The Basics of Oil and Gas Leases: Part I

Exploitation of oil and gas is going through a rebirth in Pennsylvania today, and many attorneys and individuals are new to the field and treading on uncertain ground regarding what they should and should not accept in a lease. Certain things, like royalty payments, are more fact specific, and general advice about that clause depends on land specifications and the location of the reserve the landowner situated on.

In this first post in the oil and gas series we’ll determine what basic things you should know prior to entering an oil and gas lease, especially in Pennsylvania, where much of the legal territory has been unregulated for 100 years.

First, many people don’t know that every plot of land begins with two separate estates (sets of ownership rights), a surface estate and a mineral estate.

  1. A surface estate, which allows use and exploitation of the surface area and the area above it to a reasonable point. An example would be placing your house, your farm, and a windmill on your property: then you are using the surface estate.
  2.  The mineral estate gives use and exploitation rights to all minerals under that piece of property. This would include the right to mine for coal or gold, and drill for gas and oil.

These two estates are both included in your land parcel, unless they have been severed at some point. As the country expanded west it was common for developers or even the states themselves to retain the mineral estate. For most Pennsylvanians, unless the mineral estate was sold by a prior owner, the landowner is probably the owner of both estates. A title attorney can check for full or partial ownership of the mineral estate.

The fact that most Pennsylvanians still own their mineral estate, gives the individual more control over the decisions for a lease. Although you will feel a lot of pressure from neighbors or the company attempting to lease your mineral estate, you should be cautious when accepting the terms of a lease and always consult an oil and gas law attorney.

You should be exceptionally careful if approached about outright selling your mineral estate, as that removes the right to valuable royalty payments for yourself and future generations. When it does come time to divide your estate, you may divide the ownership interests in the mineral estate, just as you would in the surface estate. However, you must be careful because when you do this, because it severs the mineral estate from the surface estate.

The division of the two estates creates an undivided interest in the whole of the mineral estate. So, where a person gives the mineral estate to her two children, each child owns half of the mineral estate, but niether can point to one half of the property and say, “That’s MY half of the mineral estate!”

One of the children is free to subsequently sell his half, or sell one quarter and retain one quarter. The effect of the sale, and the conveyance of a mineral estate, requires extremely precise language. Any ambiguous statements will not be used to your advantage in court-and a mistake in an oil and gas conveyance can be very costly!

In the next post we will discuss some of the more common clauses in leases, and what effect they have on your mineral estate and your rights. Although this portion makes mention of Pennsylvania, and I am only licensed to practice in Pennsylvania and Wyoming, the information in the second post in this series is broad and merely informative; it is not intended to be state specific.

Shannon K. McDonald studied oil and gas law while in school in the state of Wyoming. Wyoming has a thriving oil and gas industry, and has been regulating the exploitation of minerals while preserving the rights of individuals and the beauty of the land for twenty years. While in Wyoming, Shannon K. McDonald learned some of the nuances of the leasing system and how to negotiate and form oil and gas leases to benefit the landowner.

Contact Shannon K. McDonald for assistance with your mineral leasing situation today.