LANDMEN – OIL AND GAS LEASE BROKERS

By entering into an oil and gas lease, a landowner provides an oil and gas lessee, usually an oil company, with the right to explore for and produce oil and gas found under the landowner’s property. (In the article I will use the accepted term ‘oil and gas lease’, although an oil and gas lease is not in a correct legal context a real estate or commercial lease.) Both the oil company and the landowner enter into an oil and gas lease with the same goal: profit. However, the underlying interests of each party are very different. An oil company wants as much access to the surface and subsurface as possible. In contrast, a landowner desires to limit access and to limit any potential damage caused by drilling and recovery operations.  An oil company also desires to keep a lease alive despite a lack of production or a failure to drill. A landowner desires, among other things, that the lease end quickly if the oil company fails to produce in well paying quantities. Some landowners enter into oil and gas negotiations with little experience or knowledge of oil and gas matters.

A “landman” is the usual point of contact between a landowner and an oil company or a so-called lease investor. The American Association of Professional Landmen (AAPL) reports that a landman’s services include: “negotiating for the acquisition or divestiture of mineral rights; negotiating business agreements that provide for the exploration for and/or development of minerals; determining ownership in minerals through the research of public and private records; reviewing the status of title, curing title defects and otherwise reducing title risk associated with ownership in minerals; managing rights and/or obligations derived from ownership of interests in minerals; and unitizing or pooling of interests in minerals.” Given these responsibilities, landmen have influence over oil and gas leases, and over the effect that leases will have on a landowner. One could say that landmen are the “real estate brokers” of the oil and gas industry. Despite this influence, landmen generally do not need to be licensed or even certified by a state in which they are making deals. The only national organization to implement ethical standards for landmen is the American Association of Professional Landmen. The AAPL is a nationwide organization with over 20,000 members. This organization offers various training programs, sets ethical standards for landmen and lobbies congress on behalf of its members.

Landmen are paid by the lessee. Landmen are for all intents and purposes agents of the oil and gas producers. This leads some landmen to resort to high-pressure sales tactics. A report by the AAPL Licensing Task Force in 2008 recommended that the organization support landmen licensing efforts. The report concluded that licensing requirements were most needed in Texas and other states where many landmen interact with residents, and where the areas are experiencing an oil and gas boom. Opponents of licensing argue that requiring a license or certification will not make landmen better. This argument fails to consider the true purpose behind man-made laws. Laws are created to encourage people not to act on their impulses, and also allow the state to take action if they do act on their impulses. Licensing requirements for landmen will not make all parties better, but regulations allow a state to step in if a landman’s practices are contrary to established legal standards.

Landmen in South Dakota must be licensed as real estate brokers and licensees. Landmen in North Dakota are not required to be licensed. Landmen in South Dakota come under the jurisdiction of the South Dakota Real Estate Commission. The South Dakota Codified Laws define “Real Estate” to include mineral rights. Because of South Dakota law, several disclosure requirements are mandated of landmen before they can close an oil and gas lease. South Dakota law also defines a “Real Estate Broker” as someone who “buys, rents, sells, manages, leases, etc., an interest or estate in Real Estate.” The South Dakota Attorney General has opined that landmen are “Real Estate Brokers.” Accordingly, landmen must be licensed as such. The Code provides that any landman operating without the requisite license is committing a Class 1 misdemeanor and is required to forfeit any compensation for the deal he brokers. A separate legal question may lie as to whether an oil and gas lease created by and negotiated by such a landman is enforceable as a contract.

David Ganje of Ganje Law Offices practices natural resources, environmental and commercial law in North Dakota and South Dakota.   The website: lexenergy.net . The contents of this article are intended for general information purposes only and are not intended as legal advice.