Texas Attorney Blog

Part of what I do for clients as a Texas oil and gas attorney is to calculate oil and gas royalties so that they can be sure they are being paid correctly. I thought it might be useful to you to explain how an ownership percentage and royalty are calculated.

1. First, we take your percentage of mineral ownership in the land in question, and we multiply that by the number of surface acres in your entire tract. This result is that your net mineral acres. For example, if two relatives together own a one-half interest in a forty acre tract, or ½ times 40, they have twenty net mineral acres.

2. Secondly, if the land is located in a pooling unit, (sometimes also called a pro-ration unit), we multiple the total number of acres in the tract by a pro-ration fraction. The reason for this is that each royalty owner in a pooling unit is only entitled to their proportionate share of the oil or gas produced by the entire pooling unit. A pooling unit is an area around a well that is set by the Texas Railroad Commission, and is intended to approximate the area drained by a producing well. Pooling units can range in size from 80 to 640 acres or more. For example, for a forty acre tract that is located in a 320 acre pooling unit, that forty acre tract is entitled to 40/320, or 0.12500, of the minerals (whether oil or gas or both) produced by that 320 acre unit.

3. Third, we multiply that result by the royalty fraction in the oil and gas lease you signed.

4. Finally, we divide that result by the number of current owners to determine what portion of the total production from the pooling unit each owner is entitled to.

By way of example, let’s say you and a relative own 20 net mineral acres in a 40 acre tract. Let’s also say that the pooling unit is 320 acres. This fraction in our example would be 40/320. Next we multiply that result by the royalty fraction in the oil and gas lease that was signed, which in our example is 1/6. Finally, we divide that result by the number of owners, which in our example is two.

Here is the calculation for our example in numeric form:

First, I convert the fractions to decimals so they are easier to multiply:

20/40 = 0.5

40/320 = 0.12500

1/6 = 0.166666

1/2 = 0.5

Next, I multiply out the calculation:

0.5 X 0.12500 X 0.166666 X .5 = 0.005206

The result of this calculation is that for every dollar of gas sold from the well, you and your sister in our example would each get 0.005206 of that dollar. This does not seem like much, but a good gas well can produce millions of BTU's of gas, and so the royalty payments can be substantial.

Oil and gas companies can and do make mistakes in calculating a mineral owner's royalties. If you think your royalties are not being calculated correctly, give me a call.

As oil and gas lawyers in Texas are well aware, there is a lot of pipeline construction going on in Texas as well as in other parts of the United States. I had a fascinating conversation not long ago with Victoria Myers, Senior Editor for The Progressive Farmer Magazine. If you have not looked at this publication before, it is really an excellent resource for folks who make a living from farming, as well as those "gentlemen (gentlewomen?) farmers out there. (You know who you are!) Since I am a Nebraska farm girl myself (Thayer County, to be precise), I find it especially interesting.

Victoria is the author of an article in an upcoming issue of Progressive Farmer regarding pipeline easements and rights-of-way. My discussion with her has caused me to update my list of issues involved in these kind of agreements by adding a few from her list. Here is the updated list:

1. Is the easement limited to a specific area, or is it a blanket easement over your entire property?
2. Is the pipeline going to be buried to an appropriate depth, in light of your future use of that property, what the pipeline will carry and the anticipated size of the pipeline?
3. Does the easement obligate the pipeline company to refill to the original contour of the land and maintain that contour as the fill packs down?
4. Is the pipeline company obligated to remove and save the top soil from the easement area separately, to replace the topsoil and reseed with whatever grass was there originally and in general to restore the easement area to its original condition?
5. Will any waterways or drainage tiles be impacted by the pipeline? If so, is the pipeline company obligated to repair these to their original condition and possibly pay damages for temporary loss of use?
6. If your land is used for agricultural purposes, can construction, installation and maintenance be performed when the ground is cold or frozen to reduce soil compaction?
7. Is there a "temporary work area" in addition to the easement itself? Are you receiving an additional payment for use of this area?
8. Pipeline installation can involve a lot of very heavy equipment which will compact the soil. Is the temporary work area situated so that the soil compaction is kept to a minimum? Are you being paid damages if the compaction that does occur prevents future crops in this area?
9. Will you be compensated for crop loss or crop damage caused by the installation and construction phase as well as by the permanent pipeline?
10. Is the pipeline company required to notify you prior to use of herbicides for brush or weed control?
11. If fences will be effected, is the pipeline company obligated to use temporary fencing and to restore the original fence to same or better than the original?
12. If fences must be cut, will a gate be installed that is of a design and quality suitable for the use of that gate?
13. Will you have rights to use the surface in any manner that does not interfere with the pipeline?
14. Will the pipeline company agree to avoid important trees and not to remove or trim trees without your consent?
15. Will the pipeline company agree to mark the pipeline route with durable and permanent markers?
16. Will the pipeline company agree to be responsible for any damages that are caused directly or indirectly by the installation, operation, maintenance or removal of the pipeline?
17. Does the easement terminate if it is unused for a certain length of time?
18. Will there be above-ground equipment along the pipeline route? If there is going to be above-ground equipment, are you going to be separately and appropriately compensated for it?
19. Will you get a separate payment for the easement and for damages?

