Oil & Gas Flashcards
When does the Accommodation Doctrine apply?
The accommodation doctrine applies if (i) the lessee’s use of the surface substantially interferes with a preexisting surface use, (ii) alternative methods that are less injurious to the surface are practicable for the lessee to use, and (iii) this alternative is available on the leased tract. If all three conditions are proven, the lessee or severed mineral estate owner must accommodate the existing surface uses.
What is the essential purpose of the “Pooling Clause”
To give the lessee flexibility to comply with well-spacing requirements and geological realities, and allow her to operate efficiently.
What must a life tenant do to maintain the future interest of the remainderman?
If the life tenancy and remainder are legal interests, then the consent of both the life tenant and remainderman is necessary to the lease, because the lease grants present rights (which the remainderman cannot grant) that may extend beyond the end of the life estate (which the life tenant cannot grant). The life tenant may have the power to act alone to prevent imminent drainage (waste), but that power is very limited under the common law.
What does the rule of capture not apply to?
- Negligently drilled oil and gas
- Illegally Drained Oil and Gas
- Stored Gas
Who has the burden to show that the oil was stored and not native when it was captured?
The Storer
What are the Mineral Interest’s Rights?
- Development Right–exclusive right to explore, produce, and develop the minerals.
- The executive right—-the right to lease the minerals
- The economic benefits—including: a) Bonus, Royalty, Delay Rentals
When is the mineral estate dominant?
When the mineral estate has been severed from the surface estate. The owner of the mineral estate can use the surface as is reasonably necessary to develop the oil and gas.
What is the Accommodation Doctrine?
- The surface owner has a preexisting use of the surface.
- 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.
- The reasonable alternative is available on the leased tract.
What two interests are created by an Oil & Gas Lease
- The Working Interest gives the lessee the exclusive right 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 is an NPRI?
Nonparticipating Royalty Interest and it is the right to receive royalty payments held by someone other than the mineral interests owner. If the mineral owner conveys (by sale, gift, or will) her right to receive royalty payments to another but retains the ownership of the mineral estate. The gift recipient is an NPRI.
Define Concurrent Ownership
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.
Define Profits
Are revenues minus costs. Costs include all reasonable drilling and operating costs on productive wells. Dry hole costs, however, may not be assessed against the unleased cotenant.
What are a cotenant’s options when the other cotenant enters into a lease on their land
- Do nothing and collect in their fraction of the profit as a shared tenant. (Make the most money this way in a successful oil well)
- Ratify the underlying lease. Takes on the same terms of the lease as the cotenant. Once ratified, cotenant may not go back and seek a profits share as an unleased cotenant.
- Partition their portion of the land and keep it free from drilling. Must be done through judicial proceeding. Courts favor a partition in kind over a partition by sale.
What are a life tenant’s right to lease?
Neither the life tenant nor the remaindermen can grant a valid oil and gas lease without the joinder of the other.
What is the accounting distribution for life tenants and remaindermen?
Common Law: Life tenant gets current income and interest, including 100% of delay rentals plus interest on bonus and royalty; Remaindermen gets principal bonus and royalty (but does not take possession until life tenant dies).
Open Mine Doctrine: Where a lease was in place prior to the creation of the life estate, the life tenant gets all the benefits under the existing lease.
What is the Open Mines Doctrine?
Where the lease was in place prior to the creation of the life estate, the life tenant gets all the benefits under the existing lease.
What is the order of priority for mortgagor/mortgagee?
- Mortgagee records before the lease is executed: Lessee’s interest will be subject to the mortgage lien.
- 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.
What does “Marshalling” the assets mean?
At foreclosure, the mortgagee must sell the surface assets first to try to satisfy the loan, before selling the mineral estate.
What are the four types of trespass against mineral interests?
- Ordinary Trespass
- Slant well drilling
- Drilling dry well
- Geophysical or Seismic trespass
What determines recovery in a trespass issue?
The trespassor’s state of mind. Good faith trespassers who have 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 benefitted the rightful owner.
