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Before you can begin drilling for hydrocarbons, there are a couple of issues that need to be resolved. For example, where will the drill rig be placed? On whose land? Do you have permission? Do you own the mineral rights to remove the hydrocarbons once they are discovered? Have you obtained the proper permits from a myriad of governmental agencies? How do you know that oil and gas are present beneath the drill rig? There are a number of considerations before the drill rig begins operations. These activities generally fall into the broad categories of mapping, leasing, and permitting. MAPPING Mapping deals with land surface (and subsurface) determinations and measurements. It is the methodology by which we describe where things are located. In a world where individual property ownership is practiced, such a description has legal application. A legal description for a parcel of land is analogous to what a street number and street name, city, state, and ZIP code is to a mail carrier. The legal description gives surveyors and property owners a mechanism by which to precisely locate tracts of real estate. It also allows property to be transferred, leased, and mortgaged. The concept is simple, but most people do not understand what the system is or how it works. But it is utilized to establish well locations, determine land ownership, assign mineral rights, and accurately plot property lines and boundaries. Drill rigs are very large pieces of equipment and when combined with the support equipment, supplies, work force, and access roads, the total area needed for a drilling operation can easily exceed 40 acres in size. Thus leasing surface rights from private land owners is required just to establish a drill site. An accurate surface map also facilitates determining land ownership above the hydrocarbons and who owns the minerals beneath the surface; they may be different. Drilling and production companies must know this before they can proceed with their plans. Both surface land and subsurface minerals may belong to a government entity such as the State of Louisiana, in which case the property is referred to as State Lands. If the hydrocarbons are beneath a navigable waterway in Louisiana, the property is referred to as State Water Bottoms. In other instances, the mineral rights may be owned by the State of Louisiana but an individual may own the real estate; there are a number of possible combinations. In any case, permission to conduct operations must be obtained from both parties. This job is usually that of a Landman, a person whose job it is to seek out the owners of both estates and negotiate leases and contract with them on behalf of the production company for the right to drill and withdraw the hydrocarbons from the underground traps. LEASES Surface ownership issues generally revolves around a short term lease arrangement that allows the production company access to private property for the purpose of drilling the well. Payments are made to the property owner for user privileges, loss of crops by the property owner, use of water, rights of way for roads and pipelines, and for damages to the land and surrounding property. Production companies may also be required to install, at their cost, cattle guards, fences, and other specified items. This is spelled out in an agreement that is signed by both the property owner and the production company. Mineral ownership refers to the owner of the minerals at depth, in this case hydrocarbons. Mineral ownership has become very complex over the years. In Louisiana for example, if you sell land, you may retain ownership of the minerals beneath it for a period of 10 years and one day at which time you must transfer such mineral rights to the current owner of that tract of land, but only if that owner has retained the land for the same period of time. But if hydrocarbons have been discovered beneath that land, then another set of laws apply. And each state may have different laws. Or you as the original land owner may have sold a portion of the mineral rights to someone, given some to heirs who may have split up their interest, and retained a portion for them self. It can get very complicated with a large group of people owning a tiny fraction of the original 100%. Transfers of mineral ownership are accomplished by a legal instrument called a mineral deed. State or country ownership of minerals creates its own set of complexities; if Indian Tribes are involved, then tribal law, treaties, and customs become parameters that must be dealt with. Some of the largest petroleum reserves in the Western Hemisphere are in the domain of the Alaskan Native peoples. A mineral lease is a legal document; it conveys to the lessee from the mineral owner who is called the lessor, the right to drill for and produce hydrocarbons. Leases are written to cover a specific period of time called the primary term and is a time frame agreed upon by both parties, but is generally for a period of years such as 2, 3, or 5. Upon signing the lease, the land/mineral owner grants the production company certain subordinate rights. The owner of the mineral rights, by signing the lease, can receive: A bonus payment, agreed upon, for signing the lease; Delay rentals if drilling is delayed or the well is shut-in for any length of time; and Royalties which are expressed as a fraction of total production. Royalties are negotiable, but generally fall between 1/8 and 3/8s. An owner of mineral rights only has no legal right to enter private property or to drill on it.
The landman's role to the process is critical. This person is the field agent that locates mineral owners, verifies their ownership (through a legal description), and negotiates the terms of the lease. Landmen may be women, they may be independent business people representing an unnamed third party, or they may work for the drilling company. Their success often rests with their personal image strategy and on their ability to relate to a variety of people. Often they drive a dusty pickup, wear faded jeans, and can carry on an intelligent and knowledgeable conversation with a farmer in need of some ready cash. Landmen use their ability to get the best deal for themselves and the company they represent. There are no laws limiting the amount of royalties. One-eighth (1/8) was common for years, but now one-forth (1/4) and even three-eighths (3/8) is far more common. A mineral owner may reject to first offer in order to buy time to determine what other mineral owners in the region have received. And finally, there is no such thing as a Standard oil and gas lease, although the term is used on a regular basis. A lease generally begins as a preprinted, fill-in-the-blank form purchased at a printer who also furnishes blank wills, deeds, and mortgages. There are many types of leases, each designed for a different purpose. It is always wise to have an attorney skilled in petroleum leases to review any legal documents before they are signed. PERMITS Each state and country has a regulatory body that oversees petroleum operations requiring a number of permits for such things as drilling on public land, off shore (within the three-mile limit), and along the coastline. In Louisiana, the governmental agency responsible is the Department of Natural Resources. It regulates where wells can be located, and how they must be constructed, and it sells leases. The US government also has regulatory authority over hydrocarbon production, can sell leases, can control the operations of the drilling rig. Municipalities have another set of permitting ordinances if wells are drilled inside city limits. And there are environmental concerns that require the preparation of documents such as Environmental Impact Statements, Environmental Assessments, and in some cases, an Archeological Clearance may be required before drilling can begin.
REFERENCES
HARBAUSG, J. W., J. H. DOVETON, and J. C. DAVIS, 1977, Probability Methods in Oil Exploration: London, Wiley, 269 pp.
BERGER, W. D. AND K. E. ANDERSON, 1992, Modern Petroleum - A Basic Primer of the Industry: Penn Well Publ. Co., 3rd Ed., 517 pp.
EXXON CORPORATION, 1982, A Guide To Petroleum Exploration and Production: The Upstream Magazine, Dec 1982, New York, NY, 29 pp.
____________, 1993, Understanding Petroleum Exploration and Production: National Energy Foundation, 5160 Wiley Post Way, Suite 200, Salt Lake City, UT., 11 pp.
____________, 1983, Basic Oil Information: Organization of Petroleum Exporting Countries, Obere Donaustrasse 93, A-1020, Vienna, Austria, 41 pp.
____________, 1988, Oil: Shell Corporation, Houston, TX., 47 pp.
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QUESTION: Royalties can produce substantial amounts of money for the owner of the mineral rights. If a well produces 1000 barrels of oil per day (BOPD) and the lease calls for a royalty of 1/8 share, then the owner of the mineral rights is entitled to how many barrels (bbl) out of every 1000 bbl produced.