Due to the lucrative prospect of finding oil and gas, mineral estates are deeply fractionalized among multiple owners. The multiplicity of owners creates barriers of inefficiencies for oil and gas development and thus hinders Texas’s industry. The problem is aggravated by the common issue of dormant interests where interest owners cannot be found. Without a doubt, much scholarship has been written to remedy these industry-wide plagues. However, at root, Texas’s issue does not concern the multiplicity of owners or dormant mineral interest. Rather, the main barrier to oil and gas development is paying net profits to nonconsenting cotenants by virtue of accounting. In Texas, even when there is a multiplicity of owners or owners cannot be found, development by cotenants is possible, so long as proper accounting is made to nonconsenting cotenants. Thus, where the nonconsenting owners have large fractional interests, their claim to net profits will proportionally reflect the same. This causes two possible negative consequences: (1) the cotenant seeking development must bear the burden and receive a lower royalty from the oil and gas producer to secure a lease; or (2) the producer must bear the burden and see its margins decrease to secure the lease from the consenting cotenants. In either situation, the producer or consenting cotenant will be burdened and disincentivized to develop the mineral estate, thus hindering Texas’s industry. This comment will discuss this issue and possible solutions for Texas cotenants seeking to develop their minerals.
Christopher Gambini, Comment, The Plague of Net Profits Payments: Possible Texas Solutions and Recommendations, 72 SMU L. Rev. 849 (2019).