Published March 12th, 2019 by Budd-Falen Law Offices, L.L.C.
Bethany A. Gross
The Falen Law Offices, LLC
It may come as no surprise to a mineral owner in an oil and gas producing state when an oil and gas company shows up out of the blue with an offer to buy or lease the mineral owner’s mineral interest. In other situations, a landowner may discover that not only does he or she own the surface but also the minerals underneath. Selling or leasing those minerals may seem like an easy way to earn some income from the land. This may be especially true when the oil and gas company tries to entice the mineral owner with a bonus payment in the thousands or even millions of dollars. However, unless a mineral owner is very careful, he or she can often be taken advantage of by these oil and gas companies.
Price May in Fact be Insufficient
Frequently, what appears to be a substantial sum of money is in fact less than what the mineral owner could have received. In other situations, minerals are locked for several years and what was good money in the beginning becomes paltry years later when the price of oil and gas is much higher.
A mineral owner should rarely take an oil and gas company’s word that it is offering the best price. Mineral owners can often increase the price offered for their minerals by creating competition. If an oil and gas company gets the impression that it is about to lose minerals to another company, it will increase its offer if it wants the minerals enough. Local attorneys who have experience in negotiating oil and gas leases, surface use agreements and sales of minerals are familiar with the oil and gas companies in an area and can often negotiate for the highest prices an oil and gas company will offer. Local attorneys may also be the most familiar with local markets and can often give an experienced estimate of what current prices are for particular areas.
Several companies and organizations are increasingly touting their services to mineral owners claiming they will help mineral owners sell or lease their mineral interests to an oil and gas company and receive a “fair price.” Some of these companies provide valuation resources. Although these valuation resources could prove interesting, they are often hardly useful. This is due to the reality that the minerals are only as valuable as the market dictates through competition. Although often advertised with large promises, these companies and organizations might not even get the best price. Often, such companies and organizations have not been around long and may not be well versed in the fluctuations and demands of local markets which would allow them to find the best price for a mineral owner. Also, due to their junior status in the local market, these companies and organizations can be limited to what oil and gas companies choose to do business with them. Even more dangerous, these focus exclusively on price while often neglecting to take the time to negotiate a good lease and surface use agreement. By neglecting the lease and surface use agreement, a mineral owner can be stuck in a bad deal that could harm the land and minerals for years to come.
Satisfied with the price, a mineral owner might just sign whatever document the oil and gas company provides. The oil and gas company may represent that what they are providing is what everyone else signs and is nothing to worry about. For the unwary mineral owner, problems may soon arise. Suddenly, the oil and gas company who bought or leased the mineral owner’s minerals claims that there is an issue with title and it is the mineral owner’s problem to fix it. Others may be surprised to discover that the documents they signed gave the oil and gas company the right to conduct activities on the land that a landowner would not otherwise allow. Whether it is ensuring that a fair price is received for minerals sold or leased, or ensuring that a mineral owner’s rights and interests are adequately protected, it is wise for a mineral owner to consult with an attorney who has experience in mineral acquisitions and leasing before signing anything.
In the mineral acquisition context, an oil and gas company typically presents a simple purchase agreement and mineral deed. The purchase agreement and mineral deed will almost always provide the oil and gas company unfettered access across the surface to develop and produce the minerals, including the right to remove property or improvements from the surface if the company so desires. These terms may be especially problematic for a mineral owner that does not also own the surface. The more rights to the surface a mineral owner grants to an oil and gas company, the more likely the mineral owner will end up in a lawsuit brought by the surface owner.
The purchase agreement and mineral deed presented by an oil and gas company will also almost always provide that the landowner will “warrant and forever defend” the title to the minerals sold against any person who asserts an adverse claim (this is also often included in a mineral lease). Unless a mineral owner can obtain title insurance for the sale of minerals (title insurance is almost never available for minerals) a mineral owner should not agree to so “warrant and forever defend” the title to minerals. It is part of an oil and gas company’s due diligence to investigate title to minerals before acquiring or leasing them, and it has the funds to do so. A mineral owner who agrees to “warrant and forever defend” title to minerals is essentially agreeing to insure the oil and gas company’s own work.
Problems with title to minerals are common and the mineral owner who agrees to “warrant and forever defend” title to minerals can spend significant time and money in court in an attempt to clear title for the oil and gas company. Even if a mineral owner is 99% certain that they own the minerals, a warranty requires the mineral owner to defend even the most absurd claims. A mineral owner could avoid such a situation by negotiating for a quitclaim deed or a no warranty clause instead.
