Title Issues/Curative

Utah Clarifies Who Is Entitled to Proceeds of Unclaimed Mineral Interests

Oil and Gas Regulations, Royalty Issues, Title Issues/Curative, ,

On March 1, 2019, the Utah State Legislature passed a law clarifying what happens to unclaimed mineral interests located in the state of Utah.  The text of S.B. 78 and information about its passing can be found here.  This new law doesn’t change who owns unclaimed mineral interests, but it does streamline the process for transferring ownership and dealing with any proceeds derived from the interests.

The Utah Uniform Probate Code, Utah Code § 75-1-101, et seq., governs what happens to a person’s property at his death.  If a person dies without a will, then his property passes to his heirs by intestate succession.  Ordinarily, when a person dies without a will, his property passes to his immediate or extended family—beginning with his closest relationship and moving more distant until a taker is found.  If, however, a person has no family to whom his property can pass, his property will pass to the state of Utah.  That includes personal property, like bank accounts, furniture, and cars, as well as real property, like land and buildings.

A person’s ownership in real property is really a number of rights in the real property.  Normally, all of those rights remain intact and owned by a single person or in a familiar form such as “joint tenants.”  A “mineral interest” includes any interest in oil, gas, coal, gravel, or any substance that is “ordinarily and naturally considered a mineral.”  Often, a person who owns land will separate his ownership interest in the land’s minerals from the rest of his ownership interest in the land.  That means that he may sell his house and his land to one person, but sell the right to drill for oil or mine for coal to someone else.  Unless there is active drilling or mining on a property, it may not be obvious that the ownership rights have been separated.  In fact, it is not uncommon to discover many years after a property owner has died, that the person who owns the house and surface land does not own the underlying mineral interest in the land.

Mineral interests can be very valuable.  When a potentially valuable mineral interest is identified, the only person who can authorize drilling or mining on the land containing the interest is the owner of the mineral interest.  If the owner shown in the records of the county in which the land is located has died, then a person seeking to make use of the land’s minerals must find the current owner.  For property located in Utah, when the deceased owner of record has no family members, the current owner is the state of Utah.  S.B. 78 now clarifies the process by which a person who wants to make use of unclaimed mineral interests can go about getting permission. 

Under the new law, the Utah School and Institutional Trust Lands Administration (“SITLA”) has been charged with administering unclaimed mineral interests and their proceeds for the benefit of Utah’s public education.  Now, when an unclaimed mineral interest is identified, SITLA may bring an action in district court to be named the owner of record for the interest.  By becoming the owner of record, SITLA can deal with the mineral interest in the best way it sees fit.  That is, SITLA can hold the property and do nothing, it can sell the property, or it can lease the property to an “operator” to make use of the mineral interest.

As you can imagine, SITLA’s ability to determine what mineral interests may become subject to its administration is limited.  Because it would be nearly impossible for SITLA to find unclaimed mineral interests on its own, S.B. 78 requires “operators,” “owners,” and “payors” to notify SITLA that it has found a mineral interest that is potentially owned by the state.  That requirement does not impose a duty on every person who comes across an unclaimed mineral interest to report it to the state.  On the contrary, “operators,” “owners,” and “payors,” in this context, generally already have a stake in the mineral interest and owe some duty to the owner of the mineral interest.  For example, a “payor” is a person who undertakes to distribute oil and gas proceeds to the persons entitled to them.  Under the new law, the payor is not allowed to keep proceeds for himself under the guise that he cannot find to whom the proceeds should be paid.  Rather, the payor must notify SITLA that it is probably entitled to receive the unpaid proceeds to enable SITLA to perfect its right and receive the oil and gas proceeds for the benefit of Utah’s public education.

This new law benefits Utah public education because it streamlines the state’s ability to administer unclaimed mineral interests that the state owns by law.  It also benefits those who seek to make use of mineral interests because there is a clear process by which actual ownership of a mineral interest can be recorded and acted upon. 

Passage of the law highlights, however, that there may be a significant number of mineral interests in the state of Utah whose owner of record is deceased.  That leads to at least two lessons we can learn: (1) a person who owns a mineral interest should develop an estate plan that adequately passes his property to those of his choosing, whether it is family, friends, or otherwise, and (2) when administering an estate, pay attention to real property.  Whether a decedent dies intestate or has a valid will at death, a mineral interest that remains titled in the decedent’s name may not be discovered for many years.  When the mineral interest is finally discovered, if the decedent’s heirs cannot be located, that interest will pass to the state—probably not the result the decedent intended.

Will My Federal Lease Be Extended?

FAQs of Federal Oil and Gas Leases, Federal Lands, Title Issues/Curative, , , , , , ,

Like virtually all modern oil and gas leases, federal leases have a fixed primary term (typically 10 years)[1] and a habendum (i.e., “so long thereafter”) clause.  But understanding the provisions of the Mineral Lands Leasing Act of 1920 (“MLA”) and BLM regulations governing extension of federal oil and gas leases can be tricky.

Production in paying quantities.  Obtaining production is the most obvious means of lease extension – if there is a producing oil or gas well on the leased premises when the primary term expires, the lease is extended for so long as oil or gas is produced in paying quantities.[2]  The term “paying quantities” means production “sufficient to yield a reasonable profit after payment of all the day-to-day costs incurred after the initial drilling and equipping of the well, that is, the costs of operating the well, including workovers and maintenance, rendering the oil or gas marketable, and transporting and marketing that product.”[3]

However, it isn’t necessary for there to be actual production from a federal lease for it to be extended beyond the primary term; rather, the lease will be extended indefinitely if there is a well “capable of producing oil or gas in paying quantities” on the leased premises.[4]  BLM determines whether a well meets this requirement.  The well must be physically in a condition to produce by “flipping a switch” with little or no additional work.  For example, a shut-in well qualifies as capable of producing in paying quantities, but a well in which the casing has been set and cemented but not perforated does not qualify.[5]  The IBLA also has upheld lease termination when equipment required for production was not on site.[6]

This extension has its limitations, since the MLA grants BLM the authority to order the lessee to begin production within a period of not less than 60 days from receipt of notice from that agency.[7]  Failure to commence actual production within the time allowed by BLM results in termination of the lease.[8]  And because federal leases are not paid-up leases, the lessee also must pay annual rentals on or before each anniversary date of the lease until oil or gas in paying quantities actually is produced from the lease.

Drilling over primary term.  If the lessee is engaged in drilling operations at the expiration of the primary term of the lease,[9] the lease term will be extended for an additional two years if certain requirements are met.[10]  Actual drilling operations that penetrate the earth are required.  Mere site preparation, or even moving a rig on site, is not enough to obtain extension of a federal lease by drilling.[11]  The operations must be conducted under an approved application for permit to drill (“APD”).  Also, to get the drilling over extension, the lessee must have paid rentals on or before the lease anniversary date.

After commencing drilling operations, the lessee must diligently conduct such operations in a bona fide effort to drill and complete the well as a producer.  The standard is that of a reasonably prudent operator, and drilling operations must be conducted in a manner that “anyone seriously looking for oil or gas can be expected to make in that particular area, given the existing knowledge of geologic and other pertinent facts.”[12]  Notably, the drilling over extension relates only to the primary term, and it is not available if the lease was previously extended for another reason.  Nonetheless, the drilling over extension can apply if the lease was suspended (see below), since that results in tolling the lease term.

