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102 Cards in this Set
- Front
- Back
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Rule of Capture
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• The owner of the mineral estate is entitled to extract all the oil and gas on his estate no matter where it comes from. Subject to correlative rights and conservation
• Limitations 1. Personal Property 2. Stored in reservoir 3. Correlative Rights (Due Regard for Others) 4. City Ordinances 5. Police Power 6. Negligence |
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Mineral Interest
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• Characteristics
(1) Right to ingress/egress (2) Exclusive Leasing Rights (Executive Rights) (3) Right to Develop (4) Right to Receive Profits (Bonus, Royalty, Rentals, etc.) • All the characteristics are severable just as the estate |
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Working Interest
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• An interest in O&G lease that gives the owner of the interest the right to drill for and produce O&G on the leased acreage and requires the owner to pay a share of the costs of drilling and production operations. The share of production to which he is entitled will always be smaller than the share of costs that the working interest is required to bear
• Created by the lease and the owner acquires all minerals EXCEPT what is reserved in the lease • The O&G Co becomes the leaseholder with the mineral rights owner having a reverter |
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Royalty Interest
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• The mineral owner becomes the royalty interest owner who has the right to share in production free of production costs
• ALWAYS COST FREE FROM TOTAL PRODUCTION AND MUST BE FOR THE THE LIFE OF THE LEASE • It is NOT the royalty that changes it is the interest |
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Bonus
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• Paid by the lessee to the lessor upfront when the oil and gas lease is signed
• Bonuses are typically paid on a per acre agreement, ranging from a few dollars to thousands of dollars per acre |
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Non-Participating Royalty Interest (NPRI)
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• Carved out of the mineral interest royalty
• Has no interest or right other than the royalty • No right to use the surface, no right to incur costs, and no right to share in profits • The NPRI has its own royalty thus does not care about the lease terms. Interest comes from the MI and if that does not satisfy the NPRI the remaining comes from the working interest |
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Over-Riding Royalty Interest
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• Carved out of the working interest but is FREE FROM PRODUCTION COSTS.
• O&G Co. owns the right to drill and the O&G hires people to help with drilling and instead of paying them in cash the O&G Co. gives them a percentage of total production of the well out of the leasehold estate |
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Geophysical Testing
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• Mineral owner can sever any right, thus the right to develop (right to geophysical testing) can be given to someone else
• The mineral owner NOT the surface owner has the right to consent to geological and geophysical operations • No action for damages exist merely because geological researchers have obtained information about the oil content of the land, UNLESS it is through trespass. Vibrations are NOT trespass. |
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Physical Trespass
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• Trespass NO Production--The damages to the mineral owner is the fair market value of what would have been received if they sold their rights
• Trespass with Production--landowner gets fair market value of minerals taken and NOT amount realized by the trespasser • Good Faith Trespass--if the trespasser acted in good faith the driller gets to off set their costs • Bad Faith Trespass--driller must pay market value and does NOT get to recoup drilling costs |
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Slander of Title
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• An action that allows the landowner to fully assert his claim to the property. Right to freely enjoy property
• Elements (1) Publication by the ∆ (2) Falsity of the publication (3) Malice (4) Financial Damages (typically the loss of specific sell) (5) Estate or interest in the property slandered |
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Adverse Possession
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• If the interest is a possessory (corperal) interest in real property, common law rules of adverse possession apply. Adverse possession has 2 components objective notice and failure to timely respond
• Objective Notice (1) Actual (2) Notorious (3) Continuous (4) Hostile (5) Exclusive • Timely response is determined by state statute of limitations, between 5 and 25 years. |
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Adverse Possession: Entry Upon the Mineral Interest
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• Doctrine of Relation Back--toll relates back to when adverse possession begins. Ask who owns what when
• Entry BEFORE Severance of the Mineral Interest o If the Mineral Interest has not been severed from surface ownership, adverse possession of the surface estate will include title to the minerals o Severance of the Mineral Interest AFTER adverse possession has begun does NOT suspend the running of limitations as to the mineral interest. • Entry AFTER Severance of the Mineral Interest o If there is severance of the Mineral Interest the adverse possession on the surface does NOT establish title to the mineral interest. In order to adversely possess the mineral interest after severance one must drill and produce |
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Color of Title
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• If you have color of title then you are entitled to the minerals of the ENTIRE TRACT of land
• If the color of title suggests just oil rights then you have everything in the color of title document • If NO color of title you are limited to what you drill and produce. You cannot drill further |
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Cotenants
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• Minority Rule--need to get permission from both tenants
• Majority Rule--tenants in common can WITHOUT the consent of the other cotenant may develop and operate the property for oil and gas o Producing cotenant must make an accounting to the non-producing tenant of the market value of the oil and gas LESS the reasonable and customary cost of extraction (e.g. if non-producing owns 1/10 he gets 1/10 of total production less expenses) o If a cotenant drills a dry well the cotenant CANNOT deduct the cost of the dry well or other expenses that do not confer a benefit on the non-producing cotenant from the non-producing-tenant's share |
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Strategy for Un-Leased Cotenant
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• When a cotenant leases the un-leased cotenant has the option to either
(1) Negotiate a lease (2) Ratify the existing lease in a reasonable amount of time (3) Do Nothing • Good Well--do nothing, because you automatically are entitled to your proportionate share of total production less expenses. This is better than a percentage of royalties from the lease • Bad Well--ratify the lease, because he gets bonuses and rentals. Plus he gets his royalty interest immediately out of production. If he did nothing he would get nothing because little or no profit from production |
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Partition of the Mineral Interest
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• Equitable rules apply in determining how the property is to be partitioned; however, equitable principals are NOT material in determining whether or not the right of partition may be exercised
• Exceptions to Right to Partition--fraud, oppression, express agreement • Elements of a Statutory Cause for Partition (1) Joint Ownership--universally available (2) Possessory Interest--e.g. NPRI, has NO right to compel partition (3) Estate of Equal Dignity--estates must have equal dignity to partition (4) Throughout the Land--if one has a mineral interest throughout the land may force partition |
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Life Estates and Remainders
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• For successive ownership you need BOTH to sign.