These are just a sample of the kinds of serious issues involved in negotiating a pipeline easement or right of way agreement. Each of these can be major issues if not properly addressed in the easement. For example:

1. If there is no right on your part to declare an unused easement to be abandoned, that easement will show up on your title forever, even if it has not been used for many years. This can create a major impediment to future uses of your property. You can try to get a release of the easement, but the pipeline company may not exist any longer, and there may be no one to sign a release. You may even need to file a suit and obtain a court order to declare the easement terminated.

2. Above-ground equipment can include valves, gas compressors (that can be very loud and messy) loops or pig entry sites or measurement equipment that may interfere with irrigation equipment.

3. Regarding payments, currently easement payments are taxed as capital gains but damages payments are not taxable. If you get one check and the payment for the easement is combined with the payment for damages, the IRS may well assume that the entire payment is taxable.

4. Construction equipment may prevent irrigation of a field at a critical time. In fact, the construction phase may render the entire field unusable, with the resulting loss of the crop from that field. You need to be sure the compensation paid to you includes the value of the lost crop.

For all these reasons, many landowners consider it simply good insurance to consult an attorney before they sign a pipeline easement. The cost of an attorney is a small fraction of the amount of potential damages caused by pipeline construction. In many cases, an attorney will pay for themselves because they are able to negotiate more complete damage payments from the pipeline company.

As a Texas oil and gas attorney, one of the things I do often, and really enjoy, is assisting people in locating oil and gas royalties due to them from old oil and gas leases signed by their ancestors. In a previous blog here, I discussed how these royalties get lost. Today I'd like to discuss how I go about determining whether you may have oil and gas royalties due to you and your family.

First, I will need to know the Texas county in which you believe your relative or ancestor owned property or minerals. In addition, if you have any written documentation regarding this ownership, I ask you to provide me with copies. Any documentation, such as an old deed, an old oil and gas lease, a will, an old tax statement, a plat, a survey, a copy of the county appraisal district map showing the land, a stub from an old royalty check, or even just an address, can be very helpful. It is certainly possible to research all counties in Texas, but since there are 254 counties in Texas, the expense would be substantial.

Next, I research the status of your relative’s ownership of the real property that may be subject to an oil and gas lease or leases. Even if you already have a legal description of the property, it is essential to make sure that your relative has not, unknown to you, conveyed or transferred the property in question to a third party, or perhaps lost the property due to delinquent taxes. If we proceed without the precise legal description of each parcel of real property, or if the legal description is inaccurate or incomplete, or if your relative has sold or lost the property or the mineral interest, the time and expense involved in further work will be wasted.

Once we have completed the real estate research, I identify any oil and gas wells that have been or are located on your relative’s property. In addition, I determine whether your relative’s lease was part of a pooling or production unit. I obtain copies of the pooling documents so that I can calculate your relative’s ownership percentage and royalty.

If a well or wells have been identified, I then perform a royalty analysis. There are three components to this analysis. First, I determine the historical production from these wells. Secondly, I use historical price data to calculate the approximate income from the production from any wells. Thirdly, I use the ownership percentage formula to determine royalties due to you and your relatives.

