Oil and Gas

Question 1

The Rule of Capture and Limitations

Answer 1

The Rule of Capture: The basic default rule for mineral rights in Texas is the rule of capture. The rule of capture is a rule of nonliability for causing oil and gas to migrate across property lines resulting in drainage of oil and gas from under another persons land
- If you drain someone else’s land they do not have the right to share in profits or seek damages, to protect themselves they should drill their own wells

Limitations to the Rule of Capture:
The rule of capture is limited by the doctrine of Correlative Rights which means that 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 (Ex: a well blowout)
- Illegally drained oil and gas (Ex: A violation of a Texas government order)
- Stored Gas (ie gas produced from one field and then reinjected into a depleted underground reservoir for storage
IF these are violated you can sue for illegal drainage or damages (stored gas the burden to show that it is stored and not native is on the storer)
Stored gas is personal property

Question 2

Fee Simple Interest and Severance

Answer 2

A fee simple owner of property owns both the surface and the minerals below the surface. A property owner may transfer less than her entire interest through severance
- Fee simple in surface estate, and who ever has mineral estate would have fee simple interest in mineral estate

Question 3

Mineral Interest Rights

Answer 3

The Development Right: the exclusive right to explore, produce and develop the minerals (ex: would ask mineral right owner to do seismic exploratory work on surface, not surface owner)
The Executive Right: The right to lease the minerals
The Economic Benefits:
- Bonus: An upfront payment for signing the lease (usually based on dollars per acre leased)
- Royalty: A fractional share of any oil and gas produced that is free of the costs of production (usually 1/8)
- Delay Rentals: Compensation for deferring drilling during the primary term of the lease (also based on acreage)

Question 4

The Dominant Mineral Estate and Accommodation Doctrine

Answer 4

The mineral estate is dominant when the mineral estate has been severed from the surface estate. The owner of the mineral estate can use the surfaces as is reasonable necessary to develop the oil and gas
The Accommodation Doctrine
Requires the mineral owner to accommodate surface uses but only under the following three conditions:
1. The surface owner has a preexisting use of the surface
2.The mineral estate owner (or lessee) 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 (Alternative method cannot be unreasonable costly)
3. The reasonable alternative is available on the leased tract

Question 5

Working Interest/ Royalty Interest

Answer 5

An oil and gas lease conveys a deed to a fee simple determinable: The lease may last forever (ie as long as oil or gas is produced) but it may terminate if there is no production at the end of a specified time. An oil and gas lease creates 2 sets of interests

1. The 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
2. The Royalty Interest: Gives the lessor a share of the production that is free of costs of production

Ex: IF mineral owner grants an oil and gas lease to Big Oil for 10 years and as long thereafter as oil and gas is produced
Big Oil- Fee Simple Determinable, working interest and contract obligations
Mineral Owner- Possibility of Revertor (future interest), Economic benefits under the contract (bonus, royalties, delay rentals)
- Mineral Owner and Big Oil are lessor and lessee

Question 6

Nonparticipating Royalty Interest

Answer 6

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 a Nonparticipating Royalty Interest. The Nonparticipating Royalty Interest owner may not participate in any leasing transaction.
- Have no rights to contract promises, bonus or delay rentals

Reverse way: I deed you ½ mineral interest in Black acre but retain the executive right (right to lease). You have nonparticipating royalty interest and ½ of all economic benefits (bonus, delay rentals) but may not participate in any lease transaction

Words of Conveyance for Nonparticipating Royalty Interest

• A 1/16 Royalty on Blackacre= 1/16 of all production
• 1/16 of royalty on Blackacre= 1/16 of my royalty ex: if it was 1/8 you would get 1/16 of 1/8

