Mineral Interest

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Mineral Interest

 

 The   mineral estate is clearly an interest in real property in Alabama. Locke v. Locke, 280 So.2d 773 (1973); Nelson v. Teal, 301 So.2d 51 (1974); Dauphin Island Property Owners v. Callon Institutional Royalty Investors I, 519 So.2d 948 (Ala. 1988).

 Justice Janie Shores, writing for the majority in NCNB Texas National Bank, N.A. v. West,  631 So.2d 212, 223 (Ala. 1993), commented that:

Alabama determines ownership of oil and gas under the nonownership theory, which recognizes the migratory nature of oil and gas and requires actual possession to establish ownership. Sun Oil Co. v. Oswell, 258 Ala. 326, 332, 62 So.2d 783, 787 (1953); 1 H. Williams and C. Meyers, Oil and Gas Law § 203.1 at 34 (1988); Farnell, [Sarah Kathryn Farnell, Methane Gas Ownership: A Proposed Solution for Alabama, 33 Ala.L.Rev. 521 at 523 (1982)].

 

Prior to Justice Shores comment in 1993, Alabama appeared to be an “ownership in place” state, based upon opinions such as Locke v. Locke; Nelson v. Teal; Dauphin Island Property Owners v. Callon Institutional Royalty Investors I; and others.  See  Misha Ylette Mullins, Alabama Oil and Gas Law: Ownership or Nonownership after NCNB, 48 Ala.L.Rev. 1065 (1997).  Mullins explains the difference between the “nonownership” and “ownership in place” approaches as follows:

The nonownership theory of oil and gas grew out of the early idea that oil and gas were migratory, existing under the surface but flowing from one parcel of land to another over time. Early courts, adopting the nonownership theory, analogized potential oil and gas interests to those interests commonly recognized in wild animals and underground water. Therefore, although “the landowner had the exclusive right to take those substances running beneath his land . . . . (i)t was said that oil and gas, just as in the cases of percolating water and wild animals, were not capable of ownership until they were controlled through physical possession.” Under the nonownership theory, it is therefore held that an ownership interest in oil and gas cannot exist until it is produced and thus reduced to possession.

 

In a nonownership state, the original landowner cannot legally own a fee simple interest in the oil and gas deposits under her property, and it is impossible to transfer or reserve such a fee interest, regardless of the parties’ intent.  What a landowner “can transfer is the right to take the oil and gas beneath the surface,” a right referred to under the common law as a profit a prendre. Although a profit a prendre is considered an interest in land, it is incorporeal and subject to the standard property rules relating to incorporeal rights.

 

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The ownership-in-place theory is the most popular theory by which the nature of oil and gas interests are defined. Under the ownership theory, a landowner is said to own a corporeal, fee simple interest in oil and gas. Oil and gas deposits are treated similarly to other minerals, as “ ‘realty, subject to ownership, severance, and sale.’ ” Landowners can sever that mineral interest from the surface estate and transfer it in fee or as a lesser interest. If transferred in fee, the owner of the severed oil and gas interest possesses the same rights and protections that apply to other corporeal hereditaments.For example, the owner of a fee interest in oil and gas is protected from common law abandonment and may take advantage of common law possessory actions to protect their title.

 

Id, at 1066-1067.

 The “ownersip” vs. “non-ownership” classification did not determine the result in NCNB v. West, as Justice Shores recognized:

However, the issue here is who has the right to recover coalbed methane gas. ‘While the distinction between ‘ownership [in place]’ and ‘non-ownership’ of oil and gas may have significant implications in other contexts, it does not affect the extent of extraction rights.’

 

NCNB v. West, 631 So2d at 223.

 

The classification could, however, affect other aspects of Alabama oil and gas law.  As Mullins comments, under a “non-ownership” theory, a landowner would not own the fee interests in oil and gas deposits underlying the surface, but would instead own a profit a prendre.  Hence, under a “non-ownership” theory, Alabama oil and gas interests would be incorporeal rights.  Mullins, supra.

Conversely, if Alabama is an “ownership” state, an interest in the oil and gas under the surface would be a real interest benefitted by the rights and protections that apply to other corporeal hereditaments.  Mullins, supra.

Mullins argues that the court’s gratuitous dictum in NCNB sprang from an erroneous reading of the Alabama case of Sun Oil Co. v. Oswell, 62 So.2d 783 (Ala. 1953), by the treatise authors, Williams and Meyers, and by Sarah Kathryn Farnell.  Mullins argues:

Although the nonownership statement in NCNB was unfounded dictum, it still creates a measure of uncertainty as to Alabama's position on the ownership of oil and gas. This uncertainty should be remedied, and the ownership theory unequivocally affirmed as the position to be followed in Alabama. Because the adoption of a particular ownership theory affects other areas of real property law, an indeterminate standard leaves unanswered questions involving issues of abandonment, partition, and adverse possession.

 

Working under a century old assumption that Alabama allowed the fee ownership of oil and gas interests, oil and gas companies have developed systems for locating and purchasing certain title in oil and gas deposits. If ownership is suddenly disallowed, and the common law rules of abandonment and adverse possession are brought into play, companies will be forced to depend on adjudication in order to assure the validity of a long held lease. In addition, statutory and common law property principles were developed around the ownership theory. Conversion to a nonownership theory will require extensive adjustment by the legal system, oil and gas companies, and affected third parties, such as institutional lenders. The ownership theory, therefore, provides a certainty of law that should not be abandoned, and the unfounded propositions of NCNB should be explicitly rejected.

 

Mullins, at 1077.

 

Copyright 2011 by Edward G, Hawkins. All rights reserved.