On July 23, 2026, a division of the Colorado Court of Appeals issued its opinion in Myrick v. Colorado Energy & Carbon Management Commission, 2026 COA 61, addressing a matter of first impression in Colorado oil and gas law: whether overriding royalty interests (ORRIs) derived from nonconsenting working interests in and to a well must be paid immediately upon production of such well, or only after consenting working interest owners have recovered the nonconsenting owners’ share of the costs of drilling, completing, equipping, and operating such well plus statutory penalties detailed in C.R.S. § 34-60-116(7)(b) (the “Pooling Statute”), also known as when a well reaches “Payout”. In a unanimous opinion authored by Judge Freyre, the division held that ORRIs derived from a nonconsenting working interest owner’s share are not payable until consenting working interest owners have recovered the costs and penalties detailed in the Pooling Statute.
Background
Several foundational concepts in oil and gas law are necessary to understand the division’s decision.
In Colorado, operators of oil and gas wells can seek to combine, or pool, mineral interests underlying multiple tracts into a single drilling and spacing unit (DSU) so that one well (or a set of wells) can produce collectively from the pooled lands. That pooled DSU may contain lands covered by multiple different leases, which may in turn grant working interests, which include the rights to develop minerals, to multiple different parties. One way to accomplish such pooling is to request that a pooling order be issued by the Colorado Energy & Carbon Management Commission (“ECMC”). That pooling order designates an operator (generally the party with the highest percentage of working interest in the DSU).
When an operator proposes the drilling of a new well in a DSU, it must send out election letters to any other parties who own a working interest in the lands included within the DSU. The other working interest owners must then decide whether or not they wish to participate in the well. If a working interest owner participates, or consents, then they are required to bear their share of the costs of drilling, completing, equipping, and operating such well, and are entitled to receive their share of the production from such well. If a working interest owner does not participate, or nonconsents, then they are not required to bear their share of the costs of drilling, completing, equipping, and operating such well until Payout, but they may not receive their share of the production until Payout.
The question addressed by the court in Myrick is whether these cost recovery provisions apply not only to working interest owners, but also to owners of ORRIs.
An ORRI is a right to payment from production carved out of the working interest granted in an oil and gas lease. ORRIs are generally non-cost bearing, meaning they entitle the holder to a portion of production revenue without regard to the costs incurred to generate that production. In Myrick, the court considered whether a holder of an ORRI carved out of nonconsenting working interest should be subject to the cost recovery provisions imposed on nonconsenting working interests since the ORRI is derivative of that nonconsenting interest, or whether the ORRI is immune from the cost recovery provision since the interest is non-cost bearing. As detailed below, the court found that the derivative nature of the interest was dispositive and that holders of an ORRI are subject to the same cost recovery provisions as the working interest owners from which that particular ORRI is derived.
The ECMC and District Court Orders
The Myricks owned a 1.25% ORRI in oil and gas leases within the Sonic Star Drilling and Spacing Unit, a 1,920-acre DSU in Weld County operated by Verdad Resources LLC. For seven of Verdad’s eight wells in the DSU, Verdad was the sole consenting working interest owner, and three other working interest owners declined to participate; on the other well, two working interest owners joined Verdad as consenting owners. In 2022, Verdad sent division orders to the Myricks reflecting that no ORRI revenue would be paid from the nonconsenting working interest owners’ interests until those interests reached Payout. The Myricks challenged this before the ECMC, which ruled in Verdad’s favor. On appeal, the district court affirmed, and the Myricks appealed again to the Colorado Court of Appeals.
Colorado Law
The primary statutory provision at issue is section 34-60-116(7), which governs the rights and obligations of consenting and nonconsenting working interest owners under forced pooling orders.
