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Real Property > Oil and Gas > Flashcards

Oil and Gas Flashcards

1
Q

Rule of Capture

A

applies to o/g

fugitive, ok to make it drain from somewhere else

it migrates

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2
Q

Limitations on the rule of capture (3)

A

correlative rights: every o/g owner has the right to fair opportunity to produce o/g from a common reservoir

doesn’t apply to:

  1. stored gas
  2. negligently drilled
  3. illegally drilling
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3
Q

Idea of Fee Simple and Severance

A

you have a fee simple interest in the surface and the minerals initially but can sever it so there is a fee simple in the surface and a fee simple in the minerals

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4
Q

Rights that Go with the Mineral Interest

A
  1. development right: produce, explore,
  2. executive right: to lease minerals
  3. economic benefits
    - -bonus
    - -royalty
    - -delay rentals
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5
Q

define:

Bonus

Royalty

Delay Rentals

A

Bonus: upfront payment for signing o/g lease

Royalty: fractional share of o/g produced that is free of the cost of production

Delay Rentals: compensation for deferring drilling during the primary term

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6
Q

Dominant and Servient Estates

A

Mineral estate is dominant, surface is servient

owner of the mineral estate can use the surface as is reasonably necessary to develop o/g

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7
Q

Accommodation Doctrine (3 conditions)

A

the mineral owner must accommodate surface uses, but only if:

  1. surface owner had a pre-existing use of the surface
  2. mineral estate owner (lessee) has reasonable alternative method for developing o/g that is not too costly
  3. reasonable alternative is available on this leased tract
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8
Q

Interests Created by an O/G lease

A

lessee gets deed in fee simple determinable

working interest: lessee has exclusive right to develop, produce, explore

royalty interest: lessor has right to get share of profits free of the cost of production

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9
Q

NPRI

A

non-participating royalty interest

right to get royalty payments held by a third party
–mineral owner conveys (gift, sale, will) the right to get the royalty payments (from the drilling company), to another person, but keeps the ownership of the mineral estate

NPRI can’t participate in the leasing transaction

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10
Q

NPMI

A

non participating mineral interest

ex: P owns the land but deeds to S an undivided 1/2 interest in the minerals

gets 1/2 of all economic benefits (royalty, delay, etc) from the minerals but can’t participate in the leasing transaction

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11
Q

Divided Mineral Ownership–Concurrent (Co-tenants)

A

every co-tenant can drill, produce, lease his undivided interest w/o consent of the other co-tenants (other co-tenants can’t enjoin use)

but he must account to others for their rightful share of profits from production

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12
Q

Profits v. Royalty (in the world of co-tenants)

A

royalty: lessor entitled to royalty interest. it come before production cost

Profits from production: what the other co tenants are entitled to (through accounting) if they do not join the lease.

profits = revenues - costs (reasonable drilling and operating expenses)

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13
Q

Ratification by Co-Tenants

A

a co tenant can always ratify a lease entered into by another co-tenant, if that lease was for her share of the land too (ex: he made a lease for the whole tract)

this allows the ratifying co tenant to get share of royalties instead of profits

once ratified can’t go back

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14
Q

Partition by Co-Tenants

A

co-tenant has absolute right to partition of the property by judicial proceeding

judges like partition in kind over partition in sale, but won’t do in kind if it wouldn’t be fair (all minerals on one half of land)

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15
Q

Successive Ownership–life tenant and remaindermen

A

leasing: neither the life tenant nor the remainderman can grant a valid o/g lease w/o the joinder of the other

if the life estate attempts to, he can be enjoined under a theory of waste by the remainder men

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16
Q

between the life tenant and the remaindermen, who owns what?

A

life tenant:

  • -current income
  • -interest: 100% delay rentals, and the interest on bonus and royalty

remaindermen:
–principal of bonus and royalty

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17
Q

Open Mine Doctrine

A

where the lease was in place on the land before the creation of the life estate, the life tenant gets all benefit under the existing lease (just for that lease!)

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18
Q

accounting when life tenancy is created by trust

between life tenant and remaindermen

A

life tenant:
–nominal delay rentals and 85% of all other proceeds

Remaindermen
–15% of all proceeds

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19
Q

Mortgagor and Mortgagee rights when there is an o/g lease

A

first in time

mortgagee records before lease executed: lessee’s interest is subject to mortgage lien
–the co would have to try to repurchase the lease at the foreclosure sale

o/g lease recorded before mortgage: lease can’t be foreclosed against b/c mortgage not include minerals

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20
Q

marshalling assets

A

at foreclosure, the mortgagee must sell the surface assets first before selling the mineral estate

