The Two Biggest Errors in Oil & Gas Practices
According to the U.S. Energy Information Administration, Oklahoma is ranked fourth in the top oil-producing states in the country. Oil and gas is a rewarding business, not just for the country and state, but for attorneys who practice in this area. However, like with most resources that generate lucrative income, it comes with risks and requires complex knowledge and expertise.
Unlike most countries, oil and gas resources in the U.S. are privately owned (except where the land is owned by the government). The ownership rights of private individuals have legal implications with regards to procurement and development. Because oil and gas interests can be severed from land ownership and can be leased or sold, ownership can take on many forms such as landowners’ interest, lease holders’ interest, royalty interest and others.
Claims are historically rare in this area of practice but have been some of the most costly. The average cost to defend and settle an oil and gas case is approximately $450,000. Although this area of practice is mostly transactional, it can also involve litigation. Depending on a client’s needs, attorneys may find themselves in roles that involve negotiating and drafting contracts or sharing agreements in the exploration, exploitation and production of oil and gas. It may also include resolving disputes related to oil and gas interests.
Avoiding Claims in Oil & Gas Practices
Most claims in this area of practice are related to the title. The two most common errors are error in public record search and inadequate discovery of facts. To avoid oil and gas claims resulting from these errors, an attorney must carefully consider the following when handling such matters.
Experience, Expertise and Available Resources
For oil and gas examination, it is essential that the attorney look at the entire section of land and not limit the search to just the specific area and diligently inquire for any information that may be detrimental or essential to the transaction. Failure to do so provides the perfect scenario for a legal malpractice lawsuit. If an attorney does not have the time or expertise to do a thorough search, it is best to refrain.
Duty to Exercise Reasonable Care
Title opinions are issued for various reasons. This list includes, but is not limited to, tracing royalty interests, lease acquisition or using the property as security for a loan. An attorney not only has a duty to do a reasonable search but also has a duty to disclose any material defects to the client. The attorney is expected to identify the deficiencies or issues present with the title and advise the client, and they must never make a business judgment or determine what risks the client must assume. The client must make an independent informed decision given the facts from the title search. If an attorney negligently or willfully withholds information that is significant to a client’s decision, the attorney may be sued.
Also, the attorney must be sure to proofread carefully to ensure the chain of title is complete and percentages are correct.
Complexity of Title – Previous Title Opinions
Relying on a previous title opinion can significantly reduce the cost for an attorney and the client, but it comes with many risks. If a client insists the attorney rely on a previous title opinion, the attorney must consider many questions.
- Why was the opinion prepared for?
- What is the experience of the lawyer who prepared the title opinion?
- Was the title opinion prepared by a title and abstract company?
- Is it a title opinion? (Not everything on a law firm’s letterhead is a title opinion, it could be a title memorandum.)
- What kind of an opinion is it? A lease acquisition opinion, a drilling opinion or a division of order opinion, or something else?
- What was the title opinion based on and does it describe unrecorded documents?
- Is royalty interest tabulated or are only leasehold interests shown?
Our advice for attorneys who use pre-existing title opinions is to treat them as any chain of title. This means going beyond the title and, if a client insists that a previous title opinion be relied upon, the proper disclaimer must be made in writing.
Consider Each Case Carefully
This area of law requires an attention to detail, meticulousness and precise expertise. An attorney must be able to differentiate and assess each case they consider taking based on their capability and resources. Furthermore, when called upon to do a title opinion, do not limit the search to just the specific area. Look at the entire section of land to discover any other issues that may be associated with the parcel of land or mineral interests. Also be sure to include any limitations placed on the attorney by the client.