CHAPTER 11 LEASE ISSUES TO CONSIDER FOR TITLE EXAMINATION

• Jurisdiction: United States

Oil & Gas Mineral Title Examination (Sep 2019)
CHAPTER 11
LEASE ISSUES TO CONSIDER FOR TITLE EXAMINATION
Margaret G. Patton
Nathan M. Telep
Matthew R. Lee
Mary Catherine Joiner
Bradley Murchison Kelly & Shea LLC
Baton Rouge, LA

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MARGARET G. PATTON is a Member of the law firm Bradley, Murchison, Kelly & Shea, LLC based in the Baton Rouge, Louisiana office, where her practice focuses primarily on oil, gas and energy law. Ms. Patton represents major and independent oil and gas companies in title examination, division order work, and litigation, and she routinely advises her clients in all aspects of oil and gas exploration and production operations, including matters related to lease disputes, mineral owner demands, risk fee issues, contract negotiation and interpretation, statutory interpretation and other issues relevant to the drafting and operation of clauses found in mineral leases, joint operating agreements, and conveyances of mineral rights. Ms. Patton has drafted hundreds of title opinions for numerous energy companies on acreage in Louisiana's Haynesville Shale, Cotton Valley and Lower Cotton Valley, Tuscaloosa Marine Shale, Austin Chalk, and other Louisiana plays in both North and South Louisiana and has handled numerous curative projects involving complex title issues. In addition to her work in the area of oil and gas exploration and production, Ms. Patton has represented industrial clients, including oil and gas operators, before LDEQ, LDWF and LDNR, handling permitting and regulatory compliance matters in the areas of air, water and waste. Ms. Patton spoken on a variety of mineral law issues at various Louisiana landman's associations and has authored two papers for the Louisiana Mineral Law Institute.

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TABLE OF CONTENTS

I. Introduction

II. Determining Whether the Lessor has the Executive Right to Lease

III. Clauses Applicable to Maintenance of Mineral Leases

A. The Habendum Clause

1. Overview

2. Issues for the Mineral Title Examiner to Consider

a. Issues Concerning the Lack of a Primary Term and the Maximum Primary Term of a Lease

b. Production in Quantities Sufficient to Maintain the Lease

B. Delay Rental Clauses

1. Overview

2. Issues for the Mineral Title Examiner to Consider

C. Savings Clauses: Continuous Drilling, Dry Hole, Cessation of Production, Shut-In, and Force Majeure Clauses

1. Drilling Operations, Dry Hole, and Cessation of Production Clauses

a. Overview

b. Issues for the Mineral Title Examiner to Consider

i. Have Drilling Operations Commenced?

ii. Has the Lessee Engaged in Reworking Operations?

2. Shut-In Clauses

a. Overview

b. Issues for the Mineral Title Examiner to Consider

i. Is the Shut-In Well Capable of Production?

ii. Is Non-Payment of Shut-In Payments an Ipso Facto Termination of the Lease?

iii. Limitations on the Ability to Maintain the Lease by Shut-In Payments

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3. Force Majeure Clauses

D. The Royalty Clause

1. Overview

2. Issues for the Mineral Title Examiner to Consider

3. Post Production Deductions

a. Overview and Common Lease Provisions

b. "At the Wellhead" vs. "Marketable Condition Rule"

c. "At the Wellhead"

i. Louisiana

ii. Texas

d. "Marketable Condition Rule"

i. Colorado

ii. Oklahoma

iii. Kansas

e. Conclusion and Lingering Issues

E. Pugh Clause

1. Overview

2. Issues for the Mineral Title Examiner to Consider

a. The "Predicate"

b. Absolute Depth Termination Clause

IV Clauses Concerning Assignments of Interest: Entirety Clauses and Rental Apportionment Clauses

A. Assignment by Lessor: The Entirety Clause

1. Overview

2. Issues for the Mineral Title Examiner to Consider

B. Assignment by the Lessee: Rental Apportionment Clauses

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1. Overview

2. Issues for the Mineral Title Examiner to Consider

V. Clauses Related to Surface Use or Restrictions

A. Overview

B. Granting Clause

C. No Surface Operations Clause

D. Clause Restricting Surface Operations Near a Structure

E. Surface Damages Clause

VI. Conclusion

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I. Introduction

One of the most important aspects of performing mineral title examination and rendering mineral title opinions is determining the leasehold status of the property under examination. In doing so, the mineral title examiner will first need to determine whether a valid oil, gas and mineral lease exists over the Subject Property and, if so, whether said lease burdens the entirety of the Subject Property and to which depths said lease is valid. Such a determination will necessarily require an analysis of the terms of the lease itself as well as a review of the history of drilling and production covering the leased premises and the lands unitized or pooled therewith.

