Before Drilling

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 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 are 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, to determine land ownership, to assign mineral rights, and to accurately plot property lines and boundaries. Drill rigs are very large pieces of equipment. 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.

An accurate surface map also facilitates determining land ownership above the hydrocarbons and who owns the minerals beneath the surface; seldom are the mineral and surface owners the same. Drilling and production companies must know ownership before they can proceed with their plans. 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.

Leases

Surface owners can not prohibit the exploration of minerals owned by another party. For example: if you own the surface, but someone else owns the minerals, you CAN NOT stop a well from being drilled on your property. 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.

Mineral ownership refers to the owner of the minerals at depth. Mineral ownership has become very complex over the years. For example: if you sell land, you may retain ownership of the minerals beneath it. Or you as the original land owner may have sold a portion of the mineral rights to someone or 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 small fraction of the original 100%. Transfers of mineral ownership are accomplished by a legal instrument called a mineral deed.

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 1, 2, or 3. Upon signing the lease, the mineral owner grants the production company certain 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 1/4.

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 are generally 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. 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-fifth (1/5) is more common. A mineral owner may reject the first offer in order to buy time to determine what other mineral owners in the region have received.

Most mineral leases start out pretty standard. They generally begin as a preprinted, fill-in-the-blank form, but many complex add-ons (such as fencing requirements, roadway locations, material criteria, time-of-year drilling based on hunting restrictions, etc.) find their way into the agreement. 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. The regulatory body requires a number of permits for such things as drilling on public land, off shore (within the three-mile limit), and along the coastline. In Texas, the governmental agency responsible is the Texas Railroad Commission. It regulates location and construction of prospect wells, requirements for fresh water protection in vicinity of drilling, formation drainage allocation, and well to well spacing requirements.