Today we’re going to talk about an issue that affects all mineral owners in some way and that is the concept of cotenancy with mineral rights. First, though we’d like to give a shout out to Dennis who wrote in and asked a great question that I realized we hadn’t covered yet. That is, the concept of what a mineral cotenant is and what your rights and responsibilities are with mineral cotenancy (especially if you are unleased).
So before we dive into Dennis’ question, let’s define what co-tenancy is. Co-tenancy is basically the joint ownership of a particular right to a piece of property. Many states treat the mineral estate similar to the surface estate in that you can co-own mineral rights with other parties just as if you co-owned the surface rights and a say a house. This becomes important if you are what is called an “unleased co-tenant”.
This is an issue that some mineral owners have to deal with in states that either don’t have well defined statutory pooling laws in place to protect mineral owners if they elect to not sign a lease but the operator gets approval to drill a well anyway. In states where there is a co-tenancy law in place that allows companies to basically force lease mineral owners where they may have not come to terms on an oil and gas lease while meeting certain conditions as outlined in the law for that state.
Before we get too far, just a disclaimer that we are not attorneys and this is being shared for informational purposes only and should not be construed as legal advice. I strongly recommend that you get help from a qualified attorney licensed to practice law in your jurisdiction if you are faced with this situation.
Be sure to also subscribe on Apple Podcasts via the link above and please leave us an honest rating and review. We read every one of them and sincerely appreciate any feedback you have. To ask us a question to be featured on an upcoming episode, please leave a comment below or send an email to feedback@mineralrightspodcast.com.
Listener Question
Dennis wrote in asking:
“I Went looking for an episode addressing these issues, and was unable to locate one. I am currently dealing with a company that “settling” into the habit of forcing mineral owners whose leases end up with a company via assignment . . . . into cotenancy as a way to bypass leases and shift costs onto mineral owners. This would be especially useful the immediate past where prices were deflated and mineral owners would only be paid after payout. In effect, it seems like the company could make the mineral owner bear the cost of operations to the point that if the price of oil was low enough.. any royalties due would be completely offset by costs. I am uncertain if this is widespread or if this company is just pioneering the practice… but I would love to see an episode addressing how to protect yourself as a mineral owner in such situations. “
Dennis
The issue that Dennis is describing is what happens to mineral owners that are not leased and the minerals are located in a state that doesn’t have well defined statutory pooling laws in place. In the scenario where mineral owners elect to not sign a lease but the operator gets approval to drill a well anyway while meeting certain conditions as outlined in the law for that state, the mineral owner may become what is called an “unleased cotenant”.
As you may remember in MRP 8: Forced Pooling – What are Your Options? and again in MRP 29: Listener Questions, we talk about what happens if you decide to not sign a lease and an operator goes ahead with drilling by obtaining a pooling order from the state oil and gas commission.
What is Pooling?
So again, pooling is the concept of joining together various mineral interests into a single drilling and spacing unit in order to drill a well that will drain an oil and gas reservoir that spans multiple tracts of land. With pooling, each mineral interest owner gets their proportional share of the proceeds of any oil and gas that is sold, per the terms of their lease and agreed upon royalty rate.
Pooling is a good thing because it provides an environment where operators can develop oil and gas resources in a controlled and fair manner and it ensures that if you have one stubborn mineral owner who refuses to lease their minerals that it does not prevent development of the oil and gas resources owned by other owners.
Forced Pooling vs. Participating vs. Non-Consenting
Most pooling laws provide is that the unleased mineral owners must be given a competitive offer to lease and a final chance to agree to these terms before things move forward. There are certain timeframes in place to allow owners enough time (for example it is 60 days in Colorado) to review the lease terms and decide whether they want to lease, participate in the well, or to do nothing and go non-consent.
We’ve talked about leasing a bunch so we won’t go into detail here but needless to say you need to negotiate terms with the lessee. If you don’t like the terms and are considering the other options, if you elect to participate in the well, you pay your proportionate share of the costs of drilling & completions and then once the well starts producing, you proportional share of the operating costs which would be subtracted from your share of the proceeds. The good thing about participating is you get a greater proportional share of the proceeds as a working interest owner but you really need to know what you are doing because you go from the revenue in a given month.
