TBE--Prop (O&G) Flashcards
02/14 #10:
Rob owned Blackacre, a 150-acre tract of land in Bell County, Texas, subject to a one-eighth (118th) royalty interest in oil, gas, and other minerals reserved by Sean, the previous owner of Blackacre. Rob farmed
Blackacre and received income from the sale of water from a water well located on Blackacre.
Rob signed an oil and gas lease, leasing Blackacre to Ace Oil Company (“Ace”). Ace began exploration activities and preparation of a drill site. For access to the drill site, Ace constructed a new road that intersected the existing road to Rob’s water well. In the process of construction, Ace left large piles of dirt obstructing part of the existing road, making it impassable. The dirt could have easily been located a short distance away from the road. As a result, Rob lost income from water sales because the trucks that carried the water were unable to reach the well. Because Rob was angry, he installed a locked gate across the new road and refused to provide a key to Ace.
Big Oil Company (“Big”) was aware that Ace had begun exploration on Blackacre. Determined to purchase royalty interests in the area, Big searched the Bell County real property records and discovered Sean’s reserved interest in Blackacre. Big purchased Sean’s royalty interest.
A few days later, Big informed Rob that, since Sean had conveyed his royalty interest to Big, Rob was obligated to pay Big a share of the proceeds of sales of water when those sales resumed.
Was Rob entitled to deny Ace access to Blackacre? Explain fully.
The rule is that the mineral estate is the dominant estate and may use whatever part of the surface as is necessary to explore for and produce oil and gas. The surface estate and surface owner must allow the mineral owner reasonable use of the surface estate to develop the minerals in the ground. Additionally, being the dominant estate, that includes the rights of ingress and egress as well as access to water, sand, rocks, caliche, and other things on the surface estate so as to effectuate the production of oil and gas.
02/14 #10:
Rob owned Blackacre, a !50-acre tract of land in Bell County, Texas, subject to a one-eighth (118th) royalty interest in oil, gas, and other minerals reserved by Sean, the previous owner of Blackacre. Rob farmed
Blackacre and received income from the sale of water from a water well located on Blackacre.
Rob signed an oil and gas lease, leasing Blackacre to Ace Oil Company (“Ace”). Ace began exploration activities and preparation of a drill site. For access to the drill site, Ace constructed a new road that intersected the existing road to Rob’s water well. In the process of construction, Ace left large piles of dirt obstructing part of the existing road, making it impassable. The dirt could have easily been located a short distance away from the road. As a result, Rob lost income from water sales because the trucks that carried the water were unable to reach the well. Because Rob was angry, he installed a locked gate across the new road and refused to provide a key to Ace.
Big Oil Company (“Big”) was aware that Ace had begun exploration on Blackacre. Determined to purchase royalty interests in the area, Big searched the Bell County real property records and discovered Sean’s reserved interest in Blackacre. Big purchased Sean’s royalty interest.
A few days later, Big informed Rob that, since Sean had conveyed his royalty interest to Big, Rob was obligated to pay Big a share of the proceeds of sales of water when those sales resumed.
What are Rob’s rights, if any, against Ace for obstructing the road? Explain fully.
Under Texas law, and as noted above, the mineral estate is considered the dominant estate vis-a-vis the surface estate. This means that a lessee may make reasonable use of the surface, even without further permission from the surface estate owner. However, this right to reasonable use is subject to an important limitation embodied in the accommodation doctrine. Under this doctrine, a mineral estate owner must accommodate a surface owner’s use of the surface if the following conditions are satisfied: the surface owner must have a prior use; there must be a feasible alternative for oil-and-gas operations that does not impair the surface owner’s prior use; and the alternative must be available on the particular land in question.
02/14 #10:
Rob owned Blackacre, a !50-acre tract of land in Bell County, Texas, subject to a one-eighth (118th) royalty interest in oil, gas, and other minerals reserved by Sean, the previous owner of Blackacre. Rob farmed
Blackacre and received income from the sale of water from a water well located on Blackacre.
Rob signed an oil and gas lease, leasing Blackacre to Ace Oil Company (“Ace”). Ace began exploration activities and preparation of a drill site. For access to the drill site, Ace constructed a new road that intersected the existing road to Rob’s water well. In the process of construction, Ace left large piles of dirt obstructing part of the existing road, making it impassable. The dirt could have easily been located a short distance away from the road. As a result, Rob lost income from water sales because the trucks that carried the water were unable to reach the well. Because Rob was angry, he installed a locked gate across the new road and refused to provide a key to Ace.
Big Oil Company (“Big”) was aware that Ace had begun exploration on Blackacre. Determined to purchase royalty interests in the area, Big searched the Bell County real property records and discovered Sean’s reserved interest in Blackacre. Big purchased Sean’s royalty interest.
A few days later, Big informed Rob that, since Sean had conveyed his royalty interest to Big, Rob was obligated to pay Big a share of the proceeds of sales of water when those sales resumed.
Is Big entitled to a share of the water-sale proceeds from Blackacre? Explain fully.
