Do the overriding royalty holders drop off of the list once the lease has changed hands?

Full question:

I live in Tennessee and I purchased several oil leases in Lee County, Kentucky. These leases have not been in production for over 15 years. Do the overriding royalty holders drop off of the list once the lease has changed hands? Or, Is the overriding royalty expired because production was stopped for so long and the lease has changed hands? (Were talking overriding royalty, not royalty interest.)

• Category: Oil Gas and Minerals
• Date: 04/07/2025
• State: Tennessee

Answer:

An overriding royalty interest is a royalty interest carved out of the working interest created by an oil and gas lease. It is an interest in oil and gas produced at the surface free of the expense of production and its duration is limited by the duration of the lease under which it is created. Exceptions to the well-settled rule that an overriding royalty interest has no duration beyond the life of the underlying oil and gas lease it burdens exist where there are (1) express provisions in the document creating the nonoperating interest that require the overriding royalty interest to apply to "extensions or renewals" of the lease, or (2) assertions, supported by the evidence, that a fiduciary or contractual duty exists between the holders of the operating and nonoperating interests.

An assignment of an interest transfers an interest in a property from one party to another. The receiving party is the ‘assignee’; the transferring party is the ‘assignor’. Whether the overriding interest was properly assigned to the new leaseholder will depend on the terms of the contracts involved. It will be a matter for the court to determine based on all the facts and circumstances involved.

Some courts will find implied covenants in oil and gas leases to develop, protect, and manage the property. However, a violation of an implied covenant will not automatically terminate the lease. Overriding royalty interest owners have no obligation or responsibility for developing and operating the property.

Kentucky Law requires plugging of abandoned wells. Overriding interest holders must be provided with notice before it is plugged. I suggest you contact an attorney who can review all the documents and facts involved.

Please see the following KY statutes to determine applicability:

349.010. Definitions for chapter.

As used in this chapter:

(1) "Abandoned" when used in connection with a well or hole
means a well or hole which has never been used, or which, in
the opinion of the department, will no longer be used for the
production of coalbed methane or the injection or disposal of
fluid therein;

(2) "Coal interest holder" means every record coal owner,
record coal lessee, mine licensee as defined in
KRS 352.010(1)(s) and mine permittee as defined in
KRS 350.010(21) whose coalbed is penetrated, or proposed to be
penetrated, by a coalbed methane well;

(3) "Coalbed" or "coal seam" means a seam of coal, whether
workable or unworkable;

(4) "Coalbed methane" means gas produced from a reservoir
found in a coalbed, a mined-out area, or gob;

(5) "Coalbed methane well" means any well drilled,
deepened, converted, or reopened for the purpose of capturing
coalbed methane for sale or use. Any well initially used for
a coal mining-related purpose, such as a vent well, but which
is subsequently used for the purpose of recovering coalbed
methane for sale or use, shall then be deemed to be a coalbed
methane well and shall comply with the provisions of this
chapter at the time that the well is converted or used for
the purpose of recovering coalbed methane for sale or use;

(6) "Commissioner" means the commissioner of the Department
for Natural Resources;

(7) "Correlative rights" means the reasonable opportunity
of each person entitled to recover, without waste, the
coalbed methane in and under his or her tract or tracts, or
the equivalent thereof;

(8) "Department" means the Department for Natural
Resources;

(9) "Director" means the director of the Division of Oil
and Gas Conservation as established in KRS 353.530;

(10) "Drilling unit" means the maximum area in a pool which
may be drained efficiently by one (1) well so as to produce
the reasonable maximum recoverable coalbed methane in the
area. Where the department has provided rules for the
establishment of a drilling unit and an operator, proceeding
within the framework of the rules so prescribed, has taken
the action necessary to have a specified area established for
production from a well, the area shall be a drilling unit;

(11) "Division" means the Division of Mine Permits in the
Department for Natural Resources;

(12) "Field rules" means rules established by orders of the
review board relating to the drilling, completion, production
of, and specifications for coalbed methane wells in a
particular geographic area as defined by an order;