• Remainderman--may NOT make an oil and gas lease to permit immediate exploration and production without the consent of the life tenant o If a Remainderman conveys interest to lease and during the primary term and the life tenant dies the lease IS VALID despite NO consent from life tenant. o If the Life Tenant does NOT die during the primary term the lease is INVALID • Life Tenant--CANNOT drill NEW oil and gas wells or lease the land to other for that purpose • If Remainderman leases without the Life Tenant's consent = Trespass • If Life Tenant leases without the Remainderman's consent = Waste |
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Life Estate and Remainderman--Who Gets What
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• Royalties and Bonus--goes into interest bearing trust
o Principal goes to Remainderman o Interest goes to the Life Tenant • Rentals--Life Tenant |
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Open Mines Doctrine
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• If a mine or lease is created and in use BEFORE the life estate vests, the owner of the life estate is entitled to ALL proceeds from the mine (bonuses, rentals, and royalties)
• This lasts only as long as that particular lease is effective. This allows the life tenant to enjoy the land as it was before the creation of the life estate. ***Lease Opens the Mine NOT Production*** |
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Trust Act
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The Trust Act applies if the life tenancy was created in trust and the trust is silent about how receipts are to be allocated by the trustee between the Life Tenant and Remainderman
• Trust Act BEFORE 2004 o Life Tenant--Delay Rentals + 72 1/2% of Bonus and Rentals o Remainderman--27 1/2% of Bonus and Rentals escrowed • Trust Act AFTER 2004 o Life Tenant--100% of Delay Rentals, Equitable Share (85%) of all other proceeds (bonuses, royalties, etc.) o Remainderman--Equitable Share (15%) of all other proceeds |
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Mortgagor / Mortgagee
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• If Mortgagee executes and records BEFORE a lease is executed, Lessee's interest will be subject to the mortgage lien
• If the Oil and Gas Lease precedes the mortgage (and is recorded) the lease CANNOT be foreclosed against because the mortgage cannot have included the minerals as an asset belonging to the Mortgagor • Mortgage MUST sell the surface first before selling the mineral estate (marshaling assets) |
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Oil and Gas Lease
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• The owner of the lease has the right to enter, occupy, and make use of the surface as is REASONABLY NECESSARY for exploring, mining, removing and marketing minerals because it is the DOMINANT ESTATE
• These Rights are Limited by (1) Reasonable and necessary to produce oil and gas (2) Accommodation Doctrine (3) Negligence (4) State's Police Power (5) Lease Clause |
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Accommodation Doctrine
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• Where there is an existing or impaired use to the surface, and where under the established practices in the industry there are alternatives to the Lessee whereby the minerals can be recovered, the mineral owner may have to accommodate the surface owner if the Surface Owner can show
(1) Existing use of the surface (2) Lessee's proposed use of the surface would preclude or impair an existing use of the surface (3) Lessee has reasonable alternatives (See Getty Oil) |
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Remedies for Breach of the Lease
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• Surface Owner
(1) Interlocutory Injunctive Relief (2) Lease Cancellation (equitable relief that is very rare in Texas) (3) Damages--limited to market value of the land • Lessee (1) Consequential Damages (2) Obstruction Doctrine--a lessor who prevents the lessee, either by denying access to the property or by attacking the lease is liable for BOTH cost of lease AND what could have been made if drilled (lost revenue). Only force majeure would extend the lease |
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Land and Interest Granted by the Lease
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• Determined by government surveys or metes and bounds descriptions
• Protective Terms--if land description is NOT accurate (1) In-Gross Warranty--gross acres specified will be deemed correct whether it is more or less (2) Mother Hubbard--used when property description is likely to inaccurately locate boundaries. It generally provides that the lease is intended to cover ALL of the lands owned by the lessor in the area. o Applies to SMALL CONTIGUOUS/ADJACENT STRIPS of land accidentally left out of the legal document (3) Subrogation Clause--allows lessee to protect lease by paying taxes and mortgages encumbering the property (4) Warranty Clause--promise to defend lease against future claims or demands, no breach until physically or constructively ousted |
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Mortgagor / Mortgagee
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• If Mortgagee executes and records BEFORE a lease is executed, Lessee's interest will be subject to the mortgage lien
• If the Oil and Gas Lease precedes the mortgage (and is recorded) the lease CANNOT be foreclosed against because the mortgage cannot have included the minerals as an asset belonging to the Mortgagor • Mortgage MUST sell the surface first before selling the mineral estate (marshalling assets) |
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Habendum Clause
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• Primary Term--this is the fixed term of years during which the Lessee has the right, without any obligation, to explore or drill for oil. It lasts until midnight of the last day. It is an option for the O&G Co. to drill, once production is established it holds the lease
o Implied Covenant to Develop and Drill a Test Well o Delay Rentals--allows the Lessee to extend the lease from period to period during the primary term without drilling by paying money. • Secondary Term--the lease is "held by production" and the production, in TEXAS, must be in paying quantities. A lease may allow saving clauses that are a substitute for production |
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Oil and Gas Lease
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• The owner of the lease has the right to enter, occupy, and make use of the surface as is REASONABLY NECESSARY for exploring, mining, removing and marketing minerals because it is the DOMINANT ESTATE