Under Texas law, there are a number of substances that are deemed, as a matter of law, to be part of the surface estate. These include sand, lignite, and, as relevant here, water. If a substance is not deemed part of the surface as a matter of law, then the court applies one of two tests. If the conveyance of the property occurred prior to 1983, then the court asks whether any reasonable extraction of the materials would cause destruction to the surface. If so, the substance belongs to the surface estate. This is known as the “surface destruction” test. If the conveyance occurred after 1983, then the court applies the ordinary meaning test, which asks whether the substance fits within the ordinary meaning of “minerals.” If so, the substance belongs to the mineral estate.
07/13 #6:
Maggie, a widow, owned fee simple title to Blueacre and Goldacre, both located in Irion County, Texas. On February I, 2011, Maggie entered into two oil and gas leases with Gigantic Oil Company (“Gigantic Oil”), one covering Blueacre and the other covering Goldacre.
Each lease was dated February I, 2011. The leases included the following provisions:
• The term of the Blueacre lease was for “three years from February I, 2011, and as long thereafter as oil and gas, or either of them, is produced in paying quantities from Blueacre.”
• The term of the Goldacre lease was for “one year from February I, 2011, and as long thereafter as oil and gas, or either of them, is produced in paying quantities from Goldacre.”
• The Blueacre lease stated, “if operations for drilling to a depth of at least 2,000 feet are not underway within one year from the date of the lease, the lease shall terminate unless Gigantic Oil pays to Maggie the sum of $3,000 as a delay rental on or before February I, 20 12.”
• Both leases stated “When drilling or other operations are delayed or interrupted by fire, storm, flood, war, rebellion, insurrection, riot or strike, or as a result of any cause whatsoever beyond the control of Gigantic Oil, the duration of such delay or interruption shall not be counted against Gigantic Oil.”
On October 19, 2011, Gigantic Oil drilled to a depth of 750 feet and completed a gas well on Blueacre capable of producing a very small amount of gas that would be insufficient to pay costs of production. Gigantic Oil immediately shut-in the gas well.
On January 31, 2012, an employee of Gigantic Oil was on the way to pay Maggie the delay rental of $3,000 for the Blueacre lease when the employee was involved in a serious accident. Consequently, the delay rental payment was not made, which Gigantic Oil did not realize until February 22, 2012. On that day, Gigantic Oil wired the $3,000 payment to Maggie’s bank account, and sent her a letter stating that the failure
to make a payment on or before February I, 2012, was caused by an accident beyond its control, asserting that the late payment was excused by the force majeure clause of the lease.
Also on October 19, 2011, Gigantic Oil completed an oil well on Goldacre that produced paying quantities of oil. On February 5, 2012, a small fire caused by a lightning strike at the oil well on Goldacre
caused its production to be shut down. Repairs were begun immediately, were completed on February 15, 2012, and production resumed on Goldacre the day repairs were completed. Gigantic Oil sent Maggie a letter informing her that production on Goldacre had resumed on February 15, 2012.
On March 4, 2012, Maggie returned to Gigantic Oil the $3,000 delay rental payment for Blueacre and declared that she considered both leases terminated.
Is Gigantic Oil’s lease of Blueacre terminated? Explain fully.
If an oil and gas lease contains a delay rental clause, the oil company must follow it. A delay rental clause allows an oil company to suspend drilling operations during the primary term of the lease by paying a specified sum (in this case $3,000). In addition, the words used in the delay rental clause can have different impacts, if it is an “unless” delay rental clause, then the lease terminates automatically, but if it’s an “or” delay rental clause, then lease does not terminate automatically and the lessor can sue for breach and obtain damages. Also, a lease may be “revived” by the actions of a lessor. Late payments acceptance by a lessor may be construed as reinstating the lease. However, the lessor must accept the payment, must perform some action (such as cash the check) and the lessee must rely on these actions.
07/13 #6:
Maggie, a widow, owned fee simple title to Blueacre and Goldacre, both located in Irion County, Texas. On February I, 2011, Maggie entered into two oil and gas leases with Gigantic Oil Company (“Gigantic Oil”), one covering Blueacre and the other covering Goldacre.
Each lease was dated February I, 2011. The leases included the following provisions:
• The term of the Blueacre lease was for “three years from February I, 2011, and as long thereafter as oil and gas, or either of them, is produced in paying quantities from Blueacre.”
• The term of the Goldacre lease was for “one year from February I, 2011, and as long thereafter as oil and gas, or either of them, is produced in paying quantities from Goldacre.”
• The Blueacre lease stated, “if operations for drilling to a depth of at least 2,000 feet are not underway within one year from the date of the lease, the lease shall terminate unless Gigantic Oil pays to Maggie the sum of $3,000 as a delay rental on or before February I, 20 12.”
• Both leases stated “When drilling or other operations are delayed or interrupted by fire, storm, flood, war, rebellion, insurrection, riot or strike, or as a result of any cause whatsoever beyond the control of Gigantic Oil, the duration of such delay or interruption shall not be counted against Gigantic Oil.”
On October 19, 2011, Gigantic Oil drilled to a depth of 750 feet and completed a gas well on Blueacre capable of producing a very small amount of gas that would be insufficient to pay costs of production. Gigantic Oil immediately shut-in the gas well.