Subsection (7)(a)(I) requires pooling orders to provide for reimbursement to consenting working interest owners from the nonconsenting working interest owners’ share of production, “excluding royalty or other interest not obligated to pay any part of the cost thereof,” provided the royalty is “consistent with the lease terms prevailing in the area and is not designed to avoid the recovery of costs.” Subsection (7)(a)(II) provides that nonconsenting working interest owners are not entitled to receive their share of production until “the consenting owners have recovered the nonconsenting owner’s share of the costs out of production.” Subsection (7)(b) establishes a penalty structure: consenting owners may recover 100% of the nonconsenting owners’ share of surface equipment and operation costs, and 200% of certain other costs—including drilling, completion, and testing—as a statutory penalty for nonconsent.
In 2017, the ECMC issued Order No. 1-202 (the “Catamount Order”), which addressed the same ORRI payment issue. In that order, the ECMC concluded that ORRIs are not among the interests to be paid during the cost recovery period because they are carved from the interests of nonconsenting working interest owners who are obligated to reimburse consenting working interest owners. The ECMC also noted that the legislature specifically names ORRIs in other sections of the statute but chose not to include them in the “excluding” language of subsection (7)(a)(I). Order No. 1-202 was not appealed.
In 2018, after the ECMC issued Order No. 1-202, the General Assembly amended section 34-60-116(7)(a)(I). Notably, the legislature did not add “overriding royalties” to the list of interests excluded from the cost recovery scheme. Instead, it added qualifying language requiring that any excluded royalty be “consistent with the lease terms prevailing in the area” and “not designed to avoid the recovery of costs.” This legislative silence regarding ORRIs is significant to the division’s statutory interpretation.
The Division’s Opinion
In this case, a division of the Court of Appeals affirmed the ECMC’s order and the district court’s judgment, holding that the Pooling Statute unambiguously provides that ORRIs derived from nonconsenting owners’ working interests are subject to the cost recovery scheme and are not payable until the consenting working interest owners reach payout.
The division began by finding that the Pooling Statute is unambiguous. The central interpretive question was whether the phrase “or other interest not obligated to pay any part of the cost thereof” in section 34-60-116(7)(a)(I) encompasses ORRIs derived from nonconsenting working interest owners’ interests. The division concluded it does not.
The division’s reasoning centered on the derivative nature of an ORRI. While ORRIs are themselves non-cost bearing, they are carved from a working interest—an interest obligated to pay costs. The division cited Grynberg v. Waltman, 946 P.2d 473, 476 (Colo. App. 1997), for the foundational principle that an ORRI “cannot be greater than the interest from which it is derived.” Because a nonconsenting owner’s working interest is subject to the statutory cost recovery scheme, an ORRI carved from that interest is subject to that same scheme.
The division held the phrase “other interest[s] not obligated to pay any part of the cost” captures “interests granted or reserved from the landowners’ interest” such as an interest created from the landowners’ “fee simple before executing a lease or from its share of the royalty after executing the lease.” Myrick v. Colo. Energy, 2026 COA 61, ¶ 29. This reading harmonizes with the statutory structure and purpose: the exclusion protects landowner-created interests that are fundamentally separate from the cost-bearing working interest, not lessee-created burdens on that working interest.
The division found significant the legislature’s failure to add “overriding royalties” to the exclusion in section 34-60-116(7)(a)(I) after the Catamount Order. The legislature amended this very provision in 2018—after the Catamount Order was issued—and yet did not add ORRIs to the protected interests, despite naming ORRIs explicitly in other parts of the statute. The division treated this as a signal of legislative approval of the ECMC’s interpretation.
Finally, the division noted that allowing private contracts creating ORRIs to trump the statutory cost recovery scheme would subvert the rights of consenting working interest owners who are not parties to those contracts. Permitting ORRI holders to extract payments from the nonconsenting working interest owners’ share of production before payout would undermine the incentive structure the Pooling Statute creates.
Key Takeaways
The Myrick decision provides important clarity on a question that has significant practical consequences for oil and gas operations in Colorado. For the first time, an appellate court has confirmed the ECMC’s interpretation that ORRIs derived from nonconsenting owners’ working interests are subject to the Pooling Statute’s cost recovery scheme and are not payable until after the consenting working interest owners reach Payout.
For questions about this legal alert, please contact a member of the Davis Graham Appellate Group.