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21
Q

4 types of trespass and one thing that is not trespass

A
  1. Ordinary Trespass (lease expires but they stay. injunction, damages, maybe punitive)
  2. Slant Well Drilling (bottom on someone else’s land. injunction, damages, maybe punitive)
  3. Drilling Dry Well: damage to speculative lease value. if trespass makes one lessor loses lease value he could have received before world found out the land was dry. remedy is lost bonus
  4. Geophysical or Seismic Vibrations Trespass: exploring land w/o permission, getting info about minerals. remedy is to sue in assumpsit: market value of contract of the right to do seismic testing

Secondary recovery operations are never trespass
–if it ruins someone else’s land maybe sue for nuisance damage of lost value of o/g

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22
Q

Good v. Bad Faith Trespassing

A

Good faith:

  • trespasser had honest/reasonable belief in superiority of title
  • gets credit for the costs incurred in production (money made-production)
  • but no credit for drilling dry hole

Bad faith
-liable for gross value from production of well

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23
Q

Slander of Title

A

to prevail in tort action for slander of title, P must prove:
1. publication of false claim of title to property, including false claim of valid lease

  1. with malice
  2. loss of specific sale or leasing opportunity
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24
Q

Key issue regarding AP and mineral estate

A

if the possession began before severance: AP gets title to both surface and mineral estates

if the possession begins after severance: AP gets title to surface but not the minerals
–the Adverse possessor must invade the mineral estate to est. a separate action of possession (like drill a well)

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25
Q

the granting clause (in an o/g lease)

A

sets for the rights given to the lessor to the lessee and the description of the property

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26
Q

Mother Hubbard Clause

A

picks up small strips of land that are not included in the granting clause b/c mistakes

–not large contiguous tracts

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27
Q

Lease Termination Clause

habendum clause

A

Habendum clause: producing in paying quants
–duration of lessee’s interest in premise

Primary term: fixed pd during which lessee has no obligation to conduct drilling operations

Secondary term: indefinite but normally linked to production–in texas its production in paying quantities

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28
Q

what is production in paying quantities?

A

revenues - lessor’s royalty - operation costs (includes taxes and drilling costs)

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29
Q

common Law Exception of to production in paying quantities

3

A
  1. Temporary Cessation Doctrine
    - -once PPQ est. the temp cessation b/c sudden stoppage or breakdown won’t terminate lease if:

short, temporary
lessee acted diligently to fix (reasonably prudent)
due to mechanical breakdown or the like
cessation can’t be deliberate decision to stop

  1. Marginal Well Doctrine
    - -some wells produce more/some less. if reasonably prudent operator would keep operating the well to make a profit (not just speculation). the marginal well doctrine will save it b/c the yearly revenue is high enough
  2. Doctrine of Repudiation
    - -equitable rule that can extend lease if lessor obstructs the lessee from developing lease
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30
Q

how do you read the lease (who do you construe it against?)

A

o/g leases are construed against the lessee (b/c usually drafted by the o/g company)

31
Q

Delay Rentals

Unless Delay rentals and Or delay rentals

A

Delay Rentals: clauses authorizes lessee to delay drilling/commencing production by paying stipulated price of lessor

Unless:

  • ex: ‘ease shall terminate unless lessee shall pay lessor the sum of ___ money in delay rentals’
  • clause creates a condition of the lease
  • remedy: lease will terminate automatically

Or:

  • ex: ‘lessee agrees to either drill a well or pay delay rentals’
  • only creates a covenant between lessor/lessee and lease doesn’t terminate automatically
  • remedy: lessor must sue for breach of contract, damages qual to unpaid amount of rentals
32
Q

Late Delay Rentals

A

is lessor takes late delay rental payment lease come alive against based on an idea of estoppel

requires:
1. some proof of act by lessor (like cashing a check)
2. lessee detrimentally relied upon the act

33
Q

notice of assignment clause

A

clause that allows one/both of the parties to assign rights under the lease, but no change in ownership is binding on the other party until certain time after notice of assignment

34
Q

commencement of drilling clause

what is commencement

A

if delay rental clause states: ‘if operations for drilling not commenced on/before ___ date, lease terminated unless lessee pays delay rentals.’