If you take no action, your minerals are pooled if you are in a state that allows statutory pooling and you would receive a percentage of your proportional share of the proceeds from the spacing unit and the rest would be held until a non-consenting penalty is reached which is usually between 200-300% of your share of the drilling costs and a percentage of other costs. Then once the well is paid back you would receive 100% of your proceeds in the well. If you are forced pooled and go non-consent, usually you end up getting a lower royalty rate than you would have been able to negotiate in the oil and gas lease but if the well ever pays out then you would get 100% of your proportional share of the proceeds but also your share of costs going forward as a working interest owner.
What is an Unleased Co-Tenant?
So back to Dennis’ question. Again, cotenancy is basically the joint ownership of a particular right to a piece of property. Many states treat the mineral estate similar to the surface estate in that you can co-own mineral rights with other parties just as if you co-owned the surface rights and a say a house.
In states like Texas, there are no statutory pooling requirements so they have provisions in place to allow operators to drill a well when they can’t come to terms with the mineral owner or perhaps can’t locate the mineral owner. In this case, they are allowed to categorize these mineral owners as “unleased co-tenants” and carry their interest without liability until the well reaches payout (again once the cost for drilling & completing the well plus penalty is paid back).
In Texas, if you non-consent to the drilling of a well by not paying your proproportional share of the drilling & completions costs and you elect to NOT sign an oil and gas lease you become an unleased co-tenant.
In Justin’s experience due to title issues and possibly inability to find his predecessor, the operator choose to carry his interest as unleased co-tenants. He spoke with an attorney and learned it comes with pros and cons. If carried as co-tenants he would be entitled to a larger percentage of production once the operators had been paid back for his proportional share of drilling cost. On the flip side, he found it to be very difficult to obtain any information about that amount, timeline etc. There was also risk involved with being unleased cotenant for example if the well was plugged and abandoned we would have a proportional share of the cost to do so that he would be liable for.
Different Rights Associated With Minerals
Interestingly, certain rights that are part of the bundle of sticks that make up the various rights associated with mineral interests don’t have to be divided equally between the co-tenants. So you can have Bob who retains the executive rights to the minerals but grants the other interests like the right to receive royalties equally to his children.
So co tenancy is something that applies to anyone who owns less than 100% interest in an undivided or specific interest in mineral rights associated with a particular tract of land. Basically it is the concept of joint ownership of mineral interests which is a very common situation. Many of us own an undivided interest in mineral rights whether it is ½, 1/16th, or 1/100th. If you own 1/16th of all oil gas and other minerals in a particular tract of land then you are a co-tenant with the other 15 owners.
Considerations Around Unleased Cotenancy
Where things get tricky is when one cotenant decides to drill a well and another nonconsenting mineral cotenant doesn’t want to lease their minerals, then in many cases you are liable for the proportional share of the costs. Now most states don’t require you to pay these costs out-of-pocket if you are an unleased cotenant, instead like the statutory pooling example we mentioned earlier, the party drilling the well gets to recoup your share of the well costs from the future proceeds from that well, usually with a penalty. Again, you would become a working interest owner after payout and would receive your share of the production as well as your share of the costs albeit at a higher decimal interest based on the fraction of your mineral interests to the overall size of the spacing unit for that well.
Now if other mineral owners lease their interests to an oil company and they are the ones that decide to drill the well then the same rules would apply, except the lessee or the operator would be the one bearing the costs to drill and complete that well and the same scenario would play out.
This is a situation where state law plays a big role as to what is allowed and what the requirements are for that state in order for a lessee or cotenant to move forward with drilling a well on a tract that has unleased mineral owners.
Resources Mentioned in This Episode
- West Virginia: West Virginia Cotenancy Law
- Texas: Rights and Responsibilities of Mineral Cotenants
- Overview of all states: Memo of Cotenancy Development Rights
Thanks for Listening!
To share your thoughts:
- Leave a comment or question below (we read each one and your question may be featured in a future episode)!
- Ask a question or leave us feedback via email or voicemail: (720) 580-2088.
To help out the show:
Click the Apple Podcasts Logo Above to leave us a rating & review. It really helps us reach those that need to hear this information and only takes a minute. We greatly appreciate it! Plus, you can get a shout out on a future episode!
Thanks again – until next time!
