Oil and Gas - WIP Flashcards
What is the rule of capture?
A rule of non liability for causing oil and gas to migrate across property lines, resulting in “drainage” of oil and gas from under another person’s land.
e.g., A drilling on her 10 acres land causes drainage from a 40 acres radius, but her neighbors will have no right to share in the production.
How might neighbors protect themselves from drainage by other people drilling?
Drill their own wells
What are the limitations to the rule of capture?
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.
Under the doctrine of correlative rights, what does the rule of capture NOT apply to?
1) Negligently drilled oil and gas (e.g., well blowouts)
2) Illegally drained oil and gas (e.g., violation of a Texas government order)
3) Stored gas (e.g., gas produced from oil field and then reinfected into a depleted underground reservoir for storage)
What type of property is stored gas?
Personal property
impacts a right to retain possession in contract to the rule of capture
If a rival operator drills into a reservoir that contains stored gas, what can the owner do?
Sue for damages, because the rule of capture is no defense for the drainage of stored gas.
Who has the burden to show that gas is stored, and not native, gas?
The storer.
In terms of oil and gas interests, what does a fee simple owner of land have?
A fee simple owner of property owns both the surface and the minerals below the surface.
A property owner, however, may transfer less than her entire interest through severance.
Hypo: Stevie owner Blackacre in fee simply (both surface and minerals). Stewie conveys a deed to Meg of “all the minerals in Blackacre”.
What does Meg have?
What does Stewie now have?
Meg has fee simple in the mineral estate, and a vested possessory interest in real property.
Stewie has a fee simple in the surface only.
What rights does the holder of a mineral interest have?
1) Development right
2) Executive right
3) Economic benefits
What is the development right of a holder of mineral interest?
The exclusive right to explore, produce, and develop minerals.
What is the executive right of a holder of mineral interest?
The right to lease the minerals.
What economic benefits does a holder in mineral interest have?
1) Bonus: an upfront payment for signing the lease
2) Royalty: a fractional of any oil and gas produced that is free of cost (usually 1/8)
3) Delay rentals: compensation for deferring drilling during the primary tern of the lease
Who is dominant and servient when a mineral estate and surface estate have been severed?
The mineral estate is dominant when severed from the surface estate.
The owner of the mineral estate can use the surface as if reasonably necessary to develop the oil and gas.
What is 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. (cannot be unreasonably costly)
3) The reasonable alternative is available on the leased tract.
What fee interest is created by oil and gas leases?
An oil and gas lease conveys a deed to a fee simple determinable.
The lease may last forever, but it may terminate if there is no production at the end of a specified time.
What types of interests are created by oil and gas leases?
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.
The Royalty Interest: gives the Lessor a share of the production that is free of the costs of production.
What interest does a mineral estate holder have when they grant an oil or gas lease?
The mineral estate holder retains a possibility of reverter, and economic benefits under the lease contract (bonus, royalties, and delay rentals)
What is a nonparticipating royalty interest (NPRI)?
A 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 an NRPI.
The NPRI owner may not “participate” in any leasing transaction.
HYPO: Lois owns Blackacre in fee simple and conveys the following royalty deed: “Lois grants to Brian a 1/16 royalty in Blackacre”. If Lois leases to Big Oil for a 1/8 royalty, what does Brian have?
What if it conveyed “1/16 OF royalty on Blackacre”?
1) 1/16 of all production (a fixed, flat NPRI)
2) 1/16 of 1/8 royalty interest
What rights do cotenants of concurrent ownership in a mineral interest have?
Every cotenant 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 the PROFITS from production.
What are profits derived from production and leases?
Revenues minus costs
What is included in “costs”
Includes all reasonable drilling and operating costs on productive wells. Dry hole costs, however, MAY NOT be assessed against the unleased tenant.
Can one cotenant enjoin another from leasing or drilling without their consent?
No. Every cotenant may lease without permission from the other cotenants.
Can a cotenant enjoy royalties from a lease if they did not consent to it?
No, they can only obtain profits each year.
What can a dissenting cotenant do to obtain royalties rather than just profits?
The cotenant can RATIFY the underlying lease.
However, once ratified, they cannot change their mind and seek a profit share as an unleased cotenant.
What is a cotenant’s right of partition?
A cotenant has an absolute right to partition property in a judicial proceeding.
Courts prefer partition in kind (division) rather than partition by sale, unless dividing the property is inequitable (e.g., mineral reserves distributed unevenly)
In successive ownership cases, what is required to lease the property?
Neither the life tenant nor the remainderman can grant a valid oil and gas lease without the joinder of the other.
