Oil and Gas Companies Sell Acreage They Dont Control, Creating “Cloud” on Landowners Titles Oil and gas companies frequently sell and assign leases they have leased from landowners to each other. What is wrong with this practice? Nothing, as long as the companies selling or assigning acreage hold clear titles that prove they control the acreage. How does this practice turn negative and unjust for a landowner? Unfortunately, it is not uncommon for companies to complete transactions without clear title. As a result, multiple parties claim rights to the land, creating a “Clouded Title” for the legal owners of the oil and gas rights. The Clouded Title puts their ownership in question. Surprised? So are dismayed and outraged landowners who may not discover the Clouded Title until they attempt to sell or lease their land or the mineral rights under it. They find themselves in the middle of a costly dispute defending their legally owned land or mineral rights—a cost many cant afford. How “Clouded Title” Occurs and the Cost to You? • Company A sells 800,000 acres for $4 billion to Company B • Company A and Company B publicly announce the transaction • Company B discovers Company A actually does not control—have clear title--to 200,000 acres worth $1 billion • Company A fails to publicly announce Company Bs findings • The landowners acreage is included in the 200,000 acres Company A claimed to control • Company A has created a Clouded Title on acreage, putting the landowners ownership in dispute • The landowner is unaware of the Clouded Title until attempting to sell or lease the acreage • The landowner must hire a Title Attorney to conduct a title search to remove the Clouded Title, which costs thousands of dollars. • The Clouded Title delays or possibly stops the landowner from ever selling or leasing the acreage. Why O&G companies simply dont run title on acreage they claim to control? Two reasons for not having title is: 1) the high cost to the company, and 2) because not knowing means the company can claim conveyance of it was unintentional! It is expensive for companies to run title on the acreage. In our experience, companies will not run title unless it is necessary to drill a well. The effect is the conveyance agreements between companies contain landowner oil and gas rights that the companies did not own or lease. How do O&G companies benefit from this practice? Besides choosing not to spend money on expensive title searches, companies intentionally overstate the acreage in transactions to create the appearance of controlling more acreage than they actually do. By overstating oil and gas reserves, they enhance the amount of collateral they can show financial institutions, increasing their borrowing power for capital to fund the drilling. The bottom line for a company is its “value per share.” More acreage, more oil and gas reserves and higher potential earnings push up that figure. The higher the value per share companies can tout to shareholders, the more they encourage investment dollars. This bottom-line figure also determines compensation incentives company executives receive. Many reasons exist to motivate companies to unscrupulously push the boundaries to show as much acreage as possible under their control. How can this practice be eliminated? Regulations do not require oil and gas companies to conduct comprehensive title searches to show “Clear Title” in reporting oil and gas acreage to the Security Exchange Commission (SEC), shareholder reports or for appearance in buying and leasing transactions. If regulations did exist, regulators must have the expertise and capability to enforce the regulations to hold the companies accountable. The result would: 1) save landowners legal expenses to Clear Title on their acreage ownership, 2) stop the company practice of conveying acreage they do not control, 3) and ensure accurate reporting of acreage by the companies to the SEC and shareholders. How can you find out if your acreage has “Clouded Title”? You can review the recorded assignments, open-ended mortgages, line of credit agreements, deeds, etc. filed by the companies or financial institutions in the Recorder of Deeds or Clerk of Courts offices, depending on in the state in which you reside, located in the county courthouse. We highly recommend you contact an oil and gas expert such as Gaia or an experienced oil & gas attorney to review the courthouse records. It is financially beneficial for you to know if your ownership of acreage is affected by this practice. Reviews are not cost prohibitive and usually pay for themselves and more during the process of selling and leasing oil and gas rights. If you have questions about this article or would like to discuss how Gaias services can help you, please text us at 724-288-2779 or call our office at 724-720-9402.
Posted on: Mon, 22 Sep 2014 16:24:06 +0000
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