Part 6 of the Prolonged Pandemic Series

What does this mean for mineral owners?

1. If your mineral holdings are outside of the Permian and core areas of the Eagle Ford, Bakken, Marcellus, and Haynesville, be patient.

Should the pandemic carry on in full force longer than expected – through 2021 – those mineral owners outside of the Permian Basin and core areas of the Eagle Ford, Bakken, Marcellus, and Haynesville shales will almost certainly see significantly decreased if not the complete absence of activity.

2. If your operator is not a major, it is possible they go bankrupt

Operator bankruptcy poses a host of issues for mineral owners. Chief amongst these are the premature and inappropriate abandonment of marginal oil and gas wells. Though regulatory regimes differ from state to state, generally speaking, the operator of record has the legal responsibility to plug and abandon non-producing oil wells, as well as environmentally remediate all surface locations.

Unfortunately, when an operator goes bankrupt, the likelihood that proper P&A and remediation occurs decreases exponentially. Mineral owners that also own all or a portion of the surface will need to keep a close watch on any and all well sites, particularly marginal wells, should their operator declare bankruptcy.

Fortunately, the bad experiences of mineral owners faced with operator bankruptcies in the 1980s means that getting paid is now less of a concern. The cumulative bad acts of operators in the 1980s led to the 1983 passage of the First Purchaser Statute, found in § 9.343 of the Texas Business and Commerce Code. The First Purchaser Statute essentially grants royalty owners a security interest in oil and gas produced from their lands, which secures a purchaser’s obligation to pay royalties. This in turn grants such royalty owners a preferential position amongst the various competing creditors.

However, should bankruptcy ensue, it is paramount that mineral owners ensure that their lien has been properly perfected in order to retain their preferred status. Whether the lien has been perfected against the operator in question differs based on where the operator has been incorporated.