Question 7

Concurrent Ownership/ Co-Tenancy

Answer 7

Every Co-Tenant 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 profits from production
Profits: Revenues minus Cost
Costs: include all reasonable drilling and operating costs on productive wells. However dry hole costs may not be assessed against the unleased cotenant
- In most instances the leased cotenant gets money but the unleased usually gets out of the revenues minus cost so they will be owed nothing
Ratification: The unleased co-tenant can always ratify the underlying lease. However, once ratifies, he cant change his mind and seek a profits share as an unleased co-tenant
- Only get to share if the co-tenant leases the whole interest subject to your interest. If he just leased his interest (ex: his ¾) you would not be able to ratify.
- If you only have ¼ of the lease to give they are unlikely to lease from you because your co-tenant would get ¾ of everything
Partition: A cotenant has an absolute right to partition property in a juridical proceeding. Courts favor partition in kind (dividing property) over partition by sale unless dividing the property is inequitable (Ex: mineral reserves distributed unevenly)
- If you have a smaller interest in the land and your co-tenant won’t lease with you (so no one likely to touch your lease) you can ask fro partition in kind

Question 8

Successive Ownership/ Life Tenant and Remaindermen

Answer 8

Leasing: Neither the life tenant nor the Remainderman can grant a valid oil and gas lease without the joinder of the other
- If one trys, the other can seek an enjoinment to keep the other from developing the estate (under waste theory)

Accounting: Once a valid lease has been entered into, how are lease benefits to be divided if the life tenancy grant is silent?
1. Life tenant gets current income and interest, including 100% of delay rentals plus interest on bonus and royalty
2. Remainderman gets principal of bonus and royalty (but does not take possession until life tenant dies)
Exceptions:
Agreement: The life tenant and remainderman can opt out of the default rules by agreeing otherwise
Open Mine Doctrine: Where a lease was in place prior to the creation of the life estate, the life tenant gets all benefits under the existing lease
- Cannat re-lease once this lease is up, applies to leases already in place when life tenancy is created

Question 9

Accounting when Life Tenancy is Created by Trust

Answer 9

The trust act applies of the life estate was created in trust, and trust is silent about how the receipts are to be allocated.
Under 2004 Trust Act Amendments default it:
- Life Tenant: All nominal delay rentals plus 85% of all other proceeds (royalty, bonus, shut- in royalty, production payments, and delay rentals that are more than nominal
- Remainderman: 15% of all proceeds (remains in escrow until life tenant dies)

Question 10

Mortgagor/ Mortgagee

Answer 10

First lien in time, first in right

1. Mortgagee records before lease executed: lessee’s interest will be subject to the mortgage lien
   - When bank forecloses, oil and gas lease will be destroyed but bank must sell surface assets first, oil and gas’s best option it to try and purchase lease at foreclosure sale
2. Oil and Gas lease is recorded before the mortgage: Lease cannot be foreclosed against because the mortgage did not include the minerals as an asset belonging to the mortgagor and mortgagee was on notice of the lease
3. “Marshalling” the assets: at foreclosure the mortgagee must sell the surface assets first to try to satisfy the loan before selling the mineral estate

Question 11

Trespass in Oil and Gas

Answer 11

1. Ordinary Trespass: When the lease expires but the lesee stays on the tract, lesee is a trespasser
   Remedy: Injunction and damages (including possible punitive damages)
2. Slant Well Drilling: Bottoming a well underneath someone else’s tract
   Remedy: Injunction and damages (including possible punitive damages)
3. Drilling Dry Well: Damage to the speculative lease value. If a wrongful lessee enters and drills a dry hole, the lessor loses the lease value that eh could have received before the world found out the land was dry
   Remedy: Lost Bonus
4. Geophysical or Seismic Trespass: When someone on adjacent land explores lessor land using seismic vibrations and gains information lessor mineral potential
   Remedy: sue in assumpsit- the market value of a contract for the right to do seismic exploration

Secondary recovery operations are not a trespass
Ex: Because production has decline they repressure the field by injecting saltwater. You refuse to participate and some of the salt water invades your tract and causes one of your wells to drown out. Might be able to sure for nuisance for last value of oil and gas, but not a trespass for public policy reasons.

