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)
Support Agreements
Purpose is to spread risks/benefits among parties, who are interested in the same prospect
Dry Hole Support Agreement
In exchange for well logs and other information, we will pay you if you drill a well and it is a dry hole.
Lack of Consideration
Must be raised in answer to pleading
Features of a Farmout
i) Duty
ii) Earning Requirement
iii) Interest Earned
iv) number of wells
v) Timing of Assignment
vi) Miscellaneous Items
vii) Structure and Tax Implication
AMI
A certain geographic area in which the parties have a mutual interest and which provides that, if any party obtains an oil-and-gas interest in the area, the other parties have a right to participate in the interest.
Notice Issue
A purchaser is bound by every recital, reference, and reservation contained in, or fairly disclosed by, any instrument in a chain of title.
Property Description Issue
a. Reference to “said farmout agreement” in letter agreement was sufficient property description
b. Reference to “lands in the area of the farmout agreement” in letter agreement is not sufficiently specific to know what is intended.
Privity
AMI’s run with the land because it has privity by way of assignment, and it touches and concerns the land.
Does a farmee who earned acreage from a producing well have to give the farmor notice when he P&A’s the well?
An exculpatory clause will not override industry custom and usage which is to provide notice before P&A. This argument is strengthen by the fact that the contract had no entireties clause, so parole evidence could come in because the contract was silent on this particular matter.
Financing
The prevailing rate clause was an express provision, while the exculpatory clause only shields an operator from breaches of implied duties to conduct operations in a good and workmanlike manner or for tortious acts, unless it rises to the level of gross negligence or willful misconduct.
Exculpatory Clause
Prevents non-operators from suing operator under a JOA. Gross negligence or willful misconduct will defeat an exculpatory clause, as will express terms in a JOA.
JOA
Typically used where more than one lessee in a larger area wants to cooperatively develop the oil and gas for efficiency and to share risk and costs
Exculpatory Clauses
If the clause applies then it requires the operator to engage in willful misconduct or gross negligence. If not, then the operator can be sued under breach of contract.
Change in Language
“All such operations” to “Its activities under this agreement”. “Activities” must show willful misconduct or gross misconduct.
What is Gross Negligence?
Objective & Subjective. Did the operator know about the peril, but acted in a way that demonstrated he did not care about the consequences to others? Must be unjustifiable, or likely to cause serious harm is it grossly negligent.
What is Not Gross Negligence?
An act that is merely ineffective, thoughtless, careless or not inordinately risky.
AFE
Authorization for Expenditures
AFE (General Rule)
The approval of an AFE is a commitment to pay one’s proportionate share of all reasonable and necessary costs incurred until the objective formation has been reached.
AFE Basics
Just an estimate, not a ceiling on costs. Once a non-op consents they cannot pull out if drilling has started.
Operator will not get costs when:
(1) bad faith;
(2) excessive or unreasonable; or
(3) unauthorized by AFE.
Time is of the Essence
General Rule: Time is not of the essence for oilfield operation contracts. A party may recover for substantial performance of a contract, even though it is not literally met.
Three Types of AFE
1) Turnkey- bid based on total project costs, start to finish
2) Footage- Based on depth of well. Specific amount per foot.
3) Daily rate- Price based on number of days worked.
Assignment of Interests
Assignors will be liable if assignee cannot cover costs. Unless expressly provided otherwise.
Mining Partnership
A special relationship peculiarly adapted to serve the mining industry for the purpose of imposing joint and several liability on non-operating interests in favor of third party businesses.
Mining Partnership Elements
a. Joint ownership;
b. Joint operation (actual involvement in operation must occur); and
c. An express or implied agreement to share profits and losses.
Ownership & Marketing Production
If operator is profiting on the side, must be accounted to non-ops.
Elements of going Non-consent
- Parties that opt out
- Failure to respond within30-day response period
- Decision is binding (can’t change your mind
- If operator starts work before end of notice period, other parties can take advantage of additional information before making decision.
- Any additional proposed operations must fall within the geographical boundaries and depth of the contract area.
Consent Costs Agreements
Three options:
1. Pay based on fractional interests
2. Pay based on proportionate share relative to the other consenting parties
3. (2),plus all or part of proportionate share of any non-consenting parties’ share that the other consenting parties elected not to take.
Leftover non-consenting shares
must be paid by the party proposing the operation
“In-or-out” provision
once a party has gone non-consent, they have lost all interest in the proposed operation
Alternate to “in or out”
allows non-consent back in only after a “surcharge” has been recovered.
Preferential Right- ORRI
part of contract area, therefore it is subject to the perf right
Pref Right w/ multiple property owners
Don’t have to buy all, just the one your right was created from.
Preferential Right- time limit
10 days to exercise
When is a right invoked?
Majority Rule- Preferential right is not invoked unless the property being sold is the exact same package that the right is tied too.
Texas Rule- Preferential right is invoked anytime any of the property tied to the right is being sold, regardless of if it’s the whole package. Buyer can still skirt around the pref. right by including an additional property. Buyer can always counter to just his property and would then prevail.