The final step is to assemble a package of the research and transmit this with a demand letter to the well operator and/or owner to pay royalties to you and any relative who shares ownership of the minerals with you.

Sometimes we find property owned by your ancestor that has never been put in your name. If that is the case, there are simple legal procedures to cure this situation that I will be happy to discuss with you. These procedures will both clear title to family land (so future generations won't have to face these issues) as well as clear the way to getting oil and gas royalties paid to you instead of escheated to the State of Texas!

As a Texas oil and gas attorney, I negotiate a large number of oil and gas pipeline easements and rights-of-way throughout Texas, as well as easements for other types of utility lines. While the landowner and I may not get everything we want in the negotiated agreement, it is almost always more fair than the agreement the pipeline company originally offered.

I also get a couple calls a month from someone who signed an oil and gas pipeline easement or right-of-way without consulting an attorney before they signed. Usually, they are seeing activity by the pipeline company that disturbs them and they want to know if the agreement they signed "lets them to do that?" The answer most of the time is "Yes". Their next question almost always is: "Can I cancel this agreement or get out of it somehow?" The answer to that question is usually "No".

I am intrigued by why people would sign such a long term, complex, agreement, without legal advice. I have been cataloging the reasons I hear, out of curiosity. Here are some of the reasons I have heard thus far, and my parenthetical response.

1. "The landman was just so nice". (Yes, he was nice. It is his job to be nice. If he wasn't nice, he would have been fired a long time ago. Besides, have you ever been taken advantage of by someone who wasn't nice?)

2. "The contract did not look that complicated". (Well, if you are not an oil and gas lawyer, do you really know what those words mean? Do you know when words in the agreement have one meaning in ordinary use and other meaning in the oil and gas field? Even more important: do you know what's missing?)

3. "It costs too much to see a lawyer". (There are many oil and gas attorneys in Texas whose fees are not only reasonable, but whose rates are a fraction of the amount of damage that can be done to your land because of an improper agreement. In addition, the attorneys fees are sometimes offset by the increased pipeline company payment as the result of a negotiated agreement.)

4. "The pipeline company promised me everything I wanted, so I didn't care if it was in the easement". (Unfortunately most [though not all] verbal promises by the pipeline company or it's landman are not enforceable under Texas law).

5. "The landman told me I had to sign right away, or they would withdraw their offer and I wouldn't get the money they were offering". (It takes a long, long time to acquire all the right-of-way for a pipeline. There is rarely a situation where it is truly: "sign now or no deal".)

If you get an offer from a pipeline company or it's landman, simply smile and say: "Thank you. I will seriously consider this. I will send it to my attorney promptly and we will be in touch with you soon". And then call your attorney!!

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As Texas oil and gas attorneys know, each year, probably hundreds of thousands, maybe even millions, of dollars in oil and gas royalties from wells produced in Texas are lost to their rightful owners through a process called escheat. Specifically, when oil and gas companies cannot find the correct owner of mineral royalties, they are required to turn this money over to the Texas Comptroller.

How this happens is not difficult to understand. Let's say Mom and Dad bought 100 acres in Texas many years ago. They got a deed to the land and the deed was filed in the deed records of the county where the land is located. They purchased both the surface and the minerals. A while later, they sign an oil and gas lease, and shortly after that, they began getting royalty checks. They don't tell their children about the royalties, or maybe they do and the children forget about them. Many years later, Mom and Dad die, leaving five children. Maybe Mom and Dad died without leaving a will, or maybe they both had wills, but none of the children, for whatever reason, decided to have the wills probated. The five children just assume they each now own a one-fifth share of Mom and Dad's land, or 20 acres each.

Three factors now come into play that result in royalties to Mom and Dad being overlooked by the children. First, most oil and gas companies have certain minimum amounts of royalties that must accrue before they will send a check. If an individual mineral owner has a small share of the royalties on a well, checks may be sent out every few months, or even once a year. Secondly, all wells are shut down from time to time, for repairs or perhaps while a new gas pipeline contract is being negotiated. During this time royalty checks may not be sent out. One of the children or a grandchild may collect Mom and Dad's mail for a time after Mom and Dad die. At some point, they stop doing so, or perhaps the Post Office forwarding order expires and is not renewed. When royalty checks resume, they are returned to the oil or gas company as undeliverable. At that point, Mom and Dad's royalty account is put in suspense, or on hold. After a certain amount of time, the oil or gas company is required by the Texas Property Code to turn all accrued royalties over to the Texas Comptroller.