While in some instances, determining leasehold maintenance can be a relatively simple endeavor, other times this analysis can prove rather complex and can depend on the examiner's interpretation and application of highly nuanced lease provisions. This paper will attempt to highlight the various lease clauses which can affect the mineral title examiner's leasehold maintenance analysis on a given tract of land and clauses which may expand or reduce the lessee's obligations under the existing law of the jurisdiction in which the property is located. The topics addressed in this paper are by no means exhaustive, and one can likely find numerous scholarly papers and entire fields of case law dedicated to the interpretation and application of any one of the types of clauses discussed herein.

What follows is an overview of the types of lease clauses that the mineral title examiner should consider when performing a leasehold maintenance analysis, and it is the Author's hope that this overview can be used by the mineral title examiner as a springboard into any further research and analysis that may be necessary upon discovery of a complex issue related to the examiner's leasehold maintenance analysis.

II. Determining Whether the Lessor Has the Executive Right to Lease

Before diving into an analysis of the various lease clauses affecting title examination, a brief discussion of executive rights is necessary. In order to grant a valid mineral lease, the lessor must be the owner of what is known as the "executive right." The executive right is defined as "the exclusive power to execute oil and gas leases."¹ The executive right may exist independently or as part of another mineral right.² The executive right is inherent in mineral ownership, as it is in fee title ownership. Simply stated, the owner of the minerals in a tract of land always has the right to execute an oil and gas lease over his property unless he has conveyed that right to another. The conveyance by a mineral owner or fee title owner of a nonexecutive interest such as a mineral royalty right does not convey the executive right. The executive right will remain in the mineral owner or fee title owner unless expressly conveyed. Thereafter, the

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conveyance of that mineral estate which is subject to the mineral royalty or nonexecutive mineral interest also transfers the executive right unless expressly reserved.³

In regards to the executive right, the Texas Supreme Court noted that:

The executive right is defined as the exclusive power to execute oil and gas leases. 2 H. Williams & C. Meyers, Oil and Gas Law § 338 at 198 (1986). This power is an essential attribute of a severed mineral estate. . . . When a mineral interest is reserved or excepted in a deed, the executive right covering that interest is also retained unless specifically conveyed. . . . However, when a mineral interest is granted in a deed, the executive right also impliedly passes to the grantee to the extent of the grantee's interest unless specifically reserved. . . . Therefore, whether a mineral interest is reserved or granted, the executive right is appurtenant to the mineral estate absent a contrary expression in the deed. All rights inherent in the mineral estate are impliedly reserved, excepted, or conveyed, respectively, to the extent the mineral estate itself is reserved, excepted, or conveyed. ⁴

In that same case, the Texas Supreme Court held that the executive right is a property interest subject to the principles of property law when bundled with the other rights and attributes comprising the mineral estate.⁵ The Texas Supreme Court went on to further explain the executive right as follows:

Although the executive right is similar to a power, it is not a product of contract, but rather a creature of property rights. See 2 H. Williams & C. Meyers, Oil and Gas § 338 (1989); 1 E. Kuntz, Oil and Gas, § 15.7 (1987). Even when it is severed from the other rights or attributes incident to the mineral estate, it remains an interest in property. As the dissent in Cain [Pan American Petroleum Corp. v. Cain, 163 Tex. 323, 355 S.W. 2d 506 (1962)] correctly noted, the exclusive right reserved by the grantor "was a property right, an interest in land, appurtenant to the mineral interest therein conveyed, and for the use and benefit of the mineral interest retained and owned by [the grantor]." ⁶

When a "naked" executive right owner conveys interest in the land in which it owns that "naked executive right," the conveyance will also transfer the "naked" executive right even if said right is not specifically mentioned in the conveyance instrument.⁷ Thus, in order to reserve the "naked" executive right, said right must be explicitly reserved in the conveyance instrument.

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Therefore, when examining title, it is important to consider whether the executive right has ever been severed from the basic mineral right by express conveyance or reservation. If this right has been severed, then the holder of the executive right, even though he may not own any or all of the minerals in the property...