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California Oil and Gas Law Blog

What is the purpose of an operating agreement?

When you are dealing with oil and gas transactions in California, a great deal of time and communication will go into creating agreements and implementing protocols designed to protect both parties from being taken advantage of. One of the measures you may use to protect your assets is an operating agreement. The purpose of this negotiation is imperative to your ability to confidently and legally continue doing business with another party. 

Can you imagine how frustrating it would be to do business with another entity without a contract of some kind? Contracts allow you to clarify important terms, designate responsibilities and verify the conditions under which the contract is valid and usable.

Understanding why the drop in gas prices is bittersweet

For many people in California, a decline in the amount they have to pay for gas prices is a welcomed site. People often still discuss how foreign it seems to pay less than $1 for a gallon of gas, but everyone agrees that those days have long since passed. However, what many people may not realize is that a drop in the price of gas has both positive and negative effects. 

Throughout the history of America, there have been times when lower gas prices were primarily favorable, but with the drastic changes to the nation's economy throughout time, lower gas prices can have far-reaching effects in more than one way. As the largest producer and consumer of oil in the world, the natural resources industry in the United States can have startling effects on several other notable industries when it fluctuates. 

A look at what your assets may be in the oil and gas industry

When you are first starting in the oil and gas industry, chances are you will encounter many learning curves as you gain experience in buying and selling your assets. At Ehrlich Pledger Law, LLP, we have helped many people in California to protect their assets and work through complications with contracts that may have been misinterpreted. 

As with any type of business, your involvement in the oil and gas industry allows you access to many assets. Often, it requires hard work, strategic movement and time for you to gain assets and transform them into fully functioning components of your business. The way you choose to go about investing in the industry and the way you utilize your strengths will affect the type of assets you ultimately choose to purchase. 

Authority scope of the DOGGR

While states like North Dakota may have received a lot of attention in recent years when it comes to domestic oil production, the fact remains that the state of California continues to be a major player in this market. If you are involved in this industry, you will know just how regulated this business can be and how important it is that your company follow appropriate laws and guidelines. For this reason, it is important to have a good understanding of what the Division of Oil, Gas and Geothermal Resources is and what its scope is relative to your activities.

As explained by the California Department of Conservation, the DOGGR was first established more than 100 years ago to promote safe operation and extraction of natural resources from California's land and ocean bounty. The agency has responsibility for all onshore wells statewide as well as all wells in the Pacific Ocean located within three miles of the California coastline.

What factors should you look for in a gas lease?

If you plan to lease your land for the purpose of oil extraction in California, there are several heavy considerations you must make before signing on the dotted line. Your contract with the oil and gas company should address those considerations. Though every case is unique, and though you should always consult with an attorney before signing over the rights to your property, PennState details several components that all oil and gas lease contracts should include.

According to the paper, you and your attorney should first determine the actual length of the lease. This may not be as cut-and-dry as you might think. Depending on the language of the contract, the length of the lease may be the primary term of the lease, which is typically five years, or it may extend into a secondary term so long as production is still active. If a secondary term is necessary, it is usually as long as the primary term.

How is the value of mineral rights determined?

Ideally, the agreement between a mineral rights owner in California and an oil and gas company to drill a well should be a mutually beneficial arrangement. The oil company has the equipment and expertise necessary to reap the bounty of your estate, and you get a percentage of the profits. According to MineralWise, however, the value of your mineral rights can vary widely on the basis of several different factors, some of which you have little to no control over.

The commodity prices of gas and oil are not only among the most obvious factors contributing to the value of mineral rights, but they may also be the most variable as prices fluctuate on a nearly daily basis. You can continually monitor changes in oil and gas commodity prices on the New York Mercantile Exchange.

The consequences of an oil and gas dispute

We have focused on many aspects of oil and gas disputes on this blog, such as some of the reasons why business owners find themselves in the middle of a disagreement. As the owner of an oil and gas company, you should also think of the potential consequences associated with a dispute. Aside from financial headaches, you may face serious and potentially long-term complications depending on how the dispute plays out in court. Across the state of California, it is pivotal for oil and gas company owners to be prepared for these setbacks.

Regardless of the factors that have led to a dispute, the way in which your company handles this difficult situation could have an impact on the future of your firm. Sometimes, disputes can be resolved relatively effortlessly and simply communicating with those involved in the dispute can help reduce tensions and settle the disagreement. This is certainly not possible in every dispute and some can be extremely contentious, with very strong emotions and even negative media coverage.

What are surface owner rights?

If you own a piece of land in Texas and someone wants to drill for oil on your land, you may get excited about the potential income that may bring. However, before you get too excited, you need to know the rights you have to the property. In some cases, you may only have surface owner rights, which means that oil drilling may not be quite so lucrative.

According to MineralWise, surface rights give you the ownership rights to only the land and not what is below the land, which is the mineral rights. In this state, because there is a lot of oil underground, it is very common for surface and mineral rights to be separate. If you only have surface rights, you may get some money for the use of your land and any damage done to your land to drill. However, you will not see income from any oil found unless you own the mineral rights.

What you should know before about a gas lease

If you have the potential to collaborate with other entities and participate in a gas lease, the opportunity may sound incredibly promising when you hear about the potential benefits. However, doing your research before agreeing to any type of contract is imperative to protecting your assets. At Ehrlich, Pledger Law, LLP, we have helped many land owners in California to understand more about their rights in preparation for signing a contract. 

Going into a potential contract deal in regards to a gas lease, you can never ask too many questions. Your vigilance and interest in finding out exactly what you are getting involved in may potentially be the difference in a successful agreement versus one that completely takes advantage of your assets. According to dojmt.gov, to begin, you should take your time to get to know the entity who is requesting a contract deal. Ask around about them and pay attention to what people are saying. 

Can effective contract negotiation prevent disputes?

You have been approached with the possibility of joining forces with another industry leader in California to arrange an oil and gas transaction that has the potential to become extremely successful. One of the first things you will be required to do is to form a contractual agreement that will detail which party will be responsible for which requirements and their subsequent outcome. Preventing contract disputes is something you must proactively be aware of in order to maintain a functional agreement. 

One of the best ways to prevent contention and misunderstanding from infiltrating your ability to operate with confidence and success is to take your time negotiating your contract from the very start of communications. According to Entrepreneur, you should maintain the mindset that articulating a contract is going to take a bit of time to accomplish. Break it down into sections and focus time on each aspect of the contract. A term sheet can give you direction as to which specific clauses you want and need to include in your content. 

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