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Archive for the ‘Mineral Interests’ Category

Does ‘All’s Well That Ends Well’ Apply To An Oil And Gas Lease?

Posted on: February 19th, 2016
by David Ganje

In oil and gas leases, a shut-in royalty provision is essential to protect the interests of lessors and Operators alike. An Operator is the business responsible for the drilling, completion, and production operations of a well and the physical maintenance of the leased property. Oil and gas lessors like shut-in provisions because they provide that some money continues without the act of suing the Operator to start producing again or get out. Operators like shut-in provisions because they provide a path to maintaining the lease when “the market” makes production ill-advised.

As important as these provisions are for the parties, there are difficulties drafting these terms into an oil and gas lease. For an unprepared lessor, an inadequate shut-in provision allows a non-producing well to sit on his land, shut-in, for years while providing little or nothing to the lessor. For an unprepared Operator, an inadequate shut-in provision forces a lose/lose decision between bad money paid out during new production or losing both the lease and the well that took big bucks to negotiate and complete. For example, what is a fair shut-in period? 3 years? 1 year? Even leases with adequate shut-in provisions have problems in legal interpretation, and in such cases the state code should stand ready with answers. States have woefully inadequate road maps to cover these situations.

New York law requires that production continue with some consistency beyond the primary leasing term. Still, there are some important unknowns that the legislature and the courts have yet to make clear. New York courts have held that “If…there is no production and it is reasonable from the facts to determine that production has finally ceased, then the lessor may recover possession of his lands free of the lease.” But, “temporary cessation of production does not terminate the lease.” What exactly is a final ceasing of production? How long can production cease before it is no longer ‘temporarily’ so? Mechanical issues with wells can last for years, especially if not properly managed – and economic issues can make production untenable for even longer. Complicating this issue, New York courts have implied that these rules only apply when the Operators are not prevented from production by forces outside of their control (which can include market conditions). So how long can lessors be stuck with a non-producing well on their land that the Operators claim has only ‘temporarily’ ceased production because of outside forces? Answer: it is presently unclear.

Where there is no good statutory roadmap, it is vital for all parties to protect their interests with proper shut-in provisions when agreeing to an oil and gas lease. New York must fix their sparse guidance on oil and gas leases that extend past the primary leasing term. Vague statutes that force disagreeing parties into court in order to fill in the legislature’s gaps are not the answer. Astute lessors and Operators can protect their interests by writing a thorough shut-in provision. These matters are too important to be left to hand-me-down, boilerplate lease language.

David Ganje. David Ganje of Ganje Law Offices practices in the area of natural resources, environmental and commercial law in New York. The website is Lexenergy.net

In North Dakota you can talk to the dead

Posted on: January 27th, 2016
by David Ganje

In North Dakota one can give legal notice by mail to a deceased individual, even though he long ago went to that great oil patch in the sky. It is something out of a Charles Dicken’s novel. You can communicate and give notice to the dead. A landowner seeking to claim mineral interests may recover the deceased’s mineral interests by giving notice by US mail to an address long ago abandoned — and legally so, according to the Dormant Mineral Act.

The North Dakota Supreme Court, in ruling on the Dormant Mineral Act, stated that “…no reasonable inquiry was required where the surface owner mailed the notice of lapse to the mineral interest owners’ address which was of record in 2007, even though the mineral interest owners had died in 1980 and 1999, respectively.” When an individual who owned mineral interests in North Dakota dies, they and their heirs may be out of luck if death never kept up the “current address” in the county recorder’s office.

The Supreme Court in an important recent case called Capps also stated, “…the address of record need not be the mineral interest owner’s correct address for the mailing of the notice of lapse to satisfy the statutory requirement.” In other words, a landowner may serve a notice to recover mineral interests by US mail when mailed to the deceased’s last address in the records and thereby obtain minerals formerly owned by the deceased.

Both the legislature and the courts are attempting to make it easier for surface owners to clear title and reclaim lost mineral rights. The Supreme Court in Capps held that “this Court made it clear that when the mineral interest owners of record are deceased, the notice must still be mailed to the address of the deceased owners of record.” In my practice I have done this. The postman must think I am nuts. This rule derives from the intent to encourage mineral development and extraction.

The Court ruled that the surface owner was not required to conduct a reasonable inquiry into an actual address of a mineral owner even when the owner knew they were deceased. The Court determined that it was immaterial whether the surface owner had actual knowledge of the death of the party notified by mail the party who was the record owner of the mineral interests and the person to whom the statutory notices had been mailed. The Court stated that any heirs of the deceased would have received notice if the deceased had recorded notice of their current addresses. The Court also held that the constitutional safeguards of due process and adequate notice do not apply to the non-litigation Dormant Mineral Act used by the landowners in the Capps case.

The Capps case illustrates the growing body of law that makes it easier to develop and reclaim mineral rights.

David Ganje of Ganje Law Offices practices in the area of natural resources, environmental and commercial law in South Dakota and North Dakota. View the original article at the Bismarck Tribune – Brakken Breakout

Disclosure of Mineral Interests in North Dakota

Posted on: October 2nd, 2014
by David Ganje

Full property disclosure laws are needed in North Dakota.  Current law does not require that the seller disclose information regarding mineral rights ownership at the time of a closing when selling real property.

Mineral rights affect the sale of real estate and affect its value.  These often go unaddressed when selling property.  The consequences of a failure to address these rights are not pretty. Surprises when doing a real estate deal should not occur.  The era of “let the buyer beware” is long gone. I suggest that putting everything material on the table when doing a real estate sale is the best policy.

