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Posts Tagged ‘North Dakota Oil & Gas Law’

Bankruptcy in the Bakken

Posted on: January 11th, 2016
by David Ganje

Bankruptcy in the Bakken

Oil and gas production is a result of two basic factors: economics and technology. Economics means the costs of production and distribution. The price of oil is an essential element of the economics of production. One economic risk is bankruptcy. A bankruptcy filing, however, is not the same as a “funeral.” People believe what they want to believe. When I taught bankruptcy law, one of the harder things to get across to the students was the fact that a bankruptcy filing is not automatically “the end.” Nevertheless, several of the law students still came into the class carrying that attitude. One should keep in mind that even if a liquidation bankruptcy case is filed, production in the final analysis often continues. The particular chapter of the bankruptcy code filing, North Dakota property law, as well as state and federal regulations all affect a bankruptcy case. There are as many facets to a bankruptcy case as there are facets on a movie star’s wedding ring, however, in this article I will discuss basically the impact of a bankruptcy filing on the typical lessor and royalty holder.

First let us review a couple of things to watch for concerning a possible bankruptcy filing. If you are the lessor or royalty holder and think a producer may be a bankruptcy candidate, there are steps that can be taken. Your attorney can access the so-called watch list as well as access public records for delisted public companies. And a slow, or no, payment of royalties is also a red flag. But do not panic if a bankruptcy filing occurs. The royalty holder should put his energy into keeping good paperwork and records. This will make a bankruptcy experience tolerable.

Property rights created by an oil and gas lease are treated differently in the various states. In North Dakota, the oil and gas lease gives the lessor a real property interest with real property rights. According to the 1986 North Dakota Supreme Court case Nantt v. Puckett Energy Company, “[o]il and gas leases are interests in real property” and have been considered such since 1951. Although an oil and gas lease is not a lease in a landlord and tenant sense, in North Dakota, an operating lease is treated under bankruptcy law as an “unexpired lease.” In Van Sickles v. Hallmark & Associates, a 2013 case, the North Dakota Supreme Court decided that an oil and gas lease in a bankruptcy case must comply with the requirements set forth in section 365 of the bankruptcy code.

Many operators who file bankruptcy are in arrears on royalty payments. A new law goes into effect at the end of February in North Dakota that allows a royalty holder to file a security lien when the royalty has not been paid when due. The royalty owner must file the lien with the state and record the lien in the county where the well is located within 90 days of production to have a lien. With good records and timely filing and recording, mineral interest owners can gain a secured position in a bankruptcy proceeding. This greatly increases a royalty holder’s chances of a full recovery because secured creditors are paid before unsecured creditors.

In bankruptcy, the debtor must either assume or reject an unexpired lease of the debtor. A debtor may not accept only the favorable parts of an executory contract. If the lease is assumed and not in default, the royalty holder can rest easy, because an oil and gas lease must be assumed in full. The royalty owner will continue to reap the benefits of the contract. If the lease is in default, the debtor must cure the default in order to keep the lease. Therefore, if a bankrupt debtor is delinquent on royalty payments, the debtor must pay the back royalties if they want to assume the lease. Either way, the royalty owner gets paid, at least eventually. However, the bankruptcy court must approve any assumption of a lease. In this circumstances, the court will look to whether the lease is a valuable asset to the debtor and whether its preservation is sufficiently important. A royalty holder or lessor may also request that the court order the debtor to decide whether to assume or reject the lease within a specified period of time. A bankruptcy court can rule that preventing further delay with respect to assumption or rejection is in the best interest of all the parties.

Following a bankruptcy, a royalty holder or lessor may find themselves with the new option of leasing to a different producer. If a debtor elects to reject an oil and gas lease, the lease is no longer valid and the mineral interest is again available on the open market. Another way this could happen is if a producer is in default of the lease agreement. The North Dakota legislature states in N.D.C.C. Sec. 47-16-39.1 that the obligation to pay royalties is “of the essence” in an oil and gas lease and that breach of the obligation “may constitute grounds for cancellation of the lease.” If a mineral owner shows a bankruptcy court that equity requires it, the court may cancel the contract and the mineral owner may then lease to another party. In addition to the statute, some lease agreements contain a provision allowing a landowner to terminate the lease under certain conditions. This avoids the equity power of the court in favor of contract language regarding cancellation. If the terms of the lease are breached in this way, a landowner may be able to terminate the existing lease and sign a lease with another producer.

