O&G Flashcards
What are standard Royalties in an Oil & gas lease?
This is a fractional share of any oil & gas produced from an oil well that is free from cost of production. Typically standard royalties are paid at 1/8th fractional share, but the parties are free to negotiate.
What is the accommodation doctrine?
A mineral owner must accommodate pre-existing surface uses if there is a reasonable alternative method of developing the oil & gas that is less destructive to the surface use. The alternative must be available on the tract.
Who is an NPRI, and what do they own?
A NPRI is a non-participatory royalty interest holder who is someone other than the mineral estate owner, and who has the right to receive royalty interest. The mineral interest owner may convey the right to receive royalty to a transferee, but may retain ownership in the minerals with himself. The transferee becomes a NPRI. The NPRI holder does not have right to participate in the oil & gas leasing transactions. Royalties that the NPRI receives are cost free fractional share of all production from the land.
What are a cotenant’s rights w/respect to the minerals?
Every co-tenant has the right to drill or lease, but they have to account to the co-tenants for their share of profits from production. An unleased co-tenant can chose to ratify the lease or retain a profit share interest in the well.
What share of a trust does the income beneficiary receive of oil & gas?
If it was created before July 1, 2004 – life tenant gets delay rentals + 72 ½% of royalties & bonus + interest on the 27.5% remainder. After July 1, 2004 life tenant will get an equitable share of everything (85% presumed equitable)
What typical savings clauses appear in an oil & gas lease?
Typically a completion clause, force majeure clause, & shut in gas royalty clause.
What is the formula for production in paying quantities (PPQ)?
PPQ is production in paying quantities resulting in a positive revenue for the lessor, i.e. Revenues – royalties – operating cost = positive #. Usually viewed on a yearly basis. Would a reasonably prudent operator interested in making a profit rather than speculation continue to operate the well at a loss?
What is the effect of failure to pay money owed to the lessor?
Failure to pay delay rentals, terminates the lease. Failure to pay royalties does not terminate the lease, but the lessor has a claim.
What implied covenants exist in an oil/gas lease?
Implied covenant to protect against drainage. Covenant for reasonable development. Express clauses negate implied covenants. In any case, to win the lessor must show that a reasonably prudent lessee would drill – that is that it would be profitable to drill.
Substances not part of Mineral estate.
The following substances belong to the surface estate as a matter of law:
(i) building stone;
(ii) limestone;
(iii) caliche;
(iv) surface shale;
(v) sand;
(vi) gravel;
(vii) water;
(viii) near surface lignite; and (ix) iron-ore.
Pugh Clause.
This is a provision to protect landowners in a Pooling arrangement. This clause states that if only part of the leased acreage is pooled, the rest of the tract shall be severed, unless the Lessee pays Delay Rental for the remaining portion, or drills and commences production on that portion. (It becomes disadvantageous when the Lessee elects to pool only a small portion of the tract, thereby keeping the lease alive, but obligates the lessee to pay royalties in proportion to the pooled portion.)
Delay Rentals.
This authorizes the Lessee to delay drilling during the Primary Term by periodically paying a stipulated amount to the Lessor.
Bonus Clause.
This is a one-time upfront payment that is based on calculation of dollars per acre and is not dependent on drilling or production. Typically bonus is due at the beginning of the lease.
Habendum Clause.
This clause sets for the duration of the Lesses’s interest in the leased premises. Typically there is a Primary Term which is a fixed period during which Lessee has no obligations to conduct drilling operations, and Secondary Term which is indefinite but linked to production. This gives the Lessee a fee simple determinable interest in the land.
Temporary cessation doctrine?
Once PPQ is established, a temporary cessation due to a sudden stoppage, or mechanical breakdown or the like will not terminate the lease. If there is an express clause in the lease it will control. Must have production resumed w/in a reasonable amount of time.