Commencement of additional drilling operations.  If production in paying quantities ceases on a federal lease in its extended term, the lessee must commence reworking operations or drilling operations for a new well within 60 days or the lease will terminate.  Because the MLA itself provides that the 60-day period to commence drilling or reworking operations begins running “after cessation of production,”[13] the safest course is to commence operations within that period.  BLM regulations, on the other hand, provide that the 60-day period does not begin until receipt of notice from BLM that the lease is not capable of production in paying quantities.[14]  As with drilling over the primary term, once commenced, continuous operations in the extended term also must be conducted with reasonable diligence.[15]

Assign part of the lease.  If the lessee assigns 100% record title (and operating rights) in a portion of a federal lease, such assignment will cause a segregation of the assigned lands into a separate lease.  Such segregation potentially can extend a federal lease in different ways.  First, if a discovery of oil or gas in paying quantities later is made on any portion of the original leased lands, both the base lease and the segregated lease will continue for the longer of the primary term of the base lease or for two years after the date of discovery.[16]  Interestingly, there is no requirement to complete a well – a discovery can be proved by other evidence.[17]  However, a well eventually must be completed as capable of producing in paying quantities in order to qualify.  As with other extensions, rental payments are still required until there is a discovery.  Second, if the base lease is in an extended term due to production (actual or allocated) or by payment of compensatory royalties, the undeveloped portion will continue for two years from the effective date of the assignment and so long thereafter as oil or gas are produced in paying quantities.[18]

Pay compensatory royalty.  If the leased premises are determined by BLM to be subject to significant drainage from a well on neighboring lands and the lessee enters into a compensatory royalty agreement with BLM and pays a compensatory royalty for the drainage, such payment will extend the lease for the period in which the compensatory royalties are paid plus one year thereafter.[19]  As a practical matter, BLM typically will not enter into a compensatory royalty agreement if it believes the lessee can drill an offset well.  The lessee also must pay rentals.

Unit-related extensions.  If consent of the necessary parties is obtained and approval is obtained from BLM (which includes a public interest determination), the lessee may commit a federal lease to a federal exploratory unit, which can affect lease extension.  A federal lease is not extended automatically through commitment to a unit agreement alone.  However, production of oil or gas in paying quantities anywhere in the unit area will maintain a committed federal lease so long as the lease remains committed to the unit.[20]  Production from a well that meets the paying quantities test on a lease basis but which is not sufficient to establish a unit well and form a participating area (often called a “Yates well”) nonetheless will extend the leases committed to the unit.[21]  Also, the drilling over extension discussed above will extend a federal lease when actual drilling over the end of the primary term occurs on any lease committed to the unit.  Until a well capable of production in paying quantities is drilled on the lease or a participating area is established and production is allocated to the lease, the lessee must continue paying rentals.

Commitment of a federal lease to a unit with lands both inside and outside of the unit area will cause the lands outside of the unit area to be segregated into a separate lease.  The uncommitted lands will be extended for the term of the original lease, but for not less than two years from the effective date of the commitment to the unit.[22]  Similarly, when all of the leased lands in a federal lease committed to a unit are eliminated from the unit by termination or contraction of the unit, the lease will be extended for the term of the original lease, but for not less than two years from the effective date of the elimination.[23]  However, in both cases, there is no extension if the public interest requirement is not met.  The public interest requirement is met “if the unit operator commences actual drilling operations and thereafter diligently prosecutes such operations in accordance with the terms of said [unit] agreement.”[24]

Partial commitment and elimination from a unit can result in some lease extension complexities.  In particular, if a federal lease is producing beyond its primary term when it is partially committed to a unit (and thus the non-committed land is segregated), the segregated portion that does not have a producing well will remain in effect for so long as production in paying quantities continues from the existing well(s) on the other portion, regardless of which portion is committed to the unit.[25]  This typically is referred to as “associated production.”  But if the lease is still in its primary term (even if the lease is producing), the non-producing portion will not receive the benefit of the existing production after segregation.  Instead, it will remain in effect for the rest of its fixed term or two years, whichever is longer.

Additionally, a producing lease fully eliminated from a unit will receive a fixed term equal to the later of two years from the effective date of elimination or its original primary term, even though the lease is producing in an extended term at the time of elimination.[26]  This means that if the lease subsequently is partially committed another federal unit it would not receive any “associated production” as discussed above.  There are many nuances and interesting results when a federal lease has been committed to and eliminated from multiple units.  Thus, the facts and relevant law should be reviewed carefully to determine whether a lease in this situation has been properly extended.

Communitization agreement related extensions.  Commitment of lands in a federal lease to a communitization agreement is the federal equivalent of pooling.  A communitization agreement generally must conform to an existing state spacing pattern or commission order and it must be approved by BLM.[27]  Unlike unitization, commitment of part of the lands in a federal lease to a communitization agreement does not result in segregation, and thus the segregation extension mentioned above does not apply.

Similar to federal units, if any portion of a federal lease is committed to a communitization agreement, the entire lease will be extended by production in paying quantities or by the completion of a well capable of producing in paying quantities on any communitized land.[28]  In addition, actual drilling operations over the primary term of a federal lease anywhere on the communitized lands will extend the lease for two years.[29]  BLM’s approval of the communitization agreement need not be obtained prior to the end of the primary term in order to obtain the lease extension benefits, but the agreement must be signed by all necessary parties and filed with BLM prior to lease expiration.[30]  Finally, if a communitization agreement is terminated, so long as the public interest requirement was met, the eliminated federal lease will receive an extension of the remainder of its primary term or two years, whichever is longer.[31]

Suspensions.  The MLA also provides for another means of keeping a federal lease alive that technically results in tolling of the lease term and adding the period of suspension to it.[32]  The MLA gives BLM the authority to grant two types of suspension of an entire federal oil and gas lease following receipt of a timely application from all record title holders (or the unit operator with respect to all leases committed to a federal unit) showing why such relief is necessary.  First, BLM may grant suspensions of both operations and production “in the interest of conservation” (known as a Section 39 suspension).[33] Section 39 suspensions are intended to provide extraordinary relief when a lessee is denied beneficial use of its lease.[34]  For example, BLM might grant a Section 39 suspension to allow time for the reviews required by environmental statutes such as NEPA and the Endangered Species Act.  BLM also has identified many situations in which a Section 39 suspension is not warranted – a significant one being when an APD is submitted incomplete or untimely.  A Section 39 suspension terminates if the lessee undertakes activity such as road construction, site preparation or drilling. Rentals and minimum royalty payments are suspended under a Section 39 suspension.

Second, BLM may grant suspension of operations only or a suspension of production only when the lessee is prevented from operating on or producing from the lease, despite the exercise of due care and diligence, by reason of force majeure (known as a Section 17 suspension).[35]  BLM may only grant Section 17 suspension after operations on the lease have commenced and production has been obtained.[36]

[1] Competitive federal leases issued between 1988 and 1992 have five-year primary terms, and some older leases with 20-year terms subject to renewal remain in effect.

[2] 30 U.S.C. § 226(e); 43 C.F.R. § 3107.2-1.

[3] Abe M. & George Kalaf, 134 IBLA 133, 138, GFS(O&G) 3 (1995).

[4] 43 C.F.R. §3107.2-3.

[5] See Coronado Oil Co., 164 IBLA 309, 323, GFS(O&G) 10 (2005).

[6] Int’l Metals & Petroleum Corp., 158 IBLA 15, 22-23, GFS(O&G) 1 (2003).

[7] 30 U.S.C. §226(i); 43 C.F.R. § 3107.2-3.

[8] Id.

[9] The primary term expires at midnight on the day immediately preceding the lease anniversary.

[10] 43 C.F.R. § 3107.1.

[11] Estelle Wolf, et al., 37 IBLA 195, GFS(O&G) 157 (1978).

