Part 1.3

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?