Mineral law west of the Pecos

by Judon Fambrough —
Originally published in the April 2013
edition of Tierra Grande, published by
The Texas A&M Real Estate Center
Reprinted with permission.

A bit of Texas history
At
one time, all land was owned by the state (or sovereign). Private
ownership began when the state conveyed the property to a private
individual. This transaction is sometimes referred to as the patent or
land grant. Over time, different sovereigns patented land in Texas.

Spain
issued the first patent in 1730. By 1830, Spain and Mexico combined had
patented more than 26 million acres. Under these Spanish land grants,
title to the minerals remained with the sovereign even though not
specifically reserved. When Texas won its independence, it acquired vast
amounts of unsurveyed land. The state recognized the former Spanish
land grants and continued to reserve the minerals in its patents.

The
railroads agreed to survey this remote area in return for receiving
ownership of every other section of land. Unlike the metes-and-bounds
legal description used in the Spanish land grants, the railroad surveys
divided the acreage into blocks and sections. A block contained 36
sections; a section contained 640 acres.
For the most part, Texas
kept the even-numbered sections and granted the odd-numbered ones to the
railroads without retaining the minerals. This created a checkerboard
effect on mineral ownership maps.

The state placed the retained
acreage (approximately 42.5 million acres) in the Public School and
Asylum Fund to ensure a free public education to its citizens.

Private ownership of minerals
In
the 1860s, when Sam Houston was president of the republic, an ownership
dispute involving salt erupted in South Texas. The outcome forever
changed mineral law in this state. The issue focused on the ownership of
salt left in deposits when the Gulf of Mexico receded centuries
earlier. Salt trade existed in the area from prehistoric times through
the Civil War. The republic claimed the revenue from the sales because
Texas owned the minerals and salt is a mineral.

The “La Sal del
Rey Lake Controversy” led to a constitutional amendment in 1876 giving
the state-owned minerals to the then-owners of the surface. However, the
amendment did not preclude the state from reserving the minerals in
future conveyances or grants. The constitutional mandate in 1876 also
required the land that had been placed in the Public School and Asylum
Fund to be sold and the proceeds deposited into the fund. However,
before it could be sold, the state (and evidently the General Land
Office [GLO]) classified it as “grazing or pasture land,” “timberland,”
“agricultural land,” “mineral land” or combinations thereof.

Land
classified as mineral land was not sold but leased for mineral
development. This changed in 1907. Thereafter, it could be sold, but the
minerals were reserved by the state. On the other classified lands, the
state still retained the minerals but by more indirect means. For
example, in some instances purchasers were required to sign affidavits
relinquishing to the state all rights to any minerals subsequently
discovered on the property. Any land on which the state retained the
minerals after 1876 was called “mineral classified land.” Most of this
land is located in the Trans-Pecos Region.

As interest in
development of oil and gas grew, the state began leasing more and more
of the retained mineral acreage (mineral classified land) to oil
companies. The surface owners (settlers) protested, viewing this as an
intrusion on their peaceful possession of the property. The settlers
refused oil companies entry and in some cases threatened violence.

The Relinquishment Act
The
Relinquishment Act (the act), passed in 1919, resolved the controversy
(Section 52.171 et seq., Texas Natural Resource Code). The statute
granted (relinquished) a portion of the minerals to the surface owners
on mineral classified land patented by the state between Sept. 1, 1895,
and Aug. 21, 1931.
The act applied only to oil and gas. The state
continued to own all the other minerals. The determination of these
“other” substances created a modern-day dilemma (discussed later).

The
language of the act appears to grant surface owners fifteen-sixteenths
of the oil and gas in and under the property. The state retained the
remaining one-sixteenth. Because of constitutional issues with the
wording, subsequent case law casts a different interpretation.

The
courts determined that the act conveyed no interest to the surface
owners. Title to the oil and gas remained with the state for the benefit
of the Public School and Asylum Fund. The surface owners simply became
an agent of the state to lease the oil and gas.
Case law and statutes
address the division of the lease payments. To compensate the surface
owners for leasing and for surface damages stemming from the oil and gas
activity, the surface owners receive half of the bonus, rentals and
royalties.

They are entitled to no other compensation. The law
placed restrictions on how the surface owners could convey and reserve
these rights. Prior to entering an oil and gas lease, surfaces owners
cannot assign, convey or reserve any mineral rights, including the
executive rights. Once the surface is sold, the executive rights follow
the surface ownership.

However, if the land is under lease or in
production, the seller may assign, convey or reserve his or her interest
in the lease but only for the duration of the lease. (This primarily
entails the right to receive half of royalties from future production).
This right terminates when the lease ends. Thereafter, the right reverts
to the state.

The GLO commissioner oversees the leasing of
relinquished lands. Certified copies of all mineral leases must be filed
with and approved by the GLO to be effective. The basic terms of the
oil and gas leases are set forth on the GLO’s website. The state, not
the surface owner, is the named lessor. The state alone possesses the
power to enforce or cancel the lease. Surface owners have no rights
except to protect the surface from trespassers.

As a result of
these decisions, the mineral rights attached to the surface ownership on
relinquished land may (or should) be capitalized into the sales price,
making the land more valuable.

Mineral substances
Interestingly,
Texas courts recognize two definitions (or lists) of substances
included in the term minerals. One attaches to land where the state
retained no minerals or where they were released in 1876. The other
definition applies to mineral classified land.
On lands where the
state retained no minerals (or where they were subsequently released),
the term includes oil, gas, sulfur, salt and possibly uranium. Unless
specifically named in the reservation or conveyance, no other substances
are included.

