Oil and Gas

Question 1

Rule of Capture

Answer 1

applies to o/g

fugitive, ok to make it drain from somewhere else

it migrates

Question 2

Limitations on the rule of capture (3)

Answer 2

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

Question 3

Idea of Fee Simple and Severance

Answer 3

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

Question 4

Rights that Go with the Mineral Interest

Answer 4

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

Question 5

define:

Bonus

Royalty

Delay Rentals

Answer 5

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

Question 6

Dominant and Servient Estates

Answer 6

Mineral estate is dominant, surface is servient

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

Question 7

Accommodation Doctrine (3 conditions)

Answer 7

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

Question 8

Interests Created by an O/G lease

Answer 8

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

Question 9

NPRI

Answer 9

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

Question 10

NPMI

Answer 10

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

Question 11

Divided Mineral Ownership–Concurrent (Co-tenants)

Answer 11

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

Question 12

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

Answer 12

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)

Question 13

Ratification by Co-Tenants

Answer 13

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

Question 14

Partition by Co-Tenants

Answer 14

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)

Question 15

Successive Ownership–life tenant and remaindermen

Answer 15

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

Question 16

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

Answer 16

life tenant:

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

remaindermen:
–principal of bonus and royalty

Question 17

Open Mine Doctrine

Answer 17

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!)

Question 18

accounting when life tenancy is created by trust

between life tenant and remaindermen

Answer 18

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

Remaindermen
–15% of all proceeds

Question 19

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

Answer 19

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

Question 20

marshalling assets

Answer 20

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

Question 21

4 types of trespass and one thing that is not trespass

Answer 21

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

Question 22

Good v. Bad Faith Trespassing

Answer 22

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

Question 23

Slander of Title

Answer 23

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

2. with malice
3. loss of specific sale or leasing opportunity

Question 24

Key issue regarding AP and mineral estate

Answer 24

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)

Question 25

the granting clause (in an o/g lease)

Answer 25

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

Question 26

Mother Hubbard Clause

Answer 26

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

Question 27

Lease Termination Clause habendum clause

Answer 27

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

Question 28

what is production in paying quantities?

Answer 28

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

Question 29

common Law Exception of to production in paying quantities | 3

Answer 29

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 2. 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 3. Doctrine of Repudiation - -equitable rule that can extend lease if lessor obstructs the lessee from developing lease

Question 30

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

Answer 30

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

Question 31

Delay Rentals Unless Delay rentals and Or delay rentals

Answer 31

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

Question 32

Late Delay Rentals

Answer 32

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

Question 33

notice of assignment clause

Answer 33

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

Question 34

commencement of drilling clause | what is commencement

Answer 34

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) 2. lessee detrimentally relied upon the act

Question 35

Shut in Royalty Clause

Answer 35

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)

Question 36

Dry Hole Clause

Answer 36

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

Question 37

Continuous Operations Clause

Answer 37

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

Question 38

Cessation of Production Clause

Answer 38

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

Question 39

Force Majeure Clause

Answer 39

excuse performance/extend time b/c of unforeseeable factors beyond lessee's control need to read carefully to see what they exclude

Question 40

Pooling Clause

Answer 40

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

Question 41

Pugh Clause

Answer 41

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

Question 42

Royalty Clause

Answer 42

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

Question 43

Royalties sold at/off premise and market value

Answer 43

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

Question 44

Division Orders

Answer 44

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

Question 45

Rules about division orders (5)

Answer 45

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.

Question 46

Standard of Performance for the lessee

Answer 46

of a reasonably prudent operator no fiduciary standard (don't have to drill if he wouldn't make a profit)

Question 47

Implied Covenant to Protect Against Drainage what it is 3 things lessor must show what profitable means remedies

Answer 47

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

Question 48

Implied Covenant to Market

Answer 48

lessee has implied covenant to market the oil gas within a reasonable time at best price realizable judged by reasonably prudent operator

Question 49

implied covenant to develop

Answer 49

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

Question 50

Executive Right Duties

Answer 50

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

Question 51

Surface Destruction Test Ordinary and Natural Meaning Test and which test to use

Answer 51

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

Question 52

9 substances that always belong to surface

Answer 52

``` building stone limestone caliche surface shale sand gravel water near surface lignite iron ore ```

Question 53

conveyancing non-apportionment rule

Answer 53

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

Question 54

Community Lease

Answer 54

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

Question 55

how are deeds construed

Answer 55

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

Question 56

The Duhig Doctrine

Answer 56

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

Question 57

Conveyance of a Mineral Interest v. a Royalty Interest (when ambiguous) royalty language mineral language mixed language

Answer 57

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

Question 58

the Rail Road Commission and Regulation of O/G objections (3) and methods (3)

Answer 58

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

Question 59

Drilling Permits and Spacing Rules

Answer 59

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)

Question 60

Pro-Rationing

Answer 60

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

Question 61

MIPA what it means, what it is what triggers MIPA (3)

Answer 61

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

Question 62

Relinquishment Act

Answer 62

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

Question 63

Plugging Wells

Answer 63

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 2. non operator w/working interest 3. 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

Question 64

reasonably prudent operator | if there is drainage, what does the owner have to prove?

Answer 64

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

Question 65

express clause in lease

Answer 65

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

Question 66

'at the well'

Answer 66

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

Question 67

executive right owner

Answer 67

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

Question 68

Farm out agreement

Answer 68

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

Question 69

production in paying quantities

Answer 69

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

Question 70

shut in royalty

Answer 70

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

Question 71

implied covenant to market

Answer 71

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

Question 72

division order

Answer 72

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

Question 73

accommodation doctrine--what sort of surface uses

Answer 73

typically protects existing surface uses, not planned surface uses