Hay Legal Group PLLC

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

The situation: You’re in negotiations to buy your dream ranch and have come to an agreement with the Seller on the purchase price, but the Seller informs you that she would like to reserve the minerals rights. She says there is an old pumpjack on the back of the property, and the well is producing a few barrels of oil a month that she would like to continue receiving royalty checks for. A friend in the energy industry advises you to bargain for at least a portion of the mineral rights. What should you do?

First and foremost, you should enlist the help of a reputable petroleum landman to determine the Seller’s mineral rights. Mineral title in Texas can be very complex, and as a result, the Seller may be confused as to what interest, if any, she has in the minerals under the ranch.

The landman can search the county property records and prepare a mineral ownership report, and if you would like to be thorough, you could have an oil and gas attorney prepare a title opinion based upon the landman’s research.

It’s worth noting that contemporary title policies do not cover mineral title, so the best form of insurance you can obtain would be the attorney’s title opinion.

The landman should also be able to help you determine the value of the minerals under the ranch based on factors such as the production history of the tract, local leasing trends, and the purchase price paid for minerals in the area on a net mineral acre basis (similar to per square foot comparables in real estate).

Once you have an understanding of the value of the minerals and the amount of mineral interest owned by Seller, you are ready to negotiate and have a variety of options open to you, including:

1. Negotiating for a fraction of the minerals, such as a 1/2 interest.
2. Allowing the Seller to reserve a royalty interest in the existing well only.
3. Negotiating for the mineral rights below a certain depth, allowing Seller the benefits of her old, presumably shallow, existing well, and allowing yourself to cash in on a potential deeper, non-conventional formation, such as the Eagle Ford and other shale formations that have revolutionized the oil and gas industry.

You would be well-served in seeking the assistance of a landman during your negotiations, and at any rate, you should ensure that an oil and gas attorney reviews the deed to ensure it accomplishes your goals.

In the event you agree to allow Seller to reserve all of the mineral rights under the tract, beware: 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.

Our next blog post will elaborate on the ramifications of owning the ranch subject to the Seller reserving all of the mineral rights. Stay tuned for next month.

Written by Patton VanVeckhoven

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