• These Rights are Limited by (1) Reasonable and necessary to produce oil and gas (2) Accommodation Doctrine (3) Negligence (4) State's Police Power (5) Lease Clause |
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Delay Rentals
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• Allow the Lessee to extend the lease from period to period during the primary term without drilling
• These clauses are STRICTLY construed against the Lessee. The Lessee must pay (1) Proper Amount (2) On or Before the Due Date (3) To Proper Person (4) In Proper Manner • Failure to meet all of these requirements results in the termination of the ENTIRE lease |
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Maintaining the Primary Terms of Lease by Drilling
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• Drilling the Well
• "Commencement" (Majority)--does NOT require actual drilling. Commencing includes actual preparation--taking a survey is usually sufficient • Factors for Commencing (1) Acts on Premises (2) Good Faith of the Lessee (3) Diligence in Continuing Drilling Operations |
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Accommodation Doctrine
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• Where there is an existing or impaired use to the surface, and where under the established practices in the industry there are alternatives to the Lessee whereby the minerals can be recovered, the mineral owner may have to accommodate the surface owner if the Surface Owner can show
(1) Existing use of the surface (2) Lessee's proposed use of the surface would preclude or impair an existing use of the surface (3) Lessee has reasonable alternatives (See Getty Oil) |
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Notice-of-Assignment Clause
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• To avoid disputes over assignment by the Lessor to a third party, the Lessor MUST notify the Lessee about the assignment or the Lessee may rely upon its records on who to pay
• This is important because you must pay the appropriate person in delay rentals or else you could lose the lease |
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Remedies for Breach of the Lease
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• Surface Owner
(1) Interlocutory Injunctive Relief (2) Lease Cancellation (equitable relief that is very rare in Texas) (3) Damages--limited to market value of the land • Lessee (1) Consequential Damages (2) Obstruction Doctrine--a lessor who prevents the lessee, either by denying access to the property or by attacking the lease is liable for BOTH cost of lease AND what could have been made if drilled (lost revenue). Only force majeure would extend the lease |
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Separate Ownership Clause
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• Designed to protect the Lessee after assignment. Where a Lessee assigns a portion of the leased tract, the failure by the assignee to pay delay rentals on the assigned portion of the lease will not cause termination of the Lessee's portion of the tract.
• However, the assigned part does NOT go back to the Lessee, it terminates and reverts back to the Lessor |
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Land and Interest Granted by the Lease
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• Determined by government surveys or metes and bounds descriptions
• Protective Terms--if land description is NOT accurate (1) In-Gross Warranty--gross acres specified will be deemed correct whther it is more or less (2) Mother Hubbard--used when property description is likely to inaccurately locate boundaries. It generally provides that the lease is intended to cover ALL of the lands owned by the lessor in the area. o Applies to SMALL CONTIGUOUS/ADJACENT STRIPS of land accidentally left out of the legal document (3) Subrogation Clause--allows lessee to protect lease by paying taxes and mortgages encumbering the property (4) Warranty Clause--promise to defend lease against future claims or demands, no breach until physically or constructively ousted |
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Habendum Clause
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• Primary Term--this is the fixed term of years during which the Lessee has the right, without any obligation, to explore or drill for oil. It lasts until midnight of the last day. It is an option for the O&G Co. to drill, once production is established it holds the lease
o Implied Covenant to Develop and Drill a Test Well o Delay Rentals--allows the Lessee to extend the lease from period to period during the primary term without drilling by paying money. • Secondary Term--the lease is "held by production" and the production, in TEXAS, must be in paying quantities. A lease may allow saving clauses that are a substitute for production |
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Delay Rentals
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• Allow the Lessee to extend the lease from period to period during the primary term without drilling
• These clauses are STRICTLY construed against the Lessee. The Lessee must pay (1) Proper Amount (2) On or Before the Due Date (3) To Proper Person (4) In Proper Manner • Failure to meet all of these requirements results in the termination of the ENTIRE lease |
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Maintaining the Primary Terms of Lease by Drilling
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• Drilling the Well
• "Commencement" (Majority)--does NOT require actual drilling. Commencing includes actual preparation--taking a survey is usually sufficient • Factors for Commencing (1) Acts on Premises (2) Good Faith of the Lessee (3) Diligence in Continuing Drilling Operations |
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Notice-of-Assignment Clause
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• To avoid disputes over assignment by the Lessor to a third party, the Lessor MUST notify the Lessee about the assignment or the Lessee may rely upon its records on who to pay
• This is important because you must pay the appropriate person in delay rentals or else you could loose the lease |
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Separate Ownership Clause
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• Designed to protect the Lessee after assignment. Where a Lessee assigns a portion of the leased tract, the failure by the assignee to pay delay rentals on the assigned portion of the lease will not cause termination of the Lessee's portion of the tract.
