CHAPTER 10 A REVIEW OF OWNERSHIP INTERESTS IN LANDS AND OWNERSHIP ENTITIES
| Jurisdiction | United States |
(Apr 2015)
A REVIEW OF OWNERSHIP INTERESTS IN LANDS AND OWNERSHIP ENTITIES
Partner
Elias, Books, Brown & Nelson
Oklahoma City, Oklahoma
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TIMOTHY C. DOWD is an attorney with Elias, Books, Brown & Nelson, in Oklahoma City, Oklahoma. His primary area of practice is oil and gas law, including the rendering of title opinions and drafting of industry contracts. Mr. Dowd is a past President of the Oklahoma City Mineral Lawyers Society and former Chairperson of the Oklahoma Bar Association Mineral Law Section. Mr. Dowd is a member of the Legal Committee of the Interstate Oil and Gas Compact Commission and the Advisory Council to the Marginal Well Commission of Oklahoma. Mr. Dowd is also the author of the chapter on Oil and Gas Titles in West Publishing Company's Oklahoma Real Estate Forms and Practice. He is the author of many articles, including Clearing Title of Long-Lost Mineral Owners, 54 Rocky Mountain Mineral Law Institute 30-1 (2008) and Preferential Rights to Purchase in Oil and Gas Transactions, 49 Rocky Mountain Mineral Law Institute 5-1 (2003).
A. Nature of Interests in Oil and Gas
1. Introduction
There are several types of ownership interests and ownership entities in land that have developed over the years. "A common idiom describes property as a 'bundle of sticks' -- a collection of individual rights which, in certain combinations, constitutes property."1 The following will describe some of those individual rights or interests as well as different entities.
2. Fee Interest
A fee interest is ownership of both the surface interest and the mineral interest.2 A fee interest in land is often referred to as the entire bundle of sticks. It generally means ownership of both the surface and mineral rights in fee simple absolute. Fee simple absolute means an estate of indefinite or potentially infinite duration.3 At common law an owner of land in fee simple absolute was said to own the land to an infinite extent, upwards as well as downwards. This gives "one" absolute ownership which includes both title and possession of the land. This land owner may grant to others certain more specific interests in the land such as a mineral, surface, or leasehold interest.4
A fee interest can also be conveyed in such a way that it may end upon the happening of a future specified event. This is known as a fee simple defeasible. A fee simple defeasible is an estate that ends either because there are no more heirs of the person to whom it is granted or because a special limitation, condition subsequent, or executory limitation takes effect before the line of heirs runs out.5 Two possible ways property can be conveyed in fee simple defeasible are fee simple determinable and fee simple subject to condition subsequent.
a. Fee Simple Determinable
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A fee simple determinable is an estate that will automatically end and revert to the grantor if some specified event occurs.6 "An estate in fee simple determinable is created by any limitation which, in an otherwise effective conveyance of land, (1) creates an estate in fee simple; and (2) provides that the estate shall automatically expire upon the occurrence of a stated event."7 An example of this would be "to A and his heirs, so long as the town C remains unincorporated."8 If town C incorporates, then B's estate ends automatically and reverts back to A as the grantor.9
b. Fee Simple Subject to a Condition Subsequent
Unlike the fee simple determinable, a fee simple subject to a condition subsequent (FSSCS), does not terminate when the stated condition occurs. If the stated condition occurs, the grantor has the ability or right to terminate the FSSCS by reentering the property upon the happening of the stated condition in the conveyance.10 An example of this would be "to Albert and his heirs, upon condition that no alcohol is sold on the premises."11 Under this hypothetical, if alcohol is sold on the premises, the grantor has the option of reentering the premises and ending the estate. This power is called the power of termination or a right of entry.12
3. Interests in Oil and Gas That Can Be Created By Grant or Reservation
Typically, the surface and mineral estates are granted by the sovereign to the same person. However, in many states, especially where there has been extensive historical oil and gas development, it is common for the surface estate and mineral estate to be owned by different people. An owner of land may separate the surface rights from the underlying minerals in a conveyance so that there is a severance of title. The division, or "severance," of the surface estate and mineral estate occurs when an owner sells the surface and retains all or part of the minerals, or when an owner sells the minerals and retains the surface. The deed creates the separation of the surface and mineral estates. If an owner does not expressly reserve the minerals when conveying the surface, the mineral estate is automatically included in the conveyance. The surface owner has the right to use of the surface subject to the right of the mineral interest owner to use the surface for exploration purposes.13 The surface estate becomes subservient to the dominant mineral estate for the purpose of oil and gas development.14
a. Mineral Interest
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A mineral interest can be created by grant, reservation or exception.15 The owner of a mineral estate possesses a bundle of interests which can be separated, conveyed, or reserved upon any terms the mineral owner deems proper.16 Owners can also convey a fractional interest and can separate by depth as discussed below.
