Working Through Title Opinion Discrepancies &Preventing NRI Disputes.
Roger Gingell, Attorney & In-House Land [email protected]
www.linkedin.com/in/rogergingell
Goals of this presentation:
Create value for the land professional working on“bread-and-butter” land department / landadministration issues.
Cover issues that you encounter, not theoreticalones.
Focus is primarily on managing large volume ofdisputes with smaller WI partners, landowner RI& ORI owners from the Operator perspective.
More wells, less people to work themmeans efficiency is critical.
Presentation Overview:
1) Brief Overview of Division of Interest Process2) A Process to Manage Inquiries, Prevent NRI
Disputes3) Ethical & Legal Responsibilities4) Benefits of Being Ethical5) Legal Obligations & Rights6) Some of the More Common Reasons why Title
Opinion will have errors…7) General Principles8) Sample Calculation
The most difficult netrevenue issues alwaysinvolve the smallestinterests.
Brief Overview of Division of InterestProcess
1) Title Opinion is drafted for new well
2) Division Order deck is set up based on T/O
3) Division Orders downloaded, mailed out toowners
4) Owners are either paid on production or placedin suspense for a title defect
5) People in suspense will ask why they aren’tbeing paid and,
Either a) CURE defect or b) ARGUE about defect
Brief Overview of Division of InterestProcess (cont’d)
6) Owners will periodically contact Operator totransfer ownership. This transfer must behandled properly or will give rise to a newdispute
7) Ownership questions and disputes can and doarise at any point in this process whendiscovered.
A Process to Manage Inquiries,Prevent NRI Disputes
1) BIG PICTURE: An ownership inquiry is not adispute until it becomes one
2) Division Orders should inform owners insuspense of who they need to contact to obtaincurative requirements.
3) There needs to be a system to handle intake oflarge volume of NRI inquiries
A Process to Manage Inquiries,Prevent NRI Disputes (cont’d)
4) Points of intake: PHONE, EMAIL, MAIL
5) Owner Relations contact information should be easilyidentified on website, division order forms.My preference: Try to direct people to email. Email iseasiest communication method to handle high volumework with complex issues. Phone for follow-ups afterissues are researched. Snail mail is last resort for sendingmaterial to landowners without email
5) Convert all inquiries into a electronic “case” to monitor,avoid duplicate cases, and preserve communication fornext person. There are programs that do this, rangingfrom high tech to shared spreadsheets (avoid)
A Process to Manage Inquiries,Prevent NRI Disputes (cont’d)
6) A company approval process must be in placewhen changing WI and NRI decimals. No singleperson should be responsible for this as mistakescan have major monetary consequences.
7) Reviewers will find errors in an analyst’s work.That’s okay and means the system is working.Don’t get upset!
How an NRI Dispute Begins
WI Partner, Landowner, ORI owner disagrees withthe decimal they are being paid on AND does notreceive satisfactory reply / communication fromOperator.
The source of the decimal is typically a title opinion,or it is the result of a transfer of interest that theother party does not agree with.
GOAL: Prevent a Dispute from occurring byworking collaboratively to figure out the correctinterest.
Starting Point:Ethical & Legal Responsibilities
You are representing your client, or your employerin managing disputes
Sources of ethical obligations: 1) Land departmentrules. 2) Your professional association (NALTA,AAPL, NADOA). This talk, however, is not todefine those organization’s ethical rules
Benefits of Being Ethical
Ethical, honest representation of your client /employer does the following:
1) Reduces anger, frustration AND litigation
2) Encourages collaboration, team work acrosscompanies and allows the small issues to slide
3) Reduces costs for Operators by reducing workload when potential disputes resolved in moretimely manner and do no turn into litigation
Legal Obligations & Rights
Sources: Oil & Gas Lease, Joint OperatingAgreement, other contracts
Lease:
1. Place people in suspense if title is not clear
2. No obligation to pay someone UNTIL they notifyyou of an ownership change
3. You have an obligation to fulfill terms of leaseor lose the lease. You must pay royalty owners.
Must treat RI & ORI owners with respect.
