Oil and Gas Flashcards
rule of capture
default rule for mineral rights n TX
- rule of nonliability for causing oil and gas to migrate across property lines resulting in drainage of oil and gas from under another’s land
limitations to the rule of capture: correlative rights
every oil and gas owner has a right to a fair opportunity to produce oil and gas from a common reservoir underlying his property
rule of capture does NOT apply to
- negligently drilled oil and gas
- illegally drained oil and gas
- stored gas
stored gas
personal property (real when in the ground)
if a rival operator drills into a reservoir that contains stored gas, what can the owner do
sue for damages because the rule of capture is no defense for drainage of stored gas
fee simple interest in oil and gas
owns both the surface and minerals below
- property owner may transfer less than her entire interest through severance
development right
exclusive right to explore, produce, and develop minerals
executive right
right to lease the minerals
mineral interest’s rights include
- development right
- executive right
- economic benefits
bonus
upfront payment for signing the lease usually based on dollar per acre leased
royalty
fractional share of any oil and gas produced that is free from costs of production usually 1/8
delay rentals
compensation for deferring drilling during the primary term of the lease, based on acreage
when is the mineral estate dominant
when the mineral estate has been severed from the surface estate
- the owner of the mineral estate can use the surface as is reasonably necessary to develop the oil and gas
the accommodation doctrine requires the mineral owner to accommodate surface uses, but only under the following conditions
- surface owner has a preexisting use of the surface
- mineral estate owner has a reasonable alternative method of developing the oil and gas that is less destructive of the surface but still allows the mineral estate to drill and produce economically
- reasonable alternative is available on the leased tract
interests created by oil and gas lease
coveys a deed to a fee simple determinable - the lease may last forever but it may terminate if there is no production at the end of a specified time
working interest
gives the lessee the exclusive right to explore, develop and produce from the property as well as the obligation to pay all costs of production
royalty interest
gives the lessor a share of the production that is free of the costs of production
nonparticipating royalty interest (NPRI)
right to receive royalty payments held by someone other than the mineral interest owner
- if the mineral owner conveys (by sale, gift, or will) her right to receive royalty payments to another but retains ownership of the mineral estate that person has an NPRI
concurrent ownership - cotenancy
every cotenant can drill and produce or lease his undivided interest without the consent of the cotenants but he must account to the others for their rightful share of the profits from production
plugging a well no longer in service
operator of a well has the primary responsibility to plug, usually within 1 year from the time drilling or production ceases.
- operator: person responsible for the physical control of the well at the time it is abandoned
- if operator not available then non-operators plug
Duhig Doctrine
applies when a 3-party chain of conveyances seemingly results in the conveyance of more than 100% of the mineral (or royalty interest)
- grantor, and not the grantee will bear the loss
9 substances that belong to the surface estate as a matter of law
1) building stone 2) limestone 3) caliche 4) surface shale 5) water (salt and fresh) 6) sand 7) gravel 8) near surface lignite or coal 9) iron ore
when does the accommodation doctrine apply
1) lessee’s use of the surface substantially interferes with preexisting surface use
2) alternative methods that are less injurious to the surface are practicable for the lessee to use AND
3) alternative is available on the leased tract
unless limited in some manner by express lease provisions, statutes or the accommodation doctrine, a mineral interest owner (lessee) has an implied right to…
use the surface estate as is reasonably necessary to carry out the purposes of an oil and gas lease
implied covenant to market
requires the lessee to market production within a reasonable period of time at the best available price
implied covenant to protect against drainage
lessee must act as a reasonably prudent operator to protect the leased premises against drainage
implied covenant for reasonable development
once oil or gas is discovered, the lessee has an obligation to further develop the premises
to recover under the implied covenant to protect against drainage, a lessor must generally show…
1) substantial drainage
2) that a reasonably prudent operator would drill a well to protect the premises against drainage AND
3) damages measured by he royalty the lessor would have obtained had the offset well been drilled
when may payments be withheld without interest under the TX DO statute
only if there is a title dispute over the payee’s claimed interest or a reasonable doubt that the payee has clear title
rules for royalty interest owners under TX DO statute
1) DOs are binding until revoked as under CL
2) DO can never contradict a lease and is invalid if it does… if never valid RIO may be able to recover past underpayments
3) the act sets time limits for payor to pay the payees their shares
the essential purpose of a pooling clause is to…
give the lessee flexibility to comply with well-spacing requirements and geological realities, and allow her to operate efficiently
shut in royalty clause
address the problem of a well capable of production in paying quantities which is shut (not producing) usually because there is no market yet available for the gas
- permits the lessee to maintain a lease upon which wells are shut in by payment of a shut in royalty
because the shut in royalty payment is normally structured as a substitute for actual production, failure to make the shut in payment will cause…
the lease to terminate under the habendum clause
formula for PPQ
revenues - lessor’s royalty - operating costs
primary and secondary term for an oil and gas lease
primary: sets a fixed time period during which the lessee will have no obligation to conduct drilling operations and secure production on the property
secondary: indefinite but normally linked to production
a typical oil and gas leas creates a FS determinable estate in the minerals and grants to the lessee a…
possessory estate in the mineral fee for a fixed term of years and so long thereafter as oil, gas, and other minerals are produced
open mind doctrine
when a lease has been executed prior to creation of a LE (whether by grant or operation of law) the life tenant is entitled to all bonus payments, delay rentals, and royalties paid under any lease in effect prior to creation of the life interest
rights of the cotenant to separately lease their undivided interest
all may execute separate leases as to their undivided interests to separate lessees
- must account to all cotenants for the proceeds of drilling
an oil and gas lease generally conveys a ______ from the lessor to the lessee
FS determinable
rights of an NPRI
right to stated share of the proceeds from oil and gas production
if the mineral interest has not been severed from the surface interest, an adverse possessor of the surface can acquire…
both the surface interest and the mineral interest without conducting drilling or mining operations
- AP of the surface for the statutory period will include both the surface and mineral interests
