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Basic Overview of Texas Laws & Regulations Affecting Oil & Gas Tim

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Basic Overview of Texas Laws & Regulations Affecting Oil & Gas Tim SECTION III: Special Topics Contents: Chapter 9: Basic Overview of Texas Laws & Regulations Affecting Oil & Gas Tim Lester Chapter 10: Kansas Issues Affecting Land Title & The Division Order Analyst Linda Barry Chapter 11: Arkansas Land Titles William Warren Chapter 12: California Legal & Practice Summary John Quick Chapter 13: Overview of New Mexico Oil and Gas Law Gregory J. Nibert Chapter 14a: Frequently Encountered Title Problems In Oklahoma D. Faith Orlowski Chapter 14b: Oklahoma Indian Land Titles D. Faith Orlowski Chapter 14c: Senate Bill 168 D. Faith Orlowski Chapter 15: Louisiana Succession Law Paul A. Strickland Chapter 16: Hot Title Curative Issues Facing Pennsylvania Oil & Gas Operators Bradley J. Martineau & Stephanie E. Menjivar Chapter 17: Rockies (Federal Units) Division Order Overview Dick Jordan Chapter 18: How a Federal Unit is Formed Richard Champion Chapter 19: Michigan Oil and Gas Title Jeffrey A. Smetzer Chapter 20: Fundamentals of Federal OCS Title Lisa Shelton Jaubert Chapter 21: Title Issues With Respect to Corporations & Partnerships In Texas & New Mexico Robert C. Heller, Allen G. Harvey, David A Sutter Chapter 22: An Introduction To Escheat And Unclaimed Property Paula Smith Chapter 23: Acquisitions, Divestitures, and Trades 25th Annual Institute Chapter 24: Coalbed Methane – Review Of An Important Domestic Energy Resource Andrew R. Scott Chapter 9: Basic Overview of Texas Laws and Regulations Affecting Oil and Gas Tim Lester Page 1 entirely different creature. As time has moved Introduction on, the Rule of Capture has since been The Texas Railroad Road Commission (RRC) restricted in an effort to make a more even is the governmental regulatory body of the oil playing field. The biggest modification to the and gas production industry in Texas. Rule of Capture is the correlative rights doctrine. In general, the correlative rights Two other state agencies which are regularly doctrine allows equal rights between adjacent involved in the development of oil and gas are land or mineral owners. the Texas General Land Office (GLO) and the Texas Comptroller. The GLO is Ownership. Surely, property can be owned responsible for leasing state property by a single person or several persons; (approximately 20.4 million acres) for oil and however, divided ownership occurs more gas development and the Comptroller is frequently in mineral ownership than in other responsible for collecting severance taxes on types of property ownership. Special the production of oil and gas. As of June, problems or unique applications may arise 2008, severance taxes in Texas are 4.6% on when the mineral estate is owned by more oil/condensate and 7.5% on natural gas. A than one person. Furthermore, shared Regulatory Fee of $0.000667 for each ownership may be concurrent as in the case of thousand cubic feet of gas produced is also cotenants or it may be successive as in the imposed. The due dates for paying severance case of life tenants and remaindermen. taxes are monthly on the 20th day of the 2nd month following the production month; or Bundle of Sticks. Often, ownership of yearly, if qualified, on February 20 of each minerals in Texas and elsewhere is analogized year for the preceding year. as a “bundle of sticks” with each “stick” being a specific ownership right able to be conveyed Out of the 254 counties in Texas, only about or held. The sticks usually consist of the right 35 do not have any recent oil and gas of ingress and egress (a.k.a the right to enter production. As a result of this early and and drill), the right to sign a lease, the right to prolific production in Texas, along with the receive bonus payments, the right to receive constitutional focus on economic delay rentals, the right to produce the development, the state is often thought to minerals, and the right to receive royalty have the largest and best-development body payments. These sticks belong to the mineral of oil and gas jurisprudence in the world and owner; however, once a lease is signed, the has even seen many international courts adopt mineral estate owner is left with the right to Texas law as the standard for performance in receive royalty, the right to receive delay oil and gas contexts. rentals, the right to use the surface, the receipt of bonus, and a possibility of a reverter. Types of Ownership of Real Property The Rule of Capture. The Rule of Capture The right to lease is usually referred to as the originated from English hunting law, but executory right or sometimes as the somehow ended up as the basic rule allowing executive right. Bonus is compensation for for the taking of