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North Dakota Oil and Gas Leasing Considerations

The purpose of this web site is to introduce fundamental questions or issues often considered by individuals who own land or mineral rights that are being developed by a mineral company.  In this discussion, the focus will be on oil and gas production in rural or agricultural areas.  Several assumptions underpin the discussion:

• The land is being used for crop production, livestock grazing or another agricultural purpose.
• The minerals of interest are oil, (natural) gas and related hydro-carbons.
• The owner of the mineral rights is an individual who will NOT develop the oil and gas resources.
• The owner of the mineral rights is NOT interested in selling the mineral rights, but will lease the mineral rights to a company that will explore for and produce the oil and gas.
• The company that enters into the lease with the mineral right owner may not explore for or produce the oil and gas, but instead contract with another company to perform some or all of these tasks.
• Exploration and production of oil and gas could cause anywhere from a minor to a major interruption of the agricultural use of the land, and impact nearby surface and ground water.
• If ownership of the mineral rights and surface rights is severed (that is, owned by two different persons), there is no assurance that the mineral owner and surface owner have an ongoing personal or business relationship between them.
  • The law is clear -- a surface owner cannot prevent a mineral owner from entering onto the land to explore for and produce the minerals.
• If the owner of the land also owns the mineral rights, there is an opportunity when negotiating the mineral lease for the owner to address issues concerning both mineral development and land use, but if the landowner does not own the mineral rights (that is, only owns the surface rights), there is less opportunity for the landowner to negotiate with the company about how the land will be used during exploration and production.
• There will be situations in which the surface rights and mineral rights are co-owned by several individuals, such as a husband and wife co-owning the surface rights, or three siblings co-owning the mineral rights, and there is no assurance that the co-owners (such as the co-owners of the mineral rights) will conduct business as a group.

Based on these assumptions, this web site addresses several broad topics:

• a brief description of the process of oil and gas exploration and production as it relates to the owner(s) of the mineral rights and surface rights,
• the dominant nature of the mineral estate when it has been severed from the surface rights of the land,
• an overview of the role of the North Dakota Industrial Commission in regulating exploration and production of oil and gas in North Dakota,

• considerations for mineral owners interested in leasing their mineral rights to an oil and gas company,
• considerations for surface owners whose land is being used in exploring for and producing oil and gas,
• additional considerations for individuals who own both the mineral and surface rights, and
• a compilation of terms or concepts relating to oil and gas exploration and production.

This web site is NOT a substitute for advice from an attorney or other professional knowledgeable about oil and gas matters.  Consult an appropriate professional for answers to questions about the ownership, leasing, and development of mineral rights.

The information on this web site reflects the efforts of several individuals, in particular

• Professor Owen L. Anderson, Eugene Kuntz Chair in Oil, Gas & Natural Resources, The University of Oklahoma College of Law.
• Dr. Ronald A.  Anderson, Professor Emeritus of Agricultural Economics, NDSU; see Anderson, R.  North Dakota Oil and Gas Leasing Considerations, Extension Bulletin 29, 12 AECO-2, November 1981, revised October 2006, North Dakota State University Fargo, North Dakota 58105.

Additional information about oil and gas exploration and production is available from numerous sites, such as

• North Dakota Industrial Commission, Oil and Gas Division
• North Dakota Petroleum Council
• Merrill, R.L. Ownership of Mineral Rights under Texas Law -- although Texas law and North Dakota law will differ, this article introduces fundamental concepts about oil and gas production.

INTRODUCTION

Exploration and production of North Dakota's oil resources is occurring at an accelerated rate. Increased prices for crude oil and the development of new technologies make it possible and profitable to drill for petroleum at greater depths. Improved methods have enabled oil companies to produce more petroleum from existing wells. Enhanced exploration techniques have helped locate large areas of central and eastern North Dakota having geology favorable for the discovery of new oil and gas deposits.

What does this mean for North Dakota landowners? Many individuals who have never thought much about their mineral rights will soon have to make decisions having considerable economic consequences.  The ”rules of the game" are ever changing, and mineral owners who will negotiate an oil and gas lease in the future should be especially alert to maximize their lease benefits.

Entering into a mineral lease is a business transaction; documented by means of a contract negotiated between a mineral owner and an oil and gas company.  However, the exploration and production of oil and gas also are regulated by state law.  This web site discusses concepts persons want to understand as they negotiate a mineral lease, but it also introduces the role of state regulation.  For example, there will be a few topics where state law specifies the relationship between the mineral owner, surface owner, and the oil company, despite what the parties may have willing to agree to.  More frequently, there will be situations where state law will be applied because the mineral owner and oil company overlooked a particular topic when negotiating a mineral lease.  Understanding the interaction between state law and the opportunity for mineral owners and oil companies to negotiate an agreement is one objective of this web site.

Energy development is primarily a matter of state law; federal law has a lesser role in directing the exploration and production of minerals owned by individuals.  Accordingly, much of the discussion in this web site focuses on North Dakota law.  Persons involved with mineral ownership and development in another state should consult a person knowledgeable about mineral laws in that state.  There will be similarities as well as differences among the laws of the states.  Do not assume that each issue is addressed the same way in every state.