[12] 43 C.F.R. § 3107.1.

[13] 30 U.S.C. § 226(i).

[14] 43 C.F.R. § 3107.2-2. The IBLA long has held that written notice from BLM is not required when a lease ceases producing in paying quantities and, thus, the 60-days to drill starts running upon cessation of production. While the federal district court overturned the IBLA on this point in Coronado Oil Co. v. DOI, 415 F. Supp.2d 1339, 1348 (D. Wyo. 2006), that decision is narrowly construed by the IBLA.  See e.g., Atchee CBM, LLC, 183 IBLA 389, 406-08, GFS(O&G) 6 (2013).

[15] 43 C.F.R. §§ 3107.2-2 and -3.

[16] 43 C.F.R. § 3107.5-1.

[17] See Joseph I. O’Neill, Jr., 1 IBLA 56, 62 (1970), GFS(O&G) 2 (1970).

[18] 43 C.F.R. § 3107.5-3.  However, a lease in its extended terms dated prior to September 2, 1960 may be in an extended term for any reason and still be eligible for the two-year extension.

[19] 43 C.F.R. § 3107.9-1.

[20] 30 U.S.C. § 226(m).

[21] Yates Petroleum Corp., 67 IBLA 246, 252-53, GFS (O&G) 251 (1982).  A “unit paying well” sufficient to justify the formation of a participating area requires sufficient production to repay not only the operating costs, but also the costs of drilling and completing the well with a reasonable profit.  43 C.F.R. § 3186.1.

[22] 43 C.F.R. § 3107.3-2.

[23] 43 C.F.R. § 3107.4.  If only a portion of the leased lands in a federal lease committed to a unit are eliminated, the lease is not segregated and there is no extension, but the all of the leased lands will continue in effect for so long as any of the leased lands remain committed to the unit.  Continental Oil Co., 70 I.D. 473, 474, GFS(O&G) 50-1964-19 (1963).

[24] 43 C.F.R. § 3183.4(b).

[25] Celsius Energy Co., Southland Royalty Co., 99 IBLA 53, GFS(O&G) 82 (1987).

[26] Id.

[27] 43 C.F.R. § 3105.2-3.

[28] 30 U.S.C. § 226(m); 43 C.F.R. § 3107.2-3.

[29] 43 C.F.R. § 3107.1.

[30] 43 C.F.R. § 3105.2-3(a).

[31] 43 C.F.R. § 3107.4.

[32] 43 C.F.R. § 3103.4-4(b).

[33] 30 U.S.C. § 209; 43 C.F.R. § 3103.4-4(a).

[34] See Savoy Energy, L.P., 178 IBLA 313, 323, GFS(O&G) 1 (2010).

[35] 30 U.S.C. § 226(i); 43 C.F.R. § 3103.4-4(a).

[36] See Savoy Energy, L.P., supra, at 325.

Top Leases: Assessing (and Avoiding) the Risks of Novation

Due Diligence, Fee Lease 101 Series, Lease Provisions, Oil and Gas Agreements, Title Issues/Curative, , , , , , , , ,

You only have three more months on the primary term of an oil and gas lease that was issued nearly five years ago with a 1/6th royalty.  A drilling permit should be issued any day now, and you anticipate commencing operations to drill a well in sufficient time to hold the lease.  You instruct your landman to obtain a top lease from the mineral owner just in case there is a hiccup and you can’t start operations in time to hold the existing lease. Your landman negotiates a new lease from the mineral owner covering the same lands but has to agree to a 3/16ths royalty in order to obtain the top lease.  But, the top lease fails to expressly state that it is a top lease to the existing lease and doesn’t contain any other language clarifying that the top lease will only be effective if and when the underlying existing lease expires.  Despite the precautionary top lease, the well permit is issued when expected and you are able to commence drilling a well in time to hold the prior existing lease.

After the well is drilled and completed, is there a risk that the mineral owner could successfully argue that the new top lease is a replacement of the existing lease and you are required to pay a 3/16ths royalty instead of a 1/6th royalty? In the oil and gas industry, you often hear landmen and attorneys frame the question as whether or not the top lease will be deemed a “novation” of the prior existing lease. But what is the standard to prove a novation? How likely is it that the mineral owner above could successfully argue that the top lease is a novation of the prior lease, even though the well was drilled in time to hold the prior existing lease? This article will provide a brief overview of the elements and burden of proof to establish a novation.

A recent 2015 case out of Pennsylvania provides an excellent overview and example of the novation analysis in the context of oil and gas leases. In Mason v. Range Resources-Appalachia LLC, 120 F. Supp. 3d 425, 433 (W.D. Pa. 2015), an oil and gas lease was issued in 1961 in Western Pennsylvania and was arguably held by gas storage operations on the property (and by the payment of rentals). Years later, during the Marcellus shale boom, a landman working for Range Resources obtained an oil and gas lease in 2007 from the same mineral owners and covering the same lands as the 1961 lease. Range Resources only later discovered that it already owned the existing 1961 lease. Testimony in the case indicated that the leasing environment at that time was “chaotic,” that Range Resources did not have a good process for evaluating lease validity, and that landmen were taking leases without conducting complete due diligence of possible existing leases. Range Resources did not drill a well within the term of the 2007 lease, and the mineral owners asserted that the 2007 lease was a novation of the 1961 lease (which had unique provisions allowing the lease to be held by rental payments for gas storage), and that the 2007 lease then expired.

The Pennsylvania court set forth four elements to show a novation, which elements are the same or similar in other jurisdictions that have undertaken a discussion of novation:

“(1) the displacement and extinction of a prior contract, (2) the substitution of a valid new contract for the prior contract, (3) sufficient legal consideration for the new contract, and (4) the consent of the parties.”1

The Pennsylvania court further stated that “whether a contract has the effect of a novation primarily depends upon the parties’ intent” and “the party claiming the existence of a novation bears the burden of demonstrating the parties had a meeting of the minds.” The court stated that evidence of the parties’ intent to enter in to a novation can be shown “by other writings, or by words, or by conduct, or by all three.” Courts in other states have similarly emphasized that a party claiming a novation has the burden of proof, and that the party asserting the claim of novation has the burden of proving all of the required elements for a novation.2 A novation is never presumed. Instead the presumption is that the new contract was taken conditionally or as additional security, absent evidence of intention to the contrary.3 In the Pennsylvania case, the court determined that the mineral owners continued to accept rentals under the 1961 lease even during the term of the 2007 lease, and there was no evidence that the parties expressly intended to replace the 1961 lease with the 2007 lease.

Returning to our example above, the case law suggests that a mineral owner attempting to argue that the top lease was a novation of the base lease would have a very challenging case. But there is still a risk of such a claim, even if the claim is ultimately for nuisance value only. How can an operator protect itself from novation claims? Obviously, the best approach is to always put language in any top lease that makes it clear that the lease will only go into effect if and when the base lease expires by its terms, and make that intent clear in any other written correspondence to a landowner (such as an initial offer letter).

But what if an operator accidentally obtains a standard lease with no top lease language when it already owns an existing lease? For drilling purposes, the mineral interest will be leased either way. But an operator should ideally take steps to address any ambiguity resulting from the top lease and clarify the intent of the parties. If the well is successfully completed in time to hold the existing lease, the best approach would be to have the mineral owner (and operator) sign and record a ratification document where the parties acknowledge that the base lease was held by the drilling of the well, and that the top lease will remain of record as a top lease only in the event the well ceases operations.

