Replies to This Discussion

Permalink Reply by Skip Peel - Mineral Consultant on June 15, 2018 at 1:36

Thanks, Dion.  R.S. 44:104 was what I was looking for.  I think it's a safe bet that this was not legislation pushed by land or mineral servitude owners.

https://law.justia.com/codes/louisiana/2009/rs/title44/rs44-104.html

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Permalink Reply by Dion Warr, CPL on June 16, 2018 at 13:19

Skip:

Just keep in mind that the current iteration of the statute is now in the Civil Code.  You won't find it under Title 44 anymore.

https://law.justia.com/codes/louisiana/2017/code-revisedstatutes/ti...

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Permalink Reply by Skip Peel - Mineral Consultant on June 16, 2018 at 13:25

Thanks, Dion.  Regardless of its location, it is testament to the industry's attempts to put mineral owners in the dark.  And their influence over the legislature.

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Permalink Reply by Dion Warr, CPL on June 16, 2018 at 14:57

Wait, stop: "short form" leases have been around for a long time, and not just used for oil and gas lease contracts.  They have been used in real estate for years, and by any party (or parties) that wish to record notice of such a contract but keep other remaining details confidential.  They were not invented by the oil and gas industry just to keep their terms out of the courthouse.  There were more than motivated lessees lobbying the Legislature to reinstitute the statute - institutional and other sophisticated landowners (and their legal counsel) were also vying for the same privilege.

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Permalink Reply by Skip Peel - Mineral Consultant on June 16, 2018 at 15:13

I'm not referencing real estate transactions.  That's different.  Are you saying that the O&G industry did not support the legislation in question?  Sophisticated  landowners and institutions may quickly chime in and agree that they were supporters of the legislation.  I don't expect that you will hear the same from the average land/mineral owner.

Permalink Reply by Dion Warr, CPL on June 16, 2018 at 17:32

Skip:

How is that different?  Real estate transactions where significant terms are undisclosed are more acceptable to the neighboring owners?  As long as there is no sale of surface estate, there is no case for rescission.  Owners of adjacent properties are free to contract as they wish, at whatever terms a counterparty will accept.  Obviously, if lessees could obtain better terms from some owners over others, they would wish to keep that confidential; but the lessors who profit from a favorable deal would have equal motivation to keep their cards close to the vest as well.

While there is an obvious case for rank-and-file mineral owners wanting to have access to all the best terms available, what is left out is that large and/or sophisticated mineral owners have been able to negotiate for years if not decades on preferential terms based upon position, value and expert representation.  Neither them, nor their sage legal counsel, would have been keen on giving a "free look" to the riders and special provisions for which they had spent handsomely in order to create so that anyone who wished to pay for courthouse copies could pull them into their leases.  While some may wish to characterize the "Memorandum of Lease" as industry's way of "keeping everything quiet", the sophisticated lessors also benefitted from a return to the status quo as well.

While there may be some parties who seem hellbent on letting everyone know of every deal that they pulled off, there are many others who are just as happy being able to make the best deal they can every time that they can and silently count their money.  And perhaps silently support their vested interests as well.

Permalink Reply by Dion Warr, CPL on June 16, 2018 at 17:47

Skip:

From a business and real estate law website: Meislik & Meislik

"Why Record a Memorandum of Lease Rather Than the Lease Itself?

There are several reasons why recording the MOL is the preferred option.

First, as mentioned above, the cost of recording a MOL in certain jurisdictions can be quite high, often based on the number of pages that will be recorded. Nevertheless, as we all know, the majority of commercial leases contain many more pages than a MOL. Recording the actual lease, therefore, will increase the cost significantly.

Second, recording the lease itself would disclose to the world various terms and conditions that, presumably, one or more of the parties to the lease would prefer remain confidential (e.g., the amount of the rent, allowances, concessions, etc.). Disclosing such terms provides an easy way for prospective tenants to take advantage of confidential information and negotiate new leases to their advantage. Recording a MOL, where those terms can be referenced but not disclosed, would prevent third parties from utilizing such confidential information.

Does the MOL benefit both the Landlord and the Tenant?

It is commonly thought that a MOL generally benefits only the tenant. Tenants, especially those with a heavily negotiated lease (including concessions, exclusive use rights, construction restrictions, or restrictions as to the use of the rest of the overall property), want their lease recorded to ensure the viability of their business by making sure that the public knows of those protected rights. Additionally, a MOL is generally required by leasehold lenders or for a leasehold title insurance policy to establish lien priority. Landlords are often indifferent to the recording of a MOL, but will often agree to the record one to ensure that the lease itself will not be recorded, again for fear of disclosing sensitive information relating to concessions that it has granted to the tenant. In fairness, however, it must be said that some landlords prefer to avoid recording a lease due to the fact that, if the lease is terminated early, whether by surrender or by court proceedings (particularly in the lower courts where the court records may be unavailable), a landlord may have a difficult time proving that the lease is no longer effective and therefore in clearing its record title to the property. One way to protect a landlord from this problem is to provide a Discharge of Memorandum of Lease, in recordable form and fully executed by the tenant simultaneously with the tenant’s signing of the lease and the MOL, to be held in escrow by landlord’s attorney pending expiration or early termination of the lease in accordance with the terms of the lease."

Permalink Reply by Skip Peel - Mineral Consultant on June 17, 2018 at 1:27

Seemingly no level of advantage or amount of incentives subsidized by the public is ever enough for the O&G industry.

