Articles Posted in Oil and Gas Law

As Texas oil and gas attorneys know, each year, probably hundreds of thousands, maybe even millions, of dollars in oil and gas royalties from wells produced in Texas are lost to their rightful owners through a process called escheat. Specifically, when oil and gas companies cannot find the correct owner of mineral royalties, they are required to turn this money over to the Texas Comptroller.

How this happens is not difficult to understand. Let’s say Mom and Dad bought 100 acres in Texas many years ago. They got a deed to the land and the deed was filed in the deed records of the county where the land is located. They purchased both the surface and the minerals. A while later, they sign an oil and gas lease, and shortly after that, they began getting royalty checks. They don’t tell their children about the royalties, or maybe they do and the children forget about them. Many years later, Mom and Dad die, leaving five children. Maybe Mom and Dad died without leaving a will, or maybe they both had wills, but none of the children, for whatever reason, decided to have the wills probated. The five children just assume they each now own a one-fifth share of Mom and Dad’s land, or 20 acres each.Three factors now come into play that result in royalties to Mom and Dad being overlooked by the children. First, most oil and gas companies have certain minimum amounts of royalties that must accrue before they will send a check. If an individual mineral owner has a small share of the royalties on a well, checks may be sent out every few months, or even once a year. Secondly, all wells are shut down from time to time, for repairs or perhaps while a new gas pipeline contract is being negotiated. During this time royalty checks may not be sent out. One of the children or a grandchild may collect Mom and Dad’s mail for a time after Mom and Dad die. At some point, they stop doing so, or perhaps the Post Office forwarding order expires and is not renewed. When royalty checks resume, they are returned to the oil or gas company as undeliverable. At that point, Mom and Dad’s royalty account is put in suspense, or on hold. After a certain amount of time, the oil or gas company is required by the Texas Property Code to turn all accrued royalties over to the Texas Comptroller.

A third factor that contributes to royalties being overlooked by heirs is that the well that produces royalties for Mom and Dad may not be on the family land. In fact, the well may be a considerable distance away from the family land. The reason is that most oil or gas wells are required by law to be part of a pooling unit. The pooling unit may be as small as eighty acres, in the case of an oil well, or it may be several hundred acres in size, in the case of a gas well. When the well is a distance from the family land, it may not occur to the heirs that the family land is actually part of that well’s pooling unit.

As a Texas oil and gas attorney, I have occasion to review and negotiate many oil and gas leases in Texas for clients all over the United States (hopefully before the lease has been signed). However, having an attorney review a pipeline easement is every bit as important. Here are just a few of the critical questions that a pipeline easement should address:1. Is the easement limited to a specific area, or is it a blanket easement over your entire property?

2. Is the pipeline going to be buried to an appropriate depth, in light of your future use of that property, what the pipeline will carry and the anticipated size of the pipeline?

3. Does the easement obligate the pipeline company to refill to the original contour of the land and maintain that contour as the fill packs down?

As an oil and gas attorney representing clients throughout Texas, I have had many occasions to draft an assignment of one party’s interest in a well or a joint operating agreement to another, such as when a well is sold and the first operator’s rights under the operating agreement are assigned to the new operator, or when the original owner of a non-operating working interest sells their interest to a new entity. Most assignments contain language that provides that the assignor is no longer liable for claims and expenses in connection with the wells after the date of the assignment, and also provide that the assignee indemnify the assignor for these expenses.