Preferential Right- General Rule
Once notice is given, the right matures into an enforceable option.
Mutual Mistake
Parties must establish what the true agreement was, and that the instrument incorrectly reflects that agreement because of a mutual mistake.
Unilateral Mistake
The mistake is of so great a consequence that to enforce the contract would be unconsciousable. (NOTE: If other party knew of mistake, then it was mutual.)
Preferential Right- Vertical Integration
Will not trigger the right. Stock sales, not asset sales, will not trigger right.
Gas Balancing Agreements
Typically a standard exhibit in a JOA;
(2) terms of the gas-balancing agreement control over any conflicting language in a JOA;
(3) without a gas-balancing agreement non-operator can take in kind its share of oil and gas (also can terminate any contract for the gas operator made; 1989 changed to required at least 10 days written notice and operator can defer for 90 days);
(4) Operator is typically not responsible for non-operator’s failure to accommodate his purchaser’s pipeline;
(5) Because of dynamic conditions in the gas market, don’t assume that the language in the Model Form is appropriate for everyone’s situation;
(6) Percentage for make-up of underproduction in-kind;
(7) operators failure to pay is not conversion or exemplary damages
Balancing In-Kind
Under-produced party makes up its share through a temporary increase in its share of production. If practicable and available, it is generally the preferred remedy. May not be available because: no market for additional gas, reservoir is depleted, regulatory limits on production allowable
Cash balancing
Made by periodic payments over time or a single payment
Split-stream sales
Multiple purchasers of parts of the same production stream from one well. Courts will consider all equities when deciding between in-kind balancing vs. cash balancing.
Horizontal Drafting
First well in 1929 Texon.
Casing point
horizontal wells are drilled as “completed wells”
Air Quality- Aggregated Pollution
No aggregation of air quality pollution unless facilities are adjacent. If facilities are close enough then they can be considered one point source.
Tort Cases
excessive noise, earthquake, water contamination, mental distress
Causes of action- trespass, nuisance, negligence, and negligence per se
Lone Pine Orders
In a class action lawsuit, a lone pine order requires the class plaintiffs to show a substanitive link between their injuries and the defendant’s conduct. Essentially plaintiffs are required to establish a prima facie face. This cuts down on frivolous lawsuits, and helps courts organize the issues and control complex litigation.
New Data during trial exhonerating plaintiff
Court should dismiss w/ prejudice
Medical Gag Rule
Companies must tell doctors the trade secret chemical formulas used during drilling, but doctors are liable if they leak.
If plaintiff forgets to introduce evidence about fracking what should court do?
Allow jury to bring it in as outside evidence because it would not be prejudicial if the company is using the technique
Enjoining fracking for possible future health problems?
Find a better injury. No cause of action.
City bans facking, but state issues drilling permit anyway.
State Law trumps unless a home-rule applies..
Proration unit
acreage assigned to a well for purposes of assigning allowable.
Correlative interval
Vertical interval between top/base of productive reservoir.
Penetration point
Where horizontal drainhole enters correlative interval
Terminus
End of horizontal drainhole
Horizontal drainhole displacement
Distance from penetration point to terminus
Kick-off Point
Whee well starts to go horizontal
Take-point
The “wells” where oil flows into the horizontal pipeline.
Take-Point Rule
Only the take points have to follow spacing rules. The pipelines themselves do not.
Off-Lease Penetration Point Rule
Must give off-lease operators/mineral owners notice
Stacked Lateral Rule
Horizontal drainholes from different surface locations are treated as a single well. This is different than a multipateral well.
Box Rule
A well is deemed to be in compliance with spacing requirements, as long as it stays inside an imaginary box (stays between the lines)
Horizontal Trespass
Whose consent is necessary to drill from off lease position? Get it from everyone.
PSA
(i) Agreement between various mineral interst owners about allocation production.
(ii) Operates like a pooling agreement but can involve multiple pools or a mix of pools and non-pools.
(iii) RRC requires 65% of working interest and 65% of royalty owners agree to PSA.
Allocation Wells
When you can’t get 65% to agree.
Clean Water Act (Old Rule)
Two step analysis:
(i) Do the waters near the wetland area have a relatively permanent flow?
(ii) Is the wetland “adjacent” to these waters? Does it have a continuous surface connection to the waters?
Clean Water Act (New Rule)
Nexus test. Is there a significant nexus between the water or wetland in question and “navigable waters”.
What happens if my CWA permit is denied?
You’re screwed. Force Majeure does not trigger.
Endangered Species Act-Take
harass, harm, pursue, shoot, wound, kill, trap, capture, or collect.
Endangered Species Act-Harm
significant modification or degradation of habitation where it actually kills or injures wildlife. Government can issue permit, if the taking is incidental to, not the purpose, of an otherwise lawful activity.
Who is responsible under CERCLA
Potentially Responsible Parties
Who is liable for CWA violation?
Owner when issue is discovered
