The Value in Speaking with Others… Especially Competitors

       I always tell my son if you follow the money, you will usually find your answer. I know that’s not the most uplifting of messages, but it is amazing how often it ends in a correct answer. There are many, often competing, uses for the same tract of land and quite often these various uses can coexist (practically speaking, if not always in legal reality). So how do we decide which gets priority when they eventually and inevitably come into competition? What happens when a surface owner tired of farming their tract of land enters into a lucrative surface lease with a solar developer to construct a utility-scale solar farm on their land, but an oil & gas driller already has significant operations on that same tract? What if instead of current operations the oil & gas driller only has a lease? What if there is no lease and no operations but the tract is situated in a highly productive field? There has to be some mechanism to decide which competing endeavor will be given precedence. There is, and to understand it, well, follow the money.

       The oil & gas sector has a one-hundred-and-forty-year history of reliably generating not only revenue,  but tax revenue. Depending on the location, it is often the case that a state or county’s greatest source of tax revenue will be from oil & gas activity within its borders. This relatively steady and ongoing windfall, and the reliance most jurisdictions place on it, is not lost on anyone. Accordingly, oil & gas development and the jobs and tax revenue that often accompany it, have been granted certain protections under the law that other competing industries must accept and deal with. Of primary import is the granting of the mineral estate a position of preeminence, or dominance.

       Most states that allow the mineral estate to be severed from the surface estate consider the mineral estate to be dominant. In its most simple form, the state will protect the exploration and production rights of the mineral owner or developer almost to the exclusion of the surface user. To be fair, the mineral estate must try to reasonably accommodate the presence and activities of the surface user, but only if their continued presence will not preclude the mineral owner’s exploration for and development of their minerals. Again, following the money, this historically made sense as the tax revenue derived from oil & gas production usually greatly exceeded that of farming or ranching activity. Often, states would use the production tax levied on oil & gas production to effectively subsidize useful agricultural activity in the form of Ag exemptions in the tax code. It was, therefore, in the state’s vested interests to protect mineral exploration and production whenever necessary.

       Until recently, there have not been many potential surface uses that could compete with the tax revenue potentially generated by mineral extraction and so the status quo of mineral dominance has been allowed to persist. This has caused mineral explorers and producers to rest comfortably in the assumption that if push ever came to shove, they would win out against the competition, and simultaneously, caused surface users to develop a healthy level of concern when operating anywhere near a mineral developer. But with the advent of large, utility-scale renewable energy projects and the onshoring of the hard mineral mining supporting electrification, we are seeing the possibility of parity between the two competing tax sources, or at least a closing of the gap that has historically existed. The legal support underpinning mineral exploration and production remains much the same, and that is certainly not likely to change anytime soon, but the economics are, perhaps, starting to evolve.

       This blog post is not meant to be a recitation of existing case law supporting mineral dominance or outlining the boundaries of the Accommodation Doctrine. Those subjects fill volumes already written. Instead, this post of meant to discuss what actions and responses should be considered at an oil & gas company when a renewable developer proposes utilizing surface acreage over a tract in which they control some or all of the mineral estate.

       The essential, determinative precursor to this response will be whether the renewable developer selected as their intended project area the oil company’s core area of focus and investment or whether they selected a non-core, non-producing area owned by the oil company but not in active development. If the renewable developer has focused on an area not only with active hydrocarbon production but that is also part of the company’s forward-looking strategic expansion plans, then the oil & gas company would be wise to refuse the entreaties of the renewable energy developer. Most oil & gas fields are developed slowly and over time utilizing the results of the primary recovery efforts to design and layout the eventual secondary and tertiary recovery programs. It is not possible for the oil & gas company, even one with the best of intentions, to be able to definitively state what surface acreage it will need for operations in ten to fifteen years’ time and which areas might be safe for consignment to a renewable energy developer. Without some level of certainty and security, no executive at an oil & gas company would likely be willing to execute a document reducing their company’s existing leasehold.

       I have on several occasions seen renewable energy developers decide to ignore an oil company’s refusal to grant permission to coexist and operate within their leasehold, and in each instance, to varying degrees of required severity, I have seen the oil company utilize their dominant mineral position to great effect. In such scenarios, the rights of the dominant mineral estate will preclude any reasonable path forward for renewable energy development. The proper protocol for a renewable energy developer is to first ascertain the status of the underlying mineral estate and to determine whether those minerals are currently open, leased, or held by the production of oil & gas development activity. If an active leasehold or state of production is found to exist, the developer should seek to negotiate a surface use waiver or accommodation agreement with the oil & gas company. If no such agreement can be obtained, then it is time for the renewable developer to find a new project site.

