Reconciliation: A
Practical Guide to
Surface, Leasing
and Curing Mineral
Title in North
Dakota.
Presented by Josh Cole, Co-Owner of Bakken Oil
LLC, Lease Brokers
What is a Mineral Right?

Mineral rights are a real property owner’s right to
produce and save the minerals, namely the oil, gas
and other substances in and under a tract of land.
Minerals are also defined by statute.

When this right is severed from the surface through
a mineral reservation or sale of those rights
separate from the surface, a split estate is created.
In the early days of patents, most estates were not
split and it took an act of the surface owner to
create the split estate. The notable exception being
grants from the government where the minerals
were reserved, creating a split estate.

Mineral rights are “real property” and are typically
created by a reservation where a landowner sells a
parcel of land and reserves all of the oil, gas, coal and
other minerals in and under the land. Being real
property, mineral rights are subject to state law where
the property is physically located.

Mineral rights by common law are considered the
dominant estate. This was to insure mineral
development as minerals are essentially worthless
without the right of access to harvest and collect
through the surface estate.
Supreme Court of North Dakota
A mineral estate is dominant over the surface estate, the mineral owner has the
right to use the surface of the land to explore for and produce minerals as described
by the North Dakota Supreme Court in Hunt Oil Co. v. Kerbaugh, 283 N.W.2d 131
(N.D. 1979). In its decision, the Court explains:
The mineral estate is dominant; it carries with it inherent rights to use
the surface to find and develop the minerals, but,
The rights of the owner of the mineral estate are limited to so much of
the surface as are reasonably necessary to explore, develop, and
transport the minerals, which means,
If there is no alternative means of recovering the minerals, the
mineral owner may pursue the only means possible to find and
develop the minerals despite the adverse impact on existing surface
activities.
In summary, the surface cannot prevent the mineral owner from doing what is
reasonably necessary to recover the minerals. However, the mineral owner
cannot negligently or unreasonably use the surface, and the mineral owner
must reasonably accommodate an existing use of the surface.
Do you have any questions as to the
mineral owners right to produce
minerals?
Oil and Gas Lease
How does the right to produce minerals get from the mineral
owner to the oil company? This is accomplished through an oil
and gas lease. In a typical lease you will the following language:
WITNESSETH, That the Lessor, for and in consideration of Ten and more
($10.00+) DOLLARS cash in hand paid, the receipt of which is hereby
acknowledged, and the covenants and agreements hereinafter contained, has
granted, demised, leased and let, and by these presents does grant, demise,
lease and let exclusively unto the said Lessee, the land
hereinafter described, with the exclusive right for the purpose
of mining, exploring by geophysical and other methods, and
operating for and producing therefrom oil and all gas of
whatsoever nature or kind, with rights of way and easements
for laying pipe lines, and erection of structures thereon to
produce, save and take care of said products, all that certain tract of
land situated in the County of Williams, State of North Dakota described as
follows, to-wit:
In Feland v. Placid Oil Co. ... Chief Justice Teigen,
speaking for the Court, stated:
"Under a usual oil and gas lease, the lessee, in
developing the leased premises, is entitled to use of
the land reasonably necessary in producing the oil ...
Whether the express uses are set out or not, the
mere granting of the lease creates and vests in the
lessee the dominant estate in the surface of the land
for the purposes of the lease; by implication it grants
the lessee the use of the surface to the extent
necessary to a full enjoyment of the grant. Without
such use, the mineral estate obtained under the lease
would be worthless..."
Feland v. Placid Oil Company, 171 N.W.2d 829 (N.D. 1969)
If the mineral estate is dominant and we
have the right to be there, why do we
need to give notice or pay damages at
all?
State legislation has created laws to account for the
compensation for various losses of the landowner and
although they have a subservient estate, they still have a right
to use and enjoy the surface that a mineral owner may now be
occupying.
N.D.C.C. 38-11.1-01.
Legislative Findings.
The legislative assembly finds the following:
1. It is necessary to exercise the police power of the
state to protect the public welfare of North Dakota
which is largely dependent on agriculture and to
protect the economic wellbeing of individuals
engaged in agricultural production.
2. Exploration for and development of oil and gas
reserves in this state interferes with the use,
agricultural or otherwise, of the surface of certain
land.
3. Owners of the surface estate and other persons
should be justly compensated for injury to their
persons or property and interference with the use
of their property occasioned by oil and gas
development.
THE LAW

