CHAPTER 5 EXAMINING TITLE WITH HBP ACREAGE
| Jurisdiction | United States |
(Jan 2014)
EXAMINING TITLE WITH HBP ACREAGE
Crowley Fleck PLLP
Bismarck
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CHRISTOPHER FRIEZ is a partner with Crowley Fleck PLLP in Bismarck, North Dakota. His practice focuses primarily on energy and natural resources law, including oil, gas, coal, and other forms of energy. He is experienced in title examination and the preparation of title opinions, litigation, and transactional matters. He is a contributor to various trade publications and law reviews and is a frequent presenter on North Dakota oil and gas issues to various groups and associations.
EXAMINING TITLE WITH HBP ACREAGE1
The current boom in horizontal drilling on large spacing units creates a number of interesting issues for title examiners. Many of those issues relate to the fact that some of these large spacing units will include smaller spacing units that may contain oil and gas wells that have been producing for decades. This decades old production creates a number of issues surrounding title examination, specifically with respect to leasehold ownership and rights. The decades old production also creates issues with new pooling declarations and orders on top of old pooling declarations and orders which included only the smaller spacing units. One common example is the spacing and drilling of a well on a 1280 acre spacing unit. That 1280 acre spacing unit may contain an old 40 acre spacing unit which contains a producing well. A number of issues arise in dealing with that existing production. This paper will examine those issues and how they are treated. In addition, the paper will provide hypotheticals for a practical look at examples that can arise, the issues created by those examples, and how to deal with them as a title examiner.
I. Leases which are held by production
One of the first issues a title examiner will face in this situation is oil and gas leases that may be decades old but have been held by production from an existing well. These leases will likely cover only one tract in the new title opinion but must be incorporated into the larger opinion. An oil and gas lease that is held by production for an extended period of time may have extremely complicated working interest and overriding royalty interest ownership. There may be a large number of assignments which appear of record. The title examiner must carefully examine each assignment to determine what is being assigned to properly identify the current owners.
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A. Mergers and Name Changes
There may also be numerous mergers and/or name changes for working interest owners and overriding royalty owners of which a title examiner will need to be aware. Often these mergers and name changes will not be identified in the records examined. Over time, a title examiner working in a particular area or region will become familiar with several common name changes and mergers. However, if an owner does not show up in the records again or you have an assignment from a stranger company, it may be possible that an owner merged or changed its name. There are several very good publications which provide a reference for many of the common mergers and name changes in the oil and gas industry. Some of these publications also include flow charts so an examiner can trace the name backwards and forwards through time. A great online source, which is also free to access, is the Corporate Name Change & Merger Index published and maintained by the United States Department of the Interior, Bureau of Land Management, on their website.2 It is our practice to require that appropriate name change or merger documentation be placed of record if it is not already recorded.
B. Continuous Production
Another issue related to leases which are held by production is the issue of continuous production under the lease provisions. This brings up a common theme of this paper which is how far outside of the record should a title examiner look to determine for himself or herself if production has been continuous so as to sustain the lease. In North Dakota, the North Dakota Industrial Commission website will provide detailed production records for these wells. A title examiner has the option to examine the production records for the producing well on the website. However, some may think this is outside the scope of what should be examined for a title
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opinion. Also, there may be other factors that cannot be seen through the records or the website records which may affect whether production was continuous and the validity of a lease. The website may show a lapse in production but there may have been a valid cessation of production during that time and the lease may still be valid. A lapse in production does not necessarily mean a lease is expired or is no longer valid. If you have a lease, an affidavit of production, and nothing of record indicating a challenge to the lease's validity, it may be safe to presume that the lease remains valid. However, in this scenario, it is prudent to make sure your client is comfortable that the lease remains valid. This comfort will be obtained through various sources that are outside of the record available to the title examiner and will need to be investigated further.
C. Pugh Clauses
A pugh clause is defined as a type of clause "which provides that drilling operations on or production from a pooled unit or units shall maintain the lease in force only as to lands included within such unit or units." The typical effect of a pugh clause is to release those lands in a lease, which do not have actual production, or are not pooled with lands which have actual production. Those lands covered by a lease which do not have production attributed to them will not be held by production.
Below are some examples of common pugh clauses:
If at the expiration of the primary term or cessation of continuous operations (as hereinafter defined), whichever is later, the entirety of this lease is not included in a production or spacing unit, then this lease shall be subject to a one-time termination as to all the lands covered hereby except lands within a production or a spacing unit prescribed by law or administrative authority, on which is located a well producing, or capable of producing, oil and/or gas. Lessee shall be considered to be engaged in continuous drilling operations for the purposes hereof if Lessee is engaged in drilling, reworking or completion operations on a well located on the leased
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lands, or on lands included in a production or a spacing unit which contains a portion of the leased lands. Lessee shall also be deemed to be engaged in continuous drilling operations for as long thereafter as Lessee conducts drilling, reworking or completion operations on the leased lands, or on lands included in a production or a spacing unit which contains a portion of the leased lands, with not more than one hundred eighty (180) days elapsing between the conclusion of operations for reworking, completion or abandonment of one well, even if such well was reworked, completed or abandoned during the primary term, and the beginning of operations for the drilling of an additional well or reworking an existing well.
At the expiration of three (3) years after the effective date, also known as the primary term, this lease shall automatically terminate (i) as to all of the Leased Premises except lands located within the boundaries of a proration unit, drilling unit, spacing unit or pooled unit, as the case may be, on which is then located a well producing in paying quantities, whether actually producing or shut-in, or upon which operations are then being conducted in accordance with this lease, and (ii) as to all depths below 100 feet below the stratigraphic equivalent of the deepest formation then producing or capable of producing in paying quantities in any well on the Leased Premises or on land pooled therewith, unless this lease is otherwise maintained as to such outside lands or deeper depths as may elsewhere be provided herein. If Lessee is in the process of drilling or completing a well on the Leased Premises at the end of the primary term of this lease, this clause shall become effective upon conclusion of such operations.
Notwithstanding the provisions of this lease to the contrary, this lease shall terminate at the end of the primary term as to all the leased land except those lands within a production or spacing unit prescribed by law or administrative authority on which is located a well producing or capable of producing oil and/or gas or on which Lessee is engaged in drilling or reworking operations. If during the primary term of this lease, operations for the drilling of a well for oil and/or gas are commenced and continuously prosecuted to completion, whether such well be dry or capable of producing oil or gas on lands covered by this lease or lands spaced therewith, this lease shall be extended an additional 365 days beyond the end of such primary term. The primary term of this lease shall be extended an additional 365 days for each additional well drilled and continuously prosecuted to completion. It is understood that the purpose of this paragraph is to grant to the lessee, its successors and assigns, one-(1) 365 day extension of the primary term as to
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the total leasehold for each well drilled to completion, whether dry or capable of producing oil and/or gas, this lease terminating only as to those properties lying outside a spacing or producing unit set by law or administrative authority and not developed by lessee during the primary term of this lease or such 365 day extensions as herein provided.
As you can see from the examples above, pugh clauses can be much different and can have much different effects. Title examiners must very carefully examine each pugh clause to determine its effect on a lease's ongoing validity. This is...
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