       The nature of the game changes, however, when the renewable developer targets non-core, non-producing acreage held or owned by an oil & gas company. Here, while there might be some conceivable future risk for the oil & gas company, it is usually minimal at worst and easily mitigated if properly planned for. At this point, it is in the interest of the oil & gas company to take the necessary time to consider the request and either permit the proposed renewable development with any conditions they might feel necessary, or if possible, enter into more of a partnership with that developer. The acreage we are now discussing is not producing any meaningful positive returns for the oil and gas company and in all likelihood is costing that company in terms of maintenance, upkeep, and ongoing tax burdens, while also representing a potential source of liability should any accidents occur on the property. Usually, these non-core, non-producing assets were acquired as part of a larger acquisition and were very rarely the focus of that prior acquisition. It is standard fare for a savvy seller to include in the transaction less valuable or less marketable tracts of land that would otherwise be difficult to maintain or divest on their own. It is in the interest of the current holder of those tracks to find some way to make them a source of profit as opposed to a source of loss and potential liability.

       In addition to the financial motivations, an oil & gas company would be wise to at least give an audience to a renewable developer seeking to site a project on land under which they control a portion of the mineral estate as there can be many subsidiary benefits to such action. Unless the oil company controls the entirety of the mineral estate and there is a reasonable likelihood that the acreage will eventually be put into a hydrocarbon development program, then there is an increased likelihood that the renewable developer will feel comfortable including the subject acreage in their project regardless of whether the oil & gas company provides a surface use waiver or other accommodation agreement or even enters into negotiations at all. Assuming the renewable developer is both reasonable and professional in their approach there is no good reason not to at least listen to what they are offering. Often, it will be the only opportunity for an oil & gas company to have any part in negotiating what will occur or be constructed on the surface of their affected tracts. Of primary importance will be the existence and sighting of potential drilling set-asides for use in future exploration and production activity. By participating in negotiations with the renewable developer the oil & gas company will have an opportunity to site these set-aside areas in a manner most calculated to afford them an ideal location from which to conduct future activity. If the oil & gas company chooses not to participate in these negotiations, the renewable developer will quite often be forced to still include such set-aside areas within their project boundaries, but they will do so in a way more advantageous to their engineering layout and not concern themselves with the needs of the oil company.

       All of the well-managed, well-thought-out, and well-intentioned oil & gas companies I have been associated with in the past have concerned themselves with maintaining a good relationship with the current surface owner. This is not just a noble goal but also a practical one. For an oil & gas company that will operate wells in a given area (as opposed to those merely taking a non-op position) there is a continual need to go back to these individuals and negotiate new surface use agreements as future needs arise. It is always in the best interests of both parties for a good relationship to exist. Historically, the value of the minerals to be extracted from beneath the surface of the land has made a great deal of money for those owning a portion of those minerals. However, a surface owner with no ownership stake in those minerals has always been left out of this lucrative arrangement. The new, and at times highly lucrative, uses for the surface of certain tracts have for the first time offered a surface owner a share of these incredible windfalls. While this is not an actual or legal concern of the oil & gas company, by finding a way to work with the renewable developer, if at all possible, the surface owner who is present over the mineral estate will be eternally grateful and likely willing to offer whatever future concessions may be requested or needed.

       Finally, there has over the past decade been something of a shift, unfair as it often is, whereby renewable energy activity is seen as laudable and valued by ESG-focused investment groups while oil & gas exploration and production activity, as absolutely essential as it is to this nation’s security and economic well-being, has been seen as problematic. By allowing renewable energy developers to site projects over their mineral estates and leaseholds when practicable, an oil & gas company can be seen as reasonably accommodating and even supporting renewable energy ventures. Many oil & gas companies have found significant reputational and investor-relations benefits to this approach.

       In general, so long as a renewable developer has not accidentally stumbled upon the crown jewels in an oil & gas company’s portfolio, it is likely in the best interest of all parties to sit down and conduct a good-faith negotiation to see if there is some way that renewable energy development can be sited on top of a mineral estate or leasehold owned and controlled by an oil & gas company. There are numerous tangible and financial benefits for both entities in taking this approach.