N.D.C.C. 38-11.1-04. Damage and disruption payments. The mineral developer
shall pay the surface owner a sum of money equal to the amount of damages sustained by
the surface owner and the surface owner's tenant, if any, for lost land value, lost use of
and access to the surface owner's land, and lost value of improvements caused by drilling
operations. The amount of damages may be determined by any formula mutually agreeable
between the surface owner and the mineral developer. When determining damage and
disruption payments, consideration must be given to the period of time during which the
loss occurs and the surface owner must be compensated for harm caused by exploration
only by a single sum payment. The payments contemplated by this section only cover land
directly affected by drilling operations.

N.D.C.C. 38-11.1-08.1. Loss of production payments. The mineral developer shall
pay the surface owner a sum of money equal to the amount of damages sustained by the
surface owner and the surface owner's tenant, if any, for loss of agricultural production
and income caused by oil and gas production and completion operations. The amount of
damages may be determined by any formula mutually agreeable between the surface
owner and the mineral developer.When determining damages for loss of production,
consideration must be given to the period of time during which the loss occurs and the
damages for loss of production must be paid annually unless the surface owner elects to
receive a single lump sum payment. Payments under this section are intended to
compensate the surface owner for loss of production.
What Are You Paying For?
1. Loss of Land Value - Once a site has been reclaimed we have
not been able to find evidence of reduced land value. This can be
partially attributed to the increase in expendable income in a
booming region, and all land prices tend to rise over time, especially
in “boom towns.”
2. Loss of Use of and Access to the Surface Owner's Land This is traditionally what we have provided compensation for: the
actual value of the land, i.e. the sale price for land. This idea is based
on the thought that when you buy a piece of land, you are buying it
for the use of and access to the land.
3. Loss of Value of Improvements - This would be compensation
for things like grain bins, greenhouses, irrigation pivots, etc. We will
typically avoid these scenarios in the first place and rarely need to
compensate for them.
4.The mineral developer shall pay the surface owner a sum of money
equal to the amount of damages sustained by the surface owner and the
surface owner's tenant, if any, for loss of agricultural production and
income caused by oil and gas production and completion operations.
This is a recent addition to the law and further expands on access to the land and
requires payment for lost income. This is largely dependent on the crop and is an
area of heated debate between companies and landowners. Landowners will
typically try to attach other issues to the rental such as traffic, dust, long lines at the
grocery store and other inconveniences associated with mineral development. A
company will try to determine the net acre loss, that is what is the actual profit per
acre of crop. Is. For example, if wheat is $12/bushel and yields a 30 bushel/acre crop,
the company would like to subtract the cost of the seed, chemicals and other costs
to get the actual compensation number. Likewise, a landowner would prefer to take
the gross number (12*30 ) and not subtract any costs. You can see the wide array of
potential solutions and compromises in calculating an annual rental. In our
experience, it has been difficult to come up with a justifiable figure more than
$200/acre as an annual payment.
It is in the best interest of the company to provide all the notice and input
they can to work with a landowner. Many times the opportunity to be heard