• However, the assigned part does NOT go back to the Lessee, it terminates and reverts back to the Lessor |
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Surrender Clause
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• Permits the Lessee to surrender the lease to the extent that it covers land thought to be unproductive. This can allow Lessee to take a large tract and gives them the right to release some acres and not pay the delay rentals
• Rental payments will be reduced in the proportion that the acreage covered is reduced |
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Secondary Term Extension & Maintenance of the Lease
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• Held by Production
• Production must be in "paying quantities." • Texas implies production must be in paying quantities • Court typically considers 1 year a reasonable time to determine if there is a profit |
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Actual vs. Capable of Production
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• Texas--must have actual production in paying quantities and a market
• Minority Rule--there only must be a capability of production but O&G Co must make a good faith effort to find a market |
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Paying Quantities
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• Test:
(1) Step 1--Litmus Test--is there a profit in paying quantities (Revenues minus Royalty minus Operating Costs) [NOT Drilling Costs] (2) Step 2--if no profit would a Reasonable and Prudent Operator expect production in paying quantities |
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Paying Quantities--Reasonable and Prudent Operator
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Factors:
(1) Depletion of reservoir and price Lessee is able to sell oil or gas (2) Relative profitableness of other wells in the area (3) Operating and marketing costs of the lease (4) Net profits (5) Lease provisions (6) A reasonable period of time, under the circumstances and whether or not the Lessee is holding the lease merely for speculative purposes |
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Saving Clause--Shut-in Royalty
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Substitute for Production
• Common for a Lessee to drill and complete a well capable of producing oil and gas and then encounter difficulty or delay in marketing production • Even though called a royalty it is a rental • If drafted as a conditional it is STRICTLY enforced thus it terminates if not timely paid • If drafted as a covenant Lessor can only get damages if Lessee fails to pay • Payment of the Shut-in Royalty under a lease does NOT constitute production that will extend a term interest past its specified period, since Texas law requires actual production to extend the term. |
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Savings Clause--Operation Clause
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• Temporary Cessation of Production Doctrine--you have reasonable time to repair a well, once you being you must diligently continue to repair to get production started
• Express Temporary Cessation • Engaged in Operations Clause--allows the Lessee to complete what it has begun. It makes operations for drilling constructive production for purpose of the lease • Continuous Operation Clause--allows the Lessee to work on a new well so long as there are no gaps in drilling and cessation of operations of other well lease will not end. e.g. must commence another well within X days of completion of previous well. Lose non-producing tracts once drilling ends |
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Savings Clause--Force Majeure
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• Lessee tries to protect itself against unforeseen interference (Act of God) with operations
• NOT implied, it must be expressed in the lease • Strictly construed • Applies to obligations NOT options • Once force majeure is invoked you have a duty to attempt to get out of the situation to the best of your ability • An actual unforeseen material hindrance must occur BEFORE performance is excused. The mere possibility or unsupported conclusions of the existence of a hindrance is insufficient |
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Savings Clause-Pooling
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• Pooling allows a Lessee to combine two different tracts of adjacent land that is has a lease on together to form 1 continuous tract of land for terms of holding them through drilling
• Created by Designation of Pool Unit. Pool becomes effective when this is signed and filed • CANNOT pool for sole purpose of holding a lease • Production or operations anywhere on pooled unit is deemed constructive production for purposes of the lease • Lessor agrees to accept royalty that reflects their PROPORTIONARE acreage contribution to the pooled area • Lessee CANNOT pool without EXPRESS CONSENT of Lessor. It is NOT valid against an NPRI UNLESS they give consent |
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Pooling Clause
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• Applies strictly
• Pooling Language--"proscribe" = mandatory; "encourage" = permissible • Implied covenant of good faith in pooling • There is no fiduciary duty but there is more than a duty of good faith |
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Pooling Clause--Bad Faith
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Factors:
(1) Unit declared and drilling begins close to the end of the primary term (2) Could maximum be gotten through one well (3) Would there be a fair distribution of proceeds (4) Economically feasible to drill additional wells (5) Would additional wells affect the ultimate amount of recovery (6) Could additional wells be drilled without damage to recover of oil from surrounding leases (7) Gerrymandering |
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Pooling Clause--Anti-Dilution Provisions
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• Provision seeks to protect the Lessor by limiting the extent to which the Lessor's royalty can be "diluted" by pooling
• Pool All Clause--if you pool one part of the tract you must pool the entire tract. This lets Lessor realize the full acreage of his tract to determine percentage of the pool • Percentage Clause--if you pool part of the tract you must pool a certain percentage of the land |
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Pooling Clause--Pugh Clause
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• Everything not in the pool reverts back to the Lessor. This limits the constructive production effect of usual pooling. This allows the lease sever into pooled and un-pooled portions
• Vertical Pugh Clause • Horizontal Pugh Clause (depth rights) |
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Pooling Clause--Retained Tract Provision
