An MFN is an abbreviation for a clause in an oil and gas lease known as a Most Favored Nation clause. The term derives from international economic relations requiring that all countries be treated equally in terms of favorable trade treatment.
In the oil and gas business, an MFN typically requires that if a lessee pays a higher bonus or royalty payment on nearby leases, it is required to match the higher royalties or bonuses to the lessor with the MFN lease. See Hooks v. Samson Lone Star, Ltd., 457 S.W.3d 52, 61 (Tex. 2015).
In other words, if a landman negotiates a higher bonus or royalty payment with any other lessors on nearby properties, they must amend the MFN lease to match the higher bonus or royalty payment. For this reason, as you can imagine, MFN’s are a nightmare for oil and gas companies but a dream come true for mineral owners.
Thus, the inclusion of an MFN in an oil and gas lease, guarantees that the lessor’s bonus and royalty payments will match any lease that includes a higher bonus or royalty payment of its nearby neighbors.
In a recent Texas case, EP Energy E&P Co., L.P. v. Story Minerals, Ltd (No. 04-19-00534-CV, January, 2022), the Texas 4th Circuit Court of Appeals opined that an MFN clause in an oil and gas lease required the lessee to match a higher bonus and royalty payments paid to other lessors in the nearby area, but there was no requirement to match delay rental payments.
In this case, the defendant, EP Energy E&P Co, argued that they were only required to match bonus and royalty payments paid after any new leases went into effect. That is, they were only required to match bonuses and royalty payments that were actually paid after the effective date of the new lease (with the higher bonus and royalty.) For EP Energy, this meant they only needed to match any bonuses or royalties for any bonuses and royalties they still owed the mineral owners. That is, bonuses and royalties that were unpaid (and still in suspense) pending resolution of title issues.
The court rejected this argument and required the defendant, EP Energy, to pay the higher bonus and royalty to plaintiff for ALL bonuses and royalty payments, not just the unpaid amounts held in suspense.
This is the Most Favored Nations Clause found in the lease in question. This is a typical MFN.
If at any time during the existence of this lease, the lessee . . . acquires an Oil and Gas Lease on such terms that the…bonus…[is] greater than th[at] provided to be paid to lessor hereunder, lessee expressly stipulates, warrants, and agrees that it will execute an amendment to this lease, effective as of the date of the third party lease on the leased premises, to provide that the lessor hereunder shall receive thereafter the same percentage (per net mineral acre) . . . bonus . . . as any subsequent lessor of the leased premises to the extent that such . . . bonus . . . [is] greater than those provided to be paid herein. To the extent that the . . . bonus . . . in any subsequent lease [is] less than provided herein, lessor hereunder shall continue to receive the . . . bonus . . . as provided in this lease. . . . This Paragraph XXVI shall not apply to any lease or contract with a mineral owner that covers less than twenty (20) net mineral acres. (emphasis added)
MFN clauses are rarely used in oil and gas leases due to the administrative burden placed on oil and gas companies. However, if a mineral owner has a significant acreage position in an area where the oil and gas company seeks to drill, they may be able to successfully negotiate an MFN clause in their oil and gas lease. Oil and gas companies beware!.
Midland College – Module 3 Courses Open for Registration
There is still time to register for our June Module 3 courses for PLM and DO. As always, these courses are in a fully online format to allow working professionals a flexible way to deep dive into key areas of our work as land professionals.
PLM: Oil & Gas Leases, Negotiations & Interest Calculations
By the end of Module 3, students will be able to understand:
- Understand the standard provisions of an oil and gas lease including the Mother Hubbard Clause, the Habendum Clause, the Savings Clause, the Force Majeur Clause, the Dry Hole Clause, the Continuous Drilling Clause, etc.
- Negotiate an Oil & Gas Lease
- Understand Common Amendments to an Oil & Gas
- Understand Interest Calculations Terminology including Mineral Interests, Working Interests, Net Revenue Interests, Overriding Royalty Interests, Leasehold Interest and Gross and Net Acres
DO: Land & Leasing
By the end of Module 3, students will be able to understand:
- Understand the standard provisions of an oil and gas lease including the Mother Hubbard Clause, the Habendum Clause, the Force Majeur Clause, the Dry Hole Clause, the Continuous Drilling Clause, etc.
- Analyze an Oil & Gas Lease
- Understand Interest Calculations Terminology including Mineral Interests, Working Interests, Net Revenue Interests, Overriding Royalty Interests, Leasehold Interest and Gross and Net Acres
- Calculate Oil & Gas Leasehold Interests including bonus payments, rental payments, net revenue interests, working interests and overriding royalty interests.
- Distinguish between Pooling and Unitization
- Distinguish between Voluntary Pooling and Forced Pooling
- Understand the Pooling Provision and its Impact including formulas used to calculate royalty when the properties of different royalty owners are included in a pooled unit