Oil & Gas

Question 1

what are the two types of estates? which branch of law apply to each estate?

Answer 1

surface estate, surface and above - real property law

minderal estate, below the surface - O&G law

Question 2

what is the ad coelum doctrine?

Answer 2

a landowner owns the surface, the airspace above, and all the subsurface to the center of the earth (the “heaven to hell” theory). this doctrine applies to the two separate estates, which can be severed (so two different people can own the surface and mineral estates).

Question 3

what is the ownership-in-place theory?

Answer 3

mineral owner has the right to own the minerals in perpetuity. before extraction, the owner of the mineral estate has exclusive right to extract the minerals. and after extraction, mineral becomes personal property of the person who drilled

Question 4

what is the rule of capture?

Answer 4

the “there will be blood” rule.

anyone who lawfully drills on her own property owns all mineral produced from her well

note that in the movie there will be blood he does not actually horizontally drill. that tech had not been invented yet. he just drills and taps a reservoir goes beyond the boundaries of his own land

Question 5

what are 6 limitations on the rule of capture? (just list out)

Answer 5

1. does not appy to personal property
2. correlative rights
3. conservation acts
4. negligence
5. O&G leases
6. governmental, state, and city regulations

Question 6

what does it mean that the rule of capture does not apply to personal property?

Answer 6

well, dumbass, it just means that once the mineral comes to the surface, and maybe it is stored or whatever, the Rule of Capture no longer applies.

Question 7

what does it mean that the rule of capture doesn’t apply to correlative rights?

Answer 7

Each owner has a privilege that provides for an equitable share of the existing oil and gas UNDER their property, and the exercise of the privilege comes with a duty to the owner’s neighbors not to damage or waste the reservoir. Insofar as one landowner’s drilling may interfere with the correlative rights of a neighbor to the common source, the injured neighbor may be entitled to some remedy.

another explanation: Under the correlative rights doctrine, each owner of a common reservoir is entitled to his or her fair share of the oil or gas beneath his or her property. In other words, a property owner’s right to produce oil and gas is limited by an obligation to do so without affecting another property owner’s right to do the same. Therefore, under this doctrine, a property owner with the right to extract oil and gas from a common reservoir may do so as long as he or she doesn’t damage the common reservoir. The correlative rights doctrine is seen as a solution to some of the problems inherent to the rule of capture.

Question 8

what does it mean that the rule of capture does not apply to negligence?

Answer 8

just means that you cannot negligently operate a well and then claim it’s all still yours and valid and shit because the rule of capture

Question 9

what does it mean that the rule of capture may be limited by leases?

Answer 9

just means that oil and gas leases can limit the rule of capture by contract

Question 10

minerals interests can/cannot be severed from surface estate

Answer 10

can

Question 11

there are __ main characteristics of owning a mineral right. list them (will elaborate on other slides)

Answer 11

Four characteristics of mineral rights:

1. executive leasing rights
2. exclusive right to develop
3. ingress and egress
4. right to receive proceeds

Question 12

first characteristic of mineral rights (executive leasing rights): basic definition

Answer 12

a mineral owner has th exclusive right to enter into an oil and gas lease to convey the interest to a company to develop the minerals

Question 13

first characteristic of mineral rights (executive leasing rights): what is the greatest estate possible rule?

Answer 13

all interest is conveyed unless severed or resered

Question 14

first characteristic of mineral rights (executive leasing rights): does/does not violate the rule againt perpetuities because ___

Answer 14

does not violate the rule against perpetuities because it is a vested interest immediately

Question 15

second characteristic of mineral rights (exclusive right to develop): if A and B each own a 50% mineral interest in the same property, who would have the right to develop?

Answer 15

both

Question 16

third characteristic of mineral rights (ingress and egress): what is the dominant estate theory?

Answer 16

the mineral owner may enter the surface estate and use as much of the surface estate as is REASONABLY NECESSARY to develop the minerals underneath that tract.

that’s why it is called the dominant estate theory: because mineral estate is dominant over the surface estate. the mineral estate owner does not need consent. the surface owner cannot prevent the mineral owner from developing underneath their tract

Question 17

third characteristic of mineral rights (ingress and egress): what are the limitations of the dominant estate theory?

Answer 17

damages may be awarded to surface estate owner if any of these are violated:

1. Reasonableness. for example if the ordinary, customary use would be a 3-acre drill site tract, the mineral interest owner cannot use a 10-acre drill site tract.
2. Must be for the development of that particular tract (so no There Will be Blood shit)
3. Terms of the lease
4. Accomodation Doctrine (most tested)

Question 18

third characteristic of mineral rights (ingress and egress): recall that the dominant estate theory is limited in part by the accomodation doctrine. what daaa hayyyyyooool is dat waaan?

