The Oil and Gas Addendum

Let’s assume you own a 175 acre farm in Washington County. Your grandfather acquired the farm back in 1948 from Farmer Brown (the “1948 Deed”). Your grandfather always said that he bought both the surface and oil and gas. In 2020, you execute a new oil and gas lease with ABC Drilling with a 18% royalty. Several months later, ABC Drilling constructs a well pad about a mile from your farm. They eventually drill three (3) horizontal shale wells from the pad. All three (3) well bores pass directly underneath your farm. You anxiously look forward to receiving royalty income from the three (3) wells. However, when you receive your first royalty check in December 2024, you are confused by the ownership interest ABC Drilling utilized to calculated your royalty: you are not being paid a 18% royalty.

You call ABC Drilling and demand an explanation. This must be a simple accounting error. ABC Drilling informs you that, pursuant to the 1948 Deed, Farmer Brown reserved a fifty percent (50%) royalty interest in all wells “drilled on the premises.” They further say that since the three (3) horizontal wells pass underneath the farm, they are considered “on” the premises, thereby triggering the royalty reservation. As such, one-half of the 18% royalty is being paid to the heirs of Farmer Brown. You are shocked, angry and confused. How can obscure language in a historical deed impact your royalty in 2025? And how can the heirs of Farmer Brown be entitled to any royalty since there is no well technically “on” the surface of the farm? Recently, the Seventh Appellate District in Ohio addressed these troubling and complex questions in Mineral Development Inc. v. SWN Production (Ohio) LLC. (No. 21-MO-0013, February 6, 2025).

At issue in Mineral Development was a deed executed in 1918 concerning 82 acres in Monroe County, Ohio (the “Subject Parcel”). By virtue of a deed dated April 8, 1918, John Steiding conveyed the Subject Parcel, along with the underlying oil and gas, to Edward Dietrich.  The 1918 Deed, however, contained royalty reservation in favor of John Steiding: 

“[A]nd reserving therefrom. . . 1/2 of the royalty from future wells drilled on the premises (the “Steiding Reservation”).

In 1996, Michael Shroyer acquired the Subject Parcel from the heirs of Edward Dietrich. Several years later, Shroyer entered into an oil and gas lease with Eclipse Resources (the “2012 Lease”). Pursuant to the 2012 Lease, Eclipse’s successor, SWN Production Company (“SWN”), drilled three (3) horizontal wells that passed directly underneath the Subject Parcel (the “SWN Wells”). It is important to note that the well pad from which the SWN Wells were drilled was not located on the Subject Parcel. In other words, the top hole of each well was located thousands of feet away from the Subject Parcel.

In 2022, the Plaintiff, Mineral Development, Inc. (“MDI”), acquired the Steiding Reservation. Shortly thereafter, MDI contacted SWN and requested that it be paid 1/2 of all royalties generated from the SWN Wells. According to MDI, the SWN Wells were “on the premises” because they penetrated the oil and gas estate underlying the Subject Parcel. As such, this triggered the royalty reservation set forth in the Steiding Reservation.

SWN and Shroyer disagreed with MDI’s interpretation of the 1918 Deed. Shroyer maintained that no royalty was owed to MDI because there was simply no well drilled “on” the surface of the Subject Parcel. MDI filed suit in July 2023 seeking a declaratory judgment on the meaning of the Steiding Reservation in the 1918 Deed.  

In July 2024, the trial court granted MDI’s motion for summary judgment. The trial court rejected Shroyer’s argument that the surface location of each SWN Well had to be physically located on the Subject Parcel. On the contrary, the trial court opined that passing through the subsurface of the Subject Parcel was enough to trigger the Steiding Reservation. Critically, the trial court noted that a producing well consists more than what is visible on the surface of the land. Shroyer appealed to the Seventh Appellate District. 

Before we address the substance of the Mineral Development opinion, a brief review of the distinction between a perpetual non-participating royalty interest (“NPRI”) and a leasehold royalty interest is warranted. As we have written before, the oil and gas estate generally consists of five separate and distinct components: i) the right to develop and extract the underlying hydrocarbons; ii) the right to lease (the “executive” right); iii) the right to receive the signing bonus payment; iv) the right to receive delay rentals and v) the right to receive production royalties. See, Federal District Court in Pittsburgh Rules that 1897 Deed Did Not Grant Non-Participating Royalty Interest (November 2021). When a landowner signs an oil and gas lease, the exclusive right to develop and extract hydrocarbons (i.e. item #1 above) is effectively transferred to the driller – the other four (4) components are retained by the landowner. In exchange for transferring the developmental rights, the driller agrees to pay the landowner a “royalty” on the production generated from the lease. This is known as a “leasehold royalty.” Conversely, when the mineral royalty interest (i.e. item #5 above) is transferred by the landowner to a third person, it is commonly referred to as non-participating royalty interest. (“NPRI”). NRPI’s, like the Steiding Reservation, are typically created by an express grant or reservation in a deed. See, The Difference Between a “Royalty” and a “Royalty Interest” Can Be Confusing and Costly For Landowners (March 2022).

