One of the interesting things about royalty interests is that each state is different in the way that certain aspects of royalty payments are handled. One of the more unique situations exists in Oklahoma with the concept of Blanchard Royalty Interests.
Blanchard Interests or Blanchard Royalties refer to the way that royalty owners were to be paid by the various Working Interest owners in a well when each working interest owner entered into a separate gas sale contract for their proportionate share of gas produced and sold.
The term Blanchard interest stems from the landmark Oklahoma Supreme Court case from 1963 between Shell Oil Company and the Oklahoma Corporation commission, often referred to as the “Blanchard Decision.”
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What is the Blanchard Decision
In Harper County, Oklahoma, Sun Oil Company and Shell Oil Company drilled a well in a 640 acre spacing unit. Shell held 320 acres and Sun held 320 acres under lease. Waldo Blanchard owned 320 of the acres under lease to Sun Oil Company and the other 320 acres was owned by three others (including the State of Oklahoma).
Shell and Sun drilled a gas well and entered into an operating agreement whereby Shell drilled and operated the gas unit. Shell entered into a gas sale contract for their share of the gas produced and Sun entered into a contract with another company. Shell’s gas purchaser had a pipeline connection to the well but Sun’s did not.
Once the well started producing in 1959, Sun verbally agreed that Shell would take all of the production from the well and market it for the time being until Sun’s purchaser could make a pipeline connection. At that time it was envisioned that Sun would catch up with Shell in the volume of the gas taken from the well and sold until they were even.
Shell sold all of the gas produced from the well at their agreed upon price and paid royalty to its lessors and held in possession the money it received from the sale of gas apportionable to Sun’s lessor, Waldo Blanchard. Waldo Blanchard made demand to Sun for payment of his royalties but was unable to collect. He then filed an application with the Oklahoma Corporation Commission to try to resolve the situation.
Ultimately the court ruled that a drilling and spacing unit established by the Corporation Commission would essentially pool the royalty owners together so that they would receive their proportional share in the revenues from any well in that unit. This is as opposed to the minority working interest owner having to enter into separate oil and gas purchase contracts and individually pay their lessors.
How the Blanchard Decision Affected Oklahoma Royalty Owners
The Blanchard Decision would seem straightforward except that the ruling specified that this pooling or communitization of royalty interests would be handled such that each royalty owner would get their proportionate share in 1/8th of all production from any wells drilled within the unit. That works great if you have a lease royalty rate of 1/8th (12.5%). A difficult situation arose when a lease covering any separate tract stipulated a royalty in excess of 1/8th. In that situation, the working interest owner had to pay an “excess royalty” above 1/8th in order to meet any obligations to the interest owners of tracts leased by that company.
This decision resulted in royalty owners seeing a 1/8th Blanchard Interest payment on their royalty checks for their proportionate share of the first 1/8th royalty and then if they had a lease royalty rate higher than 1/8th, like 3/16ths for example, they would see the “Excess Royalty” as a separate line item. In the example where a royalty owner had a 3/16ths royalty, the “Excess Royalty” would be for their proportionate share of the additional 1/16th royalty (above 1/8th). Confusing, right?
As a result, all working interest owners had to pay the 1/8th royalty (and any excess royalty owner) to all royalty owners for wells that they have an interest in. Unfortunately this complicated matters and this and a subsequent 1985 law were not consistently being complied with.
Natural Gas Market Sharing Act
These issues ultimately resulted in the passage of Senate Bill 168 in 1992 which addressed these and other issues. Senate Bill 168 was made up of the Production Revenue Standards Act and the Natural Gas Market Sharing Act.
The first part of this bill ensures that natural gas royalty payments in Oklahoma are handled consistently so that every mineral interest owner would receive their full share of the royalty payment from any gas sold from a well, in accordance with the terms of their oil and gas lease.
It established that first purchasers of the gas would provide payment to the operator who then has the responsibility to disburse payments to the royalty owners on behalf of any of the working interest owners who sold natural gas from a well. Basically, if one of the working interest owners is contracted to sell gas production, the resulting revenues are shared ratably with the non-contracted working interest owners in the same well that meet certain requirements.
Instead of receiving multiple royalty checks from different sellers, each royalty owner would get one royalty check for gas sales for any given month. It made it so that royalty owners only had to go to the operator to resolve any disputes with respect to under payment of royalties, etc. instead of having to reconcile any discrepancies with each seller.
Production Revenue Standards Act
The other part of Senate Bill 168 also made it so that royalty owners would be owed fair market interest for payments held in suspense over a long period of time.
- A few of the other protections put in place for royalty owners is this bill specifies that proceeds from the sale of oil or gas must be paid within 6 months of the date of first production.
- Also, that royalty payments shall be paid no later than the last day of the 3rd succeeding month after the end of the month that oil or gas is sold. For example, if gas was produced and sold in September, the Operator must pay royalties by the end of December for September gas sales.
- A few other specifics is that proceeds totaling at least $10 but less than $100 must be paid annually. Anything less than that is held in suspense until it reaches the $10 threshold or whenever production ceases. Proceeds less than $100 but more than $25 have to be paid monthly if requested by the owner. A lot of times you will see on a Division Order language that says something like “payor may accrue proceeds until the total amount equals $100, or pay on a certain date each year, whichever occurs first, or as required by applicable state statute.” When I see that language, I cross out $100 and replace with $25 so that I get more timely payments for small interests.
I evaluated a property that one of my clients was looking to invest in recently and noticed that the royalty statements mentioned Blanchard Interests even though this ruling was almost 60 years ago. I have interests in a few wells in Oklahoma and my most recent check stubs don’t refer to Blanchard Interests but some operators still refer to this.
Blanchard Royalties Summary
To summarize, Blanchard Royalties refer to the practice of the pooling or communitization of royalty interests such that each royalty owner would get their proportionate share in 1/8th of all production from any wells drilled within the unit. Additionally, if a lease covering any separate tract stipulates a royalty in excess of 1/8th of the production, then the working interest owner would pay that “excess royalty” above 1/8th in order to meet any obligations to the interest owners of tracts leased by that company.
Resources Mentioned in This Episode
- Walters Signs Royalty Payment Bill
- OKLAHOMA SENATE BILL 168 & JUDICIAL DEVELOPMENTS
- SHELL OIL COMPANY v. CORPORATION COMMISSION :: 1963 :: Oklahoma Supreme Court Decisions
- MRP 75: Overview of the SCOOP, STACK, and MERGE Plays in Oklahoma
- MRP 8: Forced Pooling – What are Your Options?
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