On January 31, 2012, an employee of Gigantic Oil was on the way to pay Maggie the delay rental of $3,000 for the Blueacre lease when the employee was involved in a serious accident. Consequently, the delay rental payment was not made, which Gigantic Oil did not realize until February 22, 2012. On that day, Gigantic Oil wired the $3,000 payment to Maggie’s bank account, and sent her a letter stating that the failure
to make a payment on or before February I, 2012, was caused by an accident beyond its control, asserting that the late payment was excused by the force majeure clause of the lease.
Also on October !9, 20 II, Gigantic Oil completed an oil well on Goldacre that produced paying quantities of oil. On February 5, 2012, a small fire caused by a lightning strike at the oil well on Goldacre
caused its production to be shut down. Repairs were begun immediately, were completed on February 15, 2012, and production resumed on Goldacre the day repairs were completed. Gigantic Oil sent Maggie a letter informing her that production on Goldacre had resumed on February 15, 2012.
On March 4, 2012, Maggie returned to Gigantic Oil the $3,000 delay rental payment for Blueacre and declared that she considered both leases terminated.
Is Gigantic Oil’s lease of Goldacre terminated? Explain fully.
Gigantic Oil’s lease on Goldacre has not been terminated. The issue is whether a stop or delay in production is sufficient to terminate a lease.
In Texas oil and gas leases, there are several savings clauses that will help an oil company in the event of any problems. In this situation the temporary cessation of production comes into play. In Texas, if production stops, a lessor may be able to terminate the lease because the lease is no longer producing in paying quantities. However, this is excused if the cessation is due to a problem outside the control of the oil company, the company diligently attempts to fix the problem within a reasonable amount of time, and the cessation is only temporary. In addition, a force majeure clause, which the Goldacre lease contains, may prevent a lease from being terminated due to an event specified in the clause.
In this case, Goldacre’s lease would fall under the temporary cessation of production, and possibly the force majeure clause. Since the cessation of production was due to an event outside its control and not its fault, i.e. lightning strike, this would bring force majeure and the temporary cessation of production. The force majeure clause states that when drilling or other operations are interrupted by or storm, such delay or interruption shall not be counted against Gigantic. Since the fire was due to a lightning strike, this would fall under the force majeure clause and any delay would not be counted against Gigantic. In addition to the force majeure clause, Gigantic meets the requirements of temporary cessation because Stoppage was due to an event outside its control, and they diligently and quickly fixed the problem. The fire was on February 5th and the facts indicate that repairs were immediately begun and the problems were fixed within 10 days. 10 days is likely a reasonable amount of time. In addition, on February 15th the well was back to producing in paying quantities. Because Gigantic Oil is protected by the force majeure clause and the temporary cessation of production, its lease has not been terminated.
02/13 #1:
Bob, a single person, owned a 200-acre tract of land in Atascosa County, Texas. On July 1, 2010, Bob entered into a valid oil and gas lease with Oilco covering the entire 200-acre tract. The. lease provided the following:
• Oilco would pay a royalty of one-third to Bob on any production;
• A term of five ( 5) years, commencing July 1, 2010, and continuing as long thereafter as oil, gas or other minerals were being produced in paying quantities;
• If drilling operations did not begin within one (1) year from the date of the lease, the lease would terminate unless Oil co paid $1,500 per acre as a delay rental;
• A “dry hole” clause; and
• A “Pugh” clause.
In December of201 0, Bob conveyed a II 10th nonparticipating royalty interest to Lisa. On July 1, 2011, Oil co paid Bob, but not Lisa, delay rentals. Beginning in May 2012, oil, gas or other minerals were produced in paying quantities from the 200-acre tract. Oil co subsequently made a claim against Bob and Lisa for their pro-rata share of production expenses.
Fully describe at least two (2) kinds of royalty interests.
Types of royalty interests available are:
- a nonparticipating royalty interest,
- a working interest, and
- an outright “general” royalty.
A royalty is the right to receive the gross revenues obtained from the sale of oil, gas or minerals. A royalty is the right to the gross revenues without subtracting or accounting for the cost of production.
A nonparticipating royalty interest (“NPRI”) is granted to an individual that is not an owner of the minerals or that otherwise has no interest in such minerals other than the interest in the royalty. The NPRI holder does not have the executive right (right to lease the minerals) or the development right (the right to develop the minerals).
A working interest is the right to receive gross revenues from the sale of oil, gas or minerals pursuant to an oil and gas lease that also bears the cost of production. In contrast to an NPRI or a royalty held by a mineral owner, the holder of a working interest will have development and operating costs deducted from his interest prior to distribution of the funds. An owner of mineral rights may also be entitled to an outright royalty akin to an NPRI. Like an NPRI, the owner of the royalty in the mineral rights does not bear the costs of production and receives only his Share of the gross revenues from the sale of oil, gas and other minerals pursuant to the lease.
