Selling or leasing 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 a mineral owner with a bonus payment in the thousands or even millions of dollars.
Frequently, what appears to be a substantial sum of money is in fact less than what the mineral owner could have received. Generating competition by seeking bids is often the best way to know what the minerals are really worth.
Nevertheless, presented with what seems like a substantial amount of money, a mineral owner might sign whatever document the oil and gas company provides. The 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.
Selling minerals
In the mineral acquisition context, an oil and gas company typically presents a simple purchase agreement and mineral deed. Such purchase agreement and mineral deed will almost always provide the company unfettered access across the surface to produce minerals and may also provide the company with the right to remove property or improvements.
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, the more likely the mineral owner will end up in a lawsuit brought by the surface owner.
Warranty clauses
The purchase agreement and mineral deed presented by an oil and gas company will also usually provide that a landowner will “warrant and defend” title to the minerals sold against any person who asserts an adverse claim (the same warranty clause is also usually included in mineral leases). It is part of a company’s due diligence to investigate title to minerals before acquiring or leasing them, and it has the funds to do so.
Mineral title problems are common and the mineral owner who agrees to “warrant and defend” title to minerals can spend significant time and money in court attempting to clear title for the company. Such a situation could be avoided by negotiating for a quitclaim deed or a no-warranty clause.
Leasing minerals
In the mineral leasing context, an oil and gas company typically presents a very simple mineral lease, and if the mineral owner also owns the surface, may also present a very simple surface use agreement. The company will generally include terms as discussed above.
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, ditches, waterways, etc. without compensating for such use; the right to 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, etc., can be significant for the landowner to remediate. Without a definition of what a “mineral” is, the company could be entitled to valuable dinosaur fossils or other materials that the landowner would not anticipate as being considered a “mineral.” It is also far more preferable for a landowner to cover its own attorney fees, than to risk having to pay the company’s $900-per-hour attorney fees.
Typically, an oil and gas lease will provide the company the right to pool or unitize lands into a drilling and spacing unit. Without language in an oil and gas lease that releases lands not being held by a well’s production after expiration of the lease’s primary term, the minerals can be tied up without payment for a substantial period of time if the company is not obligated to commence drilling in the drilling and spacing unit.
Surface use agreements
For surface use agreements, 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.
The company may offer to reclaim the land once operations cease in accordance with applicable law 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 may not adequately provide for a landowner’s unique needs.
Other negative consequences
If a landowner fails to limit liability, he or she could be liable 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.
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.
Toxic produced water might be disposed onto the land or into a landowner’s pore space if a surface use agreement does not prohibit it. Noisy compressor or pump stations could be constructed 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 agreements in whole or in part, without having to at least provide notice to the mineral owner, the mineral owner may find it very difficult to figure out whom to hold accountable for any breaches.
In conclusion, 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. It is impossible to list all of the issues in detail in this article. Given the amount of money at stake, the potential liability at stake, and various negative consequences, it is advisable that a mineral owner discuss a proposed oil and gas lease and/or surface use agreement thoroughly with a qualified attorney. Although it may cost money up front, it could save thousands or millions down the road. — Bethany A. Gross, The Falen Law Offices, LLC
(Bethany A. Gross is an associate attorney with the Falen Law Offices, LLC with a primary focus on property, environment, and natural resources law. Falen Law Offices, LLC, has attorneys licensed to practice law in Colorado, Idaho, Illinois, Missouri, Montana, Nebraska, New Mexico, North Dakota, South Dakota, and Wyoming. This piece should not be understood to state or imply that any lawyers of this law firm are certified as specialists in a particular field of law. Colorado does not certify lawyers as specialists in any field. The Wyoming State Bar does not certify any lawyer as a specialist or expert. Anyone considering a lawyer should independently investigate the lawyer’s credentials and ability, and not rely upon advertisements or self-proclaimed expertise. This piece is informational and is not legal advice. Use of this piece or contact with this law firm does not create an attorney-client relationship.)