Answer 18

basically, if there is:

1. a preexisting use at the time the mineral owner wants to develop the minerals;
2. SUBSTANTIAL interference with that use; AND
3. there are reasonable alternative methods ON THAT TRACT to develop the minerals; THEN..

the mineral owner may must accommodate the surface owner’s preexisting use

Question 19

fourth characterisic of mineral rights (right to receive proceeds): what is a bonus?

Answer 19

a payment the O&G company makes to the mineral rights owner upon the EXECUTION of the O&G lease

Question 20

fourth characterisic of mineral rights (right to receive proceeds): what is a delay rental payment?

Answer 20

provision in O&G leases that pay the lessor/mineral owner if the O&G company does not drill within a certain amount of time.

e.g. “if you drill within one year, we are in good standing, but if you do not, you must pay a delay rental payment to extend the lease”

Question 21

fourth characterisic of mineral rights (right to receive proceeds): what is a shut-in royalty payment?

Answer 21

if the O&G company drilled, but failed to market or sell the minerals, this payment replaces the royalty

e.g. “if you do not sell the producton, then you pay me a payment to maintain the lease for another year”

Question 22

the four characteristics of mineral interests are like four sticks. _____ applies to the interests. i.e. you can give away one stick or even break off a piece of one stick for ya homie

Answer 22

severence

Question 23

what is a royalty interest?

Answer 23

it’s what is RESERVED in the O&G lease. it is a share in production FREE of production costs. all of the cost is free to the royalty interest owner and is paid by the lessee/O&G company.

Question 24

what are the three types of royalty interests?

Answer 24

landowner, non-participating, and overriding

Question 25

what is a landowner royalty interest?

Answer 25

a proportionate share of gross production of minerals, free of cost.

e.g., mineral interest owner Bob enters into a lease covering Blackacre for a 1/8 royalty. Bob’s royalty interest is equal to 1/8 of the share of production, free of cost

Question 26

what is a non-participating royalty interest? (aka NPRI)

Answer 26

it is an interest carved out of the landowner royalty interest.

e.g., Bob is a mineral interest owner and Bob enters into an O&G lease with an oil company. Bob sererves a 1/8 royalty. As a landowner, Bob is entitled to 1/8 landowner royalty interest. if Bob later conveys half of his royalty interest to his daughter Bobbett, she would receive a 1/16 NPRI or non-participating royalty interest. she does not participate in the leasing, etc.

Question 27

what is an overriding royalty interest? what is the abbreviation?

Answer 27

it is an interest carved out of the lessee’s interest (the person who owns THE LEASE…the O&G company)

if Bob has a 1/8 landowner royalty interest and conveys half to his daughter bobbett, now he has 1/16 landowner and she has 1/16 nonparticipating. the O&G company has 7/8 NET REVENUE interst or 7/8 leasehold interest. now, if the O&G company decides to pay a drilling engineer with an interst in the minerals rather than a higher salary, and they give him a 3% interest, that 3% comes out of the O&G company’s 7/8 leasehold interest and is called an OVERRIDING INTERREST, bitches.

Question 28

the leasehold interest is also knowng as the

Answer 28

working interest

Question 29

the leashold interest is…

Answer 29

the interest GRANTED to the LESSEE under the terms of an O&G lease

Question 30

the leasehold/working interest differes from a royalty interest in that the leashold interest…

Answer 30

bears all costs and liabilities associated with drilling the wells

Question 31

what are the motherfucking types of trespass?

Answer 31

bitch, ionno!

three most common are ordinary trespass, slant-well trespass, and geophysical trespass

Question 32

what is an ordinary trespass?

Answer 32

unlawful drilling into another’s mineral estate. if minerals are produced, then a claim for conversion will arise

rmr, even the surface owner can trespass on the mineral owner

Question 33

what is slant-well trespass

Answer 33

drilling from one tract into and under an adjacent tract without permission.

Question 34

what is geophysical trespass

Answer 34

gathering geophysical data directly from under a tract without permission. mineral owner is the only person able to obtain this data, so must get his consent

Question 35

is hydraulic fracturing considered trespass?

Answer 35

in Coastal Oil & Gas v Garza, court determined that the fractures themselves do not constitute actionable trespass. the rule of capture applies to hydraulic fracturing. so apply those rules and limitations.

Question 36

there is trespass. and there is trespass that results in production. if production, then the minerals turn to personal property. in which case there is trespass PLUS ____

Answer 36

conversion

Question 37

for trespass and conversion, the amount of damages will depend on…

Answer 37

whether the trespasser acted in good faith or bad faith

Question 38

what are the damages for good faith trespass and conversion?