Question 12

Trespass Damages

Answer 12

Good Faith: If the trespasser had an honest and reasonable belief in the superiority of his title, he will get a credit for the costs incurred in production if the costs benefited the rightful owner (credit for cost incurred to get gas/oil)
- No credit for cost of dry hole, no benefit from owner
Bad Faith: A bad faith trespasser will be liable for the gross value of production from the well

Question 13

Slander of Title

Answer 13

To prevail in a tort action for slander of title, P must prove:
A. Publication of a false claim of title to the property (including false claims of a valid leas)
B. With Malice and
C. Loss of a specific sale or leasing opportunity by the rightful owner because no buyer wanted to purchase property with disputed title
Damages: measure by the difference bwtween the market value of the lease at the time of the slander and its value at trial with the could removed

Question 14

Adverse Possession

Answer 14

Key issue is whether and when the mineral estate was severed from the surface estate

1. Possession begins prior to severance: the adverse possessor gets title to both the surface and the mineral estate
2. Possession beings after severance: the adverse possessory gets title to the surface estate only. To get title to mineral estate, the adverse possessor must establish a separate action of possession
   - If Adverse Possessor enters property and then 4 years later true owner conveys mineral fee, Adverse Possessor can still get mineral estate because it was not severed when he began Adverse Possession

Question 15

The Granting Clause

Answer 15

Purpose: The granting clause sets forth the rights given by Lessor to Lessee, and a description of the property
Mother Hubbard Clause: The first paragraph usually contains a clause to pick up small strips of land not specifically included in the granting clause because of mistakes in surveys or description
- But a grant to Blackacre will not give you rights in the 400 acre Whiteacre. It’s only or small strips of land not large contiguous tracts

Question 16

Habendum Clause

Answer 16

Production in paying quantities
Purpose- The habendum clause sets for the duration of lessee’s interest in the premises. Typically there is:
- A primary term, which is a fixed period during which lessee has no obligations to conduct drilling operations and
- A secondary term, which is indefinite but is normally linked to production
- Discovering is not production, If well not complete then that is not production
Ex: Lease shall remain in force for three years form this date and as long thereafter as oil and gas is produced from said land
- 3 year period: Primary term/ as long thereafter: Secondary Terms

Question 17

Lease Construction

Answer 17

Oil & Gas leases are construed against the lessee, unlike typical contracts – Oil & Gas leases are usually drafted by the oil company

Question 18

Production in Paying Quantities

Answer 18

Production means production in paying quantities (PPQ). The formula for production in paying quantities is revenues minus lessor royalty minus operating costs.
- Drilling costs are not deducted, Operating costs and taxes count

Question 19

Temporary Cessation Doctrine:

Answer 19

Once production in paying quantities 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. Key Factors:
- A short temporary shutdown; which lessee acts diligently to fix; that is due to a mechanical to a mechanical breakdown or the like
EX: Big Oil drills a good well that produces paying quantities past the primary term. The well gets clogged up with mineral deposits and ceases to produce. Big Oil use the temporary cessation doctrine?
Yes, if they did everything or reasonably prudent operator would have done
- But a deliberate decision to shut down will probably not count

Question 20

The Marginal Well Doctrine

Answer 20

Some wells only produce the production in paying quantities during some months of the year. The test for a marginal well is whether a reasonably prudent operator would continue to operate the well to make a profit, not merely for speculation.
- Ex: For 6 months of the year the well doesn’t meet production in paying quantities but it has such a good other 6 months that the yearly average is $800, a reasonably prudent operator would probably continued production

Question 21

Doctrine of Repudiation

Answer 21

An equitable rule that can extend the lease if the lessor obstructs the lessee from developing the lease

Question 22

Delay Rental Clauses

Answer 22

These clauses authorize lessee to delay drilling or commencing production during the primary term by periodically paying a stipulate amount to the lessor.
Unless vs. Or Delay Rental Clauses: Whether the failure to pay delay rentals automatically terminates the lease depends on the language used

