Split Estate Issues from a long time oil and gas Landman

In my new career as an oil and gas landman, my first boss, Tom Dugan, sent me off into the sometimes bizarre world of Western land ownership with some wise words.

“Make sure you got your flack jacket on, Jer,” Tom said with a little chuckle and a twinkle in his eye. With that advice, I headed off to Rio Arriba County, New Mexico, on my first encounter with a surface owner. Out West where I've lived and worked in the oil and gas business for the past 25 years, nothing about land is simple.As convoluted as the water business is, there is one immutable law: "Water flows uphill towards money." In the oil and gas business, exploratory drilling and production rarely start until you've been able to reach agreement with a landowner, who, through the machinations of the Homestead Act, railroad rights of way, and other federal laws, doesn't own the mineral rights and doesn't stand to make a dime off the energy production on his land.

Fresh out of college in 1980, Tom sent me out on that initial foray into the field of surface owner land negotiations with the Hardy Family with whom Tom, president of Dugan Production needed an agreement in order to drill a well.

I settled surface damages with the owners, the Hardy’s for $2,200 for a 100’ x 100’ drilling pad for the Big Hit #12 well, a shallow 1900’ test at the east end of the San Juan Basin. That drilling pad was less than a half acre.

We obtained no title to the land for the damages, just a one page “release” form which we stuck in the well file. Per acre values were in the $200-300 range in this area of the San Juan Basin. We could have bought the land for less, but that's not how the system works.

Fast forward twenty-five years to June 2005, as I negotiated with another surface owner in San Juan County, New Mexico, just south of the town of Farmington. SJR had been negotiating for over two years with a couple whose pseudonym is the Gilsons. We were working on an agreement for a 6500’ well proposed on their property. Mr. Gilson said that “they’re not making land anymore, that’s all that there is and it’s pretty valuable. Plus, I am a constitutionalist and I believe the individual has rights that the government should protect, irregardless of what your company wants to drill.”

As a split-estate property the Gilsons owned the surface, the Federal Government owned the minerals. The Federal lease has been in existence since 1948 covering a large tract. For two years SJR had worked with the Gilsons on a variety of right-of-way and pipeline routes and well locations. The Bureau of Land Management (BLM) requires agreement between surface owners and the operator prior to permit approval. The Gilsons also indicated that they were contacting a “citizen’s group”, the San Juan Citizen’s Alliance, to fight the drilling plans on their property.

While SJR and the Gilsons were at a stalemate, SJR had the option to obtain a surface bond through the State of New Mexico BLM office. Under Federal statute operators of wells for application for permit to drill (APD) who are unable to reach an agreement with a surface owner, can utilize a BLM directive which allows the operator to bond out with the appropriate State BLM office. The “Stockgrazing and Homestead Act, Bond for Lands Under Lease or Sales Contract” was the directive which allowed SJR to proceed.

SJR applied to the State of New Mexico BLM office and received a bond. It was issued on December 2004. SJR’s bond was for $25,000, and provided that at the end of the well’s life, SJR would reclaim surface to the condition it was at the time of the APD approval.

SJR continued to communicate with the Gilsons and the BLM after the bond was issued. SJR raised our offer by 100%, more than three times higher than the appraised value.

Upon receipt of bond approval the San Juan District Manager did not want to give SJR APD approval through the bonding process. In fact, he said that “SJR has the legal right to receive APD approval by ‘bonding out’, but in the court of public opinion, it’s a losing matter.” Also, he said that since the Gilson’s land was not for grazing, that the bonding process did not apply in this case.

I find this unconscionable, that through legal remedies, SJR was denied our rights of access because of an outside “citizens’ group,” who got involved in this matter. This is a case of the BLM being afraid of extremists, surly landowners, and those special interests which prohibited SJR from receiving APD approval.

By mid 2005 we had been unable to reach an agreement and SJR was in line for a drilling rig in their program. In a highly unusual step, the District Manager arranged to be on site with me and the Gilsons. Mr. Gilson invited the San Juan Citizen’s Alliance to represent him at the meeting. My guests included a drilling company representative, our field foreman, and a notary public, just in case we ended up signing an agreement.

This was our third predrill inspection since other well locations did not work for the landowner. Upon review of the location, the surface owner said that he did not like the proposed well site and location layout, so SJR had to restake the well for a fourth time. SJR planned to drill our well adjacent to an existing well, utilizing the same well pad and enlarging it by 2/3 of an acre. While we didn’t need our notary that day, an agreement in principle was made with the BLM mediating between SJR and the Gilsons. We shook on it. SJR spudded the well two weeks later.

What kind of value did SJR get with the arrangement brokered by the BLM? The independent appraiser determined that the price per acre was $X. SJR settled with the Gilsons for $4.5x, over four times the appraised value of the land! In the end I felt we’d gone as far as I could, but in the spirit of good cooperation, good neighbors, and obtaining access on split estate minerals, I felt satisfied about this settlement. Plus, our rig was becoming available so I had to settle at this point.

