All Posts by David Melton

About the Author

David Melton Founder, ​ ​Course Author, and Instructor. ​Mr. Melton, professional landman for over 40 years, has acquired vast experience in acquisitions and divestitures as well as executive management skills (VP of Land) for a small E&P company and as a GM of COO for two large land brokerage firms with multiple offices in Oklahoma, Texas, Montana, Colorado, Ohio, West Virginia and Pennsylvania. In addition, Mr. Melton has over 35 years of experience in oil and gas exploration and production including operations, land management and administration in all phases. David formed the Petroleum Landman School in 2005 and has had students from 34 states and two foreign countries. Mr. Melton is a recognized public speaker, course writer and presenter for the AAPL and a published author for the AAPL, IRWA and Oilprice.com. Mr. Melton is the founder of the Professional Landman Schools, parent company of the Institute of Energy Management and the Institute of Energy Development.

Feb 24

Not On My Land! Ingress and Egress vs. Easement

By David Melton | News & Blog

​Not On My Land!
​Ingress & Egress vs. Easement

When attempting to settle surface use and damage issues, have you ever had to decide which of these options would be best for your company in the short and long run?

  1. Relying on the right of ingress and egress as set out in the oil and gas lease 
  2. Acquiring an easement for such purposes?

What’s the difference?  Isn’t the right of ingress and egress an easement?

There are many reasons to obtain a specific easement for an existing road rather than just relying on the right of ingress and egress language in the oil and gas lease.  Why?

I recently had an encounter with a land trust in Colorado where it became clear that the use of existing roads, without an easement agreement, was opening the door for problems. The land trust refused to grant access into the drillsite unless my client built his own road under very strict guidelines.  ​Because it was an exploratory well, ​building a long and expensive road just get to the well drillsite did not make sense.  Could we have forced the issue? In this case, maybe – the land trust did not control the minerals.

After much negotiation, the parties agreed to a temporary easement on the existing road with a 50’ workspace on either side. There was also an understanding that upon completion of the commercial well, ​the temporary easement would be converted into a permanent easement for an agreed amount.

In addition, the decision was made to have an easement granted along the culvert beside the road to lay pipelines.

Understanding the difference between an easement vs. ingress and egress is an essential first step in understanding surface use issues for landmen, right-of-way agents, oil and gas companies, pipeline companies, and any other entity that may need access to land. 

An easement is an agreed-upon use of land between the land owner and a third party. This can include access to natural resources such as water on the land, construction of necessary utilities or pipelines and their maintenance. There are two basic types of easements - in gross and appurtenant.

In Gross Easement​: Typically held by a specific individual or entity, an in gross easement allows use of property without the benefits of ownership. It’s important to identify all easements prior to starting a project.

​Appurtenant Easement​: Often issued for the benefit of adjoining lands, an appurtenant easement automatically transfers when a property is sold. If a property’s deed includes an appurtenant easement, it’s important to be aware of ​that easement's purpose.

Many people have asked what is the difference between a right-of-way and an easement. Simply put, an easement is an agreement which grants a land right and a right-of-way is the physical land area upon which the granted right is located. This includes roadways to a drillsite, electric transmission lines, telephone lines, pipelines, etc.

Question: If your oil company has an easement which allows access to its production facility, do they have the right to assign this passage to a third party, such as a tank truck? Generally, the answer is yes.

Remember though, an easement agreement grants a right for a particular use, e.g. accessing a drill-site and/or a production facility. Unless the easement excludes anyone but the Grantee, the authority to use the easement is extended to anyone who uses it by necessity for the purpose stated in the agreement.

​In most cases, other uses of an existing right-of-way requires either an amended agreement or a completely new ​agreement.

One of the negatives for the landowner in an easement agreement is that there can be surface use restrictions that limit their use of the property.

An oil & gas lease which grants the right of ingress and egress for the purposes stated within the lease may not be enough to satisfy an owner with significant operations on his land. The easement for those purposes may very well restrict the company’s use of the property in many ways. For example, the easement may limit access to the facilities to certain time periods during the year so as not to interfere with the harvesting of crops or hunting rights.