Answer 38

FMV - costs

the fair market value (NOT what actually sold for) of the minerals produced, valued at the time of production

MINUS

the trespasser’s costs to drill the well if it benefited the owner

trespasser can even conitnue to drill in order to recoup costs before being ejected from the property.

Question 39

what are the damages for bad faith trespass?

Answer 39

FMV of the minerals produced, valued at the time of production.

the trespasser will NOT be entitled to recover any costs to drill the well (this is called “the harsh rule”)

Question 40

what are the damages for trespass when there is an O&G lease? who has right to seek damages or eject?

Answer 40

only lost royalties for lessor, while the lessee can sue for the fair market value of the minerals

both have the right to seek damages or eject the trespasser

Question 41

what are dry hole damages?

Answer 41

when a trespasser drills but does not produce minerals, damages are fair market value of the minerals before the dry hole (i.e., what the ineral owner would have received but for the trespass, like the bonus + initial or delay fees)

Question 42

minteral interest owners must prove __ elements for slander of title. they are:

Answer 42

must prove 5 elements:

1. publication
2. false statement
3. made with malice
4. causing financial loss (usually lost sale)
5. standing

Question 43

the measure of damages for slander of title is..

Answer 43

the difference between the FMV of the land before and after the slander

Question 44

what does the typical slander of title example look like?

Answer 44

Chevron obtains an O&G lease. if the lease expires and Chevron refuses to release the lease from the public records, and then Shell comes along and wants to lease the mineral interest owner’s land, the mineral interest owner may have a suit for slander of title against Chevron.

Question 45

adverse possession does/does not have the same requirements for surface and mineral interests

Answer 45

does

Question 46

for adverse possession, the adverse use must be..

Answer 46

exclusive, continuous, hostile, open, and notorious

Question 47

what is the unsevered adverse possession rule?

Answer 47

if the mineral and surface estate are owned by the same person, and the adverse possessor adversely possesses the surface estate, they the adverse possessor will obtain title to the mineral estate as well

Question 48

what is the severed adverse possession rule?

Answer 48

if the minerals and surface estate are owned by different people, then..

to adversely possess the mineral estate, the adverse possessor must actually drill and produce for the statutory period of time

Question 49

if a severed estate, can slant-well drilling satisfy the elements of adverse possession?

Answer 49

slant-well drilling alone cannot satisfy the elements of adverse possession

Question 50

what is the doctrine of relation back and how does it relate to adverse possession?

Answer 50

the doctrine of relation back says that title relates back to when the adverse possession began. so was the property severed or unsevered when the adverse posession started? based on this, adverse possession might or might not requrie actually drilling and producing for the statutory period

Question 51

if co-tenants (aka tenants in common), then each owner has right to … . what does this entail?

Answer 51

possess the whole of the mineral estate. so that means each has the right to explore, develop, and produce without the cosent of the other.

Question 52

if A and B both own blackacre, and A leases to O&G co, but B does not consent, then A has a ___ interest and B has a ___ interest in the minerals

Answer 52

royalty interest; working interest

Note: royalty interest is the only one free of production costs. the nonconsenting basically owns 50% of the minerals and has a working interest bc must pay/reimburse for the production costs (but, rmr, never out of pocket but rather will start collecting once well reaches payout phase)

Question 53

nonconsenting cotenant has three options if other cotenant begins production:

Answer 53

1. enter into an oil and gas lease and obtain a royalty interest, in which case they get paid as of day 1
2. ratify the other cotenant’s O&G lease. would be treated as royalty interst owner after ratification.
3. DO NOTHING and be treated as a carried working interest (this is called “carried” because the O&G company “carries” the debt)

Question 54

T/F. cotenants have a legal right to partition the mineral estate

Answer 54

T

Question 55

what are the elements required to partition?

Answer 55

1. joint ownership
2. possessory interest
3. equal dignity (i.e. equal interest, not quantity)
4. the ownership must exist throughout the entire tract

Question 56

court have two options for partitioning the mineral estate:

Answer 56

1. partition in kind - equal tracts (generally applies to undeveloped tracts) or “checkerboard” (generally applies to larger tracts)
2. partition by sale - land is productive or there is evidence that a fair division cannot be made

Question 57

a life tenant and remainderman do receive legal interest in a mineral estate and can explore, develop, and produce oil as long as:

Answer 57

1. the life tenant does not drill new wells or enter into new leases without the consent of the remainderman (bc otherwise this would be waste)
2. a remainderman cannot grant new leases for exploration or production without the consent of the life tenatn (bc this would be trespass)
3. therefore, a life tenant and remainderman must jointly consent to new drilling and new leases

Question 58

what is the general rule for distribution of proceeds between a life tenant and a remainderman?

Answer 58

if the life tenant and remainderman execute an O&G lease, the bonus and royalties due under the lease are paid to an INTEREST-BEARING ACCOUNT. the interest is paid to the life tenant and the principal remainder upon death of the life tenant is paid to the remainderman. the delay rentals are paid directly to the life tenant.

Question 59

what is the exception to the general rule re the distribution of proceeds between a life tenant and remainderman after an O&G lease?

Answer 59

it is called the Open Mines Doctrine.

if an O&G lease is open at the time the successive ownership is CREATED, then all the proceeds under the O&G lease are paid to the life tenant

Question 60

recall open mines doctrine depends on whether an O&G lease is open when the successive ownership is created. in the context of a will that creates a successive ownership interest, when do we count as the point at which the successive interst is created: the time the will is created or the time the dude dies?

Answer 60

in the context of a wil, the DEATH is what creates the successive ownership if there is a remainder, NOT the writing of the will

Question 61

if a life tenant is covered by the open mines doctrine, when does that coverage end? can it be extended, or the lease renewed?

Answer 61

it ends at the end of the O&G lease. extension, renewal, new lease etc will not extend the doctrine

once the “mine” closes, it goes back to the general rule

Question 62

in O&G context, what does “essential lease clause” mean

Answer 62

just means important, not necessarily required

Question 63

T/F. an O&G is similar to a landowner/tenant relationship.

Answer 63

F.

Question 64

what kind of conveyence is an O&G lease? what does this mean

Answer 64

it is a fee simple determinable

once the mineral owner enters the agreement, they have DEEDED their mineral interest to the O&G company and the O&G company now owns most of the bundle of sticks (recall the GREATEST ESTATE POSSIBLE RULE–lessee gets most sticks and the lessor just reserves the right to the royalties. that’s the ony stick they are keeping).

this means that the lessee becomes the owner of the mineral estate, while the lessor retains a POSSIBILITY OF REVERTER in the mieral estate (i.e. at some point it will expire and the whole bundle goes back to the grantor)

Question 65

what is a granting clause (one of the essential lease clauses)?

Answer 65

it identifies the interest being granted AND provides a physical legal description of the property

Question 66

granting clause: what if the lease mentions “other minerals”…how should we define “other minerals”? which are considered part of the surface vs part of the mineral estate

Answer 66

LEASE ENTERED INTO PRIOR TO JUNE 8, 1983:

apply the SURFACE DESTRUCTION test to determine which minerals were owned by the mineral owner and surface owner. if the minerals are near the surface AND if extracting the minerals would cause the surface estate to be destroyed, then those minerals are considered part of the surface estate.

LEASE ENTERED INTO ON OR AFTER JUNE 8, 1983:

apply the ORDINARY AND PLAIN MEANING test to determine which minerals belong to the mineral vs surface owner. if the substance is a mineral by the plain meaning of the word, then it belongs to the mineral estate [but there is a HUGE list of exceptions/clarifications tested on another slide]

Question 67

what are the exceptions/clarification to the “ordinary and plain meaning” test for determining whether something captured in “other minerals” is part of the mineral estate or surface estate

Answer 67

water sometimes generates bubbles like carbonated soda
W S G B L C S
water, sand, gravel, building stone, limestone, clay, surface shale

near-surface LIC
near-suface lignite, near-surface iron, and near-surface coal

NOTE: no bright-line rule for near-surface, but one case found that 200 ft or less below surface was near-surface

Question 68

what is the mother hubbard clause?

Answer 68

it is a provision that tries to pick up missing tracts that may accidentally omitted

Question 69

how do courts interpret mother hubbard clause?

Answer 69

no matter how broadly the mother hubbard clause is written, courts will only construe the provision as pertaining to small strips of land adjacent or contiguous to the described tract which were accidentally left out of the legal description

Question 70

what is a habendum clause? what are some parts of the habendum clause called? give example, bitch

Answer 70

this provision establishes the duration of the lease

it consists of the primary and secondary terms

for example, “i hereby lease to you blackacre for three years, and for so long as oil or gas is produced”
here, “for three years” is the primary term and “for so long as oil or gas is produced” is the secondary term

Question 71

in a habendum clause, what does a secondary term like “for so long as” create?

Answer 71

it creates the fee simple determinable.

Question 72

habendum clause: how do the primary and secondary terms differ with respect to requirements of the O&G co to hold the lease?

Answer 72

in the primary term, the lessee can hold the lease without drilling a well. the secondary term requires production for the O&G company to maintain the lease

Question 73

habendum clause: what is the standard to determine whether an O&G company is “producing” so as to satisfy/keep open the lease during a secondary term

Answer 73

“produced” means ACTUALLY PRODUCE in PAYING QUANTITIES

[def of paying quantitites on another card]

Question 74

habendum clause: what is the test for when production is in “paying quantitites”?

Answer 74

it is a two-part test.

you start with a litmus test:
do the O&G company’s proceeds from the lease exceed the operating costs over a reasonable time?
IF YES, the well is producing in paying quantities and the lessee has maintained the lease into the second term (12 months has been deeemd a reasonable period of time).
IF NO, then go on to the second test

objective test (or the reasonably prudent operator test):
would a reasonably prudent operator continue to operate the well at a loss for reasons other than mere speculation?
IF YES, the well is deemed producing in paying quantities
IF NO, then the lease terminates per the habendum clause

Question 75

in determining whether a well is producing, how does law treat a temporary halt in production?

Answer 75

a temporary halt is forgiven if the O&G co. tries to restore in a reasonable time (probably 1-2 months). this is an implied savings clause

Question 76

what is a delay rentals cause and how does it affect the O&G co?

Answer 76

the delay rental provision requires the O&G compay to drill a well quickly. if not, a payment is required to extend the lease

Question 77

T/F. a delay rental only applies to the primary term.

Answer 77

T, a delay rental clause only applies to the primary term. you can’t just pay delay rentals forever. it has nothing to do with the secondary term.

Question 78

a delay rental clause is a ____; a breach of a delay rental clause leads to…

Answer 78

condition

automatic termination of an oil and gas lease

Question 79

what is a shut-in payment or shut-in rental clause?

Answer 79

a shut-in rental clause applies to the secondary term and states that if the O&G co is not selling for a period of time, the O&G co. can pay to extend the lease (this is required because, remember, the habendum clause sets the secondary term as SO LONG AS producing in paying quantitied)

Question 80

a shut-in payment clause is ____; a beach of the clause leads to automatic termination (T/F)

Answer 80

traditionally considered a covenant, not a condition (rmr: a condition is a fact that MUST exist while a convenant is a PROMISE to do something)

F, does not lead to automatic termination because it is a covenant, not a condition

Question 81

what is a paid-up provision?

Answer 81

when all rentals have been paid up front, and no rentals shall be due during the primary term. there is no obligation to drill during the primary term.

Question 82

what do savings clauses do?

Answer 82

they act like actual production clauses to maintain an O&G lease. another way to think of them is as defining constructive production

Question 83

what does a “dry hole provision” say?

Answer 83

if you are engaged in operations, and that particular well does not produce oil or gas, you have X number of days to commence operations on another well per this clause

Question 84

what does a “engaged in operations clause” say?

Answer 84

if the O&G company is engaged in operations, even though they are not actually producing, the O&G company is able to maintain the lease under this savings clause, as long as the operations are in GOOD FAITH and WITHOUT CESSATION to obtain production

note: the idea is that, once production is obtained, then must actually market and sell in paying quantities)

Question 85

explain what the “temporary cessation of production clause” is, how it fits into O&G leases.

Answer 85

every well will have a time where it ceases production, whether by mechanical failure or other reason. this clause is meant to address cessation

• if there is an express temporary cessation provision, then you have X number of days to restart production
• if not,it is still always implied in a lease. courts grant an IMPLIED COVENANT OF CESSATION to allow a reasonable time period to conduct operation to get a well back online

Question 86

what does a force majeure clause say?

Answer 86

basically that the lease will be maintained when the lessee is prevented from operating under the lease due to an act of God or some other event out of the control of the O&G company

Question 87

T/F. unlike the cessation covenant, the force majeure clause is not implied.

Answer 87

T. not implied and must be an express provision

Question 88

explain what an entirities clause is

Answer 88

to understand this, must understand what non-apportionment is. in texas, we have a rule of non-apportionment. this means that if a well is drilled on a tract and the tract is later divided (e.g., half of it is sold) then only the owner of the part with the actual well the subsequent payments. an entirites clause prevents this potential unfairness by saying it must be apportioned.

Question 89

T/F. someone with landowner royalty interest does not pay production or marketing costs.

Answer 89

F. post-production costs (getting the minerals from the well head to the point of sale) are borne by both owners

Question 90

breach of a royalty clause (i.e. failure to pay) is seen a breach of a condition/covenant, so…

Answer 90

covenant, so does not result in termination of the lease

Question 91

name and define the two main methods of determining how much a landowner should be paid

Answer 91

the market value method: what a reasonably prudent purchaser would pay
the amount realized method: what the O&G co. actually obtained

Question 92

explain dis shit. how do courts determine market value when using the market value method for determining what is owed to the landowner? what is the provision in most O&G leases that requires this

Answer 92

most O&G leases contain an at the well provision, which means that market value of the extracted minerals should be determined by market value at the well. if sold very close to the well, great, but the problem is that most oil and gas is not sold very close to the well. the market value at the well site is therefore largely a theoretical number.

courts determine the “at the well” market value by considering three factors:

1. If there are other direct sales from the well, these transactions are a good indication of what a reasonable purchaser would pay at the well
2. If there are no direct sales from the well but there are direct sales of same quality oil from nearby wells, those transactions are a good indication of what a reasonable purchaser would pay at the well.
3. If there are no direct sales from the well or comparable nearby wells, then the court looks at the market value at the actual point of sale and deducts the amount of money it costs to get the minerals from the wellhead to the actual point of sale (known as THE NETBACK METHOD)

Question 93

in texas, the market value means the market value at the time of production/at the time of sale

Answer 93

at the time of production.

so if you are land owner and your lease says market value method of payment, and the price of oil increases sharply between production and sale such that the O&G sells it for way more, you still get FMV at the time of production

Question 94

in the context of an O&G lease between land owner and O&G company, what is a “take or pay provision”?

Answer 94

gas purchasers often promise O&G companies it will either “take or pay” for specified amounts of O/G. gas purchasers pay for these rights and royalty owners want to get their fair share of the payment, but O&G companies can say they do not owe them anything because the O/G not produced yet. a take or pay provision in a lease gives the landowner his fair share

e.g., “if you enter into a take or pay provision based on my minerals, i should get a cut”

Question 95

what are the three choices in terms of offering warranty. what do they do

Answer 95

1. no warranty
2. general warranty - warrants title against any problem throughout the chain of title
3. special warranty - warrants title by, through, and under the lessor only (e.g. “I have not done anything to cloud my title but not sure about anyone else bro”)

Question 96

what is a proportionate reduction provision?

Answer 96

most leases purport to cover all of the mineral estate in the lease. a proportionate reduction provision says that the monetary benefits under the lease will be reduced proportionately to the amount that is actually owed.

Question 97

what is a division order

Answer 97

Prior to distributing royalty payments to the lessor, the lessee will mail a contract to the lessor called a “division order.” The division order indicates how the royalties are to be calculated and describes the lessor’s ownership interest. The lessee requests that the lessor sign a division order to ensure that the lessor agrees on how the lessee is going to pay the royalties.

Question 98

what is the effect of the landowner signing the division order; not signing the division order

Answer 98

If the lessor signs the division order, the division order is considered binding on the lessee and revocable by the mineral interest owner. Therefore, if the lessor executes a division order that modifies the lease, the modification will be binding, but it can be revoked by the lessor.

If the lessor refuses to sign a division order that complies with the statutory requirements, the lessee may suspend royalty payments.

Question 99

list some IMPLIED covenants

Answer 99

1. covenant to act in good faith/develop the lease
2. covenant to protect against drainage
3. covenant to market
4. covenant for reasonable development
5. covenant to test
6. covenant to operate diligently and properly

in texas, there is NO implied covenant to further explore

Question 100

what is the standard for an implied covenant?

Answer 100

Lessees are subject to the objective standard of a REASONABLY PRUDENT OPERATOR. Whether an oil producer has operated as a reasonably prudent operator is judged in light of the facts, circumstances, and surrounding conditions shown by the evidence to have existed in the oil field during the relevant time period.

Question 101

implied covenants: explain the covenant to protect against drainage

Answer 101

even though there is no duty to produce in the primary term, lessees still have a duty to prevent drainage or waste

to maintain an action, the lessor must show:

1. substantial drainage;
2. that a reasonably prudent operator would drill to prevent against the substantial drainage (this entails that the well must be proven profitable); AND
3. damages (measured by the yield of production absent the waste)

Question 102

implied covenants: to prove that O&G co failed to prevent against drainage, is it enough to show that a neighbor very close drilled a well and is producing oil? if not, what would you have to show about the neighbor?

Answer 102

It is not sufficient merely to prove that a well was drilled on adjoining land and that it produced oil. The lessor must also show that the well produced in paying quantities, that it actually drained a definite amount of oil, that an ordinarily prudent operator would have drilled an offset well that would have produced a definite quantity of oil, and that its operation would have resulted in a profit to the defendant. Circumstantial evidence is admissible in a suit of this kind.

Question 103

implied covenants: can there be an express covenant to address drainage that modifies the duty/standard in the implied covenant?

Answer 103

only for the primary term. after the primary term, switches to implied covenant standard

Question 104

implied covenants: what is the covenant to market?

Answer 104

once oil or gas is discovered, this covenant requires the company to market for the prevailing market price within a reasonable time

Question 105

implied covenants: what is the covenant to reasonably develop the land?

Answer 105

Lessees have a general duty, upon discovery of oil and gas reserves, to use the best technology to begin production and produce a profit.

