JurisdictionUnited States
Due Diligence in Oil and Gas Transactions
(May 2011)


Christopher G. Hayes
Hayes Law Firm LLC
Denver, Colorado
Anna P.B. Mallett
Hensley Kim & Holzer
Nesbitt & Associates LLC
Denver, Colorado

CHRISTOPHER G. HAYES is Manager of the Hayes Law Firm, a sole practice law firm in Denver. His practice emphasizes natural resources land use and administrative issues, including surface use agreements between oil and gas producers and surface owners, federal royalties, mining and oil and gas environmental law, mining and oil and gas transactions, and business advice to nonprofit professional organizations. Chris worked as an oil and gas exploration geologist before attending law school. He earned a BS in Geology from the University of Wisconsin at Madison and an MS from Cornell University in Ithaca, NY. He received his JD from the University of Colorado School of Law, where he was a member of the Order of the Coif. Chris serves on the governing council for the Natural Resources and Energy Law Section of the Colorado Bar Association, and is a past Trustee of the Rocky Mountain Mineral Law Foundation. He is admitted to practice in Colorado, the United States Courts of Appeals for the Tenth, Fifth and Fourth Circuits, and the Supreme Court of the United States.

ANNA P.B. MALLETT practices natural resources, energy and public lands law, with particular emphasis on the representation of mining companies. Her practice is transactional based and covers acquisitions, due diligence, permitting, and joint venture development for hard minerals. Prior to joining Nesbitt & Associates, Ms. Mallett was an associate in the Natural Resources Group of Holme Roberts & Owen. Ms. Mallett is an active member of the Rocky Mountain Mineral Law Foundation and the Natural Resources and Energy Law Section of the Colorado Bar Association, where she serves as an Executive Council member. Ms. Mallett earned her J.D. from the University of Denver College of Law (Order of St. Ives) in 2003 and her MRLS degree from the Natural Resources and Environmental Law and Policy LLM program at the University of Denver College of Law in 1999. She also holds an Engineer-Economist degree from Moscow Academy of Management. Ms. Mallett is a former clerk to the Honorable Russell E. Carparelli of the Colorado Court of Appeals (2003-2005). Prior to starting her career in law, Ms. Mallett worked for the Academy of Sciences of Russia, where she was involved in the working program between U.S. and Russia implementing the Nuclear Test Ban Verification Treaty.

I. Private Lands

A. Surface Use and Lease Access

An oil and gas lease conveys to the lessee, at a minimum, the right to extract and sell hydrocarbons located on the demised property.2 A private mineral lease generally confers the right to use the surface to get at the minerals, which after all are the subject of the lease.3 The right of access to develop the minerals is usually made explicit in the oil and gas lease.4 When the lease is made on fee lands where the surface and mineral estates are not severed, the grant language in the lease creates an express right of access to the surface. Where the right of access is not made express in the lease language, there is an implied easement giving the mineral lessee the right to obtain the benefit of its bargain (unless that implied easement is expressly repudiated).

When the minerals are severed from the surface, it is important to understand when the severance took place in relationship to the lease. If the lease was made before the surface and minerals were severed, then the mineral estate has the benefit of the express access language in the

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lease. If the minerals and surface were severed before the lease was made, then the mineral lessee has only an implied right of access to develop its mineral lease, rather than an express one.5

Private lessors, and the owners of the surface in split estates overlying leased lands, often enter into agreements to define and limit the scope of use that the mineral lessee can make of the surface. Such agreements are generally referred to as "Surface Use Agreements." Because the mineral lessee already enjoys a right of access, it is perhaps more accurate to call these agreements "Surface Damage Agreements."6 The right of access to and use of the surface is necessary to the development of the mineral estate, and the easement for access is implied where it is not express, or expressly repudiated. Whatever they are called, such agreements clarify the rights and obligations of the owners and users of the different estates. Ideally, such agreements allow the owners of the respective estates to achieve accommodation of their interests by mutual consent, which often involves additional compensation to the owner of the surface for the unavoidable impacts of oil and gas development.