Legal Obligations & Rights
JOA:
1) Parties who contributed to paying for the wellare entitled to the Title Opinion, subject tocompany policies.
2) Royalty and ORI owners are not entitled to theopinion (but good practice to give them snippetsthat affect their interest).
3) JOA also governs non-consent penalties.
Some of the More CommonReasons why Title Opinion willhave errors…
Expired VS. Unexpired Leases
1) Title Opinion will have section on prior leases
2) If a lease is incorrectly treated as expired, itcould:
• “Wash out” ORI owners from the prior, correct lease
• Credit landowner royalty owners with a larger royaltyinterest than they own under old lease (ie, 1/4 vs 1/8)
HOW DO YOU HANDLE A CHALLENGE FROM A JILTEDORI OWNER?...
Expired VS. Unexpired Leases (cont’d)
1) Burden is on challenging party to prove title opinionused wrong lease. T/O is accurate until proveninaccurate. You are obligated to seriously reviewthe challenge with an open mind and discuss theissues (be ethical!)
2) If challenger is correct, you must correct NRIdecimal back to point the issue was raised
3) Depending on company policy, accounting can payORI owner up front and deduct over time fromoverpaid RI owner. Often RI will be overpaid inproportion to lost ORI
Expired VS. Unexpired Leases (cont’d)
4) If paying an ORI owner results in a landownerbeing proportionately reduced, landownermay not agree
Do the research, make the right call and trynot to have to put parties in suspense unlessthe issue is too difficult to obtain a clearresolution
Suspense = more work, more phone calls, moreemails, etc, and more costs for the company
General Principles
1) The challenger must prove a title opinion iswrong.
2) You must treat the challenge with respect.
3) Retro-active payments owed back to when theyalerted you to the problem, not before. Theirresponsibility to manage own interests.
4) Try to solve problems, not keep them alive.Close the case!
Putting it in Perspective:
0.00000001 = 1 penny per Million Dollars of oil &Gas produced
Put things in perspective when disputing interests.
Is it worth a Non-ops time to dispute somethingthis small?
Don’t change the deck over small issues
Back to Some of the MoreCommon Reasons why TitleOpinion will have errors…
More Common Reasons for DecimalErrors.
1) Title opinion lawyers worked to exhaustionduring shale boom.
2) Incorrect election to participate / notparticipate (typically a land dept issue).
3) Depths severances in title chain don’t useuniform reference points. T/O creates anextra depth that shouldn’t be there.
This is the worst and may require opinion tobe re-worked.
More Common Reasons for DecimalErrors.
4) Missing Assignments – T/O examiner missed anassignment. ISSUE: Was the assignment properlyrecorded? How does that impact responsibility?
5) Change in State Law (not a title error). Ex: Statesupreme court re-interprets rail road grants asright of way, not fee title
6) Incorrect prior transfer
7) Wellbore only transfers duplicated in subsequentunit well
Sample Calculation
Joe Smith owns 1/4 mineral interest in NE/4 of Section (160acres). He leases for 1/8 royalty in 1980 and the oilcompany gives out 3/16 ORI to Mr. Blackacre. In 1983,Joe Smith leases for 1/4 royalty. Oil company gives noORI. Unit is 640 acres.
The 1980 lease was actually ACTIVE, but 1983 leaseincorrectly credited in the Title Opinion.
How do you calculate the value to be move from overpaidJoe Smith to Mr. Blackacre (ie, the ORI ownermistakenly washed out)?
Sample Calculation
160 Gross Acres X 1/4 Mineral Interest = NetAcres
40 = Net Acres
(40 Net Acres / 640 Unit Acres) X 3/16 ORI
.0625 X 0.1875
1.117187% ORI to Mr. Blackacre (ORI owner)from Joe Smith (Lessor)
Wrapping up…
Email or connect with thoughts and suggestions.
Roger Gingell, Attorney & In-House Land Consultant
www.linkedin.com/in/rogergingell
Thanks again to NALTA!
Enjoy your conference!