Evaluating Legal Consequences of Energy Production from Agricultural Lands Theodore A. (Ted) Feitshans Department of Agricultural & Resource Economics North Carolina State University May 16, 2013

Disclaimer This slide set is provided for informational purposes only. Nothing herein constitutes the provision of legal advice or services.

Title to Interests in Real Property Subsurface capable of being a separate estate from surface estate

Title to Interests in Real Property Further subdivision –Oil & gas Depth range –Coal bed methane –Minerals –Sand and gravel (as distinguished from crushed rock)

Title to Interests in Real Property Presumption that surface estate includes all subsurface rights

Title to Interests in Real Property Importance of intent of the parties –Conveyances transfer ownership of the mineral estate and/or oil & gas estate –Leases do not transfer ownership of oil, gas, or minerals that have not been severed A leasehold interest is a chattel real, a species of intangible personal property –Bankruptcy implications

Title to Interests in Real Property Shale gas –Mineral or something else –PA - rebuttable presumption that natural gas is not included in a grant of the mineral estate Is shale gas different than conventional gas? –Shale is generally a mineral –Gas is generally not a mineral

Title to Interests in Real Property Oil & gas not included in definitions for purposes of The Mining Act of 1971 –N.C.G.S. §74-49(6) – minerals –N.C.G.S. §74-49(7) – mining The Oil and Gas Conservation Act (1945) –Applies to all “common sources of supply of natural gas discovered after January 1, ” N.C.G.S. §

Title to Interests in Real Property “’Security’ means any... certificate of interest or participation in an oil, gas, or mining title or lease or in payments out of production under a title or lease” N.C.G.S. §78A-2.

Title to Interests in Real Property Rights to sand and gravel not a mineral right? (NC decisions inconsistent) –Profit à prendre in gross –Defense of laches applicable –Title passes only upon severance Applicability to gas leases?

Relationship Between Surface & Sub-Surface Estate Dominance of surface estate (apparently opposite rule in Texas) Reasonable use of surface estate –accepted and prevailing method for mining of the particular mineral –any particular rights waived or reserved Intent of parties –protection for residences and residential water supplies (inconsistent case law) –right to compensation for surface damages?

Extinguishment N.C.G.S. § through N.C.G.S. § A –Exceptions: Current use (at effective date) Subsurface interest in adverse possession Listed for ad valorem tax purposes w/n exception period - nonpayment alone does not extinguish Exception noted in surface holders chain of title within past 30 years prior to effective date of statute

Extinguishment Grace period –Two years from statutory date Determine operative statute –Sworn and subscribed before official authorized to take probate (N.C.G.S. §47-1) –Recorded with register of deeds –Listed for, and ad valorem taxes paid

Extinguishment County failure to publish notice –Proof thereof Application to those under disability?

Extinguishment Constitutionality –Texaco, Inc. v. Short, 454 U.S. 516, 102 s. Ct. 781 (1982) Indiana Dormant Mineral Interests Act –Texaco, Inc. v. Short cited favorably in Rowlette v. State, 188 N.C. App. 712 (N.C. App. 2008) –McDonald’s Corp. v. Dwyer, 338 N.C. 445 (1994) Violation of due process for insufficient notice

Extinguishment By registration under N.C. G.S. § 43-1, et seq. (Torrens system)

Abandonment Mere lapse of time insufficient Nonpayment of ad valorem taxes insufficient taken alone Requires unequivocal acts of abandonment

Adverse Possession Not previously severed –Adverse possession of surface includes subsurface rights Previously severed –Adverse possession of surface does not include subsurface rights –Adverse possession of subsurface rights does not include surface rights Surface activities to extract subsurface resources do not confer adverse possession of the surface

Adverse Possession Actual mining required to establish adverse possession of mineral estate Need not mine all possible types of minerals in property subsurface

Conveyancing Caveat emptor Covenant of seisin Lease versus sale –Look to substance not form Statute of frauds applicable to sales and leases of mineral rights and gas & oil rights

Questions Were mineral or oil & gas rights ever transferred? What rights were transferred? Were such rights ever relinquished or abandoned? Were such rights ever extinguished?

Condemnation Fee interest in minerals may be acquired by condemnation Value of minerals a factor in valuation

Partition Tenants in common in mineral rights may have interests partitioned

Taxation Use of statutory method ‘True value’

Evaluating Oil & Gas Lease Proposals Long term leases

Due diligence

Broker or Principal

Financial condition

Safety/environmental compliance record

Litigation history

Registered to do business in North Carolina? NC Secretary of State

The Leasing Process

Standard lease agreement No Such Thing!

The landowner addendum

Lease governs entire relationship between the parties!

Threshold Issues

Does the landowner own the resource to be leased? What is to be leased?

Water?

Is the lease compatible with future land use plans?

Restrictions on land use

Zoning

Military Flight Paths

Conservation easements

Present use value program

USDA/State conservation programs

Security Interests

Factors That Affect Negotiation of Wind, Solar, and Oil & Gas Leases

Amount of acreage

Physical features of property: quality of the resource

Geological features of property

Other production/infrastructure in area

Number of companies in area

Market for energy: gas, electricity

Negotiating skills of parties

Typical Clauses

Choice of law

Choice of forum (venue)

Attorney fees clause (is it one-sided?)

Arbitration clause Who pays? How selected?

Terms of Lease Agreement

Parties to lease agreement

Property description

Length of lease agreement

Primary (exploratory) term: may start with an option

Secondary (production) term

Payment terms

Bonus Payment (signing bonus)

Delay Rental Payments

Royalty Payments

Shut-In Royalty Payments

Free Natural Gas

Rights granted by landowner/limitations on rights granted

Mineral estate

Surface Estate

Water

No Surface Rights Lease

Storage Rights

Transportation of foreign gas/Installation of pipelines/Power lines

Additional Considerations

Rule of Capture

Pooling/Unitization

Indemnification

Non-Disclosure (confidentiality) Clause

Access to records/production audits

Increased real estate taxes

Imposition of severance tax

Drilling clause/Development clause

Removal or forfeiture of equipment

Provision for Project Failure/Termination

Insolvency/bankruptcy clause

Provision for removal of equipment

Insurance: certificate of insurance

Taxes

Recordation