O&G Lease Terms

Question 1

Habendum Clause

Answer 1

Sets the duration of the interests in the premises. Typically there is primary term (fixed period) and secondary term indefinite but normally linked to production

Question 2

PPQ Formula

Answer 2

Revenues minus lessor’s royalty minus operating costs

Question 3

Delay Rental Clauses “unless versus or”

Answer 3

“Unless” –> condition and lease terminates automatically

“Or” –> covenant and lease does not terminate automatically; lessor muse sue for BOC

Question 4

Commencement of Drilling Clause

Answer 4

Objective physical acts and subjective good faith intent

Question 5

Defensive or Savings Clause

Answer 5

Necessary to hold a lease beyond the primary term. Can tack together over time.

Question 6

Pooling Clause

Answer 6

Allows Lessee to hold several tracts under lease with PPQ from just one well located on one of the tracts. Must exercise in good faith.

Executive Right owner has no power to pool the non-participating interests.

Question 7

Pugh Clause

Answer 7

If only one part of leased acreage is pooled, the rest shall be severed unless the lessee drills or pays delay rentals on the remainder.

Question 8

Dry Hole Clause

Answer 8

If a lessee drills a dry hole, it can maintain the lease by starting to drill another well within the stated time.

Question 9

Delay Rental Definitions

Answer 9

Allow the lessee to delay drilling or commencing production during the primary term by periodically paying a stipulated amount to the lessor.

NPRI does not have right to delay rental payments

If accept late delay rental –> comes alive based on “loose theory of estoppel.”

Question 10

Divison Orders

Answer 10

A “D/O” tells the lessee how to divide the proceeds from the well among the various lessors, NPRI’s and working interest owners.

D&O Act. (1) Binding until revoked (as under common law). (2) Can never contradict a lease.

Question 11

Divided Ownership: Co-Tenants

Answer 11

Every co-tenant can drill and produce or lease his undivided interest without the consent of the covenants, but he must account to others for their rightful share of the profits for production.

Ratification - Co-tenant can always ratify the underlying lease. However, once ratified he can’t change his mind

Partition - Every co-tenant has an absolute right to partition property in a judicial proceeding. Courts favor partition in kind (dividing the property) over partition by sale.

Question 12

Divided Ownership: Life Tenants & Remainderman

Answer 12

Neither the life tenant nor the remainder man can grant a valid oil and gas lease without the joinder of the other

“Open Mine Doctrine.” Where lease was in place prior to the creation of the life estate, life tenant gets all benefits.

Question 13

Oil & Gas Ownership: Mortgagor / Mortgagee

Answer 13

Basic property law “first in time first in right,” was modified in 2016.

If lease first –> lease survives foreclosure but surface rights terminate

If mortgage first –> lease survives a mortgage foreclosure but surface rights still terminate.

Question 14

“Marshaling the Assets”

Answer 14

At foreclosure, the mortgagee must sell the surface assets first to try to satisfy the loan, before selling the mineral estate.

Question 15

4 Types of Trespass Against Mineral Rights

Answer 15

Ordinary Trespass

Slant Well Drilling

Drilling Dry Well

Geophysical or Seismic Trespass

& Secondary recovery operations are not trespass because public policy favors drilling more oil. Seek a nuisance claim.

Question 16

Trespass Damages

Answer 16

Depends on Good faith / bad faith which is generally a fact question.

Question 17

Adverse Possession Oil & Gas

Answer 17

Texas rules of adverse possession apply to oil and gas interests. They key issue is whether and when the mineral estate was severed from the surface estate.

Possession begins prior to severance –> adverse possessor gets title to both

Possession after severance –> adverse possessor gets title to the surface estate only. To get title to mineral estate, must establish a separate action of possession or invade the mineral estate.

Question 18

Executive Right Duty

Answer 18

Executive Right holder duty depends in part upon there conduct.

Question 19

Duty to Plug

Answer 19

Operator

Non-operator who owns a working interest

State of Texas

No duty to plug is imposed on mineral interest holders, royalty owners, and other interested persons who do not have a working interest in the well.