Don’t Lose Oil & Lease Production Interest To Rule 37!
January 31, 2018
Mineral interest leasing and pooling are complex subjects if you have gas and oil rights to sell. Unless you agree to pool your mineral rights interest with other owners so a drilling company can efficiently extract gas and oil from the ground, you could be subject to Rule 37 of the Texas Railroad Commission (RRC) code and lose your financial interest in the process.
What Is Rule 37?
The Rule 37 exception is designed to reduce wasteful drilling and destruction of the environment by giving energy companies the right to drill even when unleased tracts stand in their way. It is also designed to protect energy companies against the possible liability that could take place when a well drilled close to an unleased tract drains that tract of available mineral deposits.
According to the RRC, a well may not be drilled within 330 feet of an unleased tract of land. When an operation needs to drill within this boundary, it will normally approach any mineral rights interest owners and make an offer to lease so they can legally continue with the drilling project. Owners interested in selling mineral rights can agree to lease and join the pool, then receive royalties based on the size of their deposit.
When an owner of gas and oil rights refuses the lease offer or an owner cannot be located, an energy company may apply for a Rule 37 exception. If the court agrees that the tract in question is interfering with drilling efforts and the project is worthwhile, the exception may be granted.
This exception may also be granted when tract owners agree to selling mineral rights but then fail or refuse to sign a lease contract. Should minerals be drained from the refusing or missing owner’s tract in the process of production, the energy company is not required to pay production interest to that owner.
How To Avoid Losing Your Production Interest
Interest owners usually lose their mineral rights production royalties to a Rule 37 exception by failing to acknowledge a notice of application. Legally, an energy company that files for a Rule 37 exception must provide you with a notice that they are applying for the exception and advise when and where the application hearing will take place.
To contest the granting of Rule 37 and retain more control over your gas and oil rights, you should have a lawyer with you at the hearing. You may be able to either negotiate for better lease terms or stop the exception being granted altogether. This would require the operator to change their project plan, which would be more costly than coming to a better agreement with you.
If you fail to respond to the notice of application or do not contest it, the exception will usually be granted. As mentioned above, you could then lose your production interests and any royalties if your deposit is drained during the production process.
Negotiating gas and oil rights leases can be tricky for those without the proper knowledge and experience. Pooling your mineral rights interests by leasing to an energy company is a simple solution to avoid the Rule 37 exception and potential loss of production interest. As the owner of these interests, you are entitled to contest the application for exception to negotiate for more favorable lease terms or simply refuse to lease altogether. There is a definite risk involved but as the one selling mineral rights, the decision on whether to lease or not is ultimately up to you!
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