A third factor that contributes to royalties being overlooked by heirs is that the well that produces royalties for Mom and Dad may not be on the family land. In fact, the well may be a considerable distance away from the family land. The reason is that most oil or gas wells are required by law to be part of a pooling unit. The pooling unit may be as small as eighty acres, in the case of an oil well, or it may be several hundred acres in size, in the case of a gas well. When the well is a distance from the family land, it may not occur to the heirs that the family land is actually part of that well's pooling unit.

(Keep in mind that the oil and gas company must depend on the county deed records to determine property ownership. If Mom and Dad did not have wills, or if they did and they were not probated, or if the wills were probated but the executor of the wills did not prepare a deed transferring the family land to the heirs, or if deeds were prepared but were not actually filed in the county deed records, then nothing shows up in the deed records to show the change of ownership! In addition, keep in mind that it is the heirs' responsibility to keep the oil or gas company informed of changes in ownership. It is not the oil or gas company's job to keep up with the heirs!)

One day, a grandchild or great grandchild may decide to investigate whether royalties are due, and if so, from what company. They will want to be sure that any royalties are paid to the current heirs. The good news is that a Texas oil and gas attorney with experience in this type of investigation can do this for you. Usually, all that is needed is one document relating to the land, such as a deed, an old tax statement, a plat, a survey, a copy of the county appraisal district map showing the land, a stub from an old royalty check, or even just an address. With just this small bit of information, an experienced oil and gas attorney can determine whether this land is part of a pooling unit, whether the well in the unit is producing, and whether royalties are due. Your attorney can then get the records corrected both with the county and the oil or gas company so that royalties are sent to the current heirs.

My office charges a modest fixed fee for this kind of investigation. The payoff for a small investment might just be substantial, not only in terms of monetary return, but also in terms of having title to the family land cleared up for future generations! Please call me if you think there may be missing royalties in your family.

Texas real estate attorneys who practice residential real estate law in Texas will want to be sure to tell their clients about a new tax credit available to first time home buyers. As part of the Housing and Economic Recovery Act of 2008, first time home buyers get a credit against income taxes of 10% of the purchase price of the home, up to a cap of $7500.00. The credit applies to new or resold housing, and the full credit is available to single taxpayers with incomes up to $75,000.00 and married couples with incomes up to $150,000.00.

There is a partial credit available for single taxpayers with incomes between $75,000.00 and $95,000.00 and married taxpayers with incomes between $150,000.00 and $170,000.00. If the taxpayer does not have sufficient income to be able to use the full credit, they will receive a check for the balance. There is no special form; the credit is simply deducted on the taxpayers’ federal income tax return. Home buyers will be required to repay the credit to the government without interest over 15 years, or when they sell the house if there is sufficient capital gain from the sale. For example, a home buyer claiming a $7,500 credit would repay the credit at $500 per year. The home owner does not have to begin making repayments on the credit until two years after the credit is claimed. The credit expires on June 30, 2009.

For additional details, go to: http://www.federalhousingtaxcredit.com/faq.php.

As a Texas oil and gas attorney, I have occasion to review and negotiate many oil and gas leases in Texas for clients all over the United States (hopefully before the lease has been signed). However, having an attorney review a pipeline easement is every bit as important. Here are just a few of the critical questions that a pipeline easement should address:

1. Is the easement limited to a specific area, or is it a blanket easement over your entire property?
2. Is the pipeline going to be buried to an appropriate depth, in light of your future use of that property, what the pipeline will carry and the anticipated size of the pipeline?
3. Does the easement obligate the pipeline company to refill to the original contour of the land and maintain that contour as the fill packs down?
4. Is the pipeline company obligated to remove and save the top soil from the easement area separately, to replace the topsoil and reseed with whatever grass was there originally and in general to restore the easement area to its original condition?
5. Will you have rights to use the surface in any manner that does not interfere with the pipeline?
6. Will the pipeline company agree to avoid important trees and not to remove or trim trees without your consent?
7. Will the pipeline company agree to mark the pipeline route with durable and permanent markers?
8. Will the pipeline company agree to be responsible for any damages that are caused directly or indirectly by the installation, operation, maintenance or removal of the pipeline?
9. Does the easement terminate if it is unused for a certain length of time?
10. Will there be above-ground equipment along the pipeline route? If there is going to be above-ground equipment, are you going to be separately and appropriately compensated for it?
11. Will you get a separate payment for the easement and for damages?