What are the elements of slander to title?
- Publication of a false claim
- With malice;
- Loss of a specific sale or leasing opportunity
How are damages measured for slander to title?
Measured by the difference between the market value of the lease at the time of the slander and its value at trial with the cloud removed.
What is the key issue in an adverse possession claim?
Whether and when the mineral estate was severed from the surface estate.
When does the adverse possessor take ownership of mineral rights?
- Possession begins prior to severance–adverse possessor gets title to BOTH
- Possession begins after severance: adverse possessor gets title to the surface estate only
What must be contained in the Granting Clause?
i) the rights given by Lessor to Lessee
ii) 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 for the duration of the Lessee’s interests in the premises. Typically there is
(i) Primary term which is a fixed period during which Lessee has no obligations to conduct drilling operations
ii) A secondary term which is indefinite but normally linked to production.
What is the formula implied by the term “production” in Texas?
Revenues minus Lessor’s royalty minus operating costs
What are the factors of the Temporary Cessation Doctrine?
- A short temporary shutdown
- Which Lessee acts diligently to fix;
- That is due to a “mechanical break-down or the like”
What is the Doctrine of Repudiation?
An equitable rule that can extend the lease if the Lessor obstructs the Lessee from developing the lease.
What is the Delay Rental Clause?
Authorizes Lessee to delay drilling or commencing production during the primary term by periodically paying a stipulated amount to the Lessor.
What is the result of an “Unless” vs. an “Or” Delay Rental Clause?
“Unless” creates a condition of the lease (fee simple determinable) Remedy: The lease terminates automatically
“Or” 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 which would be equal to the unpaid amount of rentals.
What is the effect of the Late Delay Rental Clause?
If Lessor accepts a late delay rental payment, the lease comes alive again, based on a “loose theory of estoppel” It usually requires some proof of (i) an act by Lessor (cashing check) upon which the Lessee relied.
What is the Notice of Assignment Clause?
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.
Commencement of Drilling Clause
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:
- Objective physical acts done on the leased premises, building a road, cutting down trees, drilling a water well.
- Subjective good faith intent to pursue the drilling operation.
What is the Shut-In Royalty Clause?
A shut-in royalty clause provides that when a well ceases PPQ due to market conditions, the Lessee can hold the lease by paying shut-in royalties.
What is the dry-hole clause?
Provides that if Lessee drills a dry hole, she can maintain the lease by starting to drill another well within the stated time.
What is the continuous operations clause
Covers the situation where at the end of the primary term operations have commenced, but there was not yet actual production
What is the Cessation of Production Clause?
Provides that if a well ceases producing, Lessee can maintain the lease by commencing repairs within the stated time.
May savings clauses be tacked?
Yes.
What are the savings clauses?
- Shut-in Royalty Clause
- Dry-Hole Clause
- Cessation of Production
- Continuous Operations
Force Majeure Clause
Excuses performance, or extends the time for performance, because of unforeseeable factors beyond the Lessee’s control.
What are the rights of the Pooling clause and an NPRI?
The executive right owner has no power to pool the nonparticipating interests, even though he has the power to lease the nonparticipating interests.
What is the Pooling Clause?
A pooling clause allows Lessee to hold several tracts under lease with PPQ 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.
What is the common law approach to Division Orderes
Division Orders were binding until revoked, 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.
What is the modern approach to Division Orders
A division order tells the Lessee how to divide the proceeds from the well among all the various lessors, NPRIs, 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. They are not deeds or contracts, but they have their own set of laws governing their legal effect.
What are the changes implemented in the 1991 Division Order Act
- Division Orders are binding until revoked. Cannot get past underpayments.
- A Division Order can never contradict a lease. If it does, it is invalid; if it was never valid, a RIO should get past underpayments.
What are the elements of the Implied Covenant to Protect Against Drainage
- Substantial Drainage
- Lessee could drill a profitable well to offset drainage; and
- Damages.