is more valuable to the landowner then the actual compensation. However, in
the event that negotiations break down or time doesn’t allow for prolonged
negotiations, the oil company in most cases still has the right to occupy the
land and produce oil and gas while negotiations continue. In the worst case,
where an agreement can not be made, the burden falls on the landowner to
sue the oil company. The landowner has two years from when the damage is
apparent in North Dakota. The landlord is also responsible for any losses by
the tenant.
N.D.C.C. 38-11.1-07. Notification of injury.
Any person, to receive compensation, under sections 38-11.1-08 and 38-11.109, shall notify the mineral developer of the damages sustained by the person
within two years after the injury occurs or would become apparent to a
reasonable person.
Comprehending Oil And Gas Leases
Description of Leased Premises
 This contains the legal description and
county/state of the property. Often there is a
"Mother Hubbard" clause in printed forms
following the lease description ("This lease also
covers any lands of lessor adjacent or contiguous
to the above-described lands ….")
Substances Covered by Lease
 Most printed form leases cover petroleum and
natural gas and related hydrocarbons produced in
association with oil and gas. Some leases may
include coalbed methane and other substances.
The Royalty Clause
 More forms are prohibiting or limiting deductions of
post-production and downstream costs, including
transportation, dehydration, compression, treating
and marketing costs. Have your title attorney
review for any deduction language.
Definition of "Operations"
 Look for what is necessary to constitute drilling
operations, and when drilling operations are
considered complete. The definition of "operations"
will maintain the lease in effect beyond the primary
term absent actual production. This definition could
be as broad as staking a well location or could
require the actual drilling of the well.
United States Court of
Appeals, Eighth Circuit
Drilling Operations May Not Require Drilling
“Various provisions of an oil and gas lease make it necessary to
determine what constitutes the beginning or commencement of
a well or of drilling or reworking operations․ The general rule is
that actual drilling is unnecessary, but the location of well sites,
hauling lumber on the premises, erection of derricks, providing a
water supply, moving machinery on the premises and similar acts
preliminary to the beginning of the process of drilling, when
performed with the bona fide intention to proceed with
diligence toward the completion of the well, constitute a
commencement or beginning of a well or drilling operations
within the meaning of the lease.”
ANDERSON v. HESS CORP. 649 F.3d 891 (2011)
Pooling, Unitization and Pugh Clauses
 Pooling grants the lessee the right to pool. Look for the
maximum size of pooled units or language authorizing any
sized unit approved by governmental authority. More forms
are striking the lessor’s consent to unitization. Voluntary units
in North Dakota require consent from 60% of the mineral
owners and 60% of the working interest owners. A "Pugh
Clause" provides that production from a pooled unit will not
hold that portion of the lease not included in the unit.
Continuous Operations Clauses
 A continuous operations clause requires the lessee to release
portions of the leased premises not included within
"production units" designated around producing wells, at some
time after the end of the primary term. This clause provides
the timeline necessary for the commencement of the next
well in order to keep the lease in force as to all lands beyond
the end of the primary term (typically 90 days to one year).
Watch for automatic one-year extensions of lease for every
well drilled to completion.



