Oil and Gas II Flashcards
Bank Draft Process
Lease and bank draft viewed as one transaction in Texas
i. Lessee gives bank draft to lessor (typical in mail w/ initial offer)
ii. Lessor signs and gives bank draft back to lessee
iii. Lessee approves bank draft payment to lessor
Third Party Standing to assert breach of contract
a third party can assert rights as a third party beneficiary to a contract it did not sign when the primary parties entered into the contract with the clear and express intention of benefitting the third party
Negligent Misrepresentation
Must represent an existing fact.
1. A promise of future conduct is not enough.
2. A promise to do or refrain from doing a future act does not constitute an existing fact.
Promissory Estoppel
Does not create a contract where none existed before. It will however prevent a party from insisting upon his strict legal rights when it would be unjust to allow him to do so. It requires: (1) a promise;(2) foreseeability of reliance thereon by the promisor;(3) substantial reliance by the promisee to his detriment.
Condition Precedent
Unless a clause has a pretense of “subject only to”, “on condition that”, “provided that”, “if” etc., treat the clause as a covenant.
Statute of Frauds
contracts for sale of real estate must be in writing and signed by the person to be charged. Additionally, the writing must furnish the data to identify the property with reasonable certainty.
Parole evidence
may be used to explain or clarify the written agreement, but not to supply the essential terms.
Apparent Authority
When a principal either knowingly permits its agent to hold himself out as having authority or acts with such a lack of ordinary care as to clothe its agent with indicia or authority.
1) Only the principal’s conduct is relevant for determining if apparent authority exists.
2. Silence may constitute a manifestation when, in light of all the circumstances, a reasonable person would express dissent. Failure to express dissent will be taken as a manifestation of affirmance.
Commencement of Operations
Unless the clause specifically requires otherwise, commencement of operations on a n adjacent tract for slant drilling will be commencement of operations on the intended bottom-hole lease
License
When slant drilling, a company needs to get a license from both the surface owner of the drill location and the mineral owner who’s subsurface real property the wellbore will trespass through before hitting the bottom-hole
Rule 37
Rule 37 suits do not stop or suspend operations for slant drilling that required a Rule 54 (directional drilling) permit. This rile is to determine if the operator can produce a tract smaller than a field allowable.
Rule 54
Rule 54 (Directional Drilling) is issued when: (1) conditions on the surface of the ground prevent or unduly complicate the drilling of a well at a regular location prescribed by the well spacing rules in effect; or (2) where it can be shown to be advantageous from the standpoint of the operator to drill more than one well from the same surface to location to reach a spot where several wells would normally be drilled as prescribed by the well spacing rules there in effect.
(Rule 54 only affects surface rights and has no notice requirements, so Humble didn’t need to know what was going on with these permits.)
Anti-dilution Provision
Unless otherwise stated, the anti-dilution provision will apply to both vertical and horizontal wells. Compliance with field wide rules does not preclude application of anti-dilution provision.
Damages
The rule of capture does not apply to horizontal wells. Plaintiff/rightful owner can only receive damages resulting from production from his land because the pools were invalid.
General Rule for Accommodation Doctrine
i) Existing surface use; that
ii) would be substantially impaired by the mineral lessee’s activity; and
iii) mineral lessee has a reasonable alternative available on the leased premises.
How much of the surface can the mineral estate use?
As much as is reasonably necessary to develop the minerals
Who holds burden of proof?
Surface Owner
Getty
created accommodation doctrine
Sun Oil v. Whitaker
Mineral estate is still dominant so a lessee cannot be forced to go off lease to not impair existing surface use. Alternative must be on leased premises.
Davis
Only when conduct of the lessee destroys or substantially impairs the surface owner’s use of the surface does the question arise as to whether that conduct is reasonably necessary.
Genco
Planned future surface use can trigger accommodation doctrine
Merriman
Look to see if the specific surface use is impaired, instead of if the surface user has any industry use available that would not be impaired by the mineral owner’s activity. Surface owner is also not required to show that they have alternatives for accomplishing their original surface use. Surface owner’s other land doesn’t matter.
Basics of Contract Construction
i) Documents pertaining to the same transaction should be construed as one contract.
ii) An agreement to transfer leases to be determined in the future is not a sufficient “meeting of the minds”
Nucleus of Description
If a property description contains a nucleus of description, parole evidence can be used to explain parts of the description. Property must be identifiable to a reasonable certainty.
