Posted: 22 Mar 2017
Date Written: March 19, 2017
Imagine owning a piece of chocolate cake, but not having the right to eat it. The challenges faced by a mineral (referring to oil and gas) interest owner who does not possess the executive right (the “non-executive”) is similar to the cake analogy. The executive right refers to the right to self-develop the mineral estate or to execute an oil and gas lease, which is both a contract and conveyance of the subsurface mineral estate. If the executive right is severed from the associated mineral interest, the non-executive relies on the holder of the executive right (the “executive”) to develop the minerals in order to generate revenue for the non-executive. Like the One Ring in Tolkien’s epic, “The Lord of the Rings,” the executive right controls all other oil and gas property rights (the right to develop, collect rents and royalties, etc.). Without this executive right, the mineral owner is powerless.
Challenges arise if the executive and non-executive do not desire similar property development outcomes. For example, whereas an executive with a real estate surface development may desire prohibiting oil and gas operations to satisfy buyer or lender preferences, the non-executive mineral or royalty interest owner desires oil and gas development and production to acquire potential future revenues. The burgeoning, “Keep it in the Ground” movement may also push forward to purchase executive rights to prevent the development of the associated oil and gas.
This article is the first to identify major problems that occur from severance of the executive right, focusing on scenarios where the preferred outcome of the executive does not harmonize with that of the non-executive. First, severance of the executive right violates the basic premise underlying oil and gas jurisprudence—the belief that mineral resources should not be wasted. Second, the ownership intentions of a disagreeing executive and non-executive cannot be reconciled for mutual benefit. Therefore the rights of one property owner—usually the non-executive—is likely to be disregarded in favor of the other. Finally, the loss of a defining characteristic of the mineral estate—the right to execute the oil and gas lease—leads to economic inefficiencies in the ensuing transactions after severance. Therefore severance of the executive right prevents optimization of the property interest.
To address these issues, this Article examines several resolutory mechanisms: (1) non-retroactive prohibition of severance of the executive right from the associated mineral estate; (2) adverse possession of the executive right by the non-executive; (3) adoption of a variable standard of conduct approach; (4) enacting legislation similar to dormant mineral acts (“DMA”), which encourage development of mineral resources by declaring mineral interests abandoned after a prescribed period of time and reuniting the severed mineral and surface estate; and (5) finding a covenant to execute an oil and gas lease in the executive right property interest.
Keywords: executive right, oil and gas lease, mineral, oil and gas, Keep it in the Ground, implied covenant, adverse possession, dormant mineral act, restraint on alienation, standard of conduct
JEL Classification: K11
Suggested Citation: Suggested Citation
Ehrman, Monika U., One Oil and Gas Right to Rule Them All (March 19, 2017). Houston Law Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2937509