An advantage of thorough and applicable Petroleum Landman Training comes from highly experienced oil and gas attorneys, senior right-of-way personnel, and senior landmen (See: The Advisory Board of the Institute of Energy Management) who, in their career, have dealt with certain “landmines” (like this subject) and how they resolved them.
Open Mines Doctrine
For example, have you ever heard of the ‘Open Mines Doctrine’ and if so, do you know how can it impact you, as a Landman, when you are leasing and/or performing leasehold research? Also, how it applies to more than one Life Tenant, or, rather, does it? How it affects leases that have Pugh Clauses, Continuous Drilling Clauses, and/or Depth Clauses?
Open Mines Doctrine – Definition
Under the Open Mines Doctrine, depletion of natural resources constitutes ‘Waste’ unless consumption of such resources constitutes normal use of the land, as in the case of a Life Estate. Oil and gas wells which exist prior to the creation of the Life Estate constitute an ‘Open Mine’. In addition, an Oil and Gas Lease that exists prior to the Life Estate being created is also considered an ‘Open Mine’ even though wells may not have been drilled prior to the creation of the Life Estate.
The Life Tenant, alone, cannot open the land to search for minerals and other natural resources. But, if the quarries or mines were open before the Tenant took the Life Estate, then it is not considered Waste for the Life Tenant to continue their use.
What Steps Would you Take to Determine Whether or not an Open Mine Exists?
Although the Life Tenant has the right, during his or her life, to possession and use of the property, he or she does not have the right to ‘Commit Waste’ – that is, to do anything which will diminish the value of the land when the owner of the Remainder becomes entitled to possession at the end of the Life Estate. In other words, production of oil or gas by a Life Tenant is considered ‘Waste’ and is prohibited unless the ‘Open Mines Doctrine’ is applicable.
If a mine has been “opened” prior to creation of the Life Tenancy, the Life Tenant has the right to continue to use the land in the manner that it was used at the time the Life Tenancy was created. Therefore, if the minerals are being produced at the time of creation of the Life Estate, the Life Tenant may continue to produce and develop the minerals and retain the proceeds of such production until the Life Tenant becomes deceased or the Life Estate is terminated.
In application to oil and gas production, instead of being concerned with ‘Waste’, the issue is who gets paid Royalty from production or Delayed Rentals on a property on which a Life Estate exists.
The Open Mines Doctrine Relating to Oil and Gas Production may be Summarized as
If there was a producing well or wells in existence when the Life Estate was created, the Life Tenant will continue to receive all the Royalty from the wells, and the Remaindermen will take nothing until termination of the Life Estate.
If there was no producing well on the property, and it was not subject to an Oil and Gas Lease when the Life Estate was created, the Life Tenant is not entitled to receive any royalty from wells drilled on a new oil and gas lease that was taken after the Life Estate was created but is allowed to use the Royalty for life. This usually means the Life Tenant’s Royalty share is held in Trust and the Tenant receives the interest earned from the Royalty (banking interest). On the death of the Life Tenant, the Remaindermen are entitled to all the accrued Royalty income.
If an Oil and Gas Lease was taken prior to the creation of a Life Estate, and production was developed after the creation of the Life Estate, the Open Mines Doctrine is applied. The Life Tenant gets all the Royalty for life.
This summary is the law in Texas. Other oil and gas producing states may have variations of the Open Mines Doctrine. When acquiring an Oil and Gas Lease on an interest which is owned by both a Life Tenant and Remaindermen, both the Life Tenant and Remaindermen should execute the Lease and the laws of the state in which the property is located will determine who is entitled to production proceeds from a well drilled on those lands.
I’ve had a few Petroleum Landmen ask me about the proper way to handle payments of Oil and Gas Lease Bonuses and Royalties in Oil and Gas Leases involving a Life Tenant. Judging by the guesses people have given, it may not be entirely common sense. The entire analysis changes even further if the Open Mines Doctrine applies.