Depth Severance (Vertical Pugh Clause)
Requires the lessee to release certain depths at the end of
the primary term. Pay attention to the specific language (100
feet below the deepest producing formation, the stratigraphic
equivalent, wellbore rights only, etc.).
Warranty of Title
Check to see if the warranty clause has been struck or
modified to a special warranty. Note: striking the warranty
clause may not absolve the mineral owner from having to pay
back the bonus under an implied covenant of seizin.
Right of Refusal
Look for language granting the lessee right of first refusal or
other preferential leasing rights, including extensions.



Top Lease
A “Top Lease” is designed to be subordinate to the current
lease (“Bottom Lease”) and only activates when the bottom
lease expires. Be wary of subsequently recorded leases not
styled as a Top Lease as it is unclear if this lease is invalid or
will be treated as a Top Lease if its primary term extends
beyond the primary term of the first recorded lease. North
Dakota is a Race-Notice state, meaning the first recorded
lease is valid, but only if the lessee had no notice/knowledge
of a pre-existing unrecorded lease.
See N.D.C.C. 47-19-41. Effect of not recording Priority of first record - Constructive notice
Term
Unless otherwise agreed to, a lease expires at midnight on
the final day (i.e. one year from January 1, 2010, the lease
will expire at midnight at the end of day January 1, 2011)..
Supreme Court of North Dakota
How Important is Paying the Lease Bonus?
Irish Oil & Gas, Inc. v. Riemer, 2011
ND 22, 794 N.W.2d 715
“We cannot conclude as a matter of law that the possibility of future
production and future royalties is so speculative as to provide no
consideration supporting the existence of a fact issue on the
question of failure of consideration. We note that, in the context of
breach of an obligation to pay royalties, the legislature has provided:
"The obligation arising under an oil and gas lease to pay oil or gas
royalties to the mineral owner . . . is of the essence in the lease
contract, and breach of the obligation may constitute grounds for the
cancellation of the lease in cases where it is determined by the court
that the equities of the case require cancellation." N.D.C.C. § 47-1639.1. This public policy statement suggests that the possibility of
future royalties is, or at least might be in a given case, an important
component of the oil and gas lease.”
Practical Note: just pay the lease bonus.
Do you have any questions as to
the components of an oil and
gas lease?
Common Title Issues and Curative
Statutory Reservations - The United States of
America and the State of North Dakota reserved
certain mineral rights based on statutory
reservations in effect at the time of the
conveyance. (See North Dakota Mineral Title
Standards for a comprehensive compilation).
Example: the State reserved a 5% mineral interest
from March 13, 1939 through February 20,
1941. After February 20, 1941 the State typically
reserved a 50% mineral interest (even though the
deed may not specifically reference a mineral
reservation).
 Note: For North Dakota counties, the county
may not reserve the minerals in conveyances
made after July 1, 1951.



Title vs. Ownership - Upon death, you cease to
own property rights, but the record title remains
with the decedent. When an interest is not passed
through a North Dakota probate or otherwise,
you may decide to accept recorded Affidavits of
Heirship, signed/attested by a disinterested party
when accompanied by a death certificate and a
foreign probate and Will, if available.
Note: Recording of these documents is imperative
(notice), but there is no substitute to a probate,
especially if the title is in dispute. A Will not
probated within three years of the decedent’s
death may not be recognized in a North Dakota
probate.
N.D.C.C. §30.1-12.08 Probate, testacy and
appointment proceedings -- Ultimate time limit.
No informal probate or appointment proceeding or formal
testacy or appointment proceeding, other than a proceeding
to probate a will previously probated at the testator's
domicile and appointment proceedings relating to an estate in
which there has been a prior appointment, may be
commenced more than three years after the decedent's
death, except 1) a previous proceeding was dismissed; 2) an
absentee for whom a conservator was appointed; 3) some
situations where a proceeding to contest the will is instituted;
4) certain actions may be brought to confirm title in estate
assets or establish an instrument to direct or control the
ownership of property.The three year limitation does not
apply to proceedings to construe probated wills or determine
heirs of an intestate.

Duhig Rule - Courts generally deal with the problem
of an overconveyance through a warranty deed by
deducting the overconveyance from the grantor’s
interest, to the extent possible. Example: Grantor and a
third party each owned 1/2 mineral interest. Grantor
conveyed the land to a Grantee reserving 1/2 of the
minerals. Grantee gets 1/2 and the third party gets 1/2
leaving the grantor with nothing, because all he had was
1/2. To protect himself, the deed should have said
reserving 1/2 of the minerals subject to the third party’s
1/2 mineral interest.
 Note: the Grantee must not know of the third party’s
interest so it’s a factual question whether or not they
had notice of this outstanding interest. Quit Claim
Deeds do not generally carry after acquired title.

After Acquired Title - If a Grantor conveys through a
Warranty Deed what is mistakenly believed to be good
title to land that he or she did not own, and the Grantor
later acquires that title, it vests automatically in the
Grantee.
 Note: Courts consider fairness, so the Grantee must be
harmed in order to invoke after acquired title. Simply
acquiring a new mineral interest will not normally invoke
after acquired title in a previous transaction. You should
require a Stipulation of Interest among the affected parties.


