Final Exam Review Flashcards
What is the general definition of Rule of Capture?
The owner of a parcel of land acquires title to the oil and gas which he produces from well drilled thereon, though it may be proved that part of such oil or gas migrated from adjoining lands.
What are the public policy reasons for ROC (Rule of Capture)?
Encourages development but it is an overall race to the bottom.
Why is ROC not trespass?
Lessee may drill wherever they see fit on the land leased. O&G are fugitive in nature and thus a well may draw its product from an indefinite distance beyond the location.
What are the correlative rights of ROC?
Correlative rights – an owner who exercises the rule of capture must do so without negligence or waste. Each common owner has a right to protection from negligent damage to the producing formation and a right to a fair chance to produce oil and gas in proportion to landownership of the formation.
What can be captured under ROC?
Wild animals, O&G that is not reinfected.
What are the limits on the ROC?
Stored Gas, Negligence, Waste, Illegal Production, Production from Horizontal Drilling
What is Stored Gas?
Oil or gas that is produced and then reinfected.
Why is there a limit on Stored Gas?
Extraneous gas cannot be measured but may commingle with native oil and gas already present. Will not relieve ownership by loss of possession.
What is the tort law limiting ROC?
Negligence- rule of capture only applies to legitimate operations, or ones that do not lead to negligent waste or destruction of neighbor’s property and correlative rights.
What are the nuisance laws for O&G Production?
Production cannot maintain or erect a nuisance that injures their neighbors; must pay damages or cease the nuisance.
What is waste?
Waste can be economic or physical.
(1) Economic waste is the pressure of business leading to an unnecessary and harmful activity.
(a) Ex. Neighbors drilling excessive wells to maximize capture oil.
(2) Physical waste can be where long-term recovery is lessened by short-term overproduction, or the surplus created by overproduction.
What is waste under the RCC?
operation of any oil well or wells with an inefficient gas-oil ratio and the commission may determine and prescribe by order the permitted gas-oil ratio for the operation of oil wells;
(2) drowning with water a stratum or part of a stratum that is capable of producing oil or gas or both in paying quantities;
(3) underground waste or loss, however caused and whether or not the cause of the underground waste or loss is defined in this section;
(4) permitting any natural gas well to burn wastefully;
(5) creation of unnecessary fire hazards;
(6) physical waste or loss incident to or resulting from drilling, equipping, locating, spacing, or operating a well or wells in a manner that reduces or tends to reduce the total ultimate recovery of oil or gas from any pool;
(7) waste or loss incident to or resulting from the unnecessary, inefficient, excessive, or improper use of the reservoir energy, including the gas energy or water drive, in any well or pool
What is illegal production that violates commission rules?
There is no rule of capture protection if production is in violation of the applicable law (i.e. RCC waste rules).
The State, such as the Railroad Commission (RRC) in Texas, has the authority to determine:
(1) how close to a property line a well can be drilled,
(2) how much acreage must be assigned to a well, and
(3) how much a well can produce, with some exceptions limited primarily to gas wells.
What are the differing theories of O&G ownership?
Absolute ownership (TX, KS, AR, AL, CO); Qualified Ownership (CA, OK); Liberative Prescription (LA)
What is absolute ownership?
Landowner’s interest in O&G is same as solid minerals, which are part of the land, and landowner owns O&G beneath property.
What is qualified ownership?
Mineral estate is not owned as corporal realty, but mineral owner has exclusive right to explore, produce, and develop the minerals but does not own the O&G in the ground. Title only when possessed at the surface.
What is liberative prescription?
Landowner cannot own mineral estate.
What is horizontal drilling?
Gas is not flowing according to the laws of physics, drilling past tract of land leased.
Who sets production/proration limits?
Railroad Commission of Texas oversees regulation of oil and gas.
What is proration?
Daily, Weekly, or monthly limits on production.
How does state set proration limits?
Through formulas that consider rights of parties. Surface acreage (proportionate by land ownership), Acre foot (accommodate for thickness of the formation in addition to surfacer acreage), per well ( proportioned by whose wells tap the formation, unfavorable), and bottomhole pressure (proportioned by pressure at the bottom of the bore well).
Why do we have proration?
Purpose is to prevent production in excess of scientifically determined maximum efficient rate that may damage the formation.
Goal is to share the allowable equitably among common owners and ensure production does not damage the reservoir or is not more than the market can absorb
What is required to drill a well in Texas?