Question 23

Unless delay rental clause:

Answer 23

If the clause states: the lease shall terminate unless lessee shall pay or lessor the sum of $– in delay rentals” then the clause creates a condition of the lease (ie the fee simple determinable)
Remedy: the lease terminates automatically (condition of lease)

Question 24

Or delay rental clause:

Answer 24

If the clause states “lessee agrees to either drill a well or pay delay rentals” then the clause only creates a covenant between lessor and lessee and the lease does not terminate automatically
Remedy: The lessor must sue for breach of contract; damages would be equal to the unpaid amount of rentals

Question 25

Late Delay Rentals:

Answer 25

If lessor accepts a late delay rental payment, the lease comes alive against based on a loose theory of estoppel. IT usually requires some proof of an act by lessor (ie cashing check) and (ii) upon which lessee has detrimentally relied

Question 26

Notice of Assignment Clause:

Answer 26

Some leases may contain a clause that allows one or both parties to assign their rights under the lease, but that no change in ownership is binding on the other party until a certain time after notice of the assignment
- But if you don’t give notice of the assignment and then you cash a late delay rental check its only effective to your lease, not the other person who didn’t accept the late delay rental check, that person would become a co-tenant who could now lease, drill or take ½ profits

Question 27

Commencement of Drilling Clause

Answer 27

IF the delay rental clause states that “if operations for drilling are not commenced on or before (date), the lease shall terminate unless” lessee pays delay rentals, commencement depends on two factors

1. Objective physical acts done on the lease premises (ie building a road, cutting down trees, or drilling a water well)
2. Subjective good faith intent to pursue the drilling operation
   - Can happen even if its one day before lease is to end

Question 28

Defensive or Savings Clauses

Answer 28

To hold a lease beyond the primary term the lessee needs production in paying quantities. If delay rentals are not holding the lease, then the lessee must satisfy a defensive or savings clause

Question 29

Shut-In Royalty Clause

Answer 29

A shut in royalty clause provides that when a well ceases production in paying quantities due to market conditions, the lessee can hold the lease by paying shut-in royalties

Question 30

Dry Hole Clauses

Answer 30

If lessee drills a dry hold, she can maintain the lease by starting to drill another well within the stated time

Question 31

Continuous Operations Clause:

Answer 31

Covers the situation where at the end of the primary term operations have commenced, but there was not yet actual production

Question 32

Cessation of Production Clause:

Answer 32

Provides that if a well ceases producing, Lessee can maintain the lease by commencing repairs within the state time
- Lessess can tack their savings clauses together over time.

Question 33

Force Majeure Clause:

Answer 33

Excuses performance or extends the time for performance because of unforeseeable factors beyond lessees control
- Look to see if it covers only covenants or conditions
Ex: Force Majeure only applies to drilling or producing, it won’t operate to apply to a late delay rental because of a hurricane

Question 34

Pooling Clause

Answer 34

A pooling clause allows Lessee to hold several tracts under lease with production in paying quantities from just one well located on one of the tracts. The royalty from the one well is typically split between the various tract owners. Courts require that the Lessee exercise pooling in good faith
- Proportioned by how many acres are in pool. Ex: 1/8 royalty and you have 40 acres. Someone else has 600 acres. You get 40/640 of 1/8
- What if they only pooled 15 of your 40 acres? Lease kept alive as to all 40 acres and your share is cut down to only the acres pooled (Ex: 15/615 of 1/8)
Pugh Clause: If only part of the lease is pooled the rest shall be severed unless lessee pays delay rentals or frills on remainder

