Louisiana House Bill 853

Oil and Gas Leasing Help
1

I was informed of this today from James Elder (President of the Louisiana Chapter on the National Association of Royalty Owners).

This affects every mineral owner, surface owner, and every person residing in the state including any future land or royalty owner.

If this bill gets passed it will probably cause a huge loss in revenue by the state in addition to any mineral owners who do not own the surface their minerals are under. Development of new leases and minerals would not be economically viable for the production company and would essentially disappear.

Thank you, Brian Upshaw

The following is a copy of the email received from Mr. Elder.

Dear NARO LA Members,

It has been brought to my attention that a bill is being brought to committee for review tomorrow that needs our attention as mineral owners. HB853 is a landowners protection act designed to protect the rights of surface owners, but has the ancillary and negative impact on operators and mineral owners alike.

Below is a digest of some of the main points of this proposal:

Proposed law provides that in absence of an agreement between the operator and the surface owner and where the surface owner is not paid at least a 1/8 royalty from a mineral lease, the operator shall fully compensate the surface owner for damages and reclaim the affected surface within 9 months of cessation of operations.

Several onerous terms follow.

This law does not recognize situations of separation between surface and mineral servitude. In the above they are suggesting that the surface owner should be entitled to a 1/8 royalty, depending on the underlying circumstances, this could be separate, in lieu of, or in addition to whatever mineral lease is in place and that respective royalty owned by the rightful mineral owner. It usurps the rights and powers of the mineral owner and allows the surface owner to have power over drilling. Furthermore, the onerous terms outlined in the act deters the operator from developing in Louisiana and concurrently incentivizes the surface owner to not cooperate with the operator so that mineral ownership may revert back to the surface owner after 10 year prescription.

I encourage everyone to read this bill carefully.

The committee will meet tomorrow to begin review of HB853. We believe it is important to stop this bill in committee. Please submit your opposition, if you agree, to every member of the committee by e-mail. Please follow up tomorrow with a phone call to at least one committee member’s office.

The link to the House Committee is:

http://house.louisiana.gov/H_Cmtes/H_CMTE_NR.asp - will allow anyone to click directly on member and email

http://house.louisiana.gov/H_Cmtes/H_Cmte_NRaddresses.asp (with phone numbers)

We appreciate any time and/or effort you give to this matter, as it does affect operators and mineral owners alike.

Sincerely,

James R. Elder President & Co-Founder NARO - Louisiana PH: (318)698-0048 FX: (318)698-0050 CELL: (318)347-9007

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I read it carefully.

25 (7) “Surface” means the uppermost portion of the earth’s crust, including 26 land and aquatic features. 27 (8) “Surface owner” means a person who holds legal or equitable title to the 28 surface of a parcel of real property.

(9) “Surface use and compensation agreement” means an agreement written, 2 signed, and notarized between a surface owner and an operator stipulating the 3 location of proposed oil or gas wells, access roads and any other uses of the surface 4 during oil or gas exploration and production. An oil or gas operation lease agreement 5 entered into by a surface owner and an operator, which pays the surface owner at 6 least a one-eighth royalty on gas or oil extracted from areas under the surface of the 7 surface owner’s real property, shall be deemed a surface use and compensation 8 agreement for the purposes of this act.

I am often wrong, but I do believe that the intent was that if the surface owner did not own a portion of the minerals and did not have a lease providing for a 1/8th royalty or more, the bill triggers. Perhaps it could be better worded.

As to paying the surface owner a 1/8th royalty (on what I do not know) in addition to lease royalty is just silly. If he has an oil and gas lease the bill does not trigger.

If the operator and surface owner cannot work it out, a bond is posted and operations continue.

The bill provided for P&A and surface restoration.

I just do not see a big problem unless excess royalty has to be paid.

3

Well, I would look at it a few different ways. If I were a Production company and negotiated a 1/5 or 1/4 lease, I am investing a lot of money to produce 80 to 75%. If in addition to that, I have to pay another 12 1/2% in a surface agreement I would be spending a whole lot of money to develop an area for 60% to 65% of the minerals. I think this will defer companies from drilling in Louisiana as they already are because of legacy lawsuits. This will cause the state to lose millions in revenue.

On the Royalty Owners side, I would look at this as an unfair advantage. Most earlier leases are for 1/8th. If production has held a lease with the mineral owner and no longer holds the surface, the mineral owner sold his land at a lesser value than it is actually worth. For instance, if I lease with a producer at 20% and decided to sell the surface, the producer would have an additional cost of the 1/8th interest.

