Federal Oil and Gas Leasing: Record Title vs. Operating Rights
The distinction between “record title” and “operating rights” has been a chronic source of confusion for many owners of interests in federal oil and gas leases. The BLM regulations define record title as “a lessee’s interest in a lease which includes the obligation to pay rent, and the rights to assign and relinquish the lease” (43 CFR 3100.0-5( c)). Operating rights – i.e., working interest – are defined as “the interest created out of a lease authorizing the holder of that right to enter upon the leased lands to conduct drilling and related operations, including production of oil or gas from such lands in accordance with the terms of the lease” (43 CFR 3100.0-5(d)). Both of these definitions are shamelessly BLM-centric: they define the interests from the perspective of BLM’s administration of the leases; and they completely disregard the primary value of these interests to the owner of record title or operating rights – the right (after payment of royalty and other obligations) to the well production. (In fact, without any reference to the interest owner’s right to the production, the definition of “operating rights” proffered by BLM is actually a description only of the rights held by an operator – defined at 43 CFR 3100.0-5(a) as “any person or entity, including, but not limited to, the lessee or operating rights owner, who has stated in writing to the authorized officer that it is responsible under the terms and conditions of the lease for the operations conducted on the leased lands or a portion thereof.” On the other hand, if a couple of basic rules of grammar and syntax can be overlooked, it’s possible to read BLM’s operating rights definition as acknowledging that it includes an “interest . . . [in the] production of oil or gas;” and the good news is that BLM staff themselves generally understand what operating rights are supposed to mean.)
When a lease first issues, the lessee has full ownership of both the record title and the operating rights. After that, however, the lessee is free either (1) to make conveyances of all or part of its record title interest – which would carry the corresponding operating rights interest with it – as to all or part of the lands in the lease, or (2) to make conveyances of all or part of its operating rights interest, as to all or part of the lands in the lease, and as to all or specified depths, while retaining its record title interest. (Why might a lessee want to convey operating rights while retaining record title? For two reasons in particular: first, because a conveyance of all of the record title as to part of the lands will cause a segregation of the lease; and second, because, under the regulations, only an operating rights conveyance may be subject to a depth limitation.)
One other source of confusion that should be noted: In some contexts, BLM is adamant about using the term “assignment” to mean a conveyance of record title, and the term “transfer” to mean a conveyance of operating rights; but in other contexts, BLM uses these terms interchangeably.