02/13 #1:
Bob, a single person, owned a 200-acre tract of land in Atascosa County, Texas. On July 1, 2010, Bob entered into a valid oil and gas lease with Oilco covering the entire 200-acre tract. The. lease provided the following:
• Oilco would pay a royalty of one-third to Bob on any production;
• A term of five ( 5) years, commencing July 1, 2010, and continuing as long thereafter as oil, gas or other minerals were being produced in paying quantities;
• If drilling operations did not begin within one (1) year from the date of the lease, the lease would terminate unless Oil co paid $1,500 per acre as a delay rental;
• A “dry hole” clause; and
• A “Pugh” clause.
In December of201 0, Bob conveyed a II 10th nonparticipating royalty interest to Lisa. On July 1, 2011, Oil co paid Bob, but not Lisa, delay rentals. Beginning in May 2012, oil, gas or other minerals were produced in paying quantities from the 200-acre tract. Oil co subsequently made a claim against Bob and Lisa for their pro-rata share of production expenses.
As the owner of a 1/10th nonparticipating royalty interest, was Lisa entitled to any delay rentals from Oil co? Explain fully.
An oil and gas lease includes a habendum clause that sets forth the primary term and secondary of such lease.
During the primary term, the lessee generally is not obligated to undertake any specific activities on the land. The secondary term is an indefinite term during which the lessee may hold the lease and explore and develop minerals so long as production in paying quantities (“PPQ”) is obtained.
The lease ordinarily ends at the end of primary term is no drilling has commenced.
A delay rental allows the lessee to pay certain sums of money (the delay rentals) to extend the term of the primary lease. The delay rental may either be a condition to the lease or a covenant of the lease. Use of the word “unless” in the clause indicates that the delay rental is a condition and failure to make such rental shall automatically terminate the lease.
A NPRI holder is not entitled to a portion of the delay rental since such rentals act as payments essentially for extending the primary term.
02/13 #1:
Bob, a single person, owned a 200-acre tract of land in Atascosa County, Texas. On July 1, 2010, Bob entered into a valid oil and gas lease with Oilco covering the entire 200-acre tract. The. lease provided the following:
• Oilco would pay a royalty of one-third to Bob on any production;
• A term of five ( 5) years, commencing July 1, 2010, and continuing as long thereafter as oil, gas or other minerals were being produced in paying quantities;
• If drilling operations did not begin within one (1) year from the date of the lease, the lease would terminate unless Oil co paid $1,500 per acre as a delay rental;
• A “dry hole” clause; and
• A “Pugh” clause.
In December of201 0, Bob conveyed a II 10th nonparticipating royalty interest to Lisa. On July 1, 2011, Oil co paid Bob, but not Lisa, delay rentals. Beginning in May 2012, oil, gas or other minerals were produced in paying quantities from the 200-acre tract. Oil co subsequently made a claim against Bob and Lisa for their pro-rata share of production expenses.
What is a “Pugh” clause? Explain fully.
A Pugh clause is a clause often contained in an oil and gas lease which states that if the acreage under the lease is contained in a pooled unit, the acreage that is not actually being held by production will drop off and no longer be leased. This clause essentially benefits the landowner by not keeping his land tied up in a pooled unit. When oil companies pool land, the effect is that production on any part of the pooled unit counts as production as to all the acreage contained and thus holds the land past the primary term and the lease continues regardless if the well is actually on the landowner’s land or not. A Pugh clause drops off acreage contained in a pooled unit if there is no actual production from the leased land.
02/13 #1:
Bob, a single person, owned a 200-acre tract of land in Atascosa County, Texas. On July 1, 2010, Bob entered into a valid oil and gas lease with Oilco covering the entire 200-acre tract. The. lease provided the following:
• Oilco would pay a royalty of one-third to Bob on any production;
• A term of five ( 5) years, commencing July 1, 2010, and continuing as long thereafter as oil, gas or other minerals were being produced in paying quantities;
• If drilling operations did not begin within one (1) year from the date of the lease, the lease would terminate unless Oil co paid $1,500 per acre as a delay rental;
• A “dry hole” clause; and
• A “Pugh” clause.
In December of201 0, Bob conveyed a II 10th nonparticipating royalty interest to Lisa. On July 1, 2011, Oil co paid Bob, but not Lisa, delay rentals. Beginning in May 2012, oil, gas or other minerals were produced in paying quantities from the 200-acre tract. Oil co subsequently made a claim against Bob and Lisa for their pro-rata share of production expenses.
What is a “dry hole” clause? Explain fully.
A dry hole clause is a savings clause in an oil and gas lease that has the effect of extending the lease beyond the primary term or continues the lease even though no minerals are actually being produced in paying quantities. It states that if a lessee drills a well and it turns out to be a dry hole, the lessee will have additional time to commence drilling operations elsewhere in hopes to attain production. Thus, if this clause is contained in an oil and gas lease, if a dry hole is drilled, then the lease can still continue if within a reasonable time the lessee again drills elsewhere.
02/13 #1:
Bob, a single person, owned a 200-acre tract of land in Atascosa County, Texas. On July 1, 2010, Bob entered into a valid oil and gas lease with Oilco covering the entire 200-acre tract. The. lease provided the following:
• Oilco would pay a royalty of one-third to Bob on any production;
• A term of five ( 5) years, commencing July 1, 2010, and continuing as long thereafter as oil, gas or other minerals were being produced in paying quantities;
• If drilling operations did not begin within one (1) year from the date of the lease, the lease would terminate unless Oil co paid $1,500 per acre as a delay rental;
• A “dry hole” clause; and
• A “Pugh” clause.
In December of201 0, Bob conveyed a II 10th nonparticipating royalty interest to Lisa. On July 1, 2011, Oil co paid Bob, but not Lisa, delay rentals. Beginning in May 2012, oil, gas or other minerals were produced in paying quantities from the 200-acre tract. Oil co subsequently made a claim against Bob and Lisa for their pro-rata share of production expenses.
Are Bob and Lisa responsible for their pro-rata share of Oilco’s production expenses?
Royalties are the right to receive a portion of the gross revenues obtained from the production and sale of oil, gas, or minerals that are subject to such royalty. Royalties are generally not subject to the costs of production and instead are solely a portion of the gross revenues received from such sale. Production expenses are the expenses incurred to drill the oil, gas and minerals from the land (i.e., the cost to drill). The costs of production and drilling are borne by the lessee and those with a working interest in the well. Royalties do not bear such costs.
07/12 #10:
Sean owned a 2,000-acre tract of land in Atascosa County, Texas (the “Land”), and he also owned all of the mineral interests in the Land. On December 1, 2006, Sean entered into a valid lease of all mineral interests in the north 1,000 acres of the Land with Productions Co. for oil and gas production. The lease contained the following terms:
• a 1116 royalty interest;
• a “bonus” payment of $1 ,500 per acre;
• delay rentals of$750 per acre to be paid on the anniversary of the lease for any period during which no production operations have commenced; and
• a term of five years and for so long thereafter as oil and/or gas is produced on the Land.
Productions Co. began drilling operations on the Land on December 30, 2007 and completed three wells from mid-2008 through mid-20 10, which have produced gas continuously in paying quantities since
then. Productions Co. did no further drilling thereafter.
On December 1, 2010, the fourth anniversary of the lease to Productions Co., Sean sold all 2,000 acres of the Land to Riley. The deed from Sean to Riley explicitly reserved all mineral interests in the Land to Sean.
Riley, a wind farm proponent, believed that the lease to Productions Co. on the north 1,000 acres would expire at the end of the fifth year (November 30, 2011) and that thereafter he would be able to pursue
his wind farm ambitions free of any interference from mineral production activities.
Productions Co.’s completed wells were still producing when on November 15, 2011, Productions Co. announced its intention to begin drilling a new well in January 2012 on the north 1 ,000 acres. Riley objected
strenuously, asserting that Productions Co. had no right to engage in drilling after the end of the primary term of the lease. He also demanded that Productions Co. remove all its equipment and abandon the wells at the
end of the primary term of the lease.
In March 2012, Sean entered into a new written 5-year oil and gas lease with Productions Co. on the south 1,000 acres of the Land over Riley’s strenuous objection. Riley claimed that, inasmuch as a lease did
not exist on the south 1,000 acres prior to the time he purchased the Land, Sean had no continuing right to enter into the new lease.
At any time under the lease for the north 1,000 acres, was Sean entitled to receive any delay rentals or bonus payments from Productions Co.? Explain fully.
BONUS PAYMENT AND DELAY RENTALS:
A mineral lease generally provides for a bonus payment, which is an up front payment that the mineral interest holder receives as consideration for leasing the interest in the minerals to the lessee.
A mineral lease also generally includes a Delay rental term, which is “rent” during the primary term of the lease for periods in which the lessee does not have production in paying quantities.
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Sean was entitled to a bonus payment at the beginning of the lease and to one delay rental on December 1, 2007.
The issue is when is the bonus of an oil and gas lease due and when is a delay rental due.
Unless otherwise specified in the lease the bonus is a payment from the lessee to the lessor at the signing or beginning of the lease an incentive to enter into the lease with the oil and gas company.
As such, the bonus payment should have been paid to Sean at the very beginning of the lease (or at least within a reasonably
time period after the beginning of the lease). Since the north 1000 acres was leased for a 1,500 bonus, Sean should have received 1.5 million at the beginning of the lease.
Sean was also entitled to a delay rental on December 1, 2007 and possible December 1, 2008.
The issue is how should the language of the oil and gas lease be interpreted concerning the delay rental clause in the lease.
Generally, delay rentals are not treated as uniformly as the bonus. In some cases a delay rental is only owed at the end of the primary term, and other times a delay rental needs to be paid annually regardless of
the length of the primary term. In either case, the language of the lease should control.
Here, the lease provides for delay rentals on the anniversary of the lease for any period where production operations have commenced. At the very least the first anniversary of the lease was December 1, 2007 and drilling operations had not yet commenced. Under the terms of the lease, Sean is entitled to a delay rental of 750
per acre for the entire first year of the lease where production had not commenced. In addition, there is a period from the beginning of December to December 30, 2007 where there was also no production operations commenced. The terms of the lease are ambiguous as to this “period” without production, but it is possible that Productions Co. must also pay a pro rata share of 750 per acre for the period without commencement in the second year of the lease.
However, due to the language ambiguity, it is more likely that a court would decide that a “period” without commencing production refers to a full year period when another anniversary of the of the lease arrives.
