TX Essay - Oil and Gas Flashcards
Vincent Oil, a large multi-national corporation, fails to plug a well in 2007 when the well was abandoned and the lease expired. Burton Oil leases the same land in 2010 and drills a new well, never using the old well. Who is liable for the costs of plugging the old well?
Vincent Oil is liable for the costs of plugging the well.
The operator of a well has the primary responsibility to plug a well, usually within one year from the time drilling or production operations cease. “Operator” is the person responsible for the physical control of the well at the time it is about to be abandoned. If the operator cannot be found, non-operators (persons who own a working interest in a well at the time the well is abandoned or ceases operation) are required to plug the well.
C deeds to T, reserving a one half mineral interest. C subsequently deeds to A, reserving a one half mineral interest. Under the Duhig doctrine, who owns the minerals?
Under the Duhig doctrine, T and A each owns one half of the mineral interest, and C owns none.
The Duhig doctrine applies when a three-party chain of conveyances seemingly results in the conveyance of more than 100% of the mineral (or royalty) interest. In this event, the court must determine whose title will fail. The Duhig doctrine disfavors the grantors.
What are minerals that belong to the surface estate as a matter of law? (9)
The 9 substances that belong to the surface estate as a matter of law are:
(i) building stone,
(ii) limestone,
(iii) caliche,
(iv) surface shale,
(v) water,
(vi) sand,
(vii) gravel,
(viii) near-surface lignite or coal, and
(ix) iron ore.
What is the accommodation doctrine?
The accommodation doctrine is an implied limitation on the dominant right of the mineral estate to reasonably use the surface for oil and gas development.
The doctrine applies if (i) the lessee’s use of the surface substantially interferes with a preexisting surface use, (ii) alternative methods that are less injurious to the surface are practicable for the lessee to use, and (iii) this alternative is available on the leased tract. If all three conditions are proven, the lessee or severed mineral estate owner must accommodate the existing surface uses.
H grants to his son, M, an undivided one half interest in the mineral fee in his land, and an undivided one quarter interest in the remainder of the land to each of his two granddaughters, S and G. H reserves for himself an executive right in the land. If Alvarez Oil wants to lease the land, with whom does it need to negotiate?
Alvarez Oil needs to negotiate only with H, who has executive right amounts to retention of the power to lease. The “executive right” is the right to lease and manage the mineral estate. The grantees of such a mineral estate (Michael, Stephanie and Gwendolyn) receive a “nonexecutive mineral right” or a NPMI. The grantees own mineral estates, but they cannot lease their estates. Because an executive right is an interest in land (not a power of appointment), the general rules for conveying real property apply.
What is the implied covenant to market?
The implied covenant to market requires lessee to market production within a reasonable period of time at the best available price.
What is the implied covenant to protect against drainage?
Under the implied covenant to protect against drainage, a lessee must act as a reasonably prudent operator to protect the leased premises against drainage.
What is the implied covenant for reasonable development?
The implied covenant for reasonable development provides that, once oil or gas is discovered, the lessee has an obligation to further develop the premises.
To recover under the implied covenant to protect against drainage, a lessor must show:
A lessor must show: (i) substantial drainage, (ii) that a reasonably prudent operator would drill to protect against drainage, and (iii) damages measured by the royalty the lessor would have obtained had the well been drilled.
A leased her mineral interest to Romero Gas on December 1, 2013. A signed a division order (“D/O”) that same date, which required Romero Gas to distribute proceeds to A within 60 days. If Romero Gas fails to pay the proceeds to A within 60 days, must it pay to A interest on the withheld amounts?
Romero Gas must pay interest on the withheld amounts to A unless there is a reasonable doubt that A has clear title.
Since 1992: D/O Statute sets sets time limits (varying from 60 to 120 days, unless otherwise specified in the lease) for the payor to pay the payees their shares. Payments may be withheld without interest only if there is a title dispute over the payee’s claimed interest or a reasonable doubt that the payee has clear title. Otherwise, the payor must distribute the proceeds to the payee within the required time limits. If the payor does not do so, the payor must pay interest on the withheld amounts to the payee. In other words, if a payee refuses to sign a D/O containing only the prescribed standard information, the payor may withhold payments without interest. If the payee refuses to sign a D/O containing additional, nonstandard conditions, the payor cannot withhold payment and will be liable for interest on any withheld payments (and will have to pay the attorneys’ fees for a payee who successfully sues for the payments and interest due her).