Question 35

Pooling Clause and Nonparticipating Royalty Interest

Answer 35

The executive right owner has no power to pool the nonparticipating interest even though he has the power to lease the nonparticipating interests
Ex: IF marge sells a nonpaticipating royalty interest to Bart and then 15 acres of her 40 acre tract are pooled with a 600 acre tract
- If Big Oil drills well on her 15 acres: Bart would get ½ of 1/8 of all production, he is not bound by the pooling agreement
- If Big Oil drills on the other 600 acres: Bart would get nothing, no benefit of pooling
- Bart could ratify pooling agreement and get royalty of ½ of 15/615 of 1/8

Question 36

Royalty Clause / Cost-Free Nature of Royalties

Answer 36

The typical lease states that royalties are to be paid based on production “at the well” which means royalties are free of the costs of production.
Royalties however are not free of post production costs such as transportation and processing. Absent contrary language in the lease, Lessors must share post production costs in proportion to their royalty interest

Question 37

The Royalty Clause and Market Value

Answer 37

Many leases provide for royalty payments based on the “market value at the well” where the minerals are sold or used off-premises.
The market value of oil or gas is defined as the price that similar minerals currently sell for in the spot market at the time the oil or gas is produced. Therefore the amount of royalty can differ from the factional amount of what the minerals are actually sold for under a long-term contract

Question 38

Division Orders

Answer 38

A division order tells the Lessee how to divide the proceeds from the well among all the various lessor, nonparticipating royalty interests and working interest owners. The Lessee prepares the division order for each owner if the owners sign the division order as correct, the Lessee then pays the owners their checks on the basis of the division order. Division orders are not deeds or contracts but they have their own set of laws governing their legal effect

• Under the common law division orders were binding until revoke, even if the provisions differed from the lease language. A Lessor was required to revoke an inconsistent division order to receive the correct payments going forward.
  
  • You can always revoke an incorrect division order but they are binding until revoked and once revoked you cannot recover past under/nonpayments

1991 Division Order Act: Applies to Division Orders executed after 1991

1. Division orders are binding until revoke (cant revoke a mistaken division order, but cant get past underpayments
2. A division order can never contradict a lease. IF its does it is invalid, if it was never valid then a royalty interest owner should get past underpayments
3. A division order can clarify a royalty term in a lease (close to contradicting)
4. Lessee may withhold royalty payments without interest if (i) there is a title dispute or (ii) a royalty interest owner refuses to sign a standard division order that contains statutorily authorized terms, including effective date, description of the property, fractional interest, or provisions for the valuation of settlements
5. Lessee may not withhold payments to a royalty interest owner who refuses to sign a division order because it contains items not authorized in the statute. This policy is to protect royalty interest owners from division orders that might attempt to amend the lease unilaterally

Summary: A division order is binding until it is revoked, It can clarify the methods of paying a royalty but it its not binding to the extend that it changes or contradicts a lease (except in market value cases)
- So an error that contradicts deeds would be ok, only applies to leases

Question 39

Standard of Performance:

Answer 39

Reasonably Prudent Operator: oil and gas leases contain an implied covenant that Lessee acts as a reasonably prudent operator. This is not a fiduciary standard, and operators do not have to drill and produce if they would not make a profit. A lessor would have the burden to prove that the Lessee can recover oil and gas at a profit (including the costs of drilling, not a the production in paying quantity standard)

Question 40

Implied Covenant to Protect against Drainage:

Answer 40

The lessee must act as a reasonably prudent operator to protect the leased premises against drainage. Lessor must prove three elements
1. Substantial drainage
2. Lessee could drill a profitable well to offset drainage and
3. Damages
- Same standard applies to a common lessee
To Prove Profitability: Expected revenues would exceed drilling and production cost (that it would be profitable for them to drill
Remedies: damages in the amount that you would have received had the company built and offset well or conditional decree telling company to drill or forfeit lease

Question 41

Implied Covenant to Market:

Answer 41

Lesee has an implied covenant to market the oild and gas
1. Within a reasonable time and
2. At the best price realizable
The Lessees actions in marketing are judged by the reasonable prudent operator standard.
Ex: Get a lower price on a given day then other people, paying a shut in royalty when other operators are selling for modest profit

