Business Law Articles
By: Paul R. Yagelski, Esq.
You, the landowner, own the oil and gas rights to your property and you have leased these rights. Can you get anything other than a bonus and a royalty?
You do not own the oil and gas rights to your property. These rights are owned by someone else and they have been leased. The lessee now wants to come onto your land to develop the oil and gas rights. Are you entitled to any compensation?
The answer to both questions is yes. Additional compensation can be obtained through a surface use agreement; sometimes referred to as a land use agreement. This article will address both of these questions, and it will do so within the context of what a surface use agreement or land use agreement is.
Question 1: You own the oil and gas rights to your property, and you have leased these rights. Can you get anything other than a bonus and royalty?
Many landowners are not aware that in addition to a bonus and royalty, the landowner can also be compensated for the use of the land.
The landowner can negotiate payment for damage done by the oil and gas company to the surface of property in the development of the oil and gas rights; however, this additional compensation is often not received, simply because the landowner is not aware of the possibility of obtaining this additional compensation. Accordingly, such compensation is not even discussed in negotiations between the landowner and the oil and gas company; however, it can be negotiated. Once negotiated, this additional compensation can be addressed either in a separate paragraph in the oil and gas lease, should the landowner own the oil and gas rights, or preferably, it can be addressed through a separate agreement, normally known as a surface use agreement a/k/a a land use agreement.
Question 2: You do not own the oil and gas rights to your property. These have been leased. The lessee now wants to develop the oil and gas rights to your property. Are you entitled to any compensation?
The oil and gas company, who either owns the oil and gas rights or leases them, will be coming onto your property to develop these rights. In the process, considerable damage will be done to your land in constructing the well site. You can receive compensation for this damage and for the loss of use of the real estate. Often a landowner is not aware that such compensation is available. If compensation for damage and loss of use is not addressed, the landowner will miss the opportunity to receive such compensation, which can be significant. This is particularly so where the landowner does not own the oil and gas rights and will not be receiving any bonus, royalty, or shut-in payments. Compensation for damage to the real estate and its loss of use is normally obtained through a surface use agreement a/k/a land use agreement.
Question 3: What is a Surface Use or Land Use Agreement?
A surface use agreement, which is also sometimes referred to as a land use agreement, is an agreement between the landowner and an oil and gas company or an operator for the use of the landowner’s land in the development of the oil and gas. The surface use agreement will specify what the oil and gas company or operator can do on the landowner’s land in developing the oil and gas, where development can take place, and what compensation the landowner will receive.
More specifically, the surface use agreement will address what activities may take place or what may be banned. Construction and operation of the well site is of course activity that is allowed; however, the use of an impoundment pond may be banned. Release or discharge of pollutants, toxins, or hazardous substances is normally prohibited.
Development will normally occur within what is known as the area of disturbance. The area of disturbance is that area of the landowner’s land that will be disturbed in developing the oil and gas. It is normally depicted on a map or drawing, which is attached to the surface use agreement. The map or drawing will normally show the location of the well pad, access roads, and other areas for equipment, buildings, and material that will be utilized in connection with the well pad and the wells drilled within the area of disturbance. Normally, the oil and gas company’s or operator’s activities, facilities, and equipment are confined to the area of disturbance, so that the rest of the landowner’s property can be utilized by the landowner.
The surface use agreement may also specify what type of equipment can be used within the area of disturbance and what use is banned. For example, compressor stations may be prohibited and impoundment ponds banned.
The surface use agreement will also address other important matters; e.g., use of roads, loss of timber, testing of water and its use, placement of fences and gates, and prohibitions against littering and hunting. Restoration of the surface after drilling operations or the expiration or termination of the lease is also important and is often addressed. Other matters, such as insurance for the operator, noise mitigation, taxes, remedies in case of disputes, and indemnification, are also frequently addressed.
In addition to specifying what the oil and gas company or operator can and cannot do on the landowner’s lands, and where permitted activity can take place, the compensation, which the landowner will receive for the damage to, and use of, the surface of his land, will be specified. Compensation is normally in the form of payment for the acreage that is utilized or placed within the area of disturbance. This is done on a per acre basis. In addition, compensation can be negotiated for each well that is to be placed on a well pad. Further, the surface use agreement can also provide for the right to receive compensation for damages to real or personal property outside the limits of the area of disturbance. Such damages can include damage to the landowner’s water sources, fences, timber, crops, and livestock.
Payment to the landowner for the damage to, and use of, his property by the oil and gas company or an operator is not unusual. The oil and gas companies or operators are well aware of surface use agreements and the compensation that landowners can receive. Often, they have their own form of surface use agreement; however, such agreements are normally inadequate in affording the protection that the landowner needs.
The landowner should consult an attorney familiar with oil and gas matters, so that the landowner and his land can be protected and additional compensation can be obtained for the surface use of his land.
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