Oil & Gas Lease Fiasco
Updated: Aug 26, 2018
This week has been quite a rollercoaster ride. My adult children and I learned last weekend that when their father died in 2015 (we had been divorced for 30 years), he owned a 1/12th interest in the mineral rights in almost 1,000 acres in a county in the San Antonio area. To say we were shocked would be an understatement. I knew his mother owned mineral rights in that county, but I was never told how much, or exactly where the land was located. Further, at least one of my children was told by their grandmother that she had sold off all of her ownership in the 1990’s. That simply was not true.
How they found out about their inheritance became the ordeal of the week.
One of my two sons was contacted by a landman representing a company wanting to get a “ratification” from him, his brother and two sisters, of their deceased father’s oil and gas lease. Knowing that I am a division order analyst with 40 years of experience, my son came to me with everything the landman had sent him, asking me what I thought he should do. When I looked at the paperwork, I nearly fell out of my chair. It was the biggest mess I can remember ever seeing. And that’s saying a lot.
The landman had sent an “Amendment, Extension, Ratification & Revivor of Oil and Gas Lease” document with the request that each adult child print it out, sign it in the presence of a notary, and return it. Only after my daughter-in-law replied and asked for a copy of the lease her husband would be “amending,” (she is a lease analyst) he send a Microsoft Word version of an unsigned copy of the lease, which referenced an Addendum that was not included with it. He also sent a blank Affidavit of Heirship form, with the instruction that my son’s wife (my daughter-in-law) fill out the affidavit and sign it in the presence of a notary. The email transmitting these documents stated that the company is about to drill “some vertical wells” on the lease, so my adult children needed to act quickly to get the paperwork back to him.
By the time my eldest son brought all of this to me to review, his younger brother had already signed his and returned it to the landman. So had my eldest daughter, who lives in another State.
The first thing I did was go into CourthouseDirect.com, locate a copy of the lease filed of record there, and printed a copy. My jaw dropped almost to the floor when I saw it. I also found several conveyances of record that creates a somewhat tangled mess of just what lands my adult children own as separate property, and what lands they own an interest as beneficiaries under a trust established by their grandmother 40 years ago. They step into the shoes of their deceased father as beneficiaries in the Trust now handled by their uncle.
My ex-husband signed the lease in the fall of 2013. He died in May of 2015. The company requesting the “ratification” recorded the lease for the first time in May of 2018. Now that, in and of itself, wasn’t the problem. Unorthodox, yes, but causing the lease to be invalidated, no. But the primary term of the lease was only 6 months, meaning it expired under its own terms in the spring of 2014, if there was no production or drilling occurring at that time to extend it.
I clicked into the Texas Railroad Commission website and researched. I found there were three wells drilled on only part of the acreage included in the lease, and all three were drilled in the mid-1990s. One of the wells was reopened and recompleted at the end of 2013, and from TRC production records, it has produced stripper-well quantities of oil ever since. However, that well was a lease well. No pooling was needed. I also found that a new horizontal well is about to be drilled. The drilling permit for it has been approved by the TRC just a few weeks ago.
A careful analysis of the Oil and Gas Lease revealed that it contains both a vertical Pugh Clause (surface Pugh) and a horizontal Pugh Clause (depth Pugh). Express language in the Addendum allowed only the acreage designated as productive acreage identified in the TRC P-16 form to be held by production past the primary term of the lease. As a result of this clause, more than half of the acreage described in the lease expired in the Spring of 2014. So, with this background, I can explain the huge problems with the Amendment document this landman wants my adult children to sign (and two already have).
First, case law is settled concerning “reviving” an oil and gas lease once it has expired. Basically, it is easier to raise a horse from the dead. It can’t be done. The Amendment contains a clause to “allow and provide for an extension of the Lease until December 31, 2018” except an extension can operate only before the lease expires, not after. Period.
Second, the landman says that no signing bonus will be paid for the Amendment (the name given this birdcage liner by the landman), which doesn’t matter anyway, because even if the Amendment is signed, it has no legal effect. The company might as well be trying to extend a lease taken in 1913, because it would have the same outcome as this attempt. It will only cloud title for my four children.
So two of my offspring have clouded their 1/4th share of their father’s mineral rights. The other two were waiting until I put in my two cents before signing. Now, they won’t be signing at all.
Instead, I am helping them to get their title straightened out before approaching the subject of a lease. An Affidavit of Heirship needs to be completed and signed by a party have full, personal and first-hand knowledge of all of the facts contained in it. My daughter-in-law does not, since she met my son only twelve years ago. Not only must the signer have first-hand personal knowledge (not merely “the best of their knowledge”), but they cannot stand in line to inherit any of the property being passed to heirs by law in the Affidavit of Heirship. Again, my daughter-in-law would stand to inherit according to my son’s Will leaving everything to her if he should pass first. She’s disqualified from signing the Affidavit of Heirship and have it still be defensible in a court action. The only person still alive who meets both criteria is me, so I will be signing the Affidavit of Heirship and making sure it gets recorded in the courthouse.
Next, my son needs to send a demand letter, by registered mail (not certified mail) to the company that produced the worthless Amendment document, demanding that the terms of the 2013 lease be honored and a Release of Oil and Gas Lease be filed of record releasing all of the acreage not held by the production from that one well all this time.
Only after both of those things have been done so we know that their mineral title is fully established according to law, it will be time to approach the oil company and negotiate a new lease for the land that expired under its own terms. No amendment or ratification is required for the portion of the land that has remained under the lease all these years. My two children understand that and will not sign any paperwork until the coast is clear.
Yes, this week has been a rollercoaster ride, and it’s not over yet.