How a Major Railroad Company Became a Big Player in the Oil Business

How a Major Railroad Company Became a Big Player in the Oil Business

Adam Smith is credited with the quote “Land is the Basis of all Wealth”. And we know a few railroad companies that would agree. In a recent oil and gas leasing class, we discussed different types of oil and gas mineral ownership in the United States, such as Federal, State, Tribal, and private ownership. And a couple of examples of private mineral ownership would be individuals, companies, universities, and railroads. A gentleman in the room from Cheyenne, Wyoming, said he was familiar with the Union Pacific Railroad Company (UPRC) and wanted to know if they owned minerals.

The answer is yes. But the way UPRC became a mineral owner is best explained starting in the early 1800s.

The map below reflects the territorial acquisitions of lands that now make up the United States.

Railroads had been successfully constructed and utilized in the eastern states. However, the acquisition of California and other western states following the 1848 Mexico Cession opened the door for dreams to connect the east coast to the west coast. In 1862, President Abraham Lincoln presided over the passage of the Pacific Railroad Act.

This Pacific Railroad Act chartered the Central Pacific and the Union Pacific Railroad Companies with the task of building a railroad that would connect the east and west coasts. Over the next six years, the two companies would race toward each other. Pacific Railroad started near Sacramento, California and Union Pacific started at the end of an eastern state’s existing track in Council Bluffs, Iowa. The two railroads covered a combined 1,912 miles and met on May 10, 1869 in Promontory, Utah.

The reason it was a race is that each company would receive 12,800 acres of land and $48,000 in government bonds for each mile of track they built. So, the more track they built, the more land and bonds they would receive. This is referred to as Railroad Land Grants.

This map reflects the railroads constructed across the United States. Each of these companies was also awarded land and bonds for every mile of track.

 

Transcontinental Railroads of Canada and the US
Source: familysearch.org

Township and Range System of Land Survey

Prior to the efforts to expand the railroad systems, the United States initiated an effort to map and survey lands west of the original thirteen colonies. As formalized by the Land Act of 1796, much of the land west of the Appalachians was divided into square townships of land, six miles on a side. The townships were each subdivided into sections, each section being one-mile square. That means that each township encompasses 36 square miles. Now imagine these townships lined up edge-to-edge from the Ohio River Valley to the Pacific Ocean and from the Mexican border to the Canadian Border. For ease of reference, sections were numbered 1 – 36 as shown below:

As we mentioned, the incentive to build the railroad tracks was an opportunity to receive Railroad Land Grants.  Every 20 miles of track that was built, the government would then award the railroad company with a patent to each odd-numbered section extending 20 miles on both sides of the track. The government would retain the even-numbered sections.  As shown below, this would result in a checkerboard ownership of both railroad lands and government lands.

Railroad Land Grant Checkerboard

Approximately 130 million acres were awarded to railroad companies under the Pacific Railroad Act. The majority of this land went to four companies: Northern Pacific (40 million), Santa Fe (15 million), Southern Pacific (18 million) and Union Pacific (19 million). By 1996, these four railroad companies were merged into two: the Burlington Northern Santa Fe and the Union Pacific (which acquired the Southern Pacific).

Rail official drives the golden spike in Promontory, UT

Mineral Rights

Although there was a lot of controversy, the courts eventually ruled that the patents to the Railroad Land Grants included oil and gas mineral rights. Mineral owners have the right to explore their minerals for oil and gas. They also have the right to lease their minerals to companies wanting to explore their minerals. In 1987, the surface and minerals owned by Union Pacific Railroad were transferred to Union Pacific Resources.  The New York Times reported in June 1997 that Union Pacific Resources was the largest domestic producer of oil and gas over the past 5 years.

From LandGate’s Map: Thousands of oil and gas wells (green) drilled within the 40-mile wide Union Pacific Land Grants (yellow), in the State of Wyoming.

In 2000, Anadarko Petroleum purchased Union Pacific Resources for $4.4 Billion.

 Union Pacific has restored three E-9 passenger locomotives.
Source: Union Pacific

Whether you are a mineral owner, royalty owner, oil and gas operator, or railroad company, LandGate can market your resources to get you the most money. At LandGate, we want to make you an informed owner. Give us a call. We look forward to answering your questions.

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