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California Oil and Gas Law Blog

How much should mineral royalties be?

The California gas and oil businesses are complex. If you own land or mineral rights, you probably work with those who hold interests or leases in the minerals, mining rights or royalties. Normally, contracts with these individuals and companies could provide consistent value to you as an owner. However, things do not always go as smoothly as intended.

Generally speaking, you can prevent many mineral disputes by establishing sound and fair contracts at the outset of a business partnership. Here is some information about establishing lasting royalty agreements, including some typical industry conventions on pricing.

Financial concerns regarding oil and gas disputes

Oil and gas disputes take place for a myriad of reasons, and our law office has provided many examples of why these disputes arise throughout our website. When an oil and gas dispute comes up, it can result in many different consequences, regardless of the reason(s) behind the dispute. Not only can a business' reputation be on the line, but stressful legal challenges may lie ahead. Moreover, the financial impact of such a dispute can be enormous, and we will examine some financial concerns associated with these disputes in this blog post.

For starters, an oil and gas dispute may result in significant legal fees and even penalties, if the outcome is unfavorable. Moreover, an oil and gas company may be hit hard when they are no longer able to move forward with a project that they were counting on. The aftermath of a bitter dispute may also generate long-term financial concerns, some of which may even threaten the future of an oil and gas company altogether. In some instances, the financial fallout of an oil and gas dispute has prompted business owners to shut down permanently.

Resolving an oil and gas lease dispute

In some parts of the country, blue collar workers have been hit hard by financial challenges and job losses. Some people in this position have benefited from oil and gas leases, which have helped combat these economic challenges. However, some of those who lease oil and gas rights change their minds or disagree with the way in which a project is being executed. This may be due to confusion about the terms of a lease or a property owner's refusal to abide by the terms of a lease. In some cases, this can lead to a heated dispute, which may be very hard for an oil and gas company to deal with.

If you are in the middle of a dispute over an oil and gas lease, it is crucial to do everything in your power to find a successful resolution. You may be able to resolve the disagreement outside of the courtroom, but there are times when legal action cannot be avoided. In these instances, it is imperative to carefully pore over the details of the agreement and have a firm understanding of your rights and the lease. Depending on the outcome of the dispute, this roadblock could have a major impact on future operations and the overall health of your business.

New plan proposes 37 new oil and gas wells

California residents know that the state in which they live is rich with many natural resources. Among these resources are oil and gas. While necessary for most people's everyday lives to run as they do, the collection and use of oil and natural gas can be a source of contention among politicians, business people and citizens. In California, this has led to a halting of leasing federal land to oil and gas companies for several years with the last lease sale on record taking place in 2013. This, however, may be set to change in the near future.

The current presidential administration has recently made two announcements providing information on its intention to open up more than 1.7 million acres of private and public land throughout the state for oil and gas exploration. As reported by The Los Angeles Times, the latest announcement concerns more than 725,000 acres in the central portion of the state staring in the San Joaquin Valley and running west to the coast. The region spans 11 counties with the bulk of the land falling in San Benito, Monterey and Fresno Counties.

Identifying implied surface rights

The term "mineral right" implies that one's claim to ownership extends only to the minerals found from beneath the ground of a property in California. This distinction is made due to the fact that a separate ownership category exists defining surface rights. In many agreements, the owner of a property retains the surface rights and simply sells or leases the rights to the minerals found therein to different extraction companies. Yet there are scenarios where the two terms can be blurred, thus allowing mineral rights owners to have certain surface rights, as well. 

The most obvious of these would be express rights detailed in either a sale or lease contract. Surface rights conceded by property owners typically include structure permits and extraction methodologies, as they may care less about the method through which the mineral rights owners conducts its work as they do in being compensated for the use of the land. Yet California law does indeed open the door to interpretation when it comes to additional surface rights. In defining "mineral rights," Section 883.110 of the California Civil Code states that such rights include any "express or implied appurtenant surface rights." 

States may receive more federal royalty money

California is a land ripe with many natural resources which result in some of its land being leased out for the sole purpose of harvesting these resources. Some land may be leased from private individuals or corporations while other land may involve leases with the federal government. When the federal government is involved, it may end up paying the state of California royalties.

The amount of money paid by the federal government to the state for leases involving the extraction of natural gas and oil has been the subject of legal action and political policy over the past couple of years. As reported by Courthouse News Service, effective January 2017, the federal government was supposed to increase the amount of money it paid to states for these royalties per an order dated July 2016.

Someone wants your mineral rights. Can they drill?

If someone has approached you with a lease offer for the minerals or the oil on your California land, it is not unreasonable to think the person who is talking with you represents a company that excavates minerals or other natural resources. Sometimes this is the case. However, there is the chance the party you are conversing with is actually farther removed from an actual drilling operation or has no ability to drill at all.

As Mineralwise explains, the party that approaches you for mineral rights could be one of three types. As previously stated, sometimes you are contacted by a person who actually works for an excavating outfit such as an oil and gas company. For instance, a landman that is directly employed by the oil company itself might talk to you about granting the oil company a lease.

States may lose right to opinion in drilling under Trump

The current presidential administration is making changes to a 1972 law that gave coastal states like California the right to stall or stop offshore drilling in federal waters. Governors of states up and down both coastlines contested a recent proposal to open all coastlines to offshore gas and oil drilling according to the Los Angeles Times.

The Coastal Zone Management Act gives coastline states a voice when it comes to industry development or federal projects that extend up to three miles off the coast of the state. The changes proposed by the administration will not change the current law but may affect how states are able to enforce it. The changes are seen as positive by the oil industry in removing barriers to the development of natural gas and oil resources.

Details matter in mineral rights contracts

Whether you are the owner of land in California or the representative of a company interested in accessing the resources that may lay below the surface of a particular piece of property, it is important for you to understand how agreements between these parties may work. When entering into any contract involving the rights to a mineral, whether rock, oil or something else, great care should be taken to identify the fine details in order to prevent future disputes.

As explained by Geology.com, a mineral rights contract may be structured in a number of ways. One option is to establish a lease that grants access to the land for a limited period of time. The intention here is that a company can use this time to explore and test the viability of any resource presence and production opportunity during this time. At the end of the lease period, they may pursue a purchase or walk away and all rights then return to the land owner.

What not to do during mineral lease negotiation

If you are a California landowner, signing a oil and gas lease can be a profitable proposition. However, the negotiation process can be complex and time-consuming. Typically, the proposal to you favors the producer. At Ehrlich, Pledger Law, LLP, we have the expertise and experience needed in negotiating and preparing the lease documents.

According to MineralWise, one of the most important things not to do is show your enthusiasm to the leasing agent. An emotional response often signals you are ready to sign whatever documents they supply. In doing so, you may not get the best terms and miss out on a great deal of potential upside.

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