1) A recital of ownership (ARTI) does provide a nucleus of description.
2) Example: “My property in Scurry County.” This is okay even if grantor owns multiple properties within specified area.
Essential terms of a contract
(1) time of performance;
(2) the price to be paid; and
(3) services rendered.
Failure Rate
If over 10% of the land failed to meet the deep rights description, the contract would typically be void only where it is sold by a tract. If the land is sold on a per acre basis, and has adjustment clause, this can be overcome.
Will a RRC Lease ID number suffice as a nucleus of description?
No
Partial Performance
To make an otherwise invalid assignment enforceable it needs:
(1) payment of consideration;
(2) possession of property; and
(3) permanent and valuable improvements to the land.
Promissory Estoppel Recap
Must have a promise to execute an agreement that would satisfy the stature of fraud. It must be a particular agreement that has already been prepared.
Partnership
Intent to form partnership not required. Factors that indicate partnership include sharing profits, joint participation and control of the business, and contributions (monetary or property) to the business. Showing that real estate interest is partnership asset must satisfy SOF.
Void Documents
Agreements that are not enforceable on their face as a matter of law because of illegality, lack of capacity, or impossibility.
1. It is presumed that a party knows the contents of documents he signs, including all incorporated references.
2. The void document will not be revived by subsequent assignments, but because the assignments specifically incorporated all the parts of the void document they were enforceable on their own.
What does a wellbore assignment actually convey?
i. “Insofar” is a limitation of the grant.
ii. Wellbore Assignments- narrowest form of assignment. No leasehold rights are conveyed outside the wellbore, and to no depth below where the wellbore currently sits. However, a wellbore assignee could rework the wellbore and produce a depth already achieved, but it could not extend the wellbore horizontally.
iii. The surface area conveyed is that only reasonably necessary to operate the well.
How can an overriding royalty interest be saved from a wash out?
Extension or renewal clause will hold an ORRI past the termination of an OGML if the subsequent lease is: (1) New lease taken during primary term of old lease; and (2) terms are substantially similar. Or the new lease is taken through bad faith/fraud/collusion.
Exception to wash out saving:
When a previous lease has expired and the terms are not substantially similar, the ORRI will not be attached to the new lease through the extension clause.
Time factor
Take into account time, in Sunac, it was one year between the first lease and second lease.
Partial Termination
If a lease contemplates partial termination, a court will favor partial termination. If express language in the lease provided otherwise, the ORRI would not have been extinguished.
Compensatory Royalty
Alternative of drilling off-set wells. It is a royalty paid to a landowner whose land lies adjacent to a producing well, but on whose land no well has been drilled. Intended to compensate the landowner for losses suffered due to drainage due to production on adjacent property.
When can a contractual performance be excused?
When a government regulation or law makes performance impossible. However, if the regulation deals with non-oil & gas related matters id will not relieve the obligor from their duty.
Do royalty owners have standing to sue?
Yes. A royalty interest runs with the land and therefore standing travels with the interest owner. The fewer interest affected by drainage, the stronger the claim.
Pooling ORRI
An assignee has the right to pool an ORRI belonging to the assignor if the instrument of assignment is silent on the matter, especially if the lease authorized pooling without the consent of the lessors.
Determinable Pugh Clauses
When a disjunctive “or” is used to put the pugh clause in effect at the end of the primary term or after the end of continuous development, it triggers after the latter of the two options. Courts will not read an “and” into the clause.
Pugh Clauses Generally
Pugh clauses sever unpooled acreage from pooled acreages.
Horizontal Pugh Clauses
pooled acreage in a certain formation under production will not hold others
Vertical Pugh Clauses
acreage laying outside the pooled unit will not be held by production in the pooled unit.
Indivisibility Doctrine
Operators do not have to pay shut-ins as long as one well is in production. Also applies to all savings clauses.
Covenant to Develop
If land is split into multiple parts, substantial development will hold all parts.
Covenant to Develop in 5th Circuit
Implied Covenant places burden on each tract holder in a lease to develop his own acreage independent of the others.
Miscellaneous Issues
i. Lessees want to be able to freely assign leases
ii. Lessors may want to restrict assignability
1. Requiring lessor consent absent providing a remedy for breach has been held to be unenforceable (lessor could have conveyed all of his interest in the land and still have retained the power of consent)
2. Where there was a remedy for breach, however, it has been upheld (liquidated damages; termination of lease if lessee fails to comply with a “notice” requirement in lease)
