The UCC establishes an automatically perfected security interest in favor of the interest owners to secure the obligations of the first purchaser of oil and gas production to pay the purchase price. The signed writing giving the interest owner a right under real estate law operates as a security agreement. The act of the first purchaser in signing an agreement to purchase the oil or gas production, in issuing a division order, or in making any other voluntary communication to the interest owner or any governmental agency recognizing the interest owner’s right, operates as a ratification of the security interest on the part of the debtor. This interest is perfected without the filing of a Financing Statement. If the secured party’s interest is recorded in the Real Property Records, that writing is effective as a filed Financing Statement with no requirement to refile every five years. [UCC 9.343]
This security interest is deemed a purchase money security interest, which means that it will take priority over a previously filed UCC-1 in inventory that covers the same minerals. The other written security interests noted in the Real Property Records will have the same priority as established by real estate law. A good faith purchaser of the oil or gas from the first purchaser takes free of this automatically perfected security interest, but the security interest then shifts to the proceeds from that sale. [UCC 9.343]
The UCC gives additional protection to the interest owner and makes those who deal with the first purchaser of oil or gas (other than the good faith buyer) take subject to the interest owner’s improved rights. In any situation requiring a more detailed understanding Bank counsel should be consulted.