Question 42

Implied Covenant to Develop

Answer 42

To develop an oil and gas lease. The test for breach of the covenant is whether the lessor can prove a reasonable expectation of profit from additional drilling, regardless of where the proposed well is located (high burden to meet)
- NO implied covenant to explore, develop may be broad enough to required exploration but not implied covenant to explore

Question 43

Executive Right and nonparticipating interest and right owed

Answer 43

Executive Right
Nonparticipating interest owners such as nonparticipating royalty interests and nonparticipating mineral interest rely on the executive right owner to realize income from their interests. Executive right holders duty depends in part upon their conduct
Utmost good faith and fair dealing: is the usual duty owed to nonparticipating interest owners. The executive right holder must act with due regard for the nonparticipating owners and be willing to execute a lease on the same terms as a reasonably prudent landowner would if there was nonparticipating interest
Fiduciary Standard: when the executive engages in egregious self-dealing courts will impose a fiduciary standard, meaning he executive must subordinate his interest to those of the nonparticipating interests.
Remedies: Cancellation of the executive right, cancellation of certain leases, and damages (actual (potential lease price) and exemplarily)

Question 44

Surface Owners v. Mineral Owners Test

Answer 44

Meaning of Minerals
What about other minerals that are near the surface and can be strip-mined (destroy surface)
Surface Destruction Test: Pre 1983
Near Surface minerals belonged to the surface estate, if any reasonable method of extracting the substance would destroy the surface, it belongs to the surface estate.
Ordinary and Natural Meaning Test: After 1983
Whether the substance is a mineral in its ordinary and natural meaning.

Steps to consider if lease is silent or ambiguous regarding ownership of substances:

1. Is the substance one of the nine that belong to the surface as a matter or law:
   - Building stone, limestone, caliche, surface shale, sane, gravel, water, near-surface lignite and iron ore
2. Then apply whatever test based on date. Based on date of conveyance of separation of surface and mineral estate
   - Keep in mind test is if any reasonable method would destroy surface. So even if there is only one method that does and 3 that don’t it would still fail based on the one test that would destroy surface

Question 45

The Nonapprotionment Rule:

Answer 45

When property is subdivided after an oil and gas lease has been entered into, the owners of the subdivided interest are not entitled to apportioned royalty payments. They are entitled however to an apportioned delay rental

• Remember that surface estate conveyed is subject to Big Oils reasonable use of surface and possibility of reverter for mineral rights. You are also entitled to royalties IF the well is built on the acres you were conveyed.
• Wouldn’t be able to argue that Big Oil has breached its covenant to develop by not drilling on your acres. Also wouldn’t be able to argue that there is a breach of covenant against drainage because covenant protects 40 acres as a whole

Question 46

Community Lease:

Answer 46

where two or more contiguous property owners enter into a single lease covering all of their property. Community Lease has the effect of an implied pooling agreement
- If you convey acres with someone else in a single lease. If lease is silent on royalties distributed, shares are in proportion to ownership interest. (acres owned/ total acres)

Question 47

Fractional Interest Problems and Duhig Doctrine

Answer 47

• Deeds are construed against Grantor (leases are construed against lessee). IF a deed is ambiguous, Grantor usually loses
• The “four corners” rule requires that courts try to harmonize all the clauses in a deed to give effect to each clause
• Courts read the terms of deeds very literally. EG there is a difference between the land conveyed and the land described

Ex: You convey a ½ mineral interest in Blackacre in the granting claues of the deed to Stan but the deed then describes all of the land in Blackacre and reserves you one-half of all royalties in the land descried
- You would get ½ of 1/8 based on land description not ½ of ½ of 1/8 (interest conveyed)

Duhig Doctrine: In a three or more party chain of conveyances in which the Grantor seemingly conveys more than 100% of the mineral or royalty interest the Grantor will bear the loss.
- If you only had ½ to give and you give someone an interest reserving 1/2, you get nothing and the other person gets ½

