USLegal Oil, Gas and Minerals

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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UNITS OF MEASUREMENT – TEXAS

Many deeds found in Texas, including Patents from the state, provide land descriptions stated in “Varas.” This Unit of Measurement is of Spanish Mexican origin. It was first adopted in Texas by a provision to the March 17, 1836 Constitution of the Republic of Texas. While most deeds of recent vintage now contain metes and bounds descriptions using feet and inches as the Unit of Measurement, it is not uncommon to encounter tracts of land described using vara measurements, and it is often necessary to convert the vara measurements to determine distance and area. Hopefully this information will be of assistance.

TEXAS LAND MEASURES

Unit of measure The Vara = 33-1/2 inches

36 varas = 100 feet.

108 varas = 100 yards.

1000 varas = 925 yards, 2 feet, 10-1/3 inches.

1900.8 varas = 1 mile = 5,280 feet = 1,760 yards.

1,000,000 square varas = 1 labor = 177 1/8 acres.

1,806,250 square varas = 320 acres.

3,613,040 square varas = 640 acres = 1 square mile.

8,333,333-1/3 square varas = 1/3 league = 1,476.1 acres.

25,000,000 square varas = 1 league = 4,428.4 acres.

26,000,000 square varas = 1 league and labor = 4,605 acres.

640 acres is one square mile of 1,900.8 varas on each side.

320 acres is 1,344 varas on each side.

160 acres is 950.4 varas on each side.

80 acres is 672 varas on each side.

One acre is 5,645.376 square varas = 43,560 sq. ft. = 4,840 sq.yards.

To reduce square feet to acres, divide by 43,560.

To reduce varas to feet, multiply by 100, then divide by 36.

To reduce feet to varas, multiply by 36, then divide by 100.

To reduce square varas to acres, divide by 5,645.376; or, Multiply by 177-1/8 and cut off six figures on the right, the remaining figures give the acres.

Additional Units of Measure:

1 Rod = 5.94 varas, or 16-1/2 feet or 1 pole or 1 perch.

1 Chain = 66 feet or 100 links. 1 Link = 7.92 inches.

TRANSFER OF MINERAL AND ROYALTY INTERESTS INTO A TRUST

To facilitate management, limit fractionalization, or for the purpose of avoiding probate, there seems to be an increasing frequency of mineral and royalty interests being transferred into family or intervivos trusts.  For those familiar with oil and gas transactions, the process of transferring interests into a trust may seem simple.  For those who do not deal with oil and gas interests regularly, a few suggestions may be helpful.

Starting with the presumption that the intent is to transfer all of the grantor’s interests to the trust, the following may help accomplish that goal.

1. When developing an exhibit of the property descriptions to be used in the conveyance documents, do not rely solely on descriptions contained in division orders or oil and gas leases.  They may not describe all of the lands in which the grantor owns interests, or may contain limits as to the depth which are not applicable to the grantor’s interests.
2. Be cautious in specifying the amount of interest in each property, owned by the grantor, being transferred to the trust.  The only statement of the interest owned, which the grantor may have available, is the statement of a decimal interest on a division order.  That may not reflect all the grantor owns.  If the grantor (or his/her predecessor) owns a mineral interest on which an oil and gas lease has been granted, the division order may only describe the decimal royalty and not describe the underlying mineral interest.

Following are some suggestions on preparing a deed intended to convey all of the grantor’s interest to a trust.

1. Consider using a deed containing quit claim language (“all rights, title, and interests”), rather than expressing a warranty.  If the intent is to convey all interests, and adequate land and interest descriptions are not available, a quit claim can convey all interests not specifically described.
2. Expand available land descriptions.  If you are relying on division orders for descriptions, eliminate any depth limitations.  Unless the grantor knows he/she owns interest in only part of a tract, or section, describe all of the lands.
3. Do not specify interests conveyed.  Rather, recite that the grantor is conveying all of the grantor’s interests, including royalty and mineral interests.
4. Consider giving the grantee the right to execute further assurances, division and transfer orders, and any other documents necessary or advisable to give effect to the intended transaction.

Kanes Forms Programs (www.Kanesforms.com) contains numerous forms of Deeds (both Mineral and Royalty) and Assignments that can be used, adapted, and tailored to transfer a grantor’s interest into trust.  Individual forms are available on www.uslegalforms.com.   Remember, creating a trust with the intention the trust becomes the owner of all interests is not sufficient.  In addition to the trust instrument, Deeds, Conveyances, and Assignments must also be prepared, properly executed, and filed of record to effect the transfer of interests.

SHUTTING-IN AN OIL WELL

An operator and working interest owner (“Operator”) operates a marginally producing oil well on land subject to an oil and gas lease (the “Lease”) that is well beyond its primary term.  A decline in oil prices together with the low volume of production has caused the Operator’s income from the well to be equal to or less than the actual cost of operating the well on the Lease.  The Operator recognizes that if the price of oil does not increase, or continues to decline below present levels, the cost to operate the well on the Lease will exceed income and the well will no longer be considered to be producing in “paying quantities.”

The well is producing in a field (or from a formation) that is very mature.  If the well is plugged, there is little likelihood another well will be drilled into and produce from the same formation.  The remaining reserves that could be produced from the existing well will probably never be recovered.

Payments received by the royalty owners under the Lease have dwindled as oil prices decline.  However, if the well on the Lease is plugged, the royalty owners will cease to receive any income from the well.

The Operator has determined that if the oil well could be “shut-in,” saving on electrical costs to pump the well, maintenance costs, and wear and tear on equipment, when oil prices increase, the well could be put back on production at a later date, when oil prices increase, and continue to produce for an indefinite period.  However, there is no provision in the Operator’s Lease for “shutting-in” an oil well.  To do so would be the equivalent of the well “ceasing to produce,” which if continued, would cause the Lease to expire by its own terms.  While the mineral owners may not presently object to a cessation of production, if and when oil prices improve there may be renewed interest in the area where the Lease is located for exploration.  At that time the mineral owners may contend the Lease expired for lack of production, or lack of production in paying quantities.

In response to this situation, consider obtaining an amendment to the existing lease.

An Amendment to Oil and Gas Lease can add a shut-in royalty provision to allow the Operator to shut-in an oil well.  A shut-in provision, patterned after the fairly common shut-in gas provision found in many oil and gas leases may be included.  It can provide that the shut-in royalty payment amount on oil is to be distributed to royalty owners in the same manner as shut-in royalty payments for gas.

Another solution is an Amendment to Oil and Gas Lease that provides for an extension of the primary term of the Lease.