Sunday, February 24, 2008

Mineral Owners Lose In Court

There are several MUST read documents available at Texas A&M Real estate Center . These documents explain many issues to consider when leasing.

For example, surface owner rights are subordinate to mineral owners. Also surprisingly, even if the lease indicates royalties are to be paid without post-production expenses being deducted, that is not supported by case law. In fact, owners end up sharing in those expenses.

Here are some quotes from these documents.

1. One of the earliest and most significant cases decided by the Texas Supreme Court held that the mineral estate is dominant over the surface estate. The grant of the mineral lease gives the mineral lessee the implied right to use as much of the surface as is reasonably necessary for the exploration and development of the minerals. The surface owner’s consent is not required for this right to be exercised. The mineral lessee is liable for surface damages only in limited situations.

2. The shared expenses depend partly on where the lease fixes the royalty. Commonly, the royalty for oil is set "at the well" or "wellhead." In such cases, the mineral owner’s royalty payment is free of production costs, but all costs subsequent to production are shared. (Two 1996 Texas Supreme Court decisions, Heritage Resources, Inc. v. Nations Bank, 09-0515, and Judice v. Mewbourne Oil Co., 95-0115, so held even though the lease addendum stated the royalty was free of such costs.) If the lease fixes the royalty "in the pipeline," "at the place of sale" or at other delivery points, different costs subsequent to production may be shared. These costs may include items such as compression expenses necessary to make the product deliverable into the purchaser’s pipeline, expenses necessary to make the product salable, transportation costs and the expenses used in measuring production.

Until you sign the lease, you own both the surface and mineral estate in a single deed and have control over your estate. After signing, the mineral and surface estates are in separate deeds and will never be combined again. Plus you end up losing control of the surface estate too. I am not a lawyer and can not give legal advice but the old saying "BEWARE of strangers bearing gifts" seems to apply.



Anonymous said...

Veeeery interesting! I wonder, though, what is the likelihood that in a residential setting, a driller would actually want or need to do anything that would cause surface damage?

In other words, if I enter into a lease agreement in a traditional residential subdivision, is there a realistic chance the driller might want to plow up my yard, or tear down my garage as part of drilling ro production activities?

Enjoy Gas said...

Initialy, the developers will promise to drill far away and do no damage and that is what they will do. But secondary drilling and production activities are even more strongly dominant over surface rights than the primary drilling activity.

The first well in a pooled 640 acre drilling unit doesn't have to be close to homes. Tanks and wellhead valving will not be very intrusive and probably will have little effect on property values or safety of the neighborhood.

However, when the other 80 wells are drilled to fully develop the unit, where will all those well sites, tanks, christmas trees, compressors and pipelines be installed? Will any laws or regulations force all that equipment to be installed underground to make them safe and/or reduce their visibility and impact on the esthetics and property values of a subdivision?

So far, these have not been an issue and the government regulators will be reluctant to make any changes that the public and lease contracts do not FORCE them to make.

In rural areas, these issues are not very significant. But in suburbia, who wants a big set of valves and tanks right by the entrance of a gated community of $200,000 plus homes? Is there any doubt that property values will be reduced if they are suddenly near a giant compressor installation?

And what about pipelines? They have to be installed. They have to go somewhere and in a suburban neighborhood, they will be installed where they are the lowest cost for the pipeline company.

By emminant domain, they go where they are needed. If that is through your yard, say goodby to established landscaping, big trees and perhaps even to structures.

Oh sure, fences will be rebuilt and some type of dirt will be used to fill holes. Streets and sidewalks will eventually be repaired. But it will take time for those impacts to blend in with older surroundings.

I have seen nothing that will require any tree over four inches in diameter to be replaced with one of similar size. I have seen no evidence that it is even possible for any of the 25+ year old oaks and pecans that grace the area now to be replaced.

But trees will eventually grow and property values will eventually adjust. However if 80% of the value of the gas goes to the big companies, owners will have little to show for their trouble.

We have already invested over $500,000 per acre in our property. Sometimes MUCH more. Impacting that for a signing bonus (under $20,000 per acre) may not be the wise choice particularly if it will be 10 years or more before royalties will be significant.