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Exploration and production
Who holds the rights to oil and gas reserves in your jurisdiction?
The ownership of oil and gas rights in the United States differs from most international jurisdictions in that a significant portion of oil and gas rights are privately held by individuals (or corporations or trusts) and can be transferred freely between private parties.
The federal government owns and controls oil and gas rights on US-owned lands, which cover large portions of the country (approximately 28% of all onshore lands located in the United States) and include land located within individual states’ geographic boundaries. On certain historical American Indian lands, oil and gas rights are owned or operated by the federal government on behalf of, or for the benefit of, certain American Indian individuals or tribal authorities. On state-owned lands within the geographic boundaries of the applicable state, oil and gas rights are owned by the individual states. States with a coastline own the oil and gas rights to any submerged lands up to three nautical miles from their coastlines (except Texas and Florida, which own the rights up to three marine leagues from the coastline). The federal government owns the oil and gas rights to any US submerged lands beyond such state-controlled lands, including on the outer continental shelf.
Is there a distinction between surface and subsurface rights?
Yes. Although the concept of fee simple ownership of a tract of land entitles the owner to both the surface and sub-surface, ownership of the surface and sub-surface estates can be severed by grant or reservation. A party that owns the mineral estate on a tract of land is entitled to develop and produce oil and gas from that tract, even if it does not own the surface estate covering such tract. A party that owns only the surface of a tract of land (not the sub-surface) has no right to develop the oil and gas reserves associated with such tract. Further, the mineral estate is ‘dominant’ over the surface estate, meaning that the owner of the mineral estate has the right to enter or make use of the surface estate to the extent reasonably necessary to develop the mineral estate. Property law is generally governed by state law, so this concept varies in its implementation, with states requiring that the mineral estate owner accommodate the surface estate owner to varying degrees.
Although the concept of the severance of the mineral estate does apply to federal lands and state-owned lands, it is less likely that the mineral and surface estates will be severed on such lands, and in practice, this issue rarely arises.
What rules and procedures govern the grant of rights for exploration and production purposes (eg, through licences, leases, concessions, service contracts, production sharing agreements)?
The main way of granting oil and gas rights in the United States – on federal, state and private lands – is the oil and gas lease, which is granted by the holder of mineral rights covering oil and gas (the lessor) to the party that wants to develop the oil and gas on the applicable tract (the lessee). Use of the oil and gas lease on federal and state lands is implemented by regulation, whereas use of the oil and gas lease on private lands is due to historical custom and industry practice. In most states, an oil and gas lease is regarded as a grant of a real property interest, while in practice an oil and gas lease is often treated as a hybrid of real property rights and contract rights. The holder of mineral rights covering oil and gas on a particular tract need not grant an oil and gas lease in order to develop the oil and gas reserves on the applicable tract, but rather can choose to develop the reserves itself.
Compared to international oil and gas practice, the US oil and gas lease is probably most analogous to a concession containing a fixed exploration term, with an option for an extended production term if oil and gas are discovered in commercial quantities. The specific property interests conveyed under the lease tend to vary depending on the jurisdiction in which the property is located and the terms of the particular lease agreements. It is common for modern oil and gas leases to grant the right, but not the obligation, for the lessee to develop the minerals during the initial term of the lease. If the lessee manages to produce oil and gas in commercial quantities, the lease will extend past a primary term for as long as the lessee continues to produce oil and gas in commercial quantities. The lessee has the right to take and sell freely the oil and gas produced from the applicable tract, subject only to the lessor’s entitlement to the royalty stream. The historical standard royalty was one-eighth of production, but modern leases contain a wide range of royalties, such as:
- up to one-fourth of production;
- sliding scale royalties; or
- different royalties for different types of hydrocarbon.
What criteria are considered in awarding exploration and production rights (eg, are there any restrictions on the participation of foreign investors/companies)?
Other than generally applicable restrictions on foreign investment in the United States (including the review of foreign investment in the United States by the Committee on Foreign Investment in the United States) or on property ownership, there are no material regulatory criteria for the ownership of oil and gas rights on private lands. Oil and gas leases are generally granted based on commercial factors such as the highest royalty or the ability or interest of a grantee to develop the asset.
Federal and state oil and gas leases are generally awarded according to a public bid system that requires bidders to provide a deposit and submit sealed bids to the applicable Department of Interior agency. If there are multiple bidders, the lease is awarded to the qualified bidder submitting the highest acceptable bid.
Certain restrictions are imposed on granting oil and gas leases on federal lands. A foreign citizen may not own an interest in a federal oil and gas lease, except through stock ownership in a US corporation, and provided that the foreign citizen’s country of origin grants reciprocal ownership rights to US citizens. There are also certain qualification and financial security requirements to own or operate, as applicable, federal oil and gas leases, with the requirements varying based on the type of lease.
Are there any special legal provisions applicable to joint ventures?
As a general rule, parties need not enter into any particular form of joint venture to own or develop oil and gas rights. The large majority of joint ventures formed to pursue upstream oil and gas development operations are not ‘true’ joint ventures where co-venturers form a jointly held entity (ie, a company) to own and operate the applicable asset, but rather are undertaken with each co-venturer owning an undivided interest in the applicable real property asset (ie, a joint tenancy), with the interactions between the parties governed by contract, such as the joint operating agreement. Both the American Association of Professional Landmen and the Association of International Petroleum Negotiators have developed model joint operating agreements that are widely used by the industry.
It is more common for processing, midstream and downstream operations to be conducted by a true entity-type joint venture.
Can exploration and production rights be transferred to third parties?
Yes. The restrictions on transfer of exploration and production rights are generally the same as the restrictions on the grant or ownership of oil and gas rights, as discussed above.
Is hydraulic fracturing (‘fracking’) permitted in your jurisdiction?
Aspects of hydraulic fracturing or fracking are regulated by federal law, but federal law does not prohibit fracking. The Safe Drinking Water Act’s underground injection programme regulates fracking if diesel fuel is used in the fluid or injected underground. Although in December 2017 the US Bureau of Land Management rescinded a regulation that imposed requirements on hydraulic fracturing on federal and Native American lands, other federal and state environmental laws may require a project to obtain permits for:
- well development;
- the storage and discharge of liquids generated during fracking; and
- air emissions from the wells and equipment at the wells.
State and local governments have established regulations, bans or moratoriums on activities associated with fracking.
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