H.B. 4268
Passed -- March 5, 2018
Signed by Governor - March 9, 2018
Effective -- June 3, 2018
 
Summary of H.B. 4268
 
At its core, the Cotenancy Modernization and Majority Protection Act ("Act") is a revision to the relationship between cotenants owning "oil or natural gas and their constituents." The Act is limited by an undivided interest in a single tract of oil or natural gas.
 
The Act authorizes "the lawful use or development of oil or natural gas and their constituents" with certain conditions. This authorization is in contrast to existing common law that allowed a cotenant owning a very small fractional interest in the mineral tract to prevent development of the oil and natural gas -- essentially a veto power by any cotenant despite the wishes of 99.9 percent of the ownership interest.
 
The conditions imposed by the Act for the "lawful use or development" of a single mineral tract are as follows:

1. The oil  and natural gas mineral tract must be owned by seven or more royalty owners;
2. The development operator (or owner) must have "made reasonable efforts to negotiate with all royalty owners in an oil or natural gas mineral property;"
3. The development operator must obtain the written consent (by lease or other writing) to the development from royalty owners vested with at least 75 percent  of the right to develop, operate and produce oil, natural gas, or their constituents (the "consenting cotenants"); (§37B-1-4(a))

If those conditions are met, the lawful use or development is "permissible, is not waste, and is not trespass" and the consenting cotenants "are not liable for damages for waste or trespass due to the lawful use or development," (§37B-1-4(a)) subject to the following conditions and restrictions:

1. The consenting cotenants must receive payment in accordance with two alternative options (§37B-1-4(b));
2. Royalty payments must be reserved for unknown and unlocatable mineral interest owners and a report and remittance of the reserved funds to the State Treasurer as the Unclaimed Property Administrator (§37B-1-4(d));
3. A nonconsenting cotenant is entitled to receive, based on his or her election either:
   1. a prorata share of production royalty, paid on the gross proceeds received at the first point of sale to an unaffiliated third-party purchaser and free of post-production expenses, equal to the highest royalty percentage paid to his or her cotenants in the same mineral property, under a bona fide, arms-length transaction and lease bonus and delay rental payments or other non-royalty mineral payments, calculated on a weighted-average net mineral acre basis (§37B-1-4(b)(1)) [or in the circumstance where only the target stratigraphic formation is leased by a consenting cotenant then the highest royalty, bonus and delay rental shall be paid (§37B-1-4(e))]; OR
   2. a carried working interest participation for his or her prorata share of the revenue and cost equal to his or her share of production attributable to the tract or tracts being developed according to the interest of such nonconsenting cotenant, exclusive of any royalty or overriding royalty reserved in any lease, assignments or agreements AFTER THE MARKET VALUE of such nonconsenting cotenant's SHARE OF PRODUCTION EQUALS DOUBLE THE SHARE OF SUCH COSTS PAYABLE OR CHARGED to the interest of such nonconsenting cotenant (§37B-1-4(b)(2));
4. A nonconsenting cotenant has 45 days following the operator's written delivery of its best and final lease offer in which to make the election between a. and b. above and if the nonconsenting cotenant fails to deliver a written election to the operator within the 45-day period, the nonconsenting cotenant will be deemed to have elected option "a." above (§37B-1-4(c));
5. A nonconsenting cotenant then has 30 days after the election or "deemed election" to appeal to the Commission [presumably the Oil and Gas Conservation Commission] regarding the issue of whether there has been compliance with the requirement to pay the highest royalty in the same mineral property and the value for the lease bonus and delay rental payments, but the development shall continue during any such appeal to the Commission (§37B-1-4(d));
6. The nonconsenting cotenants and unknown and unlocatable interest owners electing or "deemed electing" the production royalty described in "a." above shall be subject to and benefit from the "other terms and provisions most favorable to the nonconsenting cotenant or unknown or unlocatable interest owners AND they "shall not be subject to or liable under any warranty of title, jurisdictional or choice of law provisions, arbitration provisions, injection well provisions, disposal well provisions, and storage provisions AND the operator and consenting cotenants "shall only develop the specifically targeted stratigraphic formation" with the nonconsenting and unknown interest owners retaining "all other formations unless or until reasonable efforts are made to renegotiate under this section for each additional formation;" (§37B-1-4(e))
7. A nonconsenting cotenant electing the "carried working interest" option "shall be subject to and shall benefit from other terms and provisions determined to be just and reasonable by the Oil and Gas Conservation Commission in a manner similar to the provisions of §22C-9-7(b)(5)(B)" governing deep wells AND the operator may proceed with the development (§37B-1-4(f));
8. A nonconsenting cotenant electing a productions royalty and any unknown or unlocatable interest owner shall have "no liability for bodily injury, property damage, warranty of title, or environmental claims, arising out of site preparation, mineral extraction, maintenance, reclamation, and other operations with respect to minerals produced" except for their intentional acts (§37B-1-5);
9. Surface Use Limitation -- in the event mineral property is owned by a nonconsenting cotenant and developed pursuant to §37B-1-4, then "in no event shall drilling be initiated upon, or other surface disturbance occur, without the surface owner's consent regardless of whether such surface owner possesses any actual ownership in the mineral interest," but this language "shall not require surface owner consent for tracts on which surface disturbance does not occur or tracts otherwise subject to an existing surface use agreement, oil and gas lease which includes surface use rights, or other valid contractual arrangement in which the owner has granted rights to the operator to use the surface for horizontal drilling or any other use for which this article is used." However, "nothing contained in this chapter is intended to alter in any way, and this chapter shall not diminish or increase, the rights of the owners of surface overlying the minerals developed in this state" and "it is the intention of the Legislature to leave unchanged the common law of this state as it relates to the mineral owner's right to utilize the surface for the extraction of minerals."  (§ 37B-1-6)