The term, as a matter of law, does not include
limestone, caliche, surface shale, building stones, sand, gravel and
groundwater. Likewise, the term does not include coal, lignite and iron
ore that lies on or within 200 feet of the surface that will destroy or
deplete the surface when produced. These substances belong to the
surface owners.

A completely different picture emerges on mineral
classified land. Here, the courts ruled that the substances retained by
the state depend primarily on the statute in effect when the patent
occurred. Various statutes have been in effect since 1876, making determination difficult.

For
example, the Texas Mining Act, in effect from 1895 to 1913,
specifically lists clay, marble, natural cement, coal, valuable stone
for building purposes and other valuable building materials as a
mineral. After 1913, different statutes were in effect with different
wording. As yet, no appellate decisions have ascertained the substances
retained in mineral reservations by the state after 1913.

In
1986, the Texas Supreme Court ruled in Schwarz v. State that coal and
lignite belong to the state on mineral classified land. The Mining Act
in effect at the time specifically listed coal and lignite as a mineral.
The rule applies even though the surface will be destroyed or depleted
when the coal and lignite are produced. In 2011, the Eighth Court of
Appeals in El Paso ruled in State v. Cemex Construction Materials South
that the Land Sales Act of 1895, in effect at the time of the patent,
included “dirt, caliche, sand, gravel, limestone, and other materials at
issue, even though the state did not expressly reserve such materials.”

The
Cemex case was appealed to the Texas Supreme Court. Prior to the high
court hearing the case, the parties reached an out-of-court settlement.
In these instances, Rule 56.3 of the Texas Rules of Appellate Procedure
applies, holding that unless the supreme court vacates the appellate
court’s opinion, it stands. On March 16, 2012, the high court did just
that. It vacated the Eighth Court of Appeal’s judgment but sustained the
opinion.

Thus, as one GLO attorney summarized the status of the
case, the opinion stands as binding authority in the Eighth Court of
Appeals and persuasive authority throughout the rest of the state.
Seventeen
counties lie in the Texas Eighth Court of Appeals’ jurisdiction:
Hudspeth, Jeff Davis, Loving, Presidio, Reagan, Reeves, Upton, Ward,
Winkler, Andrews, El Paso, Pecos, Terrell, Brewster, Crane, Crockett and
Culberson. All these counties are in the Trans-Pecos Region, with 10
located west of the Pecos and the others just across the river.

Because
the state owns the coal, lignite, sand, gravel, surface shale and even
dirt that will destroy or deplete the surface when produced on mineral
classified land, does this
destruction offset any increases
associated with the partial ownership of oil and gas via the
Relinquishment Act? Only a knowledgeable appraiser knows the answer.

Leasing minerals on mineral classified land
The
Relinquishment Act clarified how oil and gas is leased and how the
revenue is shared on relinquished land patented between 1895 and 1931.
Texas legislators passed other statutes addressing how other substances
are to be leased and the revenue shared on mineral classified land. The
process is found in the Relinquishment Act (Sections 53.061– 53.066,
Texas Natural Resources Code).

The state constitutes (appoints)
the owner of the surface as its agent to lease any minerals, except oil
and gas, subject to the Relinquishment Act, that may be found within all
or a part of a survey previously sold with a mineral reservation to the
state. These substances may be leased either separately or
together on a form or forms prepared by the GLO.

As
the leasing agent of the state, surface owners receive 40 percent of
all bonuses, rentals and royalties payable under leases entered before
Sept. 1, 1987, and 20 percent on all leases entered thereafter. However,
for leases allowing the surface mining of coal, lignite, potash,
sulphur, thorium or uranium entered on or after Sept. 1, 1999, surface
owners are entitled to 40 percent of the bonuses, rentals and royalties.

Payments
received by the surface owners are in lieu of all damages to the soil.
The surface owner(s) are not entitled to further compensation.

Groundwater ownership
If
the state owns the coal, lignite, dirt, caliche, sand, gravel,
limestone and other valuable substances on mineral classified lands,
does this ownership extend to groundwater? If so, what is left? The
answer lies again in the Natural Resources Code, which provides that
“unless otherwise expressly provided by statute, deed, patent, or other
grant from the State of Texas, groundwater shall not be considered a
mineral in any past or future reservation of title or rights to minerals
by the State of Texas” (Section 53.1631; emphasis added).

However,
according to the statute, the state retains the right to use a
reasonable amount of both the surface and the groundwater for mineral
development and production purposes. As a general rule, the term
development means for drilling when it comes to oil and gas production.
The term production encompasses fracking (or fracturing). Consequently,
significant amounts of groundwater could be used for oil and gas
production without compensating surface owners.

According to Ken
Slavin, one of the El Paso attorneys who represented the GLO in the
Cemex case, mineral law takes a different twist once you reach the Pecos
River (the Trans-Pecos Region) going west. The statutes and case law
governing ownership, reservation and leasing of minerals are different
than what most people are used to. Anyone owning, purchasing, selling,
brokering or appraising land located in the Trans-Pecos Region should
check the maps online with the GLO to see if the land is subject to any
mineral classification or reservation by the state.

The maps are at http://gisweb.glo.texas.gov/glomap/index.html. The GLO does not guarantee that the maps are accurate.

Mr.
Fambrough ([email protected]) is a member of the State Bar of Texas and a
lawyer with the Real Estate Center at Texas A&M University