CHAPTER 11 RISKS OF ACQUIRING AGING OILFIELDS
| Jurisdiction | United States |
(May 2015)
RISKS OF ACQUIRING AGING OILFIELDS
Partner
Hinkle Shanor LLP
Roswell, New Mexico
Aaron K. Friess
Associate
Hinkle Shanor LLP
Roswell, New Mexico
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T. CALDER EZZELL, JR. is a partner in the Roswell office of Hinkle Shanor LLP. His practice is primarily limited to oil and gas. He received his BA degree from Washington & Lee University and his law degree from the University of Kentucky and Washington & Lee University. Mr. Ezzell is a member of the State Bar of New Mexico, the Chaves County Bar Association, the Rocky Mountain Mineral Law Foundation, American Association of Professional Landmen, and the Independent Petroleum Association of New Mexico.
AARON K. FRIESS is an Associate in the Roswell office of Hinkle Shanor LLP. His practice involves mineral title examination on fee, state, and federal lands, as well as oil and gas litigation and business litigation. Aaron graduated magna cum laude from Washburn University School of Law in 2014, where he served as the Editor-in-Chief of the Washburn Law Journal. While at Washburn, he completed certificates in Oil and Gas Law and in Natural Resources Law, both with distinction. Aaron also earned the Rocky Mountain Mineral Law Foundation's David P. Phillips Scholarship and the Energy & Mineral Law Foundation's President's Scholarship. Aaron is a member of the New Mexico Landman's Association, the Independent Petroleum Association of New Mexico, the New Mexico Bar Association, and the Chaves County Bar Association.
§ 11.01 Introduction*
As existing conventional oil and gas production continues to mature, the complexity of the legal framework involved for those seeking to buy or sell older oil and gas properties increases. The complicated weave of federal and state laws alone provides ample reason for caution. When the properties consist of older leases that have already produced for a number of years, the potential issues multiply rapidly. Title, environmental, and plugging issues associated with older properties compound an already-arduous task. This paper provides advice and tips for those seeking to acquire mature oil and gas properties,1 as well as some words of caution for sellers of these properties.
At the outset, it is important to acknowledge that the term "aging" in this context is necessarily imprecise. The age of an oil and gas property implies only its potential for problems. For example, a purchaser could reasonably expect that a fifty-year-old lease held by the original, financially-stable lessee would present few title problems. On the other hand, a ten-year-old lease held by multiple lessees involving numerous conveyances, depth segregations, financing arrangements, bankruptcies, and similar issues has the potential to cause a title examiner nightmares. Additionally, either of these scenarios could present a myriad of environmental problems, depending on the management or neglect of the properties. Because mature oil and
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gas properties have characteristics typically more attributable to their age than their value, both purchasers and sellers alike must identify the properties with increased potential for age-related issues that may require special handling.
The success of every oil and gas transaction depends on multiple variables. Geologists and engineers must provide accurate numbers for both the likelihood of future production and for the quantity and value of that production. Similarly, the negotiators must work for the best possible trade terms, which counsel must accurately incorporate into letters of intent, purchase and sale agreements, and closing documents. However, most in the oil and gas industry will agree that an acquisition's ultimate financial success will likely depend heavily on the quality of the due diligence process. Every single oil and gas transaction--from the smallest mineral lease to the largest corporate merger--involves some level of due diligence. Previous Foundation proceedings have exhaustively examined and addressed the due diligence process.2 As a result, this paper will not provide in-depth discussion of the mechanics of conducting due diligence.
However, transactions involving mature oil and gas properties present unique due diligence issues. Thus, this paper will address due diligence concerns specific to the transfer of aging properties as it examines the general regulatory schemes for onshore leases, the interplay between those schemes and state laws, the general procedures and practices of the Bureau of Land Management ("BLM"), which oversees federal onshore leasing, and state law considerations that complicate due diligence.