Third Party Reservations - Spouses may not be strangers to title
in North Dakota. Example: Joe Smith owns minerals. Joe Smith and
Mary Smith, husband wife, convey an interest to Bill White, reserving
a 50% mineral interest to Grantor(s). Joe and Mary Smith may now
own an interest as tenants in common, even though Mary Smith was
never an owner.

See Malloy v. Boetcher, 334 N.W.2d 8 (N.D. 1983)
“…a reservation or exception can be effective to convey a property
interest to a third party who is a stranger to the deed or title of the
property where that is determined to have been the grantor's
intent.”

Statements of Claim - Statements of Claim, Affidavits of Heirship,
Oil and Gas Leases, etc. do not vest title. A Notice of Succession by
the surface owner for abandoned minerals is perfected by a quiet
title action. Note: A judgment is effective against all parties, named or
otherwise, even those with valid mineral claims.

Capacity to Sign - Always document/record missing
Powers of Attorney, Letters Testamentary, Successor Trustees,
Guardianships/Conservators, or anything else which might
call into question the person’s authority to act on behalf of
another. Note: As a minimal business risk, you may choose to
rely on apparent authority (president, manager, trust officer).

Fractional vs. Stated Mineral Interests - Any internal
discrepancy within a deed requires a note for a Stipulation of
Interest, corrective deed or judicial determination. Note:
Intent clauses may prevail, but this is not a settled matter of
law in North Dakota, but in my opinion, it does evidence the
intent of the parties. Example: Bob Smith conveys an
undivided 5/250ths mineral interest in multiple tracts
containing 252.00 gross acres with an intent to convey 5 net
mineral acres. Did the parties intend to convey a 2% (5/250)
mineral interest or a 1.9841% (5/252) mineral interest?

Severed Royalty Interests

Acoma Oil Corporation v.Wilson and Universal Resources Corp., 471 N.W.2d 476
(ND 1991)

One thing that may raise a question in the formulas for net royalty interests
and cause confusion is the presence of severed royalty interests . For
example, an interest leased at a 1/6 lease royalty will not receive that much
if there are pre-existing carved out royalties. If there is an outstanding
aggregate of 7.5% perpetual royalty interest, an owner of a 1/5
leased mineral interest will receive 1/5 x (1/6 - 7.5%).
These perpetual royalty burdens sometimes come as a surprise to mineral
owners and was one of the main reasons for the Abandoned Minerals Acts.
It is further complicated by the North Dakota Supreme Court decision
referenced above which holds that fractional mineral interests are free of
such royalty burdens if the grantor of the interest owned enough to grant
the purported mineral interest with a royalty burden. Note: this means that
the royalty burden can "pile up" on the last of the mineral interests to be
conveyed out.
Rivers, Lakes, Water Issues

“North Dakota Shale-Oil Boom
Rushes Past Riverbank Dwellers”
http://www.bloomberg.com/news/2012-03-15/north-dakota-shale-oil-boom-rushes-past-riverbank-dwellers.html



There are ongoing disputes regarding competing
claims for minerals underlying the riverbed and
lots adjoining bodies of water.
Make sure you have a competent surveyor and
title attorney aware of river boundary issues and
how shifts in the river could affect the mineral
ownership.
Consider placing disputed royalties with the
Court and interpleading the funds, forcing the
parties to acknowledge the dispute and have
them petition the Court for relief.
Don’t be Afraid to Suspend a Mineral or Royalty
Owner as Recommended by your Title Attorney
What is the risk of title failure?
1) Not being able to collect on a bad payment,
2) Undisclosed or unknown title issues,
3) Paying the wrong party, or paying the wrong amount.
You have a title opinion and you should manage the
requirements. Title curative helps the oil company
and it helps the owner, but ultimately, the owner’s
payment is conditioned upon the status of their title,
and it is their responsibility to cure when you put them on
notice of title defects.
Do you have any questions as
to title curative or title issues?