Question 48

Mineral Interest and Royalty Interest Language

Answer 48

Royalty Language: Oil, gas and other minerals produced and saved
Mineral Language: Oil, gas, and other minerals in, on or under (Blackacre)
Mixed Language: Mixture of these terms indicates that a mineral interest is created
Ex: ½ of all oil and gas in, on or under and that may be produced = Mineral

Question 49

State Regulation

Answer 49

Policy: The state of Texas through the railroad commission regulates oil and gas production to serve three public objectives

• To prevent waste and maximize recovery of oil and gas
• To protect correlative rights by giving all owners in a common reservoir the opportunity to recover their fair share of the minerals
• To protect the environment

Methods: The Railroad commission has 3 major ways for preventing waste and protecting correlative rights:

• Drilling permits and Spacing Rules
• Prorating Rules
• Mineral Interest Pooling Act and compulsory Pooling

Question 50

Drilling Permits and Spacing Rules

Answer 50

A drilling permit is required before any well can be drilled. The states spacing rule requires that the applicant have a minimum of 40 acres to drill.
Exceptions: A small tract owner can get an exception to the spacing rule if:
- Confiscation (ie drainage) is proven and
- Subdivision: The small tract was subdivided by deed before oil and gas was discovered in the area or before the land was leased. Subdivisions into small tracts that occur after oil and gas is discovered or after the land was leased are voluntary subdivisions and are not entitled to a confiscation exception

Question 51

Prorating

Answer 51

The Railroad Commission regulates the maximum amount of oil and gas that wells can produce- both to prevent waste from the premature dissipation of reservoir pressure and to protect correlative rights (ie to assure that each operator or interest owner has the chance to receive his fair share of production)

Question 52

The Mineral Interest Pooling Act

Answer 52

In fields discovered after March 8 1961 the Railroad Commission can force owners to pool ie share production from a reservoir. This compulsory pooling power preempts the rule of capture. It operates much like the default rules for allocating royalties in voluntary pooling agreements, with each interest owner getting a share roughly proportional to the relative size of her interest
Rules that Trigger:
- Fields discovered after March 8 1961
- Fair and Reasonable offer: owners seeking compulsory pooling under mineral interest pooling act must first make a fair and reasonable offer to pool voluntarily.
- Fairness always judged from the standpoint of the party being compelled to pool at the time of the offer
Railroad commission cannot compel pooling on its own motion, only private parties can apply for pooling
Mineral Interest Pooling Act cannot be used to pool cotenants, only separately leased tracts

Question 53

Relinquishment Act

Answer 53

Applies to state-owned land sold to private parties between 1895-1931
The state of Texas owns the minerals and the grantees own only the surface rights. They do have the executive rights to lease the minerals on behalf of the state and to share in the economic benefits of the lease equally with the state. The grantees (and successors in interest) owe a fiduciary duty to the state)

Question 54

Plugging Wells

Answer 54

Abandoned and improperly plugged wells pose serious hazards to the public and to the environment. Statutes require that operators plug their wells property, but sometimes operators for bankrupt or otherwise fail to discharge this responsibility.
Duty to Plug: The Railroad commission will enforce the duty to plug in the following order:
1. Operator: The first line of legal responsibility is on the operator, defined as the person responsible for the physical control of the well at the time it is about to be abandoned.
- Only person in control at time it is abandoned (if Big Oil had well and then lease expired and Little Oil owns land, Big Oil still liable for plugging well)
2. Non-operator who owns a working interest. Thus, non operators may have liability for well-plugging costs even though they never had physical control of the well
3. The state of Texas. If neither an operator not a non-operator with a working interest can plug the well, Texas will be responsible. The State has established an oil filled cleanup fund that can be sued to plug abandoned wells and to clean up pollution

No duty to plug is imposed on mineral interest holders, royalty owners and other interest persons who do not have a working interest in the well