his blog is intended to provide an overview of many of the legal issues and topics that affect the mineral owner clients of Goddard & Wagoner, PLLC. It is not intended as a substitute for the advice of an oil and gas attorney. If you have questions about your rights, contact the trial lawyers at Goddard & Wagoner, PLLC today.
THE NATURE OF OIL AND GAS LEASES
An oil and gas lease is both a conveyance and a contract. Wellman v. Energy Res., Inc., 210 W. Va. 200, 557 S.E.2d 254 (2001) at N.2. The lease typically provides that it is valid for five years and as long thereafter as oil and gas are produced in paying quantities or something to that effect. During the initial five years in our hypothetical, known as the primary term, the oil and gas company has essentially an exclusive license to explore for oil and gas. After production begins, in what is known as the secondary term, the company has essentially a fee simple determinable. The resource is theirs, subject to the contractual provisions of the lease (including royalty), as long as they continue production.
DELAY RENTAL OR LEASE BONUS
Older leases typically provided for the payment of a delay rental during the primary term of the lease. This rental would be expressed as either a flat rate for a certain period of time or a per acre price for a period of time. Typically delay rentals were paid monthly, quarterly or annually until a well was producing and the lease in its secondary term.
Today, almost all leases dispense with delay rental and instead provide for a lease bonus. The lease bonus consists of an upfront per acre payment that the lessor usually receives 60 to 120 days after signing the lease. This payment holds the lease for the entire primary term. The amount of the lease bonus depends on a number of factors. Typically, mineral owners in areas that are more liquids rich, such as eastern Ohio and Tyler County, Marshall County and Wetzel County, West Virginia will receive higher bonus numbers than mineral owners in dry gas areas.
Typically, Marcellus or Utica leases are consolidated to form a pool or unit for production purposes. The gas company will take a lease from all, or most, of the mineral owners in a given area (often 500 to 700 acres). Ideally, the pooled unit will be rectangular in shape. The company will then build out a single pad from which they can drill vertically and then drill several horizontal “legs” or “laterals.” The company must, at a minimum, obtain the lease of all mineral owners whose property will be penetrated by the vertical or horizontal well bore. More often, they will lease many more owners within the pooled unit. Each mineral owner will then receive his proportionate share of the oil and gas produced from the unit. For example, if a mineral owner owns 100% of 10 acres of oil and gas leased at 15% gross royalty, all of which is within a 600 acre unit, that owner would receive a royalty of 15% of 10/600(.01666667). In other words, the owner would receive 0.25% of the value of the oil and gas produced from that unit.
COMPULSORY OR FORCED POOLING
In some states, including Oklahoma, Ohio and Colorado, once the gas company has leased a certain percentage of the acreage in a proposed unit, they can compel the leasing and unitization of the unleased acreage. Pennsylvania also recently enacted a forced pooling statute. West Virginia is a bit different. For the Marcellus formation, there is no compulsory pooling and several attempts to pass bills implementing forced pooling have failed. For deeper formations, including the Utica, the company can force pooling if certain requirements included in W. Va. Code § 22C-9-7 are met.
APPORTIONMENT OR NON-APPORTIONMENT
Apportionment, or the lack thereof, concerns the question of who receives the royalty derived from an oil and gas lease in the event the property is subsequently subdivided. Most states, including Texas, do not apportion royalties. It is generally accepted that WV is a non-apportionment state. There are early contradictory cases, however. In Campbell v. Lynch, 81 W. Va. 374 (1917), the Supreme Court of Appeals appeared to require apportionment. One year later, in Pittsburgh & W. Va. Gas Co. v. Ankrom, 83 W. Va. 81 (1918), the Supreme Court of Appeals held that royalties do not need to be apportioned. The issue has not been recently addressed. Pennsylvania on the other hand, does apportion. The distinction can be significant.
Bernie Black owns 100 acres of surface, oil and gas near Carthage, Texas. In 2007, he leased the property to Pine Curtain Gas Company and in 2010 a single vertical well was drilled on the property and it was a good producer. In 2011, Bernie sold 75 acres to Buck McConaughey but retained the 25 acres on which the well was located. By the rule of non-apportionment, Bernie will still receive 100% of the royalty from oil and gas.