Question 106

implied covenants: what is the covenant to further explore?

Answer 106

trick question, bitch! in texas there is no implied duty to further explore

Question 107

implied covenants: what is the covenant to test?

Answer 107

within a reaonable time of executing the lease, the company will test the property for minerals (this is before any production..just to see if there are actually any minerals)

only applies if there is no delay rental or paid-up provision

Question 108

implied covenants: what is the covenant to operate diligently and properly?

Answer 108

This is the catch-all provision that requires the lessee to act as a reasonably prudent operator in administering the lease.

Question 109

what are the remedies for beach of an implied covenant?

Answer 109

1. ferrrst of all, landowner MUST give O&G co notice and opportunity to cure
2. if notice given and still no cure, court may award termination of the lease
3. courts prefer monetary damages as a remedy (lost royalties: what would they have received but for the breach?)

Question 110

texas used to treat the relationship between O&G leases and security interests in land with the general “first in time, first in right” rule.

THEN, IN 2016, it made an exception for O&G leases. explain the exception/the current law

however..

Answer 110

The Texas legislature intervened, resulting in Chapter 66 of the Texas Property Code. Under Section 66.01(b), “an oil or gas lease covering real property subject to a security instrument that has been foreclosed remains in effect after the foreclosure sale if the oil or gas lease has not terminated or expired on its own terms and was executed and recorded in the real property records of the county before the foreclosure sale.” Therefore, if a lease was dated and filed of record prior to the foreclosure sale it is given statutory priority and will no longer be extinguished, even if it was recorded after the original mortgage. Instead of lease forfeiture, the purchaser of the foreclosed property acquires the property subject to the lease, along with the right to receive lease royalty payments.

However, with regard to tracts of land in which the surface and mineral estates have not been severed, Section 66.01(c) provides that, “the foreclosure sale terminates and extinguishes any right granted under the oil or gas lease for the lessee to use the surface.” Therefore, the right of “ingress and egress” granted under most any oil and gas lease is extinguished by foreclosure, and the operator loses the right to conduct surface operations on the foreclosed tract.

Question 111

key differences between langauge of conveyance of mineral interest vs royalty interest

Answer 111

key difference is whether the language is identifying/conveing the rocks in their place or the minerals produced/the future production

if you have lanaguage identifying the rocks in place, it is a mineral interest (e.g., interest in the minerals in and under hagoo farms)

if you have language talking about production, it is a royalty interest (e.g., interest in the minerals that may be PRODUCED)

if you have both, it almost certain to be royalty

Question 112

Under Texas property law, a person who makes an offer to purchase only the mineral or royalty interest must include

Answer 112

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

Question 113

A person who conveys a mineral or royalty interest may bring suit against the purchaser if (relates to the conspicuous notice requirement):

Answer 113

1. the purchaser did not give a notice complying with the above requirements; and
2. the person has given 30 days written notice to the purchaser that a suit will be filed unless the matter is otherwise resolved.

Question 114

in terms of the dump conspicuous offer rule when a company/person is buying mineral or royalty interests, if the buyer violates the standards, what is the land owners remedy if the landowner prevails in an action against the buyer?

Answer 114

A person who prevails in a suit against the purchase of the mineral or royalty interest may recover the greater of:

1. $100; or
2. An amount up to the difference between the amount paid by the purchaser for the mineral or royalty interest and the fair market value of the mineral or royalty interest at the time of the sale.

Question 115

“i want to convey [fraction] OF my [fraction] interest in the minerals under blackacre”
“of” indicates that you should ___

“i want to convey [fraction] OUT OF my [fraction] interest in the minerals under blackacre”
“out of” indicates that you should ___

Answer 115

multiply to see what grantee gets

subtract

Question 116

what is the duhig doctrine?

Answer 116

if there is an over-conveyence above 100%, this doctrine reduces the interest of the one who did the over-conveying to satisfy the grant

this is really a doctrine of estoppel that estopps an over-conveyor from claiming shit when he da real dumbass

Question 117

what is the formula for calculating the landowner interest

Answer 117

landowner interest = (original mineral interest x retained royalty) - nonparticipating royalty interest

Question 118

what is the formula for calculating the leasehold interest?

Answer 118

leasehold interest = the net profits - royalty interest - the overriding royalty interest

Question 119

pooling is when..

it results in…

Answer 119

a lessee combines two or more tracts to create one unit

Question 120

how does a pooling clause work?

Answer 120

a pooling clause serves as a savings clause by modifying the habendum clause–production on any tract in a pooled unit maintains the lease on any of the pooled tracts

Question 121

what are the requirements to exercise a right to pool?

