Oil and Gas Flashcards
RULE OF CAPTURE
Does NOT protect you IF:
RULE OF CAPTURE
Does NOT protect you IF:
- Negligently drilled OG
- Illegally drained OG
- Drained from stored gas
MINERAL ESTATE RIGHTS
MINERAL ESTATE RIGHTS
(1) Development (reasonable use of surface)
(2) Executive right
(3) Economic benefits of a lease:
- Bonus
- Royalty
- Delay rentals
ACCOMMODATION DOCTRINE
General rule: ME owner is entitled to REASONABLE USE of the surface to develop the minerals.
Accommodation doctrine elements:
ACCOMMODATION DOCTRINE
General rule: ME owner is entitled to REASONABLE USE of the surface to develop the minerals.
Accommodation doctrine elements:
- Pre-existing use
- ME owner has a REASONABLE ALTERNATIVE that is less destructive
- The alternative is AVAILABLE on the leased tract
CO-TENANTS
Lease w/o consent of other co-tenants?
Un-leased co-tenant
- Receives profits?
- Receives royalty?
HOMESTEAD
- Can one spouse lease it?
CO-TENANTS
Every co-tenant has the right to lease the entire property WITHOUT the consent of the other co-tenants.
Must account to the other co-tenants their SHARE of the PROFITS, unless they ratify the lease.
Un-leased co-tenant
- Receives share of the PROFITS
- Revenue - costs
- Does NOT receive a royalty
HOMESTEAD
- Can only be leased with the CONSENT of both spouses — under the Family Code, need consent of both spouses to allow any encumbrance on the homestead.
- Watch out for rural homesteads—can be a total of 200 non-contiguous acres, spread out all across the state.
FUTURE INTERESTS
Lease
- Need FI’s consent to lease?
Accounting
- What does FI get?
- What does LT get?
FUTURE INTERESTS
Lease
- Cannot lease without JOINDER of the remaindermen (and vice versa).
Accounting
- FI holder is entitled to a share of the lease benefits
- LT gets the INCOME = delay rentals, interest on the bonus and royalty
- FI holder gets the PRINCIPAL = bonus, royalty
*UNLESS the open mines doctrine applies (already mineral exploitation on the property)—then the LIFE TENANT gets EVERYTHING.
OG LEASE vs. MORTGAGE
General rule: who wins?
“Marshalling” the assets:
OG LEASE vs. MORTGAGE
General rule: first in time (TX NOTICE recording act)
- If OG lease executed before the mortgage, then the mortgagor is on notice that it does not have a right to the minerals.
“Marshalling” the assets
- If mortgagor can foreclose, it must sell the SURFACE ASSETS FIRST.
TRESPASS
Drilling a dry well
- How does this harm property owner?
- What damages does the owner get?
Geophysical or seismic trespass
- When is this a trespass?
- Damages:
Secondary Recovery Operations
- When is this a trespass?
- Damages:
Drilling a dry well
- This damages the speculative lease value—now lessor can’t lease to anyone because the whole world knows now that he has no oil.
- Damages: lost BONUS
Geophysical or seismic trespass
- Only a trespass if you learned about the lessor’s MINERALS POTENTIAL
- Damages: the FMV of a contract for the right to do seismic exploration
Secondary recovery operations are NOT a trespass.
TRESPASS
OGco trespass and drills a profitable well. What are TO’s damages?
Damages
- IF good faith»_space;> TO gets the revenues, but has to pay OGco back for its drilling costs.
- IF bad faith»_space;> TO gets all revenues (gross value of production)
SLANDER OF TITLE
Elements:
SLANDER OF TITLE
Elements:
- Publication of a false claim of title
- With malice
- That prevents a SPECIFIC leasing or sale opportunity
ADVERSE POSSESSION
If PRIOR to SEVERANCE, trespasser gets:
If the surface owner only owned a FRACTIONAL INTEREST in the mineral estate, the trespasser gets:
ADVERSE POSSESSION
If PRIOR to SEVERANCE, trespasser trespasses as to the mineral estate.
If the surface owner only owned a FRACTIONAL INTEREST in the mineral estate, the trespasser takes that same fractional interest.