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• It divides a lease as drilling or proration units are formed, with the result that production from one unit propels the lease into the secondary term ONLY as to the land within the productive unit
• Lessee will hold a certain amount of acres for each well you drill, while the remaining land is severed. This goes hand in hand with a Continuous Development Clause |
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Royalty Payments
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• A portion or its proceeds or value that is delivered free of production costs for the entire life of the well
• Texas Production Costs--any cost necessary to get the oil and gas to the surface • Texas Post-Production Costs--any cost incurred after oil and gas hits the surface • Oil Royalty usually assumes payment in kind by delivery • Gas Royalty, the Lessee disposes of production and then compensates the Lessor usually by check. Gas typically has high post-production costs |
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Royalty Proceeds
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• Royalties can be either paid by "market value" or "amount realized" and then either "at the well" or "point of sell"
• Market Value is determined by (1) Direct sales from another pipeline on same well (2) Comparable sales from same quality of gas in similar location (3) Amount Realized/Received (Net Related Back)--take the amount received at the point of sale and net back any costs to get from the well to the point of sale • Amount Realized--the actual contract price |
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Vela Rule
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• Only applies to Market Value leases
• Vela Rule--if you have a market value provision in the lease, and if the market value is higher than the amount realized by the lessee, the lessee MUST pay market value. This allows the Lessor to take advantage of the increase in the price of oil or gas • Reverse Vela Rule--if there is a market value provision but the price of gas goes down below the amount realized, the O&G Co. does not have to pay Lessor the amount realized but pays the lower market price. • To prevent Reverse Vela--market value but not less than the amount realized |
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Types of Royalties
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• Standard Royalty--is the point-of-sale less all the post-production costs (net back) to the "at the well" price
• Cost Free Royalty--change market value from "at the well" to market value at point-of-sale. there are NO net backs, watch out for deductions • Limited Royalty--a point of sale royalty that will deduct a certain amount from the Point-of-Sale amount. Typically "unaffiliated" expenses |
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Take or Pay
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• Purchaser of gas promises that it will take a certain amount of gas from O&G Co. and the purchaser will pay a certain amount. The purchaser also agrees that if they do not take that amount of gas they would still pay that price
• Lessor NOT in the contract; since take or pay not based on production the Lessor gets NOTHING • Take or Pay Provision--if the O&G Co. uses the lease to bargain the Lessor still gets their percentage of their royalty from the take or pay contract |
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Division Orders
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• All parties who may have a claim to the proceeds of sale agree upon how the proceeds are to be divided. Lessees use the division order as a device to protect themselves against claims that royalties have been improperly paid. Modifies the Royalty Provision
• Division Order and Royalty Provision should match • Division Orders are revocable at ANY TIME and go back to the original terms in the Royalty Provision • The division order binds underpaid royalty owners until revoked. EXCEPTION, when operators prepare erroneous division orders and retained benefits (unjust enrichment) the division orders are NOT binding, if the operator had not overpaid themselves then underpaid royalty owner operates under the division order |
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Refusing to Sign Division Order
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Lessee/Payor can withhold royalty payments without interest from a Payee who refuses to sign the Division Order
• Division Orders should statutorily contain (1) Effective Date of Division Order (2) Description of Property (3) Fractional Interest and Type Claimed by the Payee (4) With Title Assurance (5) Authorization to Suspend Payments for Title Disputes (6) Provision for Valuation of Settlements to Payee • However, Lessee has NO right to withhold for refusal to sign a Division Order because it contains items not authorized in the statute • If withhold improperly Royalty Owner gets interest • If Royalty Owner forced to bring suit may get attorney's fees |
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Remedies for Failure to Pay Royalties
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• Lessee's failure to pay royalties as provided in the lease will NOT give Lessor sufficient grounds to declare forfeiture unless by the express terms of the lease give them that right and power
• Lessor only gets money damages (royalties and interest) • Cancellation is an equitable remedy |
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Implied Lease Covenants
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To protect the landowner the court implies 6 covenants to protect the land. All of these covenants boil down to Good Faith and one acting as a Reasonable and Prudent Operator
(1) Covenant to Market (2) Covenant to Protect against Drainage (3) Covenant to Develop (4) Covenant to Test (5) Covenant to Further Explore (Texas does NOT have this one) (6) Covenant to Properly Operate and Maintain |
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Implied Covenant to Market
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• Once a well is drilled a reasonable and prudent operator would attempt to market the oil and gas. Requires a Lessee to use the diligence of a Reasonable Prudent Operator (RPO) in
(1) Finding a suitable market (2) Within a reasonable period of time look at the circumstances at the time the oil and gas was to be marketed presence of shut-in royalty may lengthen (3) Damages--money, what would Lessor receive but for Lessee's failure to find reasonable market. Leads to double payment for Lessor • Post-Production--non-operating interest MUST bear their proportionate share of costs incurred after gas is severed at the wellhead. Post-Production cost must be reasonable |
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Implied Covenant to Protect Against Drainage
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• If operations on other land causes oil and gas under the leased property to drain away, Lessee has duty to drill a well to preserve the Lessor's royalty provided that a RPO would drill the well.
