Wednesday, April 24, 2013

The Dominant/Servient Estate Theory, Part 1

This is the first subsection to the Rights of Surface and Subsurface use section of Chapter 2 in Texas Law of Oil and Gas, Section 2. 

When we look at the mineral fee ownership and the different rights, one of the rights we briefly mentioned in our last post was the implied right to use the surface in ways necessary to carry out oil and gas production operations.  As an aside, I have seen numerous deeds where there has been a severance of the mineral estate but the mineral owner has waived their right to enter on the land - keep an eye out for this on your conveyances.  It should be elementary to conclude that entering on the surface in order to carry out exploration, drilling, producing, transporting and marketing operations could in many circumstances result in interfering with the right of the surface owner to use the surface.  How to deal with that - first we have to determine which estate is dominant.  In Texas, we have case law that has established the mineral fee as the dominant estate, and the text cites numerous cases on point (I will limit my reference herein to Vest v. Exxon Corp., 752 F.2d 959 [5th Cir. 1985]).  This means that the mineral fee owner can actually enjoin actions by the surface owner or lessee that interfered with reasonable use, operation and development of the mineral estate (again, more case references here - see the text for the particular cases).  The text also discusses the historical chain of the doctrine that established the mineral estate as dominant back to the Kingdom of Spain, where Spanish law held all minerals were owned by the sovereign, and he necessarily had the right to use the surface of privately owned land for mining purposes.

The implied right to use the surface includes several activities that are often exercised by a company that has executed an oil and gas lease with the mineral owner.  This includes conducting seismic tests (I can't remember but I think I saw an episode of Psych where the guys came across seismic testing equipment - maybe it was Monk?), building storage tanks, building roads (to get to the drillsite), and using the landowner's water for drilling and secondary recovery operations (secondary recovery includes adding pressure to the minerals subsurface to push more of them to the wellbore for production). 

We will cover more of this subject on another post.

Tuesday, April 23, 2013

Attributes of the Mineral Estate

Here in Texas, the state Supreme Court has attributed five "essential attributes" that imbue to the ownership of a severed mineral estate, including (1) the right to develop, (2) the right to lease, (3) the right to receive bonus payments, (4) the right to receive delay rentals, and (5) the right to receive royalty payments. 

The text of Texas Law of Oil and Gas, Second Edition then suggests that it might help to understand these attributes might be better understood by separating them into two types of of actions that a mineral fee owner might take.  The right to develop, which would include exploring, drilling, producing, transporting, storing, and marketing, as well as the implied right to use the surface in ways necessary to carry out said operations and the right to authorize others to do so. 

The remaining attributes would result from a transaction whereby the mineral fee owner grants the aforementioned rights to a mineral company (usually through what's called an "oil and gas lease").  The right to lease, listed second above, would also be referred to as the "Executive right," while the bonus (usually a lump sum payment on the execution date of the lease as consideration for transferring the right to develop), delay rentals (periodic payments for the right to defer drilling), and royalties (a right to a stated fraction or percentage of the value produced without any deduction for costs) are financial benefits that the lease usually provides to the executive right holder. 

Now, it's possible to have a lease situation where the parties have divided ownership of the mineral fee.  As an example, the text describes a situation where one person might share the lease royalty, but not the bonus or delay rentals, and then states that the situation in question would require a determination as to where another benefit (atypical) is a royalty.  Of course, the parties could always agree to a different arrangement. 

Moreover, it's important to note that a mineral owner is not required to choose only between choosing to lease or choosing to develop.  Other options, such as participating in a Joint Operating Agreement (for example), are available to the mineral fee owner as well.

There is more to this particular section, please read the text itself for a more thorough understanding - as I've mentioned before, this is more as a study aid for my personal benefit while buffering my knowledge base.

Wednesday, April 17, 2013

More on Adverse Possession

I've already started a summary of the Texas Law of Oil and Gas Second Edition's section on Adverse Possession.  This post will be a continuation of that summary. 

One thing to consider with regard to a severance vis a vis the statute of limitations is that the severance *must* occur prior to the claimant's entry onto the surface.  Put another way - an adverse claimant who takes possession of a tract of land that is not severed takes possession of the entire tract (the surface and the minerals).  A subsequent severance would be subject to that possession and would require the ouster of the claimant.  The authors note a limited exception where the owner conveys the surface estate to the adverse possessor by a deed wherein he reserves the mineral interest.