Ganje Selected as Super Lawyer for 2014

Posted on: September 1st, 2014
by David Ganje

Ganje selected as Super Lawyer for 2014

David Ganje has been selected to the 2014 New York Super Lawyers list in the category of energy and natural resources. Each year no more than five percent of the lawyers in the state are selected by the research team at Super Lawyers to receive this honor. Super Lawyers is a rating service of outstanding lawyers from more than 70 practice areas who have attained a high degree of peer recognition and professional achievement

Landmen-Oil & Gas Lease Brokers

Posted on: August 22nd, 2014
by David Ganje


By entering into an oil and gas lease, a landowner provides an oil and gas lessee, usually an oil company, with the right to explore for and produce oil and gas found under the landowner’s property. (In the article I will use the accepted term ‘oil and gas lease’, although an oil and gas lease is not in a correct legal context a real estate or commercial lease.) Both the oil company and the landowner enter into an oil and gas lease with the same goal: profit. However, the underlying interests of each party are very different. An oil company wants as much access to the surface and subsurface as possible. In contrast, a landowner desires to limit access and to limit any potential damage caused by drilling and recovery operations.  An oil company also desires to keep a lease alive despite a lack of production or a failure to drill. A landowner desires, among other things, that the lease end quickly if the oil company fails to produce in well paying quantities. Some landowners enter into oil and gas negotiations with little experience or knowledge of oil and gas matters.

A “landman” is the usual point of contact between a landowner and an oil company or a so-called lease investor. The American Association of Professional Landmen (AAPL) reports that a landman’s services include: “negotiating for the acquisition or divestiture of mineral rights; negotiating business agreements that provide for the exploration for and/or development of minerals; determining ownership in minerals through the research of public and private records; reviewing the status of title, curing title defects and otherwise reducing title risk associated with ownership in minerals; managing rights and/or obligations derived from ownership of interests in minerals; and unitizing or pooling of interests in minerals.” Given these responsibilities, landmen have influence over oil and gas leases, and over the effect that leases will have on a landowner. One could say that landmen are the “real estate brokers” of the oil and gas industry. Despite this influence, landmen generally do not need to be licensed or even certified by a state in which they are making deals. The only national organization to implement ethical standards for landmen is the American Association of Professional Landmen. The AAPL is a nationwide organization with over 20,000 members. This organization offers various training programs, sets ethical standards for landmen and lobbies congress on behalf of its members.

Landmen are paid by the lessee. Landmen are for all intents and purposes agents of the oil and gas producers. This leads some landmen to resort to high-pressure sales tactics. A report by the AAPL Licensing Task Force in 2008 recommended that the organization support landmen licensing efforts. The report concluded that licensing requirements were most needed in Texas and other states where many landmen interact with residents, and where the areas are experiencing an oil and gas boom. Opponents of licensing argue that requiring a license or certification will not make landmen better. This argument fails to consider the true purpose behind man-made laws. Laws are created to encourage people not to act on their impulses, and also allow the state to take action if they do act on their impulses. Licensing requirements for landmen will not make all parties better, but regulations allow a state to step in if a landman’s practices are contrary to established legal standards.

Landmen in South Dakota must be licensed as real estate brokers and licensees. Landmen in North Dakota are not required to be licensed. Landmen in South Dakota come under the jurisdiction of the South Dakota Real Estate Commission. The South Dakota Codified Laws define “Real Estate” to include mineral rights. Because of South Dakota law, several disclosure requirements are mandated of landmen before they can close an oil and gas lease. South Dakota law also defines a “Real Estate Broker” as someone who “buys, rents, sells, manages, leases, etc., an interest or estate in Real Estate.” The South Dakota Attorney General has opined that landmen are “Real Estate Brokers.” Accordingly, landmen must be licensed as such. The Code provides that any landman operating without the requisite license is committing a Class 1 misdemeanor and is required to forfeit any compensation for the deal he brokers. A separate legal question may lie as to whether an oil and gas lease created by and negotiated by such a landman is enforceable as a contract.

David Ganje of Ganje Law Offices practices natural resources, environmental and commercial law in North Dakota and South Dakota.   The website: . The contents of this article are intended for general information purposes only and are not intended as legal advice.

Tribes Cast Eye To Water Laws & Protecting Resources

Posted on: July 29th, 2014
by David Ganje

Tribes cast eye to water laws and protecting resource

Peter Harriman, 11:09 p.m. CDT July 25, 2014

At the Indian Water Rights Conference this week in Rapid City, lawyer David Ganje gave a overview of water laws as they relate to tribes and offered recommendations on writing and maintaining successful tribal water codes. The conference, hosted by the Great Plains Water Alliance, included tribes from South Dakota, North Dakota, Minnesota, Montana and Alaska.

Ganje, who specializes in natural resources law, recently answered five questions on the subject for the Argus Leader.

1. Federal law already assigns primary water rights to tribes for the exterior boundaries of reservations. Why do tribes need water codes?