What is the implied covenant to market?
Lessee has an implied covenant to market the oil and gas
i) Within a reasonable time;
ii) At the best price realizable
The lessee’s actions in marketing are judged by the reasonably prudent operator standard.
What is the implied covenant to Develop?
In Texas there is an implied covenant to develop an oil and gas lease. The test for a 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–this is a high burden to meet.
What is the Executive Right?
Nonparticipating interest owners such as NPRIs and NPMIs rely on the executive right owner to realize income from their interests. Executive right holders’ duty depends in part upon their conduct.
What is the fiduciary standard in the Oil & Gas industry?
When the executive engages in egregious self-dealing, courts will impose a fiduciary standard, meaning the executive must subordinate his interests to those of the nonparticipating interests. Remedies include cancellation of the executive right, cancellation of certain leases, and damages.
What is the Surface Destruction Test?
The Texas Supreme Court held in 1971 that near-surface iron ore–technically mineral–belonged to the surface estate, holding that if any reasonable method of extracting the substance would destroy the surface, it belongs on the surface estate. Judicial decision established nine substances as belonging to the surface as a matter of law.
Ordinary and Natural Meaning Test
The court in 1983 changed the test to one asking whether the substance is a “mineral” in its ordinary and natural meaning. The new test was prospective, so it did not disturb the rule regarding the nine substances.
If the lease is silent as to ownership of certain substances what is the two-part test?
Step One: is the substance one of the nine that belong to the surface as a matter of law–(i) building stone (ii) limestone; (iii) Caliche; (iv) surface shale, (v) sand, (vi) Gravel (vii) water, (viii) near-surface lignite; and (ix) Iron Ore
Step two: if not is the date of ambiguous conveyance after 1983
a) If pre-1983 use the surface destruction test
b) If post-1983, use the ordinary and natural meaning test.
What is the nonapportionment rule
When the 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.
What is the Texas distinction of the Community Lease?
Where two or more contiguous property owners enter into a single lease covering all of their property. In Texas, a community lease has the effect of an implied pooling agreement.
What are the three general rules to remember about fractional interests?
- Deeds are construed against the Grantor. If the 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.
What is the 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.
What is considered Royalty Language?
Oil, gas, and other minerals produced and saved.
What is considered Mineral Language?
Oil, gas, and other minerals In, on or under Blackacre
What is considered Mixed Language? & What happens when there is mixed language?
In Texas a mixture of these terms indicates that a mineral interest was created.
What three public objectives are upheld by the Railroad Commission?
- To prevent waste and maximize the 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.
How does the RRC prevent waste and protect correlative rights?
- Requiring drilling permits and spacing rules
- Prorating Rules
- MIPA & Compulsory Pooling
What is the spacing rule?
A drilling permit is required before any well can be drilled. The State’s spacing rule requires that the applicant have a minimum of 40 acres to drill.
What is Prorationing?
The RRC regulates the maximum amount of oil and gas that well can produce—both to prevent waste from the premature dissipation of reservoir pressure, and to protect correlative rights.
What is the The Mineral Interest Pooling Act and what rules trigger MIPA?
After 1961, the RRC can force owners to pool. The compulsory pooling power preempts the Rule of Capture.
The rules that trigger MIPA are:
1. Timeline–must be after 1961
2. Fair & Reasonable Offer: owners seeking compulsory pooling under MIPA must first make a fair and reasonable offer to pool voluntarily. Standard for this is that fairness is always judged from the standpoint of the party being compelled to pool, at the time of the offer.
What is the policy of Plugging Wells
Abandoned and improperly plugged wells pose serious hazards to the public to the environment. Statutes require that operators plug their wells properly, but sometimes operators go bankrupt or otherwise fail to discharge this responsibility.
What is the Order in which the Duty to Plug will be enforced?
- The operator that created the well
- Non-operator who owns a working interest
- The state of Texas.
No duty is imposed on mineral interest holders, royalty owners, and other interested persons who do not have a working interest in the well.
