What is Conveyed in an Oil and Gas Lease?

in The Oil and Gas Lease

My understanding is that an Oil and Gas Lease is not actually a lease, but rather a conveyance of a ‘fee simple determinable’ ownership of the oil and gas in place.  The term “determinable” simply means that the property interest can be terminated under stipulated conditions (ie., expiration of the primary term).  I think a lot of times the term ‘lease’ leads to some confusion as to what rights were actually transferred and the law governing those transferred rights.  The understanding that a real property interest was conveyed, rather than a simple contractual relationship being created, goes a long way in explaining the relationship between the parties.

So, for example, John Smith, the owner of a one hundred acre tract, signs an Oil and Gas Lease with Alotta Oil Company, reserving a 1/5th royalty.  He has in effect conveyed all of the oil and gas that exists under the surface of the land to Alotta Oil, reserving to himself 20% of the oil and gas produced from the property.  He no longer owns any oil or gas in place under his property.  He has made a conditional sale to Alotta Oil Company.  As long as Alotta Oil continues to abide by the terms stipulated in the conveyance (the Oil and Gas Lease), then they will retain ownership, the fee simple determinable, of the oil and gas in and under the land.  John Smith’s royalty ownership of the oil and gas will vest only at the time it is produced.

The Oil and Gas Lease is a grant of an interest in real property to Alotta Oil Company.  Understanding this relationship will be very useful when learning why Lessors have the rights that they do when dealing with surface owners, but that discussion is for another day.

Further, the termination of the fee simple determinable is automatic, requiring no affirmative action on the part of the Grantor, John Smith in this instance, to terminate the conveyance and recover the land.  John Smith would not need to know that the lease was terminated for the reverter to take place.

I think that this post is appropriate for the first post in the blog, as the oil and gas lease is the foundational instrument for landmen.  Understanding specific provisions of the lease can only come with a thorough understanding of what rights an oil and gas lease actually conveys.

Sources:

Hosey, Peter E. and Smith, S. Jordan, Are We There Yet? The Start and Finish of an Oil and Gas Lease, 37th Annual Ernest E. Smith Oil, Gas and Mineral Law Seminar 2011:2-3.