Who Owns the Oil Under Your Farm, and Why America Answers Differently

Who is the trespasser? You own a quarter section of good farmland. A stranger in a clean pickup truck pulls into your lane, hands you a business card and tells you that his company has the right to put a drilling rig in your pasture. Is it you, for standing in the way, or him, for turning up uninvited?

The answer depends entirely on a piece of paper in the county courthouse that most families have never read. And the fact that the question exists at all is one of the quiet miracles of American law. In most of the world, the stranger would be a government employee, he would not have knocked, and you would not be getting a check.

Let me explain why we do it differently, because it is the reason a rancher in Texas can send a kid to college on oil royalties while a farmer sitting on the very same geology in a country with a different legal tradition gets nothing but dust from the trucks.

One rule explains almost everything

The American rule is simple to state. When a person owns land, he can own the minerals beneath it as well. Those minerals can be oil, natural gas, coal and many other things, and the owner can keep them, sell them, lease them or leave them to the grandchildren.

Compare that with the rule in most other countries. Mexico's constitution vests ownership of the subsurface in the nation. In Britain, the Petroleum (Production) Act of 1934 vested petroleum in the Crown. Norway, Saudi Arabia, Russia and Brazil all follow some version of the principle that what lies beneath the soil belongs to the state. In those places, the surface owner is someone who stands on top of a national asset.

Our approach grows from English common law and a Latin maxim that law students learn on the first day of property class: whoever owns the soil owns it up to the heavens and down to the depths. Lawyers have trimmed the heavens part since airplanes arrived, but the downward part survived. The practical result is that private ownership of minerals is normal here, and the federal and state governments own minerals only under the land they own.

Is that fair, or is it just a lucky historical accident? I will argue it is both, and that the accident worked out better for ordinary families than the alternatives did. I will get to the other side's best argument in a moment.

Two estates stacked on one piece of ground

Here is the thing that confuses people. Land ownership is not a single package. In law it is a bundle of rights, and the bundle can be split. The two pieces that matter most in energy country are:

1. The surface estate: the right to the top of the ground, to farm it, build on it, graze it and live on it.
2. The mineral estate: the right to the oil, gas and other minerals underneath, and the right to go get them.

When one family owns both, life is simple. But the estates can be separated by a deed. A grandfather sells the farm in 1952 and keeps the minerals. A bank forecloses and reserves the minerals in the paperwork. A mineral interest is left by will to three children who move away. After a few generations you can have a surface owner who lives on the land, and a dozen mineral owners scattered across the country who have never seen it. That arrangement is called a split estate, and it is far more common than most landowners realize.

This matters for a plain reason. If you bought your land and never checked who owns the minerals, you may be farming over someone else's property. And if you do own them, you may be sitting on an asset worth far more than you thought.

What the mineral owner can do on your ground

Now we reach the part that will make a surface owner's blood pressure rise. In the usual rule, the owner of the mineral estate has an implied right to use as much of the surface as is reasonably necessary to get at the minerals. The law reasons that a right to minerals would be worthless if the owner could never enter the land to reach them.

That is where the clean-pickup stranger gets his authority, if the minerals belong to someone else. A mineral owner or the company that leased from him can build a road, set a pad, bring in equipment and drill. The surface owner cannot simply say no.

But "usual rule" is not "absolute rule," and three things soften it.

First, courts in a number of states require the mineral owner to be reasonable and to consider the surface owner's existing use. In Texas, the case that set this out is Getty Oil Co. v. Jones from 1971. Under what is called the accommodation doctrine, if the surface owner already has a use that would be impaired, and the mineral owner has a reasonable alternative way to get at the minerals, the mineral owner must use it.

Second, a number of states have surface damage statutes that require operators to compensate the surface owner for damage to crops and land, and some require the operator to try to reach an agreement first. These vary a good deal from state to state, so check your own state's law and talk to a lawyer who works in oil and gas.