oil and gas from beneath the granting a lease; delay rentals are compen- surface even though it may have originated sation for deferring drilling; and royalty is under someone else’s land and migrated to simply a share of production which is free of another owner’s. Without economic the cost of production. Like the fee owner- development incentives of the Rule of ship itself, each of these incidents of mineral Capture, oil and gas production would be an ownership is alienable, divisible and inherit- able. The mineral owner can transfer all or Page 2 any part of the mineral estate. The mineral owner can transfer a portion of the mineral The remainderman holds a future interest estate, thereby creating a cotenancy of the that will become a current interest only at the whole, or transfer any of the individual death of the life estate holder. Life estates are incidents of mineral ownership such as the usually created by testament (will), intestacy, executory right, the royalty, or the like, or or by another instrument, usually a transfer the whole estate. conveyance. Usually, a life estate is written as “to Joe Smith for his life, and then to Sally Fee Simple. Fee ownership (technically fee Smith.” Texas intestacy law may also create a simple ownership) is ownership of property in statutory life estate for the benefit of a total. When someone owns a whole share of surviving spouse under the proper conditions property outright that can only be divested by (see Succession elsewhere in this chapter). conveyance, foreclosure, forfeit or adverse Often, for practical reasons, a life estate is possession, they have fee simple ownership. created by will when a person remarries later in life and has adult children from a previous Fee Simple Determinable. A fee simple marriage who may be antagonistic to the new deter-minable is ownership of property only spouse. Under intestacy, using the previous when a certain event happens, like a future “new spouse” scenario, the new spouse would date or after a specific death. “To Sally Smith receive nothing when the spouse with pre- for ten years, and then to Jeff Doe,” “To the existing children died (other than his or her Benevolent Fund Trust, so long as the share of community property). Even if the property is used as a school for the deaf, and relationship with the new step-parent was then to the heirs of Adam Barnes,” “To John good, the child(ren) could still force the Smith for the life of Sally Smith, and then to surviving spouse out of the non-community the heirs of Herman Moore” are all examples property marital home.(Often the relationship of fee simple determinable ownership. between the children and the new spouse is not good and ouster is expected so a will is Life Estates. Life estates are fee simple necessary to protect the new spouse.) determinable ownerships. More specifically, a life estate is ownership of a property given to However, the property rights of the life estate someone for the term of a life (usually the holder are not complete. Life estate holders recipient’s life), and then upon that person’s can live upon and use the land, but cannot death, to another person or entity. A life commit “waste.” Waste is an act which estate is an example of a split estate and decreases the value of the loaned or which triggers special requirements in an oil and gas uses up something that cannot be replaced, leasing scenario. The person(s) or entity, who such as minerals removed by mining or oil gets the property after the death of the and gas production, unless the Open Mine principle is called a remainderman, or Doctrine applies. The Open Mine Doctrine remaindermen (and the property owned is holds that if a life estate is created while waste often called the remainder ). One can convey is already being committed ( as from an or create a life estate for the life of someone already producing Oil, Gas, Mineral Lease or who is not a party to the life estate. For OGML), the life estate holder is entitled to instance, Joe Smith creates a life estate by continue that same waste to his or her benefit. conveying property “To Misty Jones for her That is, the life estate holder gets the revenue life and then to Franklin Williams.” Misty and does not share it with the remainderman. Jones could sell her ownership to Jason If the life estate is created by will or deed, Jackson, but Jason would only own the then the rules for waste and income can be interest for the life of Misty Jones. determined by the testator/grantor. Page 3 purchaser (unless the conveyance instrument Leasing issues. As between the life tenant states otherwise). But, with a life estate, the and remainderman, who does one obtain a remaindermen do not take subject to a lease lease from? Because the remainderman has signed only by the life estate holder.
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