Mineral Rights, Survivorship, and Probate

I am regularly surprised at how our estate planning practice overlaps with our oil and gas practice.   Lately I have helped a number of clients navigate the re-titling of an ancestor's mineral interest by working through the probate courts.  When an individual dies, the probate court takes all of the real property titled in the deceased person's name and determines the new owner.  The same is true of oil, gas, and mineral interests, as they are real property.This process is fairly straightforward if the individual had a will that clearly stated where they wanted these interests to go.  Even so, the probate court must approve of the transfer.  This can be a lengthy process and is subject to court costs and attorney's fees.Alternatively, the mineral interests can pass automatically if they are part of a deed containing survivorship language.  These deeds provide that when one of the landowners dies, their interest passes automatically to the remaining landowners.  This process avoids the probate court, but still requires some additional paperwork for it to be valid.Landowners seeking to reclaim abandoned mineral interests pursuant to Ohio's Dormant Minerals Act are also likely to deal with the probate court.  If a surface owner records a notice of their intent to declare a mineral interest abandoned, it puts the mineral owner's heirs on notice that they have to defend their title to the minerals.  Many times it is not clear just who the heirs of the mineral owner are.  A thorough search of the county's probate records can help identify them.  Our attorneys have frequently been called upon to conduct this research.Similarly, we often help clients "clean up" their title to a mineral interest they have inherited.  Oil and gas companies like to be 100% certain that the landowner who signs a lease actually owns their minerals.  To that end, they typically require a thorough title search showing with absolute certainty that this individual owns their minerals.  Regrettably, deeds and leases aren't always adequately drafted, and that can create confusion or uncertainty about someone's ownership of a mineral interest.  The lawyers in our firm draw on decades of experience with probate courts, as well as oil and gas law, and are very well-suited to resolving these issues.

Ohio's Dormant Minerals Act - Overview

This is the first part of a series of articles about Ohio's Dormant Minerals Act.  Click here for a more detailed description of how Ohio Courts interpret Ohio's Dormant Minerals Act.Oil and gas companies go to great lengths to determine if the person who signed a lease is in fact the true owner of the minerals.  It is not uncommon for a landowner to sign a lease and only be paid for 1/2 of what was originally promised, simply because the landowner only actually owned 1/2 of the minerals underneath her land.  At that point, the oil and gas company tracks down the other 1/2 mineral owner so they can enjoy the full benefits of leasing a 100% mineral interest.  Many of the landowners who contact our office have been paid for only a portion of the minerals underlying their land for this same reason: they don't own 100% of the minerals underlying their land.  They usually want to know, as surface owners: "is there a way for me to obtain the remaining mineral rights under my land?"In most states, the surface owner would have to buy the mineral interest from the person who technically owns it.  Even though the deed that created the mineral interest is very old, and the person reserving the mineral interest is long deceased, the mineral interest is still very much alive.  In this instance, the surface owner would have to track down the mineral owner's holder's heirs in order to purchase the mineral interest from them.  This process likely involves the probate courts, and can become quite messy.  This process also likely involves the probate court.  Texas, for example, operates this way.The procedure described above is still widely practiced in Ohio.  But, Ohio also affords surface owners additional options to regain title to abandoned mineral interests.  These procedures are largely known as Ohio's Dormant Mineral laws (O.R.C. 5301.56).   These laws are fairly unique to Ohio, and have recently been amended.  Because of these recent changes, Ohio courts are still interpreting the statute.  Adding to this confusion is the fact that there are two versions of the statute: one that applies prior to 1989, and another that applies after 1989.  Both statutes describe instances in which a surface owner can recapture mineral interests that, by statute, have been abandoned.  These statutes are highly technical and often don't provide for a clear-cut answer.  As a result, I will be writing a series of articles hoping to explain them, while offering updates on how Ohio courts have interpreted these laws.  Please check back soon for further discussion.

Living Trusts

Many people mistakenly believe that they need to have a lot of money to benefit from a trust.  This couldn't be further from the truth.  In fact, many benefits trusts provide don't have anything to do with how much money someone has.  Trusts just make managing assets simpler, and operate a little differently than wills: the probate court ensures that an individual's will is followed, but the probate court has little to say regarding trust enforcement.Take a living trust, for instance.  Living trusts are created by a Settlor, for the benefit of named Beneficiaries, subject to the oversight of a Trustee.  Living trusts are revocable, which generally means they can be amended.  This makes living trusts an attractive vehicle to manage beneficiaries: it is quite easy to add/remove beneficiaries with a living trust.  Living trusts can also be an attractive asset-management vehicle for families with minor children.  Even if a will leaves several assets to a minor child, the probate court will typically withhold those assets until the child turns 18.  Assets left to a minor child under a living trust, by contrast, will pass to the child on the trust's own terms, which could be well before the child turns 18.Individuals with minor children, or individuals seeking to avoid what can often be a lengthy and expensive probate administration may benefit from a living trust.  We are very well-versed in the nuances of these documents and are well-equipped to draft them according to your family's specific needs.  Contact us today if you believe your family might benefit from establishing a living trust.

