Developing easements: Mineral rights hold primacy in conservation easements

Lander – During the Aug. 23-24 meeting of the Select Committee on Natural Resource Funding held in Lander, committee members looked at oil and gas development on lands protected by conservation easements.
    “The statutes provide that everyone having an interest in the mineral estate, including the carbon sequestration rights, has to consent in order for the conservation easement to impact the development of those mineral interests,” explained John McKinley, attorney at Davis and Cannon, LLP in Cheyenne. “Unless everyone gives consent to the conservation easement, it cannot impair the ability to develop oil and gas interests.”
    However, McKinley also noted that some differences exist between split and unified estates, and donated easements also have additional stipulations.
Split or unified estates
    “You have to distinguish not only between split and unified estates, but also whether the easement is going to be purchased, donated or a combination,” McKinley continued.
    Split estate regulations require that a conservation easement does not impact the mineral estate.
    “Wyoming statute provides that the mineral estate remains dominant, and the conservation easement cannot impair the third party’s rights to develop those minerals,” he clarified. “From a practical standpoint, certain companies may be more reluctant to lease those minerals, but they are still available for leasing and development.”
    However, if landowners own the entirety of the surface and mineral estates, it is their prerogative whether to allow or disallow oil and gas development on the property in the future.
Localized and limited development
    “The only guidance in the regulation and the code is that oil and gas development is limited and localized,” he said, adding, however, that the terms limited or localized have not been defined by the court system. “There is a little bit of guidance in the regulations, and there are a couple of letter rulings that help define it.”
    Additionally, conservation easements are often drafted to include language that negotiates surface use agreements regarding the property.
    “The grantee – the land trust – has an obligation to monitor and make sure the terms of the conservation easement are upheld,” McKinley explained. “We put the initial burden on the grantor – the rancher who has been out there for years.”
    “The grantor negotiates in a fashion to minimize the surface impacts for the conservation values, but both the grantor and grantee have to approve the surface use agreements,” he added.
    Enforcement of surface use agreements also depends on the terms of the agreements.
    Language inserted in conservation easements stipulating surface use can be agreed to by all parties – the grantor, grantee and funding sources – without the separate consent of the federal government.
IRS implications
    McKinley added that there are special provisions that need to be considered in the event that IRS deductions are taken when a conservation easement is donated.
    “When you take the deduction, look at the present time – what is going on right now,” he explained.
    “If it is a purely donated easement and the landowner intends to take certain IRS deductions and benefits, the landowner has to comply with the IRS code and regulations to limit oil and gas development in a manner that is limited, localized and can be remedied,” McKinley said. “That is a condensed summary.”
    He added, however, that there are instances where a private letter ruling has allowed landowners to benefit from a tax deduction on donating an easement and oil and gas development in the future has occurred, providing that certain parameters are satisfied.
Strip mining
    “Strip mining deals get a little dicey,” McKinley noted, especially if the easement is donated and the landowner intends to utilize IRS deductions. “If you put a conservation easement on donated land, it has to have a prohibition as to strip mining.”
    In many conservation easements, a remoteness letter is required. The letter details the likeliness that land will be developed
    “The grantee is going to require a geologic review of the property before they enter into a conservation easement,” he added. “That review, or the remoteness letter, should identify whether mineral development will occur on the property. I’m aware of at least one conservation easement property that got nixed because of the results of the remoteness letter.”
    In other words, if land is highly likely to be developed, a conservation easement on the property does not make sense, said McKinley.
Prohibiting development
    While McKinley said that he is unsure of exactly how a conservation easement would be structured to effectively prohibit oil and gas development on lands protected by a conservation easement, there are most likely ways to do it.
    “If the landowner wants to prevent development and he owns the minerals, it is a private property right,” said McKinley, noting that parts of a property can be carved out of a conservation easement, leaving them available for development.
    “The landowner really has to spend a lot of time when they are sitting down to figure out the structure of the conservation easement that makes the most sense to accomplish their goals and at the same time continue ranching,” McKinley commented.
    Saige Albert is managing editor of the Wyoming Livestock Roundup and can be reached at saige@wylr.net.