These can be major issues if not properly addressed in the easement. For example, if there is no right on your part to declare an unused easement to be abandoned, that easement will show up on your title forever, even if it has not been used for many years. This can create a major impediment to future uses of your property. You can try to get a release of the easement, but the pipeline company may not exist any longer, and there may be no one to sign a release. You may even need to file a suit and obtain a court order to declare the easement terminated.

In connection with above-ground equipment, this can include valves, gas compressors (that can be very loud and messy) loops or pig entry sites or measurement equipment (that may interfere with irrigation equipment).

Regarding payments, currently easement payments are taxed as capital gains but damages payments are not taxable. If you get one check and the payment for the easement is combined with the payment for damages, the IRS may well assume that the entire payment is taxable.

If you are the kind of person who takes out their own appendix, then by all means, negotiated your own pipeline easement. However, the small amount you pay an attorney to review and negotiate that easement now is very likely going to save you a lot of expense and distress in the future!

As a real estate attorney representing clients all over the world in connection with their real estate interests in Texas, I am naturally following the current economic challenges and their impact on Texas real estate very closely. Dr. Mark Dotzour, with the Texas A & M Real Estate Center, was speaking at the national convention for Commercial Real Estate Women ("CREW") recently in Houston, Texas. According to the Real Estate Center’s chief economist, investors will return when:

1. they can believe bond ratings agencies again;
2. they can believe corporate accounting again;
3. they think the recession is nearing an end;
4. they think house prices are stabilizing nationally;
5. they regain confidence in the value of a contract and that the federal government will not change the terms of mortgages the investors may have invested in;
6. there is clarity regarding what the income tax rates and capital gains taxes will be in 2009 and beyond;
7. they have sorted out the massive government intervention and determined the unintended consequences; and
8. the return on short-term cash gets so low that corporate dividends and corporate bond interest become attractive again.

Dr. Dotzur's full presentation can be found here. His comments are well worth your time.

As an oil and gas attorney representing clients throughout Texas, I have had many occasions to draft an assignment of one party's interest in a well or a joint operating agreement to another, such as when a well is sold and the first operator's rights under the operating agreement are assigned to the new operator, or when the original owner of a non-operating working interest sells their interest to a new entity. Most assignments contain language that provides that the assignor is no longer liable for claims and expenses in connection with the wells after the date of the assignment, and also provide that the assignee indemnify the assignor for these expenses.

There is an old saying in the oil patch that once you have been involved with an oil or gas well, you are always potentially liable. A Texas Supreme Court case in 2006, as well as a federal court case in 2008, illustrate this point. In the first case, Seagull Energy E & P, Inc. v. Eland Energy, Inc., the Texas Supreme Court held that Eland, as an intermediate assignee of an oil and gas lease, remained liable for costs and expenses arising pursuant to a joint operating agreement, even though the costs occurred after Eland had sold and assigned all of its interest in the leases to an unrelated third party. The Court based its decision on two facts: 1) the joint operating agreement was silent on the question of the liability of a working interest owner after it sold its interest; and 2) the assignment did not contain a release of liability that was agreed to by both Seagull, as operator, as well as the new owner.

Not surprisingly, after this opinion was issued, oil and gas practitioners made certain that their forms met the criteria described in the Seagull case. Unfortunately, even terminology that met the Seagull criteria failed to protect a working interest owner in GOM Shelf, LLC v. Sun Operating Limited Partnership 2008 WL 901482 (S.D. Tex. 2008). In GOM, despite language in the joint operating agreement like that required by the Seagull decision, the Court held that: 1) the obligation to plug and abandon the wells accrued prior to the date of the assignment; and 2) the plugging and abandonment liability was not expressly released by the release language in the joint operating agreement. As a result, the former interest owner was held liable for plugging costs.