Third, and best of all, you can negotiate a surface use agreement. That is a contract that spells out where the pad will go, how the road will be built, what happens to the topsoil, how fences and gates will be handled, and how much you will be paid. The families who come out best are the ones who put the details in writing before the bulldozers arrive.

The rule of capture, or why the neighbor's straw matters

Oil and gas are not like a barn. They move. A pool of oil under your land can be tapped by a well on the neighbor's land, and the oil will flow toward the low pressure of the new well whether it respects the property line or not.

The traditional American answer is called the rule of capture. In its classic form, you own what you produce from your own well, even if some of it migrated from beneath the neighbor's land. The neighbor's remedy is to drill his own well and get his share before it is gone.

If you think that sounds like an invitation to a race, you are right. Early oil fields were chaotic scrambles with derricks packed shoulder to shoulder, each owner trying to pump faster than the next. The waste was real. Over time, states answered with spacing rules that keep wells a set distance apart, and with pooling or unitization rules that combine tracts into a single drilling unit so everyone shares production in proportion to their acreage. In Texas the Railroad Commission handles much of this; in Oklahoma it is the Corporation Commission. Other states have their own agencies. The idea is to preserve private rights while ending the race.

I find this a good illustration of a conservative principle. The state did not seize the oil. It wrote rules that let private owners share a common pool fairly. That is a very different thing from nationalization.

Where it began: 69 feet in Titusville

The industry in America starts in a small Pennsylvania town. On August 27, 1859, a former railroad conductor named Edwin Drake, working for the Seneca Oil Company, struck oil at Titusville after drilling about seventy feet. He is called "Colonel" Drake, although the title was a bit of promotional polish and had nothing to do with the army.

Drake's well did not make anyone in the area rich overnight, but it proved something. Oil could be drilled for, rather than collected from seeps, and a market existed for what came out. Within a few years the valleys of western Pennsylvania were crowded with wells, and the rush was on. Because the land belonged to private owners, the rush worked through leases, purchases and contracts. Fortunes were made and lost. The basic structure of buying a right to drill from the person who owned the ground came out of those years, and it has stuck.

How a lease actually works

Let me walk you through the parts of a standard oil and gas lease. Every one of these is negotiable, and every one affects what your family will earn.

• Bonus payment. A one-time payment per acre when you sign. It is yours whether or not anyone ever drills.
• Primary term. The number of years the company has to begin drilling. Typically a few years. If no well is drilled, the lease ends.
• Royalty. The share of what is produced that belongs to you, free of the cost of drilling the well. Historically a royalty was one-eighth of production. In competitive areas, landowners have negotiated much higher fractions. A royalty owner does not pay to drill. That is the big difference between a royalty and a working interest.
• "Held by production." The lease continues past the primary term for as long as the well produces in paying quantities. That can be decades.
• Pooling clause. Lets the company combine your land with neighboring tracts to form a drilling unit. Your royalty is then calculated on your acreage's share of the unit.
• Surface provisions. Where the company can build, how land is restored, who pays for damage.
• Post-production costs. Whether the company can deduct the costs of gathering, compressing, processing and transporting the product before it calculates your royalty.
• Pugh clause. Releases acreage that is not drilled or included in a unit, so the company cannot hold all of your land with a single well.

If you take only one thing from that list, take this: read the royalty clause and the post-production cost clause together. The headline fraction means nothing if costs are quietly deducted from your share.

The kitchen-table math

Here is a hypothetical, with numbers I made up so you can see how the pieces fit. A family owns 160 acres, including all the minerals. A company offers a bonus of $500 an acre.

• Bonus: 160 acres × $500 = $80,000, paid on signing.

The company drills a well on a 640-acre unit that includes the family's 160 acres. The family's share of the unit is 160 ÷ 640 = 0.25, or one quarter. Suppose the well sells $4,000,000 of oil and gas in its first year. Your tract's share of that is $4,000,000 × 0.25 = $1,000,000.

