“The basic underlying theme of oil and gas law is still undeniably rooted in property concepts developed over the past 1000 years.”
Bruce Kramer, “The Mangling of Common Law Property Concepts”,
33 Washburn Law Journal 540, 568 (1994)
If you own land in Ohio, do you own the oil and gas under your feet?
We expect that most landowners would say, “Yes.” It would seem to follow, as our concept of land ownership is that one’s property includes, as they say, everything to the heavens and to the center of the earth. That concept has served us well in many aspects of real property law, but it has its limits. If a plane flies over your property is it trespassing? Closer to the point, if there is a wild raccoon on your land, do you own it? Is oil and gas like coal and trees or more like moving water? If you do own the oil and gas under your property, your property is more valuable, isn’t it? Can you be taxed for that value?
- use it as security and grant a mortgage in it?
- leave it to your children in your will?
- sever your rights from the ownership of the surface?
- lease your rights to it like an apartment?
On the other hand, if the landowner cannot own oil and gas in place (which is apparently the case in Ohio, like other “non-ownership” states), what is being bought and sold in that oil and gas lease? If the lease, or some later document provides for an overriding royalty interest, what is that? Does it need to be recorded at the county recorder’s office as an interest in real estate? Need it be probated upon the death of its owner? Or, is it merely the right to receive a payment, i.e., personal property? More basically, what is the difference between a mineral interest and a royalty interest?
Does any of this matter?
As we begin another oil and gas boom in Ohio, it seems incredulous, but true, that the law is so susceptible to reexamination as relates to oil and gas issues. Much of the judge/jury-made law, the Ohio common law, was made in the 1890’s and is grounded in centuries-old legal principles – as it should be. But there is a tension. Expectations have changed and, ultimately, that is what the law reflects.
That tension is evident in oil and gas leases. Many oil and gas leases have been in place for decades based on shallow production and now that new production is achievable at greater depths (and yielding higher returns), the viability and terms of those old leases are under increased scrutiny. Is the law that settled disputes more than a century ago likely to be relevant today?
We think it is. That means everything related to the planning, negotiating, conveying, leasing, purchasing, encumbering, processing, selling – you name it — of oil and gas has to grounded with history in mind. This is a specialized area of law.
Beyond common law, the role of governmental authorities is certainly different this time around. Clearly, private rights are not what they once were. The use of the land and the production of oil and gas do not turn solely on the rights of the landowner and the oil company. Like it or not, the public at large, represented by the government, will be much more involved.
Environmental, well construction and conservation/spacing laws didn’t even exist during the boom in Morrow County. And as those who saw the result of that can attest, government involvement is not necessarily a bad thing. But which government? Does federal authority preempt state authority for, say, disposal of produced water? Does state authority preempt county, township and municipal authority?
In spite of all of this, oil and gas lease forms still in use don’t seem to have acknowledged many of these changes. The “Surface Use Agreement” can dwarf the size of the lease itself yet the “for so long as oil and gas is produced in paying quantities” provision is still there. It needs to be for what it costs to drill a well. But with farmland at $6,000 an acre, the internet – you get the picture – much has changed.
One thing has not changed: With large sums of money at stake, impact on the environment, and the charlatans that seem inevitably drawn to the oil field, disputes and litigation are most likely in the future. But like all business, the goals of competing considerations can be accomplished through careful planning and the allocation of risks and benefits.
Future posts will shed some light on these issues in a way, we hope, that is relevant and not too academic.