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BAR EXAM > Oil and Gas > Flashcards

Oil and Gas Flashcards

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1
Q

RULE OF CAPTURE

Does NOT protect you IF:

A

RULE OF CAPTURE

Does NOT protect you IF:

  • Negligently drilled OG
  • Illegally drained OG
  • Drained from stored gas
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2
Q

MINERAL ESTATE RIGHTS

A

MINERAL ESTATE RIGHTS

(1) Development (reasonable use of surface)
(2) Executive right
(3) Economic benefits of a lease:
- Bonus
- Royalty
- Delay rentals

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3
Q

ACCOMMODATION DOCTRINE

General rule: ME owner is entitled to REASONABLE USE of the surface to develop the minerals.

Accommodation doctrine elements:

A

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
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4
Q

CO-TENANTS

Lease w/o consent of other co-tenants?

Un-leased co-tenant

  • Receives profits?
  • Receives royalty?

HOMESTEAD
- Can one spouse lease it?

A

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.
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5
Q

FUTURE INTERESTS

Lease
- Need FI’s consent to lease?

Accounting

  • What does FI get?
  • What does LT get?
A

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.

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6
Q

OG LEASE vs. MORTGAGE

General rule: who wins?

“Marshalling” the assets:

A

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.

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7
Q

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:
A

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.

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8
Q

TRESPASS

OGco trespass and drills a profitable well. What are TO’s damages?

A

Damages

  • IF good faith&raquo_space;> TO gets the revenues, but has to pay OGco back for its drilling costs.
  • IF bad faith&raquo_space;> TO gets all revenues (gross value of production)
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9
Q

SLANDER OF TITLE

Elements:

A

SLANDER OF TITLE

Elements:

  • Publication of a false claim of title
  • With malice
  • That prevents a SPECIFIC leasing or sale opportunity
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10
Q

ADVERSE POSSESSION

If PRIOR to SEVERANCE, trespasser gets:

If the surface owner only owned a FRACTIONAL INTEREST in the mineral estate, the trespasser gets:

A

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.

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11
Q

OIL AND GAS LEASE

Mother Hubbard clause

Habendum clause

A

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
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12
Q

OIL AND GAS LEASE

Assignment

A

Assignment

  • Not binding until the other party knows about it.
  • Terms of the lease control.
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13
Q

PRIMARY TERM

Delay rentals:

  • UNLESS lease:
  • OR lease:

Commencing drilling operations:

A

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
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14
Q

SECONDARY TERM

Need WHAT to survive the primary term?

A

PPQ

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15
Q

SECONDARY TERM

PPQ = ?

A

Revenues - Royalty - Operating Costs

Must be ABOVE ZERO ^

  • Note that this does NOT include drilling costs
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16
Q

SECONDARY TERM

TWO exceptions to the PPQ requirement:

(not savings clauses)

A

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.

17
Q

SECONDARY TERM

Savings clauses

A

(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

18
Q

POOLING

Accomplishes what?
How should the different landowners be compensated?

A

POOLING

Keeps a lease alive even though drilling occurs on a different tract
- Pay each lessor their proportional share of the royalty (by ACREAGE)

19
Q

POOLING

Accomplishes what?
How should the different landowners be compensated?

A

POOLING

Keeps a lease alive even though drilling occurs on a different tract
- Pay each lessor their proportional share of the royalty (by ACREAGE)

20
Q

POOLING

Does it matter if OGco pooled in good faith or not?

A

Cannot pool in BAD FAITH

21
Q

POOLING

Pugh clause

A

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.

22
Q

POOLING

Compare with COMMUNITY LEASE:

A

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
23
Q

ROYALTIES

Royalty =

A

ROYALTIES

Royalty = share of production revenues FREE OF PRODUCTION COSTS

24
Q

ROYALTIES

Share of production “SOLD AT THE WELL”

Share of production “SOLD OFF PREMISES”

A

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)

25
Q

ROYALTIES

Non-apportionment rule

A

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.
26
Q

ROYALTIES

Failure to pay royalties
- Grounds to terminate lease?

A

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
27
Q

ROYALTIES

Offer to purchase royalty interest

  • Must be:
  • Remedies for violation:
A

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
28
Q

DIVISION ORDERS

A

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.

29
Q

DIVISION ORDERS

“Sneaky” division orders

  • What is this?
  • Remedy?
A

“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.
30
Q

IMPLIED COVENANTS

Governing standard for all of these:

A

IMPLIED COVENANTS

  • Reasonably prudent operator *
31
Q

IMPLIED COVENANTS

What are the THREE implied covenants?

A

(1) Protect against drainage
(2) Covenant to market
(3) Covenant to develop
* There is NO covenant to EXPLORE*

32
Q

IMPLIED COVENANTS

Protect against drainage

Covenant to market

A

(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

33
Q

IMPLIED COVENANTS

Covenant to develop

  • What must P show?
  • What if P’s tract is POOLED?
A

(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.

34
Q

EXECUTORY INTEREST DUTIES

Duty to NPRI’s?

A

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

35
Q

FRACTIONAL INTERESTS - DUHIG

How are deeds construed?

Duhig doctrine:

A

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).
36
Q

ROYALTY vs. MINERAL INTEREST

“produced and saved” = ________________

“in, on, or under” = ________________

If BOTH = ________________

A

ROYALTY vs. MINERAL INTEREST

“produced and saved” = ROYALTY

“in, on, or under” = MINERAL INTEREST

If BOTH&raquo_space;> it’s a MINERAL INTEREST.

37
Q

PLUGGING ABANDONED WELLS

Order of responsibility:

  • NEVER has responsibility:
A

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

BAR EXAM (25 decks)

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