Owners of oil and gas interests
|Development Geology Reference Manual|
|Series||Methods in Exploration|
|Part||Land and leasing|
|Chapter||Determining owners of oil and gas interests, and methods of conveyance|
|Author||James C. Tinkler|
|PDF file (requires access)|
Ownership of oil and gas interests, whether privately or publicly owned, is reflected in the public records of the various states or, in the case of interests owned by the federal government, in the offices of the various federal agencies, principally within the Department of the Interior.
Fundamental to determining ownership is the necessity of understanding the rudiments of real property principles and laws because in most states, oil and gas interests are classified as real property, and if not, they are treated in a manner that achieves the same or a similar result.
Principles and terms of property law affecting oil and gas interests
A person who owns land in fee simple owns, among all real property rights, all of the oil and gas interests underlying the land. Lesser interests in real property can be carved out of the fee simple estate on a undivided basis (e.g., 1/2 or 1/4). Also, a party can dispose of their rights to the surface (surface fee), to all or part of the minerals (mineral fee) underlying the land, to the oil and gas underlying the land, and to the royalties from oil and/or gas production. The oil and/or gas production payments and/or the interests can be pledged as collateral to loans or mortgages or may be subject to liens.
By the same token, all of these types of interest may be limited as to term, horizon, purpose, or amount of money. The most prevalent example of a term oil and gas interest is an oil and gas lease, which creates in the lessee a leasehold estate commonly referred to in the oil and gas industry as a working or operating interest. The rights granted under an oil and gas lease to a lessee may vary from lease to lease. An overriding royalty is generally a cost-free interest carved out of the lessee's leasehold estate.
Among other types of term interests are life estates for the life of a persons (life tenants) and remainder estates for future interests maturing to the remainderman upon the death of the life tenant. Generally, both the life tenant and remainderman must execute an oil and gas lease for it to be effective since both interests are affected.
The possibility of reverter is another type of contingent future interest. This occurs when a party (who, with its heirs, successors, or assigns, retain the possibility of reverter) transfers an interest in land to a party upon the condition that the land be used for a specified purpose, such as a road, park, or church. If the specified use is discontinued, then the land reverts and is returned to the those holding the rights of the transferer.
Conveyance or transfer of interests in land
An owner of property may generally dispose of any or all of the rights of ownership by sale, gift, devise, or descent. Transfers of property may also be the result of judicial decree or of equitable interests created by contracts.
- Sales or gifts may be concluded by documents such as the following:
- Deeds (e.g., warranty, quit claim, easement, permit, foreclosure, tax, mineral, and royalty deeds)
- Leases (e.g., oil and gas, coal, uranium, and surface leases)
- Assignments or partial assignments of leases, overriding royalty, production payments, and so on.
- Equitable interests created by contracts such as seismic options, joint venture agreements, joint operating agreements, farm-outs, pooling or unit agreements, and partnership agreements
- All of the documents must be in writing to be valid against the claims of innocent purchasers for value. Generally the law requires that they be registered or recorded in the public records of the county or parish where the land lies.
- Transfers by devise ordescent are affected by the laws relating to inheritance of property interests from deceased persons. Such transfers can be accomplished by a will or, in the absence of a will, by laws of descent and distribution of the various states. A party who dies without leaving a will is said to have died intestate, and the beneficiaries or heirs of the deceased person may have the estate administered in the appropriate judicial forum. A person who dies leaving a will is said to have died testate, and the will is probated in the appropriate judicial forum. In some cases, wills are not probated and heirs do not seek court sanctioned administration. In those cases, most states recognize the transfer of interests, but some form of proof f heirship may be necessary. This proof can be offered in several different ways, such as by filing the unprobated will in the public records or by obtaining affidavits of death and heirship from people who knew the deceased person's family history.
- Transfers by judicial decree may occur as the result of court action involving such things as divorce, foreclosures, contested wills or heirship, partition, taxation, levies on property for collection of money judgments, adverse possession, title disputes, and eminent domain.
Ascertaining ownership of property interests
Private and state lands
Each state has a registration system, usually on a county basis, open to the public whose principal functions include (1) safekeeping of documents and (2) providing a search system that allows the general public to ascertain the current owners property rights (and other ancillary rights), along with the recorded history of all transactions affecting a given tract of land. These recording offices usually have such names as County Recorder, County Clerk, County Registrar, or Parish Clerk. In addition, since judicial decrees may reflect property rights not revealed in the county records, searches in the official clerical records of the courts (both at the state and federal level courts of original jurisdiction) may be appropriate.
The various systems may be indexed in several different ways. For example, alphabetical listings of those giving up rights in property (e.g., grantors, lessors, assignors, mortgagors, and trustors) and of those receiving property rights (e.g., grantees, lessees, assignees, mortgagees, and trustees) may be keyed to the property descriptions involved in the transactions.