(13) "Gob" means the de-stressed zone associated with any
full-seam extraction of coal that extends above and below the
mined-out coalbed;

(14) "Gob well" means a well drilled or a vent hole
converted to a well pursuant to this chapter which produces
or is capable of producing coalbed methane for sale or use,
from a de-stressed zone associated with any full seam
extraction of coal that extends above or below a mined-out
coalbed;

(15) "Horizontally drill" or "horizontal drilling" means
the intentional act of drilling a borehole, shaft, or hole,
which deviates from vertical for the purpose of penetrating a
coal seam to produce coalbed methane;

(16) "Mine licensee" means the mine licensee as defined in
KRS 352.010(1)(s);

(17) "Mine permittee" means the permittee as defined in
KRS 350.010(21);

(18) "Nonparticipating working interest owner" means a
coalbed methane owner or lessee of a tract included in a
drilling unit who elects to share in the operation of the
coalbed methane well on a carried basis by agreeing to have
his or her proportionate share of the costs allocable to his
or her interest charged against his or her share of
production from the coalbed methane well;

(19) "Nonparticipating operator" means a nonparticipating
working interest owner who is also the operator of the
coalbed methane well;

(20) "Operator" means any owner of the right to drill,
develop, operate, and produce coalbed methane from a pool and
to appropriate the coalbed methane produced therefrom, either
for himself or herself, or for himself, herself, and others;
in the event there is no coalbed methane lease in existence
with respect to the tract in question, the owner of the
coalbed methane rights therein shall be considered as an
"operator" to the extent of seven-eighths (7/8) of the
coalbed methane in that portion of the pool underlying the
tract owned by that owner, and as a "royalty owner" as to
one-eighth (1/8) interest in that coalbed methane;

(21) "Other interested coalbed methane parties" means all
working interest owners other than the operator, all royalty
and overriding royalty interest owners or holders, and any
other party who owns or holds a right or interest in a
drilling unit, coalbed methane well site for which a drilling
permit has been issued or is pending, and all associated
equipment, facilities, infrastructure, and improvements;

(22) "Participating working interest owner" means a coalbed
methane owner or lessee who elects to bear a share of the
risks and costs of drilling, completing, equipping,
operating, plugging, and abandoning a coalbed methane well
equal to the proportion which the acreage in the drilling
unit he or she owns or holds under lease bears to the total
acreage of the drilling unit;

(23) "Participating operator" means a participating working
interest owner who is also the operator of the coalbed
methane well;

(24) "Person" means any person, corporation, association,
partnership, limited liability company, receiver,
governmental agency subject to this chapter, trustee,
so-called common law or statutory trust, guardian, executor,
administrator, or fiduciary of any kind, federal agency,
state agency, city, commission, political subdivision of the
Commonwealth, or any interstate body;

(25) "Plat" means a map, drawing, or print showing the
location of a well;

(26) "Review board" means the Coalbed Methane Well Review
Board;

(27) "Royalty owner" means any owner of coalbed methane in
place, or coalbed methane rights, to the extent that the
owner is not an operator as defined in subsection (20) of
this section;

(28) "Stimulate" means any action taken to increase the
flow of coalbed methane, or the inherent productivity of a
coalbed methane well, including but not limited to
fracturing, shooting, acidizing, or water-flooding, but
excluding cleaning out, bailing, or workover operations;

(29) "Surface owner" means the person in whose name the
surface of the land is assessed for purposes of taxes imposed
according to the property valuation administrator;

(30) "Unit" means any tract or tracts which the department
has determined are underlaid by a pool or pools of coalbed
methane and are not drilling units as defined in
subsection (10) of this section;

(31) "Unitization" means the act of combining separately
owned tracts or separate interests therein into a unit
constituting all or some portion of a coalbed that produces
or is capable of producing coalbed methane and the joint
operation of that unit;

(32) "Unit operator" means the party designated in a
pooling order to develop a unit by the drilling of one (1) or
more coalbed methane wells;