Drilling Permits: required to drill a well in Texas.
a) Statewide Spacing Rule 37 (16 Texas Admin Code §3.37 (2004)):
i) No well for oil, gas, or geothermal resource shall hereafter be drilled nearer than 1,200 feet of any well completed in or drilling to the same horizon on the same tract or farm, and
ii) No well shall be drilled nearer than 467 feet to any property line, lease line or subdivision line.
What is Rule 37?
No well for oil, gas, or geothermal resource shall hereafter be drilled nearer than 1,200 feet of any well completed in or drilling to the same horizon on the same tract or farm, and NO WELL SHALL BE DRILLED NEARER THAN 467 FEET TO ANY PROPERTY LINE, LEASE LINE, OR SUBDIVISION LINE.
What are the dates for Rule 37?
Does not apply to voluntary subdivisions made before May 29, 1919.
What is the relevant distance between wells?
1,200 feet between wells on the same tract.
How close to the surface does a well have to be?
There are no vertical depth requirements ( Gulfland).
What are the distancing exceptions?
When necessary to prevent either waste or confiscation of property. Can be both physical or economic waste.
How do you apply for Rule 37 exceptions?
Applicant must file a list of mailing addresses of all affected persons, including designated operator, all lessees of record , and all owners of record of unleased mineral interests, and adjacent owners.
What is the Rule 37 confiscation exception?
Means ones correlative rights are being violated by drainage onto another’s property. Must be either a separate tract or not a voluntary subdivision.
What is the voluntary subdivision rule?
Any subdivision of property creating a tract of such size and shape that it is necessary to obtain an exception to the spacing rule before well can be drilled there on is a voluntary subdivision (VSD) and is not entitled to a permit to prevent confiscation if it were either,
1. (A) Segregated from a larger tract in contemplation of oil gas or geothermal resource development (Shell v. TXRRC); or
2. (B) Segregated by fee title conveyance from a larger tract after the spacing rule became effective and the voluntary subdivision rule attached. (Gulf Land)
What is the century refining doctrine?
If a tract has been voluntarily subdivided so no subdivisions can individually receive an exception, the parent tract as a whole may receive a permit. Must prove 1) Confiscation 2) First tract to get permit gets the oil, even if a subsequent application is a better option.
What is pooling?
Pooling is the joining together or combination of small tracts or portions of tracts to create sufficient acreage and interests to receive a drilling permit under applicable state spacing rules and regulations (to get around Rule 37!), and for the purpose of sharing the production in a manner proportionate to the contribution from the pooled unit (surface acreage basis) among the pooled interest owners.
What is compulsory pooling?
Compulsory pooling is when unleased mineral interests are combined, even without the consent of the mineral interest owner.
The policy behind forced pooling is that a mineral interest owner who refuses to enter into a lease should not be permitted to forestall development and production of the oil and gas resources.
Can you compel pooling?
Yes, but not in Texas.
Under what power can Texas compel?
Through MIPA however it is a voluntary statute.
How long does a tract need to be to get a drilling permit?
A unit shall not exceed 160 acres for an oil well or 640 acres for a gas well plus 10% for tolerance.
What things cause something to be done in anticipation of oil and gas lease?
Going and asking a party to voluntarily pool
What is MIPA?
Authorizes RR Commission to pool all of the interest of a proration unit for two or more separately owned tracts of land that share a common O&G reservoir to prevent unnecessary drilling and waste if a voluntary pooling order is fair and reasonable.
When does MIPA apply?
Only applies to O&G, not other minerals. Does not apply to reservoirs discovered and produced before March 8, 1961 or public lands (e.g. lands owned by the State).
What is unitization?
Multiple interests put together, for the joint operation of all or some portion of a producing reservoir, generally for secondary or tertiary production.
What is the standard for MIPA?
There needs to be a fair and reasonable offer before and other party said no.
- Two or more separately owned tracks of land
- Must be above a common reservoir
- Must be in an existing proposed unit/ Has to be in a part of the world where drilling activity is on a proration unit
- Owners have not agreed to pool their interests
- At least one owner has drilled or proposed to drill a well on existing proration unit
What is a fair offer under MIPA?
An offer that takes into account all relevant facts at the time that a reasonable person could consider.
Why do you pool?
Your plot is too small to get a Rule 37 exception, to avoid waste, less risk
What is the negative rule of capture?
