LEGAL GUEST BLOG -- NATHAN A. FELKER
Mineral rights impacted by numerous title issues
By Nathan A. Felker
4:30 am, June 19, 2012
(This is the first of a two-part series on the topic of mineral rights. Part II will appear next week and will focus on the termination of mineral leases.)
The Ohio shale boom means great things for both the state and local economies and communities in the broader sense, without question. Individual stakeholder rights often rest, however, on much less certain footing, dependent upon title conveyances and lease language that may have occurred long before current landowners had any rights to the property.
To make matters more frustrating, the exact mineral rights owned are not always readily apparent and may be dictated by documents executed many decades ago that will not turn up in a standard chain of title search. Stakeholders can undertake certain steps to clarify or enhance their rights and should consider their options so as to maximize the positive impact of the Ohio shale boom for them personally.
Clarifying and Confirming the Rights of Mineral Rights Owners -- Chain of Title
The specific rights owned by a given stakeholder often are the product of a chain of documents that were created over decades or even a century earlier. Under Ohio law, mineral rights can be severed from land for a given parcel of real estate and are thereafter treated as the separate property of the owner of such rights. It is imperative that a stakeholder obtains all relevant documents with respect to a given piece of property in order to ascertain what rights are owned. Complicating this effort is the fact that a standard chain of title search -- which often only goes back 60 years -- may not locate all relevant documents and does not necessarily follow the chain of any severed mineral rights. Missing one document from the chain of title can, of course, dramatically affect the outcome of the title analysis and, thus, a stakeholder's understanding of what rights are held.
Clarifying and Confirming the Rights of Mineral Rights Owners -- Operation of the Lease
Verifying the chain of title clarifies the rights that existed at the time of the entry of a mineral lease. From there, the terms of the lease determine the rights of stakeholders and typically turn on whether or not a well has been drilled and whether or not royalties currently are being paid under the lease. Most historic mineral leases include both a primary term -- typically no more than five years -- and a secondary term that continues for as long as oil or gas is being produced by the well. Failure to drill a well within the primary term results in the automatic termination of the lease by its terms, allowing the landowner to enter into a new lease with another operator.
If a well has been drilled during the primary term, then the specific language becomes essential to determining the nature of the lease's secondary term (and thus, the ultimate duration of the lease). Some leases require that the well produce oil or gas in paying quantities to continue the secondary term; others simply require that they could be produced from the well (rather than that they actually be produced).
If the lease is more favorable to the lessee (i.e., the party installing the well and marketing the extracted minerals) and does not require that the well produce in paying quantities, then the owner of the mineral rights might find himself at the mercy of the lessee. Experts widely expect that oil and gas companies in Ohio will, as a matter of simple logistics, have to choose to prioritize drilling in some areas before others based upon expected results of the underlying leases, a phenomenon that some commenters have referred to as “hydrocarbon triaging.”
If the lease is more landowner-friendly and requires that oil or gas be produced in paying quantities to keep the lease in effect, then the timing of royalty payments and lease terms with respect to royalties will likely determine the outcome. A lessee's cessation of drilling on the property for an extended period may result in the termination of the lease (and perhaps may require going to court to enforce the landowner's rights). Some leases contain provisions for shut-in payments, whereby the lessee can pay a fee to the landowner for the privilege of continuing the lease's secondary term, even though a well is not producing for a period of time.
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