Gas and Oil Rights in State and Local Government Lands

Extraction of oil and gas is generally regulated in the U.S. by the individual states through statutes and common law. Federal and constitutional law applies as well.

Oil and gas producing companies do not always own the land they drill on.  Offshore oil and gas rights are owned by either the state or federal government and leased to oil companies for development.

Many states lease their lands to private operators.  Other states issue prospecting permits especially with respect to areas not known to be within a producing structure.  Under some jurisdictions, the Department of Natural Resources can lease state lands only if it makes a written finding that the interests of the State will be best served[i].

Unless explicitly separated by a deed, oil and gas rights are owned by the surface landowner.  Once severed from surface ownership, oil and gas rights may be bought, sold, or transferred, like other real estate property.

Although, many states prescribe the terms of the oil and gas lease by statute, the lease itself is a contract between the State as lessor on the one hand and private operators as lessee on the other[ii].  Where the statute prescribes how the grant will be made, that method must be pursued.

In some states, applications must be made to a designated board or commission.  In some other states, the board will renew a lease, even though no statutory right to a renewal exists[iii].

Legislative grants of property, rights, or privileges is construed strictly in favor of the state by the courts and whatever is not unequivocally granted in clear and explicit terms is withheld[iv].  Any ambiguity or obscurity in the terms of the statute must operate in favor of the state.

Government, in acquiring land for public purposes, may find that the property so acquired contains valuable deposits of gas and oil.  The authority to lease such lands for gas and oil operations depends not only on the authority conferred upon the particular public agency by the legislature, but also on the terms of the grant to the agency.

Thus, if a grant passes merely an easement, any underlying gas and oil remain in the grantor[v], but if the grant includes the fee, such deposits become the property of the grantee.

[i] Trustees for Alaska v. Department of Natural Resources, 865 P.2d 745 (Alaska 1993).

[ii] Harvey E. Yates Co. v. Powell, 98 F.3d 1222, 1229-1230 (10th Cir. N.M. 1996).

[iii] Sanchez-O’Brien Minerals Corp. v. State, 149 Ariz. 258 (Ariz. Ct. App. 1986).

[iv] Magnolia Petroleum Co. v. Walker, 125 Tex. 430 (Tex. 1935).

[v] Basin Oil Co. v. Inglewood, 125 Cal. App. 2d 661 (Cal. App. 1954).

Inside Gas and Oil Rights in State and Local Government Lands