Oil and Gas

Question 1

obligation to plug abandoned well

Answer 1

well operator is primarily obligated, and non-operating owner of working interest is secondarily responsible. Royalty owners and lessors are not liable. If neither responsible party is found, RRC can plug the well and seek indemnity from responsible parties

Question 2

Division orders

Answer 2

specify how proceeds of production will be divided; binding until revoked.

Payor not liable for incorrect payments, but the aggrieved interest owner can recover from overpaid interest owners.

Payor cannot refuse to pay if an interest owner refuses to sign a division order.

Question 3

land subdivided after oil lease executed

Answer 3

royalties belong to the owner of the subdivided part of the land on which well physically sits

Question 4

Duhig Rule

Answer 4

applies where conveyance of mineral or royalty interests is greater than 100%. Places loss of title on grantor in middle of three-party chain of conveyancing.

Occurs when full effect cannot be given to both the interest granted and the interest reserved, priority given to the interest granted.

If Duhig rule cannot make the grantee whole, he may have cause of action for damages against grantor for breach of warranty

Question 5

Mineral interest owner

Answer 5

owns the right to economic benefits from the lease, including right to receive bonus payments and delay rentals

Mineral estate is the dominant estate. MIO does not need permission from the surface estate holder before executing any oil and gas lease

Question 6

bonus payments

Answer 6

a one-time payment usually received when the lease is signed, unless the terms specify otherwise. these payments are due when the lease is signed

Bonus payments are considered community property

Question 7

Delay rentals

Answer 7

payments specified in the lease to defer drilling a well

Question 8

royalty payments

Answer 8

share of production free from the cost of production. Begins when minerals are produced and lasts so long as they continue to be produced

Question 9

Habendum Clause

Answer 9

duration of a mineral lease is usually fixed for a definite term of years, called the primary term, and “as long thereafter as oil or gas are produced,” called the secondary term

Primary term: period during which the lessee has the option of maintaining the lease without drilling, by making delay or rental payments

Secondary term: indefinite period of time granting rights to the lessee once production has commenced

Question 10

Production in Paying Quantities (“PPQ”)

Answer 10

whether or not, under all relevant circumstances, a reasonable prudent operator would continue to operate the well for the purpose of making a profit

Question 11

Rights of lessee

Answer 11

owns all of the O&G underneath the tract as well as a working interest in the land, exclusive right to explore, produce, and develop the minerals. Owns Fee Simple Determinable.

Lessee has the implied right to sue the surface as is reasonably necessary to carry out the purpose of the O&G lease

Question 12

Accommodation Doctrine

Answer 12

mineral estate owner must accommodate surface uses, but only if (1) surface owner has a preexisting use of the surface; (2) mineral estate owner has a reasonable alternative method of developing the oil that interferes less; and (3) reasonable alternative is available on the leased tract

Question 13

groundwater

Answer 13

English common law rule that groundwater is subject to the control of the owner of the land under which it flows or is located

Question 14

executive right

Answer 14

right to lease and manage the mineral estate and, as an interest in land, any conveyance generally requires a signed writing (SOF)

Question 15

O&G Lease

Answer 15

conveys fee simple determinable, and will terminate if no production at the end of the time specified as the primary term of the lease

creates a lessor-lessee relationship and the MIO retains the: (1) development right to explore, produce, and develop the minerals, subject to lessee’s working interest; (2) executive right to lease the minerals, subject to working interest; (3) the economic benefit of any lease; and (4) a future interest in all of the oil and gas

Question 16

Working interest

Answer 16

exclusive right to explore, develop, and produce from the property, as well as the obligation to pay the costs of production

Question 17

Non-Participating Royalty Interest (“NPRI”)

Answer 17

right to receive royalty payments held by someone other than the mineral owner. No right to participate in any leasing transaction or receive delay rentals, bonuses, etc.

Question 18

shut-in royalty

Answer 18

defensive clause that can operate to extend a lease when a producing well is shut in for economic reasons. Can only be paid on wells that are capable of producing oil and gas

Question 19

Delay rental clause

Answer 19

authorize the lessee to delay drilling or commencing production during the primary term by paying a stipulated amount.

loose theory of estoppel: lessor can revive the expired lease by accepting a late delay rental payment

Question 20

pooling clause

Answer 20

allows the lessee to hold several tracts under lease by PPQ from just one well located on one of the tracts. Royalties from one well typically is split between the various tract owners in proportion of their share in the entire pool

Question 21

Pugh Clause

Answer 21

states that only part of the leased acreage is pooled, the rest shall be severed unless the lessee drills or pays delay rentals on the remainder

Question 22

dry hole clause

Answer 22

provides that if lessee drills a dry hole, it can maintain the lease by starting to drill another well within the stated time

Question 23

Temporary Cessation Doctrine

Answer 23

common law exception that allows a lessee to preserve the lease in the secondary term without continued PPQ. Excuses a sudden stoppage of the well or mechanical breakdown that is not a deliberate decision of the lessee.

Factors: (1) a short temporary shutdown; (2) which lessee acts diligently to fix, and which is (3) due to a mechanical breakdown or the like

Question 24

Force Majeure Clause

Answer 24

can excuse nonperformance of lease obligations due to circumstances beyond lessee’s control, construed under the plain and ordinary meaning of tis terms

may excuse the performance of certain covenants, it will not excuse the failure to perform a condition of a mineral lease

Question 25

commencement of drilling clause

Answer 25

construed against the lessee and will be enforced based on: (1) objective physical acts done on the premises; and (2) a subjective good-faith intent to pursue drilling operations

Question 26

conveyance of mineral/royalty interest

Answer 26

include: (1) payment; (2) conspicuous language; (3) 14 size font; (4) statutory language

suit can be brought within 2 years of conveyance; must give 30 days notice of intent to sue

get FMV of royalty interest