USLegal Oil, Gas and Minerals
Oil & Gas Legal Information
The term “minerals” includes all inorganic substances, as well as hydrocarbons, such as oil and natural gas, and carbon deposits, such as coal. Minerals in the ground are treated as real property, but, after removed from the land, they become personal property. The owner of land may convey title to minerals separately from the title to the surface. The conveyance is governed by the same law as sales of land. In jurisdictions in which an oil and gas lease is construed to be a conveyance of an interest in real property, the lease must satisfy the formal requirements that are essential to a conveyance of land.
A landowner who believes his or her property may contain deposits of valuable minerals may enter into an exploration agreement with a person or organization interested in prospecting the land. The agreement may contain a covenant to test and explore the land, or it may be a mere license granting the right to enter and explore for minerals.
The owner of land may “sever” his/her interest in the oil, gas, and other mineral resources of the land and sell the mineral estate separately from the surface estate, or the owner may reserve the mineral estate and convey the surface estate to another.
A mineral lease from the owner of the minerals to a person grants that person the exclusive right to drill for the minerals for a specific length of time. After a landowner has leased property for gas and oil purposes, there remain three separate and distinct interests: (1) the estate in the surface, (2) the reserved royalty interest, and (3) the right to extract the minerals. These interests are regarded as interests in real property. A lessor may transfer by a single instrument all three of these interests or may convey them separately.
Royalties are the funds received from the production of oil or gas, free of costs, except taxes. In a jurisdiction in which a royalty interest is considered to be realty or an interest in realty, the transfer of such an interest should be in writing. A lessor of land subject to a gas and oil lease may convey the royalty under the specific lease in whole or in part, or may convey the royalty interest in perpetuity. A conveyance in perpetuity includes both royalties arising under the existing lease and those arising under any lease that may be made in the future. The conveyance of a royalty interest therefore should clearly specify whether the right being conveyed is perpetual or limited to the duration of a particular lease.
A deed conveying minerals is broader in its effect than a deed conveying a royalty interest, since a mineral deed generally includes the right of ingress and egress, the right to develop the land for gas and oil, and the right to lease the land.
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DIVISION ORDERS
Division Orders have long been used as a means of identifying ownership and documenting the payment of royalty on sales of oil and/or gas by the purchaser of production, or the operator of the properties.
The Division Order acts as a stipulation as to the ownership of each party owning an interest in production from a well or wells.
Over the last twenty to thirty years, Division Orders have changed in that many state statutes now limit what may be included in a Division Order, and their effect.
The basic provisions of a Division Order are:
1. The identification of the owner of an interest and a statement of the owner’s interest. By signing the Division Order, the owner certifies that the decimal interest in production identified in the Division Order, or the proceeds of that production, are to be paid to the owner by the issuer of the Division Order.
2. Division Orders typically provide that the owner will notify the issue of the Division Order, in writing, of any change in ownership or change in the interest owned, and that the changes will be effective on the first day of the month following receipt of the notice, or thirty (30) days after that time.
3. Division Orders typically authorize the company making payments to withhold payments in the event of any title dispute or adverse claim to the interest of the owner, and for the owner to agree to reimburse the company on any amounts attributable to an interest to which the owner is not entitled.
4. Division Orders typically include a provision that provide that the company making payment for production may accrue proceeds until the total amount reaches a certain amount, or until the end of the year, whichever occurs first, subject to any requirements by applicable state statute.
5. Most Division Orders now include the provision that its terms do not amend any oil and gas lease or operating agreement that has been entered into by the owner. If the Division Order does not provide this, it is provided for by statute in many states.
In that the owner will be receiving payments from the company issuing the Division Order, a social security number, in addition to a signature and current address is usually required. The Division Order typically provides that if a social security number is not provided that the company may withhold up to thirty-one percent (31%) (or whatever Congress determines to be that statutory withholding rate) to be paid as taxes, which amounts are not refundable to the owner.
On oil production, a Division Order may be issued by the company purchasing the oil and responsible for making payments. Alternatively, an operator of a property may receive 100% of the proceeds from the purchaser or production, and in turn, issue its Division Order and make payments to all owners in an oil well.
On gas wells, typically, companies that purchase gas do not make distributions, but pay 100% of the proceeds from the sale of gas to the operator. The operator then issues its Division Order and makes payments to each owner.
