Oil & Gas Flashcards
Lease
An oil and gas lease conveys a deed to a fee simple determinable. It also gives the lessee the working interest in the property and exclusive rights to explore, develop, and produce from the property, as well as the obligation to pay the costs of production.
Fee Simple Determinable
A determinable fee interest will terminate if there is no production at the end of the time specified as the primary term of the lease.
Owner of the Mineral Interest - Lessor’s Rights
A lessor of a mineral estate retains the development right to explore, develop, and produce the minerals (subject to lessee’s working interest) and the economic benefits of the lease. This includes the executive right to enter into new leases. Retains a possibility of reverter when FSD terminates.
Economic Benefits of a Lease
Royalty Interest: a fractional share of all production that is free or production costs
Bonus: an upfront payment for signing the lease
Delay Rentals: compensation for differing drilling during the primary term of the lease
Failure to Pay Delay Rentals
Delay rental clauses authorize the lessee to delay drilling or commencing production during the primary term by periodically paying a stipulated amount to the lessor in order to hold the lease.
Failure to pay delay rentals causes the lease to expire automatically at the end of the primary term.
Lessor may choose to revive the expired lease under a loose theory of estoppel by accepting late delay rentals, but is not obligated to do so.
Conveyance of a Mineral Estate
A property owner, including the owner of a fee simple in a mineral estate, is generally able to assign, transfer, convey, or devise any quantum of their estate. Conveyee will acquire all of the rights and interests previously held by conveyor.
Royalty Payments
Begin when wells begin producing in paying quantities and last for as long as they continued producing in paying quantities.
Habendum Clause
Under Texas law, the habendum clause of an oil and gas lease sets forth the duration of the lessee’s interests in the premises. The primary term is a fixed period, followed by a secondary term, which is indefinite, but is normally linked to production.
Foreclosure after Oil & Gas Lease
An oil and gas lease is an interest in real property and will enjoy its first in time position and will not be affected by the foreclosure of an interest later in time. When a foreclosure occurs, it extinguishes the interest foreclosed on and all interests junior to it. It does not extinguish any interests senior to it.
