THE ANATOMY OF AN OIL AND GAS TITLE OPINION Shannon, Gracey, Ratliff

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THE ANATOMY OF AN OIL AND GAS TITLE
OPINIONShannon, Gracey, Ratliff Miller,
LLPOil Gas Seminar 2008Ballpark in
ArlingtonSeptember 23, 2008 Roger E.
BeechamShannon, Gracey, Ratliff Miller,
LLP500 N. Akard St., Suite 2500Dallas, Texas
75201(214) 245-3077 Office(214) 245-3097
Facsimilerbeecham_at_shannongracey.comTitle
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• Roger E. Beecham
• Roger E. Beecham is a partner in Shannon, Gracey,
  Ratliff and Miller, L.L.P.
• Mr. Beecham began his career working for a major
  oil and gas company. He is experienced in
  dealing with acquisitions, exploration and
  production of non-producing and producing oil and
  gas properties including fee lands, Indian lands,
  and state and federal lands.
• Mr. Beecham has been involved with all aspects of
  mineral titles, leases, leasing, seismic
  agreements, exploration agreements, drilling
  contracts, joint operating agreements,
  participation agreements, farmouts and farmins,
  gas balancing agreements, oil and gas purchase
  and sales contracts, natural gas transportation
  agreements, gas processing agreements, pooling
  and unitization. Recently, he participated in
  defeasing publicly issued bonds issued in 1998 by
  the Texas Municipal Gas Corporation to secure
  releases of oil and gas properties
  collateralizing these bonds that were purchased
  by his client.
• Mr. Beecham has represented both borrowers and
  lenders in oil and gas lending transactions
  including asset-based and corporate loans and
  non-conventional lending and financing based on
  production payments, net profits interests,
  back-ins, and carried interests. He is a member
  of the American Association of Petroleum Landmen
  and the Dallas Association of Petroleum Landmen.
• He also practices Water, Oil and Gas Litigation,
  and Real Estate Law.
• Background and Education
• University of Oklahoma (J. D., 1968)
• Oklahoma State University (B. S. Civil
  Engineering, 1965)
• Bar Admission
• Oklahoma and the State Bar of Texas
• United States Supreme Court
• United States Court of Appeals Fifth Circuit
• United States District Court for the Northern,
  Southern, Eastern and
• Western Districts of Texas

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• Seminar Speaker
• Groundwater Rights in Texas, including water use
  by mineral owners, Water Rights Sales and
  Transfers in Texas, Lorman Educational Services,
  Forth Worth, Texas, March 24th, 2006.
• Water Rights in the Western United States,
  Teleconference Seminar, Lorman Educational
  Services, Dallas, Texas, June 6th, 2006.
• The Oil and Gas Lease from the Land Owners and
  the Operators Perspective, Shannon, Gracey,
  Ratliff Miller, L.L.P.s Oil and Gas in an
  Urban Environment 2006, Ranger Ballpark in
  Arlington, September 18th, 2006.
• You have land, now you want water, or how to get
  water and wastewater service to your
  subdivision, Water Rights Sales and Transfers in
  Texas, Lorman Educational Services, Dallas,
  Texas, December 14th, 2006.
• Remainder and Special Damages, including damages
  to the mineral estate, Eminent Domain, Lorman ,
  Dallas, Texas, January 24th, 2007.
• Groundwater Rights, Pending Legislation, and
  Barnett Shale Groundwater Study, Environmental
  Law Section, Tarrant County Bar Association,
  Forth Worth, Texas, March 26th, 2007.
• Water Law, including water verses oil and gas,
  Legal Issues for Texas Civil Engineers, Halfmoon
  , L.L.C., Arlington, Texas, April 25th, 2007.
• Oil and Gas Lease Issues, including the
  Accommodation Doctrine, the Doctrine of Strips
  and Gores, and Water Issues, Shannon, Gracey,
  Ratliff Miller, L.L.P.s Second Annual Oil
  Gas Seminar 2007, Ranger Ballpark in Arlington,
  June 6th, 2007.
• Remainder and Special Damages, including
  revisiting damages to the mineral estate,
  Eminent Domain, Lorman , Dallas, Texas, January
  24th, 2008.
• Unique Title Issues in the Barnett Shale Gas
  Play, Fort Worth Business Press Barnett Shale
  Symposium, Fort Worth, Texas, June 19th, 2008.
• Municipal Regulation of Urban Natural Gas
  Pipeline International Right of Way Association,
  Dallas Fort Worth Chapter, Forth Worth, Texas,
  September 9th, 2008.