I guess there are really two lessons here. The first is to be careful who you sell your interest to. If the new interest owner is a thinly capitalized sham company trying to make a quick buck, who folds without meeting their obligations under the operating agreement and the Texas Railroad Commission rules, you may get the bill when the Railroad Commission is looking for someone to pay for well plugging and clean up. Secondly, it is probably good insurance to have an oil and gas attorney draft the necessary documents when you are selling or acquiring an interest in oil and gas properties. While in oil and gas law, as in life, there are no guarantees, you will at least have the full benefit of all protections offered by the law at that time. I can guarantee one thing: the cost of proper documentation is light years less than the cost of remediation of an abandoned well site.

As an oil and gas attorney representing clients from all over Texas and from all over the world who have land in Texas, I have been getting quite a number of calls from people who signed a document before consulting an attorney and have lived to regret it, I'm sorry to say. It is apparent that there are a number of scams going on out there. One woman I talked to said that she was presented with a document that she was verbally told was merely permission to do seismic testing on her land. The document turned out to be an oil and gas lease. The terms were not very favorable to her and were substantially less than what the oil company was offering other lessors. Another woman called me recently to say that her elderly mother had signed a document that had been verbally represented to be an oil and gas lease. The document turned out to be a mineral deed, which means the woman had sold her minerals in their entirety forever!

Please folks, do not sign anything until you have a lawyer look at it. There are many honest oil companies and land men and women out there. However, even the honest oil companies are not going to offer you their best lease deal at first. In addition, oil and gas is an area that has its own language and concepts, and unless you have an oil and gas background, you are not going to be familiar with these. Finally, be aware that an oil and gas lease, in most cases, continues for as long as there is paying production, so that lease may be in place for your lifetime or longer.

Where a lease or deed has been obtained fraudulently, you may be able to sue to get the lease or deed canceled, but that is usually going to be a long, expensive and uncertain process. Please do yourself a favor: 1) do not sell your minerals, only lease them; 2) have an oil and gas attorney look at any document before you sign it, whether it is a seismic testing agreement, a pipeline easement or an oil and gas lease; and 3) please tell your elderly relatives to call you immediately if they are approached to sign anything, and not to meet with anyone about signing documents unless you are present.

As a Texas oil and gas attorney representing clients from all over the country with oil and gas leases in Texas, I am continually amazed at how many people sign an oil and gas lease without reading it!

My flight instructor used to have a rule he would use when I was doing something bad while I had the plane and he wanted me to stop it immediately because I was getting ready to kill both of us. He called it "Rule 13" and it meant "Whatever you are doing, stop it!" To all of you folks out there who sign a lease without reading it, or who read a lease and don't understand it or who don't understand the legal ramifications of what you are signing, I would say: "Rule 13...Don't do that!". In most cases, I can negotiate with the oil company to make changes that will make the lease much more fair and much more favorable to you. In almost every lease I have negotiated, the oil company has accepted most, if not all, of these changes. For most leases, I charge a very modest set fee. Many of my clients find that the increase in their bonus or royalty check more than pays for my legal service. An oil and gas lease is a serious legal contract that is going to control your land, in many cases, for many years to come. So please seek legal advice before you sign that lease!

Texas lawyers and real estate brokers have by now, along with other Texas business owners, filed their first return under the revised Texas Franchise Tax. It is described by the Texas Comptroller as a "privilege tax", paid for the privilege of doing business in Texas, but it is an income tax, nonetheless.

One of the frustrating and, in my opinion, inequitable, aspects of the new tax is that companies that produce tangible goods are able to deduct the cost of making those goods, under the "cost of goods sold" deduction. Those of us who are in the business of providing a service, whether lawyer, broker, physician, hair stylist, health care worker, massage therapist, etc., do not get this or any comparable deduction.

Nationally, service businesses account for 55% of all economic activity, according to the 2006 Service Annual Survey by the U.S. Census Bureau. Does it make economic sense to discriminate against this segment of our state's economic base? I think not!