Oil and Gas update - October 2013

We have been quite busy since our last update.  Most -if not all- of the most valuable lands have already been leased, and energy companies have essentially staked out their positions.  An incredible 169 wells are currently producing from the Utica shale in eastern Ohio.  Chesapeake Energy is far and away the biggest producer in the region, as they operate 114 of these 169 wells.  The lion's share of these producing wells are in Carroll county.  Carroll saw such a boom due to its underlying geology, but also because it had never seen significant oil and gas development.  As a result, energy companies like Chesapeake did not need to navigate around already existing wells and older leases: it had a relatively blank canvas with which to operate.Many more wells have been permitted and drilled.  The Ohio Department of Natural Resources reports that more than 700 lateral wells have either been drilled or permitted within the last few years.  Even so, there are limits to the development of the Utica shale play.  Unfortunately, what comes out of the wellbore can't immediately be put to use and first needs processed to remove impurities and fractionate natural gas liquids.  Two plants have recently come online in Ohio to address this problem: one in Kensington (operated by Utica East Ohio), and another in Cadiz (operated by Mark West).  Four other plants are expected to be built in Ohio to process Utica gas and gas liquids.Of course, the gas first needs to get to these processing facilities.  Pipeline projects by various companies are evolving every day.  We have represented countless landowners who have been approached by entities such as Halcon, BP, and Sunoco, just to name a few.  My niece, Atty. Molly Johnson Phillips, has been handling the vast majority of these pipeline agreements and she has quickly become an expert in the field.   She will be instrumental in the installation of the Bluegrass pipeline which will take Utica natural gas liquids to Kentucky on their way down to the Gulf Coast.We continue to be amazed at how quickly this has developed.  The more information we obtain the more encouraged we are that this play has staying power. 

Special Needs Trusts

Clients with disabilities or other special needs have a few options when it comes to creating trusts that can improve their life.  Oftentimes these individuals receive governmental benefits for their health and maintenance.  Typically, these programs first require that the individual spend their own money before expending any of the government's.  In these situations, individuals with special needs who do have substantial money of their own can create a medicaid pay-back trust that allows them to enjoy the health and maintenance benefits of the government programs while using their own money for supplemental support.  Put simply, the beneficiary of such a trust can use the trust monies for things not covered by governmental assistance programs and still enjoy those program's benefits.    Whatever monies are not used at the time of the beneficiary's death would then go to the government program.The trust described above is designed to protect the assets of the individual with special needs.  But what about individuals who want to create a trust to benefit a loved one with special needs?  In that instance, the settlor (the person establishing the trust) can name the individual with special needs as a beneficiary of the trust.  The trust would provide that its money would pay out to the beneficiary for their supplemental support.  At the time the individual with special needs dies, 50% of the remaining trust money would go to the government program, and the other 50% of the money would go to another beneficiary named in the trust.Yet another option exists for individuals seeking to benefit loved ones with special needs.  Called a "wholly discretionary trust," these trusts give the trustee 100% discretion as to whether the named beneficiary receives any money from the trust at all.  The advantage of the wholly discretionary trust is that upon its termination, 100% of the monies remaining in the trust will go to a named beneficiary, and 0% goes to the government program.  It is essential that the relationship between the trustee and the beneficiary with special needs is a good one in order for wholly discretionary trusts to work the way they are intended.Please contact us if you would like to set up a trust that accomplishes any of the goals summarized above.

