The Different Ways by Which Oil and Gas Interests May be Created and/or Transferred in the United States and United Kingdom
Introduction
A mineral (i.e. oil and gas) interest refers to the “ownership of the right to exploit, mine, or produce minerals lying beneath the surface of a property” (Hancock 2009, p.1). The creation and transfer of oil and gas interests may mean the same things in different countries. However, the laws that apply to them tend to vary- sometime in small and at times in big ways (Hancock 2009; Glasser & Humphrey 2013). This paper explores more keenly the creation and transfer of oil and gas interests in the United States. This exclusive focus on the US as the context of study is prompted by the word-limitations of this paper, so that there is no much space to explore the situation in the UK, which is similar in some ways but also different in others. For example, unlike most other countries, the US allows private individuals to own oil and gas.
In testing the thesis in the title of his article, Property and Oil and Gas Don’t Mix, Kramer (1994) argues that there are definitional and conceptual difficulties- some driven by the historical evolution of the oil and gas industry. For instance, he cites the Restatement of Property: “an interest in land which (a) is or may become possessory and b) is ownership measured in terms of duration” (1994, p.541). To Kramer (1994), therefore, this definitions complicates- albeit only theoretically- the creation and transfer of oil and gas interests as it restricts the concept of ‘estate’ (in this case synonymous with ‘property’) to possessory or corporeal interests. This is particularly applicable for the US- if not the rest of the world.
However, despite these definitional and conceptual difficulties- which not just Kramer (1994) cite-, the creation and transfer of oil and gas interests remains a reality in the US- albeit with a few problems here and there (some implicitly cited here). In the US, for instance, majority of minerals (including oil and gas) are privately owned. According to Lowe (2014), this is good for charitable institutions in particular. In many states, including Texas, this gives the owners the right to lease interests to others. This is known as the ‘executive right’ and what it does is enable the ‘transfer’ of oil interests. This transfer is one way by which to create interest, with the transferee being the new interest owner.
Ownership (Creation of) Interests
Generally, in the US, there three types of ownership interests (i.e. creation of interest): tract or parcel; separate deposit; and unitization. Each of these has its own limitations.
On tract or parcel, the key word is ‘property’ and not ‘lease’. There are limitations relating to the lease of land. For example, although a single lease may cover various separate tracts or parcels of land, this does not necessarily mean that these parcels or tracts of land are a single property. In other words, the question is whether the different tracts of land are contiguous or share a common side. But on this arise even more complications. For example, while tracts are said to refer to a physical area delineated by legal description, the tracts that only touch at the corner are considered as merely adjacent (not contiguous). Therefore, such tracts do not constitute the same property. Moreover, Treas. Reg. section 1.614-1(a)(3) considers all contiguous parcels or tracts of land obtained on the same day and from the same person one property, perhaps implying that if they are acquired on different days then they are not considered as the same land (Market Segment Specialization Program 1996). Indeed, this small ‘definitional’ issues impact on the ability to create and transfer oil and gas interests.
On separate deposit, each separate mineral deposit (relating to the aspect of tract or parcel discussed above) are treated as separate property. Thankfully, though, a special-rule provision in IRC section 614(b)(1) and (2) that allows “operating mineral interests in oil and gas deposits in a tract or parcel of land to be considered as one property” (MSSP 1996, p.8). However, the same provision allows for an election against this special treatment. Regardless, though, this election does not necessarily the creation and transfer of oil and gas interests. Rather, it only impacts on the treatment of the oil and gas deposits on the separate parcels or tracts of land. Still, the aspect of separate deposit remains subject to the aspects of tract or parcel.
Finally, to help solve the problems discussed in the two types of ownership interests discussed above, unitization allows different property owners to combine their properties into one unit (MSSP 1996). Still, this may face difficulties of private interests of property owners, especially relating to- as in Texas- the “rule of nonliability for drainage of oil and gas from adjoining property” (Texas Oil and Gas Property Rights n.d., p.1) under The Rule of Capture.
Ultimately, all these aspects together complicate the question of property ownership- what the Texas Oil and Gas Property Rights (n.d.) refers to as ‘absolute ownership’.
As already noted above, regardless of the complications of legal definitions of land and ownership, the creation and transfers of oil and gas interests is still very much a possibility in the US, not just for companies within the US but also those from abroad. For example, a number of Chinese companies have been acquiring major ownership interests in US’s oil and natural gas resources. These Chinese companies are having the freedom to acquire equity interests in the product of energy in the US (Corsi 2013). Moreover, a plethora of Japanese investors and companies have been arriving in the US for several years with the aim of exploiting a share of the shale revolution in the country. Initially, the industry belonged to independent US oil and gas companies. However, with the passage of years, other players (including international energy investors and companies) have arrived (LeFort et al. 2013). All these players have managed to have a share of the industry one way or another. This paper examines the creation of oil and gas interests in the US (using the shale oil industry as a case study).