Phil G. Hogg owns 60 acres in Jefferson County, Pennsylvania. In 2008, he leased the property to Connors Production Company and in 2012, a single producing vertical well was drilled on the property. Phil sold 22 acres to Ned Ryerson last month, including the acreage with the well. By the rule of apportionment, Phil will now receive 38/60ths (63.33333333%) of the royalty due under the lease and Ned will receive the remaining 22/60ths (36.66666667%).
Non-apportionment can obviously adversely affect the mineral owner who does not own the wellsite. Under non-apportionment, he will receive no benefit from the existing lease but yet that lease precludes him from leasing the property elsewhere. For this reason, non-apportionment is only a default rule and may be modified by an entireties clause in the oil and gas lease.
NON-PARTICIPATING ROYALTY INTERESTS
Cuius est solum, eius est usque ad coelum et ad inferos is a latin legal axiom that loosely translated means whoever owns land owns that land the way up to heaven and all the way down to hell. In other words, an owner of property, in the absence of any alienation, owns all of the rights in the property, including the surface, air space, oil and gas, coal, and subsurface water. Any of these rights can be alienated or severed from the surface.
In West Virginia, the oil and gas, coal and surface are often held by three separate parties. Within each of these interests, lie several elements as well. Ownership of the oil and gas includes the right to make reasonable use of the surface, the right to convey the mineral rights, the right to receive bonus, the right to receive royalty and right to receive royalties. Any of these rights can likewise be alienated or severed. Often, an owner of the surface and oil and gas will convey the property reserving “1/2 of the royalty on oil and gas produced from the premises” or “1/16th of the oil that may produced from said lands.” While the interpretation of any older mineral deed is not an exact science, in most instances this will effectively reserve royalty only. In other words, the other party will receive 100% of the other rights incident to oil and gas ownership but only a portion of the right to receive royalty. The severed royalty interest is known as a non-participating royalty interest or NPRI.
While the NPRI owner has no right to lease the minerals or receive bonus, their assent to certain terms in a lease may be necessary. There is no West Virginia authority directly on point, however, in Texas a mineral owner cannot bind an NPRI owner to a pooling agreement. Brown v. Smith, 174 S.W.2d 43 (Tex. 1943). It is very possible that a West Virginia court will agree with the Texas courts. It is therefore imperative that the gas company obtain the ratification of any pooling agreement by the NPRI owners prior to conducting any operations.
THE RULE OF CAPTURE
The Rule of Capture is deeply embedded in the law of West Virginia and throughout the U.S. Puts succinctly, “If an adjoining owner drills his own land, and taps a deposit of oil or gas, extending under his neighbor’s field, so that it comes into his well, it becomes his property.” Energy Dev. Corp. v. Moss, 214 W. Va. 577, 589 (2003).
The rule of capture raises interesting questions with the advent of horizontal drilling and hydraulic fracturing or fracking. The primary question is whether a fracture that crosses or may cross a property line constitutes a trespass into the non-leased adjoining owner. The Supreme Court of Texas considered the question and concluded that the fracs do not constitute trespass but rather fall under the rule of capture. See Coastal Oil & Gas Corp. v. Garza Energy Trust, 817 S.W.2d 363 (Tex. 2008).
James Delfino owns 200 acres of minerals adjacent to a 10 acre parcel on which Jackie Treehorn owns the surface, oil and gas. Delfino signs a lease to Simi Valley Oil and Gas. Treehorn refuses to sign. Simi Valley drills a horizontal well with a well bore passing near to but not under Treehorn’s property. Simi Valley then fracs the well and begins production. It appears that the fractures crossed under Treehorn’s property. Treehorn claims that Delfino is liable to him in trespass.
The West Virginia Supreme Court has yet to address this issue in depth but many commentators and producers believe that it will follow the lead of the Texas Court.
Partition suits arise when one co-owners or co-tenants of an interest in real estate cannot agree as to the use and development of the property. These suits are governed by W. Va. Code § 37-4-1 et seq., which provides that the property, including an interest in oil and gas, may be partitioned in kind (i.e. divided so that each co-owner obtains a share to his own); set aside to one of the co-owners who must pay the others; or sold with the proceeds paid to the co-tenants according to their respective shares. The law in West Virginia favors partition in kind. While partition suits can be useful, the gas companies will often threaten a partition suit to intimidate landowners into signing a lease. The underlying threat is that the mineral owner will lose their interest if they don’t sign on the gas company’s terms. This is not the case and you should contact a lawyer to explain your rights.