Another approach (with attendant risks) would be to send an informative letter to a landowner prior to drilling, informing them of the pending well, stating that the operator will deem the base lease as held by the drilling of the well. That would at least set up an estoppel argument, and the operator will know prior to drilling the well whether or not the landowner objects and claims a novation. Or, an operator may simply pay proceeds on the prior existing lease, see if the landowner accepts royalty payments under that lease, and simply run the risk of a future novation claim. There may also be facts that make an operator more confident that a novation argument will be unsuccessful that justifies a riskier wait-and-see approach.4

Each fact scenario will be different, and an oil and gas lessee must evaluate the facts and risks to determine what level of clarification and curative action it requires to address risks of novation claims when there are overlapping leases.

1 Another novation case in the oil and gas context, Warrior Drilling & Eng’g Co. v. King, 446 So. 2d 31, 33-34 (Ala. 1984), framed the elements as: “[T]o establish a novation there must be: (1) a previous valid obligation, (2) an agreement of the parties thereto to a new contract or obligation, (3) an agreement that is an extinguishment of the old contract or obligation, and (4) the new contract or obligation must be a valid one between the parties thereto.”
2 In re United Display & Box, Inc., 198 B.R. 829, 831 (Bankr. M.D. Fla. 1996). See also Fusco v. City of Union City, 618 A.2d 914 (App. Div. 1993); Alexander v. Angel, 236 P.2d 561 (1951); Scott v. Bank of Coushatta, 512 So. 2d 356 (La. 1987); Credit Bureaus Adjustment Dep’t, Inc. v. Cox Bros., 295 P.2d 1107 (1956).
3 For example, a Utah court conducting a novation analysis stated: “The burden of proof as to a novation by the transaction in question rests upon the party who asserts it; … an intention to effect a novation will not be presumed; … in the absence of evidence indicating a contrary intention, it will be presumed, prima facie, that the new obligation was accepted merely as additional or collateral security, or conditionally, subject to the payment thereof; and the intention to effect a novation must be clearly shown.” First Am. Commerce v. Washington Mut., 743 P.2d 1193 (Utah 1987); see also Tri-State Oil Tool Indus., Inc. v. EMC Energies, Inc., 561 P.2d 714, 716 (Wyo. 1977).
4 For example, if the existing lease covers multiple parcels in several drilling units, and the new lease only covers one parcel, that may make an argument for a novation more difficult. Also, if there are unrecorded documents that evidence clear intent that the second lease was intended only as a top lease, that fact may make an operator more confident that a novation claim would be unsuccessful.

Utah Oil & Gas Update

Oil and Gas Regulations, Royalty Issues, Title Issues/Curative, , , , , , , , , , , , , ,

UTAH COURT OF APPEALS APPLIES THE OPEN MINES DOCTRINE, REJECTS PETITION TO CONSTRUE WILL IN FAVOR OF LIFE TENANTS

In re Estate of Womack, 2016 UT App 83, 2016 WL 1729528, involved a decedent whose formally probated Will devised a 160-acre parcel to his three children, in equal shares. See id. ¶ 2. In his Will, the decedent specified that “the oil, gas and mineral rights under the said property . . . are devised to each of my children, share and share alike, for life,” remainder to the decedent’s grandchildren. Id. In 1990, the district court entered an estate closing order that named the decedent’s three children as the owners of the 160-acre parcel outright. Id. ¶ 3. In 1992, the district court amended the estate closing order “to conform to the Will” and provide for the grandchildren’s remainder in the minerals, which had been incorrectly omitted in the prior order. Id. ¶ 4. In 2008, an oil and gas company leased the minerals underlying the 160-acre parcel, but a question arose as to who was entitled to the proceeds of production. Id. ¶ 5.

In an effort to clarify who was entitled to the proceeds of production, one of the life tenants petitioned the district court to reopen the decedent’s estate and construe the Will in favor of the life tenants. According to the life tenant, the prior order’s lack of specificity resulted in an ambiguity that should be resolved in favor of the life tenants, based on an affidavit from the drafting attorney regarding the decedent’s intent. Id. ¶¶ 5 and 6. Two of the remaindermen challenged the petition, asserting that the requested relief would require the court to re-construe a provision of the Will that had already been construed, and that the court would be required to vacate or modify its prior order. This, the remaindermen contended, was barred by a six-month statute of limitations. Id. ¶ 14 (citing Utah Code Ann. § 75-3-412). The district court agreed with the remaindermen and denied the life tenant’s petition to construe the Will.

The life tenant appealed, claiming that the district court had misinterpreted the nature of the petition, and that the petition only sought clarification of the prior estate closing order, which was not subject to the six-month limitations period. The Court of Appeals affirmed the district court’s decision. The Court cited the open mines doctrine and concluded that the remaindermen were entitled to the proceeds of production because the Will did not specify otherwise. The Court found that the prior estate closing order had already construed the Will as creating life estates in mineral rights, and “[l]ife estates in mineral rights, by default, do not encompass a right to any proceeds from new mineral extraction.” Id. ¶ 17 (citing Hynson v. Jeffries, 697 So.2d 792, 797 (Miss. Ct. App. 1997). In the Court’s view, the Will was not ambiguous, and clarification was not necessary. Id. The Court found that the prior estate closing order “implicitly granted extraction proceeds to the [remaindermen] (albeit by default).” Id. ¶ 19. Because the petition sought to prove the decedent’s intent for the life tenants to receive income from the minerals, “rather than letting such proceeds default to the holders of the remainder” under common law, the Court found that the six-month time limit for vacations and modifications of prior orders applied, and the petition was time-barred. Id.

UTAH LEGISLATURE CONFIRMS THAT FEDERAL, STATE, AND TRIBAL INTERESTS MUST BE EXCLUDED WHEN CALCULATING SEVERANCE TAX ON OIL AND GAS

In the May 2015 edition of the Rocky Mountain Mineral Law Foundation Mineral Law Newsletter, we reported on the Utah Supreme Court’s decision in Anadarko Petroleum Corporation v. Utah State Tax Comm’n, 2015 UT 25, 345 P.3d 648 (Utah 2015). In Anadarko, the Court held that an oil and gas operator may exclude federal, state, and tribal interests when calculating its severance tax rate.

The Utah legislature recently codified the rule established by Anadarko. See S.B. 17, ch. 324, 2016 Utah Laws (amending Utah Code Ann. §§ 59-5-102 and 59-5-103.1). S.B. 17 confirms that the severance tax on oil and gas does not apply to federal, state, or tribal interests in oil and gas. As such, for purposes of determining the amount of severance tax, these exempt interests should be excluded when calculating the value of oil and gas and the tax rate. S.B. 17 applies to a taxable year beginning on or after January 1, 2015, as well as to severance taxes “for any taxable year, including a taxable year beginning before January 1, 2015, that is the subject of an appeal that was filed or pending on or after January 1, 2016.” Id.

(Re-printed from Andrew J. LeMieux, Utah Oil & Gas, Rocky Mountain Mineral Law Foundation Mineral Law Newsletter, May 2016)

Practical Advice Regarding Pooling Clauses

Fee Lease 101 Series, Lease Provisions, Title Issues/Curative, Uncategorized, , , , ,

Pooling is a fundamental concept within oil and gas law, but one that is often misunderstood. Pooling is most commonly defined as “the combining of two or more tracts of land into one unit for drilling purposes … accomplished voluntarily, or through compulsion.”1 In other words, it is how a lessee is able to extend a lease without physically drilling on the lease. For private (fee) oil and gas leases, the ability of the lessee to pool the lease is typically addressed in the lease provisions. These provisions are known as the pooling clause. This article provides some practical tips in dealing with the issues that arise from pooling clauses.