Commencement depends on
1. some proof of act by lessor (like cashing checks)

  1. lessee detrimentally relied upon the act
35
Q

Shut in Royalty Clause

A

when well ceases to produce in paying quantities the lessee can hold the lease open by paying shut in royalties

(if this clause isn’t in the lease this isn’t an option)

36
Q

Dry Hole Clause

A

if lessee drills dry hole, she can maintain lease by starting to drill another well w/in the stated time

37
Q

Continuous Operations Clause

A

where, at the end of the primary term, operations have commenced but not yet actual production

38
Q

Cessation of Production Clause

A

if well ceases producing, lessee can maintain lease by commencing repairs w/in stated time

39
Q

Force Majeure Clause

A

excuse performance/extend time b/c of unforeseeable factors beyond lessee’s control

need to read carefully to see what they exclude

40
Q

Pooling Clause

A

allows lessee to hold several tracts under one lease with PPQ with jut one well located on one of the tracts

royalty from the one well is typically split between the various tract owners

must do pooling in good faith

it will cover all the land in the lease

41
Q

Pugh Clause

A

if only part of the leased land is pooled the rest must be severed unless the lessee drills or pays delay rentals

42
Q

Royalty Clause

A

cost free, paid based on production at the well

so free of production costs but not free of post production costs

  • -transportation
  • -processing

lessors share in post production cost in proportion to royalty interest

43
Q

Royalties sold at/off premise and market value

A

royalties owed for gas sold at the well? amount realized under the contract

royalties owed for gas sold off the premises? whatever is market value

44
Q

Division Orders

A

tells the lessee how to divide the proceeds from the well among various lessors, NPRIs, and working interest owners

lessee prepares it and if it is correct the lessees sign it and thats how things are distributed

45
Q

Rules about division orders (5)

A
  1. it’s binding until it is revoked
    - -can revoke it but don’t get past underpayments
  2. it can’t contradict the lease
    - -if it did it was invalid and then you can get past underpayments
  3. it can clarify a royalty term in the lease
    - -like that it was based on market value
  4. lessee may withhold payments w/o interest if there is a title dispute or the person refused to sign the Order when it had stat. authorized terms
  5. Lessee can’t withhold payments to a person who refuses to sign it b/c it contains a term that is not in stat.
46
Q

Standard of Performance for the lessee

A

of a reasonably prudent operator

no fiduciary standard (don’t have to drill if he wouldn’t make a profit)

47
Q

Implied Covenant to Protect Against Drainage

what it is

3 things lessor must show

what profitable means

remedies

A

lessee must act as reasonably prudent operator to protect the leased premises against drainage

lessor must show:

  1. substantial drainage
  2. lessee could drill a profitable well to offset it
  3. damages

profitable: expected revenues exceed production and drilling costs
remedies: damages in amount of royalties would have gotten from offset well

this will apply to competing lessees and common lessees

48
Q

Implied Covenant to Market

A

lessee has implied covenant to market the oil gas within a reasonable time at best price realizable

judged by reasonably prudent operator

49
Q

implied covenant to develop

A

implied covenant to develop the lease

test: if lessor can prove a reasonable expectation of profit from additional drilling, regardless of where the proposed well is located

high burden to meet and hard for lessor to win

NOT a covenant to explore

50
Q

Executive Right Duties

A

executive right holder is the person who has the right to lease/make decisions regarding the mineral estate

NPRI and NPMI depend on executive right holder

duty depends in part on conduct

umtost good faith and fair dealing: usual duty where he must act with due regard for the others and be willing to execute a lease on same terms as reasonable prudent landowner would, if there wasn’t any other interests

Fiduciary standard: when he engages in egregious self dealing, he must then subordinate his interests to those of the others. could cancel the executive right or certain leases he has made

51
Q

Surface Destruction Test

Ordinary and Natural Meaning Test

and which test to use

A

Surface Destruction Test: if any reasonable method of extracting would destroy the surface, it belongs to the surface estate

Ordinary and Natural Meaning Test: is the substance a mineral in it’s ordinary and natural meaning?

Step 1: is substance one of 9 things that belongs to the surface as a matter of law?

Step 2: if not, is the date of ambiguous conveyance after 1983?

before 1983: surface destruction test
after 1983: ordinary and natural meaning test

52
Q

9 substances that always belong to surface

A 
building stone 
limestone
caliche
surface shale 
sand
gravel
water
near surface lignite
iron ore
53
Q

conveyancing non-apportionment rule

A

when the property is subdivided after o/g lease, owners of subdivided interests are not entitled to apportioned royalty payments

but they are entitled to an apportioned delay rental

54
Q

Community Lease

A

where 2+ continuos property owners enter a single lease covering all of their property

has the effect of implied pooling agreement

share royalties in proportion to ownership interest

55
Q

how are deeds construed

A

deeds are construed against grantor (while leases are construed against lessee)

56
Q

The Duhig Doctrine

A

in 3 or more party chain of conveyances where grantor seemingly conveys more than 100% of mineral or royalty interest, grantor will bear the loss

57
Q

Conveyance of a Mineral Interest v. a Royalty Interest (when ambiguous)

royalty language

mineral language

mixed language

A

royalty lang: oil, gas and other minerals produced and saved

mineral lang: oil, gas, and other minerals in, on or under Blackacre

mixed lang: in Texas mixture of terms indicates that a mineral interest is created