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• TITLE HISTORY OF NORTH TEXAS
• Historically in Texas land titles come from four
  different sources Spain, Mexico, the Republic of
  Texas and the State of Texas. Further most of
  the land titles in North Texas were obtained from
  the land grants in Peters Colony.

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• 1. SPANISH GRANTS
• Spain first claimed land in Texas in 1519 along
  the Gulf Coast to the Rio Grande. Not finding
  great wealth, Texas was ignored until 1685 when
  La Salle claimed the land for France. To protect
  its claim, Spain attempted to populate the state.
  The first Spanish land grant was made in 1690 in
  East Texas. For the next 130 years Spain
  continued to issue land grants in large
  quantities to a small number of people in leagues
  (4,428.4 acres per league) with the wealthier
  people getting larger tracts. To encourage more
  settlers in Texas, in 1748, Spain allowed private
  agents colonization grants to be sold to
  settlers.
• With the sale of the Louisiana Purchase territory
  to the United States, the Spanish government
  allowed more settlers private grants to prevent
  control by the United States. Until 1819, land
  grants were primarily awarded to Spanish subject.
  One of the first Americans to respond to the
  expanded colonization was Moses Austin. As
  compensation he was allowed four leagues of land
  for every 30 families he settled.

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• 2. MEXICAN GRANTS (1821-1836)
• In 1821 after Mexico became independent from
  Spain, Mexico continued the empresario system to
  recruit colonist. These agents brought about
  50,000 settlers to Texas. After the death of his
  father, Moses Austin, Stephen F. Austin obtained
  the first contract from Mexico. The terms of
  this colonization was much more generous that
  that allowed by the Spanish. Initially each
  settler received one labor of land (177.1 acres)
  for farming and one league for grazing. Austin
  received 15 sitios (66,420 acres) for grazing and
  two labors for farming for every 200 families up
  600 families settled. As time went along, the
  size of the grants and compensation for the
  grants were reduced.
• Austin was the most successful of the
  empresarios. Initially he persuaded more than
  1,100 families to come to Texas and received 22
  sitios of land in payment. Later he settled 900
  more families. There were several other
  empresarios that settled many parts of Texas.
  The Mexican land laws were favorable to the
  settlers and the land hungry Americans flooded
  into Texas between 1821 and 1836. One big
  influence of Mexico was the Homestead Act which
  is somewhat followed today that prevented seizure
  of a home to secure payment of a debt.

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• 3. THE REPUBLIC OF TEXAS (1836-1845)
• Texas gained its independence, created a general
  land office to collect the land records to
  determine which land were covered by Spanish or
  Mexican titles and which land were vacant, and
  claims all the land down to the Rio Grande. When
  the republic government was formed, the treasury
  has only 55.68 but thousands of acres in vacant
  land. Land was given to those that served in the
  military, defended against warring Indians, and
  to veterans that served revolution. These
  warrants and certificates granting this land
  initially were not transferable but later were.
  They were forwarded to the general land office
  where they were checked. If no conflicts were
  found, patents were issued to the owners. Later,
  the Republic passed headright acts to encourage
  additional settlers. These setters could obtain
  from a league and labor down to 320 acres of
  land. Additional headrights programs where
  passed for other military service.

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• 4. PETERS COLONY
• In 1841, to encourage more immigration, the old
  empresario system was brought back. William. S.
  Peters and 19 associates were allowed to settle
  600 colonists in North Texas. The first contract
  established boundaries of the colony from the Red
  River down through lands in portions of Cooke,
  Grayson, Denton and Collin Counties with each
  family to get 640 acres and single men to get 320
  acres.
• The first contract established boundaries of the
  colony from the Red River down through lands in
  portions of Cooke, Grayson, Denton and Collin
  Counties with each family to get 640 acres and
  single men to get 320 acres. Due to insufficient
  unappropriated lands in this grant, a request for
  an extension of the boundaries was made. The
  second contract extended the boundaries
  approximately 40 miles south to include lands in
  portions of Tarrant, Dallas, Johnson and Ellis
  Counties.
• In 1842, the Republic extended the contract to
  the west with the western boundary being lands in
  portions of Wilbarger, Baylor, Throckmorton,
  Shackleford, and Callahan Counties. Further in
  early 1843, the colony was expanded to additional
  lands to the colony. The most settled areas were
  in Cooke, Denton, Collin, Dallas, and Ellis
  Counties.
• During this time, the counties referenced above
  as we know them did not exist. Most of these
  lands were then situated in Old Fannin,
  Nacogdoches, and Robertson Counties. However,
  many disputes erupted over title to the
  properties. Protests were held and demands were
  made that the legislature secures the settlers
  claims. A compromise was reached in 1852 and the
  colonists where to have until the middle of 1852
  to establish their claims. The colonists opposed
  the law and armed opponents showed up scheduled
  meetings to resolve the matter. A settlement was
  finally reached and the compromise law amended
  but it took nearly 10 subsequent legislative
  enactments over 20 years to bring finality to the
  land titles.

