Oil & Gas

Question 1

What is the rule of capture?

Answer 1

A rule of nonliability for causing oil and gas to migrate across property lines, resulting in drainage of oil and gas from one person’s land to another.

Question 2

What are exceptions to the rule of capture?

Answer 2

Negligently drilled oil and gas (like blowouts)
Illegally drllled oil and gas
stored gas

Question 3

What are corralative rights?

Answer 3

The rights of every real property owner to the fair opportunity to produce oil and gas from a common reservoir.

Question 4

What rights are included in the mineral estate?

Answer 4

The development right, the executive rights, and the economic right.

Question 5

What is the development right of a mineral estate?

Answer 5

The right to explore, produce, and develop the minerals

Question 6

What is the executive right of a mineral estate?

Answer 6

The right to lease the minerals

Question 7

What is the economic right to a mineral estate?

Answer 7

the right to receive bonuses, royalties, and delay rentals

Question 8

What rights does the mineral estate holder have as the dominant estate for a severed estate?

Answer 8

The right to use the surface as reasonably necessary to develop gas, subject to the accomodation doctrine

Question 9

What is the accomodation doctrine?

Answer 9

The surface estate owner can prevent surface use if the surface owner has a preexisting use of the surface and there are reasonable, available, alternative methods of producing the minerals without damaging the surface estate.

Question 10

What is a delay rental?

Answer 10

payment for deferring drilling during the primary term of the lease.

Question 11

What type of interests are created in an oil and gas lease/ severance?

Answer 11

The lessee has a fee simple determinable, and the lessor has a possibilty of reverter.
The working interest gives the lessee the right to explore, develop, and produce from the property and to pay the costs of production.
The royalty interest gives the lessee a share of production free from the costs of production.

Question 12

What is a nonparticipating royalty interest?

Answer 12

The right to receive payments, severed from the mineral interest. The NPRI is not “participating” because he has no executive right. The mineral estate owner is NOT the NPRI.

Question 13

Significance of “of?”

Answer 13

1/8 royalty is 1/8 of the profits. 1/8 of royalty is 1/8 of 1/8. “Of’s” insertion gets you less

Question 14

What rights does a cotenant in a mineral estate have?

Answer 14

Each cotenant can drill and produce the land without others’ permission, but must give accounting of share of profits.
Dry holes’ costs cannot be counted against covenants.

Question 15

What is ratification for mineral co-tenenants?

Answer 15

If a cotenant leases the estate for a royalty, other cotenants can ratify it to get a share of the royalty, free of operating costs, to share in gross revenues.

Question 16

Life tenants and mineral rights?

Answer 16

Either the life tenant or remainder man needs the other’s permission to grant an oil and gas lease.
IF a lease is agreed to, common law division is delay rental and interest on bonus and royalty goes to life tenant, while remainderman gets principal of bonus and royalty.
An exception is for open mines, where the lease is there before the life tenancy is created. Then the life tenant gets all the benefits under the lease.
Another exception for life tenancy created by trust.

Question 17

Life tenancy created by trust?

Answer 17

Since 2004, Life tenanc gets 85% of everything and reminder man gets 15% of everything, held in escrow until life tanant dies.

Question 18

Mortgages and mineral interests?

Answer 18

If the mortgage is recorded before the lease, then the lessee takes subject to it. If the mortgagee forecloses, he must sell the surface assets first to try to preserve the mineral estate.
If the lease is first, then the lease can’te be foreclosed because the mortgage did not include the minerals as a mortgage asset.

Question 19

What are types of trespass of mineral rights and what are their damages?

Answer 19

1. trespass of a holdover lessee. Injunction, actual, and punitive damages.
2. slant well drilling. injection, actual, and punitive damages.
3. drilling a dry well as a trespasser. lost bonus for lost information value.
4. Geophysical/ seismic trespsss: assumpsit for value of doing the testing.

Question 20

What is explicitly not a trespass?

Answer 20

conductiong secondary recovery operations.

Question 21

How can good/bad faith affect damages?

Answer 21

If the trespasser has honest and reasonable belief in superior title, then he can get credit for share in the costs of production that benefit the rightful owner, while bad faith is liable for the gross value of production.

Question 22

What is slander of title?

