Fixed vs. Floating Royalty – What’s the Difference?

I keep getting questions on what the difference is between a fixed vs floating royalty is so I thought I would write this article to help explain the distinction.

• Landmark Case: The landmark case on whether a royalty is “fixed” or “floating” is U.S. Shale Energy II, LLC et al. vs. LaBorde Properties, LP, et al, decided in 2018 by the Texas Supreme Court.
• Non-Participating Royalty Reservation Deed: The case pertains to a reservation in a 1951 deed of a type of royalty interest known as a non-participating royalty interest (NPRI), so named because the royalty owner has no executory right to sign an oil and gas lease. A NPRI entitles the owner to a royalty only – with no right to “participate” in the lease.
• Fixed vs. Floating: The key issue in the case is whether the NPR reservation is “fixed” or “floating.” The determination could have a significant bearing on the amount of royalty the owner of the royalty is entitled to.
  • Fixed – A fixed royalty is calculated based on an actual fraction, as spelled out in the deed. For example, “1/16th of production.”
  • Floating – A floating royalty is calculated as a percentage of a future and/or unknown fraction. At the time the royalty is created, there may be no lease in place. Thus, the floating royalty is usually described as a percentage of the unknown royalty in a potential future lease. For example “a 1/2 interest in the royalty.”

Actual Deed Language: Here’s the actual language from the deed.

How would you rule?

There is reserved and excepted from this conveyance unto the grantors herein, their heirs and assigns, an undivided one-half (1/2) interest in and to the oil royalty, gas royalty and royalty in other Minerals in and under or that may be produced or mined from the above described premises, the same being equal to one-sixteenth (1/16) of the production.

Which Clause Controls? The court categorizes the first two lines of the reservation as a floating royalty – that is, the royalty interest is calculated based on what the royalty is in the oil and gas lease, “undivided ½ interest”, and the last line as a fixed royalty, that is 1/16th of production.

The calculation for the fixed royalty would be 1/16th royalty referenced in the reservation.

The calculation for the floating royalty would be ½ of whatever the royalty fraction is in a future oil and gas lease.

So, which clause controls?

Division Order Analyst – When the division order analyst set up the interest in the well, the deed was interpreted as being a floating royalty and since the lease royalty was for 1/5, the division order analyst credited each of the two heirs with ½ of 1/5. The leasehold owner, Laborde, disagreed with this calculation, asserting that the Bryan heirs were only entitled to 1/16 royalty (a fixed royalty) and not a 1/10 royalty. The difference is significant because, under Laborde’s interpretation, the Bryan heirs would be entitled to slightly less than 1/3 of the royalty under the current lease, rather than 1/2.

History – While the trial court found this interest to be floating, the court of appeals took the opposite stance, finding it to be fixed.

Holding: However, the Texas Supreme Court agreed with the trial court. According to the Supreme Court, “upon examination of the language and structure of the reservation at hand, it is clear that royalty interest is unequivocally floating as it pertains to an undivided half interest in all oil, gas or other minerals produced from the conveyed property.”

In order to give plain meaning to both clauses, and the reservation as a whole, the second clause was viewed by the court as a mere clarification, “as an incidental factual matter, what a 1/2 interest in the royalty amounted to when the deed was executed.”

Conclusion: Keep in mind, the reservation in the deed occurred in 1951, long before there was ever a lease in place. At that time, a 1/8 royalty fraction was standard for all leases. Thus, a ½ interest in a typical royalty at the time, would have been a 1/16th royalty.

Overall, this case illustrates the importance of careful drafting and interpreting reservations of non-participatory royalty reservations. It also demonstrates the need for both landowners and oil land gas companies to be vigilant in monitoring royalty payments and ensuring that they are calculated and paid in accordance with record title.

Kudos to the division order analyst who accurately calculated the interest in the first place!

Honoring Our PLM & DO Certificate Graduates

As working professionals it’s often tough to balance doing your job and finding time to learn, train and improve your skills. It’s why I’m so passionate about our self-paced, online classes to help make it easy for land professionals to achieve that second part easily.

It also takes commitment and consistency to complete a six-month program. So, today, we’re celebrating your peers who earned their certificates over the past six months.