• There is NO difference between local drainage and field wide drainage • There is NO duty if Lessee can prove that the drilling of another well would exceed the profits from the well. • Rule 37 Exception--the Rail Road Commission has a provision regarding spacing of oil and gas wells. A Rule 37 Exception allows you to drill closer • Burden of Proof---initially on Lessor to give notice to Lessee then switches to Lessee to show RPO would NOT drill because no profit • Remedies--money Lessor would have received if off-set well drilled |
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Off-Set Provision
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• An express term in the lease that if a well is drilled within a certain number of feet of Lessor's tract an off-set well must be drilled to prevent drainage
• This provision trumps implied covenant and requires drilling even if RPO would not drill |
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Implied Covenant to Test
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• Lessee must act as an RPO and test within a reasonable amount of time during the Primary Term.
• If you use delay rentals or a paid-up lease (paid all rentals up front) the duty does NOT apply • A lease that is silent may invoke this duty |
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Implied Covenant to Develop
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• A Lessee has a duty to test, develop, or to explore
• Not triggered until the lease is propelled into the Secondary Term by production or some substitute • Must drill new wells on tract that RPO would drill on the tract • An oil and gas lease will not be cancelled for breach of an implied covenant without Lessor giving Lessee NOTICE of the breach and reasonable time to comply with terms of the implied covenant • Elements for Duty (1) Additional well would be profitable (2) Acted imprudently by not drilling (3) Cancellation only available if money is inadequate • Remedies--Lost Royalty |
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Implied Covenant to Further Explore
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• Texas has NO duty to further explore
• Must show profitability • Must explore the other zones of drilling, above and below where you drilled |
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Implied Covenant to Operate Diligently and Properly
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• This is a catch-all covenant
• Texas ALWAYS requires a show of profitability • Other violations of the covenant (1) Not using the best technology (2) Not using the best methods (3) Bad well, had a RPO drilled the well a profit would have been made |
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Distinction between Mineral Interest and Royalty Interest
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• Mineral Interest
o Rights--own, drill, develop, explore, ingress/egress, executive rights, royalties (all severable) o Language--"in, under and beneath" or "in, under and beneath and that may be produced" o Royalties--1/2 MI = 1/2 of royalty amount so if royalty is 1/4 MI gets 1/8 Formula MI% * Royalty • Royalty Interest o Rights--royalties free from production for life of the lease, becomes an NPRI o Language--"may be produced" o Royalties--1/2 royalty interest is 1/2 of total production 1/2 of the royalty--same as MI; if royalty 1/4 NPRI gets 1/8 |
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Deed
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• The deed controls. If the contract says one thing and the deed says something else the deed controls unless you reform the deed
• If intent conflicts with the conveying language the Court will look at the document as a whole |
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Stripping Mineral Interest
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• You may convey your mineral interest and strip it of all of the attributes but royalty and this would create an "of the royalty" provision
• ALL mineral rights are severable |
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Non-Participating Interest
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• If you reserve a non-participating mineral interest you impliedly give away your ability to lease
• Non-Participating Royalty Interest (NPRI) o Retains--royalty interest o Forgoes--all other attributes of mineral estate • Non-Participating Mineral Interest (NPMI) o Retains--royalty, right to develop, ingress/egress, right to drill o Forgoes--rentals, bonuses, ability to lease • Non-Executive Mineral Interest (NEMI) o Retains--royalty, right to develop, drill, ingress/egress, bonuses, rentals o Forgoes--right to lease |
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Executive Interest Duty
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• In most cases the duty owned is one of utmost good faith and fair dealings. This standard requires acting with due regard to the non-executive interest and would be willing to execute a lease on the SAME terms and conditions as a reasonably prudent landowner
• If executive engages in EGREGIOUS SELF-DEALING courts impose a fiduciary standard on the executive interest |
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Minerals
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• "other minerals"--ORDINARY AND NATURAL meaning test determines what are "other minerals," except for near the surface coal, lignite, and sulphur, which are minerals. However, this applies ONLY to deeds dated 6/8/83 and going forward BEFORE this date the court will apply the Surface Destruction Test.