58
Q

the Rail Road Commission and Regulation of O/G

objections (3)

and methods (3)

A

Texas, through RRC, regulates o/g production to serve 3 public objections

  1. prevent waste for max recovery of o/g
  2. protect correlative rights
  3. protect environment

RRC’s methods of preventing waste/protecting correlative rights

  1. drilling permits and spacing rules
  2. pro-rationing rules
  3. MIPA and compulsory pooling
59
Q

Drilling Permits and Spacing Rules

A

drilling permits req before drilling
spacing: 40 acres

exception: small tracts can get exception to spacing rule if:
- -confiscation: like draining, is proven
- -subdivision: small tract subdivided by deed before o/g found in the area or land was leased (but not if they voluntarily subdivide after)

60
Q

Pro-Rationing

A

RRC regulates max amounts that wells can produce to prevent waste from premature dissipation of pressure and protect correlative rights

61
Q

MIPA

what it means, what it is

what triggers MIPA (3)

A

Mineral Interest Pooling Act

in fields discovered after March 8, 1961, RRC can force owners to pool (share productions from reservoir)
–pre-empts rule of capture

each interest owner getting share roughly proportional to relate size of her interest

Rules Triggering MIPA

  1. timeline: fields after March 8, 1961
  2. Fair/reasonable offer: owners seeking compulsory pooling under MIPA
    - -must first make reasonable/fair offer to pool voluntary
  3. standard: fairness judged from standpoint of party being compelled to pool at time of offer
  • -only private parties can use MIPA
  • -not for co-tenants
62
Q

Relinquishment Act

A

act applies to state owned land sold to private parties between 1895 to 1931

Texas owns minerals and the grantees have the surface rights
–but the grantee has exclusive right to lease minerals on behalf of state and get share of economic benefits of lease equally w/state

fiduciary duty to state

63
Q

Plugging Wells

A

operator is supposed to but they don’t always

RRC set this order to plug:
1. operator: person responsible for physical control of well at time abandoned

  1. non operator w/working interest
  2. texas: oilfield cleanup fund used to plug abandoned well and to clean up pollution

no duty to plug on mineral interest holders, royalty owners, other ppl who do not have working interest

64
Q

reasonably prudent operator

if there is drainage, what does the owner have to prove?

A

implied covenants

  • don’t allow the land to be drained by rival operators
  • prevent drainage

lessor has the burden of proving that

  • -substantial drainage is occurring
  • -it would be profitable to drill a well to offset the drainage

develop like a reasonably prudent developer

implied covenant to market

65
Q

express clause in lease

A

may change the implied covenant

usually express offset clause mimics common law, lessor must prove the same two elements (substantial drainage, profitable to drill)

but the lease may have additional terms that can be breached

66
Q

‘at the well’

A

triggers the rule that royalty owners do not bear any costs of production incurred before o/g is produced at the wellhead, but must share in postproduction cost after gas is produced at wellhead

so not: exploration/drilling
yes: transportation, treatment, compression costs and severance tax

67
Q

executive right owner

A

duty of good faith, utmost fair dealing to nonparticipating mineral interest (but could be raised to fiduciary duty if there was self dealing)

required to bargain for all benefits that could reasonably be obtained from a disinterested 3rd party and share benefits with NPMI

cancel self dealing contracts, pay actual damages

68
Q

Farm out agreement

A

assignment of leasehold rights

under typical farm out agreement first lessee will sell/assign right to drill on leasehold to a second lessee in exchange for second lessee’s promise to drill well on leasehold and pay on overriding royalty or sometimes cash payments to first lessee

69
Q

production in paying quantities

A

no production in paying quantities, or legal substitute, won’t keep lease alive

70
Q

shut in royalty

A

allow payment if the well is capable of producing in paying quantities, such as gas well awaiting a pipeline connection

so it can keep the lease alive but it doesn’t constitute production in paying quantities

71
Q

implied covenant to market

A

lessee can’t simply sit on its shut in royalty clause and pay small shut in amounts when a reasonably prudent operator would market the gas

72
Q

division order

A

standard:

  • effective date
  • property description
  • fractional intrest claimed
  • certificate of title to that interest
  • agreement to indemnify lessee/reimburse for payments made if they don’t have title
  • authority to suspend payments if title dispute arises
  • provisions for valuing o/g

may suspend payments w/o interest if there is dispute about these things

but it can’t change lease’s obligations

73
Q

accommodation doctrine–what sort of surface uses

A

typically protects existing surface uses, not planned surface uses

Real Property (2 decks)

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