Mineral Rights and Leases – Confusion

Many landowners are confused about mineral rights and how oil & gas leases work. Many oil & gas lease operators are also confused about mineral rights and even about some of the clauses in their oil & gas leases. There’s also confusion among lawyers and judges, especially those who aren’t experienced with mineral rights and oil & gas law. I shuddered one day in court when the judge held up the oil & gas lease and said, “Looks like just another business contract to me.” My opposing counsel also shuddered, and we looked at each other, knowing we would settle the case because there was no predicting what this judge might do with it. Minerals and leases thereon have spawned volumes of court cases spanning more than a century of jurisprudence. It’s a subject well suited to the word “esoteric“. Lawyers and judges like “black letter law” because it requires no interpretation, nor analysis of how it might apply to a given factual situation. The phrase rarely, if ever, applies to oil & gas cases. Yes, there are statutes and regulations on the books printed in black letters. They are frequently poorly drafted or subject to interpretation or, more often, just not clearly dispositive given the facts that can arise in the real world. It’s amazing what people who are confused about mineral rights and leases can spawn. Okay, where am I going with this?

It’s not unusual to get a phone call from a landowner who starts with, “I just have a quick question…” There will be a five or ten minute description of their perspective of the matter before getting to the quick question. I invariably start my reply with, “Well, there’s no quick answer.” Then I explain that the law is generally not black and white when it comes to oil & gas matters and I can’t provide a competent answer within the confines of a phone call. Sometimes I provide an educated guess but it is accompanied with warnings and disclaimers. Then I disclose my hourly rate and advise it’s likely to involve at least three hours of billable time to study the pertinent documents that they probably don’t have in their possession but will need to get for me (or else pay me to track them down with a title search), to track down some pertinent information that I can probably find online, and to then explain where they stand, which won’t be a sure win or sure loss but, hopefully, somewhere east or west of 50/50. By now I’ve been on the phone at least half an hour that I can’t bill for. Okay, where am I going with this?

Sometimes I suggest they do some “homework” to acquire basic knowledge about mineral interests and oil & gas leases. This can shorten the amount of time it takes for me to explain what the law portends for their situation. As a simple example, if they know what “royalty” means, then I can use it in a sentence without having to spend extra time explaining it; and, if they know the difference between a “mineral deed” and a “division order”, then that will save time. Saving time will save them money, since the less time I have to spend on it the less my fee will be. So, to that end, I sometimes refer them to one of my blog posts that has links to information about minerals and leases.

Which brings me to where I was going with this, which is another article I recently came across: “Mineral Rights” on the Geology.com website. It’s a pretty good summary of mineral rights in layman’s terms.

What the Frack?

It was 1976, the bicentennial birthday of the United States of America. It was also the year Jimmy Carter and I were elected to public office. It wasn’t his first election, but it was mine. He beat a Republican. I beat a Democrat. In 1981, Ronald Reagan’s first year as president, I got a Christmas card from the White House. When I was sworn in, I’d never heard of fracking, or hydraulic fracturing; nor had anyone else outside the oil patch. By the time I left office four years later I was familiar with it. My public office (County Attorney) was, officially, only a part-time position with a part-time salary. So, 1976 was also the year I launched my private practice of law. As County Attorney, I prosecuted robbers, rapists, arsonists, drug dealers, drunk drivers and other perpetrators of offenses against the peace and dignity of the State of Kansas. As a general practitioner of civil law, I helped husbands and wives sever the bonds of matrimony, helped entrepreneurs launch their corporations, partnerships and limited liability companies, wrote contracts to further trade and commerce by individuals and companies, helped newlyweds buy their first homes, and helped farmers buy and sell quarter-sections of land.

Strangely, the private practice of civil law wasn’t where I first encountered an oil and gas lease. A number of people in a number of states who claimed they’d been ripped off in an oil investment scheme had been calling the police and sheriff’s offices which had no idea what to do so they advised these folks to call the County Attorney. I actually had my own investigator, and we proceeded to educate ourselves about oil and gas leases and how wells got drilled and, before long, I was prosecuting “white collar crime” in the form of a promoter who was selling 1/32 fractional interests in a drilling program; sold 35 of them, as I recall. Looked to me like a violation of the Kansas Securities Act. It wasn’t long before I heard from the Kansas Securities Commissioner whose toes I had unknowingly stepped on. “Violations of the Kansas Securities Act are prosecuted by the Kansas Securities Commissioner,” I was informed. Well, um, I thought I was the “chief law enforcement officer” in my county. I offered to show them several official opinions released by the Kansas Attorney General that said so. They went back to Topeka and I promised to keep them informed as the case proceeded. It proceeded to a conviction (the perp pleaded guilty, or maybe no contest – I don’t remember for sure now), following which he filed an ethics complaint against me for violating his constitutional rights. Somehow in my Constitutional Law class at law school I missed the one that says “shall not be deprived of the right to defraud fellow citizens”. The complaint was deemed without merit and dismissed by the Disciplinary Administrator. Now that I’m older and wiser, though, I understand better why that class was referred to as “Con Law”. Defrauding the citizenry does seem to be a protected right of certain institutions such as the Congress, the White House, IRS, EPA, and certain large corporations, particularly, cable media and telecommunications, and insurance. Health insurance is an especially nefarious industry, moreso than ever thanks to Obamacare. But, I digress.

