1. Part 1.3 Mineral Rights & Leasing

2. Objectives After reading the chapter and reviewing the materials presented the students will be able to: Understand ownership of mineral resources Identify leasing laws and procedures Figure lease contract terms and provisions Analyze executing a lease and managing agreements

3. Introduction Before a petroleum company can develop oil and gas reserves, it must acquire the legal rights to explore, drill, and produce on the site. In most oil producing countries, mineral rights are owned by the national government and petroleum corporations must negotiate with government representatives to secure contracts for mineral deposits. In the United States about two thirds of US onshore territory belongs to private individuals. The legal instrument used to transfer these rights from both private and public ownership to a petroleum company is an oil and gas lease, which is another form of license.

4. Leasing of Lands Even in the United States, most oil and gas is located on state, federal, and Native American lands rather than on privately owned lands. Each state of the United States has a board or agency that governs the leasing of its lands. The American Association of Professional Landmen (AAPL) has a listing of all agencies in all states. In Texas, leasing and managing state owned minerals is the responsibility of the Texas General Land Office. The Texas General Land Office periodically distributes a notice for bids offering certain tracts of land and describing procedures and limitations to development. To bid on and secure a lease in Texas, applicants must submit a sealed bid to the General Land Office. The DNR (Department of Natural resources) of Alaska, closely monitors the state’s leases to protect the social, economic, and environmental impact of development.

5. U.S. Federal Government Lands Land set aside for military use, national parks, and wildlife refuges among others is not generally leased to the petroleum industry. Native American tribes in the United States control the leasing of their own lands. The Bureau of Land Management (BLM) of the Department of the Interior is responsible for managing the mineral rights of onshore U.S. federal lands and administers leasing and drilling. The U.S. federal government controls the area from the state’s inland waters to 200 miles out. This region is known as the outer continental shelf (OCS)>The Bureau of Ocean Energy Management, Regulation, and Enforcement, a unit of the U.S. department of the Interior is responsible for managing the mineral resources offshore of the U.S.

6. Canadian Land Ownership With few exceptions, each of the ten Canadian provinces owns and manages its own mineral resources. The Canadian federal government owns and manages the oil and gas of the Northern Territories and offshore lands. A limited amount of Canadian subsurface minerals are privately owned.

7. Court Rulings Rule of Capture: The rule of capture allows the landowner to drill as many wells as they can, provided there is no diagonal drilling onto a neighbor’s property. Offset Drilling Rule: A landowner whose oil and gas reserves are being drained by a neighbor’s wells cannot go to court to recover damages or stop the offending operator. The landowner’s only option is to drill their own wells and produce as fast as possible. Currently oil and gas production is among the most heavily regulated industries in the United States.

8. Ownership in the United States The four types of U.S. mineral ownerships are private, state or federal government, and Native American tribes. An oil and gas lease is the most common method of obtaining rights to mineral production. A lease is an agreement between the mineral owner and the petroleum company.

9. The Language of Leasing The mineral owner is called the lessor. The petroleum company or other party is the lessee. The lessor grants exclusive rights to the lessee in exchange for consideration, usually money, called a bonus. The lessor also receives a share of the production, known as a royalty. The royalty is expressed as a fraction such as 1/8. If there is no drilling, the lessee usually pays a delay rental for each year to prevent automatic lease expiration.

10. Leasing Privately Owned Land A landman’s primary responsibility is to identify, locate, communicate and negotiate with mineral owners for the acquisition of the rights to drill and explore. The landman performs a preliminary check of records to determine ownership of the land and the mineral interests in the land. A lease broker is an independent expert in investigating and negotiating acquisition in specific regions.

11. Establishing the Contract The landman and land owner negotiate a lease through a bargaining process to reach the best possible deal. After negotiation, both parties agree on the primary term, bonus, and royalty. Bonus is generally paid on a per acre basis.

12. Provisions of the Lease The provisions essential to a lease – conveyance, term, and royalty – are found in standard lease clauses. Conveyance is the granting of interest in the petroleum to a person or company for the purpose of exploration, drilling, and producing. Term is the duration of the lease. Royalty is a profit share of production as explained in clauses dealing with payments for production. In addition a lease contains dates, names, and signatures of all parties involved, and the seal and signature of a notary public. Most leases have clauses and specifications to protect the lessor and lessee.

13. Executing a Lease A properly executed oil and gas lease is a written document signed by the mineral owners, acknowledged by a notary public or other witnesses, and officially recorded in the records of the county or parish where the property is located. After signing the lease, the lessee takes responsibility for exploration of oil and gas, obtaining permits to drill wells, and negotiating agreements for further development.

14. Summary Before a petroleum company can develop oil and gas reserves, it must acquire the legal rights to explore, drill, and produce on the site. The legal instrument used to transfer these rights from both private and public ownership to a petroleum company is an oil and gas lease, which is another form of license. The American Association of Professional Land men (AAPL) has a listing of all agencies in all states. In Texas, leasing and managing state owned minerals is the responsibility of the Texas General Land Office. Rule of Capture: The rule of capture allows the landowner to drill as many wells as they can, provided there is no diagonal drilling onto a neighbor’s property. The mineral owner is called the lessor. The petroleum company or other party is the lessee. A landman’s primary responsibility is to identify, locate, communicate and negotiate with mineral owners for the acquisition of the rights to drill and explore. A lease broker is an independent expert in investigating and negotiating acquisition in specific regions. Conveyance is the granting of interest in the petroleum to a person or company for the purpose of exploration, drilling, and producing. Term is the duration of the lease. Royalty is a profit share of production as explained in clauses dealing with payments for production.

15. Home Work 1. Explain the rule of capture. 2. What is a landman’s primary responsibility? 3. What is royalty?