Parker County Today June 2017 - Page 13

Scratching the Surface: Oil and Gas 101 Ever get confused by oil and gas terminology? If so, you’re not alone. Here are some basics to help keep it straight.   Surface vs. Mineral Estate Real property consists of the surface estate and the mineral estate. The surface estate seems self-explan- atory: the surface of the land and buildings. But the surface estate also includes other less-apparent attri- butes. Notably, the surface estate includes not only water on the surface, but also groundwater and the layers of dirt and rock beneath the surface. On the other hand, the mineral estate includes oil, gas, coal, and other minerals found under the surface. The mineral estate can be “severed” from the surface, such that different persons may own the minerals and the surface. When minerals are severed, the mineral estate is the “dominant” estate and the surface is the “servi- ent” estate—meaning the mineral owner has the right to reasonably use the surface to produce miner- als, and the surface owner must allow this reason- able use. However, an oil and gas lease or other agreement may include language limiting or prohibit- ing use of the surface. Blair Park is an attorney with Harris, Finley & Bogle, P.C. She has a background in oil and gas as a graduate of Texas Tech University’s Energy Commerce program with a concentration in Oil and Gas and, prior to law school, working as a mineral estate consultant to owners of large mineral estates and ranches in West Texas Bonus & Royalty The mineral owner typically receives a bonus payment, on a per-acre basis, as consideration for This article is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue. Oil and Gas Leases A mineral owner (“Lessor”) enters into oil and gas leases to grant a person or entity (“Lessee”) the right to develop and produce minerals. Oil and gas leases are not the same as house or building leases. In Texas, oil and gas leases convey the mineral estate, which then reverts back to the mineral owner when the lease terminates. The “Habendum clause” generally stipulates the duration of the lease for a specified amount of time, called the Primary Term, and “for so long thereafter as oil and gas is produced,” called the Secondary Term. For example: “this Lease shall be for a term of three years and for so long thereafter as oil and gas is produced.” If oil or gas is produced from the leased land at the end of the specified Primary Term, then the lease continues onto the Secondary Term—terminating when production ceases. signing an oil and gas lease. For example, a $500/acre bonus for a 100-acre tract results in a $50,000 bonus payment. The mineral owner also receives royalty, expressed in fractions or percentages. The Lessee must pay the Lessor this percentage of the oil sales proceeds and, depend- ing on the language, either the sales proceeds or market value of natural gas. The royalty does not bear drilling or completion costs; however, the royalty may bear post- production expenses, such as compression, gathering, and transportation expenses, unless the lease provides other- wise. Royalty is usually proportionately reduced by the percentage of minerals owned. For example, if you own an undivided 50% of the minerals and sign a lease for 25% royalty, then your royalty will be proportionately reduced to 12.5%. Royalty is also proportionately reduced through pooling (when a lease is combined with neighboring leases to create a pooled unit). In this situation, royalty is proportionately reduced by the leased acreage contributed to the unit. These basics barely “scratch the surface,” but expe- rienced oil and gas counsel will help you uncover the complexities lurking below. 11