Answer 22

prove publication of a false claim of title to the property, malice, and loss of a specific sale or lease, then the plaintiff can recover the difference between the market value at the time of slander and its value at trial with the cloud removed.

Question 23

Adverse possession of mineral rights?

Answer 23

IF the entry on the land occurs before the estate is severed, then the AP gets titlte to the surface and the minerals. If the severance occurs first, the AP=or must AP the minerals to get them, otherwise, he only owns the surface estate.

Question 24

What is the granting clause in an O &G lease?

Answer 24

The part of the lease that sets for the rights given and a description of the property

Question 25

What is a mother hubbard clause?

Answer 25

It describes small strips of land not specifically included in the granting clause because of mistakes int eh surveys or descriptions, allowing those small strips to be covered under the lease.

Question 26

What is the habendum clause?

Answer 26

It sets forth the lease’s duration, including the primary and secondary terms.

Question 27

What is paying quantitles?

Answer 27

implied in the secondary term’s requirement for production. REvenues minus royalty minus operating costs. Initial costs aren’t included.

Question 28

What are common law exceptions to production in paying quantities?

Answer 28

temporary cessation doctrin when there is a short shutdown from mechanical or similar breakdown that hte lessee acts diligently to fix.
Marginal well doctrine, when the well PPQ only some months out of the year can be excused if a reasonably prudent operator would continue to operate.
Repudiation if the lessor obstructs the lessee from developing the lease.

Question 29

What is a delay rental clause?

Answer 29

it requires the lessee to pay while lease has not started drilling or production during the primary term.
The delay rental clause can say “unless” or “or.” If it says “unless,” then the clause is a condition of the lease, the lease automatically terminates if there isn’t production and there isn’t delay rentals. If the clause says “or pay” then the clause is a covenant, the lease continues and damages are contract damages.

Question 30

What happens with late delay rentals?

Answer 30

If the lessor accepts the late payment, it revives the lease, based on a loose estoppel theory.

Question 31

What is a notice of assignment clause?

Answer 31

It requires either/both hte lessor or lessee to give notice of an assignment and say that the change in ownership is not binding on the other party until a set time after notice is given.

Question 32

What is a commencement of drilling clause?

Answer 32

With/under the delay rental clause, the commencement of drilling clause says that drilling must start at a specific date unless he pays delay rentals. “Commencement” means objective physical acts and subjective good faith intent to pursue drilling.

Question 33

What are savings clauses?

Answer 33

Provisions in the lease to allow the lease to go beyond the primary term: shut-in royalty, dry hole, continuous operations, cessation of production, for majeure clause

Question 34

What is a shut-in royalty?

Answer 34

Amount paid under the lease to hold the lease int he secondary term without PPQ

Question 35

What is a dry hole clause?

Answer 35

Clause that if the lessee drills a dry hole, the lease can be maintained in the secondary term by beginning another well within a set time.

Question 36

What is a continuous operations clause?

Answer 36

Allows a lease to continue in the secondary term if at the end of the primary term where there were operations, but not yet actual PPQ, as long as those operations continue.

Question 37

What is a cessation of production clause?

Answer 37

A clause that allows the lease to continue in the secondary term when a well stops producing and the lessee commences repairs within a set time.

Question 38

What is a force majeure clause?

Answer 38

Allows a lease to continue in the secondary term where unforeseeable factors prevent PPQ. they can expressly cover covenants or conditions. If they cover covenants only, the lease can still terminate.

Question 39

What is a pooling clause?

Answer 39

It allows the lessee in good faith to hold several tracts of land under leases with PPQ when there is just one well between them. The royalty is split between the tracts in their proportional land contribution to the pool.

Question 40

What is a pugh clause?

Answer 40

It says that when a portion of leased land is pooled, then that portion is severed from the rest of the premises, not allowing that portion to continue into the secondary term without PPQ or shut in royalties.

Question 41

Mineral rights and NPRIs?

Answer 41

The mineral right holder does not have teh ability to pool NPRI’s though he has the right to create, lease them. So NPRI’s do not benefit from subsequent pooling, though they may share in the royalty.

Question 42

What costs are with a royalty?

Answer 42

royalty holders share in post-production costs, like transportation, in proportion to their royalty interest. This is usually termed “at the well.”