“On our new drills SJR makes every effort to work with landowners in the settlement of surface damages and access agreements.” This is SJR’s mantra when working with ALL surface owners. It is my experience that we want to make sure the landowner is happy and that there are not hard feelings since the land is being taken out of commission for the life of the well, which in our case could be 30-40 years.

I believe the Gilson story is indicative of what operators go through when proposing new wells to drill. It is my firm belief that SJR, other operators, and the industry as a whole is doing as much as we can to work with landowners, like the Gilson’s on our new drills. Changing the laws to prohibit drilling will only make matters worse. The laws allowing ingress and egress for mineral development are in place for very good reasons—to allow unfettered access to the minerals the US needs for its economy. Any more government meddling will only hurt the energy picture in the US and dampen American supply.

Great Partnerships

In most instances landowners are not resistant to oil and gas development on their lands. I’d say that 80% of the negotiations I have had with split estate landowners go very well. As I have worked with landowners I found that if I am honest about our intentions, give them ample notice of our drilling, and make myself available to their questions and queries, then things go well. Granted things have changed a lot between 1980 and 2005. But for the most part people realize that companies need to drill their leases and really want their fences and gates intact, roads and noise minimized. Most reasonable landowners, too, know where they live and aren’t in denial that they live in a gas or oil producing region. I enjoy working with reasonable owners, as we’ve become friends in several instances. In fact, the Hardy’s and I were friends for quite some time when I lived in Northern New Mexico.

80-20 Rule

While many landowners are great to work with the other twenty percent are resistant to drilling and production on their property and normally feel as they’re a victim. Many live in a black or white world with very rigid views of life. They want it their way and most are in denial that a well can or will be drilled on their land.

Some landowners are literally greedy about what they can “get” from the oil companies. Many do not understand the industry and are misinformed about what is actually happening. Some landowners have had bad experiences in the past with previous companies which lend to this sort of behavior. Often they are distrustful of their neighbors, have a disdain for corporations and oil companies, and basically not open to having their world changed. I have seen all sorts of these people and find it a huge challenge of this business.

The Sky is Falling

There are also those environmentalists, who are referred to as “extremists.” They think they are the guardians of the earth’s surface, groundwater, and activity thereupon, relegating a policy of prohibited development.

Some of these people are landowners. Others just promote the animosity against oil and gas companies. Extremists don’t understand the logistics of the industry while utilizing tactics of lies and mistruths about how the oil and gas industry works.

Extremists, shortsighted in their view of the world, ask the general public to sacrifice the American way of life for the environment, putting the insignificant needs of animals, snails, and bogs ahead of the human needs. Their myopic perspective clouds the horizon of truth of honest and standard industry practices, fomenting discord amongst the general public, landowners, and companies. They want a war declared against American oil and gas producers. Development of resources in American is a crime in their eyes and they do anything and everything to prohibit resource work on ANY lands. They cite a variety of imagined environmental catastrophes designed to paralyze oil and gas companies.

I have seen all of the above examples during my over 25 years in the oil and gas business. It is very difficult when oil and gas operators come up against those 20%. These people utilize delay and stall tactics to prohibit drilling on private or Federal lands.

SJR’s estimated costs on the Gilson’s land were $950,000 to drill, complete, hookup, and equip this well. Surface disputes are a small cost compared to the overall project. However, without access, SJR and others cannot spend the money to move their drilling forward. Extremists may claim that this miniscule cost can easily be forwarded to them or the landowners, despite the fact that actual value of land is far less than extremists demand. Producers don’t like to be blackmailed in these instances.

Get deals done

Oil and gas producers, by nature, want to get deals done. There are a variety of obstacles in obtaining our goals, most of which are the geologic, mechanical, and engineering risks. In addition, the red-tape risk and litigiousness of society thwart our operations. With that said, SJR and most producers I know usually bend over backwards to work with surface owners in getting the access approved and work commenced. Most producers are optimists by nature and usually have done many impossible deals to move forward in business. SJR and other producers desire good relations with stakeholders in their wells including, non-operated owners, royalty interest owners, landowners, and the extremists who want to put us out of business.

If lands fall on private surface with private severed minerals, then court action can open up access to commence operations. SJR and others have the opportunity to do this, but only as a last resort.

New laws and regulations are not going to find more hydrocarbons for America. These restrictive rules will go a long way to limiting development that is already pinched tight on lands in the Rocky Mountain west. We have a great opportunity in the Rocky Mountain west to find ample energy supply as we move into new technologies and fuel alternatives. Access to surface should not be impeded by the 20% extremists.

Surface owner’s bills were tabled in the legislatures of New Mexico and Colorado this year. Industry was willing to go along with adequate guidelines to facilitate split-estate surface owners’ situation.I am told that the extremists did not want the bills to go forward because they were too watered down. In Colorado there is a move to have the voters decide on this issue. This would be a mistake if put on the ballot since the average person would not begin to comprehend the issues surrounding split-estate nature of the Rockies. That’s why we elect legislators—to sort out the minutae of the issues, which can be complicated.