Adverse Possession of Oil and Gas Interests in Arkansas
Adverse possession is a legal doctrine that allows a person to acquire legal title to real estate by taking possession of the property for a prescribed amount of time. This doctrine becomes more complex in the oil and gas industry because the surface and mineral estate can be severed, and titled vested in different owners. Then the mineral estate is divided into working interest, royalty interest, overriding royalty interest, and non-participating royalty interest and others. Some of these interests are subject to adverse possession while others are not. Our oil and gas practice group prepared this article to assist you in navigating the common oil and gas interests in Arkansas.
In order to prove adverse possession at common law a claimant has to prove six elements: that his possession was (1) actual, (2) open, (3) exclusive, (4) hostile in character, (5) accompanied by an intent to hold adverse against the true owner, and (6) continued for seven years. In 1995 the Arkansas legislature further added the requirements that to prove adverse possession the adverse possessor must have had color of title and paid property taxes on the property for seven years.
Surface and mineral estate, not severed – If the surface estate has not been severed from the mineral estate, the two estates can be adversely possessed together. Union Pac. R.R. Co. v. SEECO, Inc., 2016 Ark. App. 466 (2016). This means that if someone satisfies the elements of adverse possession of the surface, they will also take any un-severed minerals. As a practical matter, the owners of large tracts in Arkansas are well advised to sever their minerals from the surface estate, and convey their minerals into a separate entity to protect from adverse possession.
Surface estate, severed from the mineral estate – If the surface estate has been severed from the mineral estate, adverse possession of the surface is ineffective against the owner of the minerals. Taylor v. Scott, 285 Ark. 102 (1985).
Mineral estate – It is possible, although difficult, to adversely possess a severed mineral estate in Arkansas. Generally, courts across the county, including Arkansas, hold that in order to obtain title to severed minerals by adverse possession, actual possession of the minerals must occur. The Arkansas Supreme Court has held that adverse possession of severed minerals occurs when the possessor “actually invades the minerals by opening mines or drilling wells and continues that action for the necessary period.” Taylor v. Scott, 285 Ark. 102 (1985).
Royalty interest – The royalty interest is a share of production, or the value of proceeds of production, free of costs of production, and if there is oil and gas produced on the property. The royalty interest owner does not have any right to operate the property. Therefore, a royalty owner does not have the right to lease or to share in the lease bonus or delay rental payments unless specifically authorized by the terms of the lease or prior conveyance.
Texas courts have held that a royalty interest cannot be adversely possessed. In Saunders v. Hornsby, 173 S.W.2d 795 (Tex. Civ. App. 1943), writ refused W.O.M. (Oct. 27, 1943) the Texas Court of Civil Appeals held that a royalty interest cannot be adversely possessed because it is non-possessory. This means that a royalty interest entitles the owner to a cost-free share of production when and if oil and gas is produced from the tract, but gives the holder nothing to possess until that production is obtained, nor does it entitled the holder to any right to go onto the subject tract and produce minerals. The result being that there can be no adverse possession because there is nothing to adversely possess.
The court in Saunders v. Hornsby held that a royalty owner who wrongfully received royalty payments did not adversely possess the royalty interest, stating “appellant merely converted to his own use the oil and gas that had already been produced by the Gulf Production Company and did not affect that which remained in the ground…”
Although not as well developed, Arkansas appears to adopt the rule in Texas. In Warmack v. Henry H. Cross Co., 237 Ark. 869 (1964) the Arkansas Supreme Court cited approvingly to the holding in Saunders that a royalty owner that had been overpaid for twenty-five years was not entitled to keep receiving the same overpayments.
Non-Participating Royalty Interest (NPRI): A Non-Participating Royalty Interest is entitled to the value of the proceeds of production, free of the costs of production, carved out of the mineral interest. The NPRI holder lacks the executive right to execute an oil and gas lease and share in the lease benefits such as the bonus or delay rental payments. Often the NPRI holder is entitled to the stated share of production without regard to the terms of any lease. Just like a royalty, an NPRI cannot be adversely possessed.
Leasehold Interest/Operated Working Interest: The working interest is the right to the mineral interest granted by a landowner to an oil company in an oil and gas lease. This grants the lease holder the rights to search, develop, and produce oil and gas. The Texas Supreme Court has held in Nat. Gas Pipeline Co. of Am. v. Pool, 124 S.W.3d 188 (2003) that if a lessee (the oil company) produces oil and gas after the oil and gas lease has expired for the time required for adverse possession, he acquires the same interest that he adversely and peaceably possessed; that is, the oil and gas leasehold as defined by the original terms of the lease.
Arkansas does not have any case law on point. However, Arkansas would likely reach the same result as Texas. The rationale behind the Pool is that the oil and gas lease conveys to the lessee a fee simple determinable interest in the minerals, and that the lessor only has a royalty interest and a revisionary interest if the lease terminates. Therefore, the terms that made the original mineral estate “determinable” continue to apply to the fee simple determinable interest acquired by adverse possession.
Like Texas, the Arkansas Supreme Court has held that an oil and gas lease is a conveyance of a fee simple determinable interest of oil and gas in place rather than a mere license. Hillard v. Stephens, 276 Ark. 545 (1982); Longino v. Machen, 217 Ark. 641 (1950); Edwards v. Hall, 267 Ark. 1003 (Ct. App. 1980).
Overriding Royalty Interest (ORRI): An overriding royalty is a share of production, or the value of proceeds of production, free of the costs of production, carved out of a lessee’s interest under an oil and gas lease. Arkansas has not addressed whether or not an ORRI can be adversely possessed. A Wyoming court has held that an ORRI cannot be adversely possessed under the rationale that a non-possessory royalty cannot be adversely possessed. Connaghan v. Eighty-Eight Oil Co., 750 P.2d 1321 (Wyo. 1988).
If you have any further questions about adverse possession of oil and gas interest please contact our oil and gas practice group at (501) 603-9000.