A mineral interest includes rights other than ownership of specific minerals. A mineral owner has the right to explore for oil and gas, the right of ingress and egress over the surface, and the authority to occupy the surface to the extent reasonably necessary for exploring and marketing the oil and gas.17 The mineral interest consist of the exclusive right to enter the premises for the purpose of drilling; the right to execute oil, gas, and mineral leases; and the right to participate in bonuses, rentals, and royalties.18 Mineral rights can also include the rights to benefits under an oil and gas lease, right to profits, and the obligation for costs.19
In cases where the leasing or "executive right" has been severed from the mineral estate, the right has been held to be a personal right, not a real property right, and thus not inheritable when it was reserved by the grantor.20 However, an Oklahoma court has held that the executive right was a vested right and will descend to the heirs if it is reserved by the "grantor, his heirs, executors, administrators and assigns."21
i. Term Mineral Interest
Non-perpetual mineral and royalty interests are referred to as term interests.22 Specifically, term royalty and term mineral interests are divided into two basic types: a) a grant or reservation for a fixed term only, and b) a grant or reservation for a fixed term and "as long thereafter as oil or gas is produced," also known as a defeasible term interest. The main difference between a fixed term interest and a defeasible term interest is that the fixed term interest will terminate automatically upon expiration of the specified number of years.23 The defeasible term interest, whether mineral or royalty, will continue as long as there is production anywhere on the conveyed premises or production from a unit containing the described premises.24
To extend a term deed into its secondary term, there must be actual marketing of the oil and gas during the "primary term."25 The payment of a shut-in gas royalty by a lessee under an oil and gas lease will not extend a term mineral interest into its secondary term, unless the instrument creating the term mineral interest ties its term
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contractually into the term of an oil and gas lease covering said land, or contains a shut-in gas royalty clause itself. A shut-in gas well will not perpetuate a term mineral interest into its second term if the deed calls for production.26
ii. Royalty Interests
A royalty interest may be broadly defined as a right to a fractional share of production, free of cost or expense incident to exploration, development or production.27 A royalty interest can be created in the same way as a mineral interest, by grant or reservation.28 A royalty interest differs from a mineral interest in that the owner of a royalty interest is not authorized to go upon the property in which the interest exists, for the purpose of prospecting for, or severing or removing minerals.29
In most jurisdictions, a royalty interest is a real property interest which may be separated from the remainder of the mineral estate.30 Such separate interest is termed a "non-participating" royalty interest (NPRI) and will not share in the other economic benefits from an oil and gas lease.31 When a NPRI is created it is often by a reservation in a conveyance of a mineral interest.32 The owner of a NPRI is generally not a party to an oil and gas lease. A NPRI holder generally has no interest in the working interest as discussed below.33
b. Leasehold Interest
The mineral interest owner has the right to drill a well, explore, develop, and extract hydrocarbons. However, because of costs or technological limitations, the mineral owner will, almost universally, grant its rights to an oil and gas company in an oil and gas lease creating a separate leasehold estate. The oil and gas company, as the lessee, under the oil and gas lease then owns the leasehold interest. The leasehold interest is also referred to as the working or operating interest.
The owner of the leasehold interest has broad rights to use the surface for the purpose of exploring for and producing oil and gas. "The very name 'lease' is unfortunate inasmuch as it tends to give the...
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