Assignment of Oil and Gas Lease
An oil or gas lease provides the lessee with many rights regarding the use of the land and the minerals buried underneath it. When that lease is signed, it creates a real estate, which can be further divided or assigned to other parties. That’s where the term assignment comes from in the oil and gas industry.
But the assignment of oil and gas lease can include the transfer or conveyance of various things. So for anyone involved in an oil or gas lease in any capacity, it’s beneficial to understand the meaning of assignment and its implications for the lease itself.
Assignment of Oil and Gas Lease Meaning
The definition of assignment in real estate is the sale, transfer, or conveyance of a whole property ownership/rights or part of it to another party.
The term in the oil and gas industry is used for sale, transfer, or conveyance of working interest, lease, royalty, overriding royalty interest, or net profit interest.
Since real estate property rights or mineral rights in the case of oil and gas are divisible, mineral rights owners or lessees often sell or convey parts of the mineral rights to other companies. The legal instrument used for this purpose is called an assignment.
The party assigning the rights is called the assignor, and the party receiving the rights is called the assignee.
Assignments are filed in the same way as an oil and gas lease or a title deed to a property. These legal documents need to be drafted in accordance with the state requirements and filled with the relevant county or municipality authorities.
Of the different assignment transactions in the oil and gas industry, the assignment of rights in the oil and gas lease is the most common. While the lease itself is the negotiable instrument in the scenario, the assignment establishes the successful transfer of the rights.
It may look like a simple document, but the rights and duties of the different parties can make it complex. As a result of the assignment, the property interests, rights, and obligations of the lessor, lessee, and assignee may alter.
On top of this, any local laws governing such a transfer also need to be accommodated. Now, federal regulations also impact the transfer of oil and gas interests.
What Can Be Assigned?
The lessee of an oil or gas lease can assign the entire lease or part of it. In other words, the lessee can sell or transfer part of the estate or the entire estate to which they have the working rights.
The assignee is assigned the working interest and lease obligations, including override royalty. The assignment document will state the percentage of override royalty, which is the percentage of the mineral removed from the land under lease and the net profits received by the assignee by the sale of the minerals.
An overriding royalty interest is an undivided interest that gives the holder the right to receive a certain percentage of the revenue from the sale of the mineral. This differs from royalty interest in that the overriding interest cannot be divided and doesn’t grant ownership of the mineral rights once the assignment expires.
In other words, the original mineral owner (the lessor) retains a royalty interest, whereas the lessee assigning the lease to an assignee gets the overriding royalty interest.
Multiple Lease Assignments
Normally, the assignment mentions and describes the lease assigned to an assignee.
However, an oil or gas company often may have multiple lease agreements with different mineral owners from the same field or formation. On the other hand, the leases involving different lessees may have undergone unitization to increase production and reduce competition.
In such cases, the assignment may include multiple leases. If multiple leases are in an assignment, they are typically described in an exhibit with the document. However, in cases of unitization, the assignment may not necessarily list or describe the leases. Instead, it will just mention all the lease agreements in a particular unit or tract of land.
It all comes down to the document’s language, as sometimes the focus is on the rights and obligations rather than the actual lease or property.
Oil and gas leases are pretty flexible regarding how they can be further leased or assigned. An assignor may choose to assign the lease as is or set limitations that may not exist in the original lease. An assignor may set the following limitations for the assignee:
- Wellbore Limits: The assignment may set the production to the wellbore only. In other words, the assignee can only produce the mineral from the wellbore of a particular well, and all the interests outside of this wellbore are not assigned. In such a case, the assignee cannot produce from deeper formations.
- Depth Limits: The assignment may set the interest to a certain depth or a particular formation by mentioning the formation’s depth or name. For instance, the assignee may only have a working interest up to a depth of 8,000 ft. from the surface. These are more common in assignments than wellbore limitations. Such limitation may also automatically apply if the oil or gas lease also had depth limitations.
- Horizontal Limits: The assignment may set horizontal limitations or, in other words, include only a part of the land. The assignee would not be able to produce from outside these parts of the land as described in the assignment, even if they are part of the actual lease.
Assignment of oil and gas lease is a common instrument in the oil and gas industry in the US, used to assign lease rights and obligations to other companies. The companies with the lease can assign multiple leases to the same party. Similarly, they can divide a lease and assign it to different parties.
The assignment procedure and documentation may vary based on state laws and the individual case. However, it’s a detailed document that specifies what is covered under the assignment, what duties befall the assignee, and what they need to pay the assignor.