Evaluating Legal Consequences of Energy Production from Agricultural Lands

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 ted_feitshans@ncsu.edu 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 andgas & 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 http://www.sosnc.com/

32. The Leasing Process

33. Standard lease agreementNo 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