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Posts Tagged ‘Royalty Interests’

Foster Care for Unlocatable Mineral Interest Owners

Posted on: April 7th, 2014
by David Ganje

Foster Care for Unlocatable Mineral Interest Owners

 

Natural resources development and extraction is both cleaner and fairer if all the owners of mineral interests participate. This statement of preferred principal is not, however, reality. Many owners are missing or unlocatable.  Missing interest holders create legal ‘gaps’ in the oil and gas development picture. Gaps perpetuate problems. Problems—such as future claims by currently unlocatable mineral interest owners, and penalties against producers for failure to pay or timely pay interested parties are examples. Both South Dakota (as of 2013) and North Dakota (revised in 2007) have created statutory remedies addressing this conundrum. In North Dakota over 40% of royalty interest payments go out of state. The remedy is a statutory trust created to manage the interests of the unlocatable owners of mineral interests. A party wishing to develop a tract of land can petition the court for the creation of this trust. A petitioning party can be an individual, corporation, or limited liability company that owns a mineral, leasehold, or royalty interest in the relevant tract of land. The statute allows for the creation of a trust by any of the three main interests in oil and gas matters: a mineral interest, a leasehold interest, or a royalty interest. The trust can be used to participate in the leasing and production of the oil and gas interests. Nevertheless, such a trust can only be created if the place of residence and present whereabouts of the so-called unlocatable persons are unknown and cannot reasonably be found after due diligence following a search. In North Dakota, circumstances may arise that warrant a trust account to be set up for the benefit of an unlocatable mineral interest holder. The establishment of the trust has the effect of discharging the developer from further liability for legal or financial claims by unlocatable or unknown claimants to the interest when all payments are made to the trust. The county treasurer, where the interest is located, becomes the trustee and manager of the new trust. An oil and gas lease negotiated by the trustee is an enforceable binding agreement. When an unlocatable claimant comes forward to claim his ownership, he must obtain an order from the district court to receive the monies deposited in the trust account.

 

Any bonuses, royalties, lease payments, or other income owing to the unlocatable mineral interest owner are to be paid to the trustee after the trust is approved by the court. The trust must be kept in force until the unlocatable owners of the mineral interests have successfully claimed their share of the funds held in trust pursuant to the act. This special trust is in affect ‘taxed’. Fifty percent of the monies paid to the trustee, the county treasurer, must be credited to the general fund of the county in which the mineral interest is located. This assessment is stated to be ‘for the costs of administration’. In reality it is somewhat of a confiscatory tax for the benefit of using the law to protect such interests. After three years, if the trust is still open, it is considered abandoned property with the effect that the trust administration is taken over by the State Treasurer rather than the county treasurer. The trust will, however, continue in existence under this special statute. After the three year period mentioned, the State Treasurer takes over the management of the trust unless it is otherwise closed out because of ‘found claimants’. The North Dakota treasurer maintains a data base of unclaimed property, including mineral interests. This public data base however, does not guarantee successful access to the information by a claimant because the parties may not be properly named—the owner is indeed unlocatable, the state’s website data base does not give complete reference to the tract of land, that is, the location of the mineral interest, or a detailed description of the relationship of the petitioning party with the unlocatable mineral interest holder. With its challenges, the law is still a good vehicle for protecting interests while encouraging development of the state’s natural resources.

A Second Look at Royalty Interests

Posted on: February 26th, 2014
by David Ganje

All That’s Royal Aint Royalty—A Second Look at Mineral Interests

                                                By David Ganje

 

            Let’s start at the beginning.   Production is not the starting point in the oil patch.   The genesis of all operations goes back to the basics, Mineral Rights Law.  In the Bakken and elsewhere, the basics require a look at oil and gas interests’ law also known by some as “real property law on steroids.”  In what other field of law can efforts to retain one’s property rights result in the loss of those same rights? 

The mineral interest has a first cousin, the royalty interest.  One needs to scrutinize the four corners of the legal document on which they are described.   Legal phrases were perhaps not meant to confuse, but they sure do.   If the document uses words describing a particular percentage of a mineral that will be “produced,” “saved” or that it is “nonparticipating,” this often refers to royalty interests.  Documents using phrases such as “in and under” usually grant mineral interests.

       Mineral interest versus royalty interest—what do you get?   A “grant” made by deed or other legal document can convey either a “mineral interest” or a “royalty interest”.   Both appear to offer the grantee the same thing:  a percentage of the value of minerals on a described plot of land.  However, a mineral interest includes an interest in the land itself.  It is a real estate interest “with benefits” as they say and that is pretty powerful.  A royalty interest, on the other hand, only offers an interest in a percentage of the minerals’ value after they have been extracted from the ground.  If processing is required in order to make their sale possible, the cost of doing so is deducted from the sales price when calculating royalties.

A mineral interest contains several rights for the holder.  These rights are usually described in a deed as “the minerals in and under and that may be produced from” a given area of land and grants the holder rights concerning the land.  In North Dakota, a holder of a mineral interest has the right to explore and develop the area (including the right to enter).  In addition to the profits from the minerals themselves, he may also receive bonuses, delay rentals, and royalties.  Because a mineral interest holder also possesses an interest in the land from which the minerals are extracted, he can enter into leases with regard to the resources contained in the ground (oil, gas, minerals, etc.) with third parties. 

The holder of a royalty interest, on the other hand, has no right of entry or exploration of the land, no right to receive bonuses or delay rentals, and may not grant leases to third parties.  A royalty deed is usually written in reference to minerals “produced and saved.”  Interestingly, a royalty interest holder has a cost-free interest in the resources that are produced.  He is like a teenager.  He gets the car, but doesn’t have to pay for the gas or insurance.  He gets the profit of the oil and gas production, but does not have to deal with management or production issues.

When negotiating or determining mineral rights one should always be on the lookout for these two categories.  When dealing just with the basics, this may not be too difficult.  But, mineral interest or royalty interest contracts are rarely limited to the basics.  There are too many moving parts.  Even the very language used may prove improper.   In other words; read the fine print.

In North Dakota, this may not always be an easy picture to read.  Many deeds contain the phrase “other minerals” regarding the interest that is being conveyed or reserved.  The meaning of that term has not been consistent over the history of North Dakota law.  From 1955 to 1983, the definition differed.  Under a 1955 statute, a lease or conveyance of “minerals” did not include interests in gravel, coal, clay, or uranium, unless the intent to convey those materials was separately stated.  Oddly, a reservation of a mineral interest still included coal.  A 1975 amendment to the statute fixed this unusual distinction.  Since July 1983, North Dakota law has defined the use of the word “mineral” to mean the same thing, regardless of whether it is the subject of a deed or a reservation: “all minerals, and their byproducts and compounds, except those specifically excluded by name.”  Also, the language used to define interests is also treated differently depending on whether it might be a deed or an oil and gas lease.

In the end production is what we’re all shooting for, but don’t ignore the basics.  Be aware of mineral rights law.  The wording in your legal document determines your interest which in effect determines your profit.

 

Author:   David Ganje.  David Ganje of Ganje Law Offices practices in the areas of natural resources law, environmental law, and commercial law in North and South Dakota.