Legal Strategies

Nils Peter Johnson, Johnson & Johnson Law Office:
Unexpected Profits From Mineral Act

June 22, 2018

In Ohio, as in many states, different people can own different interests in the same piece of real estate.

One owner could exclusively own all the timber rights, while another could own all of the coal rights, with yet another owning the rights to the property’s surface.

This division of ownership interests poses unique challenges to the oil and gas industry, which needs authorization from the surface owner to place a well on the land, as well as authorization from the oil and gas owner to extract their valuable minerals.

When the surface owner also owns the oil and gas rights, the transaction proceeds smoothly.

However, when the oil and gas owner cannot be located or may have died many years ago, the surface owner desiring an oil and gas well – and the royalties associated with it – cannot obtain one. Enter the Ohio’s Dormant Minerals Act.

The Dormant Minerals Act is designed to rejoin abandoned oil and gas rights with a property’s surface. In a very basic illustration, a surface owner notifies the oil and gas holder of their intention to declare the holder’s rights abandoned 60 days in the future.

To preserve their interests, the holder must record a specific form in the subject county prior to this 60th day.

Timely filing of this claim form shuts down the whole process: The surface owner cannot recapture the holder’s interests.

This basic statutory right – designed to encourage oil and gas development in the state – also affords significant upside to enterprising surface owners and clever oil and gas holders.

Imagine that the surface owner owns 100 acres of property, itself subject to a one-half oil and gas reservation (or 50 oil and gas acres) made many years ago.

The surface owner, aware of this reservation, undertakes efforts to locate the present holders of the original reservation, ultimately identifying the holder’s 10 living heirs. Each holder would therefore be entitled to his share of oil and gas rights (50 oil and gas acres divided by 10 holders equals five oil and gas acres per holder).

But if the surface owner cannot physically locate the 10 holders to directly provide them legal notice, the surface owner must publish a similar legal notice in the local newspaper.

If an individual holder sees the published notice and either suspects the other nine holders will not see the notice or will take no action to preserve their interests, this individual holder holds substantial leverage over the surface owner. That is, if the individual holder files a claim form, the surface owner gets nothing.

Instead, the individual holder might strike a deal with the surface owner. In such a deal, he agrees to not file a claim form. In exchange, the surface owner agrees to transfer to the individual holder half of the oil and gas rights that he recoups as a result of the Dormant Mineral Act process.

In the example above, such a deal would net the individual owner 25 acres of oil and gas rights, compared to the five acres preserved by filing a claim form.

In reality, this fact pattern arises fairly frequently for several reasons.

First, family trees diverge over time, making heirs difficult to locate.

Second, the probate process – through which heirs inherit the holder’s interests via testamentary dispositions – can be more expensive than the corresponding future windfall.

And third, published legal notices often do not reach their intended audience.

Although the Dormant Mineral Act was primarily created for the benefit of surface owners, the discussion above clearly reveals its utility to the prudent oil and gas holder and their heirs as well.

Published by The Business Journal, Youngstown, Ohio.