Oil And Gas - Part Deux

Front 1

Characteristics of Mineral and Royalty Interests

Interpreting the "in and to" clause

Back 1

Buffalo Ranch v. Thomason - O conveys to A 2K acres and the executive rights and reserves 1/2 interest "in and to" all of the oil and gas and other minerals. The question is whether O reserved mineral interest or a nonparticipating royalty interest.

Crt held that it was a mineral reservation. Just b/c the deed conveyed the executive rights does not make what O owned less than the mineral rights he reserved. The fact that they labeled the reservation a mineral interest was controlling.

Prairie v. Schlacter - O executed a deed to A conveying half of O's interest "in and to" all of the oil, gas, and other minerals "in and under" BA. The rights to explore and develop, to lease, and to receive royalties passed to A. O retained the rights to receive bonus payments and delay rentals.

Crt held that A had rec'd a mineral interest.

Front 2

Characteristics of Mineral and Royalty Interests

Interpreting the "being equal to" clause

Back 2

Brown v. Harvard - O conveyed BA to A reserving a 1/2 R, being equal to and not less than, an undivided 1/16th of all oil and gas in an under BA.

Crt held that the phrase "being equal to" was ambiguous. It was not clear whether O retained 1/16th or 1/2. The court admitted extraneous evidence to show the intention of the parties and held that O had reserved a 1/16th interest. (Crts typically hate to do this).

Front 3

Characteristics of Mineral and Royalty Interests

Rules of Interpretation

Back 3

1. the crt must give effect to the intention of the parties
2. intent is derived from the instrument as a whole
3. if there is doubt after reviewing the document as a whole, then the court will:
(a) construe the instrument against the party that prepared it;
(b) interpret typed or handwritten provisions over printed provisions;
(c) examine parole evidence

Front 4

Characteristics of Mineral and Royalty Interests

Nature of the Duty that one interest owner owes to another interest owner - In General

Back 4

Mangas v. Guerra - The holder of an executive right owes the duty of utmost good faith and dealing to the nonexecutory owner, which is a fiduciary relationship.

The fiduciary duty arises from the relationship of the parties, not from the contract.

The executive interest owner must obtain for the nonexecutive owner all the rights and benefits he obtains for himself - (The Supreme Court of Texas held that Manges had breached his duty owed to Guerra by (1) burdening Guerra’s mineral interest by subjecting the executive right to a security interest for a personal loan, (2) taking 100% of 7/8 of the three producing wells, and (3) taking ½ of the working interest by his farm-out to Schero. In sum, he had dealt with entire mineral interest so that he received benefits that the non-executives did not receive.)

Front 5

Characteristics of Mineral and Royalty Interests

Nature of the Duty that one interest owner owes to another interest owner -

Duty owed to owner of royalty lease

Back 5

Pickens v. Hope - Crt refused to apply fiduciary duty b/c parties were NOT CO-TENANTS, Picken's didn't extract teh same type of benefit that Mangas dd,

Front 6

Term Interests

Two Types

Back 6

Fixed term - O to A for 20 yrs

Defeasible Term - O to A for 20 yrs "and so long thereafter as oil and gas and other minerals are produced"

Front 7

Term Interests

Rule Against Perpetuities

Back 7

The interest is invalid if there is any possibility that the interest might remain contingent for a period within the lives in being plus 21 yrs 9 mos.

Front 8

Term Interests

Types of Contingent Interests

Back 8

Contingent Remainders - if there is any possibility that the contingent remainder wont vest w/in the perpetuities period, the conveyance is void

Executory Interests:
Shifting Executory Interest - O to A for life, but if oil well which is now producing ceases to produce, then to B

Springing Executory Interest -
Peveto v. Starkey - 2 royalty interest conveyances, 2nd held to violated RAP.
(1) O to A a term royalty for 15 yrs and so long thereafter ..
(2) O to B term royalty 10 yrs and so long thereafter as ... "but effective only on the expiration of A's royalty deed" - NOT EFFECTIVE

Why isn't 1st a violation? B/c it is already vested w/a possibility of reverter to B.

Front 9

Term Interests

When do Term Royalties Terminate?

Production w/in Fixed Period

Back 9

Clark v. Holchak (Tex. 1953) - Clark claimed an oil royalty interest under a grant which was to become null and void "in case there was no production on Dec. 10, 1945 and for six months thereafter."

Crt held that if a deed granting a term interest provides that a reverter will occur if there is no production on a given date and for a fixed term thereafter, a reverter does not occur as long as there is production any time within the fixed period. The six month period was included in the fixed period.

Front 10

Term Interests

When do Term Royalties Terminate?

Temporary Cessation

Back 10

Beatty v. Baxter (OK 1953) Baxter held a mineral estate which was to last "for a period of 20 yrs and as long thereafter as oil or gas i produced" -- Temporary cessation of O & G production for repairs or reworking does not constitute such cessation of production as will automatically terminate an interest. There was no sign of abandonment in this case. (HAVE TO LOOK AT SPECIFIC FACTS TO DETERMINE IF IT WAS TEMPORARY OR NOT)

Amoco Production Co. v. Braslau (Tex. 1978) - Issue: No production at the end of the term so when production is restored to a different sand does it mean that the cessation was temporary or a total cessation of orudction such that the term royalty expired?

General Rule - if production ceases temporarily even w/out specific clause addressing the issue there is a reasonable amt of time to restore production

Front 11

Term Interests

When do Term Royalties Terminate?