The first question that should be asked is if there is an existing spacing order in place for the lands and formation(s) involved. Many pooling clauses provide that the lease can only be pooled in conformity with a spacing order from the applicable state regulatory agency. If you encounter such a clause, you will need to check for a state spacing order, and if an order is not already in place, you will need to initiate the required steps to obtain an order. There may also be an order in place that does not match your proposed operation. If so, a new order would need to be obtained modifying the existing order. If spacing is governed by statewide spacing, you will want to double check the language in the pooling clause to confirm that statewide spacing is sufficient.

If the proposed well will be a horizontal well, there are special considerations that need to be addressed. Some lease provisions specifically address horizontal spacing. Many states have special statewide rules that are in place for horizontal wells. Particular attention should be paid to any total acreage limitation included in the pooling clause of the lease, for example, the lease cannot be included in a pooled unit for oil greater than 160 acres. If the lease has this limitation, an amendment to the lease may be the best option to eliminate this conflict.

The next question when reading a pooling clause is what role, if any, the lessor will have in the pooling process. The most common oil and gas lease terms allow the lessee to pool the lease without obtaining any additional consent from the lessor. In some cases, if the lessor desires to retain this right, they will strike out the pooling provision in the entirety, or add a specific lease provision requiring their consent. If the lease does not have a pooling clause, or if the pooling clause is stricken, the lease can only be pooled with the express consent of the lessor. This consent would be expressed by having the lessor execute a pooling agreement. The pooling agreement should be recorded to provide third parties with notice of the terms of the agreement. If obtaining consent is not an option, compulsory pooling by the governing state agency would be the alternative.

Some leases require that notice of the pooling be provided to the lessor in order for the pooling to be effective. If the pooling clause requires that notice be mailed to the lessor, an effort should be made to locate both the last address of record and a current address, utilizing online resources. If a more recent address is discovered, the notice should be mailed to both the address of record and the new address that was located. More commonly, the lease requires that for it to be properly pooled, a proper declaration of pooling needs to be executed and recorded by the lessee in the applicable county. Care should be taken in drafting the declaration of pooling. It should be signed by all parties owning a working interest in the lease. In order to be recorded, the signatures will need to be originals and it will need to be notarized. It should describe the specific lease(s) being pooled, including the recording information (Book/Page, Entry No.) for each lease. It should cite the authority to pool contained in the lease, for example: “Pursuant to Paragraph 10 of the lease.” It should define the pool, the total lands included and the formation(s) covered. If the lease covers more lands than what is being pooled, the declaration should describe all of the lands covered by the lease. This is particularly important in states that utilize a tract index recording system. If the pooling is in conformity with a state spacing order, it should be noted. If the party executing the declaration was not the original lessee, a statement as to the succession (Book/Page, Entry No. of the document transferring the interest in the lease) should be included. If the operator is drilling the well to earn an interest in the lease from another party, for example under a farmout agreement, it is recommended that the declaration be executed by both the record title owner and the party that is to earn the interest. Doing this would avoid any dispute as to the correct party to execute the declaration. Once executed, confirmation should be made that the declaration of pooling is properly recorded and, if it is a tract index state, that it is has been properly indexed against the lands.

Confirmation should be made that the effective date of the pooling is either the date of, or prior to the date, of first production. The effective date should also be prior to the termination date of the lease. Most lease provisions provide that the declaration of pooling must be prior to lease expiration. In the event the well was drilled prior to lease expiration, but the declaration of pooling was not timely recorded in order to avoid any issue, the lessor should execute a pooling declaration which includes a statement that the lease was properly pooled prior to the expiration date of the lease.

Finally, after reading the specific pooling provisions in the leases to be pooled, a broader examination of some additional issues raised by pooling the lease should be conducted. Confirmation should be made that all of the leases to be pooled are private leases. If the pool includes either federal, Indian, or state leases, additional steps will be needed to pool these leases. As to state leases, various state agencies have adopted different rules and procedures regarding private pooling agreements. As to federal and Indian leases, there are two ways to pool them: a federally approved unit or communitization agreement. The nuances of federal unitization and communitization will be further explored in a subsequent article in this series.

1 Patrick H. Martin and Bruce M. Kramer, Williams & Meyers, Oil and Gas Law § P Terms. (LexisNexis Matthew Bender 2016).

Pugh(eee)…Get Those Lands Outta Here: A Look at the Pugh Clause

Fee Lease 101 Series, Lease Provisions, Title Issues/Curative, , , , , , , ,

For the unwary, Pugh clauses (pronounced “Pew”) can sometimes stink.  Although it is a fairly common provision in many fee oil and gas leases today, there is no industry standard Pugh clause.[1] As a result, the many variations of the Pugh clause can provide unpleasant surprises to both lessors and lessees who assume that all Pugh clauses operate similarly.  From an industry perspective, it is essential for landmen negotiating oil and gas leases to understand how a Pugh clause will operate an­­­­d potentially affect other provisions in the lease.  Additionally, with the sharp decrease in oil prices, many oil and gas companies have pushed drilling schedules into the indefinite future.  The delay in drilling necessitates a careful review of the underlying lease portfolios to determine when certain leases will expire. A thorough understanding of the effect of a  Pugh clause’s on a lease is vital to this review.

So What Is It?

As a general rule, production, or other operations, on “any part of the land, included in an oil and gas lease will perpetuate the lease beyond the primary term as to all of the land covered by the lease.”[2] Moreover, if lands are pooled or unitized, production or operations on any of the lands within the unit can extend all leases committed in whole, or in part, to the drilling or spacing unit.[3] This means that an oil and gas lease can be held past its primary term by production on only a small portion of the leased lands or on lands outside of the leased lands that are located in a drilling or spacing unit. Understandably, lessors can be less than thrilled to discover that all of their lands are locked-up by a lease when only a small portion of their lands are included within a drilling or spacing unit—preventing them from re-leasing their non-producing lands so that they can receive additional bonus payments, rentals, or production royalties from these lands. Without an “express provision in the lease, the lessor only has recourse to the implied covenant of reasonable development (or further exploration in a state that recognizes such a covenant)” to force additional development on the lessor’s lands or allow them to re-lease the lands altogether.[4]

A Pugh clause can prevent this scenario. Named after a Louisiana lawyer named Lawrence Pugh,[5]  the Pugh clause operates to sever the non-producing lands or interval based on some defined criteria, such as acreage or depth.[6] The impact of a Pugh clause “increases the burdens on the lessee who must take additional steps to maintain the lease as to the [non-producing portion]; this may include a return to delay rentals,” (if the lease is not a paid-up lease), “or initiation of drilling operations within a specified period.”[7] In other words, by including a Pugh clause in a lease, any production located on or attributed to leased lands will no longer be sufficient to extend the primary term for the entire leasehold. If the lessee takes no actions to extend the lease excluded by operation of the Pugh clause, the lease will expire as to these excluded lands. This provides an obvious benefit to lessors, who can once again make the forfeited lands available for lease. Since Pugh clauses are decidedly pro-lessor, they are “virtually always inserted into or attached to a lease at the insistence of the lessor’s attorney.”[8]

Horizontal and Vertical Pugh Clauses

It is important to note that Pugh clauses can be horizontal, vertical, or both.  A horizontal Pugh clause “has the effect of severing a leasehold as to the pooled and non-pooled portions on the basis of horizontal planes,” while a vertical Pugh clause “has the effect of severing a leasehold on the basis of vertical planes only.”[9] This means a Pugh clause can be structured by depth (e.g., severing all lands below 100 feet of a drilled well or the bottom of the producing zone), or by acreage.

