Surface Rights vs Mineral Rights in Oil & Gas Leasing
Although it may not be immediately intuitive, the surface and its attendant rights (associated rights) of a particular tract of land can be owned separately from the minerals underneath. This may sometimes come as a surprise to an owner that would like to participate (as in make money) through an oil and gas lease. Surface owners can be restricted simply by the fact that they are not the owner of the minerals underneath. This article addresses some of the issues related to the interplay between surface and mineral ownership with respect to oil and gas operations.
Surface Rights Don’t Necessarily Mean You Own the Minerals in Energy Rich Areas
Depending on the area of the country, it can be normal for ownership (legally referred to as “fee simple”) to include rights to everything – the surface, the minerals, pore space, the water, the sky, etc. – and the executive power that goes with their rights. In other words, nothing has been severed, thus all rights remain joined with the property and thus “transfer with” the property. However, in other parts of the U.S. where drilling, mining or wind energy operations are common, it is not unusual to see ownership rights that are segregated (ie, severed). States where minerals (the mineral estate)are often severed from the surface estate include: Texas, Oklahoma, Pennsylvania, Louisiana, Colorado, New Mexico and others where oil and gas has been produced for decades.
When Surface and Minerals Are Separated
Let’s say John originally owns the surface and mineral rights to his property, then sold just the surface rights to his brother Jack. Since John retained his mineral rights, he is the person an oil and gas company will approach to sign an oil and gas lease. Jack’s surface rights are in most states subservient (secondary) to John’s mineral rights. The oil company will, however, have to consider John when it comes to surface operations on this particular tract of land. A review of the deed to your property may or may not tell you if you own the mineral rights. A task known as running title (the mineral title) is the only sure way of determining ownership with any measure of authority. By having a qualified person run (ie, examine) title, you may determine whether or not the mineral rights have been severed through a prior mineral conveyance.
The process of drilling and completing an oil or gas well is obviously going to cause disturbance to the surface. A typical footprint needed for drilling, completion, and subsequent production is generally in the 3 to 10 acre range. As you can imagine, this may cause problems with those who own the surface rights only, and are not going to enjoy future royalty income. It is beyond the scope of this article to review each state’s law on this topic – simply understand that laws vary from state to state on this matter, thus owners need to review the law in their state before setting expectations.
Smaller Drill Sites Are the Trend
The trend toward horizontal drilling is reducing the required area needed to drill an oil or gas well. Damage to the surface-only owner’s property has been greatly reduced in some areas, most significantly in the shale plays where Operators are drilling multi-well pads. One ten-acre drill-site might replace 5 five-acre drill sites. Horizontal and directional drilling allows an operator to access minerals beneath adjacent tracts of property from a nearby location; therefore, minimizing surface damage.
Surface Damage and the Surface Owner
A certain amount of surface space (acreage) is required for an oil and gas operator to drill a well and keep it in production throughout well’s life. In cases where the surface and mineral owner are one and the same, and they have enough acreage for the operation, oil and gas companies often provide compensation for surface related issues. The following are samples of different types of surface damage clauses which could be added to a lease (provided they are appropriate for a specific situation):
- No Surface Operations – A no surface operations clause can be used if an owner simply does not want certain operations to occur on his or her property. One example (probably the most prominent) is when an owner does not want a well physically located on his tract. He or she can use this clause to restrict the oil and gas company from using all (or a certain portion) of the land for drilling operations. Additional specifications could be: no pipelines, no roads, no seismic activity, etc. Again, these type operations can be restricted for the whole property (no surface use period), or confined to a portion of the property. Obviously this clause cannot be used in every situation and could make your property less valuable to the Operator. Work with the landman or leasing agent to determine what is workable. At times, the oil company has certain needs regarding its operations which are sometimes non negotiable, in order to physically drill the well. For instance, in some cases the topography of the land demands that a well site location be in a certain spot.
- Surface Damage Payment – A surface damage clause is often used if an owner normally uses his or her land for agriculture or other income producing purposes. Most oil and gas companies will compensate owners for the altered productive capacity when the owner employs the land for timber, crops, pasture, etc. A third party can be useful for appraisal of this value – sometimes landowners and oil companies think a little differently don’t you know! Let reasonableness prevail.
- Location approval – At times it’s prudent for a landowner to establish approval authority over the exact placement of drilling or surface production operations. A location approval clause is often seen in leases for larger tracts of land. The oil and gas company and the mineral owner both agree where drill sites will be positioned, along with access roads, pipeline easements, etc. On smaller tracts this can be difficult to negotiate. Operators often choose the well site location based upon their geologist’s recommendations and have to place the well in where they can. Location approval is more rarely used where wells are spaced close together. This is especially true with vertical wells.
- No Drilling Within XXX Feet – Similar to the location approval clause, this clause can be used by an owner that does not want a well, pipeline, road or any other related facility placed within a designated distance from their house, well water, septic system, barn, pond etc. This distance should be based upon good faith negotiation between the oil and gas company and the owner. These are usually drafted such that the company must obtain the written consent of the owner to construct anything within the prescribed distance.
- Water Related Clauses -– Plain and simple, water is required for the drilling and production of oil and gas. Consideration of the on site (or near site) water resources should be made by both land owner and the oil company. Clauses surrounding water issues are primarily designed to protect the owner and his or her water. The oil and gas company will often test the ground water before and after a well is drilled. More and more, as a matter of practice, water issues are being addressed proactively within leases. If any water is affected, the oil and gas company will usually correct the damage, and many times provide the owner with fresh water at the company’s expense. A water usage clause may be established in order to address issues related to water usage. This may include statements about the sourcing of the water and payment for same.
- Land Reclamation – This clause is sometimes included within the lease itself, therefore not requiring a separate amendment. Essentially, it says the oil and gas company will agree to restore the land to it’s original condition as it was before drilling, to the best of their ability. There’s nothing like before and after pictures to minimize problems in this area.
In addition to the items covered in this article, consideration of equipment storage, equipment takeaway, salt water disposal wells, ingress and egress during production, are topics of importance to surface owners. You’ll want to understand the industry – learn more in our Oil & Gas 101 short course.
Surface Owners Are Not Left Out of All Oil & Gas Operations
If your property is going to be damaged, make sure you negotiate a payment that compensates you for current and future losses.
Also, in many states the surface owner retains the pore space of formations. That means you might not own the oil and gas in the ground, but you own the rock where it is contained. This is important when it comes to natural gas storage or fluid (usually salt water) disposal. In states like Texas, agreements for storage and disposal are negotiated with and for the benefit of the surface owner.
As you can see, there are multiple ways by which an owner can feel more comfortable with an oil and gas company using their land. Information, reasonableness, and localized intelligence are your friend. Be sure to initiate conversation with the land agent about surface rights clauses that may be appropriate for your situation. As always, understand what the laws in your state can or cannot do for you. While the law may or may not be “on your side”, reasonable and intelligent thought applied to your lease prior to signing will serve you best.
- Lease My Land – Short article explaining how to attract oil and gas companies to lease your land. Topics include mineral values, property records, and finding companies.
- Mineral Rights Value – Short article explaining how to estimate the value of oil & gas mineral rights and what influences their value. Gain perspective on your minerals and royalty.
- Oil & Gas Production 101 – Article explaining the drilling, completing, and testing of oil and gas wells in nontechnical language.