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(No Transcript)
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• 5. STATEHOOD (1845-Present)
• When Texas became a state in 1845, it recognized
  all valid land titles previously issued by Spain,
  Mexico, and the Republic of Texas. The state
  also sold land to pay off debts. Further land
  grants continued to be made to settlers.
  Initially one could be granted 320 acres and if
  you lived on it and improved it, you could buy it
  for 0.50 per acre. These pre-emption acts
  continued until 1898. Land was used for public
  improvements such as the construction of
  railroads, steamships and other vessels,
  industry, and ship channels and harbors. Former
  soldiers of the Texas Revolution and the
  Confederacy were rewarded with land. Land was
  allocated for the support of schools and was
  generally sold through competitive bidding. In
  1898, the Texas Supreme Court declared there was
  no more vacant and unappropriated land. Lastly
  the capitol in Austin was build from the
  appropriation of approximately 3,000,000 acres of
  land located in the panhandle. This land
  eventually became the XIT Ranch. There were
  often many problems with the surveys of these
  lands. Many of the tracts were identified by
  field notes where the surveyor never visited the
  land. Other surveyors measured boundary
  distances by the revolving wagon wheel. Others
  determined distance by a half days walk, or
  north three cigarettes on a donkey. Surveys
  were inaccurate as a result of low pay,
  dishonesty, carelessness, and the treat of danger
  (Indian attacks). When the oil boom hit in the
  early 1900s these inaccurate surveys led to may
  lawsuits and confusion.
• http//www.glo.state.tx.usarchives/history
• http//www.tshaonline.org/handbook/online/articles

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• PURPOSE OF TITLE OPINIONS
• No title insurance covering the underlying
  mineral interest.
• Must examine the Chain of Title from
  sovereignty of the soil to present day ownership.
• Types of title examinations.
• 1. Review of Abstracts of Title.
• 2. Perform Stand-Up title Examinations.
• 3. Prepare Runsheets and Obtain Copies of
  Instruments.

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• TYPES OF TITLE OPINIONS
• 1. MINERAL OR LEASE ACQUISITION TITLE OPINIONS
• When a party desires to acquire mineral
  interests or oil and gas lease he must determine
  who owns the minerals and/or the oil and gas
  leases. Here the title examination must identify
  the mineral owners and those owning the executive
  rights. Once this is accomplished, the landman
  can then proceed to obtain oil and gas leases
  from these owners. If valid leases are existing
  the lessees or owners of the lease may be
  identified. The title examiner is not concerned
  with royalty owners and their division of
  ownership but only with the ownership of the
  mineral, executive rights, and/or leases and
  whether there are any encumbrances affecting
  these interests.

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• 2. DRILLSITE TITLE OPINIONS
• Maybe the first time the examiner is requested to
  examine title.
• Concerned with identifying working interest,
  executive rights, and possibly net revenue and
  lease encumbrances.
• Lease(s) must be determined to be valid and
  subsisting.
• If lease is pooled, the pooling declaration must
  be reviewed.

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• 3. Division Order Title Opinions
• Must be prepared after the well is drilled and
  production is found.
• Established the division of interest of the
  parties.
• Must cover not only the lease but if the lease
  has been pooled, it must cover the pooled unit.
• Used for division order.
• All curative work must be complete.
• Must comply with Tx. Nat. Res. Code, Sec. 91.401
  et seq., Vernon 2007.

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• 4. Lending title Opinions.
• Must Opine that Deed of Trust is a first and
  prior lien.
• Verify division of interest.
• Verify borrowers interest will not be diluted.
• May require a pre-closing and post-closing title
  opinion.