There are some basic elements common to every situation. The following is a list of issues that should be addressed in any agreement between the oil and gas operator and the surface owner.

1. Parties and Description of Lands

All necessary parties must be identified and joined in the SUA. If the mineral estate is not severed from the surface, the parties to the SUA will include the surface owner and the oil and gas lessee/operator. If the minerals are severed, the surface owner and the mineral lessee are the bare minimum parties. The surface owner may want to include the mineral owner as a party to protect its interests indefinitely; otherwise, upon the termination of the oil and gas lease and the SUA, the surface owner will have to negotiate a new SUA with each successive lessee. It is a good practice for an oil and gas lessee to identify any non-executive rights holders in the mineral estate, and such non-executive rights holders should be required to ratify the SUA if it significantly affects the mineral owner's ability to develop the estate. If there is a surface lease on the property, the mineral lessee should attempt to make the surface lessee a party to the SUA. The SUA should contain a legal description of lands subject to it.

2. Scope of Access Rights

Surface Use Agreements may serve to grant access rights where none exist, or serve to define and limit them where the operator is entering under the implied easement for access. The operator may want a broad grant encompassing the access to the surface for the purposes of exploration, development, production and transportation of oil and gas. The surface owner may want to limit the access to a sole purpose, such as drilling of a specified number of wells in specified locations, for the purpose of producing oil and gas from such wells. If the surface owner reserves certain uses, such as grazing, use of surface water, or the right to issue other surface licenses, the operator should insert language guaranteeing that such uses will not interfere with its oil and gas operations.

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Surface Damage Agreements may limit the surface access and use rights that the operator already enjoys, serve to set the compensation to be paid to surface owners for the diminution of the value of their own estates caused by operations, or both.

The surface owner may want to keep the operator from accessing certain areas. Such areas must be clearly described to avoid any misunderstanding between the parties. The clarity of the description should strive for the same accuracy as the legal description of the overall property. The surface owner may wish to specify any seasonal restrictions and proscribed activities, such as fishing, hunting, use of recreational vehicles, or bringing dogs onto the property.

3. Designation of Operations Areas and Access Ways

This is usually a significant concern of the surface owner. Well locations, wellpads for drilling multiple wells, oil and gas operations areas, together with access ways and locations of production facilities, should be clearly defined by exhibit or description. Such description should define those areas that are given over to the exclusive use of the operator, such well locations, pipeline and meter locations, tank and battery locations, flowlines, gathering lines, and other facilities. The SUA should also describe the existing roads designated for operator's access, specify the location, the width and the minimum construction requirements for new roads, and describe the location of pipeline and flowline rights of way.

4. Term

The SUA should expressly state the time period during which the agreement remains in effect. If the term is not perpetual, the SUA should contain a description of the conditions that will result in its termination. If the SUA is tied to an oil and gas lease, the operator should specify that the term of the SUA will be at least coextensive with the lease. If the operator intends to use the surface in question as a part of a larger operation, it should include language to that effect. Unless there is language to provide that the lease and SUA will be kept in effect by production from an adjacent tract, normally the right to use the surface will expire with the end of production from the primary tract.

5. Compensation/Indemnity

An important function of the SUA is to describe the compensation for surface damages caused by oil and gas operations. In the past, oil and gas leases provided for damages to "growing crops"; this language is no longer considered adequate by most sophisticated surface owners. It is common for leases now to include much more complete damages language, or to incorporate the SUA into a lease by reference. The Surface Damage/Surface Use Agreement should cover the following categories and provide compensation specific to each: (i) seismic and stratigraphic tests, (ii) well locations, (iii) use of existing and new roads, (iv) easements for flowlines, pipelines, power lines and gathering and compression sites, (v) damages...

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