As will be stated many times on this web site:

Seek appropriate professional counsel before

taking action involving mineral rights.

PARTIES OR ENTITIES INVOLVED IN OIL AND GAS DEVELOPMENT

This web site focuses on four different roles or perspectives relating to oil and gas production in North Dakota.  These perspectives are introduced in this section.

• The mineral owner – the person who owns the mineral rights associated with a tract of land.  This may be more than one person, such as a husband and wife co-owning the mineral rights, a group of family members (e.g., siblings, cousins, and others), or even unrelated persons.  How ownership of minerals rights can become fragmented is discussed on another page. The mineral owner may or may not own the surface rights to a tract of land.  As discussed in other sections, the mineral owner has the legal right to enter onto the surface of the land to explore for and develop minerals, even if the surface is owned by another person.

• The surface owner – the person who owns the right to use the surface of the land; often considered the landowner.  This may be more than one person, such as a husband and wife, or siblings co-owning the land.  The surface owner may or may not own the mineral rights.  Some of the surface rights also may be temporarily held by a tenant who has leased the land from the surface owner to use the land according to their lease agreement, such as leasing the land to graze livestock or grow crops.  The surface owner, as discussed on another page, is required by law to allow the mineral owner onto the land so the mineral owner can explore for and develop the minerals, even if these activities disrupt the surface owner’s use of the land.

• The company that has leased the mineral rights from the mineral owner. This lease entitles the company to explore for and develop minerals located in the land.  The company’s legal right to enter onto the land stems from the mineral owner’s right to enter onto the land; this right is transferred from the mineral owner to the company as part of the mineral lease.  The company that leased the mineral rights from the mineral owner may subsequently involve additional companies in exploring for minerals, or drilling and operating a well.  The rights of these additional companies stem from the first company’s rights (which previously had been acquired from the mineral owner).  These rights transferred from the first company to the additional companies as a result of whatever contracts were entered into among the companies (which are beyond the scope of this discussion).

• The government – in the case of oil and gas in North Dakota, the Oil and Gas Division of the Industrial Commission is the lead agency in regulating the exploration and development of oil and gas.  The authority of the Industrial Commission is defined by the state legislature which enacted statutes (as codified in the North Dakota Century Code or N.D.C.C.) that direct how oil and gas should be produced in the state.  The Industrial Commission more fully explains the details of its regulatory role by creating regulations (as codified in the North Dakota Administrative Code or N.D.A.C.).

Even though oil and gas production can be described as having these four primary perspectives, each perspective may involve more than one person or entity.  The various perspectives brought to the interactions among the different parties can be a source of legal issues or disputes.

PURPOSE OF WEB SITE

Providing information to help the citizens of North Dakota better understand the oil and gas exploration and production process and related leasing considerations fits within the objectives of the NDSU Extension Service. Oil and gas companies also will benefit from this educational effort.  An informed public is less apprehensive and easier to deal with, which should reduce the number of disagreements caused by misunderstanding the leasing process and the need for various leasing provisions to protect both the mineral owner and oil company.

Specifically, the purpose of this web site is to:

1. Serve as a general guide to the oil and gas exploration and production process for individuals not yet acquainted with the process.
2. Acquaint non-experts with the more common provisions of an oil and gas lease, relate these provisions to the various steps in the exploration and production process, and introduce their legal significance.
3. Detail specific provisions a mineral owner may wish to include in a mineral lease for additional personal benefit or protection.

Mineral leasing is a matter of negotiation, and mineral owners should be aware of a number of basic factors before beginning these negotiations.  Less-experienced or uninformed mineral owners may be at a disadvantage in arranging for the future use of their mineral resources. Topics discussed in this web site were chosen either because they may be of special concern to mineral owners or because they are basic to the structure of an oil and gas lease.

NEED FOR LEGAL ADVICE

Negotiating a mineral lease will likely begin with an oil company offering the mineral owner a standard or form lease for the mineral owner to consider.  Even though the mineral owners may feel they need to accept the terms offered by the company, a mineral lease can be negotiated.  Mineral owners should familiarize themselves with relevant questions and potential issues, carefully review any offered lease (perhaps with the assistance of a knowledgeable attorney), and offer appropriate alternative lease language.  A company interested in the minerals will not necessarily reject the mineral owners' proposal.

Before a lease is signed, an attorney knowledgeable in the oil and gas leasing area should review the lease offered by the company to determine if it meets the specific needs of the mineral owner. Seeking legal advice when a problem arises after the lease is signed may be too late. At that point, the lease is a legal contract and resolution of the problem may be difficult.

Likewise, always get knowledgeable legal advice in drafting a mineral deed, royalty assignment, or deed to land containing a mineral or royalty assignment. Drafting these documents is highly technical and legal matter. Knowledgeable legal assistance can avoid possible problems and resulting disagreements and lawsuits.

Next Pages

This web site contains several pages, however, an individual unfamiliar with oil and gas exploration and production process may want to read that brief introduction next. 

Last Updated August 29, 2010

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