A land owner may inject into a formation substances which may migrate through the structure to the land of others, even if it thus results in the displacement under such land of more valuable substances with less valuable substances (e.g. dry gas displacing wet gas)
Why does the negative rule of capture exist?
Trespass does not occur when the injected, secondary recovery forces move across lease lines, and the operations are not subject to an injunction on that basis.
Policy: Necessary to protect correlative rights and prevent drainage.
If there are holdouts in unitization what happens to the parties?
People can hold out but lose the ability to recover for trespass. Possibly nuisance. Must compensate for unreasonable destruction that occurs as a result of approved secondary methods of recovery.
What is The Legacy?
Improperly plugged wells are bad and hurting everyone. Need to plug holes better.
What is the Dominant Mineral Estate and Accommodation Doctrine?
Possessor of the right to use and develop the mineral estate (lessee or mineral owner) can use as much of the surface as reasonably necessary to explore for minerals.
How can you sever mineral rights?
Mineral and surface rights can be severed in conveyance of real property.
Must have constructive and actual knowledge of severance via deed.
What is the accommodation doctrine?
A mineral owner is required to accommodate the surface owner when: 1) there is an existing use of the surface, 2) the mineral owner’s use of the surface precludes/impairs the existing use of the surface, 3) there are alternative, reasonable, usual, and customary methods available to recover the minerals
Who owns water?
Water belongs to surface owner but there is an implied grant of reasonable use that extends to use water from the leased premises in such amount that is reasonably necessary to carry out operations.
Who owns hard minerals?
When a general grant or reservation is made of all minerals without qualifying language. Can sever mineral rights from surface.
How do we categorize surface and mineral estates?
Mineral estate can enjoy right through extraction of valuable substances.
Surface estate owner can enjoy their rights through retention of such substances as are necessary for the use of the surface.
What is the test for things that apply to the surface and mineral estate?
New Surface Test: If a hard mineral deposit lies near the surface the substance will not be granted as a ‘mineral’ for the mineral rights purpose if it shows that 1) any reasonable method of production at the time of conveyance or thereafter would 2) destroy or deplete the surface. Surface owner has burden to prove. Near surface is a deposit within 200 feet of the surface as a matter of law.
Who owns which hard minerals?
Ordinary Natural Meaning: A severance of minerals in an oil and gas and other minerals clause includes all substances within the ordinary and natural meaning of the word, whether their presence or value is known at the time of severance.
How is Moser distinguished from Reed 1 and II?
Pre-June 8, 1983: Use the Surface Destruction Test): Surface owner owns if production method could destroy surface, where mineral owner owns if the ONLY reasonable method would not destroy the surface.
Post-June 8, 1983: Use the Ordinary and Natural Meaning Test
Note: If mineral requiring strip mining: belongs to surface estate; If mineral not at surface, not requiring strip mining: belongs to mineral owner
What minerals are surface owners by matter of law?
Building stone, limestone, caliche, surface shale, fresh/salt water, sand, gravel, near surface lignite, near surface iron ore, near surface coal.
What is primary recovery, secondary recovery, tertiary recovery?
Primary oil recovery refers to the process of extracting oil either via the natural rise of hydrocarbons to the surface of the earth or via pump jacks and other artificial lift devices.
Secondary Recovery: This method involves the injection of gas or water, which will displace the oil, force it to move from its resting place and bring it to the surface.
Tertiary Recovery: Thermal Recovery. This is the most prevalent type of EOR in the USA and works by heating the oil to reduce its viscosity and allowing easier flow to the surface;
Gas Injection. Either natural gas, nitrogen or carbon dioxide (increasingly the most popular option) are injected into the reservoir to mix with the oil, making it more viscous, whilst simultaneously pushing the oil to the surface (similar to secondary oil recovery).
Chemical Injection. The least common method of EOR, chemical injection works by freeing trapped oil in the well.
What are the different owners under each oil recovery method?
For dominant mineral estate owners: consider customary and reasonable practices ion the industry like circumstances of time, place, and servient estate use.
For servient surface owner consider: the conditions of the surface itself and the uses being made by the servient owner.
If manner selected by dominant mineral estate owner is the only reasonable usual and customary method for mineral exploration then servient owner must yield.
What is seismic trespass?
Trespass by using seismic data to determine whether rock is permeable and able to produce oil. Mere vibrations are not a trespass. Plaintiff must show actual damage and there must be actual physical entry.
