In addition to evaluating geoscience and engineering essentials such as where operators are drilling, EnergyFunders evaluates the legal side of potential oil and gas investment opportunities before presenting them to our investors.
State Regulatory Commission Rules
Well placement must follow state rules. The state oil and gas regulatory commission which issues rules on where you can place an oil and gas well — how far it must be from the boundary line of the neighboring land owner and how far it must be from other wells to prevent waste.
Placing wells too close to a boundary line will drain another property owner’s reservoir without compensation, which can give cause for a lawsuit. Placing too many wells too closely together may damage the underground reservoir and cause the irreparable loss of hydrocarbons.
Oil and Gas Lease
The mineral owner (called a “land owner” even if he or she does not own the surface), must be under an oil and gas lease, controlled by the company that is drilling.
Ownership of the lease may be segmented by depth or by geographic area, and it is common for multiple companies to own interests in the same area of the same lease. If multiple parties own it, the company performing or overseeing the drilling and controlling the operations of the lease will be the operator.
The landman ensures that the leases are properly taken, that they cover 100% of the minerals, and that they are correctly assigned to the oil and gas company.
If a single lease is not large enough to meet the minimum area requirements set by the state regulatory commission, you have to “pool” leases together to create a drilling unit. The landowners within the unit will share in production proportionate to their ownership of the minerals in the unit.
Joint Operating Agreement (JOA)
A landman must negotiate a joint operating agreement if there are multiple working interest owners in a lease or within a drilling unit.
The JOA is essentially a private constitution that defines the rights and responsibilities of the various working interest owners. (Mineral owners do not sign JOAs. They receive royalty payments from the working interest owners who own the lease and the oil and gas wells drilled thereon.)
What Does This Mean for Investors?
If you are evaluating oil and gas investment opportunities, these are some of the legal factors to consider. At EnergyFunders we complete the due diligence process for investments, including evaluating the operator’s team and geoscience data. Then, you can review all the information so you can select projects that are right for you. Create a free account to view our current oil and gas investment opportunities.