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Evaluating Legal Consequences of Energy Production from Agricultural Lands Theodore A. (Ted) Feitshans Department of Agricultural & Resource Economics.

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Presentation on theme: "Evaluating Legal Consequences of Energy Production from Agricultural Lands Theodore A. (Ted) Feitshans Department of Agricultural & Resource Economics."— Presentation transcript:

1 Evaluating Legal Consequences of Energy Production from Agricultural Lands Theodore A. (Ted) Feitshans Department of Agricultural & Resource Economics North Carolina State University 919-515-5195 May 16, 2013

2 Disclaimer This slide set is provided for informational purposes only. Nothing herein constitutes the provision of legal advice or services.

3 Title to Interests in Real Property Subsurface capable of being a separate estate from surface estate

4 Title to Interests in Real Property Further subdivision –Oil & gas Depth range –Coal bed methane –Minerals –Sand and gravel (as distinguished from crushed rock)

5 Title to Interests in Real Property Presumption that surface estate includes all subsurface rights

6 Title to Interests in Real Property Importance of intent of the parties –Conveyances transfer ownership of the mineral estate and/or oil & gas estate –Leases do not transfer ownership of oil, gas, or minerals that have not been severed A leasehold interest is a chattel real, a species of intangible personal property –Bankruptcy implications

7 Title to Interests in Real Property Shale gas –Mineral or something else –PA - rebuttable presumption that natural gas is not included in a grant of the mineral estate Is shale gas different than conventional gas? –Shale is generally a mineral –Gas is generally not a mineral

8 Title to Interests in Real Property Oil & gas not included in definitions for purposes of The Mining Act of 1971 –N.C.G.S. §74-49(6) – minerals –N.C.G.S. §74-49(7) – mining The Oil and Gas Conservation Act (1945) –Applies to all “common sources of supply of natural gas discovered after January 1, 1945...” N.C.G.S. §113-387.

9 Title to Interests in Real Property “’Security’ means any... certificate of interest or participation in an oil, gas, or mining title or lease or in payments out of production under a title or lease” N.C.G.S. §78A-2.

10 Title to Interests in Real Property Rights to sand and gravel not a mineral right? (NC decisions inconsistent) –Profit à prendre in gross –Defense of laches applicable –Title passes only upon severance Applicability to gas leases?

11 Relationship Between Surface & Sub-Surface Estate Dominance of surface estate (apparently opposite rule in Texas) Reasonable use of surface estate –accepted and prevailing method for mining of the particular mineral –any particular rights waived or reserved Intent of parties –protection for residences and residential water supplies (inconsistent case law) –right to compensation for surface damages?

12 Extinguishment N.C.G.S. §1-42.1 through N.C.G.S. §1- 42.9A –Exceptions: Current use (at effective date) Subsurface interest in adverse possession Listed for ad valorem tax purposes w/n exception period - nonpayment alone does not extinguish Exception noted in surface holders chain of title within past 30 years prior to effective date of statute

13 Extinguishment Grace period –Two years from statutory date Determine operative statute –Sworn and subscribed before official authorized to take probate (N.C.G.S. §47-1) –Recorded with register of deeds –Listed for, and ad valorem taxes paid

14 Extinguishment County failure to publish notice –Proof thereof Application to those under disability?

15 Extinguishment Constitutionality –Texaco, Inc. v. Short, 454 U.S. 516, 102 s. Ct. 781 (1982) Indiana Dormant Mineral Interests Act –Texaco, Inc. v. Short cited favorably in Rowlette v. State, 188 N.C. App. 712 (N.C. App. 2008) –McDonald’s Corp. v. Dwyer, 338 N.C. 445 (1994) Violation of due process for insufficient notice

16 Extinguishment By registration under N.C. G.S. § 43-1, et seq. (Torrens system)

17 Abandonment Mere lapse of time insufficient Nonpayment of ad valorem taxes insufficient taken alone Requires unequivocal acts of abandonment

18 Adverse Possession Not previously severed –Adverse possession of surface includes subsurface rights Previously severed –Adverse possession of surface does not include subsurface rights –Adverse possession of subsurface rights does not include surface rights Surface activities to extract subsurface resources do not confer adverse possession of the surface

19 Adverse Possession Actual mining required to establish adverse possession of mineral estate Need not mine all possible types of minerals in property subsurface

20 Conveyancing Caveat emptor Covenant of seisin Lease versus sale –Look to substance not form Statute of frauds applicable to sales and leases of mineral rights and gas & oil rights

21 Questions Were mineral or oil & gas rights ever transferred? What rights were transferred? Were such rights ever relinquished or abandoned? Were such rights ever extinguished?

22 Condemnation Fee interest in minerals may be acquired by condemnation Value of minerals a factor in valuation

23 Partition Tenants in common in mineral rights may have interests partitioned

24 Taxation Use of statutory method ‘True value’

25 Evaluating Oil & Gas Lease Proposals Long term leases

26 Due diligence

27 Broker or Principal

28 Financial condition

29 Safety/environmental compliance record

30 Litigation history

31 Registered to do business in North Carolina? NC Secretary of State

32 The Leasing Process

33 Standard lease agreement No Such Thing!

34 The landowner addendum

35 Lease governs entire relationship between the parties!

36 Threshold Issues

37 Does the landowner own the resource to be leased? What is to be leased?

38 Water?

39 Is the lease compatible with future land use plans?

40 Restrictions on land use

41 Zoning

42 Military Flight Paths

43 Conservation easements

44 Present use value program

45 USDA/State conservation programs

46 Security Interests

47 Factors That Affect Negotiation of Wind, Solar, and Oil & Gas Leases

48 Amount of acreage

49 Physical features of property: quality of the resource

50 Geological features of property

51 Other production/infrastructure in area

52 Number of companies in area

53 Market for energy: gas, electricity

54 Negotiating skills of parties

55 Typical Clauses

56 Choice of law

57 Choice of forum (venue)

58 Attorney fees clause (is it one-sided?)

59 Arbitration clause Who pays? How selected?

60 Terms of Lease Agreement

61 Parties to lease agreement

62 Property description

63 Length of lease agreement

64 Primary (exploratory) term: may start with an option

65 Secondary (production) term

66 Payment terms

67 Bonus Payment (signing bonus)

68 Delay Rental Payments

69 Royalty Payments

70 Shut-In Royalty Payments

71 Free Natural Gas

72 Rights granted by landowner/limitations on rights granted

73 Mineral estate

74 Surface Estate

75 Water

76 No Surface Rights Lease

77 Storage Rights

78 Transportation of foreign gas/Installation of pipelines/Power lines

79 Additional Considerations

80 Rule of Capture

81 Pooling/Unitization

82 Indemnification

83 Non-Disclosure (confidentiality) Clause

84 Access to records/production audits

85 Increased real estate taxes

86 Imposition of severance tax

87 Drilling clause/Development clause

88 Removal or forfeiture of equipment

89 Provision for Project Failure/Termination

90 Insolvency/bankruptcy clause

91 Provision for removal of equipment

92 Insurance: certificate of insurance

93 Taxes

94 Recordation

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