Oil and Gas

Question 1

Accommodation doctrine

Answer 1

Requires the mineral interest owner and his lessee to accommodate existing surface uses where reasonable alternatives are available for developing the mineral estate.

Question 2

Anniversary date

Answer 2

The date on which payment of delay rentals or shut-in gas well royalties must be made as a condition of keeping a lease. The anniversary date is usually one year from a specified date.

Question 3

Apportionment:

Answer 3

Division of royalties (and sometimes of other lease proceeds) among the owners of interests in the land subject to the lease.

Question 4

Automatic termination

Answer 4

The lessee’s interest terminates by operation of law under a general or special limitation in the lease. At the expiration of the primary term of a lease, if there is no production (or, in some cases, if drilling or reworking operations are not being pursued), then the lessee’s interest automatically terminates by operation of the conditional habendum clause.

Question 5

Bonus

Answer 5

The consideration (usually cash) paid to the mineral owner by the lessee for the execution of an oil and gas lease.

Question 6

Common reservoir

Answer 6

Any oil and/or gas field or part thereof which comprises and includes any area which is underlain by a common pool of oil and/or gas.

Question 7

Continuous drilling operations clause:

Answer 7

A lease clause providing that a lease may be kept alive after the expiration of the primary term and without production if the lessee has initiated and continuously pursued drilling operations of the type specified in the clause.

Question 8

Delay rental

Answer 8

A sum of money payable to the lessor by the lessee for the privilege of deferring the commencement of drilling operations or the commencement of production during the primary term of the lease.

Question 9

Development

Answer 9

The drilling of wells in addition to the discovery of a well on a lease. The drilling of development wells may be required by the express or implied covenants of the oil and gas lease.

Question 10

Dominant Estate Rule

Answer 10

The mineral owner or the lessee under an oil and gas lease is viewed as owning the dominant estate, and the surface owner or lessor is viewed as owning a servient estate. This means that the surface estate is burdened with a servitude or easement in favor of the mineral estate, which enables the mineral owner to use as much of the surface as is reasonably necessary to explore for and produce the minerals under that tract.

Question 11

Dry hole

Answer 11

A well determined to be incapable of commercially producing either oil or gas.

Question 12

Dry hole clause

Answer 12

A lease clause specifying the means by which a lessee may keep a lease alive after the drilling of a dry hole.

Question 13

Duhig Rule

Answer 13

A rule developed by the Texas Courts to deal with the problem of the over-conveyance of fractional interests. The rule is based on breach of warranty and estoppel by deed principles.

Question 14

Easements

Answer 14

Upon the severance of minerals by lease or deed, the lessee or transferee has an easement to use as much of the surface as may reasonably be necessary for exploration and development of minerals.

Question 15

Executive Right

Answer 15

The power to make executive decisions regarding the mineral estate, including the power to lease. The executive right can be severed from the other incidents of mineral ownership.

Question 16

Force majeure clause

Answer 16

A lease clause providing that the performance of the lessee’s covenants shall be excused if the failure of production or performance of covenants is due to causes (usually catastrophic causes) specified in the clause.

Question 17

Forfeiture clause

Answer 17

A clause in an oil and gas lease framed as a condition subsequent, giving the lessor a right of reentry (or power of termination) for breach of the condition. The typical form provides that the lessee is to drill a well or pay rentals or forfeit the lease. This has been interpreted to give the lessor an option to recover the rentals as damages or to declare a forfeiture and cancel the lease when no well has been commenced prior to the Anniversary date during the primary term.

Question 18

Fractional mineral interest (royalty deed)

Answer 18

A deed conveying a fractional or undivided interest in minerals or royalties rather than the entire interest.

Question 19

Implied covenants:

Answer 19

Unwritten promises that generally impose duties on the Lessee and protect the Lessor. Most Courts recognize the following implied covenants:

(1) To protect the leasehold from drainage
(2) To reasonably develop the premises
(3) To produce and market the product
(4) To conduct operations with due care

Question 20

Landowner’s royalty

Answer 20

A share of the gross production of minerals free of the costs of production granted to the mineral owner(s) under a lease as partial consideration for granting the lease.

Question 21

Lessee

Answer 21

The person entitled to drill and operate wells under an oil and gas lease. The lessee pays the lessor a royalty and retains the remainder, known as the “working interest.” The lessee pays all production costs out of his fractional interest.

Question 22

Mineral deed

Answer 22

A conveyance of an interest in the minerals in, on or under a described tract of land. The grantee is given operating rights on the land, and easements of access to the minerals are normally implied unless expressly negated.

Question 23

Mineral interest

Answer 23

The property interest created in oil and gas after a severance by mineral deed or oil and gas lease. Its duration is like that of common law estates, namely, in fee simple, in fee simple determinable, for life or for a fixed term of years. The primary characteristic is the right to enter the land to explore, drill, produce, and otherwise carry on mining activities.

Question 24

Nonexecutive mineral interest

Answer 24

An interest in oil and gas that does not include a right to join in the execution of oil and gas leases and/or the right to develop.

Question 25

Nonparticipating royalty

Answer 25

An expense-free interest in oil or gas, if and when produced, that is carved out of the landowner’s royalty. The prefix “nonparticipating” indicates that the interest holder does not share in bonus or rental payments, nor in the right to execute leases or to explore and develop the property. A nonparticipating royalty owner is entitled to a cost-free share of production without regard to the terms of any lease.

