Blogging Tulsa Real Estate: The Oil & Gas Lease Is Available; You Can Buy the Lease

The Oil & Gas Lease Is Available; You Can Buy the Lease

"The lease is available; you can buy the lease."

A REALTOR®-Associate in my company said this today in one of our land and ranch meetings while touting a lovely 269-acre parcel of land which I will be previewing later today.

I thought to myself, "That's pretty cool.  Owning the oil & gas lease is the next best thing to owning the minerals.

Then I wondered if she really meant what she said.

Did she understand what she said?  Did she mean what she said?  Did she even know what she said?

[I kept my mouth shut in the meeting rather than interrupting and going off on a tangent -- since nobody really cared anyway except me (I am one of those about whom it is said, "There's always one in every group.....")  However, I couldn't sleep.  The distinction is important and I just cannot keep it to myself.  I felt a blog coming on, so I got out of bed to write.  So here it goes........ ]

Oklahoma Pump Jack at Sunset When we own land, we don't actually own the land.  We own a bundle of rights which includes the use of that land with restrictions.

When a landowner owns land in fee simple, that means he owns the full bundle of rights.  Fee simple absolute or simply "fee simple" means that you own everything from the center of the earth up to where the government allows planes to fly.

As an owner, you can lease the entire bundle of rights to another person or you can lease a particular right.  Thus you can lease the oil, gas and other minerals, you can lease the grazing rights, you can lease a cottage on the land (or just a room in that cottage), or you can lease hunting rights, etc.

If the mineral rights have been severed from the surface rights (meaning that a previous owner somewhere in the chain of title has retained the oil, gas, and other minerals in a recorded deed), then it is the owner of the mineral estate who has the right to lease the right to drill and produce the oil, gas and other minerals in and under the land.  The landowner who only owns the surface cannot lease the minerals as the lessor.

However, the landowner who does not own the minerals can lease the minerals as a lessee.  Usually it is someone other than the surface owner who leases the minerals (much to the dismay and sometimes anquish of the surface landowner).  This is a pretty cool option.

Now, as someone purchasing a lease, it needs to be understood that a lease can and will expire.  You can have a lease for 2 days or even 99 years -- but no more.  You cannot own a lease in perpetuity.

Having said that, an oil & gas lease is valid as long as it is in it's primary term, be it 2 days, 3 years, 10 years, etc.  This primary term is negotiated by a landman or an oil & gas attorney who is qualified to navigate the ins and out of such leases at the time that the lease is signed and purchased.  A lease is a legal document that should be filed at the courthouse to have actual notice announcing to the world that such a lease exists.  This is hugely important.

The lease is valid as long as it is in it's primary term or is held by continuous production.  Oh, there is the kicker, continuous production.  In other words, if you are the leaseholder (the lessee or the assignee), then you had best be drilling or producing oil & gas that makes it clear that you are actually doing something.  This is technical and many leaseholders lose their lease after pumping milions of dollars into wells in the hopes of making them profitable, only to lose their investments of time, expense, and effort to someone else who picks up the lease at a later time.  Boo hoo, so sorry, good bye..... 

A Pump Jack on an Oil & Gas Lease in Pawnee County Oklahoma

Now if the leasholder does not have an operator's license, then he must hire an operator to operate the lease.  Only an operator can operate oil & gas wells.  Anybody can own the lease, but they have to hire an operator if they themselves are not licensed to operate oil & gas wells.  An operator is the only person authorized by the State of Oklahoma to do anything on an oil & gas lease.  He must participate in every activity. 

An operator can be a company or a person.  An operator has a license number.  In the eyes of the Oklahoma Corporation Commission Joe Operator is exactly the same as ExxonMobil and are under the same laws, rules, regulations, and restrictions. One operator is a single person and the other operator is a multi-national corporation.  When either one comes on your land, they are exactly the same in the eyes of the State of Oklahoma.  There is virtually no difference -- they are both operators.