Ownership and Full Ownership Interest: the Shale Industry Case Study
A good number of shale transactions have mostly- if not entirely- taken two forms: full and partial acquisition of a company’s gas interests in the US plus- particularly in the case of partial acquisition- a development agreement that helps govern the ongoing development and operation of the oil and gas interests. For example (LeFort et al. 2013):
Mitsui acquired 12.5 percent of SM Energy’s shale interests in Eagle Ford
Atlas sold to Reliance 40 percent of its shale interests in Marcellus
Cheasepeake sold 20 percent interest in Haynesville, 25 percent interest in Utica, 32 percent in Marcellus and 33.3 percent interest in Eagle Ford to Plains, Total, Statoil and CNOOC respectively.
CONSOL sold half (50 percent) of its interest in Marcellus to Mitsui, among others.
Some transactions have taken the form of acquisitions of equity in companies that hold U.S. oil and gas. The most popular examples include (LeFort et al. 2013): the acquisition of XTO by ExxonMobil; acquisition of Atlas Energy by Chevron; the acquisition of El Paso Oil and Gas by Apollo; and the acquisition of East Resources by Shell, among others.
These discussions reflect the general forms creating and transferring oil and gas interests in the US. Generally, the creation and transfer oil and gas interest in the US can be done through ownership or lease.
There are various forms of oil and gas ownership in the US: landowner’s ownership; leasehold interest; mineral interest; royalty interest; and net revenue interest. Even here, the legal complications regarding ownership are evident. For example, generally, landowner’s interest is where the owner of a parcel of land has absolute ownership of everything under the land’s surface, including minerals, oil and gas, etc. In other words, the owner of a piece of land has the right to drill wells on his/her piece of land and explore for, produce and dispose of oil and gas for his own personal benefit (Williams and Meyer 2012). However, it is not as simple as that. For instance, legally, state laws govern oil and gas rights including those of the owner of land. Above this, there exist various theories regarding the nature of the landowner’s rights. For example, in most states across the US, the state’s ownership of oil and gas rights is based on the premise of place theory, which grants the landowner the rights to oil and gas as they are part and parcel of the land (). In this respect, the oil and gas are part of ‘real’ property interest. Moreover, once the oil and gas is extracted, it becomes the landowner’s private property and remains so regardless of whether it is re-injected back into the ground for storage. Moreover, such landowner interest theories are still subject to the Rule of Capture, which the owner rights to even oil and gas that drain into his/her land from an adjacent land (Kramer & Anderson 2005). The landowner can create interest on the oil and gas under the surface of his/her land by grant or reservation through: leasehold interests, mineral interests and royalty interests.
Other than ownership (of which there are other examples besides landowner’s interest- discussed above), lease is another way by which to transfer oil and gas interests. This grants the lessee the exclusive right to explore for, produce and dispose of oil and gas LeForte et al. 2013). There are standard forms for oil and gas lease. However, most conventional oil and gas leases in the US use the same provisions. In recent years, the nature of oil and gas lease in the US has evolved, such as in the recent shale gas boom (already cited above). Like is the case in the shale industry, oil and gas leases has been a major strategy for oil and gas companies from abroad to enter the US’s oil and gas industry. For example, in October 2009, China’s state-owned CNOOC bought a total of 600,000 acres of land in South Texas which contained oil and gas fields for millions of shillings (Corsi 2013).
Conclusion
US’s oil and gas industry has experienced major transformation in the last decade, especially alongside the shale gas boon in the country, which has attracted several energy companies from abroad, including China and Japan. However, even then, the country’s oil and gas law is still unique to most other national laws around the world, most prominently the allowance for private persons to own (including creating and transferring) oil and gas interests. But most important is the fact that these transformations in the legal framework governing oil and gas interests in the US, the definitional and conceptual complications remain. For instance, there seems to remain issues regarding the definition of property (i.e. tract and parcel). Regardless, these issues have only furthered the uniqueness of the US oil and gas laws and industry- if hardly much else. The question remains whether the issues can be addressed sufficiently. But then again, maybe it does not matter. Besides, these issues have not maimed the oil and gas industry (i.e. in terms of the creation and transfer of interests).
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