• Underground water is part of the Surface Estate • Damage to the Surface Property (1) Specific Reference to minerals, NO damages owed to the surface estate, unless there is negligent infliction of damage to surface (2) General Reference to minerals, actual damages (loss of value) to surface |
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Surface Destruction Test
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From Reed I and Reed II
• If the mineral is so near the surface and the extraction of the minerals would destroy the surface the mineral belong to the surface owner • Near the surface is typically less than 200 ft. and reasonable production would cause destruction of the surface minerals belong to the surface owner |
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Catch All Provisions
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If you have a specific grant that grants nothing (e.g. it describes land not owned) and there is a general catch all provision in the deed can be deemed ambiguous and extrinsic evidence may be admitted
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Strips and Gore Doctrine
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• Where a grantor conveys all the land it is assumed that the grant goes to the center of the road next to the land.
• The court allows this presumption because it does not want strips of land that could prevent drilling • Does not apply if the road is larger than the tract • Applies even if road is not in metes and bounds description or no Mother Hubbard |
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Size of the Fractional Interest
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• Specific Rules of construction apply when a grantor owns an undivided MI and reserves a fraction of the mineral in the deed:
• Conveyed--if the deed reserves a fraction of the minerals "conveyed" then the deed reserves a part of the estate that is actually conveyed in the deed • Described--if the deed reserves a fraction of the minerals "described" the deed reserves a fraction of the minerals under the ENTIRE physical tract regardless of what is conveyed • "Subject to" clause affects the ownership of the undivided shares of the minerals, NOT the description of the land containing them. |
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Deed Language
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• In a conveyance the word "of" has the same meaning as "times" in a multiplication formula: e.g. thus "1/16 of the usual 1/8 royalty" transfers 1/128 royalty
• A deed that grants a fraction "out of" the grantor's fractional interest merely specifies the source from which the grant is taken and does not affect the size of the interest transferred |
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Conveyance of a Mineral Interest vs. Royalty Interest
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• "oil, gas, and other minerals PRODUCED AND SAVED" = Royalty Interest
• "oil, gas, and other minerals IN AND UNDER" = Mineral Interest • "oil, gas, and other minerals IN AND UNDER AND PRODUCED AND SAVED" = Mineral Interest |
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Duhig
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• A grantor, who by warranty deed, purports to convey a fractional MI is ESTOPPED from asserting title to a reserved fraction of the MI in contradiction to the interest purportedly conveyed.
• Example G→D surface and mineral (G reserves 1/2 MI) D→P (D reserves 1/2 MI but does not tell P about G's reservation) P thinks gets 1/2 MI but would get nothing because of D. Thus D is estopped from reserving 1/2 and that 1/2 MI goes to P • Only applies to Over Conveyances • Only look at 1 deed conveyance at a time in chronological order • Only care about what the deed PURPORTS to convey • Do NOT look at the entire chain of deeds • Only applies to oil and gas lease does NOT apply to quick claim deeds • Duhig also applies to other mineral interest conveyances such as the royalty interest • Constructive notice does NOT matter |
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Proportionate Reduction Clause
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• Proportionate reduction clause provide for the reduction of payments to the lesser if his interest is less than that which he purports to lease. If Lessor enters into a lease with 1/4 royalty it assumes 100% ownership. If he actually only owns 1/2 MI the royalty becomes 1/8
Example Lease purports 100% M has 1/2 interest J has 1/2 with 1/16 NPRI M & J → XYZ for 1/8 royalty M gets 1/16 (1/2 of 1/8) J gets NOTHING, his 1/16 goes to the NPRI |
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Two Grant Theory
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• Typically occurs in deeds where a granting clause conveys a particular interest and a subsequent provision conveys something else in addition to the granting clause
• Courts will give both grants meaning provided that they are not ambiguous--conveyance do not conflict with the interest conveyed, i.e. there is enough to satisfy both conveyances independently. However, only lasts so long as each lease lasts, new lease voids • If grants are ambiguous court will NOT honor both but will admit extrinsic evidence to determine proper grants • A simple "subject to" existing lease clause prevents double grants |
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Non-Apportionment Doctrine
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• Apportionment of royalties does NOT apply merely because the entire tract was under one lease
• If there is NO apportionment clause (entireties clause) then the proceeds from the wells are not distributed by the proportionate ownership of land. However if there was production BEFORE, the subdivision of the property then all parties get their proportionate share of the royalties despite where the well is drilled |
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Conservation
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• Waste entails both economical and harms to the Public.