Some states (mostly those using the rectangular system) use a plat or property description system in which each document is entered in chronological order on a page or pages specifically devoted to a given tract of land. Many recording offices use combinations of these two systems. Separate index books or systems (many of which have been computerized in the more active counties) may be set up by category, for example, transactions affecting real property, personal property, mineral interests, oil and gas interests, mortgages and liens, or judicial actions.
In some cases, the search of the recording offices may be aided by searches of other public offices such as the tax assessor or collector whose records may reflect the owners or agents of the owners whose property interests are subject to ad valorem taxes. But note that in many states, owners of minerals are not taxed, nor does the taxpayer necessarily own all of the interests in the affected lands.
In addition to the use of the public records to ascertain ownership, commercial entities, primarily abstract companies, will make title searches identifying the current owners or will prepare abstracts of title that include copies of all the recorded documents affecting the particular property described for the period of time so requested. These commercial abstract companies have created index systems from the public records that generally simplify the search for ownership.
Commercial land ownership maps are also available to aid in the identification of owners of property interests.
The responsibility for management of most federal lands falls within the purview of the U.S. Department of the Interior and its subordinate agencies. The Mineral Management Service (MMS) has the responsibility of managing and maintaining the records of ownership on lands and minerals underlying the federal portion of the outer continental shelf (OCS) of the Atlantic and Pacific oceans, the Gulf of Mexico, and the various seas adjacent to Alaska and Hawaii.
The Bureau of Land Management (BLM) has a similar responsibility for most federal onshore land and minerals. The U.S. Forest Service, Bureau of Indian Affairs, the Defense Department, and other federal agency departments may have overlapping or separate responsibilities with reference to ownership of lands within their jurisdiction.
Just as in the case of private lands, commercial entities such as abstract companies, map companies, and computer statistical reporting companies may have information available ascertaining ownership.
Determining specific ownership cost and revenue interests
Since the discovery of America by Columbus, literally billions of transactions have occurred affecting the ownership of property rights. As a result, the norm is to find that a given tract may have multiple owners of varying fractional interests in various property rights. In the case of oil and gas interests, varied ownership of the "working interest" (a cost-bearing interest) in a well or lease is common, as is that of the revenue interest owners, which are those who own non-cost bearing interests such as royalty, overriding royalty, net profits, production payments, and other working interest shares of revenue.
Because all calculations of ownership involve the use of the number of acres owned by a party, understanding the meaning of the terms gross acres and net acres is essential. Gross acres refers to the number of surface acres lying within the boundaries of a given tract of land. A net acre is determined by multiplying the fractional interest owned by a party in the given tract of land times the number of gross acres in the tract. For example, if John Doe owns a 1/2 interest in a tract of land consisting of 100 surface acres, Mr. Doe would own 100 gross and 50 net acres. If a lessee called XYZ Co. bought an oil and gas lease from Mr. Doe on that tract, the company would have acquired a lease covering 100 gross and 50 net acres.
The following examples demonstrate the calculation of cost and revenue interests under various circumstances.
Assume the Oily Co., lessee, obtains oil and gas leases from I. M. Lucky, lessor, who owns a 3/4 interest in a area::20 acre tract of land, and from I. S. Rich, lessor, who owns the other 1/4 interest in the tract. Mr. Lucky and Mr. Rich each reserve a 1/8 royalty (cost-free) interest. Oily Co. drills and completes an oil well at a depth above 3000 ft on the leased area::20 acre tract. The costs and revenue interests are shown in Table 1.
|Oily Co., lessee||100.00000||87.50000|
|I. S. Lucky, lessor #1 (3/4 of 1/8 royalty)||0||9.37500|
|I. S. Rich, lessor #2 (1/4 of 1/8 royalty)||0||3.12500|
Assume the Oily Co. sold the deep rights to the leases in the area::20 acre tract to the Gassy Co. with the Oily Co. retaining a 5% overriding royalty interest (ORRI). The Gassy Co. obtained an oil and gas lease covering a 5/8 interest from B. A. Winner, lessor, who retained a 1/5 royalty on the area::300 acre tract adjoining the area::20 acre tract. The OPM Co. owned a lease obtained from Gotta Fortune, lessor, on the other 3/8 interest in the area::300 acre tract. The Fortune lease provided for a 1/5 royalty,but Gotta had sold 1/2 of her royalty to Fast Buck. All four leases authorized pooling, which allowed the Gassy Co. and the OPM Co. to pool their interests in the area::20 acre leases with the 300 acre leases, creating a area::320 acre unit on which the companies successfully drilled and completed a gas well on the unit. The costs and revenue interests of the parties in this unit are shown in Table 2.
