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Royalty Concepts and Present Applications to Federal Oil and Gas and Coal Leases Revisited—The Saga Continues

Dante L. Zarlengo, Royalty Valuation and Management (1988)

This paper is intended as a restatement and supplement to Royalty Concepts and Present Applications to Federal Oil and Gas and Coal Leases presented by this author at the Federal Royalty Revolution Oil and Gas and Coal Workshops in October, 1986. The issues discussed in that paper concerning historical development of royalty clauses in oil and gas and coal leases, and in federal leases, will be restated here in modified form. The portion of the discussion relative to current practices in royalty valuation will be restated and updated. The new regulations for valuation are discussed here in a general way, and the reader is referred to other papers presented in this institute for detailed discussion of the new regulations. The discussion presented relative to royalty policy and conflicting theories of royalty application is continued in this paper.

I. HISTORICAL DEVELOPMENT OF THE ROYALTY CLAUSE.

A. In General.

The term “royalty” appeared in common law history as early as 1400. It had the general meaning of a right or privilege retained by the crown. Given that all subsurface substances were owned by the crown, by 1850, the term “royalty” was also used to denote rights pertaining to minerals. The particular meaning of “royalty” as a right retained by a landowner under a lease in return for the privilege of working a mine had appeared by the year 1829.