 
Miscellaneous Information

• Act includes definitions for "consenting cotenant," "nonconsenting cotenant," "Operator," Person," "Post-production expense," "Prorata share," "Royalty Owner" and "Unknown or unlocatable interest owner."
• H.B. 4268 empowers the Oil and Gas Conversation Commission to "execute and carry out, administer, and enforce the relevant provisions of §37B-1-1 et seq. of this code concerning mineral development by cotenants for all wells at all depths (§22C-9-4(j)).
• Definition of "unknown or unlocatable interest owner" is determined following a (i) reasonable review of available county records, (ii) reasonable inquiry in the vicinity of the owner's last known place of residence, (iii) diligent inquiry into known interest owners in the same tract and (iv) reasonable review of available internet resources commonly utilized by the industry (§37B-1-3).
• Operators must, within 120 days from the date upon which an amount is reserved for an unknown or unlocatable interest owner, make a report to the State Treasurer as the Unclaimed Property Administrator and each calendar quarter, thereafter, concerning each reserved interest for each unknown or unlocatable interest owner and shall concurrently remit the amount reserved which shall be submitted by the first day of the month following each calendar quarter (§37B-1-4(d)).
• "After 7 years from the date the first report to the Treasurer, a bonafide surface owner may file an action to quiet title to the interests of all unknown and unlocatable interest owners of the oil and natural gas estate underlying the surface tract." (§37B-1-4(g))

H.B. 4268 also creates a new article titled "Unknown and Unlocatable Interest Owners Act" §37B-2-1 et seq. The article establishes the process for the State Treasurer to follow in handling and disposing of reserves related to unknown or unlocatable interest owners paid by operators to the State Treasurer, including disbursement 50 percent to the Oil and Gas Reclamation Fund and 50 percent to the PEIA Stability Fund.
 
Article 2 becomes effective July 1, 2018.
 
If you have any questions about this Act and how it impacts a variety of entitities within the oil and gas industry, please contact us.