​What if the landowner grants you the right to use an existing farm road to get to and from a drill-site? That’s great, but don’t fail to consider the possibility of needing additional work space on either side of the road, which allows room for vehicles traveling in the opposite direction.

When an easement is granted for some purpose that requires construction of facilities on the land, the agreement must take into account the ongoing operation and maintenance of that facility.

It must also account for additional temporary work space for any construction or maintenance periods. These easements can include demands to regularly clear, trim and remove vegetation and trees, including any trees along the boundary of the right-of-way which have been damaged by weather and could fall onto the right-of-way.

Careful attention to this issue is needed when drafting an easement agreement, especially if your location is remote or way off the main road.

IMPORTANT NOTE: Be sure to put specific common use language in the easement agreement.  This will set forth parameters of surface use rights and responsibilities for both parties.

There may be some occasions when a landowner expects you to buy the property you need access to rather than simply acquiring an easement.

The purpose for the easement generally does not require ownership of the land and companies typically do not want to be in the real estate business, so to speak. However, diminishing the use and/or value of a property may demand that the company compensate the owner through the purchase of the land.

In such as case, you need to be aware of dealing with land trusts.  They can make it difficult, if not impossible, to actually buy the land where the surface owner has a contractual relationship with them.

What if the property is auctioned off at a Tax Sale for failure to pay back taxes and there is no right-of-way/easement agreement in place?

  • ​Can the new owner refuse you access on any existing roads across the property, your drill-site and the production facility?
  • Can the new owner demand that you dig up any buried lines?
  • Is the new landowner subject to compliance with state statutes but has the right to collect new surface damage and use settlements?
  • Does the new owner have the right to demand a new right-of-way/easement agreement and payments?

Since the use of land for oil and gas purposes has an inherit subservient relationship with the development of minerals, the worst case may be that new surface damage and use agreements along with new easement agreements may have to be signed and compensation paid to the new owner.

I think it is vital for you to know what I call the “Life of a Well” and/or “Life of a Right-of-Way/Easement” and what that means to the landowner.  If you can explain this to the landowner it makes for much easier negotiations.

Most landowners work hard to keep their land productive and looking the way they want it.  They generally will not like what oil companies can do to their landscape or conservation value.  Therefore, sadly, many land owners take the stand of “Not On My Land” only to find out the hard and expensive way that they may have been able, at best, only to delay the inevitable - a well being drilled on their land.

But just know that next to the oil and gas lease, the surface use and damage agreement is one of the most important, complex and difficult agreements to create in the oil and gas business and right-of-way industry. 

The relationship between the landowner and the oil company or pipeline company is generally the most adversarial one in the industry.

 It truly is like the “Hatfields and McCoys”.

One issue to remember when creating a right-of-way/easement agreement is the Accommodation Doctrine/Reasonable Necessity Doctrine.

The issue of surface owners attempting to stop drilling activities started in the early 1970’s.  The Accommodation Doctrine simply states that the mineral owner and Lessee must accommodate the surface owner’s “existing use” of the land. But the Doctrine also allows the mineral owner to move forward with drilling operations on “empty land” even if the action impedes the surface owner’s claimed plan for future development (unless such plan has already been filed with the planning commission). 

Again, a good negotiator (landman or right-of-way agent) who is trying to settle land use issues should know to ask questions regarding current and future plans for the use of the surface, despite language in the oil and gas lease, prior to discussing any settlement issues.

Understanding these issues thoroughly will help prevent you from being ‘bullied’ into thinking that the law will not allow you to use the land as you want, when actually the law may not prevent it at all.

Another good question to ask the surface owner is whether their land is part of the Conservation Reserve Program (CRP). The landowner may be expected to reimburse the government for payments he received because your activities on the surface violates his CRP agreement.

The landman should also know that the surface owners would have to meet a rather high burden of proof that a Lessee’s activity would be a major hindrance to existing surface uses (called the ‘reasonably necessary’ doctrine).

Again, in settling surface use and damage issues, ask questions regarding current surface use operations, despite language in the oil and gas lease.