• At a one-eighth royalty (12.5 percent): $1,000,000 × 0.125 = $125,000.
• At a one-quarter royalty (25 percent): $1,000,000 × 0.25 = $250,000.

The difference between the two royalty fractions on the same well is $250,000 − $125,000 = $125,000 in a single year. That is why you do not sign the first form that lands on the kitchen table.

Now add the cost clause. Suppose the lease allows the company to deduct transportation and processing before it figures your share, and those costs take 15 percent of the sale price. Then a quarter royalty is not a quarter. It is 0.25 × 0.85 = 0.2125, or 21.25 percent. On the same $1,000,000 that is $212,500 and not $250,000, a loss of $37,500 buried in a clause you may not have read.

Again, those figures are invented to show the arithmetic. Real numbers depend on the well, the prices and your lease. Also talk to your tax preparer: royalty income is taxable, and depending on your situation there may be a depletion deduction to consider.

What to check before anyone knocks

Before the pickup arrives, do the homework.

1. Find out who owns the minerals. Look at your deed and the chain of title in the county records. An oil and gas attorney or a landman can do this for you.
2. Ask whether earlier deeds reserved the minerals. A 1950s reservation by a previous owner can mean you hold only the surface.
3. Keep the lease short and specific. Short primary terms, a Pugh clause, and clear surface language.
4. Get offers from more than one company. Competition drives up bonuses and royalties.
5. Put surface promises in writing. If a company agrees to pay for damaged fences, fix the road and restore the soil, the agreement belongs in the contract, not in a handshake.

For more on what you can do when someone with a clipboard actually shows up on your acreage, A Survey Crew Is on Your Land, So Here Is Your Pipeline Playbook covers the moves step by step, and The Takings Clause in Four Cases Every Landowner Should Know explains what the Constitution says when government wants your land.

The best argument for the other system

Fairness demands that I state the opposing case at full strength. Here it is. A nation's oil and gas are a natural endowment. No farmer created them. They sat in the ground for hundreds of millions of years before anyone arrived. Under the argument, it is arbitrary and unfair that one lucky landowner, who happened to buy a parcel over a rich formation, receives a windfall, while the neighbor two miles away over a dry formation gets nothing. Better, say the critics, for the people as a whole to own the resource and spend the proceeds on everyone.

It is a serious argument, and it is how many countries choose to live. But I think it fails, for three reasons.

One: ownership creates the incentive to say yes, to bear the nuisance, and to look after the land. A country where the landowner gets nothing from the rig in his pasture is a country where the rig is an imposition. In America it is an opportunity, and landowners have been willing partners.

Two: a government monopoly on the subsurface gives an enormous resource to politicians and ministries to allocate. Anyone who has watched what happens when a central authority decides who gets the contracts knows how that tends to turn out for the ordinary citizen.

Three: it was private ownership, with thousands of landowners and hundreds of independent operators, that produced the shale revolution described in The Texas Wildcatter Who Spent Twenty Years Cracking the Shale Code. A wildcatter could find a willing landowner without going through a ministry. Competition for leases forced the rewards toward the people who owned the ground. The system let a lot of little guys try a lot of things, and the winners turned out to be better than the planners.

Is it uneven? Yes. Life is uneven. But widespread private ownership is a better answer to unevenness than concentrating ownership in the state.

The bottom line

• In the United States a private landowner can own the minerals under the surface, and that single rule is why farm and ranch families became partners in oil and gas.
• Surface and minerals can be owned by different people. Check your deed and the county records before anyone else tells you what you own.
• The usual rule gives the mineral owner a right to use the surface reasonably, so protect yourself with a written surface use agreement and learn your state's surface damage law.
• Read the royalty clause and the post-production cost clause together, ask for competing offers, and talk to an oil and gas attorney before you sign. The same well can pay twice as much under a better lease.
• When someone tells you that natural resources should belong to the government, ask who benefits from that, and point to the family that got a check in the mail.