There is an old saying in the oil patch that once you have been involved with an oil or gas well, you are always potentially liable. A Texas Supreme Court case in 2006, as well as a federal court case in 2008, illustrate this point. In the first case, Seagull Energy E & P, Inc. v. Eland Energy, Inc., the Texas Supreme Court held that Eland, as an intermediate assignee of an oil and gas lease, remained liable for costs and expenses arising pursuant to a joint operating agreement, even though the costs occurred after Eland had sold and assigned all of its interest in the leases to an unrelated third party. The Court based its decision on two facts: 1) the joint operating agreement was silent on the question of the liability of a working interest owner after it sold its interest; and 2) the assignment did not contain a release of liability that was agreed to by both Seagull, as operator, as well as the new owner.Not surprisingly, after this opinion was issued, oil and gas practitioners made certain that their forms met the criteria described in the Seagull case. Unfortunately, even terminology that met the Seagull criteria failed to protect a working interest owner in GOM Shelf, LLC v. Sun Operating Limited Partnership 2008 WL 901482 (S.D. Tex. 2008). In GOM, despite language in the joint operating agreement like that required by the Seagull decision, the Court held that: 1) the obligation to plug and abandon the wells accrued prior to the date of the assignment; and 2) the plugging and abandonment liability was not expressly released by the release language in the joint operating agreement. As a result, the former interest owner was held liable for plugging costs.

I guess there are really two lessons here. The first is to be careful who you sell your interest to. If the new interest owner is a thinly capitalized sham company trying to make a quick buck, who folds without meeting their obligations under the operating agreement and the Texas Railroad Commission rules, you may get the bill when the Railroad Commission is looking for someone to pay for well plugging and clean up. Secondly, it is probably good insurance to have an oil and gas attorney draft the necessary documents when you are selling or acquiring an interest in oil and gas properties. While in oil and gas law, as in life, there are no guarantees, you will at least have the full benefit of all protections offered by the law at that time. I can guarantee one thing: the cost of proper documentation is light years less than the cost of remediation of an abandoned well site.

As an oil and gas attorney representing clients from all over Texas and from all over the world who have land in Texas, I have been getting quite a number of calls from people who signed a document before consulting an attorney and have lived to regret it, I’m sorry to say. It is apparent that there are a number of scams going on out there. One woman I talked to said that she was presented with a document that she was verbally told was merely permission to do seismic testing on her land. The document turned out to be an oil and gas lease. The terms were not very favorable to her and were substantially less than what the oil company was offering other lessors. Another woman called me recently to say that her elderly mother had signed a document that had been verbally represented to be an oil and gas lease. The document turned out to be a mineral deed, which means the woman had sold her minerals in their entirety forever!

Please folks, do not sign anything until you have a lawyer look at it. There are many honest oil companies and land men and women out there. However, even the honest oil companies are not going to offer you their best lease deal at first. In addition, oil and gas is an area that has its own language and concepts, and unless you have an oil and gas background, you are not going to be familiar with these. Finally, be aware that an oil and gas lease, in most cases, continues for as long as there is paying production, so that lease may be in place for your lifetime or longer.

Where a lease or deed has been obtained fraudulently, you may be able to sue to get the lease or deed canceled, but that is usually going to be a long, expensive and uncertain process. Please do yourself a favor: 1) do not sell your minerals, only lease them; 2) have an oil and gas attorney look at any document before you sign it, whether it is a seismic testing agreement, a pipeline easement or an oil and gas lease; and 3) please tell your elderly relatives to call you immediately if they are approached to sign anything, and not to meet with anyone about signing documents unless you are present.

As a Texas oil and gas attorney representing clients from all over the country with oil and gas leases in Texas, I am continually amazed at how many people sign an oil and gas lease without reading it!My flight instructor used to have a rule he would use when I was doing something bad while I had the plane and he wanted me to stop it immediately because I was getting ready to kill both of us. He called it “Rule 13” and it meant “Whatever you are doing, stop it!” To all of you folks out there who sign a lease without reading it, or who read a lease and don’t understand it or who don’t understand the legal ramifications of what you are signing, I would say: “Rule 13…Don’t do that!”. In most cases, I can negotiate with the oil company to make changes that will make the lease much more fair and much more favorable to you. In almost every lease I have negotiated, the oil company has accepted most, if not all, of these changes. For most leases, I charge a very modest set fee. Many of my clients find that the increase in their bonus or royalty check more than pays for my legal service. An oil and gas lease is a serious legal contract that is going to control your land, in many cases, for many years to come. So please seek legal advice before you sign that lease!