The need to protect purchasers through honest and full disclosure of mineral rights has also been borne out in the experiences of other states.  Four years ago, Wyoming adopted a statute which requires sellers of property to disclose whether any mineral rights have been severed prior to a sale.  The reason for the new law, according to the President of the Wyoming Realtor’s Association, was to avoid the unpleasant surprise encountered by people who bought property thinking that they owned the rights to minerals only to find that a third party would appear on their land, and start digging on the property.  By making the buyer aware of the severance of mineral rights, Wyoming’s new disclosure law allows a prospective purchaser to make a more informed decision when purchasing. Recently in Florida a large home builder announced that it will stop severing mineral rights when selling property – after a local newspaper wrote a series of articles investigating the practice of selling property to people who learned of the practice only at the closing table where they felt pressured to consent.

Mineral rights can be severed from surface property rights on the same piece of property in North Dakota and do not automatically pass with title to the land in a sale. A third party can own the mineral rights to land. Title insurance is not the answer to this issue. Title insurance does not insure mineral rights on a property, nor does title insurance cover such things as water permit rights. When doing a real estate deal a purchaser should not assume that the title insurance policy will offer coverage.

            “Full disclosure,” makes for a complete sale in a real estate deal.   Full disclosure is the act of a seller of providing all the facts which the other party should know before the other party decides to buy. Full disclosure is not something I would always do on a first date when I was a young man – but that is another matter.  Full disclosure is akin to the term used by contemporary politicians and pundits known as “transparency.” North Dakota’s property disclosure law should require a seller to disclose mineral associated with a piece of property. 

 

A Second Look at Royalty Interests

Posted on: February 26th, 2014
by David Ganje

All That’s Royal Aint Royalty—A Second Look at Mineral Interests

                                                By David Ganje

 

            Let’s start at the beginning.   Production is not the starting point in the oil patch.   The genesis of all operations goes back to the basics, Mineral Rights Law.  In the Bakken and elsewhere, the basics require a look at oil and gas interests’ law also known by some as “real property law on steroids.”  In what other field of law can efforts to retain one’s property rights result in the loss of those same rights? 

The mineral interest has a first cousin, the royalty interest.  One needs to scrutinize the four corners of the legal document on which they are described.   Legal phrases were perhaps not meant to confuse, but they sure do.   If the document uses words describing a particular percentage of a mineral that will be “produced,” “saved” or that it is “nonparticipating,” this often refers to royalty interests.  Documents using phrases such as “in and under” usually grant mineral interests.

       Mineral interest versus royalty interest—what do you get?   A “grant” made by deed or other legal document can convey either a “mineral interest” or a “royalty interest”.   Both appear to offer the grantee the same thing:  a percentage of the value of minerals on a described plot of land.  However, a mineral interest includes an interest in the land itself.  It is a real estate interest “with benefits” as they say and that is pretty powerful.  A royalty interest, on the other hand, only offers an interest in a percentage of the minerals’ value after they have been extracted from the ground.  If processing is required in order to make their sale possible, the cost of doing so is deducted from the sales price when calculating royalties.

A mineral interest contains several rights for the holder.  These rights are usually described in a deed as “the minerals in and under and that may be produced from” a given area of land and grants the holder rights concerning the land.  In North Dakota, a holder of a mineral interest has the right to explore and develop the area (including the right to enter).  In addition to the profits from the minerals themselves, he may also receive bonuses, delay rentals, and royalties.  Because a mineral interest holder also possesses an interest in the land from which the minerals are extracted, he can enter into leases with regard to the resources contained in the ground (oil, gas, minerals, etc.) with third parties. 

The holder of a royalty interest, on the other hand, has no right of entry or exploration of the land, no right to receive bonuses or delay rentals, and may not grant leases to third parties.  A royalty deed is usually written in reference to minerals “produced and saved.”  Interestingly, a royalty interest holder has a cost-free interest in the resources that are produced.  He is like a teenager.  He gets the car, but doesn’t have to pay for the gas or insurance.  He gets the profit of the oil and gas production, but does not have to deal with management or production issues.

When negotiating or determining mineral rights one should always be on the lookout for these two categories.  When dealing just with the basics, this may not be too difficult.  But, mineral interest or royalty interest contracts are rarely limited to the basics.  There are too many moving parts.  Even the very language used may prove improper.   In other words; read the fine print.

In North Dakota, this may not always be an easy picture to read.  Many deeds contain the phrase “other minerals” regarding the interest that is being conveyed or reserved.  The meaning of that term has not been consistent over the history of North Dakota law.  From 1955 to 1983, the definition differed.  Under a 1955 statute, a lease or conveyance of “minerals” did not include interests in gravel, coal, clay, or uranium, unless the intent to convey those materials was separately stated.  Oddly, a reservation of a mineral interest still included coal.  A 1975 amendment to the statute fixed this unusual distinction.  Since July 1983, North Dakota law has defined the use of the word “mineral” to mean the same thing, regardless of whether it is the subject of a deed or a reservation: “all minerals, and their byproducts and compounds, except those specifically excluded by name.”  Also, the language used to define interests is also treated differently depending on whether it might be a deed or an oil and gas lease.

In the end production is what we’re all shooting for, but don’t ignore the basics.  Be aware of mineral rights law.  The wording in your legal document determines your interest which in effect determines your profit.

 

Author:   David Ganje.  David Ganje of Ganje Law Offices practices in the areas of natural resources law, environmental law, and commercial law in North and South Dakota.