Give Me An Example

Because there is no industry standard Pugh clause, there can be as many different forms of the clause as there are people drafting the clause.  The following is an example of a generic Pugh clause:

A producing well, or well capable of producing, will perpetuate this lease beyond its Primary Term ONLY as to those lands as are located within, or committed to, a producing or spacing unit established by Government authority having jurisdiction.[10]

This provision in an oil and gas lease operates to segregate the lease at the end of the primary term according to whether the leased lands were within a drilling or spacing unit established by the appropriate government agency. Any lands not located within a drilling or spacing unit would not be extended by production (keeping in mind, of course, that these lands could be extended by other provisions in the lease, such as those pertaining to drilling operations). As a title examiner, it’s not uncommon to see other triggering criteria in a Pugh Clause—such as one or two years after the end of the primary term, or when drilling operations on any portion of the leased lands cease for a specified amount of time.

It’s crucial to clearly specify how and when the clause will come into play, as illustrated by the following real-life Pugh clause:

Notwithstanding anything to the contrary herein, this lease shall terminate after the primary term as to all the lands not included within a drill site spaced unit as provided by the proper Governmental Authority….

This Pugh clause is poorly drafted because it segregates the leased lands only on the basis of whether they are within a “drill site spaced unit,” without clearly specifying that the spaced units must also be producing in order for the lease to be extended beyond its primary term for those lands.  Read literally, the provision raises the question of whether a lease would be extended for lands that are merely subject to a spacing order (and thus presumably within a drill site spaced unit) when there is no production within the drilling or spacing unit, assuming that there is production elsewhere on the lease lands, as was the case in this instance.[11] Although it’s likely that the parties to the lease intended that the clause include a production requirement, it’s uncertain how a court would rule if this clause was litigated, particularly since Pugh clauses tend to be strictly construed.[12]

Problematic Pugh clauses, such as the example above, often arise when the Pugh clause is merely copied and pasted from another oil and gas lease, which can result in omitted words or phrases, or inconsistencies with other provisions of the lease. Problems can also arise when a Pugh clause is drafted by a person who does not fully understand the impact of words or phrases included in, or excluded from, the provision.

Be Careful

As illustrated by the poorly drafted Pugh clause above, not all Pugh clauses are created equal, and it’s important to review and understand the specifics of a Pugh clause when negotiating an oil and gas lease, or when later evaluating how a Pugh clause affects the extension of a lease.

 

[1] 1 Bruce M. Kramer and Patrick H. Martin, The Law of Pooling and Unitization, § 9.01 (LexisNexis Matthew Bender 2015), hereinafter referred to as “Pooling and Unitization,” citing Robin Forte, “Helpful Hints: The ‘Pugh’ Clause,” 42 Landman 9 (May/June 1997) (“Just as there is no standard oil and gas lease, today there is no standard ‘Pugh’ clause.”).
[2] Adams, James W., Jr., “Lease Issues for Opinion Purposes,” Nuts and Bolts of Mineral Title Examination, Paper 11, Page No. 517 (Rocky Mt. Min. L. Fdn. 2015), hereinafter referred to as “Lease Issues”.
[3] Id.
[4] Pooling and Unitization § 9.01.  For a discussion on the implied covenant to develop as it relates to Montana law, see Miller, Adrian, “The Implied Covenant to Drill and Develop in Montana,” available at:  https://www.hollandhart.com/implied-covenant-to-drill-and-develop-in-montana.
[5] Pooling and Unitization § 9.01, ft. 3.
[6] Patrick H. Martin and Bruce M. Kramer, Williams & Meyers, Oil and Gas Law § 669 (LexisNexis Matthew Bender 2015), hereinafter referred to as “Oil and Gas Law.”
[7] Pooling and Unitization § 9.01.
[8] Pooling and Unitization § 9.04.
[9] Oil and Gas Law § H Terms. According to one commentator, the terms “horizontal Pugh clause” and “vertical Pugh clause” are often mistaken with one another and, as a result, are used somewhat interchangeably within the industry.  Consequently, the commentator suggests that Pugh clause should clarify whether the provision affects depth or acreage. See http://landmaninsider.com/pugh-clauses/.
[10] This example is given in Lease Issues, p. 518.
[11] The question regarding this Pugh clause’s operation might be even more muddled in some states, such as New Mexico, which have standard spacing requirements.  See N.M. Admin. Code 19.15.15.
[12] Pooling and Unitization § 9.01. The treatise notes, however, that “strict construction is by no means uniform,” and “a few courts have seemed almost eager to interpret such provisions in favor of the lessor through readings that do not appear entirely reasonable.”  Id.

Utilizing Online Resources to Save Time: A Primer for Landmen and Title Examiners

Due Diligence, Title Issues/Curative, , , , , , , ,

Advances in technology save everyone time. We all look to technology to organize and inform our daily lives in both professional and personal settings. How can technology be used to save time when dealing with common title issues? Something as simple as knowing where to obtain a patent or how to determine potential heirs can save a landman time and avoid unnecessary questions and research.

There is a vast amount of title information available online, but knowing where to find it is half the battle. This article provides a brief summary of some of the best online resources available to landmen. These websites1 provide materials ranging from oil and gas plats to well production records, which can be used to form a more complete and accurate picture of the land and title issues being examined.

Because most land ownership in the Western United States originated with the federal government, a good place to start is with the Bureau of Land Management (“BLM”) website2, regardless of the current ownership of the land. The BLM website provides land patents, surveys, master title and oil and gas plats, and historical indices for a select group of states:

  • Official BLM Patents are particularly useful to confirm federal reservations.
  • Survey plats can be used to track changes in legal descriptions.
  • Plats provide a visual representation and depict the current uses on those lands in a given township and range.
  • Historical indices provide a ledger-like record of all uses that have occurred in a given township and range.

However, land status records for a few of the Western states are maintained separately on the respective BLM state office’s website.3 See the BLM website for more information regarding the availability of these records.

In addition, geographic reports with accompanying serial register pages are available through the Bureau of Land Management Land & Mineral Legacy Rehost 2000 System (“LR-2000”) website4. These reports can be obtained by searching lands by township, range, and section. Geographic reports provide a list of all uses, including mining claims, federal leases, right-of-ways, and communitization agreements for a designated geographic area and will provide the BLM internal serial number for each use. Once you have the serial number, an accompanying serial register page which is available for both inactive and active uses provides more detailed information pertaining to each use.

The next source of valuable information is the state entity tasked with regulating oil and gas. Various oil and gas records can be found on state oil and gas commission websites:

Unfortunately, most states have unique websites that require a little patience to navigate. Also, some states do not provide older production records online. Although it is easier to search in some states than others, most states also provide spacing and pooling orders. These records are helpful to find detailed information on a well or to determine whether a lease has been properly held by production.

Individual county resources available online can vary greatly. Fortunately, more and more counties are providing online parcel viewers, often with aerial maps, which can be used to give a visual representation of the land, surface parcel boundaries, parcel acreage, roads, railroads, utilities, and bodies of water. Most county websites at least provide the status of property taxes which can help confirm surface ownership, while other counties provide additional resources through a paid subscription service.

You may also need to research corporate status or history of an entity. Every state has an entity that regulates the corporations registered in the state5 with a range of information that can be obtained regarding a business entity including (but not limited to) officers, addresses, and formation dates. One type of data that is typically available from these Secretary of State sites, but often requires a fee, is the corporate succession. However, there are other online resources that are free and easier to use. For example, the BLM Wyoming website offers the Corporate Name Change & Mergers Index6 and the National Association of Division Order Analysts maintains a mergers and acquisitions database as well.7 In the event a landman is faced with a gap in title between two entities, these resources particularly helpful to confirm whether an entity has merged or changed its name.

