What mineral rights, landowners looking to cash in on the Eagle Ford Shale should know

SAN ANTONIO - Frenzy over the Eagle Ford Shale oil and gas prospect is turning lucky mineral rights owners into millionaires overnight. But in a rush to cash in on the opportunity, costly mistakes are being made that will leave many learning lessons about legal issues the hard way.

“The devil is in the details,” says attorney Robert A. Schaezler, of The Schaezler Law Firm.  “When there’s so much money at stake, it’s important to keep a cool head and make sure you get the law on your side. “

To help ensure that, there are three key questions he recommends mineral rights and landowners should ask themselves:

First, where do you stand?

Imagine for instance that your grandparents signed an oil and gas lease 30 years ago. You may think you can’t sign a new lease.  And since the lease is recorded at the county courthouse, landmen seeking oil and gas leasing opportunities probably will ignore your property.

But you may not be out of luck.  If you’ve received no payments and there’s been no drilling by the leasing entity, the lease by operation of law may have become null and void.  You may in fact have an opportunity to remove that stale lease from the records and pursue a new lease.

Another area where you want to know you stand on firm ground is in terms of liability.  For example, there’s money to be made when oil and gas crews move into your area.  Housing is in short supply, and increasingly landowners are turning their property into RV parks.  This is no time to make a deal on a handshake because any accident that happens on your land opens you up to a potential lawsuit. Without a rental agreement drawn up by an attorney, you are putting yourself and your property risk.

Second, what are your rights?

Signing an oil and gas lease gives full access to the leased property for development. Many things can happen that damage the property or impact the quality of life for people who own the surface rights. Crews may scare game or leave cattle gates open. There’s more traffic on the land. Ranch roads will be rutted. The work is noisy. 

Schaezler estimates that probably only one in ten lease agreements include a surface use agreement. Because the lease allows oil companies the right to reasonably pursue and explore, the law is on their side. But damages can be fixed if surface rights owners know how to pursue the matter properly.

As the Eagle Ford oil field develops, infrastructure will course throughout South Texas. Thousands of ranches will be crossed with pipelines and utility easements. Landowners have the right to negotiate with pipeline and utility companies to work out a fair deal.

There are also water use agreements to consider as well. Unless otherwise agreed to, the oil companies can use as much groundwater as they need. This could have impact on the surface owner’s agricultural value of the land, not to mention ability to grow crops. With the slow recharge of the Carrizo Aquifer, and the aridness the region, groundwater sources are going to be tapped.

Third, what should you look for in a lease?

When negotiating a drilling lease, there are three major things to look for: bonus, royalty and primary term.  Bonuses have skyrocketed in the Eagle Ford Shale, which tempts mineral rights owners to sign leases quickly, without really considering the rest of the lease. 

The real money in the lease, however, is in the royalties – the money that is paid mineral estate owners should their land produce oil and/or gas.  Where royalties just a few years ago were 1/8 of the product sale price, excitement over the Eagle Ford has driven those rates up to 1/4.  Many wells on the Eagle Ford Shale are bringing in over 1000 barrels of oil a day in addition to large quantities of gas.  With oil prices predicted to remain over $100 per barrel, it’s easy to see just how lucrative the royalty can be.

Which is why it’s so important to consider the lease primary term.  The primary term is the length of time in which a lessee must develop and produce oil and gas in paying quantities or the lease reverts back to the mineral rights owner.  The primary term provides the incentive for the lessee to explore and drill.  Avenues that perpetuate the lease, such as “savings clauses” should be avoided, because they allow the lessee an option to extend the lease and delay drilling with a simple payment to the owner, which turns out to be a pittance compared to a royalty payment.

Of course, these are just the top three questions to ask, and every situation has its own special set of circumstances, says Schaezler.  Since making mistakes is costly, the smartest thing a mineral rights and landowner can do is consider the questions and then seek the advice of a qualified attorney.