OIL AND GAS LEASE
Mother Hubbard clause
Habendum clause
OIL AND GAS LEASE
Mother Hubbard clause
- Small strips of land can be added to the extent that the lease left out some parts on accident
Habendum clause
- Spells out the DURATION of the lease
- Primary term
- Must begin DRILLING OPERATIONS, or else pay a delay rental
- Secondary term
- Must be PRODUCING IN PAYING QUANTITIES, or the lease TERMINATES
OIL AND GAS LEASE
Assignment
Assignment
- Not binding until the other party knows about it.
- Terms of the lease control.
PRIMARY TERM
Delay rentals:
- UNLESS lease:
- OR lease:
Commencing drilling operations:
Delay rentals
- Keeps the PRIMARY term alive
- UNLESS lease
- “The lease shall terminate UNLESS lessee pays $X in delay rentals”
- Termination is automatic.
- OR lease
- “Lessee agrees to either drill a well OR pay delay rentals.”
- Termination is not automatic. Lessor has to sue.
- Accepting a late delay rental REVIVES the lease.
Commencing drilling operations
- SUBJECTIVE:
- Intent to pursue drilling
- OBJECTIVE:
- Physical acts on the premises
SECONDARY TERM
Need WHAT to survive the primary term?
PPQ
SECONDARY TERM
PPQ = ?
Revenues - Royalty - Operating Costs
Must be ABOVE ZERO ^
- Note that this does NOT include drilling costs
SECONDARY TERM
TWO exceptions to the PPQ requirement:
(not savings clauses)
Exceptions to the PPQ requirement:
(1) Temporary cessation doctrine
- Once PPQ is established, a temporary cessation due to “a sudden stoppage of the well or some mechanical breakdown or the like” will not terminate the lease.
- A reasonably prudent operator would continue production.
(2) Marginal well
- Some wells may only produce a tiny bit for some months of the year.
- A reasonably prudent operator would continue production.
SECONDARY TERM
Savings clauses
(1) Shut-in royalty
- Look at the terms, but generally, shut-in must be for MARKET reasons (e.g. shut in for a bit while demand is too slow to justify production)
(2) Dry hole
- If drilled a dry hole, can maintain the lease by drilling again within the stated time
(3) Continuous operations
- Drilling operations deemed enough to keep lease alive (even though not PPQ)
(4) Cessation of production
- If a well ceases producing, can keep lease alive by making REPAIRS
POOLING
Accomplishes what?
How should the different landowners be compensated?
POOLING
Keeps a lease alive even though drilling occurs on a different tract
- Pay each lessor their proportional share of the royalty (by ACREAGE)
POOLING
Accomplishes what?
How should the different landowners be compensated?
POOLING
Keeps a lease alive even though drilling occurs on a different tract
- Pay each lessor their proportional share of the royalty (by ACREAGE)
POOLING
Does it matter if OGco pooled in good faith or not?
Cannot pool in BAD FAITH
POOLING
Pugh clause
Pugh clause
- If only part of my lease is pooled, you can’t keep the whole lease alive without drilling on that part or paying me a delay rental for that part.
POOLING
Compare with COMMUNITY LEASE:
COMMUNITY LEASE
- Group of landowners agree to a lease that covers all of their properties
- This is like an “implied” pooling agreement
- Same result—they get an acreage share of the royalty
ROYALTIES
Royalty =
ROYALTIES
Royalty = share of production revenues FREE OF PRODUCTION COSTS
ROYALTIES
Share of production “SOLD AT THE WELL”
Share of production “SOLD OFF PREMISES”
ROYALTIES
Share of production “SOLD AT THE WELL”
- 1/8 x PRICE (amount realized from the sale)
Share of production “SOLD OFF PREMISES”
- 1/8 x FMV PRICE (price is whatever the gas is going for in that spot market)
ROYALTIES
Non-apportionment rule
Non-apportionment rule
- If an OG lease is already in place BEFORE a grantee receives a portion of the land, the royalty is NOT apportioned among the different landowners. Whoever’s land the producing well is on gets ALL of the royalties.
- Unless the grantor includes an “entireties” clause, which specifies that overrides the non-apportionment rule.