Question 26

Open mine doctrine

Answer 26

A doctrine which developed at common law and which permits a life tenant to continue to sever and appropriate minerals from a mine which was opened before the creation of the life estate.

Question 27

Ownership in place theory

Answer 27

The theory that a landowner owns the oil and gas which was originally in place beneath the surface of her property. Under this theory, the landowner may, by grant or reservation, grant a corporeal or possessory interest in the minerals, separate from the estate in the surface. Despite this theory, title to the oil and gas in place may be lost by legitimate drainage under the Rule of Capture.

Question 28

Partition

Answer 28

The conversion of a concurrent estate (a joint tenancy or a tenancy in common) into:

• Partition by sale—a fund of money, by sale, which is divided pro rata by the tenants;
• Partition in kind—estates are divided and owned in severalty.

Either form of partition may be made by voluntary agreement or by judicial action. In Texas, partition is available as a matter of right.

Question 29

Pooling clause

Answer 29

A lease clause authorizing a lessee to “pool” or join the particular leased premises with other leaseholds for the purpose of creating a single unit.

Question 30

Primary term

Answer 30

The period of time during which a lease may be kept alive by a lessee by virtue of drilling operations on the leased land or the payment of rentals, even though there is no production in paying quantities.

Question 31

Production and marketing covenant

Answer 31

An implied duty in oil and gas leases that, after discovery of minerals, the lessee shall use due diligence in operating the wells and marketing the product.

Question 32

Pugh clause

Answer 32

A clause that protects the lessor if the lessee includes only a small portion of a leasehold in a pooled unit, produces on the pooled unit, and thereby extends the entire leasehold after the expiration of the primary term. In this scenario, the lessee makes only a nominal payment to the lessor (in the form of a royalty payment) and avoids paying delay rentals on the substantial portion of the leasehold that is excluded from the unit. The effect of the Pugh clause is to avoid this result, highly undesirable from the standpoint of the lessor. The Pugh clause severs the un-pooled acreage from the pooled acreage so that, to maintain the lease on the un-pooled acreage, the lessee must either pay delay rentals or drill a well pursuant to the terms of the lease.

Question 33

Reasonable development covenant

Answer 33

An implied duty in an oil and gas lease that obligates the lessee to use due diligence in drilling wells on the leasehold after it discovers oil or gas in that area.

Question 34

Reasonable Prudent Operator

Answer 34

The objective standard generally applied to determine whether a lessee complied with the implied covenants under the oil and gas lease. The standard refers to the scope of the operator’s duties to act in good faith, with economic motivation and taking into account the lessor’s interests as well as his own.

Question 35

Royalty

Answer 35

The landowner’s share of production, free of the expenses of development

Question 36

Rule of Capture

Answer 36

The legal rule of non-liability for (1) causing oil or gas to migrate across property lines; and (2) producing oil or gas that was originally in place under the land of another landowner, so long as the producing well does not trespass.

Question 37

Savings clause

Answer 37

Clauses in an oil and gas lease that keep the lease alive in the absence of production. The theory underlying savings clauses is that they operate as substitutes for production.

Question 38

Secondary term

Answer 38

The term of the oil and gas lease after the Primary term (i.e., after production has been established).

Question 39

Shut-in gas well clause

Answer 39

A lease clause that authorizes a lessee to pay a shut-in gas well royalty and thereby keep a lease alive without actual production. The clause applies when and if a well has been drilled that is capable of producing gas in paying quantities, but is shut-in, usually because there is no market.

Question 40

Shut-in royalty

Answer 40

A payment made under a shut-in gas well clause, when a gas well that is capable of producing in paying quantities is shut-in for lack of a market.

Question 41

Working interest

Answer 41

A cost-bearing interest owned by the lessee, which gives the lessee the exclusive right to develop the property for oil and gas at its sole risk and expense.

Question 42

Loose Theory of Estoppel

Answer 42

If a lessor takes objective actions that suggest acceptance of a late delay rental (such as cashing the check), and the lessee relies on those acts to its detriment, then the lease may be revived under a loose theory of estoppel.

Question 43

Temporary Cessation Doctrine

Answer 43

Under the temporary cessation doctrine, if a mechanical breakdown results in a short, temporary shutdown in production, the shutdown will not cause the lease to terminate as long as the lessee acts quickly to repair the problem.

Question 44

Who has duty to plug an abandoned well

Answer 44

1. Operator
2. One with a working interest
3. Railroad commission

Question 45

Divison Orders

Answer 45

Division orders—outlines royalty payments and protects lessees who make payments consistent with the D/O

• Cannot contradict or change the lease
• If terms are legal, then lessee may withhold royalties from parties who refuse to sign

Question 46

Habendum Clause

Answer 46

i. Primary term—–no production required

ii. Secondary term—if, at the end of the secondary term:
1. Producing well—–lease continues indefinitely
2. No producing well—lease terminates automatically UNLESS

a. Lessee pays timely delay rentals
i. Estoppel—–if lessor accepts late rental, then lease preserved

b. Temporary cessation doctrine – lease preserved if brief stoppage/breakdown AND the lessee acts quickly to restore

Question 47

Dry Hole Clause

Answer 47

Extends lease if drilling results in dry hole and the lessee pays delay rentals

Question 48

Operations Clause

Answer 48

Extends lease if operations have begun