JurisdictionUnited States
Due Diligence in Oil & Gas and Mining Transactions
(Sept 2018)


Eric Thompson
Akers & Thompson LLC
Denver, CO

[Page 13 - 1]

ERIC THOMPSON is licensed to practice law in Colorado, Wyoming, Utah, and New Mexico. He received his J.D. from the University of Wyoming, College of Law. Eric began his legal career at Akers & Thompson LLC, formerly Akers & Associates LLC, in January of 2010, and was promoted to partner in July of 2015. His practice has focused entirely around oil and gas law, including mineral title examination on federal, state, and fee land, the acquisition and divestiture of leasehold and mineral properties, as well as service, joint operating, communitization, and unitization agreements.

An overarching principal in any oil and gas transaction is the doctrine of Caveat Emptor. As a result, the onus is placed on the buyer to perform due diligence before finalizing the purchase.

Typically, when planning a due diligence project, the immediate focus of the project is dedicated to the big-ticket items, such as status and ownership of leases, underlying mineral ownership, confirmation of net revenue interests, wells, and material contracts; however, issues remain outside the items traditionally earmarked for prioritized review. The focus of the discussion below revolves around one such issue; surface use and access.

While the majority of the dialogue will focus on issues presented during due diligence and the emerging case law affecting surface use and access, we begin with a very brief introduction to surface use agreements on fee, federal and Indian lands.1

I. Surface use and access in fee lands

Generally, a lessee under an oil and gas lease is given authorization to go upon the lands to prospect for oil and gas. Historically, a mineral owner, being the dominant estate, has "the right to use so much of the surface as may be reasonably necessary to enjoy the mineral estate."2 However, a shift in the common law has led to several jurisdictions adopting a form of the "Accommodation Doctrine" which requires the surface owner and mineral owner/lessee to exercise its rights with due regard of the rights of the other.3

Fee oil and gas leases typically grant, in the habendum clause, the lessee use of the surface in order to exploit the minerals covered by the lease; however, as will be discussed below, leases limiting and even prohibiting surface access have become more common.

When the surface and mineral estate remain unsevered, express language in a lease covering the lands can grant an express right to access the surface for exploration and development. Even absent such express language, implicit in any lease is the right to reasonable access of the surface.4

Similarly, severed mineral interests typically include the right to develop,5 although leases executed prior to severance continue to carry the same rights as if the surface and mineral estates remain unified.6

[Page 13 - 2]

Irrespective of the common law rights afforded mineral owners and their lessees, several states have regulated surface use for oil and gas exploration, extraction and other related uses.7 The surface damage acts, as they are often referred to, changed the common law and emergent accommodation doctrine, ranging from simply shifting the burden of producing evidence,8 to requiring damages paid to the surface owner for loss of access, land use and land value - even if the use was reasonably necessary.9

While access to surface above fee mineral lands continues to be a mix of statue and common law, access to federal and Indian lands remain, for the most part, directed by statute.

II. Surface access to federal mineral tracts

When the federal government owns both the surface and mineral estates of a tract of land, they also control unfettered access to exploit the mineral estate. Additionally, when the federal government owns the mineral estate in a split estate, there still exists an implied right of ingress and egress in order to access the federal mineral estate. Federal authority exists to permit easements and rights-of-way upon the leasehold surface that are necessary to develop the underlying minerals under 30 U.S.C. § 186.

Federal oil and gas leases, under Form 3100-11(October 2008), are issued to lessees with the "exclusive right to drill for, mine, extract, remove and dispose of all oil and gas (except helium) in the lands described in ... [the lands covered by the lease] together with the right to build and maintain as necessary improvements thereupon for the term indicated below...".

Pursuant to 43 U.S.C. § 299, a Federal Operating Rights owner, having the right to federal minerals, may enter lands patented under the Stock Raising Homestead Act to exploit the reserved minerals.10 Bonding is available to the federal lessee if certain notice and good-faith obligations have been met.11

III. Surface access to Indian lands

The first hurdle in gaining access to Indian lands is classifying mineral and surface ownership.12 "Tribal lands" are federal lands owned by the tribe, "Allotted lands" are lands held in trust for the use of individual Indians, or their heirs, while fee lands within reservations can also be owned by tribe members or non-tribe members.

[Page 13 - 3]

Adding to the complexity, tribes are sovereigns, although the authorization of Congress is required for any transfer or conveyance of trust lands.

Surface access in Indian lands is historically granted in the lease form.13 It should be noted that most modern Bureau of Indian Affairs ("BIA") leases expressly grant surface use rights, but older leases often fail to expressly grant such a right.

The nature of mineral and surface ownership will dictate different levels of review for existing surface use and access. However, regardless of the nature of the surface and mineral ownership, an in depth review of existing agreements should be made in order to avoid unintended consequences that could have been avoided, or at least lessened, prior to closing.

IV. Existing Surface Use Agreements

Conducting a due diligence project, with regards to existing surface access and surface use agreements, is more nuanced than simply checking the box upon the existence of an agreement. Below is a discussion of a few of the many issues presented when acquiring or divesting the rights and obligations under existing surface use agreements, including recent developments in the case law.

A. Transferability

A party to a contract may typically convey any right unless such a transfer (i) materially changes the duties of the obligor, (ii) is prohibited by law, or (iii) is expressly prohibited by the agreement itself.14

Surface use agreements, like all agreements, allow either party to assign their interest while binding its successor to the terms and obligations of the agreement. Transfers of the rights and obligations under a surface use agreement, although common, may be undesirable to a surface owner. Surface owners may be concerned about subsequent parties acquiring access to their surface via transfer of an existing surface use agreement. As a result, surface owners have negotiated consent-to-assign clauses in surface use agreements.

Upon discovering a consent-to-assign clause, the next step becomes determining the rights of the surface owner. Unilateral clauses strictly require the consent of the surface owners, while others may require the surface owner's consent, but require consent not be unreasonably withheld.

While unilateral written consent of a non-selling party, irrespective of reasonableness, has been seen as an untenable restraint on alienation,15 limiting a non-selling party from unreasonably withholding its consent has been enforced, with reasonableness becoming a question of fact.16

[Page 13 - 4]

Requiring consent which will not be unreasonably withheld is a double-edged sword, however. On one hand, parties to a purchase and sale agreement can be assured that there exists a standard of reasonableness, but on the other hand, even with a reasonableness standard, added time and expense to the seller may be required to obtain a surface owner's consent.

While Caveat Emptor dictates a purchaser to do its homework, sellers must further consider its duties under a surface use agreement may survive closing.

B. Party conveying a contractual duty remains responsible for performance of that duty

In addition to a seller's potential burden of acquiring the consent of a surface owner, a seller may also have a vested interest in researching the solvency and reputation of a potential purchaser.

In Pennaco Energy, Inc. v. KD Company LLC, 363 P.3d 18 (Wyo. 2015), the Wyoming Supreme Court held a prior operator under a surface use agreement liable for...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT