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Oil & Gas Flashcards

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1
Q

Rule 38

A

Density - Minimum amount of acreage to drill a well is 40 acres

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2
Q

1991 Well Cleanup Fund

A
  • Oversight by commission
  • Funded through fees
  • Includes provisions for:
    1) Prevention of oil and gas production pollution
    2) Plugging of abandoned wells
    3) Regulation of waste discharge
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3
Q

Rule 37

A

Well spacing - establishes the minimum distance between each well (1,200 ft) and from each well to each unlicensed property line (467 ft)

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4
Q

Prorationing

A

Commission establishes well allowables to give each landowner the opportunity to produce her fair share

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5
Q

Division Order

A
  • If signed, binding and irrevocable. A signed division order that modifies the lease will bind the lessee, but can be revoked by the landowner.
  • If the landowner refuses to sign, the lessee may suspend royalty payments
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6
Q

Operations clause

A

Permits continuation of the lease after expiration of the primary term if lessee is drilling, substituting “operations” for actual production

-Savings clause

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7
Q

Correlative rights

A

Each owner has privileges for an equitable share of oil and gas under the property, but also a duty not to commit damage or waste.

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8
Q

Force majeure clause

A

“Acts of God” and other catastrophic events will excuse performance and extend the lease.

-Savings clause

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9
Q

Proportionate reduction clause

A

Lessee can reduce delay rental and royalty payments if the lessor owns less than whole mineral estate

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10
Q

Dry hole clause

A

Lessee may maintain the lease if a dry hole is completed, giving the lessee extra time to drill another well.

-Savings clause

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11
Q

Ordinary and natural meaning test

A

If the substance was ordinarily defined as a mineral, then it would belong to the mineral estate owner, except for water, sand, gravel, building stone, limestone, clay, surface shale, and “near-surface” coal and iron ore

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12
Q

Monetary lease benefits

A

1) Bonus (paid as front-end money to owner)
2) Delay rental payments (paid to commence drilling operations or production during the primary term of the lease)
3) Shut-in royalty payments (paid after development when production is temporarily halted)
4) Royalty payments (paid on production of oil or gas)
5) Production payment (fixed amount, payable from mineral production. Not related to costs of production)

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13
Q

Shut-in royalty clause

A

Payment of shut-in royalties when wells are capable of production but are not producing because of market conditions or other issues.

  • “Unless” - failure to pay terminate the lease
  • “Or” - failure to pay is just a breach
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14
Q

Exceptions to Rule 37 and Rule 38

A

1) Confiscation - every landowner may drill one well, unless there is voluntary subdivision to skirt Rule 37
2) Prevent waste
3) Protect correlative rights (rights to a common reservoir)

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15
Q

Mineral Interest

A

Property interest in oil and gas created by a severance, either by a mineral deed or an oil and gas lease.

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16
Q

Mother Hubbard Clause

A

Grants the lessee an interest in small strips of land, adjacent or contiguous to the described land, accidentally omitted from the legal description of the property

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17
Q

Royalty interest

A

The right to share in proceeds from production, free from production costs. It is considered a real property interest.

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18
Q

Types of trespass in oil/gas

A

1) Ordinary trespass (entering/possessing the mineral estate without a lawful right)
2) Slant well drilling (drilling at an angle, does not have to be intentional)
3) Geophysical trespass (Entering the property of another to conduct research of the mineral estate)

Statute of limitations is 2 years.

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19
Q

Greatest possible estate rule

A

Deed conveying real property will pass the entire estate. unless severed or reserved.

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20
Q

Surrender clause

A

Lessee may terminate the lease as to all or any portion of the leased premises, but remains liable for any breach

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21
Q

Implied covenants

A

1) Reasonably prudent operator standard
2) Implied covenants to develop leases (implied duty to drill an initial well and reasonably develop the lease after production has been acquired)
3) Covenant to protect against drainage (must show i) substantial drainage, ii) a reasonably prudent operator would drill to protect, iii) damages)
4) Covenant to market
5) Covenant for reasonable development
6) Covenant to further explore - no duty to explore
7) Covenant to test (if the lease does not provide for delay rentals or paid-up provisions)
8) Covenant to operate diligently and properly

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22
Q

Calculation of royalty interest

A

Royalty interest = mineral interest percentage x landowner royalty - non-participating royalty

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23
Q

Texas Railroad Commission

A

Regulates oil and gas operations in Texas

1) Prevent waste
2) Protect correlative rights
3) Avoid unnecessary wells

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24
Q

Notice to cure clause

A

Landowner must notify and allow the lessee to remedy any clause (not condition) breaches

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25
Q

Entirety clause

A

Apportionment of royalties if property is subdivided after execution of the lease.

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26
Q

Temporary cessation of production doctrine

A

A sudden production halt will not terminate a lease if the lessee has diligently sought to restore production within a reasonable period of time (usually a month or two)

-Savings clause

27
Q

Secondary term

A

Lessee must be actually producing minerals in “paying quantities”

28
Q

Right of ingress/egress to the surface

A

Right to enter upon and use the surface, as is reasonably necessary to develop the minerals.

Damages may be awarded if use:

1) is excessive and unreasonable;
2) does not benefit the development of the mineral estate; or
3) violates lease provisions or law

29
Q

Habendum clause

A

Establishes the duration of the lease and typically designates a primary term and secondary term

30
Q

Pugh Clause

A

If only a portion of the leased premises is included in a pooled unit, then the lease only applies to that portion. In Texas, production on any portion of the leased premises will hold the entire tract, unless a Pugh clause is added.

31
Q

Subrogation clause

A

Lessee may pay the mortgage and taxes of the landowner and then assume creditor status

32
Q

“Produced” - determining paying quantities

A

1) Litmus test - has the well made enough money to cover operating expenses over a reasonable period of time?
2) If not, objective test - would a reasonably prudent operator continue to operate the well for other reasons than mere speculation?

33
Q

Requirements for purchasers of only the mineral or royalty interest

A

A person who makes an offer to purchase only the mineral or royalty interest must include a conspicuous statement printed in a large type style stating that by executing the document, the person is selling part or all of the mineral interest.

A person who conveys a mineral or royalty interest may bring suit against the purchaser if:

i) the purchaser did not give the notice complying with the statutory requirements; and
ii) the person has given 30 days written notice to the purchaser that a suit will be filed.

A person who prevails in such a suit may recover the greater of:

i) $100; or
ii) an amount up to the difference between the amount paid by the purchaser for the interest and the fair market value of the interest at the time of the sale.

34
Q

Paid-up provision

A

Instead of delay rentals, provides that all rentals have been paid upfront and there is no obligation to drill during the primary term

35
Q

Kinds of royalty clauses

A

1) Amount realized (amount of money the oil and gas company receives for the sale of the minerals)
2) Market value (what a reasonable purchaser would pay for that substance at that location). Based on the market value “at the well”, determined by:
- Price paid for direct sales from the wellhead;
- Price paid for direct sales from nearby wells; and
- Netback method - market value at the actual point of sale, deducting the amount it costs to transport the minerals

36
Q

Equipment removal clause

A

After termination of the lease, lessee may enter and remove any remaining equipment

37
Q

Responsibility for plugging abandoned wells

A

The plugging of wells is the primary responsibility of the operator, who must do so within one year of cessation of operations. In certain circumstances, non-operators can also be liable, but not landowners or royalty interest holders.

38
Q

Rights of non-consenting co-tenant

A

Must receive proportionate share of production, minus exploration, development and production costs.

  • Enter into own lease;
  • Ratify existing lease
  • Do nothing and be treated as a carried working interest owner. In this case is entitled to her share of production, but also bears her share of production costs. Does not bear the drilling costs though.
39
Q

Partition for co-tenants

A

1) Partition in kind
2) Partition in sale
3) Receivership - if inability to identify co-tenant will result in damage to the mineral estate, co-tenant may seek a court-appointed receiver to mange the mineral interest

40
Q

Unitiziation

A

Field-wide pooling

41
Q

Right of lien holders

A
  • If a security interest attached before severance, can prevent exploration, development, and production if they will damage the value of the security interest.
  • Exception to the “first in time, first in right” - if lien attaches to surface estate before severance and the mortgagee forecloses on surface estate, oil and gas lease continues so long as it was executed and recorded before the foreclosure sale (but lessee no longer possesses a right to use the surface, and foreclosure sale purchaser has right to royalty payments under lease)
42
Q

Slander of title

A

Owner must show the party

1) Made a publication
2) which is false
3) with malice
4) causing specific financial loss, and
5) the owner owns an interest in the estate being slandered

Damages is the difference in FMV before and after.

43
Q

Take or pay clause

A

Lessee pays for a percentage of the gas that the land can produce, whether or not the purchaser actually takes it

44
Q

Remedies and damages for trespass

A

Good faith trespasser - liable for the FMV of the mineral produced at the time the minerals were produced, less the production and operating costs.

Bad faith trespasser - liable for the FMV of the mineral produced at the time the minerals were produced, without the ability to recoup production costs.

The trespasser bears the burden of proving good faith.

45
Q

Calculation of working interest revenue

A

Revenue interest = net revenue interest percentage - overriding royalty

46
Q

Rule of capture

A

Landowner who captures a natural resource within his surface boundaries has no liability for draining it from adjacent lands, but the adjacent landowner may also drill to offset the draining.

47
Q

Ownership-in-place theory

A

Landowner owns all minerals, subject to the rule of capture.

48
Q

Executive right

A

An interest in land reserved by the grantor to lease and manage the mineral estate.

49
Q

Ad Coelum (“heaven to hell”) doctrine

A

Landowner owns surface, airspace above the surface, and below the surface to the center of the hearth.

50
Q

Leasehold interest/working interest

A

Bears all of the risk of cost and production. Also called a working interest or operating interest.

51
Q

Accommodation Doctrine

A

Mineral interest owner must accommodate the surface owner if the mineral development:

1) substantially interferes with pre-existing use of surface, and
2) reasonable alternatives are available

If not, surface estate may get get damages or injunction.

52
Q

Types of royalty interests

A

1) Landowner royalty (free from production costs)
2) Non-participating royalty (not a mineral interest, but an interest only in the royalty. Carved out of the landowner’s royalty)
3) Overriding royalty (royalty interest in the lessee’s share of production, carved out of the leasehold estate)

53
Q

Assignment or change of ownership clause

A

Lessee can rely on initial land records to determine the ownership of the mineral interest

54
Q

Delay rental clause

A

Requires a payment to the lessor to maintain the lease when not drilling in the primary term.

  • “Unless” - failure to pay constitutes a breach of a condition and terminates the lease
  • “Or” - breach of the covenant, but does not terminate the lease
55
Q

Status of minerals brought to the surface

A

Convert from real property to personal property.

56
Q

Pooling clause

A

Production anywhere in the pooled unit is considered production on each tract.
-Lessee must pool in good faith and not (i) include known unproductive acreage in the pooled unit or (ii) gerrymander a pooled unit to maintain leases.

57
Q

Warranty clause

A

Lessee can recover damages/indemnification if the landowner has bad title

58
Q

Executive rights

A
  • The right to lease and manage the mineral estate of real property.
  • Only the holder of the executive right may execute a lease of the minerals estate. Leases executed by anyone other than the executive right owner are invalid.
  • Interest in land that must be transferred under general real property principles.
  • Under the Statute of Frauds, any interest in real property must be in writing.
59
Q

Separate ownership clause

A

Lessee may sever and assign portions of the lease without affecting the remainder

60
Q

Duhig doctrine

A

An owner who reserves an interest and conveys more than he owns will be estopped from claiming his reserved interest insofar as it is necessary to satisfy his conveyance.

61
Q

Proceeds between life estate and remaindermen

A

1) Bonus and royalties - placed in interest-bearing account, with interest paid to life estate and principal paid to remaindermen at end of the life estate.
2) Delay rentals - paid to life tenant, then remaindermen at the end of the life tenancy
3) Open mines doctrine (exception) - if a lease is executed before the creation of the life estate, the life tenant receives all proceeds paid under any lease in effect at the time the life estate was created

62
Q

Compulsory Pooling under MIPA

A

Purpose:

1) avoid unnecessary wells
2) protect correlative rights
3) prevent waste

Creates a unit containing the approximate acreage of a standard proration unit (not to exceed 160 acres for oil or 640 acres for gas, plus 10%, when:

1) two or more tracts in a common reservoir for which the commission has established the size of proration units;
2) separately owned interests in oil and gas within an existing/proposed proration unit;
3) owners has not voluntarily agreed to pool, despite good faith efforts; and
4) at least one owner has drilled or proposes to drill

-Disfavored in Texas

63
Q

Oil and gas lease property classification

A

Fee simple determinable - landowner owns a royalty interest and a possibility of reverter in the mineral estate

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