This is a more likely reading because delay rentals are often paid on the basis of lack of production in a given year, so a pro rate delay rental for such a short time seems
unlikely.
07/12 #10:
Sean owned a 2,000-acre tract of land in Atascosa County, Texas (the “Land”), and he also owned all of the mineral interests in the Land. On December 1, 2006, Sean entered into a valid lease of all mineral interests in the north 1,000 acres of the Land with Productions Co. for oil and gas production. The lease contained the following terms:
• a 1116 royalty interest;
• a “bonus” payment of $1 ,500 per acre;
• delay rentals of$750 per acre to be paid on the anniversary of the lease for any period during which no production operations have commenced; and
• a term of five years and for so long thereafter as oil and/or gas is produced on the Land.
Productions Co. began drilling operations on the Land on December 30, 2007 and completed three wells from mid-2008 through mid-20 10, which have produced gas continuously in paying quantities since
then. Productions Co. did no further drilling thereafter.
On December 1, 2010, the fourth anniversary of the lease to Productions Co., Sean sold all 2,000 acres of the Land to Riley. The deed from Sean to Riley explicitly reserved all mineral interests in the Land to Sean.
Riley, a wind farm proponent, believed that the lease to Productions Co. on the north 1,000 acres would expire at the end of the fifth year (November 30, 2011) and that thereafter he would be able to pursue
his wind farm ambitions free of any interference from mineral production activities.
Productions Co.’s completed wells were still producing when on November 15, 2011, Productions Co. announced its intention to begin drilling a new well in January 2012 on the north 1 ,000 acres. Riley objected
strenuously, asserting that Productions Co. had no right to engage in drilling after the end of the primary term of the lease. He also demanded that Productions Co. remove all its equipment and abandon the wells at the
end of the primary term of the lease.
In March 2012, Sean entered into a new written 5-year oil and gas lease with Productions Co. on the south 1,000 acres of the Land over Riley’s strenuous objection. Riley claimed that, inasmuch as a lease did
not exist on the south 1,000 acres prior to the time he purchased the Land, Sean had no continuing right to enter into the new lease.
At what point in time, if at all, did Sean’s right to begin receiving royalty payments arise
and for how long do such rights continue? Explain fully.
ROYALTY PAYMENT:
A mineral lease generally provides for a royalty payment, which is a percentage of the value of the oil and gas produced from the land during the term of the lease. The right to a royalty payment does not turn on paying quantities; it is an off the top cut that the lessor gets from the proceeds from the sale of any minerals produced under the terms of the lease. Generally a lease has a primary and a secondary term. The primary term is generally for a fixed period of time, and the secondary time is so long as oil and gas are produced. Production is means production in paying quantities.
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Sean’s right to receive royalty payments began the moment that Productions Co. began producing oil or gas on the property and that right continues for so long as oil or gas is produced on the property.
The right to royalty by a lessor begins the moment production begins because the royalty is taken off the top of production, such that the royalty interest is not accountable for any costs.
From a practical perspective the royalty interest owner might not receive payments until the end of the first month of production, but ideally the right to such payments began the moment the lessee has a producing well. In addition, although the oil and gas lease uses the word production to mean “production in paying quantities” (i.e. proceeds from selling the oil or gas minus the operation costs minus taxes must be a positive figure), the royalty interest, since it does not account for production costs, technically can receive payment on any oil and gas produced before any costs are taken into account.
Here, Sean’s right to begin receiving royalty payments began in mid-2008 when Productions drilled its first producing well.
Under the terms of the lease, the beginning of
production pushed the lease into its second term, which is limited only by the language that the lease shall continue so long as oil and/or gas is produced on the land. This means that Sean’s right to royalty payments continue so long as Productions continues to produce. Production can continue to produce so long as it is in paying quantities. This means that Sean’s right to royalty payments in indefinite so long as Productions continues to operate its wells. In addition, although Sean sold the 2000 acres to Riley, he explicitly reserved the mineral interests in himself, thereby maintaining his right to the royalty payments.
07/12 #10:
Sean owned a 2,000-acre tract of land in Atascosa County, Texas (the “Land”), and he also owned all of the mineral interests in the Land. On December 1, 2006, Sean entered into a valid lease of all mineral interests in the north 1,000 acres of the Land with Productions Co. for oil and gas production. The lease contained the following terms:
• a 1116 royalty interest;
• a “bonus” payment of $1 ,500 per acre;
• delay rentals of$750 per acre to be paid on the anniversary of the lease for any period during which no production operations have commenced; and
• a term of five years and for so long thereafter as oil and/or gas is produced on the Land.
Productions Co. began drilling operations on the Land on December 30, 2007 and completed three wells from mid-2008 through mid-20 10, which have produced gas continuously in paying quantities since
then. Productions Co. did no further drilling thereafter.
On December 1, 2010, the fourth anniversary of the lease to Productions Co., Sean sold all 2,000 acres of the Land to Riley. The deed from Sean to Riley explicitly reserved all mineral interests in the Land to Sean.
Riley, a wind farm proponent, believed that the lease to Productions Co. on the north 1,000 acres would expire at the end of the fifth year (November 30, 2011) and that thereafter he would be able to pursue
his wind farm ambitions free of any interference from mineral production activities.
