Oil and Gas

Question 1

rule of capture

Answer 1

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

Question 2

limitations to the rule of capture: correlative rights

Answer 2

every oil and gas owner has a right to a fair opportunity to produce oil and gas from a common reservoir underlying his property

Question 3

rule of capture does NOT apply to

Answer 3

1. negligently drilled oil and gas
2. illegally drained oil and gas
3. stored gas

Question 4

stored gas

Answer 4

personal property (real when in the ground)

Question 5

if a rival operator drills into a reservoir that contains stored gas, what can the owner do

Answer 5

sue for damages because the rule of capture is no defense for drainage of stored gas

Question 6

fee simple interest in oil and gas

Answer 6

owns both the surface and minerals below

- property owner may transfer less than her entire interest through severance

Question 7

development right

Answer 7

exclusive right to explore, produce, and develop minerals

Question 8

executive right

Answer 8

right to lease the minerals

Question 9

mineral interest’s rights include

Answer 9

• development right
• executive right
• economic benefits

Question 10

bonus

Answer 10

upfront payment for signing the lease usually based on dollar per acre leased

Question 11

royalty

Answer 11

fractional share of any oil and gas produced that is free from costs of production usually 1/8

Question 12

delay rentals

Answer 12

compensation for deferring drilling during the primary term of the lease, based on acreage

Question 13

when is the mineral estate dominant

Answer 13

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

Question 14

the accommodation doctrine requires the mineral owner to accommodate surface uses, but only under the following conditions

Answer 14

1. surface owner has a preexisting use of the surface
2. 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
3. reasonable alternative is available on the leased tract

Question 15

interests created by oil and gas lease

Answer 15

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

Question 16

working interest

Answer 16

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

Question 17

royalty interest

Answer 17

gives the lessor a share of the production that is free of the costs of production

Question 18

nonparticipating royalty interest (NPRI)

Answer 18

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

Question 19

concurrent ownership - cotenancy

Answer 19

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

Question 20

plugging a well no longer in service

Answer 20

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

Question 21

Duhig Doctrine

Answer 21

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

Question 22

9 substances that belong to the surface estate as a matter of law

Answer 22

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

Question 23

when does the accommodation doctrine apply

Answer 23

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

Question 24

unless limited in some manner by express lease provisions, statutes or the accommodation doctrine, a mineral interest owner (lessee) has an implied right to…

Answer 24

use the surface estate as is reasonably necessary to carry out the purposes of an oil and gas lease

Question 25

implied covenant to market

Answer 25

requires the lessee to market production within a reasonable period of time at the best available price

Question 26

implied covenant to protect against drainage

Answer 26

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

Question 27

implied covenant for reasonable development

Answer 27

once oil or gas is discovered, the lessee has an obligation to further develop the premises

Question 28

to recover under the implied covenant to protect against drainage, a lessor must generally show…

Answer 28

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

Question 29

when may payments be withheld without interest under the TX DO statute

Answer 29

only if there is a title dispute over the payee’s claimed interest or a reasonable doubt that the payee has clear title

Question 30

rules for royalty interest owners under TX DO statute

Answer 30

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

Question 31

the essential purpose of a pooling clause is to…

Answer 31

give the lessee flexibility to comply with well-spacing requirements and geological realities, and allow her to operate efficiently

Question 32

shut in royalty clause

Answer 32

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

Question 33

because the shut in royalty payment is normally structured as a substitute for actual production, failure to make the shut in payment will cause…

Answer 33

the lease to terminate under the habendum clause

Question 34

formula for PPQ

Answer 34

revenues - lessor’s royalty - operating costs

Question 35

primary and secondary term for an oil and gas lease

Answer 35

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

Question 36

a typical oil and gas leas creates a FS determinable estate in the minerals and grants to the lessee a…

Answer 36

possessory estate in the mineral fee for a fixed term of years and so long thereafter as oil, gas, and other minerals are produced

Question 37

open mind doctrine

Answer 37

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

Question 38

rights of the cotenant to separately lease their undivided interest

Answer 38

all may execute separate leases as to their undivided interests to separate lessees
- must account to all cotenants for the proceeds of drilling

Question 39

an oil and gas lease generally conveys a ______ from the lessor to the lessee

Answer 39

FS determinable

Question 40

rights of an NPRI

Answer 40

right to stated share of the proceeds from oil and gas production

Question 41

if the mineral interest has not been severed from the surface interest, an adverse possessor of the surface can acquire…

Answer 41

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