By Nathan A. Myers

By statute, royalties on oil and gas production are due on or before 120 days after the end of the month of first sale of production from the well. This gives operators about four months after a well begins producing to obtain title curative, set up a pay deck for the well, issue division orders to the various owners, and start paying royalties. Thereafter, royalties are payable 60 days (for oil) and 90 days (for gas) after the end of the calendar month in which subsequent production is sold. Please note that these time periods may be modified by the lease form.

Notwithstanding the foregoing time periods, operators do not have to make timely royalty payments if a royalty owner refuses to sign a division order or if the royalty owner’s interest is subject to a title defect.

Section 91.402(c)(1) of the Natural Resources Code states that as a condition to payment, an operator is entitled to receive a signed division order (that contains only the statutory provisions) from the royalty owner. By implication, an operator must actually send a division order to the royalty owner and have it rejected in order to rely on the statute. And, also implied by the statute, operators should (but don’t always) send out division orders before the date the first royalty payment is due. Note, however, that it is becoming more common to see leases that expressly negate the statute by stating that a lessee does not have the right to condition payment upon receipt of a signed division order – in other words, the royalty owner does not have to sign a division order to receive royalties.

Section 91.402(b) of the Natural Resources Code also authorizes an operator to withhold royalty payments when there is either (i) a title dispute, (ii) a reasonable doubt that the payee has clear title to his interest, or (iii) an unsatisfied title opinion requirement that pertains to the payee’s title, identity, or whereabouts. Additionally, effective September 1, 2017, Section 91.402(b)(2) allows an operator to withhold royalties from a payee when the payee’s interest is subject to a child support lien or order of withholding under the Family Code.

If a royalty owner believes its royalties are being unlawfully withheld (in “suspense”) by the operator, it must contact the operator and request an explanation/demand payment as a prerequisite to filing suit. The operator then has 30 days to respond with a reasonable cause for maintaining the royalties in suspense or pay over the undisputed royalties. If the operator fails to do so (or the royalty owner believes the operator’s explanation is not legally justified), the royalty owner can then file suit against the operator. If the royalty owner obtains a favorable judgment, it is entitled to statutory interest on the withheld royalties in addition to a mandatory award of attorney’s fees.