The ultimate conflict to be resolved in most surface use and damage litigation deals with whether or not the mineral owner's and Lessee’s use of the surface is reasonable.

Reasonable could mean necessary to successfully honor the terms, covenants, and conditions of the oil and gas lease and to successfully operate the wells.  These types of issues need to be researched prior to leasing minerals. There’s only so much of the land that may be considered ‘reasonably necessary’ to operations.

In addition, the use of the surface must be done in a non-negligent manner with due regard for the surface estate and conservation values.

Just as the mineral owner has the full right to explore for the oil and gas under the surface, the surface owner has the right of full enjoyment of the land (including scenic enjoyment).

This issue should raise caution and awareness for the lease agent, landman or right-of-way agent handling the negotiations. If handled hastily and poorly, there could be grounds for court proceedings and undue delays of the proposed operations.

In addition, when considering surface use issues, it’s important to realize that some matters are ‘preventive in nature’ and do not have anything to do with actual damage to surface. These include:

  • ​Dust control during drilling operations or road construction.
  • ​Best available technology for use on the production facility, such as natural gas flares.
  • ​The right for the surface owner to have a gas pipeline from the well to hook-up natural gas to his house (free use of the natural gas is known as ‘house-gas’).
  • ​How close to any structure can or should the oil company drill, despite the language in the lease.
  • ​Designation of hours, days and months of operations.
  • ​Controlling the speed of vehicles and the placement of applicable signs.
  • ​Gate access procedures, including how locks are to be placed on gates and the opening and closing of any gates.
  • ​Protection of trees and other plant life.
  • ​Location of power lines.
  • ​Gas Flares - could be that the surface owner wants the ‘night flame glow’ to be minimized as much as possible.
  • ​What safety signs should be placed in and around the drilling location and production facility.
  • ​Spill containment and storage procedures around oil tanks and liquid storage and/or providing copies of the company’s spill plans.
  • ​Location of Temporary and Permanent roads and the type of material used to build them, along with their removal in the event they are temporary.
  • ​Maintenance of roads, rights-of-way for electrical lines and buried pipelines, and production locations.

For example: In California you can have several issues that will directly affect the ‘short’ and ‘long’ term outcome of the oil company’s operations. For example, if a road has to be built through an area where ‘oak’ trees will have to be cut down, the state has rules under which the oil company must address the replacement and care of those oak trees (since that is the ‘state tree’).

Also, there are many fruit tree groves and other farming issues to consider that an oil company’s operations could impact in the ‘day-to-day’ farming business, such as replanting and expansion issues (grape vines and other fruit trees), water usage, choosing locations where all of the oil company’s operations will least impact the farming, fire control (onsite water supply), insurance, electrical power line placement, burying pipelines, having safety signs in multiple languages on all sites (including on tanks and production facility equipment), thorough spill plans and other safety measures and procedures, and the onsite storing of chemicals needed in the oil company’s operations.

Here are some examples of issues regarding buildings and roads that the surface owner may request.  Again, the Lessee has the reasonable use of the land for the production and development of the minerals:

  • ​The Lessee is prohibited from constructing more than one road to each location and is required to restrict all travel to the wells to a single road.  There may be some requirements as to what type of road material that the surface owner requires in order to prevent further damage to the land.
  • ​The Lessee must consult with the surface owner prior to creating or widening any roads, and the Lessee has no right to use any existing roads on the premises without the prior written consent of the surface owner.
  • ​The Lessee is responsible for maintaining all roads used in Lessee’s operations and may be responsible for removing the roads and restoring the land soon after operations are completed and/or abandoned.

Conclusions

Just know, any use of the land, whether with the right of ingress and egress or a right-of-way/easement, you have to respect the land and its conservation value (wildlife and scenic).  In addition, in an attempt to make the use of surface less intrusive, some states have recognized the need to protect the agricultural industry and have provided incentives for fair dealings by enacting the ‘Surface Damage Compensation Act’ for their state.  A savvy attorney determine what each state’s statutes in this regard are.  

