Oil Boom – Landowner Beware

As was recently reported in the Jackson Citizen Patriot newspaper, the Jackson, Michigan area is experiencing an oil exploration boom. Many exploration and drilling companies are combing the area, signing leases with landowners, and exploring the subsurface for oil and gas. As reported, one well is even actively producing oil and gas. With all of the talk about striking it rich with “black gold”, I thought it would be prudent to discuss the general background as well as the legal aspects of an oil and gas lease.

As a landowner, your interest in land extends indefinitely downward as well as upward. Oil, gas and mineral rights are severable from the surface rights. As such, an owner may create an interest in a subsurface mineral estate that is separate from the surface estate. This is often done either when a seller wishes to retain the subsurface rights but dispose of the surface rights, or through a lease transaction when the owner wishes to continue to maintain surface rights but wants to obtain a financial benefit by leasing the subsurface rights. With the latter, frequently, an exclusive right, also called a working interest, is created by a lease where the mineral owner retains the right to a royalty, and the owner of the working interest retains the right to the remainder of the value of the mineral production.

Normally, the exploration company pays a flat rate per acre for the working interest, and if production is undertaken, an additional royalty is paid based upon the success of production. The right to explore usually lasts a number of years, and if extractable minerals are found, production can continue for years until all available minerals are extracted.

The above discussion is a brief overview of a typical oil and gas lease situation. There are, however, many legal implications and potential pitfalls for a landowner. The drilling companies take the position that their leases are non-negotiable, based on their belief that the landowners are receiving a windfall because they didn’t anticipate receiving this money. Just as in any other real estate transaction, everything is negotiable to some extent. If you are not happy with certain terms of an oil and gas lease, are intimidated by the process, or simply do not understand the terms or potential consequences of entering in to such a lease, consult with an attorney. The laws governing this topic are complex and court decisions go back many, many years. Don’t underestimate the gravity of the situation and sign a lease for a potentially infinite time period without being informed. You wouldn’t do the same if it was your house or some other physical, surface building. If you have any questions or need assistance, please contact our office.

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Curtis & Curtis, P.C. is a full service law firm located in Jackson, Michigan providing superior legal services and advice to individuals, families and businesses throughout mid-Michigan since 1901.

This publication is provided for general informational purposes only and does not constitute formal legal or other professional advice. No attorney-client relationship is created with you when you read this information. The above information may be changed without notice and is not guaranteed to be complete, correct or up-to-date, and may not reflect the most current legal developments. If you have any questions or need assistance, please contact Curtis & Curtis, P.C.