Productions Co.’s completed wells were still producing when on November 15, 2011, Productions Co. announced its intention to begin drilling a new well in January 2012 on the north 1 ,000 acres. Riley objected
strenuously, asserting that Productions Co. had no right to engage in drilling after the end of the primary term of the lease. He also demanded that Productions Co. remove all its equipment and abandon the wells at the
end of the primary term of the lease.
In March 2012, Sean entered into a new written 5-year oil and gas lease with Productions Co. on the south 1,000 acres of the Land over Riley’s strenuous objection. Riley claimed that, inasmuch as a lease did
not exist on the south 1,000 acres prior to the time he purchased the Land, Sean had no continuing right to enter into the new lease.
Could Riley have prevented Productions Co. from drilling the new well in January 2012
and required it to remove its equipment and abandon all wells at the end of November
2011? Explain fully.
SURFACE ESTATE:
Under Texas law, the owner of the surface estate owns the dominant estate of the surface estate. Therefore, the owner of the mineral estate may use as much as is reasonably necessary of the surface estate in order to enjoy their interest in the mineral estate. However, the owner of the surface estate may enjoin some uses of the surface estate if it can be proven that the surface use being obstructed is a pre-existing use, that there are alternatives available to the mineral estate which would not result in the obstruction, and those alternatives a reasonably available. Also, Under Texas law, an oil and gas lease that states that it will be in effect during a primary term and a secondary term as long as oil and gas a produced on said law will entitle to lessor to continuation of the lease after the primary term until there is no longer production in paying quantities. Production in paying quantities means production that is larger than the costs of that production, namely the royalty interest, the costs of producing and other costs.
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No Riley could not have prevented the new well, nor require Productions to remove its equipment by the end of November 2011.
The issue is what rights does a surface owner have in preventing continuing production by and oil and gas lessee.
In general, as stated above, the oil and gas lessee may continue production so long as it continues to have productive wells on the land.
The secondary term is indefinite because of this clause, and thus a lessor may not force the oil and gas lessee from producing on the land.
Also, unless the lease expressly states otherwise, once the lease is in the second term, there is no limitation on the lessee to drill new wells to maintain production.
Since the old wells continue to produce, Productions has the right to continue to explore the land under lease for so long as the lease continues and drill wells where it sees fit (in a reasonable manner). Riley, however, is not even the lessor, since Sean reserved the mineral interest, and thus as the surface owner his estate is servient to the mineral estate and
the lessee. The implied easement to go on the surface to explore and drill the land is granted to the lessee, and the surface owner may not prevent that, albeit with some narrow exceptions.
Thus, Riley has no right to prevent drilling the new well, or trying to remove Productions equipment already on the land.
07/12 #10:
Sean owned a 2,000-acre tract of land in Atascosa County, Texas (the “Land”), and he also owned all of the mineral interests in the Land. On December 1, 2006, Sean entered into a valid lease of all mineral interests in the north 1,000 acres of the Land with Productions Co. for oil and gas production. The lease contained the following terms:
• a 1116 royalty interest;
• a “bonus” payment of $1 ,500 per acre;
• delay rentals of$750 per acre to be paid on the anniversary of the lease for any period during which no production operations have commenced; and
• a term of five years and for so long thereafter as oil and/or gas is produced on the Land.
Productions Co. began drilling operations on the Land on December 30, 2007 and completed three wells from mid-2008 through mid-20 10, which have produced gas continuously in paying quantities since
then. Productions Co. did no further drilling thereafter.
On December 1, 2010, the fourth anniversary of the lease to Productions Co., Sean sold all 2,000 acres of the Land to Riley. The deed from Sean to Riley explicitly reserved all mineral interests in the Land to Sean.
Riley, a wind farm proponent, believed that the lease to Productions Co. on the north 1,000 acres would expire at the end of the fifth year (November 30, 2011) and that thereafter he would be able to pursue
his wind farm ambitions free of any interference from mineral production activities.
Productions Co.’s completed wells were still producing when on November 15, 2011, Productions Co. announced its intention to begin drilling a new well in January 2012 on the north 1 ,000 acres. Riley objected
strenuously, asserting that Productions Co. had no right to engage in drilling after the end of the primary term of the lease. He also demanded that Productions Co. remove all its equipment and abandon the wells at the
end of the primary term of the lease.
In March 2012, Sean entered into a new written 5-year oil and gas lease with Productions Co. on the south 1,000 acres of the Land over Riley’s strenuous objection. Riley claimed that, inasmuch as a lease did
not exist on the south 1,000 acres prior to the time he purchased the Land, Sean had no continuing right to enter into the new lease.
Could Riley have successfully challenged Sean’s March 2012 lease to Productions Co.? Explain fully.