Also, the oil company should use extra caution when planning a drill-site and a production facility along with roads so as to not create erosion, loss of livestock, loss of wildlife habitat, aquifer pollution, ground pollution, air pollution, and fire hazards. They must also address right-of-way and facility maintenance, safety issues (including appropriate signage), surface water usage, and water run-off issues.

Feb 07

Here We Go Again – The Oil Embargo Revisited

By David Melton | News & Blog

​Here We Go Again
The Oil Embargo Revisited

It has been said, that the best teacher and predictor of the future is the relevant past. Have you heard about the latest move by some really well intended, but extremely naive, people? 

"Let’s Run Oil Companies Out of Business?"

These same folks have recently said that we should take away all incentives for oil companies and stop drilling on Federal Lands and offshore.  My answer to this is, "How is the view from the Cheap Seats?"

Oh, I get it. These people want to take away the incentives that allow oil companies to risk (and lose) billions, but expect oil companies to continue to provide the fuel, the tires, the roads and very infrastructures​ that go blindly used. They want to run oil companies out of business, but have no concern or understanding of how that will directly effect their livelihood.  After taking away the much needed incentives that make oil companies able to risk billions year after year (money which is largely provided for by equity firms, banks, and their own inhouse ​funds) just so they can be replaced at some point in time in the future.

While this makes for interesting lunchroom talk and speeches, it is virtually impossible to think of what our lives would actually be like without the oil companies risking this money for our benefit. This "utopia" that is being built off the backs of oil companies is just that- a utopia that relies on oil companies. What happens when the rug gets pulled out from under these companies?

Let’s say that actually happens. This could be the end result to that thinking.  You wake up one morning and start reading the newspaper and see this:

​NEWS FLASH: THE OIL EMBARGO IS BACK AND ON STEROIDS

Last night it was announced by the oil and gas industry that in the next year all nationwide tire companies will no longer be in business. There will be no more asphalt roads because​ these companies also went out of business. ​The housing ​market ​will soon follow due to no pre-cut lumber being available. All plumbing ​supply houses and hardware stores ​are gone, too.  In addition, all heavy equipment ​shops are also shutting down and, ​by this time next year, will no longer be available.  

Your cell phone will no longer work. No new ​models will be made for many years to come.  

This time next year if you need to take your child to the hospital, you should ​begin considering alternate plans. ​Transporting them to the hospital will be one issue, though even if you make it the equipment needed to save your child’s life will no longer work​. We don't expect to see new ​equipment or repair parts to become available for many years into the future​.

Unfortunately, the oil companies were ran out of business when we needed them most. See you in the funny pages?

The next day another article comes out ​letting everyone know that all TV, Radio and Internet services are being suspended due to no ability to broadcast or even transport ​broadcast employees to their stations. However, the good news is that we now have clean air where we live. The bad news is that no groceries will be available for quite some time due to the trucking and rail systems being shut down. ​If you have only just begun considering ​to grow your own food, it is already too late.

​A fact of life we can’t ignore is, young people today have no idea what it is like to be without transportation or being able to enjoy their way of life. If you were around in the in the early 1970’s you will remember the Oil Embargo. Cars ​lining up around the block, their drivers desperate to get ​fuel from the ​stations that had posted signs ​stating “OUT OF GAS”.  I even saw a picture of a man standing in the line of cars with his lawnmower.  This will happen again and if this way of thinking persists. ​Especially if oil companies ​continue to be restricted, curtailed and prohibited.

An interesting point, the gas shortage during the Oil Embargo was only in US. It was caused by​ foreign oil dependency. ​Other countries around the world went right on with the daily lives, completely unaffected. For those who are not familiar, look up the birth of the ​Petro Dollar and the ​Oil Embargo.  

This ​should be an eye opener. If we are not careful ​​history will not only be repeated, but it will be repeated on a much larger scale.