Question 43

How is the value of royalties determined?

Answer 43

market value at the well is the amount realized at the well, while market value is the price that similar minerals sell for in the market at the time it is produced.

Question 44

What is a division order?

Answer 44

A form given to all interest holders in and O & G lease to sign and divide how the proceeds will be divided.
Under common law, if a person signs, that is binding until it is revoked, though it can be revoked anytime.

Question 45

1991 Division Act changes?

Answer 45

Division orders cannot contradict a lease, only clarify it. So if a division order is revoked for being wrong from a lease, then the payor is liable to correct the proceed amount.
The lessee can withold paying a royalty holder that refuses to sign a standard division order.
The division order can contradict a deed, though.

Question 46

What covenants are implied by a lessee?

Answer 46

1) . Act as a reasonably prudent operator, including make a profit.
2) . prevent drainage when there is substantial damage, ability to drill a profitable well, and damages.
3) . covenant to market within a reasonable time at the best price realizable
4) . covenant to develop, though hard to prove that there is a reasonable expectation of profit from additional drilling.

Question 47

What duties does an executive right holder have?

Answer 47

Normally good faith, to have due regard for the nonparticipating owners and be willing to execute a lease as a reasonably prudent landowner would.
IF there is self-dealing, then he has a fiduciary standard, where breach may lead to cancellation of the lease and/or the executive right.

Question 48

How to determine whether something is a “mineral” or part of the surface estate?

Answer 48

IF the lease is ambiguous or silent, some things are  part of the surface estate as a matter of law:
building stone
limestone
caliche
surface shale
sand
gravel
water
near-surface lignite
iron ore
   If not on that list and the original lease is before 1983, then it is part of the surface  if any reasonable method of extraction would destroy the surface.
   If not on that list and the original lease was after 1983, then it's a mineral if under the ordinary and plain meaning it is a mineral.

Question 49

What is the nonapportionment rule?

Answer 49

What property is divided after an oil and gas lease, then the owners do not get royalties, though they do get apportioned delay rentals.

Question 50

What is a community lease?

Answer 50

When multiple property owners in contiguous property enter into a single lease covering all their property. Udner Texas law, there is implied pooling.

Question 51

What is the Duhig rule?

Answer 51

When a mineral owner conveys more interest than he has, the grantor bear the loss, or his interest is satisfied first.

Question 52

How do you determine whether something is a mineral interest or royalty interest?

Answer 52

the language: “the oil, gas, and other minerals in, on, or under” are a mineral interest.
the language “oil, gas, and other minerals produced and saved” is a royalty language.
IF there is a mixture of the language, then there is a presumption it is a mineral interest.

Question 53

General rules of deed construction?

Answer 53

Deeds are generally construed against the grantor.

There is a difference between the land “described” and the land “conveyed.”

Question 54

What are the mineral polices of the Texas RRC?

Answer 54

To prevent waste, maximize recovery of oil and gas, protect corratlative rights, and protect the environment.

Question 55

How does the RRC accomplish its primary policies?

Answer 55

drilling permits and spacing
prorationing rules
Minteral Interest Pooling Act

Question 56

What is the drilling permits and spacing rule?

Answer 56

It requires a drilling permit before drilling any well and requires 40 acres to drill unless the drilling is to prevent drainage and the tract was divided befoer oil and gas was discovered.

Question 57

What is prorationing?

Answer 57

setting the maximum amount that an oil and gas well can produce to prevent waste and protect corralative rights.

Question 58

What is the Mineral Interest Pooling Act?

Answer 58

The MIPA allows owners to compel pooling when they share a common resevoire after making a fair and reasonable offer to pool. The RRC cannot compel pooling itself.
Cotenants can’t force pooling, only separate tract owners.

Question 59

What is the relinquishment Act?

Answer 59

some state owned land sold to private parties retained the mineral rights, though the private owners have executive rights and ability to share in economic benefits. Mostly in West Texas.

Question 60

Duty to plug wells?

Answer 60

Because of the potential risk to the public and the environment, the operator of a well at the time of its abandonment has a duty to pug it. Second to them is a working interest, and third to the state.
Mineral holders, royalty owners, and other non-working interest holders do not have plugging duties.