What is slant well trespassing?
The use of whipstocking, or drilling in a slanted direction, to appropriate neighboring minerals.
a.Railroad Commission is first line of defense to prevent crooked wells.
Is trespass by fracing a legitimate claim?
The rule of capture precludes recovery for drainage by hydraulic fracturing. [Example: Salinas’s only claim of injury (that Coastal’s fracing operation made it possible for gas to flow from Tract 13 to 12) is not an actionable trespass. (Fracking too valuable to the industry to call it trespass!)]
What are Trespass Damages?
Actual damages, economic damages.
Intentions of the trespasser are imperative in determining the amount of damages. When determining intentions, consider:
a. If trespasser received advice from reputable counsel,
b. Any doubt of exclusivity or cloud of title,
c. The findings of another jurisdiction in a situation with similar facts, and
d. Whether trespass was needed to remedy a delay or problem.
e. Cannot be a good faith trespasser if a well is drilled while a title action from the potential true owner is pending or proceeding. (See Mecom Oil)
What is required for trespass damages?
Good Faith.
1) Reasonably thought he had a valid lease, not on notice that he had reason to think there wasn’t a right to be there (clean hands)
2) Acted on advice of reputable counsel
3) Court had rendered judgment on prior identical facts
4) Urgent action
What are the elements for slander of title?
1) The uttering and publikshing
2) Of statements that are false
3) Done with malice
i) Malice: act or refusal was deliberate conduct without reasonable cause
4) Causing special damages
5) To a person with the estate or interest in the property slandered
P has burden to establish they suffered damages
What are shut-in royalties?
Are payments that excuse production only if the well is actually capable of producing gas in paying quantities (PPQ).
What are the elements of Shut-In royalties?
1) Well capable of producing in PPQ
2) Lack of market that results in inability for PPQ
3) Reasonable prudent efforts to bring production to market
What happens if a well is drilled where its not supposed to be?
The surface owner owns all non-mineral molecules of land, i.e. the mass that undergirds the surface estate.
An unauthorized interference with the place where the minerals are located constitutes a trespass as to the mineral estate only if the interference infringes on the mineral lessee’s ability to exercise its rights.
What happens if a well starts where it should and finishes where it shouldn’t?
Use the Lightning v. Anadarco Balancing test – the relevant interests of society and the interests of the oil and gas industry as a whole v. the interest of the individual operator.
Longstanding policy in TX to minimize waste and maximize recovery of minerals.
- No doubt that individual interests in the oil and gas lost through being brought to the surface as part of drilling a well are outweighed by the interests of the industry as a whole and society in maximizing oil and gas recovery.
- The loss of minerals Lightning will suffer by a well being drilled through its mineral estate is not a sufficient injury to support a claim for trespass.
What’re the five attributes of a severed mineral estate?
- the right to develop
- the right to lease
- the right to receive bonus payments
- the right to receive delay rentals
- the right to receive royalty payments
What is a good-faith trespass?
This trespasser will be able to recover production value minus reasonable costs of extraction, if the costs benefited the rightful owner.
a.‘Reasonable costs’ is determined whether the trespasser’s expenditures benefit the true owner (unjust enrichment theory) or if the expenditures were made in exercise of business judgment (cotenant theory).
i.A dry hole does not benefit the owner or produce any value.
b.Mineral owner may sue the geophysical trespasser only in trespass.
i.No conversion for information or the right to obtain it.
What is a bad faith trespass?
A landowner will not have to reimburse expenses incurred or benefits conferred from a bad-faith trespasser.
a. Trespasser will not be permitted to plug and abandon a well capable of commercial production, unless the owner demands it.
b. Some courts presume bad faith because the actions of a trespass are prima facie willful.
What are the three forms of cotenancy?
- Tenancy in Common – separate but undivided interests in the property that are not identifiable unless partition is sought.
- Joint Tenancy – whole property is owned, subject to the right of survivorship of the other owners.
a. The last owner alive takes all the interest.
b. Can be converted into a Tenancy in Common by conveyance. - Tenancy by the Entirety – only available between husband and wife.
a. Subject to right to survivorship, but the spouses are treated as one person.
b. One spouse cannot sever by conveyance because this has the unities of person, time, title, interest and possession. A divorce will break up the tenancy.
c. If the mineral estate is separate property, bonus and royalties are also separate property, but delay rentals are community property.