The holder of a NPRI has no power to negotiate or execute an oil and gas lease and has no power to enter upon the land to extract the hydrocarbons. Likewise, if an oil and gas lease is executed, the holder of the NPRI will not share in the payment of the signing bonus or any delay rentals. The holder does, however, have a vested and perpetual right to a stated percentage of production from any hydrocarbons produced from the premises. In other words, the NPRI essentially lies dormant until there is an actual production. In Mineral Development, the Steiding Reservation created in the 1918 Deed essentially remained dormant until the SWN Wells began producing in 2022.

Back to the Seventh Appellate District. On appeal, Shroyer’s position was two-fold. First, he argued that the trial court’s ruling ignored the plain meaning of the phrase “on the premises.” Shroyer cited to the Random House dictionary for the proposition that the word “on” means and refers to “a position above and in contact with a supporting surface.” Given this definition, Shroyer argued that the Steiding Reservation was inapplicable unless the wells had their surface hole location “on” the Subject Parcel. Since the top holes were located thousands of feet away, Shroyer contended that no royalty was owed to MDI. Second, Shroyer argued that at the time the 1918 Deed was drafted and executed, oil and gas wells were only drilled vertically.  Horizontal drilling had not been developed. As such, the parties in 1918 could not have intended the word “on” to include the underground location of a well bore running horizontally through the subsurface of the Subject Parcel.

The Seventh Appellate District rejected Shroyer’s arguments and affirmed that trial court’s decision. The panel observed that it was undisputed that the term “premises” in the 1918 Deed included both the surface and the sub-surface. Moreover, the panel noted that the Steiding Reservation did not say that it was limited to wells only drilled on the “surface” – that limiting term does not appear in the reservation itself. This omission was significant as the Seventh Appellate District opined that the Steiding Reservation “does not restrict the royalty interest to a particular entry point.”

The panel also found dispositive the pooling clause set forth in the 2012 Lease. This clause, the court suggested, “provides evidence of what [Shroyer] agreed would be considered a well drilled on the premises.” Through the pooling clause, Shroyer agreed to accept a fractional share of the production from the unit and further agreed that operations anywhere within the unit would “have the same effect upon the terms of the Lease as if a well was located on . . . the Leasehold.” Thus, by virtue of the pooling clause, Shroyer acknowledged that a well drilled anywhere in the unit would be treated as if it was “on” the leasehold premises. The panel therefore opined that the SWN Wells, regardless of the actual top hole or horizontal location, should also be treated as if they were “on” the Subject Parcel.  Accordingly, the Seventh Appellate District affirmed the entry of summary judgment in favor of MDI.

It is worth noting that the Mineral Development holding is at odds with the Pennsylvania Superior Court’s decision in Mitch v. XTO Energy, 212 A.3d 1135 (Pa. Super 2019). In Mitch, the Superior Court was asked to interpret a “free gas” clause in a 2012 oil and gas lease and whether a horizontal well bore qualified as a “well drilled on the lease premises.” The landowner, like MDI in Mineral Development, argued that a horizontal well bore passing underneath the property should be considered “on” the leased premises since the lease itself included both the surface and the sub-surface. The Mitch panel disagreed and ruled that a horizontal well bore was not “on” the leased premises:

Our review of the Lease and Addendum as a whole leads us to ascertain the parties’ intent in using phrase “on the lease premises” in paragraph 4 of the Addendum to mean on the surface of the lease premises.  To require XTO to pay in this situation would be an unreasonable interpretation that does not effectuate the intention of the parties.

Although the precise issue before the court in Mitch (i.e. applicability of free gas clause) was different than the issue in Mineral Development (i.e. payment of NPRI), how the respective panels interpreted the phrase “drilled on the premises” illuminates the fluid and complex nature of oil and gas law. If you have a question about an oil and gas deed or a non-participating royalty interest, please call or contact Robert J. Burnett at 412-288-2221 or rburnett@hh-law.com.