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INTERNET OIL & GAS PRIMER™

on

THE OIL & GAS LEASE

Copyright © 1999 by Lewis G. Mosburg, Jr.  All Rights Reserved.

Author's Note

    Our discussion of the rights of a Lessee under the Granting Clause now moves to the question:  what substances are covered by the Lease?

PART ELEVEN: THE GRANTING CLAUSE: SUBSTANCES COVERED BY THE LEASE

The area of what substances are covered by a grant or reservation, including what substances are conveyed ("leased") under the Granting Clause of an Oil and Gas Lease, is fraught with confusion. First, what does the instrument say:  does it purport to convey/reserve "oil and gas," "oil, gas and [all] other minerals[, whether similar or dissimilar]," and are there other provisions of the instrument that must also be considered? What do we mean by "gas?"  By "minerals?"

From a practical standpoint, the issue is normally less serious when in the Lease situation then where a grant or reservation between potential mineral owners is concerned. Usually, when I take an "Oil and Gas Lease, " or even an "Oil, Gas and Other Minerals Lease," oil and hydrocarbon gasses are the substances I'm (chiefly) interested in.1 (If my primary objective had been gold or coal I would have taken a gold or coal lease, not an "Oil, Gas and Other Minerals Lease.")  And most of the time, oil and/or hydrocarbon gasses are what will be discovered. This is a blessing, since, as mentioned above, there is terrible confusion among the states as to how "oil and gas" or "oil, gas and other minerals" should be interpreted.2 Still, problems may arise if an Oil and Gas (or Oil, Gas and Other Minerals) Lease is taken, and it is subsequently determined that valuable substances other than oil and hydrocarbon gasses lie under (or form a part of) the leased premises.

A word concerning what we mean by "covered" by the Lease.  As discussed in earlier articles in this Primer, the Lessee may be entitled to use various substances such as water, soil or gravel to further the conduct of the operations on the leased premises which are aimed at producing those substances which are clearly covered by this lease, e.g., oil and hydrocarbon gasses.3 Here, the Lessee is entitled to use those substances not because they are "covered" by the Lease at least as we are using that term but due to the fact that his rights of "surface" user include the right to use the leased premises, and its constituents, to further accomplishment of the basic purpose of the Lease.  For the purposes of this article, "covered" by the Lease means that the Lessee has the right to produce/extract the substance to market that substance.4

A first step in determining which substances are covered by the Lease is, as is mentioned above, to study the language of the Lease itself.  If, for instance, the Granting Clause, in listing the leased substances, mentions only "oil and gas," it should not be interpreted to cover coal.5

Or should it? Normally, the answer would clearly be, "No:  the language of the Lease is plain as to the substances covered." There is also no utilization of a "catch all," such as "and other minerals."  But interpreting substances covered by the Oil and Gas (or Oil, Gas and Other Minerals) Lease, the entire Lease must be interpreted.  And this includes the Royalty Clause.

In a number of Leases, there are three provisions for the payment of royalties on production: one covers royalties on oil, a second covers royalties on gas, and the third covers royalties on other substances, frequently adding specific provisions concerning certain substances such as coal, potash or sulfur.6 Under the "four corners" rule, such a provision has the effect of modifying the Granting Clause, so that the Lease now covers any additional substances specifically mentioned in the third royalty provision, plus any further substances now covered under ejusdem generis as a result of adding to the list of items specifically mentioned. 

The Royalty Clause is the clause which most frequently changes those substances covered by the Lease, in effect "amending" the Granting Clause from the result that would have flowed absent such a wording of the  royalty clause. However, other provisions of the Lease may also have an impact under the "four corners" doctrine.  For instance, provisions concerning the conduct of operations may be interpreted to limit (or expand) the substances covered to those extractable through the designated types of operations.

Special issues arise if the substance in question is lignite or some other substance whose strip-mining extraction will prevent use of the surface for normal farming and ranching purposes.  Here, again, there is considerable uncertainty, although Texas has an extensive history of litigation on this issue.7

Another special issue concerns what substances are included within the term "gas." In light of the application by many states of the ejusdem generis rule in generally interpreting substances covered, it might be expected that "gas" would be limited to hydrocarbon gasses, thus excluding substances such as helium, carbon dioxide and nitrogen.  However, although authority is limited, it is more likely that "gas" will be held to include any vaporous substance if there is no other language in the Lease that dictates a different result.  Whether gas found in coal seams will be covered by an Oil and Gas Lease or a Coal Lease, if the two are separately leased, has also caused considerable litigation:  see the series by David Kreher on  Coal-Bed Methane Mineral Rights Ownership - A Brief Overview, elsewhere in this Newsletter.8

One of the best ways of addressing these issues is expressly to provide for them in the Lease. Thus, the sample Oil and Gas Lease contained in Part Two of this Primer expressly covers "oil and gas (including, but not limited to, gas producible from coal-bearing formations) . . . ."

Next:  "Lands Covered by the Lease"

 

1Even problems as to whether the constituent parts of oil and gas, such as condensate, distillate or casinghead gas, are covered by the Lease a particular problem in early cases in Oklahoma are generally avoided by specifically mentioning such substances in the granting clause or in other provisions of the Lease. See, e.g., the sample Lease reproduced in Part Two of this Primer, which covers "oil and gas . . . and all substances produced in association therewith."

2 For an exhaustive list of authority, see Williams & Meyers, Oil & Gas Law 219, hereinafter referred to as Williams & Meyers.

Considerable debate has raged over whether or not hydrocarbons are covered by a grant or reservation of "minerals," standing alone. See Williams & Meyers, 219 - 219.7. While this could be an issue in determining from whom to take an Oil and Gas Lease, it would normally not be a practical issue in interpreting representative modern leases, and will not be dwelt upon in this article.

3See Lewis Mosburg's Internet Oil & Gas Primer™ on The Oil & Gas Lease (Part Five): "The Granting Clause: Basic Concepts," and (Part Six): "The Granting Clause: Use of the Leased Premises: The General Right."

4As to a Lessee's right to extract soil, gravel, clay, limestone, etc., for sale for its own benefit (rather than for use in operations), see Williams & Meyers, 219.  As to water, see 219.6.

5The same rule would apply in many states even if the Granting Clause listed "oil, gas and other minerals.  Many states interpret such language by applying the ejusdem generis rule, under which the generality ("and other minerals"), no matter how broad, is limited to items of the same type or class as those specifically mentioned ("oil, gas").  Since oil and gas are both fugacious substances and hydrocarbon substances, "hard," non-hydrocarbon minerals such as sulfur, potash and uranium would not be covered, despite the breadth of the "and other minerals" language.  (Adding "all" before "other minerals," or "whether similar or dissimilar," doesn't seem to impress the courts.) Precious metals such as gold and silver would be excluded under ejusdem generis; other metallics such as lead, copper and iron would also be excluded.  The closest issue would be coal which is both a carbon (although not a hydrocarbon) and an energy substance; however, since coal is not fugacious, a number of states exclude it as well.

6This is particularly true in Leases labeled "Oil, Gas and Other Minerals" Leases.

7See Williams & Meyers, 219.

8There is a similar issue as to who owns (and thus has the right to lease) coalbed methane rights if there is separate mineral ownership of the coal and the oil and gas rights.

In some instances, gas rights may be leased separately from oil rights, or may be governed by different considerations (e.g., different overriding royalties on "oil" and "gas.") For a discussion of issues that may arise under these circumstances, see Williams & Meyers, 219.7.

 

 

Copyright © 1996 - 2007
 by Lewis G. Mosburg, Jr.

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