In addition to government sponsored websites, there are also some private sites that can be useful, especially in the area of genealogy. Genealogical research may be required for various title curative issues that may arise, including determining potential heirs, or confirming the death of a join tenant. There are many helpful resources online to troubleshoot these issues, including GenealogyBank.com8, a subscription-based service with a database of 6,500 newspapers which can aide in the search for an obituary or death notice. In addition, Ancestry.com9 can be used for a more intense, subscription-based genealogical search for census records, birth and death certificates, and other historical documents like military and marriage records.

These easy to access records can save time and money when dealing with basic title issues that arise at the outset of many, often time-sensitive, title projects.

1Many of these online resources limit their liability regarding the accuracy of the information provided.
2https://www.glorecords.blm.gov/default.aspx.
3For example, Nevada and Wyoming.
4http://www.blm.gov/lr2000.
5Colorado, Delaware, Montana, New Mexico, North Dakota, Utah, Wyoming.
6 http://www.blm.gov/wy/st/en/resources/public_room/corporate_list.html.
7http://www.nadoa.org/forms/ma/From_To_Updated_2014.pdf.
8http://www.genealogybank.com/.
9http://www.ancestry.com/.

The Granting Clause: The Gift That Keeps on Granting

Fee Lease 101 Series, Lease Provisions, Title Issues/Curative,

The granting clause of a lease contains the required words of grant that create an interest in the lessee.1 This clause is typically found at the beginning of the lease and is often overlooked when drafting a lease, to the detriment of the lessee. The granting clause generally covers three main topics: (i) the leased substances; (ii) the associated easement rights; and (iii) the property description.

Leased substances

The granting clause should include a careful description of the substances covered by the lease. Typical granting clauses include language such as “oil, gas, and other minerals,”2 “oil and all gas of whatsoever nature or kind,”3 or some variation of these simplistic descriptions. Even though this language may, at first glance, seem uncontroversial, the failure to adequately list the substances covered by the lease has led to a multitude of lawsuits.

For example, the failure to adequately define the leased substances can lead to questions whether the lease covers coalbed methane, which depending on the state, may not be included in a general grant of gas. Another problem is encountered when interpreting what is included in the “other minerals” under a lease. The parties to a lease should not rely on a court to dictate what substances are covered by that lease.

As a practical matter, the goal in drafting the leased substances portion of the granting clause is to ensure that the lease covers all substances that are necessary to produce the oil and gas from the leasehold. Any special substances that may be encountered, such as coalbed methane, helium, carbon dioxide, hydrogen, or sulfur, should be individually listed in the lease. By including a list of known or expected substances, together with catch-all language to cover substances that may not yet be known or expected in the field, the lessee can avoid unfavorable interpretations by a court that could render the lease unprofitable or unusable.

Associated Easement Rights

The second part of the granting clause is the description of the easement granted to the lessee. Historically, the grant of an easement and the right to conduct surface operations has been broadly, if not vaguely, described in the lease. The lessee has, instead, relied on the implied right of access to the surface estate arising from the mineral estate’s dominance. Reliance on this implied right of access can be problematic when the surface owner engages in activities that prevent or inhibit oil and gas development or when the surface owner disagrees with and challenges the lessee’s use of the surface estate.

As for split estate lands, the lessee should be careful to ensure that the lease does not grant and that the lessee does not rely on a right of access that was not reserved or conveyed in the deed creating the split estate. Keep in mind that the lessor can only grant the rights that the lessor owns.

To avoid these issues, I recommend that this portion of the granting clause describe the specific activities that the lessee will be conducting on the leased premises, such as construction and location of the various production facilities, powerlines, roads, pipelines, and any other activity that may foreseeably be required to produce the oil and gas. By describing the specific activities, the surface owner is put on notice of the types of activities that the lessee is planning to conduct on the surface estate. If a lawsuit ensues, it will be very difficult if not impossible for the surface owner to argue that they were unaware that the surface would be used for these activities.

I note also that, even though the lessee, through careful drafting of the lease, may be able to secure surface access for gathering facilities and other surface disturbance activities not related to production of oil and gas from the leasehold, this grant of access could be terminated upon expiration of the lease term. For such activities, I recommend that the lessor obtain a separate surface use agreement specifically granting the right to conduct these activities to ensure that they survive termination of the lease.

The Leased Premises

Finally, the granting clause should include a description of the land covered by the lease. This should, of course, include a legal description of the property together with the acreage covered by the leasehold. For small or irregular tracts of land, the lease should include a Mother Hubbard clause4 to ensure that inadequately described property that is adjacent to and contiguous with the leasehold will be covered by the lease.

In the event that the lease is limited in depth, the property description should include language that identifies the specific interval covered by the lease, making sure that the depth description is tied to a measured depth in a specific well. A carefully crafted depth description will avoid confusion as to the actual depth covered by the lease.

Other Considerations

A common, but surprising, issue is that some granting clauses fail to include present words of grant. That is, the granting clause describes the activities that can be undertaken on the leasehold but does not expressly grant the rights to the underlying oil and gas.5

Another issue that you should be aware of is that, with horizontal drilling resulting in ever increasingly long laterals, the easement in the granting clause should include language granting the lessee a subsurface easement to accommodate horizontal development. Again, if this subsurface easement will be used for the benefit of lands located outside the leasehold, the subsurface easement should be created by a separate agreement between the parties, thereby preventing the easement from terminating with the underlying lease. Also, for a lease limited by depth, the granting language should include a subsurface easement for all depths that must be traversed in order to access the leased interval.

In summary, through careful drafting of the various components of the granting clause, the lessee can protect itself from unexpected complications and ensure that it is allowed to fully develop and produce the oil and gas resource.

1Patrick H. Martin & Bruce M. Kramer, Williams & Myers, Manual of Oil and Gas Terms 497 (12th ed. 2003).
2David E. Pierce, Incorporating a Century of Oil and Gas Jurisprudence Into the “Modern” Oil and Gas Lease, 33 Washburn L. J. 786 (1994).
3Martin & Kramer.
4A clause commonly included in contemporary leases to meet the problem of adequately describing strips of land owned by a lessor contiguous to the land specifically described by the lease and intended to be covered by the lease. Id. at 246. Also known as a cover-all clause or an all-inclusive clause.
5Pierce.

Beyond Six Feet Under: Mineral Ownership and Development Issues Involving Cemeteries

Title Issues/Curative, ,

Recent news coverage has spurred discussion on the rights that burial plot owners have in cemeteries and whether or not drilling for oil and gas should be prohibited on or under lands reserved for the dead.1 As horizontal drilling brings oil and gas development closer to population centers, the oil and gas industry will need to address some of the unique title and public policy issues surrounding mineral development under cemeteries.

Often, individual burial plot deeds read like warranty deeds and do not contain mineral reservations. However, burial plot deeds may contain a qualifier that the deed is granted for the sole purpose of the burial of human remains. If a burial plot deed grants fee title and contains no mineral reservations, it is conceivable that the burial plot owner (or his or her estate) could attempt to make a claim to the minerals underneath. Under general rules of deed interpretation in most states, a deed with no mineral reservations is deemed to convey fee title, including mineral rights.