SURFACE ESTATE:
Under Texas law, the owner of the surface estate owns the dominant estate of the surface estate. Therefore, the owner of the mineral estate may use as much as is reasonably necessary of the surface estate in order to enjoy their interest in the mineral estate. However, the owner of the surface estate may enjoin some uses of the surface estate if it can be proven that the surface use being obstructed is a pre-existing use, that there are alternatives available to the mineral estate which would not result in the obstruction, and those alternatives a reasonably available. Also, Under Texas law, an oil and gas lease that states that it will be in effect during a primary term and a secondary term as long as oil and gas a produced on said law will entitle to lessor to continuation of the lease after the primary term until there is no longer production in paying quantities. Production in paying quantities means production that is larger than the costs of that production, namely the royalty interest, the costs of producing and other costs.
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No, Riley cannot challenge the new lease as to the Southern 1000 acres.
The issue is to what extent may a surface owner prevent a mineral estate owner from entering into an oil and gas lease.
The mineral estate owner has the executive right to enter into lease for the mineral estate they own. This is a necessary result since otherwise the mineral estate would be worthless if a surface estate could dictate access to the minerals.
Since Sean maintained the ownership right in the mineral estate, Riley has no right to prevent Sean’s new lease. Riley’s claim that because the lease did not exist before the sale of the Southern 1000 acres to him means the executive interest is extinguished is simply incorrect. By reserving the mineral estate in himself, Sean was saving the executive right. Finally, Riley has no other claims to prevent the lease, such as the accommodation doctrine, because he has established no prior use of the land.
02/12 #5:
Abby owned fee title to 100 acres of land in Travis County, Texas, with a house on it. A producing oil well on the property provided a royalty payment of about $50 per month to Abby under a written mineral lease. It was the only land owned by Abby in Travis County.
Abby orally leased the house to Wyatt with the only agreement between them being that Wyatt would pay Abby $250 rent for each month he lived there. Abby borrowed $50,000, signed a real estate lien note payable to Bank providing for quarterly interest-only payments for the next ten years, and secured the loan with a deed of trust lien on the land.
Later, Abby executed a deed conveying the property to Courtney for life, then to Madisen in fee simple. The deed, which was duly recorded, described the property as “the 100-acre tract of land and house that I own in Travis County, Texas” and recited that the conveyance was “subject to the mineral lease, the oral lease to Wyatt, and Bank’s deed of trust lien.” Abby told Courtney and Madisen what she had done and described the contents of the deed. Courtney and Madisen orally expressed their appreciation and said they were happy to accept the conveyance, but neither of them actually received a copy of the deed or signed any
written acknowledgement of it.
Three months after the conveyance to Courtney and Madisen, Abby received Bank’s quarterly interest statement and the County’s ad valorem property tax bill for the coming year. Abby forwarded these bills to Courtney and Madisen for payment. Abby declined to pay the interest and sent notice to Bank that she had conveyed the property and that Courtney and Madisen were responsible for future payments. Courtney and Madisen insisted that neither of them was liable for either the interest or the property tax.
Wyatt continued to pay the monthly rent to Abby, and the mineral lessee continued to pay the royalty to Abby as well. Abby insisted that she was entitled to keep those payments inasmuch as the deed conveying the land to Courtney and Madisen recited that it was “subject to” those encumbrances. Courtney and Madisen each claimed the right to receive those payments.
A few months later, Wyatt gave timely and proper notice to Abby that the lock to the front door of the house and the carpet in the living room, by reason of age and ordinary wear and tear, had worn out and demanded that they be replaced. Abby forwarded the notice to Courtney and Madisen directing them to ‘‘take care of this.”
Was the deed executed and recorded by Abby valid as a conveyance of the property to
Courtney and Madisen? Explain fully.
(1) Yes, the deed executed and recorded by Abby was a valid conveyance of the property to Courtney and Madisen.
This result requires a determination of
(i) whether the deed contains a proper description of the property conveyed, and
(ii) whether the deed was “delivered” to the grantees.
For a conveyance of real property to be valid, the deed must describe the property conveyed with sufficient certainty to enable a party familiar with the locality to identify the premises to the exclusion of other premises. Courts give a liberal construction to words of description in a deed in order to uphold the conveyance, and parol evidence is admissible to explain the descriptive words and to identify the property, as long as the instrument contains the “nucleus” of a description. If enough information appears in the description so that a party who is familiar with the locality can identify the premises with reasonable certainty, the description will be deemed sufficient.
Abby’s description of the property states that it consists of 100 acres in Travis County and has a house on it. The fact that the only property that Abby owns in Travis County is a 100-acre tract with a house on it and the courts’ tendency to give a liberal construction to words of description in a deed would indicate that parol evidence could be admitted to identify the premises conveyed with certainty.
The deed must be delivered in order to transfer title to property. The question of whether delivery of the deed has occurred is controlled by the grantor’s intent, which is determined by examining all of the facts and circumstances preceding, attending, and following the grantor’s execution of the deed. When a deed is signed, acknowledged, and recorded, a presumption arises that the deed was delivered and that the grantor intended to convey the property according to the terms of the deed. A deed must be delivered by the grantor or by the grantor’s authorized agent. However, it is not necessary that the grantor manually transfer the deed to the grantee.
The fact that Abby signed, acknowledged, and recorded the deed raises the presumption that the deed was delivered and that she intended to convey the property. Furthermore, Abby disclosed to Courtney and Madisen that she had prepared, signed, and recorded the deed and the contents of the deed.
