Real Property Interests Subject to Oil and Gas Interests: Practical Suggestions for Resolving Potential Legal Conflicts Between Purchasers or Developers of Real Property and the Owners of Oil and Gas Interests to Which the Property Is Subject
| Publication year | 2012 |
| Pages | 21 |
Teresa James
[21]
Here is found a mixture of mining in its liquid phase with agriculture in its agronomical phase, a mixture which immediately arrests the imagination. Perhaps its most appealing manifestation in central terms is the way the derrick has jostled with the windmill on the skyline of the prairie landscape ... There is no statute against any victim of the oil contagion sharing the general thrill which invariably quickens the closer you get to its source ... [The oil and gas] under its wheat field lid is an enormous volume and it crouches there like a lion.[1]
I. Introduction
Modern development in traditionally agricultural or rural areas has brought with it a variety of interesting legal issues and challenges. Oftentimes, plans to construct new homes, businesses, and commercial developments come into conflict with traditional oil and gas interests that were granted decades ago. When those early oil and gas interests were conveyed, the drafters of the conveyance documents obviously could not have conceived the full nature and extent of development that might occur decades later on that very property and adjacent properties. The competing interests of oil and gas developers and producers versus the interests of modern-day residential and commercial developers are significant and warrant serious consideration.
Issues may arise in many and varied circumstances:
• a prospective purchaser desiring to purchase the fee interest in property discovers from a title commitment that the property is subject to a mineral deed;
• a prospective purchaser anxious to close on the purchase of what appears to be barren ground discovers that the property is encumbered by an oil and gas lease;
• a builder in the course of excavating the basement of a new home discovers an abandoned well beneath the surface;
• property owners plan to construct a detached garage near their existing home, but when they place a One Call[2] prior to commencing construction, learn that the proposed construction would overlap an existing pipeline easement;
• a municipal government plans to construct a major thoroughfare in a newly developed area, but discovers it would be on top of an existing pipeline easement.
This article focuses on the legal and practical implications of pre-existing oil and gas interests upon real estate purchasers and developers of properties encumbered by such interests. It is intended to assist lawyers who represent real estate purchasers and developers to identify, avoid, and resolve legal problems that may arise during the course of negotiation, acquisition, or development of real property subject to such oil and gas interests. It is not intended as a treatise on the intricacies of traditional oil and gas law in Kansas, nor does it address the negotiation for and/or leasing of properties for oil and gas exploration and production. Rather, as the title suggests, this article is intended to provide a basic understanding of what lawyers should know and what questions they should ask when their clients contemplate the purchase or development of Kansas real property subject to pre-existing oil and gas interests.
It is always better practice to identify specifically any such potential conflicts and to resolve them before the real estate is purchased or the development commenced. While this may seem obvious, in the case of property, for example, encumbered by a pipeline easement, prospective purchasers may be anxious to proceed with closing the real estate purchase on the assumption that any potential issues can be resolved later. A decision to close the deal under those circumstances could prove devastating and costly, if the easement prohibits buildings or structures on the very portion of the property where the prospective purchasers intend to build their dream home or a major retail outlet.
II. The Property Interest at Stake must be Properly Identified
“A mineral interest is an interest in the ‘minerals, including oil and gas, in place or in and under the land.’”[3] In Kansas, the mineral interest is considered real property, and when it is transferred there is a severance of the fee.[4] The right to sever title of a mineral estate from real estate has been recognized by Kansas courts for a hundred years.[5] Severance is the act of separating mineral or royalty interests from other interests in the land, either by grant or reservation.[6]
More precisely, a landowner may sever the mineral interest in real property: (1) by executing [22] a mineral deed conveying only the mineral estate to a third party;[7] or (2) by executing a deed or other conveyance of the land, and reserving the mineral estate from the conveyance, thus retaining the mineral interest.[8] As to the latter method, however, special care should be taken to ensure that any such reservation is clearly and precisely described in the conveyance document.[9]
Two separate estates exist after severance, each held by a separate and distinct title in severalty, which is then a freehold estate that can be inherited independent of the other.[10] Separate and apart from the surface ownership, the owner of a severed mineral interest owns the rights to explore, develop and produce the minerals underneath the property,[11] and the implied right to enter onto the overlying surface of the land to make reasonable use of the land to do so.[12]
As a preliminary matter, it is absolutely essential that the purchaser and seller have a clear understanding and agreement concerning whether the real estate conveyance will include the mineral interest and, if so, to what extent. Although this is a fundamental point, the issue can be complex if the minerals have been severed. A grantee under a deed can acquire no greater title than his or her grantor had,[13] nor may a grantor except or reserve in a deed an interest that he or she does not own at the time of the deed.[14]
Title work should reflect any mineral deed or conveyance in the chain of title that accomplished a severance of the mineral interest, as well as any deed that reserved the mineral interest from an earlier conveyance of the property. But, the inquiry does not end there. A landowner may convey all or part of the land. It may be divided vertically or horizontally, and full title may be conveyed, or a fractional interest in the whole or in any part of the land may be conveyed.[15] Thus, for example, the fee owner may convey or reserve only the minerals to a certain depth underneath the property;[16] only the minerals above or below certain geological formations;[17] only the minerals within certain geological sands or formations;[18] only a fractional share of the minerals;[19] or only certain specified minerals but not others.[20]
A conveyance limited to specific depths or formations underground may be for purposes of underground gas storage. The gas storage operator may acquire by mineral deed or conveyance all of the minerals (or only the gas, leaving rights to the oil and other minerals in the owner-lessor) in the desired depths or specified geological formation(s), as well as a gas storage lease or easement in those same depths or formations. Typically, such gas storage leases or easements will grant the gas storage operator exclusive rights to inject, store, and withdraw gas within the described depths or formations. Such leases or easements may allow the owner-lessor of the property to drill through the gas storage formation(s) to produce minerals from deeper formations, subject to specified conditions and precautions. They may also give the owner-lessor rights to receive free or reduced-cost gas from the gas storage operator to the principal dwelling or to buildings on the property, if the owner-lessor lays a line and connects to the storage operator’s pipeline. Because underground gas storage fields oftentimes encompass thousands of acres, the gas storage operator may or may not require surface rights on any given tract within the gas storage boundaries. Obviously, a prospective purchaser should review the terms of the gas storage lease or easement carefully to determine the extent, if any, of surface rights granted to the gas storage operator, as well as any rights to free or reduced cost gas, or any other rights, granted or reserved to the owner-lessor.
The very nature of the oil and gas interest being conveyed may not be clear from an initial reading of the conveyance document. Even the title of the document may not accurately describe the interest being conveyed.[21] A classic example of the difficulty in distinguishing certain types of oil and gas interests is illustrated by those cases that address the issue of whether a mineral interest or merely a royalty interest has been [23] conveyed.[22] Making the proper distinction is very important. Royalty is the right to share in oil and gas when it is produced, whereas a mineral interest includes the right to oil and gas in place along with the right to develop the resources, or to lease them for development.[23]
It is, therefore, important for a number of reasons that a prospective purchaser or developer of real property understand the current mineral ownership of the property. From a sheer valuation standpoint (that is, placing a value on the interest being acquired) it is important for the prospective purchaser or developer to understand the nature and extent of the interest being acquired. For example, if the property being purchased is subject to a prior conveyance titled a royalty deed, it will be important to determine whether the reserved interest in the property is really a...
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