​It my humble opinion, people can be very dangerous when statements are made without really thoroughly thinking ​of the real-world consequences.  For example, try doing an autopsy on the ​food supply chain. What could happen to that industry which, by the way, was greatly affected during the Oil Embargo, too. ​Think about what it takes to get equipment built; to the farm, cultivate, and irrigate (where does the water come from) the land and grow the crops. Follow that all the way to the point of processing and transporting food to ​the grocery stores. How will the food get to your home, and how will you​r refrigerate, cook, and feed your family?  It is a very scary, very real, proposition.

I recently read an article that stated in part: “More relevant for the oil and gas sector is the call to end subsidies for fossil fuels, which total as much as $14.7 billion annually, including deductions for intangible drilling costs; last-in, first-out accounting; master-limited partnership tax exemptions; and low-cost royalty and leasing rates on federal lands, among others. Many want to revoke the permits or otherwise block major long-distance pipelines, including Keystone XL, Dakota Access, Line 3, Line 5, and essentially any other project of this nature. This will severely damage Canada’s oil sands, which will begin to lose access to the U.S. market. Oil sands producers would only have the Pacific Ocean as their way out.”

My immediate response to this was, "REALLY, ARE YOU KIDDING ME?"  

These people have no idea what the dry hole rate and cost is today.  Oil supplies are a diminishing asset always needing to be always replaced. We all have to join in ​the effort to make sure we do not fall behind and become dependent on foreign oil again.  The costs and risk to make sure we can live a normal and safe life is based on a very costly low success rate that has been somewhat subsidized for over 100 years by way of the industry being able to deduct their Intangible Drilling Costs (IDC).  In addition, this IDC is one of the main factors why Private Investors invest with oil companies.  Take that away and what would that do to our economy? ​These well intended people seem to not have a clue as to what it costs in man power and money to get what oil we can out of the ground and to the market, much less supporting new exploration efforts to replace what we have taken out of the ground. Millions of jobs and tax revenue will be lost if oil companies are forced into this box and we all will suffer!  ​But why are ​automobile manufacturers ​continually ​receiving incentives and subsidies? ​Their cars use fossil fuels-  Isn’t that like cutting your nose off to spite your face?

A recent article by the U.S. Energy Information Administration (EIA) stated, “IDCs were put in place to reflect the deduction of expenses specifically for oil and natural gas production – and that’s just what they do. Removing this 100-year-old tax provision from the code would not only strip away roughly 25 percent of the capital available for independent producers to continue looking for new oil and natural gas, but also diminish the many economic benefits created by those activities. Independent producers support over 4 million direct, indirect, and induced jobs – in the lower 48 states alone – while providing billions in revenue and taxes. In 2010, onshore upstream taxes amounted to $67.7 billion.”  

So, removing the 14.7 billion in tax deductions is worth it to lose 67.7 billion in tax revenue?

It has been reported in an article published by Maurice R. Greenberg, Center for Geo-economics Studies, in August of 2016, “Policymakers considering this issue of removing all incentives need a thorough understanding of the potential consequences of tax reform in the new energy context. Unfortunately, existing studies either fail to seriously analyze the economic effects of removing tax preferences or are not transparent or publicly available.”

​It is reported that these policymakers assume that since the US has become the largest oil producer and that the industry does not need these incentives. ​It is naive to believe that oil prices will stay up to support that thinking.  

​Another overlooked side-effect? This focus on oil ​is going to leave a natural gas issue in its wake. ​We all need natural gas and it is not something we can just import. The cost and availability of natural gas will be dramatically affected if these incentives are removed. Enormously high gas bills will prevent millions from heating their homes in the winter.

​​In the very near past we had been dependent on foreign oil, and that put us in an ​alarmingly vulnerable position. Rather than shutting down our largest producing capabilities, like off shore ​and ​shale fracking, let’s ​focus on ​how new technology can make it safer by promoting cooperation with the oil and gas industry.

We should learn from our past mistakes and ​avoid another path of potential financial ruin. A path that will lead to an end of our way of life as we know it today. ​History has shown us that no one will be able to escape the massive fallout from this way of thinking, not even the people making these statements.

There are better ways to accomplish ​the goals of a better future. It is only through cooperation and mindfulness- not through forcing ​companies to do what you think they should do. 

-My two cents a barrel

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