• The Texas Railroad Commission promulgates rules to prevent waste through (1) State Wide Rules (2) Field Wide Rules • The rules formulated by the RR Commission deal with (1) Permitting--when, where, how to drill (2) Operations--pollution controls, water use, pressure control, plug and abandonment • There can also be city and subdivision rules in addition to the RR Commission |
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Prevention of Waste
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• Rule 37--Spacing rule
State Wide--1200ft between well bores Field Wide--trump general Rule 37 • Rule 38--Density Rule How many wells you can have per acre State Wide--1 per 40 acres Field Wide--trump general Rule 38 |
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Rule 37 Exceptions
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• General Rule--everyone has a right to drill and produce, no matter how small your plot of land. Thus one can get an exception to Rule 37 and 38. The court will consider
(1) Correlative Rights (2) Economic Waste |
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Voluntary Subdivision Rule
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• Pertains to tracts smaller than Rule 37 or 38 requirements
• If your land is classified under this rule you are not allowed to drill or produce or get a Rule 37 or 38 exception • Voluntary Subdivision Rule (1) If the tract was subdivided AFTER field was discovered (2) Subdivision by an oil and gas lease (3) Cannot create a small tract for purposes of circumventing Rule 38 (Bad Faith) |
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Prorations and Allowables
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• Are rules that control production--they determine how much gas or oil 1 well can produce in a certain amount of time. The purpose behind such as order is conservation
• Usually based on per acre unit. • Example 1 well on 10 acres and 1 on 320. The Person with 320 acres can produce 32 times as much as 10 acre |
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Compulsory Pooling Statutes
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• In order to prevent waste the RR Commission MAY require pooling. Generally provides that any person seeking a drilling permit may force inclusion of the necessary adjacent tracts to meet the minimum requirements for a drilling permit
• If force pooling is made owner of forced tract MUST choose between (1) Lease to Working Interest (2) Carried Interest with Penalty (3) Become Working Interest |
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Community Lease
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• When two landowners lease to the SAME O&G Co. under the SAME lease.
• ABSENT EXPRESS language in the lease to the contrary the landowners share royalties proportionately • A cross-conveyance among the owners of all royalty interest occurs • ONLY example of IMPLIED POOLING in Texas |
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Carried Interest with Penalty
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• Carried Interest--treated as a working interest owner, which means must bear proportionate share of production costs to drill the well. HOWEVER, the carried interest does NOT have to pay out of pocket immediately. Working interest ONLY recover production costs from carried interest if the well produces. RISK FREE working interest
• With Penalty--risk penalty, which is typically 300%. If you choose to be a Carried Interest with Penalty not only do you not get your interest until your proportionate share of production costs are paid, you do NOT get your proportionate share until the working interest gets 300% of what your proportionate interest would be, thus you lose another 300% |
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Texas Forced Pooling
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• If reservoir DISCOVERED BEFORE 3/8/1961 CANNOT force pool
• For forced pooling Texas requires the Pooling Party to give the other parties a REASONABLE AND FAIR OFFER O&G Co. must exhaust all available options--lease, carried interest with penalties, working interest • For forced pooling non-pooling parties must refuse all offers. • O&G Co. MUST prove the pooling (1) Protects correlative rights (2) Prevents waste (3) Beneficial for the greater good of the public • Forced pooling takes a long time and may make lease fail in primary term |
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Mineral Interest Pooling Act
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• Applies ONLY to field discovered AFTER 3/8/1961
• Under certain circumstances the Railroad Commission can COMPEL owners to pool, i.e. to share production from a well • Owners seeking to pool must make a fair and reasonable offer to pool voluntarily (Fairness is viewed at the time of the offer) • NO MIPA for Cotenants, MUST be SEPARETLY OWNED TRACTS |
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Voluntary Pooling
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• Must have landowners consent
• Why Pool (1) Small tract may need to pool (2) Geological reasons (3) Business flexibility (4) Hold acreage • How to Pool (1) Pooling in lease clause (2) Consenting document (3) Ratify the Unit designation, an O&G creates a pooling designation that includes several leases and landowners agree • Valid Pool Unit--construed strictly and requires good faith |
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Pooling Effect on Lessor: Cross-Conveyance
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• Pooling effects a cross-conveyance so that lessors are now deemed cotenants with working interest
• Pooling creates a cross-conveyance thus royalty owners under the lease that are brought together under a pool are NECESSARY parties to a suit involving ANY part of the pooled mineral interest • This is due to the fact that because of the cross-conveyance each party owns an interest in every other parties interest, thus when 1 is affected they are all affected |
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Pooling Effect on Royalty & Related Interest
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• Absent consent, the executive interest does NOT have the legal right to authorize the Lessee to pool the royalty rights of the NPRI with other royalty interest owners
• If executive interest owners lease multiple tracts and one or all the tracts are subject to a non-executive interest owner it is an OFFER to pool for the non-executive interest • If NPRI ratifies the lease, the lease affects a cross-conveyance of interest and a pooling or combining or royalty interest |
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Pooling Effect on Terminable Interest
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• If a portion is included in a pooled unit that portion of the lease WOULD HOLD the ENTIRE acreage under the lease if the portion in the pooled unit is held because the pool is producing
• This applies unless there is a Pugh Clause |
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Relinquishment Act
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• Applicable to State-owned land sold to private parties (usually West Texas Ranchers) between 1895 and 1931
• These landowners do NOT own oil and gas underneath the State of Texas does • Surface owners only have rights to lease as agents of the State and share in the lease benefits (royalties, bonuses, etc.) equally with the State • Fiduciary duty is owed to the State, CANNOT convey mineral interest nor create an NPRI or create a perpetual royalty |
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Plugging Wells
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• Abandoned and improperly plugged wells by statute are to be plugged by
(1) Operator (2) Non-operator working interest in well at the time the well is abandoned ceases operation (3) State of Texas • Landowners and Royalty Interest owners are NOT responsible for plugging |