An oil & gas lease can be sold or assigned to another person by means of an assignment or a bill of sale.  Both of these should be filed at the courthouse as soon as possible to effect actual notice of assignment of the oil & gas lease.  Again, this is hugely important.  Race notice literally means that the first person to the courthouse wins.  No kidding, I heard of one situation in Rogers County where a lessee was dying and needed cash to pay medical bills.  He assigned the same oil & gas lease to six or eight assignees.  The first one to file the assignment at the court house got the lease. 

Of course, you can own a lease that isn't registered, but I recommend being safe.  Toodle on down to the court house and get the documents filed.

Important note to self:  Don't leave legal documents in the kitchen drawer.  File them at the court house!  Then put original documents in a safe place, such as a safe deposit box.

"The lease is available; you can buy the lease."  I think she means that you can purchase an assignment.  Or maybe she meant you can purchase the minerals from the owner of the mineral rights.  I'll have to ask her.

 

Debbie Solano, CRS, ABR, CDPE, CHMS, e-PRO, GRI, REOS, SRES
Coldwell Banker Select, Realtors -- Land & Ranch Division
4408 S. Harvard Avenue
Tulsa, OK  74135

Office:  918-712-4473

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Comment balloon 3 commentsDebbie Solano • January 27 2011 03:17AM

Comments

My Gawd Debbie,

You must have been up all night writing this.

All points right on and now I'm going to bed.

At least I know who to call regarding mineral rights.

Nighty night!

Posted by Art Hademan (Century 21 Real Estate Center) almost 7 years ago

Thank you, Art.

I finally did go to bed. However, my brain continued to ponder all night long.

I woke up wondering about Certificates of Non-Production.  I'm thinking there may be another blog that has to be written about them, since the title attorneys ask for them.   They only have one lady at the Oklahoma Corporation Commission who does the research to create the certificates and she was a good ten days behind the last time I needed to get one.  That was when I was representing the buyer.

Since I now have an 80-acre listing in the Bristow Oilfield with inactive oil & gas wells on it, I woke up wondering if perhaps my seller is wrong about the oil & gas leases on the property.  There are three oil & gas wells and an injection well on the property that are not currently running.  There are two inactive tank batteries on one of the two leases.An inactive tank battery on the Ada Williams Lease

In this particular case the seller does not own the minerals.  There are two separate leases on the property and there are are two operators. 

There is absolutely nothing apparently going on right now that I can see.  The pump jacks look operable, but they are not flowing.

Just because things look inactive doesn't mean that things will stay inactive.  You cannot assume that the lease has been lost by lack of production -- just because it looks like nothing is going on.

It could be that one or both of the leases are part of a unit.  When a property has been unitized (or a particular horizontal zone of production, eg., the Canyon Sand in the Sweetwater Oilfield down in West Texas), there can be forty square miles of leases put together into one unit.  Sometimes the unitization was done some eighty years ago.

You may have heard of pooling or forced pooling.  That is what is often done to create a unit when there is a holdout mineral owner who doesn't want to sign an oil and gas lease.  When oil flows through reservoirs under the ground, it does not respect artificial boundary lines created on pieces of paper filed at the court house.

If a producer is picking up oil at just one little tank battery anywhere in the unit, then the unit (and therefore the various leases that are part of that unit) is considered to be active by the Corporation Commission in Oklahoma or the Railroad Commission in Texas.  The leases in that unit are therefore being held by production -- even if it's miles away.  It's a real pain. 

This is why it is really important for REALTORS® to have their buyers do their due diligence when they are buying rural property. It is our job to make sure that our buyers hire good attorneys who deal in rural issues (oil & gas, fencelines, etc.)

Just because it looks inactive, doesn't mean it will stay that way for very long.

I probably need to have my seller spend the $10 to try to get a certificate of non-production and see what turns up.  It will really save us a lot of headache when we get a buyer.

Also, I would encourage any REALTORS® dealing with rural property to join our new Oklahoma Chapter of the REALTORS® Land Institute (RLI).  It's a brand new chapter and we have already had several classes and seminars dealing with these issues.  They just don't teach about this stuff in real estate licensing courses.  It takes a little extra training.

Posted by Debbie Solano, ALC, CRS -- Land & Country Estates near Tulsa (Coldwell Banker Select, Realtors -- Tulsa, Oklahoma) almost 7 years ago

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