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• 5. Supplemental Title Opinions
• Reflects curative work that has been done.
• If older title opinions are relied on, examiner
  should reflect reliance and include disclaimer in
  the STO.
• May bring Drillsite TO or DOTO up to present day
  date.

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• FORM OF THE TITLE OPINION
• 1. MATERIALS EXAMINED
• Abstracts
• Runsheets
• Instruments
• Letters and other documents
• Set out the period time each abstract or runsheet
  covers

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• 2. DIVISION OF INTEREST
• Mineral Interest
• Leasehold Interest
• Royalty Interest
• Other Leasehold Burdens
• Working Interest
• Net Revenue Interest
• Royalty Interest
• Other Leasehold Burdens
• Working Interest

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• 3. Existing Lease(s)
• Date
• Recorded Memorandum of Oil and Gas Lease
  between.
• Lessor
• Lessee
• Land Covered Property Description in lease
• Interest Covered All or partial.
• Warranty
• Primary Term
• Royalties Royalties on oil, gas and other
  substances produced ..
• Shut-In Gas Payments or Royalties
• Delay Rentals
• Depository
• Pooling Provisions
• Lease Form
• Unusual Provisions See lease.

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• 5. Easements
• 6. Patent Information
• 7. Legal Description
• 8. Encumbrances
• 9. Taxes
• 10. Title Requirements

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• 11. Comments
• 1. The title examination was conducted by
  examination of the documents referenced in
  Exhibit __, which were based on uncertified
  runsheets prepared by Osage Land Company, which
  are the least reliable form of title examination.
  We have used this form of title examination at
  your request and with your assurance that you
  understand the risks associated with this form of
  examination. Our opinion is limited to the
  instruments actually examined.
• 2. This Opinion does not cover any matters not
  revealed by the materials examined, such as
  undisclosed liens, genuineness of the
  instruments, prior dedication of gas reserves and
  interstate commerce, number of wells, surface or
  sub-surface location of wells, depth of wells,
  area of the premises, boundary lines of the
  premises, survey lines, conflicts of boundary
  lines, vacancies, excesses, rights of partying
  possession or other matters which can be
  determined by an investigation upon the ground or
  by a survey of the premises.
• 3. The title of ABC Gas Company may be subject to
  any inchoate liens incidental to the furnishing
  of labor, materials or supplies for use in
  connection with the operation of the oil and gas
  lease to which the premises if subject. You
  should satisfy yourself that all invoices for
  labor, materials or supplies furnished for use in
  connection with the operations of said oil and
  gas leases have been paid, except for current
  invoices not yet due.
• 4. This Title Opinion is prepared at your request
  for your purposes only and may not be relied on
  by any other party without this examiners
  written consent.

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• UNIQUE TITLE ISSUES IN THE BARNETT SHALE
• 1. RESTRICTIVE COVENANTS AND DEED RESTRICTIONS
• These restrictions may limit an operators use
  of the surface and subsurface for drilling an oil
  and gas well. These restrictions are normally of
  record and included in the deed conveying the
  property or in a separate instrument filed of
  record. These limitations will be enforceable if
  they are created prior to the severance of the
  minerals from the surface estate. Dyegard Land
  Partnership v. Hoover, 39 S.W.3d 300 (Tex.
  App.Fort Worth 2001).

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• 2. NON-SURFACE USE
• An operator has the right to the reasonable use
  of the surface to conduct drilling operations
  subject only to limits imposed by the lease. Some
  of the problems can be avoided by the land owner
  if he enters into a surface use agreement. This
  agreement may provide for the non-use of the
  surface in drilling operations. A land owner
  should be aware that such agreement providing for
  surface damages will not require lessee to
  remediate subsurface contamination or damages.
  Unless the surface use provisions are contained
  in the lease, this agreement must be negotiated
  as a separate contract. Humble Oil Ref. Co. v.
  Williams, 420 S.W.2d 133 (Tex. 1967) Jones v.
  Getty Oil Co., 470 S.W.2d 618 (Tex. 1971) and
  Fenner v. Samson Resources Co., Not Reported in
  S.W.3d, 2005 WL 2123043 (Tex. App.Houston 1st
  Dist. (mem.op.).