Once a Division Order is issued, if there is a change in ownership (either an owner transfers all or part of his or her interest) those changes may be reflected in an amended Division Order or Transfer Order issued by the company making disbursements of production proceeds.
In instances where a company is making payments to an owner on multiple properties, it may issue what is referred to as a “blanket” Division Order, which covers a number of properties, setting out the property name and owner’s decimal interest in several properties, under one Division Order, rather than issue separate Division Orders on each property.
RECORDING STATUTES – ESTABLISHING TITLE TO PROPERTY PURCHASED
Recording a document transferring title to property is a means of giving “constructive” notice of real property ownership.
States have adopted various statutes for recording transfers of real property interests. There are three (3) types of recording statutes in use in the United States:
a. Notice: Under a notice statute, a subsequent bona fide purchaser prevails over an earlier purchaser who did not record, if the subsequent purchaser has no actual or constructive notice of the previous transfer at the time of his or her purchase. That is to say, the second or subsequent bona fide purchaser will prevail over the prior purchaser whether the subsequent purchaser records his or her transferred documents. As far as the subsequent purchaser is concerned, there is no benefit to racing to the recording office. Priority is determined on the status of the purchaser at the time the deed/mortgage/transfer document, is acquired.
b. Race: Under a race statute, the first to record the conveyance document wins. Priority is established solely by the order in which competing claimants record their transfer documents. No conveyance or other transfer is valid as against purchasers for valuable consideration except after the time of recording. The subsequent purchaser does not need to be bona fide and without notice since he or she will prevail if his or her document is recorded first.
c. Race-Notice: Under a race notice statute, subsequent purchasers who purchase without notice of a prior conveyance are protected against prior conveyances when the prior purchaser fails to record his or her conveyance documents, as long as the subsequent purchaser records his or her document first. The race-notice statute combines the essential features of both the notice and race type recording statutes. For a second or subsequent purchaser to prevail in a race-notice jurisdiction, he or she must be both a bona fide purchaser for value without notice of the prior conveyance, and be the first to record his or her conveyance documents.
Texas is a Notice state. With respect to other states, laws of those states should be consulted to determine what statutory rules apply with respect to recording instruments and verifying that the conveyance is valid and establishes title.
EASEMENTS / ACCESS
An easement gives the right to use or control the land or an area above or below the land for a specific purpose. In connection with the use of the surface of the lands, there are three (3) primary types of easements used to gain access: Express Easements, Easements by Necessity, and Implied Easements.
1. Express Easements. Express easements are created by specific language in an agreement allowing for or granting the right to use the surface of the lands. Express easements, in connection with oil and gas activity or operations are often broadly defined, extensive, and cover all activities necessary or anticipated in connection with oil and gas exploration and production.
2. Easements by Necessity. An Easement by necessity has three (3) requirements:
i. There must have been unity of ownership prior to severance of the property. (Stated another way, the easement over unleased property must have originally been part of the property which is leased.) The person claiming an easement by necessity must show that prior to the division of the property the grantor owned both the surface and minerals (the dominant and servient estates) as a single unit or tract.
ii. Access to the property must be a necessity and not a mere convenience. This requires that there is no other way to enter on the property.
iii. A necessity must have existed at the time of the severance of the two estates (the mineral and surface estates).
In short, if there is no other way in or out of the property, an easement by necessity of an adjoining tract, if all the requirements set out above are met, will be deemed to exist.
3. Implied Easement. An implied easement refers to a situation where the easement is only “reasonably necessary.” To imply an easement, the easement must be reasonably necessary to have the enjoyment of the property. The property must be severed, and the basis of the implied easement must have existed before the severance or the sale of the property.
Texas courts stated that requirements for implication of an implied easement are:
i. The use must be apparent, in existence at the time of the grant of the property.
ii. The use must have been continuous, so that the parties must have intended that its use pass by the grant or conveyance of the property.
iii. The use must be necessary for the use of the dominant estate. (The mineral estate.)
A party seeking an implied easement must show the easement is apparent, permanent, in existence at the time of the grant or conveyance, continuous, and reasonably necessary to the enjoyment of the lands granted or conveyed.
These are the three (3) types of easement available to mineral owners, or their lessees, in the State of Texas. As indicated above, many states have passed legislation and codified the rights and obligations of a mineral owner/lessee with regard to its rights and use of the surface of lands.