“Water codes are really property management vehicles for managing both a right and a commodity. Tribes, as all government bodies now, are more and more aware of the proper management of water. Historically, all of them had been inattentive to water. There had more or less been enough of it around, both surface and groundwater. Now there is a realization that surface and groundwater interact with each other, and climate is affecting all of them. This goes for states and reservations.”

2. What is the relationship between state government and tribes in the Dakotas regarding water?

“Different states over time have approached reservations and undertaken water compacts. There are about 14 different water compacts in the region. In Idaho, Utah and Colorado, some tribes have completed successful water compacts, effective agreements between reservations and the state. There are no compacts in South Dakota and North Dakota. It is always possible. It is a matter of how willing each side is to negotiate, put everything on the table and address it.”

3. As they deal with the issue of managing water, are states and tribes also further developing the concept of tribal sovereignty?

“Water is a major issue in terms of what is tribal sovereignty. While there is precedent for strong water rights in favor of tribes, the question is how does that coexist with an immediate neighbor’s rights, and how does it exist on checker-boarded reservations? Those are questions where water is developing the idea of sovereignty.”

4. Is the historical assumption in the Dakotas that there will always be enough water undergoing review?

“Yes, the scientists are telling us the ebb and flow of water is still unpredictable, notwithstanding the management of flood control dams. They are not the panacea not the bottom line. Nor are they a guarantee that there can be a proper allocation of those resources. The question of who owns the water, who owns the flow is not yet resolved. Science has taught us to be careful, to be more prudent about this.”

5. Because it is out of sight, is groundwater also out of mind with regard to water quality, even in the face of potential development in South Dakota such as uranium mining, fracking to increase oil and gas production and the Keystone XL pipeline that could possibly threaten it?

“Groundwater quality is an emerging issue. The uranium leach mining currently under consideration has risks involved. There is a school of scientific thought that the dispersal of water is as problematic as the water itself used in natural gas production. There is some evidence that water has a tendency to leach itself into groundwater.”

To Trust Or Not To Trust

Posted on: July 28th, 2014
by David Ganje

To Trust Or Not To Trust

Placing mineral interests and mineral royalty rights or interests in a “mineral trust” is an economic and efficient way for a current or future transfer of mineral rights to family members or beneficiaries in order to independently own and manage such rights.  Mineral trusts are sometimes called a ‘Family Mineral Trust’ but can be used for more than conveyances to family members. When one creates a mineral trust one is creating it to convey to the trust all or a portion of one’s ownership in mineral rights.  A mineral trust has a number of advantages over a traditional last will and testament.  Assets held in a mineral trust are not included in an individual’s taxable estate.  These trust assets are in effect owned and managed independent of any other property of the granting owners.  The value of mineral interests, due to production increases or the changing market value of the minerals, may also increase dramatically.  If a mineral trust is to be considered, it is important that these assets are included in a mineral trust as early as possible. This is done ideally prior to an increase in value in any royalties to avoid estate taxes.  Mineral trusts may also take advantage of gift tax rules by gifting early in the ownership or value of the mineral interest and thereby shifting income and value to the trust rather than the original grantor.

A trustee is the “manager” of the trust property.  The trustee is given his marching orders by the written terms of the trust instrument. It is said, ‘The trust controls the trustee.’   A designated trustee in a mineral trust handles all decision making concerning multiple mineral interests or multiple beneficiaries as a single operating unit.  This can make for more efficient decision making and collection of royalty rights.

Fractionalized mineral interests (smaller multiple interests) can often be lost in the shuffle and sometimes forgotten by later generations of beneficiaries.   When a mineral trust is created, the earnings from royalties, leases and other income based payments, are held in perpetuity if an heir is lost, until that heir is located.  Unlike abandoned property, with privately created mineral trusts beneficiaries are able to collect on past proceeds when they claim ownership.

Mineral trusts keep the beneficiaries invested in the asset(s).  Without a mineral trust, ownership sometimes becomes unmanageably fractionalized.  In a large family situation, or when the ownership transfers to third and fourth generation, an individual ownership percentage may be small. The cost of managing minerals can also increase when each individual must be consulted or when multiple small beneficiaries are receiving separate royalties based on their individual ownership.  However when a trustee is managing the unit as a whole, the cost of managing is less expensive and the individuals usually have a better ability to monitor the trust asset.

Reconstructing and consolidating several divided mineral interests is an onerous process.  This may be avoided by creating a mineral trust early on.  It is also intended beneficiaries by proper drafting of the ownership terms in a mineral trust.  Creating sound asset management to eliminate disagreement or confusion among owners and beneficiaries, a mineral trust agreement enables the trust maker to detail explicit rules.  All beneficiaries are placed on notice of the trust terms which will designate how the trustee will manage the assets and income derived from royalties or income.  Unlike a will, a trust does not have to be filed publicly. Using this type of trust allows individuals to maintain privacy.