Hay Legal Group PLLC

Negotiating Mineral Rights, Part II

The post of 2/18/15 dealt with the scenario of buying a ranch from a Seller that wants to reserve her mineral rights. Texas law provides that the mineral estate is dominant to the surface estate, meaning the Seller, or any oil company she leases to, will have broad rights to use the surface of the ranch to develop the mineral estate.

In the event you acquire the ranch subject to Seller’s mineral reservation, and Seller subsequently signs an oil and gas lease, the oil company will have the right to conduct the following activities without compensating you and without obtaining your permission:

Seismic testing: The oil company may acquire a seismic survey that will be examined to determine optimal drilling locations. A seismic company will likely send a “thumper truck” to the ranch to obtain seismic data, or, alternatively, could use dynamite shots on or around the ranch to obtain the seismic data.

Surveying: Once drillsite locations are chosen, company employees or contractors will come to the ranch to stake the wells and prepare a plat.

Padsite preparation: Before the drilling rig arrives, the oil company will prepare a level pad site and an access road to the site. This may require removing trees and vegetation.

Digging of pits: Reserve pits and disposal pits may be dug to support drilling operations.

Use of water: The oil company will have the right to use the groundwater under the ranch to support its drilling operations, including the right to drill water wells on the ranch.

Drilling the well: This process will likely involve a substantial amount of time, people and equipment. The oil company will rent a drilling rig, and will then drill, case, perforate, and complete the well. Sophisticated, horizontal wells can be thousands of feet long and can involve numerous stages of fracing. The fracing process involves the high pressure pumping of water, sand, and chemicals into the well in order to cause fractures in the rock formation that will release the targeted oil or gas. Fracing jobs can use millions of gallons of water, and the oil company may need to construct a frac pond on the ranch.

Constructing Pipelines and Tank Batteries: An extensive pipeline network may be necessary to serve the wells drilled on the ranch, and tank batteries may be placed on the ranch to store oil production.

Maintenance: Once the well is completed, you are not done seeing oil field employees and contractors on the ranch, as the wells may require extensive maintenance.

Injection wells: Once the reservoir begins to lose pressure, the oil company may drill injection wells on the ranch to enhance recovery. Injection wells may also be drilled to dispose of waste water produced during the initial drilling process.

The above list is not exhaustive and is only meant to give a cursory overview of operations that may occur on the ranch without the consent of the surfaced owner.

LIMITING MINERAL OWNERS USE OF THE SURFACE ESTATE

The general rule that the mineral estate is dominant to the surface estate is subject to a legal principle known as the accommodation doctrine. Under the accommodation doctrine, the oil company may be required to modify its drilling operations to accommodate existing surface uses; however, the oil company is only required to accommodate such existing surface uses when there is no other reasonable way that the surface could be used, and where there are reasonable alternatives to access the minerals without disturbing the surface owner’s existing use of the land.

Additionally, the oil company’s use of the ranch for mineral exploration must be in compliance with the regulations of the EPA and the Texas Railroad Commission, and, depending on the location of the ranch, local ordinances that might prohibit drilling activities altogether, or at least restrict them.

NON-EXECUTIVE MINERAL INTEREST

Most rural ranches will not be protected from drilling operations by city regulations or the accommodation doctrine. Therefore, your best protection when buying the ranch is to negotiate for at least a partial mineral interest. In the event the Seller would like to retain a mineral interest, you should negotiate for the Seller’s mineral interest to be a non-executive mineral interest. This would give you the executive right (right to execute leases), while allowing Seller to retain the other benefits of her mineral rights, including bonus, royalty, and delay rental payments.

In summary, beware of the consequences of acquiring only the surface estate of your dream ranch, because the mineral estate owners will have broad rights to use the surface without your consent or compensation.

Written by Patton VanVeckhoven

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