The next section of the text then discusses Thomas v. Southwestern Settlement & Development Co., where the court held that when there's a purported severance by a person who doesn't held good title the subsequent occupancy/entry of the surface will not affect the title of the mineral estate.  Please note that the court here was dealing with a claim under the 5 year statute of limitations.  On the other hand - a severance completed by the adverse claimant who maintains the surface "has no more effect on the running of the statute of limitations than a severance by a true owner after an adverse entry takes place." (see Texas Law of Oil and Gas, Page 2-7).  The text also notes that the most common cases involve oil and gas leases that the adverse claimant who occupies the surface.  So, if you adversely claim a tract, and then execute an oil and gas lease, you need the continued surface occupancy to benefit the mineral estate.  The opposite has been held to be true, as well, where an adverse possessor who conveyed the surface and reserved the minerals - where there is a continuous surface occupancy by the grantee, the limitation title to the mineral estate is ripened. 

Now, you can acquire title to a mineral estate through adverse possession where the estate's been severed, however, according to Blocker v. Davis (241 S.W.2d 698, 702 (Tex. Civ. App. - Fort Worth 1951, write ref'd n.r.e.), "such a dominion exercised over said minerals as would have become notice to owners of the mineral estate" must be exercised.  This would probably include drilling followed by production (continuous) of minerals over the severed estate.  The text also provides other examples - check the book for those.

The text also discusses claims to limitation title by a lessee that remained in possession and continued to produce after the lease terminated because of a period of Non-production, e.g. Natural Gas Pipeline Co. v. Pool (124 S.W.3d 188 (Tex. 2003), but it's best to read this on your own, as well... particularly given the length of this post already. 

Next time, we'll get into section 2.1[A][1]b - Attributes of the Mineral Estate

Friday, April 12, 2013

Texas Oil and Gas Law - Adverse Possession, Part 1

It's been a while, but we're back.  The last time we spoke, we discussed the mineral estate generally.  Today, we will go over the concept of Adverse Possession with regard to the mineral estate. 

When the surface estate and the mineral estate are jointly owned (i.e. there has been no severance), then adverse possession extends to the minerals underneath.  In other words, if you acquire title to the surface estate through limitation title, then you also get the mineral estate (the whole bundle of sticks). 

Now, when we talk about adverse possession with respect to the mineral estate, the first issue that must be addressed is when the severance occurred, as well as whether the severance was a total severance or a partial severance. 

Let's tackle the easiest portion first - if the mineral estate was completely (100%) severed from the surface estate prior to the first date of occupation of the surface by the claimant, then the claimant cannot acquire any interest in the mineral estate.  This is logical, as the mineral owner's estate is separate and distinct from the surface. 

Now, if there was a partial severance, which has been known to happen, then the adverse possessor would be able to gain limitation title to the portion reserved (i.e. the non-severed portion). 

The authors of Texas Law of Oil and Gas note that a surface owner in possession is in no better position than an adverse possessor.  The state has had several cases where the surface owner has asserted limitation title to the mineral based on continuous surface occupancy that did not reserve the mineral severance (and based on tax payments), the state has noted that even where the instrument that separate the surface and the mineral rights was not recorded, possession of the surface under a chain of title that contains a mineral severance cannot be adverse to the mineral estate. 

We will continue with Adverse Possession on another post. 

Monday, April 01, 2013

The Mineral Estate

Once a mineral estate has been severed from the surface estate on a tract of land, that mineral estate becomes a fee simple estate in and of itself.  This means that it's not subject to abandonment and also receives, as the authors of Texas Law of Oil and Gas Second Edition note, the benefit of the doctrine of accretion (the gradual buildup of land from water).  Moreover, you can receive ad valorum taxes separate from what's imposed on the surface estate and contracts regarding the mineral estate must comply with the Statute of Frauds, et al.

Because it's a fee estate, the owner of the mineral rights has the same basic rights that any other fee owner has, including the right to use, convey, and dispose of the property, as well as creating lesser estates (such as a Life Estate). 

Adverse Possession is the next section, but it takes up a decent amount of space, so I'll address that another time.