Once a valid lease has been entered into, how are lease benefits to be divided if the life tenancy grant is silent?
CL: Life tenant gets current income and interest, including 100% of delay rentals plus interest on bonus and royalty, and remainderman gets principal of bonus and royalty (but does not take possession until life tenant dies.
Open Mine Doctrine: Where a lease was in place prior t the creation of the life estate, the life tenants gets all benefits under the existing lease.
What is the general rule for priority in mortgages on oil and gas leases?
Basic property law: First in time, first in right.
What is the rule for when a mortgagee records before a lease is executed?
The lease survives a mortgage foreclosure, but the surface rights still terminate.
What is the rule for when an oil and gas lease is recorded before the mortgage?
Lease cannot be foreclosed against because the mortgage did not include the minerals as an assert belonging to the mortgagor, and the mortgagee was on notice of the lease.
What does it mean to “marshall” the assets?
At foreclosure, the mortgagee must sell the surface assets first to try to satisfy the loan, before selling the mineral estate.
HYPO: Lois mortgages to Bank in exchange for a $250,000 loan. Lois then leases the mineral rights to Big Oil. When Lois defaults on the load, what happens?
Big Oil’s lease survives foreclosure, but its surface rights terminate, and Lois’s rights as lessor will transfer.
Big Oil’s best option is to repurchase surface rights at foreclosure sale.
What are examples of interference with oil and gas interests by trespass?
1) Ordinary trespass
2) Slant well drilling
3) Drilling dry well
4) Geophysical or seismic trespass
5) Secondary recovery operations NOT a trespass
What constitutes ordinary trespass of an oil or gas interest?
When the lease expires but the lessee stays on the tract, the lessee is a trespasser.
REMEDY: Injunction and damages (including punitive)
What is trespass by slant well drilling?
Bottoming a well underneath someone else’s tract.
REMEDY: Injunction and damages (including punitive)
What is trespass by drilling dry well?
Damage to the speculative lease value. If a wrongful lessee entered and drills a dry hole, the lessor loses the lease value that he could’ve received before the world found out the land was dry.
REMEDY: Lost bonus.
What is geophysical or seismic trespass?
When someone on adjacent land explores lessor’s land using seismic vibrations, and gains information lessor’s mineral potential.
REMEDY: Sue in assumpsit - the market value of a contract for the right to do seismic exploration.
What is a secondary recovery operation?
e.g., repressing an oil field by injecting saltwater, which invades another tract and causes a neighboring well to drown out.
This is not trespass because public policy favors more oil and gas.
REMEDY: Can sue for nuisance damages for value of lost oil and gas, however.
What are possible reductions in damages for good faith trespassing?
If the trespasser had an honest and reasonable belief in the superiority of his title, he will get a credit for costs incurred in production If the costs benefited the right owner.
What are damages for bad faith trespasses?
A bad faith trespasser will be liable for the gross value of production from the well.
What is required to establish slander of title?
To prevail in a tort action for slander of title, plaintiff must prove”
1) Publication of a false claim of title to the property (including false claims of a valid lease)
2) With malice; and
3) Loss of a specific sale or leasing opportunity by the rightful owner because no buyer wanted to purchase property with disputed title
What is required for adverse possession of oil and gas interests?
The key issue is whether and when the mineral estate was severed from the surface estate.
1) If possession begins prior to severance: The adverse possessor gets title to BOTH the surface and mineral estate
2) If possession beings after severance: The adverse possessor gets title to the SURFACE ESTATE only. To get title to the mineral estate, the adverse possessor must establish a separate action of possession.
What is the purpose of the granting clause?
The granting clause sets for:
1) The rights given by Lessor to Lessee, and
2) A description of the property
What is a 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 descriptions.
What is the habendum clause?
The habendum clause sets forth the duration of Lessee’s interests in the premises.
Typically there is a:
1) Primary term, which is a fixed period during which Lessee has no obligations to conduct drilling operations, and
2) Secondary Term, which is indefinite but normally linked to required production. Failure to produce during the secondary term results in TERMINATION of the lease.
Example: “This lease shall remain in force for three years from this date and as long thereafter as oil and gas is produced from said land.”
How are oil and gas leases construed?
Oil and gas leases are construed AGAINST the Lessee, unlike typical contract
(Oil and gas leases are usually drafted by the oil company)
What are paying quantities?
In Texas, “production” means production in paying quantities (PPQ). The formula for PPQ is:
Revenues - Lessor’s royalty - Operating costs
What is required of the PPQ in order for the “production” requirement to be met and a lease to stay in effect?
The total PPQ must be POSITIVE in order for the production requirement to be met.