On the other hand, burial plot transactions are not typical real property transactions. It is arguable that burial plot deeds are not intended to grant fee simple title to the land. The general rule is that “one who owns or has an interest in a cemetery for burial purposes does not acquire any title to the soil, but only an easement or license for the use intended.”2 Case law suggests that a burial plot deed should be interpreted as conveying only such interests in the burial plot that are necessary for the purpose of burying human remains (in other words not mineral rights). However, it is not clear that this rule applies in each state.3 From a public policy standpoint, it could be very difficult to track down the heirs or devisees of burial plot owners who died centuries ago.

If burial plot owners do not have a valid mineral claim, then who does? Public entities, common-law dedicators, and cemetery operators are likely candidates. For example, if a parcel of land is owned in fee simple by a public entity and dedicated for a cemetery, then the public entity (such as the city) would own the fee title, including mineral rights. If a parcel of land is privately owned in fee simple and dedicated on a subdivision plat or conveyed as a common-law dedication for use as a cemetery, then arguably the mineral title remains with the dedicator.4 If a cemetery operator acquired fee simple title, including minerals, by conveyance, then the operator may be deemed to own the minerals after deeding out the burial plots under the general rule discussed above.

Although the value of mineral rights under individual burial plots are likely to be economically miniscule, particularly if a cemetery is contained within a large drilling and spacing unit, there are risks involved if the proper mineral owners are not identified. Unfortunately, because of the small amount of oil and gas development near cemeteries to date, there are very few states that have addressed issues of mineral title in cemeteries. Therefore, title examiners and land departments should carefully examine burial plot deeds and thoroughly analyze the applicable state’s law in order to determine the correct mineral ownership under cemeteries.

Knowing who owns the minerals is only part of the issue if an operator intends to drill within the boundaries of a cemetery. Conducting drilling operations on actual cemetery land will likely be against public policy in many states. For example, inChas. E. Knox Oil Co. v. McKee, a church signed a lease with the operator for the purpose of drilling for oil and gas.5 Some of the church congregation members had family members buried in the cemetery and filed an injunction against the operator. The court held that it was against public policy to permit an operator to drill for oil and gas in a cemetery.6

Today with technological advancements in horizontal drilling, operators now have the ability to drill for minerals underneath cemeteries without having to conduct surface activities on the surface of the cemeteries. Arguably, the public policy rule established in cases like McKee would not apply to horizontal drilling. However, there have been recent oil and gas opposition groups claiming that underground fracking would disturb gravesites and not allow the dead to effectively “rest in peace.”7 Although mineral extraction occurs at depths that would likely never have any impact on gravesites, operators should be prepared to discuss and address these concerns when electing to drill for minerals on or beneath cemeteries.

*The author would like to acknowledge Scott T. Swallow for his contribution to this article.
1Manny Fernandez, Drilling for Gas Under Cemeteries Raises Concerns, N.Y. TIMES, July 8, 2012, available athttp://www.nytimes.com/2012/07/09/us/drilling-for-natural-gas-under-cemeteries-raises-concerns.html; see also Julie Carr Smyth, PRESSCONNECTS, Gas Drilling under Cemeteries Raises Money, Moral Questions, July 3, 2012, http://archive.pressconnects.com/article/20120704/NEWS01/207040337/Gas-drilling-under-cemeteries-raises-money-moral-questions.
2Walker v. Georgia Power Co., 177 Ga. App. 493, 496 (1986); see also Heiligman v. Chambers, 338 P.2d 144, 148 (Okla. 1959); Evergreen-Washelli Memorial Park Co. v. Dep’t of Revenue, 574 P.2d 735 (Wash. 1978); Petition of First Trinity Evangelical Lutheran Church in City of Pittsburg, 251 A.2d 685 (Pa. 1969).
3See, e.g., Wyo. Stat. Ann. §§ 35-8-102; Colo. Rev. Stat. Ann. § 12-12-116 (2006).
4See Taylor v. Con’t S. Corp., 280 P.2d 514 (Cal. App. 2d 1955).
5Chas. E. Knox Oil Co. v. McKee, 223 P. 880 (Okla. 1924).
6Id. at 882.
7See infra note 1.

How Online Genealogical Tools Can Make a Landman’s Life Easier

Title Issues/Curative, , ,

The drilling rig is en route to your location and your land manager is breathing down your neck to lease the last remaining fee owners. The only problem: the owners cannot be found because they are likely deceased. Now what do you do? Carry the interests? Force pool? Drilling delays can be costly and carrying interests can be risky, so time is of the essence. Fortunately, there are a number of online genealogical tools available that might help you track down the heirs or devisees of the deceased owners.

Surprisingly, Google searches are a great starting point. In particular, rare names or unique spellings are helpful to locate information and, oftentimes, an obituary can be located by searching a decedent’s name and last known city or state of residence. Obituaries are generally accurate and provide a list of possible heirs or devisees. If an obituary is not located by a Google search, it might be found using another search engine, such as Yahoo or Bing.

If you know the decedent’s place of death and approximate date of death, you can search probate records. Some states, such as Colorado1, Montana2, New Mexico3, North Dakota4, Texas5, and Utah6, have websites which provide probate or other genealogical resources online. Individual counties typically maintain their own probate files. Where resources are not available online, you may ask the county court if there is a probate file for the decedent and, if so, request a copy of the file.

What about the more difficult searches? GenealogyBank.com, a subscription-based site, has a database of 6,500 newspapers with some newspapers going as far back as 1690. Generally, the earlier the date of death, the more difficult it is to find an obituary for the decedent. However, GenealogyBank.com may provide a death notice (indicating when and where the decedent died), a social security number, newsworthy stories, or birth or marriage announcements. If a social security number is located, it can be used to search the Social Security Death Index (free on several online genealogical websites, see below) to identify the date of the decedent’s birth and death, the town in which the decedent’s social security card was issued, and the decedent’s last place of residence. Any information gathered about the decedent, including relatives, dates of life events, places of life events, etc., can be used on other genealogical websites to locate potential heirs or devisees.

Obituaries and genealogical information may also be available on FindAGrave.com. However, this website is best known for its vast library of headstone images. These images generally include the name of the decedent’s spouse and the decedent’s and his or her spouse’s birth and death dates (as well as the location where the decedent was buried).

The largest of all the genealogical websites is Ancestry.com, which claims to have over 6 billion records available online. Another genealogical website, FamilySearch.org, is particularly helpful for decedents who resided in Utah, Idaho, and Wyoming. There are countless other genealogical blogs and websites to search, many of which focus on a particularly feature such as religion, national origin, ethnic background, etc. The larger genealogical websites, including Ancestry.com and FamilySearch.org, have census records available up until 1940.7 These websites also include marriage records, birth records, military records, and family trees. Family trees are created by individuals, which means they are not always accurate or complete. However, they are a great source for locating possible heirs or devisees because they may include names of descendants, biographies, and family histories. As an added feature, some websites allow communication with the person who provided the genealogical information to the website.

The more information that you can use in a search, the better the chance that: (i) you will find the decedent’s heirs or devisees and (ii) they will be the right persons. With any luck, you will gather enough information to track down possible heirs or devisees to obtain leases or send participation letters prior to drilling. Although these online genealogical resources may not finish the job, since title curative will likely be required, they can start you down the right path.

1https://www.colorado.gov/pacific/archives/archives-search.
2http://www.montana-genealogy.com/Montana-Probate-Records.htm. No subscription required, but the website links to third-party subscription websites.
3http://caselookup.nmcourts.gov/.
4http://publicsearch.ndcourts.gov/.
5http://www.texas.gov/en/discover/Pages/topic.aspx?topicid=/records. Records available for select counties only.
6http://www.utcourts.gov/xchange. Subscription required.
7Census records are sealed for 72 years after the census is taken, which means they are currently available for the 1940s and back.