Legal Definitions - apportionment rule

The apportionment rule is a legal principle, primarily applied in oil and gas law, that dictates how royalty payments are distributed when land subject to an existing oil and gas lease is later divided among multiple owners. Under this rule, all landowners who hold a portion of the original leased property are entitled to a share of the royalties from any oil or gas production on that entire original tract, regardless of where the producing well is physically located. Their share is proportional to the size of their interest in the subdivided land. This approach is considered a minority view in the United States.

• Example 1: Residential Development

  Imagine a large 100-acre rural property owned by Ms. Chen, which is under an active oil and gas lease with "EnergyCo." EnergyCo has the right to explore and extract resources from the entire 100 acres, paying Ms. Chen a royalty on any production. Later, Ms. Chen decides to sell 25 acres of her property to Mr. Davies for a new housing development, while retaining the remaining 75 acres. If EnergyCo then drills a successful well on Ms. Chen's retained 75 acres, the apportionment rule would require that the royalty payments from that well be shared between Ms. Chen and Mr. Davies. Ms. Chen, owning 75% of the original leased land, would receive 75% of the royalties, and Mr. Davies, owning 25%, would receive 25% of the royalties, even though the well is not on his specific parcel.

• Example 2: Inherited Farmland

  Mr. and Mrs. Rodriguez own a 200-acre farm that has an active oil and gas lease with "PetroCorp." Upon their passing, the farm is divided equally between their two children, Maria and Carlos, with Maria inheriting the northern 100 acres and Carlos inheriting the southern 100 acres. PetroCorp subsequently drills a productive well on Maria's northern 100 acres. According to the apportionment rule, both Maria and Carlos would be entitled to a share of the royalties. Since they each own 50% of the original leased property, Maria would receive 50% of the royalties, and Carlos would also receive 50% of the royalties, despite the well being physically located only on Maria's portion of the land.

• Example 3: Corporate Land Sale

  A timber company, "Forestry Inc.," owns a vast 500-acre tract of land that is subject to an oil and gas lease held by "DrillCo." Forestry Inc. later decides to sell off three smaller, distinct 100-acre parcels from this tract to different buyers: "Developer A," "Developer B," and "Developer C," while retaining the remaining 200 acres. DrillCo then discovers a significant oil deposit and drills a well on the 100-acre parcel now owned by Developer A. Under the apportionment rule, the royalties generated from this well would not go solely to Developer A. Instead, Forestry Inc. (owning 200 acres or 40% of the original tract), Developer A (100 acres or 20%), Developer B (100 acres or 20%), and Developer C (100 acres or 20%) would all share in the royalties proportionally to their respective land interests within the original 500-acre leased area.