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One question I believe everyone should clearly define is “what is the scope and purpose of the opinion I’m requesting / preparing / reviewing?” Opinions can be long or short, detailed or brief, can be written to deliver pristine title or marketable title, or can be long or short, limited in scope or quite thorough, and the requirements can be written comprehensively or in a way that will allow curative strategies to be wholly developed in-house. There is practically no end to the number of variations that can be developed. However, what follows is a description of the main categories of oil and gas title opinions that are typically encountered:
Prior to drilling a well, an oil company will have a law firm prepare a drilling title opinion. Some firms also refer to these opinions as an original title opinion. The title opinion identifies all who would have an interest in the oil, gas and other minerals in the lands upon which a well is to be drilled. It will identify problems or any issues in each owner’s title and make requirements that specify solutions to these issues so the oil company can be fully assured that it has purchased the right to drill for and produce oil and gas from the right parties. These solutions are called “curative measures.” The main idea with a drilling title opinion is to reduce the risk of title failure caused by a third party that is unleased claiming an interest in the well once it has been drilled. Unleased parties are disasterous for an oil company, because they essentially have the right to a free well, and 100% royalty; the oil company is left only with the recoupment of some drilling costs, and often times is left millions of dollars in the red. A good title attorney will give an accurate division of interest, skillfully recognize the pertinent title issues, and will describe easy to understand curative measures.
Division Order Opinions
In the event the oil company drills a well and finds producible oil or gas from the property, a division order title opinion will be prepared. This opinion is usually based on the prior title opinion (the drilling title opinion), will be updated with any new instruments filed in the record, and will identify the persons who are entitled to proceeds from the sale of production from the well and the percentage each is entitled to. Again, the division order opinion will identify the problems or issues in each owner’s title and will specify requirements concerning how to correct those issues so that those persons described as being entitlted to production are paid and receive the correct percentage of the revenue.
Drilling and Division Order Title Opinions
In the Rocky Mountain Region, including Colorado, North Dakota and Wyoming, it is common to skip straight to the division order title opinion. However, because this also means you will be obtaining the first impression of all title issues, it is also a drilling title opinion. This is particularly common in these areas because of the prevalence and effectiveness of forced pooling. Under these regimes, the drillsite no longer has such a heightened title risk, and therefore it makes sense to forgo all the separate title work and go move straight to one unit-wide title opinion.
Lender’s opinions are prepared and addressed to a bank or other institution who is lending money to a company that is using the oil properties as security for a loan. These opinions are limited to the interest of the borrower, and the purpose of the opinion is to confirm the nature of the oil and gas interest the lender is acquiring as security for the loan.
Acquisition opinions are prepared for a company that is intending to purchase an oil and gas property. These opinions are more limited and enable the purchaser to understand what they are purchasing, to confirm the seller’s ownership interest in the property, and to identify any title issues in the seller’s chain of title. Typically, these opinions are fashioned according to the nature of the properties being purchased, and are prepared in connection with the purchase and sale agreement (“PSA”), and any other due diligence measures the buyer and/or seller agree to in identifying the quality and quantity of the properties being acquired. Additionally, some companies will order “Lease Acquisition Opinions” or “Lease Acquisition Reports,” which are narrowly tailored to discuss the sufficiency of title as to only a single lease or small collection of leases.
The possibilities are virtually limitless. Any one of the above categories of opinions could be tweaked or slightly modified to fit your purpose, budget, or unique goals. Perhaps you would like a specialized spreadsheet prepared. Perhaps you would like the attorney to omit all legal analysis and only deliver conclusions. Perhaps you would like the attorney to conduct independent investigations into ambiguous matters needing clarification. Again, the possibilities are virtually limitless. That’s why it is important that you and your attorney are on the same page when it comes to the purpose, scope, and limitations you would like placed on the opinions you are ordering.