We assist clients in negotiating area of mutual interest provisions as separate agreements and as a part of a farmout agreements, operating agreements and other contracts. Area of mutual interest and acreage or cash contribution provisions are often used to ensure that the parties share in acquisitions of rights in minerals in a specified contract area. The basic terms of such an agreement are that a party who acquires a mineral interest in a certain area must offer it to the other parties on a pro rata basis. An acreage or cash contribution clause provides that a party receiving a contribution of cash, or acreage lying outside of the contract area, toward the drilling of a well on the contract area must share it with the other parties. The purpose of the agreement or clause is to maintain the parties’ participation percentages in an area or, in the case of an acreage contribution clause, with respect to individual wells.
Simply stated, an oil and gas farmout agreement is an agreement by one who owns drilling rights to assign all or a portion of those rights to another in return for drilling and testing on the property. We understand the complexities of farmout agreements, including the often overlooked tax implications thereof. Complicated tax rules govern the structure of a farmout agreement and dictate its terms. Entry into a farmout agreement should include consideration of the complicated tax rules that dictate its structure. Specific items that must be considered are the intangible drilling cost deduction, the IRS’s recognition of a farmout agreement as a “sharing arrangement” and Revenue Ruling 77-176. Key characteristics of the farmout agreement must be properly structured, including the duty imposed to drill, the “earning factor”, the type of interest earned, the number of wells concerned and the timing of issuing the assignment of the farmout acreage. We are please to assist our clients with the full array of issues arising from farmout agreements.
Our firm has chosen not to represent national oil, gas and energy companies, choosing instead to represent Louisiana and Texas local and regional companies and local landowners. In doing so, we have established our loyalty to the persons who live and work in our area and who have a long-term commitment to our community. As we do not represent the large energy companies, we are able to provide thorough representation to the interest of landowners in the protection of their rights, both in the negotiation of agreements and in litigation, where necessary.
Having long assisted clients in the area of oil, gas and mineral leasing, we have represented and continue to represent parties in significant leasing transactions, not only in the Haynesville Shale play, but on a more general basis. We understand the importance of the clauses and riders in and to mineral leases, including the Pugh clause, and clauses limiting surface operations. Our attorneys are pleased to advise you with respect to your leasing matters.
Our lawyers negotiate terms of right-of-way agreements to include indemnity provisions in favor of the landowner, limitations on location of the right-of-way, maintenance of the land used, land restoration, provisions concerning depth of pipelines, fencing and livestock protection, warranty limitations, sound volume limitations and other provisions. We know what terms are and are not common and reasonable.
A royalty is agreed upon as a percentage of the lease, minus what was reasonably used in the Lessee’s production costs. The royalty is paid by the Lessee to the owner of the mineral rights, the Lessor in the Lease. It is based on a percentage of the gross production from the property and is free and clear of all costs, except for taxes. Parties sometime choose to sell royalties quickly to convert their stream of income to a lump sum payment. We are pleased to provide our clients assistance with sales and purchases of royalties.
As we have done with oil, gas and mineral leasing, we have represented parties in significant sales of minerals and leases. In doing so, we provide assistance in the areas of due diligence, terms of the purchase and sale agreement, and provisions in more complex transactions for farmout, area of mutual interest and operating agreements.
Parties receive income and gains in many forms in oil and gas transactions. These include delay rentals, shut in payments, bonus payments, royalty payments, crop damages, surface damages, right-of-way payments and others. Funds received may be taxed as ordinary income or as capital gains. In some instances self-employment taxes may also be owed. It is essential that a person participating in transactions involving oil, gas and minerals both understand the tax consequences of a given transaction and be assisted by counsel who can understand how the structure of a transaction may affect the taxation thereof. Our tax lawyers understand these issues and are qualified to examine them on an in-depth basis. Similarly, tax counsel can provide an understanding to the tax benefits that may be generated from participation in oil and gas activities, such as intangible drilling costs deductions, intangible completion costs deductions, depreciation, depletion allowance, tax credits and lease operating expenses.