In the mineral leasing context, an oil and gas company will typically present a very short and simple mineral lease, and if the mineral owner also owns the surface, may also present a very short and simple surface use agreement. Again, the oil and gas company almost always includes terms as discussed above which provide it with unfettered access across the surface, the right to remove property or improvements, and will require the landowner to “warrant and forever defend” title. Other common terms that typically appear in an oil and gas company lease and surface use agreement include the right to use any and all roads, easements, canals, ditches, waterways, etc. (including those located on adjacent property) without compensating for such use; the right to develop and produce anything that can be considered a “mineral”; and that in the event of dispute, the losing party pays the winning party’s attorney fees.
Damage caused by the oil and gas company to roads, easements, canals, ditches, waterways, etc. can be significant for the landowner to remediate on his or her own dime. Without a definition of what a “mineral” is, the oil and gas company could end up being entitled to valuable dinosaur fossils or other materials that the landowner would not have anticipated as being considered a “mineral.” A mineral owner should almost never agree to a provision granting the winning party attorney fees. Suing an oil company is often a David and Goliath scenario, and the oil and gas company could drastically outspend a mineral owner in legal fees, leaving the mineral owner with the check. The mineral owner should always request that only the oil and gas company pay the mineral owner’s attorney fees when the mineral owner wins, or request that each party pays their own fees.
Perhaps one of the greatest dangers in a lease is the possibility of tying up thousands of acres of mineral rights with either a single drilled well, or in some cases, even a non-producing well. Typically an oil and gas lease provides the oil and gas company the right to pool or unitize lands into a drilling and spacing unit. Without release language, all of a mineral owner’s minerals can be locked into an undesirable lease simply because the lease was included in a drilling and spacing unit that might not expire in the mineral owner’s lifetime. If an oil and gas company has plenty of time before it must drill within a drilling and spacing unit, it can simply wait and do nothing. In the meantime, the mineral owner receives no money from royalties that could have been received from a different oil and gas company willing to drill immediately.
Surface Use Agreements
If the mineral owner also owns the surface, it is very important to protect the land with a surface use agreement. Oil and gas companies typically offer very low or no compensation for building new roads, installing pipelines, installing transmission lines, for damages to crops and livestock, and for damages to fences and/or gates. An oil and gas company may offer to reclaim the land once operations cease in accordance with applicable law or regulations in conjunction with its required permit to drill. However, an oil and gas company can sometimes persuade the governmental agency to waive certain reclamation obligations. Also, applicable law and regulations may not adequately provide for a landowner’s unique needs.
Other Negative Consequences
Numerous other problems may not be addressed. If a landowner fails to limit his or her liability, he or she could be liable to an oil and gas company for millions of dollars in damages and lost profits if the landowner accidentally plows into an oil or gas pipeline. Indemnity is also important because a landowner should never be liable for the activities of the oil and gas company. For example, if someone else sues the oil and gas company for contaminating their drinking water and the landowner has broadly agreed to indemnify the oil and gas company, the landowner could become embroiled in an expensive lawsuit. Oil and gas companies have the insurance and funds in place to cover their own risks. Failing to limit liability and indemnity means that a landowner is taking on an industrial-sized risk that no landowner could afford and is well beyond what a landowner’s insurance policy would cover. A landowner should only be liable for his or her own willful or intentional acts. Further, a landowner should only agree to an indemnification clause that provides that the oil and gas company will indemnify the landowner for any activities the oil and gas company undertakes on the land.
An oil and gas company might dispose of toxic produced water or other materials onto the land or into a landowner’s pore space if a surface use agreement does not prohibit it. An oil and gas company might construct noisy and burdensome compressor or pump stations if a surface use agreement does not provide that such facilities are subject to a separate agreement. Further, if an oil and gas company has the right to assign an oil and gas lease and/or surface use agreement in whole or in part, without having to at least provide notice to the landowner/mineral owner, the landowner/mineral owner may find it very difficult to figure out who to hold accountable for any breaches of the lease/surface use agreement.
In the end, these are only some of the potential issues a mineral owner could encounter in agreeing to an oil and gas lease and surface use agreement. Each issue raises various pros and cons which should be discussed in detail with a qualified attorney. Given the amount of money at stake, the potential liability at stake, and various negative consequences that could forever harm the land, it is absolutely imperative that the mineral owner discusses a proposed oil and gas lease and/or surface use agreement thoroughly with a qualified attorney. Although there is an upfront cost in hiring an attorney, retaining a qualified attorney to negotiate on the mineral owner’s behalf can save thousands if not millions of dollars later down the road when unanticipated situations arise.
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