Trespass and Ownership in Oil & Gas (Spring 2021 Course Notes - GULC Evenings)

Common Patterns of Oil and Gas Ownership

A fee / fee interest is the totality of all private rights in the land. Fee owners own everything in free simple absolute; different parts of these interests can be conveyed or reserved as are other real property interests. A mineral interest can be completely severed from the fee interest, or partially severed (conveying a percentage of the minerals, a certain kind of mineral, or a percentage of a certain kind of mineral); mineral interests also have different “incidents” that can be carved out:

• The right to use the surface: the right to use the surface and subsurface to explore for, develop, and produce minerals such as oil and gas (for states with ownership in place, this also implies a possessory interest through (and limited by) the rule of capture) (surface owners can be those who own everything except the mineral interest; they can allege that a mineral owner with this right to use has used the right unreasonably)

• The right to incur costs and to retain profits (the right to develop): developing oil and gas requires costs for operating the wells and profits after selling the production; those that bear these costs and also reap the profits have a working / operating interest, while those that simply share the profits have a net profits / carried interest

• The right to alienate: the ability to transfer all or part of a mineral interest to another party through a mineral deed / oil and gas lease / royalty deed; one can own a fractional mineral interest (1/4th) and still own the right to alienate the full mineral interest (the owner of this right would have the executive right, and the other owners of the mineral interest (3/4th) would have nonexecutive mineral interests)

• The right to retain lease benefits: often, the lessor retains some benefits after leasing mineral rights to a lessee; these include a bonus (which is paid to the lessor in consideration for the lease at the very beginning), delay rental payments (payments before development has been started by the lessee), shut-in royalty payments (payments made to the lessor when gas has been discovered but not yet produced, or when production is on halt), and royalties (the lessor gets a share of production free of production costs). These rights / payments can all be separately owned and quantified

A leasehold interest is the lessee’s rights to all mineral interest incidents except those reserved to the lessor (so, the lessee owns the working / operating interest). Because oil and gas leases generally only last for a specific number of years, lessors retain the possibility of reverter / reversion (obtaining all the conveyed mineral interests back after the lease is over) (the lessee’s interest here is a fee simple determinable or a profit of determinable duration).

Nonparticipating royalties are royalties which can be given out to or retained by a party that does not own the mineral interest anymore (only applies for production royalties, not for the lease bonus / delay rental benefits); a lessor’s reserved royalty is the landowner’s / lease royalty; a royalty carved from the lessee’s working interest is an overriding royalty. Royalty interests are non-cost-bearing and are nonexecutive (because the royalty owner doesn’t pay for exploration / development and has no right to execute an oil and gas lease).

Term (terminable) mineral interests are interests that have a set duration (or those that are less than a fee simple absolute). In Louisiana, there is no common law for interests; only oil and gas leases, mineral servitudes (the right to explore and develop), and mineral royalties (right to profits without production fees) exist; the latter two automatically terminate and are automatically acquired by the landowner if the mineral servitude holder doesn’t exercise that right within 10 years. Several other forms of interests exist, such as a production payment, an interest which means that the lessor will receive a percentage of production until a certain amount (like $50,000) is reached.

References:

https://www.amazon.com/Cases-Materials-Oil-American-Casebook/dp/1683288327