Once a Lease is granted by both the Life Tenant and the Remaindermen, courts generally allocate funds between them as follows:
Perhaps counter-intuitively, this may also include additional wells drilled under that Lease. One important limitation is that the Open Mines Doctrine generally does not apply to future Leases or ‘Top Leases’.
In Affect: Consider an example of a 640-acre tract of land with the minerals which has an existing oil and gas lease and a well on it prior to the Life Estate being created.
This well is drilled on a ‘stand-up’ 80-acre spacing which will play a key role in understanding the ‘Open Mines Doctrine’ and how it applies to future wells drilled on the property. The oil and gas lease had a ‘Pugh Clause’, ‘Depth Clause’, and a ‘Continuous Drilling Clause.’
For Example – What If?
Grandpa was in the oil business and drilled a well on his land where he owned all the minerals as his own sole and separate property. In other words, Grandpa inherited the land before he was married. When he died, he left the oil company, the land, and the minerals to his wife as a Life Tenant with their grandchildren as Remaindermen.
Even though there is now a Life Estate, Grandma, as Life Tenant and via the Open Mines Doctrine now owns all the Royalty from the well and from any new wells drilled under that existing Lease. The minerals and land are ‘Future Interest of the Remaindermen.’
Before her death she conveyed the Royalty from the well only (well bore) to her church. When she passed, the Remaindermen thought that they now owned the well and revenue.
However, the Remaindermen discovered a ’Royalty Deed’ filed of record before Grandma’s death to the church on the one well and a clause in her Probated Will where she mentioned the bequest of the well and revenue to her church upon her death to own until its plugging.
The question is:
Do the Remaindermen have a claim? Yes. Grandma’s interest ceases upon her death.
Do they have to wait to enjoy the development of their minerals due to Grandpa’s well, even though they own the minerals? Yes/No. It depends if the lease has limitation such as a Pugh Clause, Depth Clause, and/or a Continuous Drilling Clause.
Can they enter into an agreement with another oil company to develop the minerals? It depends if the lease has limitation such as a Pugh Clause, Depth Clause, and/or a Continuous Drilling Clause.
What if another well was drilled on Grandpa’s land after the Life Estate was created, would the Royalty from this new well then belong to the Remaindermen or the church? According the Royalty Deed, it would belong to the Remaindermen because Grandma’s Royalty Deed only pertained to the one well.
Questions to Consider
In such case, does Grandpa’s well hold all the minerals under his company’s Lease? What about the drilling of any Increased Density wells or the deepening of the original well of Grandpa’s oil company, who gets what in that regard?
Is it possible that no additional wells can be drilled on this property until Grandpa’s original well is plugged?
Think about it.
What if, all the minerals under that Grandpa’s oil company Lease are in fact HBP by the well mentioned in Grandma’s Royalty Deed. In other words the original lease did not contain a Pugh Clause, Depth Clause, and/or a Continuous Drilling Clause.
The church cannot give a Farmout because they only own interest in the Royalty revenue in the existing well, not the Lease.
What if, the church was approached by an oil company to sell them the rights to complete another formation in Grandpa’s well that required the well to be deepened?
In this case, would the church still own the Royalty or the Remaindermen?
Seems the church would not have the right to negotiate because they only own a Royalty Interest in the well.
Therefore, someone would have to approach the Remaindermen for the workover agreement, but the church would still get the Royalty until the death of the Life Tenant.
A Final Thought
What if a company approaches the church to buy the well and its equipment, who will get the money from the sale - the church or the Remaindermen?
Would that new company be able to continue producing the well and complete new formations up-hole or by deepening the well?
Would the company retain all the revenue until it’s plugged if it were completed in other formations?
Does the Church have the right to other formations?
The Petroleum Landman School, Professional Landman Schools, and the Institute of Energy Management’s courses deal with many other critical issues to help a Petroleum Landman become more aware of things which could become critical issues.
Please visit www.instituteofenergymanagement.com for a complete list of the most comprehensive and applicable Petroleum Landman training courses available.