Landowner Royalty Calculations

One of the questions we've been getting a lot of recently is: "how are my oil and gas royalties calculated?"  There are actually a few different ways to answer this question.  The first angle has to do with how a royalty is calculated as part of a drilling unit.  Let's say that you own 50 acres in a 100 acre drilling unit.  Your lease probably says you are to earn 1/8 (or 12.5%) of all oil and gas produced from the premises.  The premises in this instance is the 100 acre drilling unit, of which you only own 1/2 (50 acres = 1/2 of 100 acres).  Therefore, the entire drilling unit will earn 1/8 as a royalty.  Because your land is about 1/2 of that 100 acre drilling unit, your royalty would be 1/2 of the 1/8 the entire drilling unit receives.  In other words, a 50 acre landowner in a 100 acre drilling unit receives a 1/16 royalty.Another way to answer the question of "how are my royalties calculated" has to do with other language in the lease allowing the energy company to deduct various costs.  Typically, the landowner royalty is calculated as (using the above example) 1/8 of the value of whatever comes out of the well.  Older leases might have had some language allowing the energy company to deduct transportation costs, but that language wasn't very common.  That is because older, shallower wells didn't always need to be treated before it could be put to use.  The wells currently being drilled in the Utica play are much deeper, and what comes out of these wells isn't immediately useful: the gasses and liquids need to be send to a treatment plant.  In many cases, energy companies have passed this cost on to the landowner in the form of deductions in the underlying lease.  Well-written leases provide for "gross royalty" payments.  This allows landowners to escape costs that are associated with "net royalty" payments.A further complication to "net royalty" language has to do with how companies account for these various deductions.  Much has been written about energy companies that sneakily deduct landowner royalty payments in the form of gathering costs, compression costs, transportation costs, and processing fees.  Other times, energy companies can simply sell the oil and gas to one of its own subsidiaries at a low cost.  This effectively lowers the price at which the landowner's royalty is calculated while also allowing the subsidiary to later sell it to another entity at a higher price.  The methods by which they accomplish this aren't always readily apparent to landowners, and even savvy accountants.The good news is that there has been some reporting on such practices, indicating that the public is generally aware of them.  Nevertheless, it is a good idea to keep records of whatever statements you might receive as a landowner.  Learn what the information on these statements means, and do not hesitate to call the energy company to ask questions.  Some landowners may have a term in their lease allowing them to audit the energy companies books, effectively allowing the landowner an opportunity to see just how their royalties are being calculated.Thankfully, we have yet to see this happen to our clients.  Even so, if you believe your royalty is being calculated inappropriately, get in touch with the energy company, study the statements you have been sent, and if you still have questions, please don't hesitate to contact us.

Mortgage Subordinations

Lately we have spoken with a number of clients about mortgage subordination.  Drillers typically ask the landowner's bank to subordinate their interest in the land (the mortgage) to the driller's interest (the oil and gas lease).  The driller, of course, was concerned that they would lose their interest in the land if the bank foreclosed on the property.  If the bank's interest was subordinated to the driller's, however, the driller would retain their interest even in the event of foreclosure.  In the past, banks granted subordinations without hesitation.  Lately, however, banks are approaching mortgage subordinations much more carefully.  The general concern involves the enormous amounts of money involved in recent Utica shale drilling.  Larger banks sometimes have a policy against granting subordinations.  Smaller, regional banks, on the other hand often approach subordinations on a case by case basis.  Other banks sometimes will charge a fee for giving consideration to a subordination.  All banks, regardless of size, need to assure themselves of how an oil and gas lease for Utica shale affects the value of the landowner's property.  A lot of times the answer to this question can't be so easily ascertained.  However, our firm is well-positioned to provide valuations for Utica shale rights, and can help.From our standpoint, much of the refusal to grant mortgage subordinations is confusing because Ohio has a law that expressly protects oil and gas leases in the event of foreclosure.  ORC 1509.31(d) states that:

"If a mortgaged property that is being foreclosed is subject to an oil or gas lease, pipeline agreement, or other instrument related to the production or sale of oil or natural gas and the lease, agreement, or other instrument was recorded subsequent to the mortgage, and if the lease, agreement, or other instrument is not in default, the oil or gas lease, pipeline agreement, or other instrument, as applicable, has priority over all other liens, claims, or encumbrances on the property so that the oil or gas lease, pipeline agreement, or other instrument is not terminated or extinguished upon the foreclosure sale of the mortgaged property. If the owner of the mortgaged property was entitled to oil and gas royalties before the foreclosure sale, the oil or gas royalties shall be paid to the purchaser of the foreclosed property."

Even in light of this protection, drillers continue to insist on mortgage subordinations before commencing drilling operations.  Similarly, even though the oil and gas lease is -by statute- superior to a mortgage, banks continue to systematically refuse to grant subordinations.  Lately we have been advising our clients to meet with their bank and approach them as partners in a venture.  Both parties have an awful lot to gain if a good Utica well is drilled on the property.

Oil and Gas Valuations for Businesses

Nearly all of our oil and gas clients ask us "what are my oil and gas rights worth?" Having been a producer in the oil and gas industry for over 25 years, I am well attuned to the business side of the industry.  Having practiced oil and gas law for over 25 years, I am also well versed in the legal side.  This positions our firm nicely to handle a wide variety of our client's concerns, such as estate planning for oil and gas revenues, valuations for probate courts, creating trusts to shelter oil and gas money from inheritance taxes, and helping businesses simply evaluate their current assets.  Recently I have been asked to ascertain the value of nearly 100 wells in Alabama.  Doing this requires deep knowledge of geology, oil and gas markets, global production trends, as well as local industry practices.The circumstances in which I'm called on to use this unique skill set are always surprising to me.  If you have questions about the value of your oil and gas rights for a legal or professional matter, please contact me at the number above.