For a surface owner or prospective surface owner, this will cause property values to go up at a very high rate. If I am a rancher who intends to purchase property from a mineral owner or a royalty owner, I would be required to pay a higher price for the land due to the additional value. Whether the intent was to get additional revenues or not.

Let’s just say that I have purchased a piece of property and I have owned it for eight years with no production. When the production company comes in and wants to drill, I lawyer up and tie it up in court for two years. I then own the minerals and have cheated the original seller to lose out on his minerals.

I do not know the exact requirements in Louisiana for plugging and abandoning, but if they do not have requirements in place now, they should.

I have a client in California, who sold their land and exclusively expressed in the sale that there could be no exploratory operations in the sale. Now the surface owner is negotiating his own override and is going to be compensated for the loss in land use.

I guess you are right. This should be worded differently, but when someone buys the surface somewhere, they know if it will not include the minerals and are not entitled to a Royalty interest unless negotiated with the production company before drilling. If the issue cannot be settled, then they will have the opportunity to pick the best deal made in the general area.

I guess this might help some surface owners, but it will mainly hurt Louisiana and mineral owners.

Brian Upshaw

Royalty Auditor

4

Dear Brian,

I still read it that “An oil or gas operation lease agreement entered into by a surface owner and an operator, which pays the surface owner at least a one-eighth royalty on gas or oil extracted from areas under the surface of the surface owner’s real property, shall be deemed a surface use and compensation agreement for the purposes of this act.”

In the alternative where you have a surface owner who has no minerals and will never likely have them (Pine Island Field in Louisiana for example), instead of years and years, a bond is posted after a total of 60 days if they do not come to an agreement and operations continue. Much about nothing until a bill is passed and the legal scholars make their decision.

Brian Upshaw said:

Well, I would look at it a few different ways. If I were a Production company and negotiated a 1/5 or 1/4 lease, I am investing a lot of money to produce 80 to 75%. If in addition to that, I have to pay another 12 1/2% in a surface agreement I would be spending a whole lot of money to develop an area for 60% to 65% of the minerals. I think this will defer companies from drilling in Louisiana as they already are because of legacy lawsuit. This will cause the state to lose millions in revenue.

On the Royalty Owners side, I would look at this as an unfair advantage. Most earlier leases are for 1/8th. If production has held a lease with the mineral owner and no longer holds the surface, the mineral owner sold his land at a lesser value than it is actually worth. For instance, if I lease with a producer at 20% and decided to sell the surface, the producer would have an additional cost of the 1/8th interest.

For a surface owner or prospective surface owner, will cause property values to go up at a very high rate. If I am a rancher who intends to purchase property from a mineral owner or a royalty owner, I would be required to pay a higher price for the land due to the additional value. Whether the intent was to get additional revenues or not.

Let just say that I have purchased a piece of property and I have owned it for eight years with no production. When the production company comes in and wants to drill, I lawyer up and tie it up in court for two years. I then own the minerals and have cheated the original seller to lose out of his minerals.

I do not know the exact requirements in LA for plugging and abandoning, but if they do not have requirements in place now, they should.

I have a client in California, who sold their land and exclusively expressed in the sale that there could be no exploratory operations in the sale. Now the surface owner is negotiating his own override and is going to be compensated for the loss in land use.

I guess you are right. This should be worded differently, but when someone buys the surface somewhere, they know if it will not include the minerals and are not entitled to a Royalty interest unless negotiated with the production company before drilling. If the issue cannot be settled, then they will have the opportunity to pick the best deal made in the general area.

I guess this might help some surface owners, but it will mainly hurt Louisiana and mineral owners.

Brian Upshaw

Royalty Auditor

5

I agree with the discussion that the surface owner should not get a new or additional 1/8 over and above the original lease agreement.

However, as both a surface owner without any mineral rights and a surface owner with mineral rights (on different tracts as you would expect), I have first-hand experience with what can happen to the surface in a drilling frenzy. Just look at some oil/gas fields on aerial maps like Google Earth. Operators are taking 3 to 5 acres well sites in every corner of 40 acres so productive use by surface owner is severely restricted.

Also, as surface owners, we are working under leases that are held by production since the late 1930s without any minerals. Operators do what they want with the surface and never tell us. When we find the damage and complain, they say they can do what they want with surface according to the lease. We then have to fight them to try to get damages. Only wish when the leases were signed someone had realized what might happen 70 years later and had a little more concern about the surface.

Maybe a bill such as the one proposed will slow some of that down in future leases. We always try to get a surface use agreement in any new lease, but many times the operator will not agree. If there are multiple royalty owners and only one surface owner then the surface owner has less clout.

Just want others to be aware of some of the downfalls of mineral ownership with and without surface ownership.

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