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Creation and Conveyance of Oil and Gas Leasehold Burdens

Frank W.R. Hubert, Jr. and James A. Taylor, Proceedings of 31st Annual Rocky Mountain Mineral Law Institute (1985)

Oil and gas leases ordinarily provide that the lessee may freely transfer all or part of the leasehold estate. A transferee of a leasehold interest takes such interest subject to its proportionate share of the duties imposed by the lease.1 These duties include the express or implied obligations to pay delay rentals, operate prudently, reasonably develop the leased premises, and protect the premises against drainage.

Often, a party may wish to own a portion of the benefits of the leasehold estate without being subject to the corresponding burdens imposed by the lease. Fortunately, it is possible to create a nonoperating interestthat is, an interest which is entitled to receive some percentage of the production or income attributable to the lessee's estate but is not obligated to bear any of the development (e.g., drilling) or operational (e.g., lifting) costs associated therewith. The three most common nonoperating interests are the overriding royalty interest, production payment (also called an oil payment), and net profits interest.2

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This paper will explore the issues the draftsman should consider in preparing instruments which create and convey these nonoperating interests. While various authorities will be cited, it is not possible nor necessary within the confines of this paper to attempt to present a treatise of the relevant law dealing