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Permalink Reply by Dion Warr, CPL on June 17, 2018 at 4:38

Skip, you seem to be suffering a lot of anti-industry angst over something that played out over a decade ago...

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Permalink Reply by Skip Peel - Mineral Consultant on June 17, 2018 at 5:04

No, Dion, not really.  It's cumulative knowledge of numerous such instances including those ongoing and industry crocodile tears.  If you want a response, let's start with the fact that most home owners know the approximate value range of their home.  It is a subject of neighborhood interest and discussion for those in an urban or suburban setting.  So everyone has some idea of value.  I expect rural residents do also.  In any case most home and land owners can afford an appraisal.  There is no such avenue for determining mineral value if recent leases taken in the vicinity are not available in the public record.  Mineral owners are far too often in the dark and negotiating with no experience or relevant data.  The industry prefers it that way and works to keep it so.

I can assure you that I will continue to support the industry when it comes to clear cut issues of wide benefit like fracking and pipelines.  My concern is for poor communication and customer relations for those with a lease and for constant attempts by the industry to benefit their bottom line at the expense of their lessors.  Every time I turn around these days I find another example and it wears on me.  The fact that Mr. Briggs makes some of the lamest, unfounded claims and threatens negative consequences for all if the industry doesn't get treated with kid gloves serves to increase that wear and tear.

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Permalink Reply by Dion Warr, CPL on June 17, 2018 at 6:17

Skip:

Re: the approximate value range of their home, neighborhood, etc.  Ah, yes!  Most homeowners are aware of the value of their home, both land and improvements.  They likely even know that value down to a "price per square foot" basis.  They take solace in knowing the value of comps and "rescission for lesion beyond moiety".  What they don't know is that Wal-Mart is putting in a new location on a parcel five minutes down the street, until Wal-Mart, Wal-Mart Properties or related entities makes it known after the deal is done.  Or that the real estate developer down the street is planning to put in Section 8 housing and apartments subsidized by tax dollars.  Each of these can also dramatically impact the value of your property, and you won't know a thing until the deal is done, because it is to the parties' advantage not to disclose.  You likely still won't know how much the parties were enriched by the transaction, other than the purchase price on the Bill of Sale.  And the subprime debacle and housing bubble effectively set fire to the myth of "stable value", if not "steadily rising value appreciation" in urban and suburban real estate.

One should take note in the claims, quotes and press releases of Mr. Briggs.  He is a spokesman and lobbyist for LOGA, and represents the interests of LOGA and its members.  One should not infer, nor would he ever claim, that he represents the industry as a whole.  When local professional landmen associations took exception to the rollback of the "blockbuster" penalties on alternate wells and pass-through of royalties from operators to non-operators quietly brokered between vested interests (LOGA members and contributors, including the "Big 5" Haynesville gas producers at the time) and legislative leaders (quickly passed through the Legislature and signed into law) as being detrimental to the practice of landwork and advantageous to speculators, none other than Mr. Briggs (the younger) pointed out that LOGA represented such interests of its members, not landmen, nor the industry in general.  And certainly, LOGA does not represent the interest of land and mineral owners (NARO and/or NARO-LA is about as near as one comes to having rank-and-file land and mineral owners being represented collectively).  So likely some LOGA members are crying about "unfair" provisions which have been availed to the state and agencies and politicial subdivisions of the state for quite some time, and the dutiful Mr. Briggs has stepped to the mic. The Hayride just reprinted the LOGA missive as sure as a copy machine.

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Permalink Reply by Skip Peel - Mineral Consultant on June 17, 2018 at 8:07

Industry risk is mitigated by tax payers.  Here's the short list not including state tax breaks/incentives.

Striking Oil Tax Benefits

The main tax benefits of investing in oil include:

• Intangible Drilling Costs: These include everything but the actual drilling equipment. Labor, chemicals, mud, grease and other miscellaneous items necessary for drilling are considered intangible. These expenses generally constitute 65-80% of the total cost of drilling a well and are 100% deductible in the year incurred. For example, if it costs $300,000 to drill a well, and if it was determined that 75% of that cost would be considered intangible, the investor would receive a current deduction of $225,000. Furthermore, it doesn't matter whether the well actually produces or even strikes oil. As long as it starts to operate by March 31 of the following year, the deductions will be allowed.
   
• Tangible Drilling Costs: Tangible costs pertain to the actual direct cost of the drilling equipment. These expenses are also 100% deductible, but must be depreciated over seven years. Therefore, in the example above, the remaining $75,000 could be written off according to a seven-year schedule.
   
• Active vs. Passive Income: The tax code specifies that a working interest (as opposed to a royalty interest) in an oil and gas well is not considered to be a passive activity. This means that all net losses are active income incurred in conjunction with well-head production and can be offset against other forms of income such as wages, interest and capital gains.
   
• Small Producer Tax Exemptions: This is perhaps the most enticing tax break for small producers and investors. This incentive, which is commonly known as the "depletion allowance," excludes from taxation 15% of all gross income from oil and gas wells. This special advantage is limited solely to small companies and investors. Any company that produces or refines more than 50,000 barrels of oil per day is ineligible. Entities that own more than 1,000 barrels of oil per day, or 6 million cubic feet of gas per day, are excluded as well.

• Lease Costs: These include the purchase of lease and mineral rights, lease operating costs and all administrative, legal and accounting expenses. These expenses must be capitalized and deducted over the life of the lease via the depletion allowance.

• Alternative Minimum Tax: All excess intangible drilling costs have been specifically exempted as a "preference item" on the alternative minimum tax return.

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