Oil & Gas Leases

I’m getting more and more calls and emails from landowners wanting advice about a lease they’ve just received from a landman or oil producer wanting to develop their land for oil and/or gas production. These inquiries are a challenge because there are very few short answers. A proper “review and comment” on their lease would involve considerably more time than I can afford to contribute for free, which generally means more time than they want to pay for.

The best short answer may be to click on over to the National Association of Royalty Owners Store and order one or more of their publications. They’re a lot cheaper than an hour of my time. There are several excellent choices, from Look Before You Lease to NARO’s Great Texas Lease Mark-Up Handbook and even Oil and Gas Law in a Nutshell which I think I have on a bookshelf somewhere around here. And, of course, there are a few comments about leases in previous articles in my blog; search for “landowner” or “producer’s 88” or “landowner’s guide”. Finally, don’t forget your friends Google, Bing, Yahoo, etc. They’ll lead you to other websites and blogs with a wealth of information.

Oil & Gas Seminar

On January 13 I was one of four speakers at an oil and gas seminar in Overland Park, Kansas, put on by Half Moon Seminars. It had been nearly 30 years since I was a seminar speaker. With 40+ attendees it was considered a “sellout”, which surprised me. I didn’t think there could be enough interest in the subject in the Kansas City area to garner even 10 attendees. The majority were from title companies, about a half dozen (other than the speakers) were lawyers. The rest were, interestingly, from engineering firms. Everybody was, of course, seeking CEC (Continuing Education Credit). My particular topic had to do with title examination and how to cure defects in title to minerals and leasehold interests. I had a well organized presentation sketched out, but within a minute of starting I was off it and never got back. I was originally concerned how to fill two hours on my topic, and ultimately amazed how fast the two hours flew by. If you’re interested, here’s the seminar brochure.

Mineral and leasehold title is an esoteric subcategory of real estate titles. The problem we run into these days is that the title companies no longer do title abstracts, at least not in this part of the state. In the “old” days, abstracts were common. Somebody from the title company did the actual searching of records at the courthouse, and then they typed up an “abstract” (summary) of all the material provisions of each and every instrument affecting title, and bound all these summaries together into the “abstract”. The title company was bonded for errors and omissions, so if they missed something there would be insurance money to cover the damages. We attorneys would examine the abstracts and base our title opinions on what we found there. If we missed something in the abstract, then our own malpractice insurance came into play.

And then as large areas became urbanized, everybody switched to title insurance. In urban settings, there was little concern about oil and gas leases. The title companies got used only looking back 25 years in the chain of title, since most defects older than that were “cured” by the Marketable Title Act. Unfortunately, certain critical defects in mineral title are not cured by the Marketable Title Act. To do a proper title examination and opinion regarding mineral title or an oil and gas lease based thereon, one must search clear back to the original government grant (Patent). Most title companies are not too keen at this prospect. Consequently, these days, I generally have to do a “stand up” opinion, meaning, I go to the courthouse and search the chain of title myself. I think it’s called a “stand up” because in most register of deeds offices, you hauled the title books from shelves along the walls and looked through them at a counter, standing up. At least, that’s how it was before the books started getting replaced by computers. In most of the rural counties, it’s still done the old fashioned way, poring through the old books, standing up at the counter.

I suspect the level of interest evidenced by the seminar attendance reflects the growing clash of urbanization into rural areas, where developers hoping to build housing subdivisions are encountering oil wells and wondering what that bodes for their vision of development. Or, maybe it was just a different topic from the usual seminar and attendees were motivated by curiosity. In any event, it was one of the better seminars I’ve attended in the past few years. 🙂

The Standard Producer’s 88 Lease

Back in the 80’s and 90’s (and earlier but that was before my time) we had oil and gas leases that contained mostly “boilerplate” clauses. People often referred to a standard “Producer’s 88” lease. There were, actually, dozens of variations on the so-called “Producer’s 88”, but the variations were mostly a matter of which boilerplate clauses were or were not included in a particular lease form. These boilerplate clauses were born in the first couple of decades of the 20th century, and they remained basically unchanged for nearly 100 years. You decided which lease form you liked and bought it in tablets of 50 from your preferred forms printer. As you went around to landowners, you tore off a lease, filled in the blanks, and got it signed and notarized. Some landmen (people who go around to landowners to get them to sign leases) carried a typewriter with them, many just filled them in by hand.

These boilerplate clauses became the subject of decades of court interpretations. Consequently, we had lots of court decisions telling us what these clauses meant and how they were to be interpreted. Court cases also developed what were called “implied covenants” inherent in these boilerplate clauses. There were (and still are) covenants such as the implied covenant to develop the lease, the implied covenant to produce and market oil and/or gas, the implied covenant to operate as a reasonable and prudent operator. You couldn’t find these obligations by reading the leases; the courts declared them to exist by implication. As a rule, they benefitted the landowners (lessors).

Then along came word processors. Nobody wanted to fill in forms with a typewriter any more, so lease forms were copied to hard drives and blanks were filled in with the word processor. Over time, people with lease forms on their computers decided to start messing around with the wording. Some of these people were lawyers who generally made changes that legally made sense. Other people were non-lawyers who generally made changes because they didn’t understand the lease in the first place and thought they’d make “improvements”. Non-lawyers generally had little inkling of how their changes might conflict with a century old body of court decisions.

Lawyers, especially over the last decade or so, have been making changes that specifically emasculate the implied covenants. It’s interesting to see how they come up with wording to eliminate covenants that aren’t contained in the wording of the lease in the first place. They’re not something you can “select” and “delete” on the word processor. You have to come up with language that expressly supersedes something that was there by implication in the first place!

Landowners have always been at a disadvantage when it came to comprehending oil and gas leases. It’s worse now, as clever lawyers (dare I count myself among them?) generate new lease forms that remove implied covenants – covenants that were favorable to landowners even though they didn’t know it. The “Standard Producer’s 88”? A thing of the past, if it ever existed in the first place.