Courts give Rutter Umiat prospect royalty

Alaska Supreme Court affirms lower court ruling on small overriding royalty interest at the North Slope oil prospect

Eric Lidji

For Petroleum News

Affirming a lower court ruling, the Alaska Supreme Court is allowing a Texas-based independent to keep an overriding royalty interest in a North Slope oil prospect.

The Oct. 28 ruling allows Rutter and Wilbanks Corp. to retain half of a 3.75 percent overriding royalty that it and former partner Renaissance Alaska LLC kept on the leases they held in the Umiat area under a joint venture called Renaissance Umiat LLC.

While the interest is small, it could be valuable.

Earlier this year Australian independent Linc Energy Ltd. acquired Renaissance Alaska, giving it 100 percent working interest and 80 percent net revenue interest in the Umiat oil field in the foothills of the Brooks Range Mountains, straddling the Colville River.

Linc plans to begin exploring the prospect this winter and previously estimated that its stake in the prospect could yield more than 200 million barrels of oil equivalent.

The case concerns lease documents for the prospect.

Renaissance Alaska and Rutter and Wilbanks began considering a partnership at the Umiat oil field in 2004 and 2005. As the companies moved forward on the project, they kept all lease documents in Renaissance’s name alone to simplify federal paperwork.

After purchasing leases at Umiat, the companies sought an additional lease in the area owned by Arctic Falcon Exploration LLC. The three companies eventually formed Renaissance Umiat in early 2007. While the negotiations involved in creating that joint venture set the stage for the current lawsuit, Arctic Falcon is not a party in the case.

When the companies joined together, Arctic Falcon insisted on retaining an overriding royalty interest on its lease. Renaissance’s Mark Landt told the courts, “Our position was, if he’s going to retain an override, then we’re going to retain an override,” and as a result, Renaissance Alaska decided to keep a 3.75 overriding royalty interest in its Umiat leases.

The operating agreement between Renaissance and Rutter and Wilbanks required the two companies share development costs at Umiat up to $25 million, or forfeit their interest.

As Renaissance began developing the prospect, it asked Rutter and Wilbanks for its share of the money. When it didn’t pay, Rutter and Wilbanks forfeited its interest in Umiat.

In August 2008, Rutter and Wilbanks claimed in court that it was entitled to half of the 3.75 percent overriding royalty interest and the Superior Court ultimately agreed.

Although the companies never made any agreement about the overriding royalty, Renaissance said it should be allowed to keep the entire 3.75 percent for two reasons.

First, Renaissance argued that it held legal title to the overriding royalty, and that Rutter would need a court order to obtain a title. Second, it argued that the contract essentially implied Rutter would forfeit its share of the royalty by forfeiting its interest in the leases.

While Renaissance argued that it alone held legal title to the overriding royalty interest, the courts decided that the companies always intended to proceed as an equal partnership, and used only Renaissance’s name on federal filings to simplify the paperwork process.

Concerning the idea that the contract implied forfeiture of the overriding royalty should one of the companies fail to pay its share of the operating expenses, the courts decided that “had Renaissance and Rutter wished to include an express term linking the (overriding royalty interest) to the minimum spending requirement, they could have done so.”