What is the effect of the Texas Division Order (D/O) statute?
Several rules that apply to royalty interest owners (RIOs):
(i) D/Os are binding until revoked, as under the common law (e.g., a RIO can revoke a mistaken D/O but is not automatically entitled to past underpayments);
(ii) a D/O can never contradict a lease and is invalid if it does; if it was never valid, a RIO may be able to recover past underpayments;
(iii) the act sets time limits (varying from 60 to 120 days, unless otherwise specified in the lease) for the payor to pay the payees their shares.
T/F: The essential purpose of a “pooling clause” is to give the lessee flexibility to comply with well-spacing requirements and geological realities, and allow her to operate efficiently.
True. A pooling clause allows the lessee to place the leased tract into a larger unit created by combining acreage from adjacent tracts. Production from any well on the pooled unit (even if not actually on the leased tract) will satisfy the production requirement. Royalties are usually apportioned to landowners in the pooled unit based on surface acreage.
Wallace Oil enters into a lease on January 1, 2011, which includes a clause containing a primary term of three years and a secondary term of “as long thereafter” as production in paying quantities (“PPQ”) is produced. The lease also contains a clause stating: “If at the expiration of the primary term there is a gas well on the leased land but gas is not being sold, used, or marketed, Wallace Oil may pay as royalty the monthly sum of $500, it will be considered that gas is being produced in paying quantities.” Wallace Oil drills a producing gas well but shuts in the well on February 1, 2014 due to an economic recession. If Wallace Oil promptly begins paying $500 per month, is the lease in effect?
Yes, the shut-in royalty clause is broad enough to cover cessation because of lack of market demand. Shut-in royalty clauses address the problem of a well capable of production in paying quantities which is shut in (not producing), usually because there is no market yet available for the gas.
The shut-in royalty clause permits the lessee to maintain a lease upon which wells are shut in by payment of a shut-in royalty. Because the shut-in royalty payment is normally structured as a substitute for actual production, failure to make the shut-in payment properly will cause the lease to terminate under the habendum clause. FYI: that shut-in royalties can be paid only on wells that are capable of producing in paying quantities; a lessee cannot drill a junked well or dry hole and then attempt to hold the lease in effect by paying shut-in royalties.
Live Corp. signs an oil and gas lease for Crudeacre, subject to a clause stating, “if drilling operations are not commenced within 11 months, the lease terminates unless Live Corp. pays to Lessor delay rentals of $500 per month.” Is the lease terminated if Live Corp. fails to either drill a well on Crudeacre or pay delay rentals?
The lease would be terminated because the delay rental clause is a condition of the lease. Delay rental clauses authorize a lessee to delay drilling or commencing production during the primary term by periodically paying a stipulated amount to the lessor. A delay rental clause is included in a lease to negate any implied duty or implied covenant to drill an exploratory test well during the primary term.
There are two polar types of delay rental clauses: the “unless” clause and the “or” clause. The typical “unless” clause provides that the lease shall terminate unless lessee pays delay rentals of dollars to the lessor. A failure to properly pay will cause automatic termination of the lease.
In which of the following scenarios would an oil and gas lease with a typical habendum clause most likely be extended to its secondary term upon completion of the primary term?
A - Oil is discovered, but not actually produced and marketed in paying quantities.
B - The lessee is engaged in drilling a well, but it is not yet completed or producing.
C - Oil or gas is being produced and sold in paying quantities.
D - A gas well is completed and is capable of profitable production, but lacks a pipeline connection.
C. An oil and gas lease with a typical habendum clause would most likely be extended from its primary term to its secondary term upon completion of the primary term if oil or gas is being produced and sold in paying quantities. The amount of production necessary to extend a lease from the primary term to the secondary term and maintain it thereafter is actual production that is marketed in paying quantities. “Production” means production in paying quantities (“PPQ”). The formula for PPQ is: revenues, minus lessor’s royalty, minus operating costs.