Answer 121

in the even that the O&G co. exercises its right to pool, it must do so in good faith and get the mineral owner’s consent before enterting into a pooling agreement

Question 122

reasons for lanowner to pool…

Answer 122

1. tract is too small.
2. spreads the risk
3. participate in more wells to maximize profit

example: tract A and tract B are adjacent to each other (each 50 acres). they pool before a well is drilled and do not know where the better well will be. pooling spreads the risk and maximizes the profits.

Question 123

reasons for O&G company to pool…

Answer 123

1. flexibility regarding the number of locations of wells

2. pooling erases the lease boundary line (otherwise would have to be certain distance away from boundary lines)

Question 124

in a pooling arrangement, the royalies must be..

Answer 124

proportionately reduced (if you keep same pre-pool numbers landowners would be getting more)

Question 125

what is the pugh clause

Answer 125

whatever acreage that is not included in the pooled unit termiantes and goes back to the mineral owner. that way he could lease it to someone else.

Question 126

what is pooling by law

Answer 126

if owners of separate tracts sign a single lease covering both their tracts, a pooled unit is automatically formed. production on any tract is shared among the owners based proportionally on the amount of acreage they own

Question 127

what is the mineral interest pooling act or MIPA

when can it be exercised by commission

Answer 127

a LIMITED (not favored) compulsory pooling statute created to protect small-tract owners and operators. provides that when there are two or more separately owned tracts over a single common reservoir of oil or gas, the commission may pool the interests in the unit (not to exceed 160 acres for oil or 640 acres for gas, plus 10 percent). Compulsory pooling may be ordered by the commission only when:

there is different ownership among the tracts over the same reservoir, there is a good faith inability to agree, and at least one owner drilled or proposed to drill a well

Question 128

purpose of MIPA

Answer 128

avoiding unnecessary wells, protecting correlative rights, preventing waste

Question 129

what is unitization and how common is it in texas

Answer 129

it is field-wide pooling (pooling the entire reservoir) so that production from ANY location on that reservation is shared with everyone. rare in texas

Question 130

“fieldwide” rules trump “statewide” rules. T/F

Answer 130

T. you can think of statewide as the minimum standard, the floor

Question 131

what is Rule 37

Answer 131

well spacing rule. a statewide rule

1. a producing well must be at least 467 feet from a lease line or from unleased lines (AKA property line.. also rmr that pooling eliminates lease lines)
2. producing well must be at least 1200 feet from another producing well

rmr any field rules trump statewide rules

Question 132

what is Rule 38

Answer 132

density rule
statewide rule

it requires at least 40 acres to be attributable to each well drilled

Question 133

what is the first big exception to rule 37 and 38? explain. what prevents your from using the exception

Answer 133

would be unfair to not let ppl with small amounts of land (like under the 40 acre threshold in the Rule 38 density rule) drill and get money like all the big wigs with more land. that is why the big exception to Rule 37 and 38 is CONFISCATION. in other words, to prevent other peeps to drain and confiscate all the oil under your land, EVERY LANDOWNER is allowed to DRILL ONE WELL, regardless of the size of their lot.

However, no exception is allowed if there is a voluntary subdivision where the small tract was created after the discovery of oil and gas or created with the intent to circumvent the provisions of Rule 37.

Question 134

what are the other two exceptions to rule 37 and 38? explain

Answer 134

waste and correlative rights.

Exceptions to Rule 37 and Rule 38 are permitted to prevent waste, even on voluntary subdivisions, if unique considerations, such as an existing hole, are shown.

Exceptions to Rule 37 and Rule 38 are permitted to protect correlative rights.

Question 135

what is a proration or allowable?

Answer 135

sometimes the comission sets production limits. an “allowable” or “proration” is the formula that says how much each well can produce in a particular field. it is based on acreage and how much can be produced

Question 136

how do we classify when a well is an oil vs gas well

Answer 136

Wells in Texas are classified as either gas wells, which produce less than one barrel of oil per 100,000 cubic feet of gas, or oil wells.

Question 137

what is the 1991 well cleanup fund

Answer 137

all operators that drill a well must provide bonds that are paid to the fund in the event that the well is not plugged or abandoned, or there was a spill that needed to be cleaned up. if an operator committed a violation that required the Railroad Comission to use the funds within the last 5 yrs, that operator is barred from drilling additional wells

Question 138

what is the relinquishment act

Answer 138

applies to all public lands conveyed between 1895 and 1931 in the state of texas. the act granted the land but only the surface rights. the mineral rights belong to the state of texas and the act would allow the landowner to lease on behalf of the state.

the surface owner held the minerals as a fiduciary to the state of texas, but could not convey them in fee. surface owners could lease the minerals but had to pay a 1/16 royalty to the state