Oil and Gas Leases – The Gift that Keeps on Giving

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Dr. Carol A. Simpson

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Serving Plano, TX

  • Serving Plano, TX

  • Free initial consultation, Credit cards accepted, Fixed hourly rates

Shareholder at firm Eichelbaum Wardell Hansen Powell & Mehl, P.C.

Serving Plano, TX

Free initial consultation, Credit cards accepted, Fixed hourly rates

By Dr. Carol Simpson – Associate
Eichelbaum Wardell Hansen Powell & Mehl, P.C.
800.488.9045 | www.edlaw.com | information@edlaw.com

It’s no secret. Gas prices
are up and the oil industry is booming. With new drilling technology, more and more
people (and school districts) are being approached by oil companies or
“landmen” looking to execute an oil, gas, and mineral lease.[1] Usually,
a landman will present an initial offer to lease property by providing a
finalized, “ready to sign” mineral lease, with a nice looking check attached.

So what should a school
district do in this situation? Are there any legal requirements that prevent it
from just executing the lease? For example, let’s say a landman walks in and
hands over a mineral lease that lacks only the Board President’s signature. The
lease has a fat bonus check attached. What should a district do?

Should a district just sign the lease, and put the money in the bank?

Unfortunately, no. This is
one gift horse that should be looked
in the mouth, and carefully.

But wait! If a district isn’t selling
any real property, that means it doesn’t have to jump through all those
“hoops” the legislature enjoys making school districts jump through. Right?

Well, it is correct that
the notice and bidding requirements of the Texas Local Government Code would
not apply unless a District was also selling its ownership interest in the real
property itself. However, there is a completely different set of “hoops” that
school districts must jump through before executing a mineral lease, including
separate notice and bidding requirements.

First, execution of a mineral
lease must be authorized by resolution of the board of trustees.[2] The
resolution must state the board’s determination that it is advisable to lease
the property for mineral development.[3]

After a resolution is
passed, districts must comply with notice and bidding requirements before a
lease for mineral development can be lawfully executed. This means that a
notice of intention to lease the land must be published once a week for three
consecutive weeks in a newspaper of general circulation in the county.[4]
Additionally, a public hearing must be held for consideration of bids.[5] Notice
must be given for the hearing, and it must be held before the lease is executed.[6]

Lastly, school districts
can consider all submitted bids and “award the lease to the highest and best
bidder who submits a bid.”[7]
Districts are not obligated to accept a bid, and have the right to reject all
bids if none represent the fair market value of the lease. In that case, districts
can re-publish notice and call for additional bids.[8] Don’t be
fooled by “three year” or “two year” lease language. If an exploration company
finds minerals, a lease will continue until no more minerals are produced. There
may not be a second bite at the apple, so districts should seek to obtain the
best possible deal from the start.

addition to the requirements above, the Texas Natural Resources Code contains
regulations regarding royalties, length of lease terms, pooling provisions, and
other technical requirements of mineral leases executed by school districts. Also,
remember that landmen are not trying to make school districts lots of money;
they’re trying to make their company lots of money.  A school attorney knows what to look for in a
mineral lease for a school district to get the most return for what may be a
lifelong partnership. This article is not a comprehensive list of all mineral
lease requirements, and is not intended to be relied upon when procuring a
mineral lease. A school attorney should always be consulted before a school
district executes any lease for oil, gas, or minerals.

[1] In this article, a lease of oil, gas,
and/or minerals is collectively referred to as a “mineral lease.”

[2] Education Code § 11.153(c).

[3] Natural Resources Code §

[4] Id.

[5] Id. at
§ 71.004.

[6] Id.

[7] Id. at § 71.006.

[8] Id. at § 71.007.

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