Oil & Gas Flashcards
Rule of Capture
Subject to regulation by TX Railroad Commission; authority & duty :
1) prevent waste (maximize efficient recovery of oil & gas)
2) protect correlative rts (assure each owner in common pool has fair opportunity to produce oil & gas under his land; &
3) protect environment to prevent air & water pollution
Leasehold Interest (Working Lease or Operating Lease)
Rt granted by oil & gas lease to lessee. Rts & obligations determined by lease.
Royalty Interest
Rt to share of production free of costs of production. Non-possessory. Owner has no rt to develop or to lease mineral interest. Types:
1) Landowner’s or lessor’s royalty paid under terms of lease
2) Nonparticipating royalty interest (NPRI)
3) Overriding royalty
Cotenants
- must account to each other for any proceeds from production from jointly owned land (developing cotenant must account to any non-consenting cotenant for that co-tenant’s proportionate share of profits (value of what produced minus cost of production)
- custom to make leasing easier: lessee takes lease from all persons who seem likely to have an interest in desired tract & treats each as if he owned 100%
- non-consenting T can ratify lease thereby electing to receive a royalty share from date of ratification forward rather than waiting for “payout” (when operator has recouped costs)
Proportionate Reduction Clause
“If lessor owns less than he has conveyed, royalties & rentals in lease will be reduced proportionately.” Allows lease lessee to reduce royalties to correct fractional share if production obtained (gives developer chance to do due diligence, title wrk to determine who really owns what)
Successive Ownership: Life Tenants & Remaindermen
Neither life T nor remaindermen may, w/o joinder of other, commence extraction or execute a valid lease.
Life Tenant & Remaindermen Jointly Signed Lease
If both have jointly signed lease, 1 of 4 rules will govern division of royalties, bonus & delay rentals:
1) Express Language - follow express language of grant that created tenancies
2) Common Law - favors remainderman. Corpus reserved for remainderman, interest or current income goes to life T
3) Open Mines Doctrine - favors life T. Life T entitled to all lease payments if, at time life estate vests, testator already executed lease on tract
4) A Life Tenancy Created in Trust - if no specific instructions given to trustee on how to distribute then TX Trust Act fills in gap statutorily
Adverse Possession
- AP takes what owner had (unsevered tract gives title to both surface & mineral estate)
- to AP severed mineral estate, must posses minerals for statutory period (drilling & production for that period)
- title earned relates back to time of its beginning (paper transactions, such as conveying deeds, doesn’t toll SoL)
9 Substances Belonging to Surface Owner as Matter of Law
1) building stone
2) limestone
3) caliche
4) surface shale
5) water
6) sand
7) gravel
8) near-surface lignite or coal
9) near surface iron-ore
Severance Deeds BEFORE June 8, 1983, Surface Destruction Test
Does any reasonable method of producing substance destroy surface? If so, substance belongs to surface owner.
Severance Deeds AFTER June 8, 1983, Ordinary & Natural Meaning Test
If substance at issue is considered to be a mineral in the ordinary & natural meaning of the word, even if removal would cause destruction of surface (surface owners may have surface destroyed by strip mining). Mineral owner must compensate surface owner for damages for loss of surface use when conveyance is a general one of “other minerals”. If mineral specifically deeded, mineral owner only liable for negligently inflicted damage.
- mineral owner’s dominant use of surface continues to be restricted by Accommodation Doctrine (must give “due regard” to surface owner.
Accommodation Doctrine
- lessee must “reasonably accommodate” lessor use of surface
- limited to obtaining minerals under the land - can’t use adjacent owner’s surface to transport or store minerals obtained from adjoining parcel of land
- accommodate when:
1) there’s existing use of land
2) lessee’s use of land impairs lessor’s existing use
3) & under established industry practices, there are alternatives available (located on tract) - surface owner must generally show particular surface activities not “reasonably necessary” to extract
RAP in Oil & Gas Context
Conveyance of a future interest that is conditional on expiration of underlying fee simple determinable may not vest w/in a life or lives in being plus 21 yrs. Possibilities of reverter not subject to RAP (considered presently vested). All RAP problems can be avoided by including a time limit (ex: This top lease (or NPRI deed) must vest w/in 21 yrs of the date of its execution).
Nature of Oil & Gas Lease
- if lessee does produce, its obligated to to pay royalties to lessor (& any NPRI interests that share in lessor’s royalty)
- generally construed against lessee
- granting clause: sets forth rts granted to lessee
- generally, leases will cover all “oil & gas & other minerals” but no lessee has claimed rt to mine minerals like coal under lease clearly intended to cover oil & gas & substances that are produced jointly w/ oil & gas (sulfur or other gases)
Pooling
- process of bringing together several smaller tracts of land to form a drilling unit or production unit for 1 well
- in TX, executive rt owner doesn’t have power to pool nonexecutive interests (such as NPRI or NPMI), even though executive owner has inherent rt to lease nonexecutive interests
- NPRI/NPMI no affected by pooling unless ratify pooling agreement (lessees must try to secure permission of non-participating interest owners to pooling, even though they have no power to lease) (lease pooling clause ineffective to pool them, even though it can be used to pool interests of lessors (mineral interest owners) who granted lease)
- if NPRI ratify pooling agreement to cover tract containing her royalty interest, she may receive royalties from production from pooled well she would not otherwise be entitled to b/c well located off tract upon which her NPRI based