|Costs (%)||Multiplication Factors (%)||Revenue (%)|
|20-ac tract (20/320)a||= 06.25000||x [100 - (12.5 + 5)]b||= 05.1562500|
|300-ac tract (300/320a x 5/8)||= 58.59375||x (100 - 20)b||= 46.8750000|
|GASSY CO. TOTALS||= 64.84375||52.0312500|
|OPM Co. 300-ac tract (300/320a x 3/8)||= 35.15625||x (100 - 20)b||= 28.12500000|
|Oily Co. ORII 20-ac tract||0||6.25a x 0.05||= 00.3125000|
|I. M. Lucky, lessor, 20-ac tract||0||6.25a x 3/4 x 1/8||= 00.5859375|
|I. S. Rich, lessor, 20-ac tract||0||6.25a x 1/4 x 1/8||= 00.1953125|
|B. A. Winner, lessor, 300-ac tract||0||93.75a x 1/5 x 5/8||= 11.7187500|
|Gotta Fortune, lessor, 300-ac tract||0||93.75a x 1/5 x 1/2 x 3/8||= 03.5156250|
|Fast Buck, 1/2 of Fortune's royalty||0||93.75a x 1/5 x 1/2 x 3/8||= 03.5156250|
|GRAND TOTALS FOR UNIT||100.00000||100.0000000|
Title opinions and title curative
When a party acquires real property interests of value, they usually obtain a title opinion from a title examining attorney. The purpose of the opinion is to obtain a title experts' advice as to whether the interest acquired or to be acquired is as represented and whether it is free of title defects or claims of others that could reduce their interests, impair their rights, or create liabilities an acquiring party is unwilling to assume. The title examiner's opinions are based upon examination of the documents filed in the public records affecting the particular property interests under examination and the examiner's knowledge of the legal implications of those transactions.
The period of time covered by title examination may vary depending upon circumstances (previous opinions may be available) and the title risks the examiner's client is willing to assume. Many examiner's opinions commence with "sovereignty of the soil," the date that the property rights were severed or conveyed by a sovereign government to a private party. This is necessary because all private property rights in the United States exist only if a proper grant or patent is obtained from a sovereign government (English, Spanish, French, Mexican, and Republic of Texas grants made prior to US sovereignty are recognized).
When the title examiner discovers defects of title, they are noted in the opinion and title requirements, or instructions on how to cure these defects, are specified (called title curative). The examiner may also make comments and advisory statements in the opinion to further explain the rights, obligations, and liabilities that may have been known, but not thoroughly understood, by the examiner's client.
In the oil and gas industry, the types of title opinions obtained on a tract of land examined are generally classified as follows.
Original title opinions
Original title opinions are the first opinions obtained. They may be limited to opinions on rights, obligations, and liabilities acquired pursuant to an oil and gas lease—as opposed to other opinions rendered for the purpose of reflecting upon the rights of the ownership of the surface, non-oil and gas mineral ownership, entitlements to production revenue or royalties, easements, and so on.
Supplemental title opinions
These opinions are the second and subsequent opinions to the original or drilling opinions. They are obtained to (1) update the period of time covered since rendition of the original opinion, (2) reflect upon the effects of title curative submitted to meet opinion requirements, or (3) both.
Drilling opinions may be original opinions, but they are expressly rendered for the purpose of ensuring that the property rights essential to drilling and ownership of any of the oil and gas obtained from a well are vested in the drilling parties. These opinions will cover at least the drillsite tract.
Division order opinions
These opinions are rendered, after production of oil and gas has been obtained, for the purpose of determining who is entitled to production and/or revenue obtained from a given well or unit.
During the life of an oil and gas lease, special circumstances may arise in which a client lessee may need legal advice about the payment of delay rentals, shut-in gas payments, transfers of lessor's interests, and so on. The most commonly obtained opinions of this type are the rental and shut-in gas royalty opinions.
In the oil and gas industry, the amount of title curative effort is substantial and varied. The most common title curative documents requested by examiners include the following:
- Land surveys by civil engineers to delineate lease and unit lines
- Affidavits, which are sworn statements of facts by knowledgeable and credible persons as to heirship, death, possession or nonpossession of land, development or nondevelopment of oil and gas rights, identities of persons, and so on
- Ratifications, or confirmation of previous actions
- Tax certificates, which provide evidence of payment of taxes
- Correction instruments to correct mistakes in deeds, leases, and so on
- Subordinations, which are usually obtained by a lessee from a lessor's mortgagee or lien holder so that the lessee's rights are not subject to foreclosure in the event the lessor defaults on the loans
- Judicial action, which may involve guardianship, disputed heirships, adverse possession, fraud, declaratory judgments, probating wills, foreclosures, and title disputes arising from a multitude of sources
- Regulatory activity, which involves conforming to the rules, regulations, and requirements of local, state, and federal regulatory bodies
- Miscellaneous requirements, including obtaining new leases, obtaining consents to pooling or unitization, amending contracts, and providing corporate resolutions reflecting the authority of persons to act on behalf of the corporation
- Functions of a petroleum landman
- Oil and gas contracts
- Nature of the oil and gas lease
- Land description and maps