§ 11.02 Statutory and Regulatory Schemes for Oil and Gas Properties
[1] Federal Mineral Leasing Acts
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To understand federal oil and gas leasing fully, one must understand the basic statutory scheme for federal oil and gas leasing, which consists of a number of acts. In a transaction involving old federal properties, it is possible to encounter leases issued under the Mining Laws of 1866 and 1872,3 the Mineral Leasing Act of 1920,4 as amended by the Amendatory Act of August 21, 1935, the Right-of-Way Leasing Act,5 the Mineral Leasing Act for Acquired Lands of 1947,6 and the Federal Onshore Oil and Gas Leasing Reform Act of 1987.7 Each of these statutes provided different mechanisms for leasing federal lands for exploration for oil and gas, including prospecting permits, competitive bidding (known geologic structure), preference right or over the-counter leases, and simultaneous drawings. Anyone dealing with federal leases--especially purchasers, landmen, and title examiners--should know and understand the procedural hoops that potential lessees had to jump through under the various statutory schemes because failing to comply with certain of those procedures can result in lease cancellation or termination. In addition, the leases issued under the various statutes have different terms and conditions. Lastly, one must also pay attention to federal leases on split-estate lands and the particular act under which the federal government patented the lands.
The Mineral Leasing Act does not define "transfer," "assignment," or "sublease," but it does distinguish between an assignment and a sublease.8 The Department of the Interior ("DOI") and the BLM define an "assignment" as "a transfer of all or a portion of the lessee's record title interest in a lease;" a "sublease" as "a transfer of a non-record title interest in a lease, i.e., a transfer of operating rights is normally a sublease;" and a "transfer" as "any conveyance of
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an interest in a lease by assignment, sublease, or otherwise."9 Generally, most refer to conveyances of record title as to as "assignments" and conveyances of operating rights as "transfers," because BLM Form 3000-3 is titled "Assignment of Record Title Interest in a Lease for Oil and Gas or Geothermal Resources," and BLM Form 3000-3(a) is titled "Transfer of Operating Rights (Sublease) in a Lease for Oil and Gas or Geothermal Resources."10 The BLM must approve both assignments and transfers.11 Before approving an assignment or transfer, the BLM State Office will notify the appropriate Field Office of the pending assignment or transfer and request any objection to the approval, including any special bonding requirements.12 This review may delay the approval process, especially if the transaction involves a large number of properties and/or older properties. This delay may in turn create serious problems for the purchaser and the seller because the rights, duties, and obligations of each during the approval process are not entirely clear.
[2] State Leasing Acts
Although it is beyond on the scope of this paper to compare each of the producing states' statutory leasing authority for state minerals, potential purchasers of properties that include state oil and gas leases must familiarize themselves with the state's statutory and regulatory scheme. For example, potential purchasers must know that the land commissioner's approval of an assignment of a state lease does not necessarily authorize the assignee to assume operations and produce oil and gas. Obviously, such situations require the purchaser to have either a familiarity with state leasing statutes and rules (or good local counsel).
[3] Fee Leases
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With respect to fee oil and gas leases, and the variety of restrictions and conditions on transfer are limited only by the breadth of the lessor's--or his lawyer's--imagination. A purchaser's due diligence team must identify the leases that may provide the lessor a preferential right to purchase, or that require the lessor to approve a potential assignee or that--in extreme cases--may attempt to bar certain named assignees from holding the lessor's lease. Although potentially unenforceable, the purchaser should know what potential issues the leases pose.13
§ 11.03 Motivation of the Parties--Ut Quod Ali Cibus Est Aliis Fuat Acre Venenum14
In any transaction, each party must understand its own motivation. But, when dealing with aged oil and gas properties, a party's accurate assessment and understanding of the counter-party's need or desire "to do the deal" may prove most helpful. It takes two to tango, but what made your partner come to the dance?
[1] Acquisition Motivation
Although many reasons for acquiring mature oil and gas properties exist, the following seem most common:
1. Upside Potential: The purchaser's geologists may have determined that the property has unrecognized potential from up-hole zones or deeper, untested formations. Engineers may have determined that the producing formation would benefit from drilling increased-density wells.
2. Technology: Technological advances in drilling and completion continue to open the door...
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