Ezra A. Johnson July 23, 2014 Can’t we all just get along? Surface and Mineral Rights in Texas Texas Association of REALTORS

2 SURFACE RIGHTS ARE LIMITED Surface Impacts of Oil and Gas Development Texas Association of REALTORS

What is the “Surface” What “comes-with” the purchase of the “surface estate” or the “surface” of the land in Texas? In the absence of an expressed intent to do to otherwise, a sale of the “surface” includes all: Water Limestone Caliche Surface shale Sand Gravel Iron Near-surface (0-200ft) lignite (coal) 3 Texas Association of REALTORS

What is a “Mineral” It’s complicated What is the meaning of “oil, gas and other minerals”? Depending upon the circumstances, a conveyance of “oil, gas and other minerals” may include much more than oil and gas. However, the term “other minerals” never includes the surface (i.e., limestone, sand, water, etc.). 4 Texas Association of REALTORS

What is a “Mineral” “Incidents of the Mineral Estate” or “The Bundle of Sticks” Right of Ingress and Egress (more commonly known as the Executive Right or the Right to Develop) Right to Receive Royalty Right to Receive Rentals Right to Receive Bonus Each stick in the bundle can be conveyed separately from the surface and from each other. 5 Texas Association of REALTORS

What is a “Mineral” Economic Benefits of Mineral Ownership The right to receive royalty may be “participating” or “non- participating” A conveyance of “royalty” without more, is a non-participating interest. The right to bonus entitles the owner to a share of the price paid to sign a lease. The right to rentals entitles the owner to a share of the price paid to delay drilling a well during the term of the lease. 6 Texas Association of REALTORS

What is a “Mineral” The right of ingress and egress entitles the owner to go on the surface of the land to extract the minerals on or beneath it. The right to convey rights of ingress and egress (aka development rights) to others is called the “executive right.” When the owner of the minerals leases property to an oil and gas developer, that is an exercise of the executive right. 7 Texas Association of REALTORS

What is a “Mineral” The owner of the right of ingress and egress has a controlling interest in the surface, even if they own no interest in the surface! The right of ingress and egress includes the right to enter and use the surface in any way deemed reasonably necessary to extract the minerals. If the owner of the surface estate does not own the right of ingress and egress to the minerals under his land, he has very little control over the development process. 8 Texas Association of REALTORS

Surface Impacts of Oil and Gas Development What is “reasonable use” of the surface? Remember that the surface includes water, caliche, gravel and sand; however, If the use of water is reasonably necessary to extract the minerals, the mineral developer can take water without consent of the surface owner. If new roads are reasonably necessary to access the drilling location, mineral developer can not only build those roads but use caliche gravel and sand found on the surface (again, without the consent of the surface owner). 9 Texas Association of REALTORS

Surface Impacts of Oil and Gas Development What is “reasonable use” of the surface – Cont’d. Clearing of trees and brush that interfere with mineral development Housing employees Storing equipment Processing, treating and storing minerals Installing pipelines Installing utilities HOWEVER: Operators are under no legal obligation to protect livestock by fencing their facilities. 10 Texas Association of REALTORS

11 DRILLING PADS Surface Impacts of Oil and Gas Development Texas Association of REALTORS

12 SETBACK REQUIREMENTS? Surface Impacts of Oil and Gas Development Texas Association of REALTORS

13 DRILLING PADS Surface Impacts of Oil and Gas Development Texas Association of REALTORS

14 DRILLING PADS Surface Impacts of Oil and Gas Development Texas Association of REALTORS

15 FRAC Surface Impacts of Oil and Gas Development Texas Association of REALTORS

16 PRODUCTION FACILITIES Surface Impacts of Oil and Gas Development Texas Association of REALTORS

17 PRODUCTION FACILITIES Surface Impacts of Oil and Gas Development Texas Association of REALTORS

18 PRODUCTION FACILITIES Surface Impacts of Oil and Gas Development Texas Association of REALTORS

Surface Impacts of Oil and Gas Development Given all of that, is anything considered “unreasonable?” Yes. Negligent damage to property is unreasonable. Use of the surface estate for the benefit of minerals under “other lands” is unreasonable. Any activity that fails to reasonably accommodate existing uses of the surface is unreasonable. However, these exceptions to the general rule have more loopholes than teeth. 19 Texas Association of REALTORS

Surface Impacts of Oil and Gas Development What is meant by “other lands” in the context of reasonable use of the surface? Lands having different mineral ownership. Multiple surface owners may own interests in lands on top of minerals owned by the same person (or group of people). Accordingly, mineral ownership, not surface ownership, determines the reasonableness of surface use. When different mineral tracts are “pooled” to form a drilling unit, they become a single mineral tract for determining use of the surface. 20 Texas Association of REALTORS

A Quick Note on Water Landowners cannot depend on conservation districts to protect their water rights from oil and gas development Use of water for oil and gas development is largely exempt from pumping restrictions, at least for now. Unlimited right to take water from the surface so long as that water is used to extract minerals from the same lands. 21 Texas Association of REALTORS

How Do Buyers Protect their Surface Rights? Get control over the right of ingress and egress. Best case: 100% ownership of surface and minerals or a waiver of all ingress and egress rights to the surface. Remember - a deed that is silent as to the minerals conveys whatever mineral rights the grantor has. Total surface waiver is covered by the TREC addendum but is difficult to apply to larger tracts. Pre-negotiate particular “zones” for mineral exploration. See Chapter 92 of the Texas Natural Resources Code, which allows real-estate developers to set aside two-acre blocks out of every eighty acres as mineral development zones. 22 Texas Association of REALTORS

How Do Buyers Protect their Surface Rights? Get control over the right of ingress and egress. Second best: 100% ownership of the executive rights. The TREC addendum does not cover executive rights conveyed separately from the mineral estate. Next best: Any combination of minerals and executive rights that ensures control over at least 25-50% of the minerals (the more, the better). The TREC addendum may or not be applicable/appropriate depending upon the circumstances. 23 Texas Association of REALTORS

Pipeline Easements According to Railroad Commission of Texas statistics, there are 366,274 total pipeline miles in Texas (interstate and intrastate, regulated and non- regulated). 24 Texas Association of REALTORS

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