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Protecting Landowners in Transactions with Oil and Gas Companies

By: Heidi R. Kemp

Oil and gas interests can be a blessing for people when they turn into up front bonus payments for leasing and/or royalty payments from the production of oil and gas. However, many landowners do not adequately protect their interests against the oil and gas companies. Whether they are dealing with oil and gas companies in leasing, pipelines, waterlines, royalties, etc., the law puts the onus on the landowners to protect themselves.

If the oil and gas company approaches you and needs something signed, you should have it reviewed by knowledgeable legal counsel – especially if you are granting any kind of rights. Many landowners signed the oil and gas lease the company handed to them. Those landowners did not negotiate the lease. Under those “generic” leases, it is very easy for the oil and gas company to hold the lease. “Holding” a lease means that the lease does not terminate. If an oil and gas company holds a lease during the primary term of the lease, then it does not need to pay any kind of extension payment. And, usually, production does not have to occur in order to hold these generic leases. Thus, landowners may find themselves locked into leases for a very long time without any additional monetary compensation.

For waterlines and pipelines, much of a landowner’s bargaining power depends on what the oil and gas lease states about the company’s right to use the leased premises for those purposes. Even still, if a company approaches you with a waterline or pipeline agreement, whether temporary or permanent, there is usually some negotiating ability. Again, there are many factors that play into how much bargaining power you will have but it’s usually worth spending the time to try to negotiate more landowner-friendly terms in these agreements.

For royalties, the oil and gas lease is the governing document that dictates how these are to be paid. Thus, obtaining good royalty language up front during the lease negotiation is critical. Some companies and/or land agents (those who are out trying to get leases from landowners on behalf of the company) present a lease they claim has “gross” royalty language. A gross royalty means that the company cannot deduct post-production costs from the landowner’s royalty. However, in practice the oil and gas company uses that language to take post-production costs from landowners’ royalties and those deductions can range upwards of 50% of the royalty each month. Royalty clauses can often be interpreted different ways and there is a lot of litigation in the courts right now over those very issues.

The reality is that landowners must monitor and review their royalty statements to ensure the oil and gas company is paying the landowner the proper royalties. This is extremely difficult. There is only so much data on the statements that come with the royalty checks. Furthermore, many issues cannot be identified just from looking at the statement. Someone knowledgeable in reviewing oil and gas royalty statements can often see blatant problems from the surface of the statement but also identify “red flags” where there might be issues but more information is necessary to make a final determination. It is not unusual to find simple coding mistakes on royalty statements where something gets programmed into the oil and gas company’s computer/accounting system incorrectly. It is our experience that these mistakes usually do not get fixed until a landowner or an attorney contacts the company. We always recommend landowners have their royalty statements reviewed by knowledgeable legal counsel. In Ohio, there is a four-year statute of limitations for a landowner to bring a lawsuit on improperly calculated royalties.

If you have questions or concerns about any of these oil and gas issues, find counsel who is knowledgeable about oil and gas. Often, many of the issues can be taken care of on the front end. And if you have already signed the agreement, an attorney can help navigate the difficult job of making sure the oil and gas company complies with the agreement.