(33) "Vent hole" means a borehole, shaft driven, or hole
dug, drilled, deepened, converted or reopened, which is used
for the purpose of releasing or venting coalbed methane to
the atmosphere and not for the purpose of capturing or
producing coalbed methane for sale or use;

(34) "Venting" means the act of releasing coalbed methane
to the atmosphere;

(35) "Well" means any borehole, shaft driven, or hole dug,
drilled, deepened, converted or reopened for the purpose of
capturing or producing coalbed methane for sale or use; and

(36) "Workable coalbed" means:

(a) Any coalbed twenty-four (24) inches or more in
thickness;

(b) Any coalbed actually being operated commercially;

(c) Any coalbed that the department decides can be operated
commercially, and the operation of which can reasonably be
expected to commence within not more than ten (10) years; or

(d) Any coalbed that, from outcrop indication or other
definite evidence, proves to the satisfaction of the
department to be workable and, when operated, will require
protection if wells are drilled through or into it.

349.025. Procedure for plugging and abandoning wells — Request for
hearing — Exception — Rights of coal interest holder.

(1) Prior to the abandonment of a coalbed methane well drilled through
a workable coalbed, the well operator shall notify, by certified mail,
return receipt requested, or by registered mail, all the coal interest
holders of the workable coalbed and the department of the operator's
intention to plug and abandon the well. The notice shall give the number
of the well and its location, and fix the time at which the work of
plugging and filling will be commenced. The time shall not be less than
fifteen (15) days after the day on which the notice was received, or in
due course should be received, by the department. The department shall
prescribe the form of notice to be used. A representative of any coal
interest holder, at his or her own expense and liability, and of the
department may be present at the plugging and filling of the well.
Regardless of whether representatives appear, the well operator may
proceed, at the time fixed, to plug and fill the well. When the well is
plugged and filled, an affidavit setting forth the time and manner in
which the well was plugged shall be made in triplicate by two (2) persons
experienced in plugging and filling wells who participated in the work.
The affidavit shall be made on forms furnished by the department. One (1)
copy of the affidavit shall be retained by the well operator, one (1)
provided to each coal interest holder, and one (1) provided to the
department.

(2) In addition to the notification required under subsection (1) of
this section, prior to the abandonment of a coalbed methane well the
operator shall submit a plugging plan which is subject to approval by the
department. The proposed plugging plan shall be designed to allow coal
mining to occur through the well after the well is plugged.

(3) If a coalbed methane well ceases to produce in paying quantities
and no dewatering operations are being conducted for a period of fifteen
(15) consecutive months, any coal interest holder or any record oil or
gas lessor or lessee of any tract being penetrated by the coalbed methane
well, may file a request for hearing pursuant to KRS 349.060, to
determine whether the well has been abandoned and should be plugged in
accordance with this section. However, nothing in this subsection shall
require the plugging and abandonment of a coalbed methane well that is
being temporarily shut in by the coalbed methane well operator.
Simultaneously with the filing of a request for a hearing with the
department, the person requesting the hearing shall send a copy of the
request to the coalbed methane well operator.

(4) Any coal interest holder shall have the following rights with
respect to a coalbed methane well to be plugged and abandoned:

(a) To convert the coalbed methane well to a vent hole or otherwise
take the coalbed methane well. In this event the department, upon
determination that the coal interest holder has placed the coalbed
methane well under a mining permit, shall release the coalbed methane
well operator's bond and the coalbed methane well operator shall be
relieved of further responsibility for the coalbed methane well; and

(b) To file an objection concerning the proposed manner or method of
plugging with the department, within fifteen (15) days after receipt of
notice of intent to plug. The department shall consider any objection and
may issue an order specifying the manner and method of plugging and
reclamation consistent with this section.

(5) All coalbed methane wells shall be plugged and abandoned in
accordance with this section. The department shall promulgate regulations
specifying the manner and method of plugging vertical and horizontal
coalbed methane wells and in so doing, or in entering any order for such
plugging and abandonment, shall give consideration to the ability to mine
any affected coal seam safely and the protection of any affected coal
seam for future mining.