Jun 10
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The purchaser of a new home wants to make certain he or she obtains good title to it. Likewise, the company that wants to lease the oil and gas under your land also must make sure that it is obtaining good title to that oil and gas. The drilling company is making a multi-million dollar investment in its drilling project, and good title to the oil and gas is a must. Title considerations in the leasing of oil and gas are similar to title considerations for any interest in real estate.
It is important for prospective lessors to understand that when the drilling company asks them to sign a lease, the drilling company is not contractually bound at that time. There are a number of conditions that must be met before the driller accepts the lease and pays the lessor. Title to the oil and gas must be good , and the project must be economically feasible. A word to the wise – don’t run to the automobile dealer until you have actually received the funds.
Think of the ownership of real estate as a “cone,” that reaches below the surface to the very center of the earth, and stretches to the heavens above. This includes everything in between, including the oil and gas. It also helps to visualize real estate as a birthday cake, with multiple layers underground, consisting of many different substances. One layer might be the Pittsburgh vein of coal; another layer might be the Freeport vein of coal; and yet another layer might be the oil and gas.
Many of us are not interested on what is under our feet, as long as it does not disturb our enjoyment of the surface. We don’t realize that the various layers of the birthday cake may actually be owned by others. Often, the oil and gas under land is owned by someone other than the surface owner.
The oil and gas can actually be sold outright by the owner to a third party. That third party, not the surface owner, would then be the person able to lease the oil and gas, and would receive the royalty income and other benefits. Many Washington County residents have already received solicitations from a number of companies seeking to purchase their oil and gas outright. Although the amount offered (usually about $2000 per acre) may seem like a big number, it pales to insignificance when compared to a potential royalty income stream. Only in rare cases would it make sense to sell your oil and gas outright to a third party.
Sometimes the seller of real estate “excepts and reserves” the oil and gas, and all benefits involved with it. This simply means that the seller keeps the oil and gas, and it means that this particular layer of the birthday cake stays with the seller. It is not transferred to the buyer along with all of the other layers. This reservation is usually the subject of specific negotiation, and would have to be clearly spelled out in the sales agreement. If the agreement does not specifically provide that the seller is keeping the oil and gas, and is silent on the subject, then the oil and gas passes to the buyer.
Sometimes the oil and gas was reserved by a seller long ago. The current seller never owned it and cannot now pass it to the buyer, regardless of what the agreement of sale might or might not say.
It should be noted that because of a rule of real estate law peculiar only to Pennsylvania (the “Rule in Dunham’s Case”), the term “minerals,” when used in an agreement or deed, does NOT typically include the oil and gas. A reservation of the oil and gas should very clearly and specifically use the words “oil and gas”.
Another title matter which has been the subject of a great deal of discussion is the issue of “held by production” (HBP). The oil and gas industry started in western Pennsylvania more than 150 years ago. It has been estimated that there have been more than 100,000 holes punched in the surface in Washington County in the search for oil and gas. Virtually every rural parcel of real estate in Washington County has been the subject of one or more oil and gas leases over the decades. Most of these older leases have expired by their own terms. However, there are oil wells in Washington County that have producing continuously for more than 100 years.
If a particular property is already the subject of a producing oil and gas lease (that is, the land is held by production), then the current owner of the oil and gas is not free to lease to another. The current lessee is usually free to sell the lessee’s interest (known as the “working interest”) to a large company that will drill the deep wells into the Marcellus Shale. While the owner of the royalty interest may receive a real benefit from the assignment by the lessee, the royalty and other financial benefits will typically be much less than if the owner were able to enter into a new oil and gas lease.
Royalty owners must understand their rights when it is asserted that a parcel of real property cannot be leased by the royalty owner because the land is HBP. Sometimes the old wells are in fact not producing, and the original lease has expired by its own terms. Many factors must be considered. How old is the lease? Are there any visible operations on the surface? Has anyone received royalties, delay rentals, or free gas? Does a meter placed on the well actually show any production? Do the lessee’s own records show proof of production?
Originally Published in the June 2, 2010 edition of the Observer Reporter by:
James H. McCune, Esquire
Partner at Bassi, McCune, & Vreeland, P.C.
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