Interesting, you might say, but what does it have to do with fracking? Patience, my friends; good things come to those who wait.

The case was front page news in the local paper which was read by, among others, a farmer who’d been approached by a company from Oklahoma that wanted to lease his farm and drill oil wells on it. He phoned me in my capacity as a private attorney, not public prosecutor. Representatives of the company were coming up in a couple days to visit him at home and get his signature on an oil lease. Could I be there and look it over for him? I was obliged to inform him that I’d never actually represented anybody in oil lease negotiations and probably every other lawyer in town had much more experience than I did. “I understand,” he said, “but I still want you.” So, I went to his house at the appointed time, met him and the Oklahoma fellows, and we hammered out my first oil and gas lease.

My new client’s house had been the area’s elementary school for many years. He’d bought it and converted it to a home. Interestingly, the house where I grew up, in St. Louis County, Missouri (no oil wells there!), had previously been a school which my parents bought a couple years before I was born and converted it to a home. Even more interesting, I later discovered that for several years circa 1907 (before my father was born) my grandfather was the Baptist minister in the city I moved to and made my home in 1976. When I moved there, I didn’t even know he’d ever lived in Kansas!

What a coincidence, you might say, but what about fracking? Bear with me, I’m getting there, but this just popped into my head (really, just this moment as I typed the comma after “bear with me”): a scene in a bar where a guy goes up to a gal and his pick-up line is, “Bare with me.”

Okay, we’re getting close to fracking. A week later, the guys from Oklahoma called and asked if they could hire me as their attorney. They were planning to lease a lot more land in the area and would like to have me working for them. I was obliged to inform them that I’d only handled one oil lease negotiation and probably every other lawyer in town had much more experience than I did. “We understand,” they said, “but we still want you.” Thus were planted the seeds of what would become a legal career focused almost exclusively on oil, gas and mineral law. As for fracking, I soon got acquainted with how it worked and had been working, for several decades before I knew what it was, without causing, contributing to, or otherwise suggesting any relationship with, earthquakes.

Wait, you might say, is that it? Well, for now it is. If anyone is really interested, let me know and I’ll consider a fracking supplement.

 

Only Real Men Need Apply

Over the years I saw quite a range of private placement memoranda, prepared to coax money out of investors to drill oil and/or gas wells. They ran the gamut from thick slick magazine quality presentations with full color photos, graphs, diagrams and reports by petroleum engineers and geologists (that only petroleum engineers and geologists could understand) to things that looked like school reports written by 6th graders using a typewriter for the first time. It never ceased to amaze me that presumably well educated men wrote checks for thousands of dollars payable to somebody they’d never met in order to get in on oil well drilling programs that were grossly inflated as to cost and unlikely to yield a return on investment regardless of how good the wells turned out if they ever were, in fact, drilled. Even the 6th grade quality memorandum could attract enough money to fund the proposed program whose unstated goal, I sometimes suspected, was really a two-week spree in Vegas for the promoter and a few good buddies followed by a “sorry, dry hole” letter to investors.

I had a theory that it didn’t really matter to many investors if they ever saw a return; they just wanted to be able to tell their golfing buddies about their oil wells in Montana (or wherever). Regardless of whatever else they contained, most private placement memoranda had at least a couple of pages in capital letters “warning” about the high risk of putting money into drilling wells. Rather than serving to emphasize the need to think carefully and think twice before investing, it seemed that the warnings served to emphasize that “Only Real Men Need Apply”. There never seemed to be a shortage of potential investors who, in their own minds, were “real men” or, perhaps, who were easily persuaded that “real men have oil wells”. Over the years, I received several calls from women whose story began, “My husband invested in this oil well venture…”

It also never ceased to amaze me how such promoters avoided jail. Many of them probably gave little, if any, thought to federal and state securities (“blue sky”) laws. The ones who did probably assumed their “private” drilling programs were exempt from securities laws and regulations. Many programs probably were exempt from registration by reason of the Uniform Limited Offering Exemption (ULOE), though not from the “notice filing” required under ULOE. Exemption from registration did not mean exemption from the general fraud (“bad boy”) provisions of blue sky laws. Those provisions make it unlawful to misrepresent the facts (i.e., dozens of highly successful wells have been drilled all around our lease), as well as unlawful to not disclose important facts (i.e., nothing but dry holes have been drilled all around our lease). State securities regulators would periodically crack down on “oil well scams” and find a particularly egregious case to prosecute and “make an example”. And, yet, well educated men still write checks for thousands of dollars to somebody they’ve never met to get in on oil well drilling programs.

Speaking of petroleum engineer and geologist’s reports, after reading quite a few, one begins to wonder if they all use the same template and just fill in different names for the state, county and target formation. A humorous take on such reports can be seen here.