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• 3. DEEDS OF TRUST AND OTHER LIENS
• In most subdivisions, the properties are going to
  be subject to deeds of trusts securing notes
  financing each individual lot located within the
  subdivision. This deed of trust creates a lien
  on the property. Other liens may be created on
  the lots by home improvement loans, home equity
  loans, delinquent taxes, judgments, and other
  obligations. Under the chain-of-title rule, any
  operator is deemed to know all the facts of the
  liens included in this chain-of-title through
  which he acquires his oil and gas lease. For
  example, if a lot is pledged as collateral by a
  deed of trust securing a purchase money loan, and
  the owner subsequently leases the minerals under
  his lot, the lease will be subject to the deed of
  trust. If production is obtained under the oil
  and gas lease before the royalty can be paid,
  subordination or a release of the deed of trust
  covering his property must be obtained. The same
  requirement applies to all other liens that may
  be filed on the property. If subordination or a
  release is not obtained, the operator may escrow
  and hold the royalty payments until such
  subordination or release has been obtained.
  Without a subordination, if the property is
  foreclosed, the lease may be terminated. Williams
  v. Jennings, 755 S.W.2d 874 (Tex. App. Houston
  14th Dist. 1988) Stowe v. Head, 278 S.W.2d 120
  (Tex. App.Tyler 1987, no writ).

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• 4. STRIPS AND GORES
• Under Texas law, when a deed conveys land
  abutting a right-of-way, title to the center of
  the right-of-way also passes by the deed.  State
  v. Fuller, 407 S.W.2d 215 (Tex. 1966) Cox v.
  Campbell, 135 Tex. 428, 143 S.W.2d 361 (1940) 
  Rio Bravo Oil Co. v. Weed, 121 Tex. 427, 50
  S.W.2d 1080 (1932) Reagan v. Marathon Oil
  Company, 50 S.W.3d 70 (Tex. App.Waco 2001, no
  pet.).  This general rule applies even if the
  description of the land terminates at the
  right-of-way, unless a contrary intention is
  expressed in plain and unequivocal terms.  Under
  the strips-and-gores doctrine, it is presumed
  that a grantor has no intention of reserving a
  fee interest in a narrow, adjoining strip of land
  when such land ceases to be useful to the grantor
  after the conveyance.  To overcome this
  presumption, the grantor must explicitly reserve
  in the deed with plain and specific language an
  interest in a narrow strip of land adjoining the
  conveyed land.  Cantley v. Gulf Production Co.,
  135 Tex. 339, 143 S.W.2d 912 (1940) Cox v.
  Campbell, 135 Tex. 428, 143 S.W.2d 361 (1940). 
  This rule applies to city lots for they are
  adjoining streets and easements that were
  acquired by public dedication, easement or
  eminent domain.  If the right-of-way is acquired
  by deed, this doctrine may not apply and the
  mineral interest underlying the interest may
  belong to the grantee.

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• 5. REFERENCES TO DOCUMENTS NOT FILED OF RECORDS
• The chain-of-title doctrine may also affect
  instruments referenced in recorded documents. In
  the Westland Oil case, several sections of land
  were leased to the oil company. This oil company
  entered into a farmout agreement with a second
  company who in turn transferred these rights to a
  third company. The second company subsequently
  farmed out these same rights along with some
  other rights to a fourth company but referenced
  an operating agreement between the second and
  third company that was not filed of record. The
  third company drilled and earned assignments of
  oil and gas interests under its farmout. The
  fourth company brought suit against the third
  company claiming it did not have notice of the
  first farmout agreement since it was not filed of
  record. The court said that due to the operating
  agreement being referenced in the second farmout
  agreement, the fourth company was charged with
  knowledge of the first farmout agreement and took
  subject to it. Westland Oil Development Corp. v.
  Gulf Oil Corp., 637 S.W. 2d 903 (Tex. 1982).
  These types of transactions usually affect the
  oil and gas operator more often than the land or
  mineral owners. If a landowner or mineral owner
  is examining title to the minerals underlying a
  tract of land, if extrinsic instruments are
  referenced in the public record but not recorded,
  a thorough search should be made to locate and
  examine the referenced instruments.

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• CONCLUSION
• What have I missed? This is the questions title
  examiners are always asking. Title examination
  is time consuming and exacting work. In
  preparing title opinions it is always suggested
  that a title examiner follow the Texas Title
  Stands which are found in the Property Code.
  These standards have been prepared by the Joint
  Editorial Board of the Real Estate, Probate,
  Trust Law, Oil, Gas and Energy resources Section
  of the State Bar of Texas. While these standards
  are not primary law, they are compilations of
  many title issues that all title examiners see.
  In closing, remember a bad title opinion can
  always be cured by a dry hole.