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Convertible Oil and Gas Interests After Southland Royalty and Phillips

Pete Schenkkan, Proceedings of 24th Annual Rocky Mountain Mineral Law Institute (1978)

A convertible interest in oil and gas has been defined by eminent authority as an interest which is convertible into an interest of another type.1 This tautology may not be very helpful but is difficult to improve upon. Convertibility of oil and gas interests is a concept which is difficult to analyse but which has a wide range of possible applications. To appreciate the range of the concept, consider two major recent Natural Gas Act2 cases.

The first of these cases involved the most common convertible interest, the overriding royalty convertible upon payout into a partial working interest, which is often reserved in a lease assignment executed pursuant to a farmout agreement.3 In Phillips Petroleum Co. v. Federal Power Commission,4 the Tenth Circuit held in 1977 that the assignee under the farmout may, by making an interstate sale of leasehold gas prior to payout, commit the gas attributable to the partial working interest that the assignor might regain by converting his override. The court's thinking was that, since the assignee owned the entire working interest at the moment of interstate [548] dedication, the assignor's merely contractual and contingent right to compel reassignment of a part of the working interest was subject to the burden created by the dedication. This decision is obviously important for its direct effects on the true convertible interest.