QUIET TITLE ACTIONS
W. Va. Code § 51-2-2 provides for actions to remove any cloud to the title to real property. This provision can be used to resolve disputes as to the construction or interpretation of deeds and is often used in tandem with a suit to establish title by adverse possession.
In West Virginia, the adverse possession period is ten years. Other states may have longer periods, but the standard to prove adverse possession is similar. One must prove that they have held the tract adversely or hostilely, that the possession has been actual, that it has been open and notorious, that the possession has been exclusive, that possession has been continuous for the period required and has been under claim of title or color of title. Syl. Pt. 1, Somon v. Muphy Fabrication & Erection Co., 160 W. Va. 84, 232 S.E.2d 524 (1977). Proof of these elements must be made by clear and convincing evidence.
When a person dies without a will, their real property (including oil and gas, minerals or royalty) passes by the laws of intestate succession in the state where the real estate is situated. The intestate succession statutes in West Virginia are found at W. Va. Code § 42-1-3 and W. Va. Code § 42-1-3A.
W. Va. Code § 42-1-3 provides that in general, the surviving spouse of the intestate decedent will receive the entire estate IF the decedent left behind no descendants OR all of the decedent’s surviving descendants are also descendants of the surviving spouse AND the surviving spouse has no descendants who are not also descendants of the surviving spouse. If the surviving spouse has descendants who are not descendants of the surviving spouse, the surviving spouse would inherit 3/5ths of the deceased intestate’s share and the remainder would pas according to W. Va. Code § 42-1-3A. If the decedent had one or more descendants who are not descendants of the surviving spouse, the surviving spouse would inherit ½ of the intestate decedent’s estate.
W. Va. Code § 42-1-3A specifies how any portion of the decedent’s estate that does not go to the spouse will descend. It descends in the following order, to the decedent’s descendants by representation; if no descendants to the decedent’s parents, and if no parents to the descendants of the decedent’s parents. If there are no surviving descendants of the decedent’s parents, then it will pass to the decedent’s grandparents or descendants of the decedent’s grandparents.
John and Mary are married and had three children together. Neither John nor Mary have any children other than these three. When John dies intestate owning 40 acres of oil and gas in Tyler County, West Virginia, Mary will inherit all of John’s interest.
Jack and Diane are married. Jack has one child, Maeve, from a previous marriage and two children with Diane, Katie and Pat. Diane dies intestate owning a share of royalty in Greenbrier District, Doddridge County, West Virginia. Jack would receive 3/5ths of Diane’s interest in the royalty. Maeve, Katie and Pat would each receive 2/15ths (1/3 x 2/5) of Diane’s interest.
Peggy is a widow who had three children, Nancy, Joseph and Bobby. Bobby is deceased but survived by his son, Bobby, Jr. Joseph is deceased and survived by his four children, Hank, Enrique, Joe Jack and Donna. Nancy is still living. Peggy dies owning 20 acres of surface, oil and gas in Mannington, Marion County, West Virginia. Nancy and Bobby, Jr. would each inherit 1/3rd and Hank, Enrique, Joe Jack and Donna would each receive 1/12th (1/4 of 1/3) of Peggy’s surface, oil and gas.
TESTATE SUCCESSION (WILLS)
Testate succession is the law of wills. In a will, a property owner can determine who will receive his or her property upon the owner’s death. Wills provide a great deal of flexibility and typically a person can devise their property to whoever they choose. The validity of the will is measured by the law of the state where the testator resided at the time the will was made. West Virginia law requires that in order to be valid, a will must be either: (a) written entirely in the testator’s own handwriting (what is known as a “holographic will”) or (b) signed by the testator in the presence of two witnesses who also sign the will. W. Va. Code § 41-1-3
While no special form is otherwise required for a will, you should consult with a competent attorney prior to creating one. The testator’s choice is largely only constrained by the effects of estate taxes and the so-called forced or elective share statute contained in W. Va. Code § 42-3-1. This statute provides that a surviving spouse is entitled to at least a portion of their deceased spouse’s estate, regardless of the terms of the will.
If you are a West Virginia, Pennsylvania, or Ohio mineral or landowner with questions about your rights, contact the oil and gas attorneys at Goddard & Wagoner, PLLC today for a free consultation. We’ll use our resources to protect yours. (304) 933-1411