Articles Posted in Negotiating Leases

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TexasBarToday_TopTen_Badge_SmallTwo recent appellate opinions illustrate why landowners and their counsel need to know the basic fundamentals of field rules and how they can affect provisions in oil and gas leases. I wrote about those cases in 2015. Both involve the interaction between field rules and lease provisions. ConocoPhillips Co. v. Vaquillas Unproven Minerals, Ltd., 2015 WL 4638272 (Tex.App.-San Antonio Aug. 5, 2015), was appealed to the Texas Supreme Court but settled before the court acted on ConocoPhillips’ petition. Endeavor Energy Resources, L.P. v. Discovery Operating, Inc., 448 S.W.3d 169 (Tex.App.-Eastland 2014), has been briefed on the merits and is awaiting the court’s decision on whether to grant review. You can read my summary of the two cases here.

The root of the issue is that oil and gas lease forms typically refer to and adopt field rules to regulate how large pooled units and earned acreage units can be. For example, a printed form oil and gas lease that has been commonly used in Texas for many years contains the following provision:

Lessee is hereby granted the right, at its option, to pool ur unitize any land covered by this lease with any other land covered by this lease, and/or with any other land, lease, or leases, as to any or all minerals or horizons, so as to establish units containing not more than 80 surface acres, plus 10% acreage tolerance; provided, however, units may be established  … so as to contain not more than 640 acres plus 10% acreage tolerance, if limited to … gas, other than casinghead gas…. If larger units than any of those herein permitted, either at the time established, or after enlargement, are required under any governmental rule or order, for the  drilling or operation of a well at a regular location, or for obtaining maximum allowable from any well to be drilled, drilling or already drilled any such unit may be established or enlarged to conform to the size required by such governmental order or rule.

To understand how the italicized sentence in this lease form works, one must know what governmental rules govern the size of units for drilling wells at a “regular” location, and for “obtaining maximum allowable” from a well. These regulations are included in “field rules” adopted by the Texas Railroad Commission. (Warning: this post is longer than usual, so be prepared.) Continue reading →

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An excellent article by Judon Fambrough of the Real Estate Center at Texas A&M University, about how oil and gas leases can be extended beyond there primary term, can be found here. Great tips about how to avoid pitfalls in lease terms. Mr. Fambrough has written many good articles about negotiating oil and gas leases.

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Last week I presented a paper at the Texas State Bar Advanced Real Estate CLE Conference for attorneys in San Antonio. I was asked to write a paper giving real estate attorneys a basic introduction to negotiating oil and gas leases. It might seem odd that real estate attorneys would want a primer on oil and gas leases; most people would assume that an attorney practicing real estate law in Texas would know about oil and gas leasing. And that used to be true, when the majority of attorneys had a rural general practice. General practitioners in Texas knew the basics of real estate and oil and gas law and often helped their landowner clients negotiate leases. Today, most real estate attorneys have little to do with oil and gas matters, and as practices have become more specialized the oil and gas specialty has diverged from the real estate specialty.

I was given thirty minutes to make my presentation – hardly enough time to do justice to the subject of oil and gas leases. The exercise of preparing my remarks caused me to focus on some basic concepts that I’ve not recently thought about, and I decided they would make a good topic for discussion here.

The oil and gas lease is in many ways a unique form of contract. It is the foundation of the oil and gas industry in the U.S. Because most minerals in the U.S. — unlike most of the world — are privately owned, some way had to be found for those willing to risk capital to exploit oil and gas to obtain rights to those resources. The oil and gas lease was the result. In its basic form, the oil and gas lease has remained unchanged since the early days of the industry.

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I have recently been asked to review requests for lease ratifications sent to my clients, and I thought that ratifications would be a good topic for this site.

Companies generally ask owners of royalty and non-executive mineral interests to ratify oil and gas leases covering the lands in which they own an interest. The companies ask for the ratification because they want the right to pool the royalty or non-executive mineral interest covered by the lease. In Texas, even though the holder of the executive right (the right to lease) has the right to negotiate and grant leases covering the interests of royalty and non-executive mineral owners, the holder of the leasing right does not have the right to grant the lessee the right to pool those interests (unless that right was expressly granted or reserved in the instrument creating the royalty or non-executive interest). In order for a pooled unit to be effective as to a royalty or non-executive mineral owner’s interest, the owner must either agree to the pooled unit or grant the lessee the right to pool his/her interest.

A non-executive mineral owner is the owner of a mineral interest who has given up the right (by conveyance or reservation) to lease his/her interest. The non-executive mineral owner has the right to receive his/her share of any bonus and royalty paid pursuant to the lease granted by the holder of the leasing right.

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Ian Urbina, the New York Times reporter who has written several articles recently about oil and gas exploration and the perils of hydraulic fracturing, recently wrote an article, “Learning Too Late of Perils in Gas Well Leases,” that appeared on the front page of the Times on December 2. In research for the article the Times obtained and reviewed more than 111,000 oil and gas leases covering lands in Texas, Maryland, New York, Ohio, Pennsylvania and West Virginia – a remarkable effort. Urbina’s article points out several ways in which the leases fail to protect the interests of landowners:

— They do not require companies to compensate landowners for water contamination.

— They do not address well locations, destruction of trees, or other surface use issues.

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