- BUT the DELAY RENTALS ARE APPORTIONED.
ROYALTIES
Failure to pay royalties
- Grounds to terminate lease?
Failure to pay royalties
- Breach of contract
- NOT grounds to terminate the lease—pmt of royalties is a covenant, not a condition of the lease
ROYALTIES
Offer to purchase royalty interest
- Must be:
- Remedies for violation:
Offer to purchase royalty interest
- Must be CONSPICUOUS (14+ pt font)
- If P unwittingly sells royalty interest, P can sue for failure to comply:
- Remedies: rescission or damages ($100 or, if greater, FMV of the interest - what the P received)
- 30 days notice of suit required
DIVISION ORDERS
DIVISION ORDERS
Binding until revoked
- Can’t be reimbursed for being short-changed on your royalty before you revoked the DO
UNLESS it contradicts the lease.
- Then you can be reimbursed according to what you should have gotten under the lease.
DIVISION ORDERS
“Sneaky” division orders
- What is this?
- Remedy?
“Sneaky” division orders
- Include extraneous obligations on a royalty owner
- A DO is a simple document that spells out how much each party with a royalty interest receives. They are not supposed to impose other obligations before that person can receive a royalty.
- If a lessee refuses to pay under DO unless the royalty interest accepts a “sneaky” DO, the royalty interest owner can sue the lessee and recover fees.
IMPLIED COVENANTS
Governing standard for all of these:
IMPLIED COVENANTS
- Reasonably prudent operator *
IMPLIED COVENANTS
What are the THREE implied covenants?
(1) Protect against drainage
(2) Covenant to market
(3) Covenant to develop
* There is NO covenant to EXPLORE*
IMPLIED COVENANTS
Protect against drainage
Covenant to market
(1) Protect against drainage
- Substantial drainage
- Lessee could drill a profitable well to offset
(2) Covenant to market
- Sell the OG within a REASONABLE TIME at the BEST PRICE
IMPLIED COVENANTS
Covenant to develop
- What must P show?
- What if P’s tract is POOLED?
(3) Covenant to develop
- P has a HIGH burden on this—must show that developing has a REASONABLE EXPECTATION OF PROFIT. The OGco can probably always rebut this.
- A POOLED tract may argue that the well drilled on another tract in the unit is draining from under their tract, but this is only a meaningful argument if P can show that drilling a SECOND well on their property too will reasonably yield a profit.
EXECUTORY INTEREST DUTIES
Duty to NPRI’s?
EXECUTORY INTEREST DUTIES
Utmost good faith and fair dealing
- Reasonably prudent landowner*
- Should take steps with due regard to the NPRI’s
Fiduciary standard
- Imposed only in extreme circumstances
FRACTIONAL INTERESTS - DUHIG
How are deeds construed?
Duhig doctrine:
FRACTIONAL INTERESTS - DUHIG
Deeds are construed AGAINST the GRANTOR.
Courts read deeds very LITERALLY.
DUHIG doctrine
- In a three-or-more conveyance, if the second person conveys to the third person more than they actually have to convey, the second person bears the loss—court construes the grant AGAINST the grantor.
- A grants B his 1/2 mineral interest. B grants C a 1/2 mineral interest in the whole tract, reserving the other 1/2 for himself — PROBLEM: B only owns 1/2 so he can’t grant C the other half. RESULT: B’s entire 1/2 goes to C (don’t reduce C’s share—construe against B and reduce his share).
ROYALTY vs. MINERAL INTEREST
“produced and saved” = ________________
“in, on, or under” = ________________
If BOTH = ________________
ROYALTY vs. MINERAL INTEREST
“produced and saved” = ROYALTY
“in, on, or under” = MINERAL INTEREST
If BOTH»_space;> it’s a MINERAL INTEREST.
PLUGGING ABANDONED WELLS
Order of responsibility:
- NEVER has responsibility:
PLUGGING ABANDONED WELLS
Order of responsibility
(1) Operator of the well—the one who abandoned it
(2) Non-operator with working interest
(3) RRC—oilfield cleanup fund
- NEVER has responsibility:
- Lessor
- NPRI’s
- Subsequent operators