Situations Supporting Termination

Back 11

1. Cessation due to depression in the price of oil
2. Cessation b/c of no production in paying quantities

Front 12

Term Interests

Summary of Treatment of Term Interests

Back 12

The interpretative tools used in construing O & G leases may not apply with the same affect to identical provisions in mineral deeds. For example:
(a)In OK the discovery rule will NOT apply to minerals deeds even though it applies to mineral leases (Fransen). Also, the temporary cessation of production doctrine will apply to mineral deeds (Beatty).

(b) In Texas, however, the temporary cessation of production doctrine applies to mineral deeds as it does to mineral leases (Braslau).

Front 13

Transfers Subsequent to a Lease

Transfers by the Lessor Subsequent to a Lease

Back 13

The lessor can transfer by voluntary or involuntary conveyance or by testate or intestate succession, the lessor's interest, or some portion thereof, to others.

Front 14

Transfers Subsequent to a Lease

Transfers by the Lessor Subsequent to a Lease - Examples of Possible Conveyances

Back 14

If O has FSA and executes O & G lease to Exxon, subsequent the lease, the lessor can convey:

1. entire interest in leased premises (O executes a deed of BA to A)
2. entire interest in BA to several persons as concurrent owners (O executes a deed of BA to A & B)
3. an undivided interest in BA and the lease (O conveys half of BA to A)
4. entire interest in a portion of BA (O conveys the NW portion of BA to A)
5. an interest in production under existing lease (O conveys 1/2 interest in a 1/8th royalty to A.)
6. a percentage of the royalty under future leases ( O conveys to A 1/16th royalty payable on all production from BA, whether under the terms of the existing lease or a future lease)
7. his entire interest in BA, or part thereof, excepting and reserving some share of production or share of the lease proceeds (O conveys 1/4th BA, excepting and reserving 1/2 of a 1/8th royalty payable under the terms of the lease covering BA)

Front 15

Transfer Subsequent a Lease

Transfers by the Lessee Subsequent to a Lease

Back 15

Situations are even more varied; depend on lessee's exploring objectives:
1. Can transfer the entire leasehold estate and retain an overriding royalty interest (lessee has no interest in exploring or developing and hopes to convey so someone will)
2. may have acquired lease w/lots of acres and wants to sell drilling operations to someone else. by doing this, the lessee will be able to satisfy drilling reqs & avoid delay rentals or offset oblig
3. may want to find parties to carry his working interest. (lessee has an oblig to drill, but does not want to pay for the drilling, so he sells a portion to others, the lessee has no obligation to pay for the operating costs, which is pd by the remaining fractional interest owners - the carrying goes to the casing pt, at which time the pipe is set and then the lessee pays his portion of the drilling
4. can sign a bottom hole letter.
5. may become a ltd partner or part of a large public offering
6. may transfer the property after it has been developed and is producing
7. may transfer the property as a result of a mortgage, foreclosure, or trst
8. may transfer the property subj to bankruptcy proceedings

Front 16

Terms

Bottom Hole Letter

Back 16

agreement by which an operator contemplating drilling of a well on his own land secures the promise of another to contribute to the cost of the well; this is in return for an assignment of part of the payee's lease to the payor upon completion of the well.

Allows data concerning two wells to be exchanged between lessees who have adjacent tracts, there is no obligation to assign anything on either's leasehold.

Front 17

Terms

Dry Hole Letter

Back 17

Agreement by which an operator contemplating drilling of a well on his own land secures teh promise of another to contribute to the cost of the well, but requires payment upon completion of the well up to a specific depth, whether the well produces or not.

Front 18

Transfer by the Lessor Subsequent to a Lease

"Subject to" Clause & "Future Lease"

Back 18

The “subject to” clause in a mineral deed states that the deed is subject to existing oil and gas leases.

Its purpose is to avoid Duhig problems and makes clear that grantee is intended to receive an interest in rentals and royalties under the lease.

Follows the granting clause.

Future lease clause - sets out how the interest will be owned by the grantor and grantee once the lease in existence comes to an end.

Problems may arise when the "subject to" clause and the future lease clause comes into conflict w/the grating clause:
1. amt of land conveyed by deed
2. quantum of interest conveyed by the deed;
3. duration of the interest conveyed by the deed

Front 19

Transfer by the Lessor Subsequent to a Lease

"Subject to" Clause & Two Grants Theory

Back 19

A "subject to" clause of a mineral or royalty deed referring to an existing lease may have the effect of a second grant so that the grantee will have on interest in production under the existing lease and a different interest in production under future lease.

Hoffman v. Magnolia Petroleum Co.(TX), the lessors who owned ½ the mineral interest in 320 acres subject to an oil and gas lease, conveyed to Hoffman their mineral interest in 90 acres. The granting clause was followed by a subject to clause that stated “the sale is made subject to said lease, but covers and includes ½ of all the oil royalties to be paid under the terms of the lease.” Hoffman argued that he is to receive ½ of the royalties from the whole 320 acres and not just the 90. Lessor argued that the language in “subject to” clause referred only to the smaller tract. The court looks at the instrument as a whole in order to determine the intent of the parties.

Court holds that (1) the deed conveyed an undivided ½ interest in the possibility of reverter in the oil in place under the 90 acres and (2) conveyed a ½ interest in the royalty to accrue under the terms of the lease as an entirety (the whole 320 acres).

Front 20

Transfers Subsequent to a Lease

Transfers by the Lessor: Two Grants Theory - Garrett v. Dils Co

Back 20

Garrett v. Dils Co (Tex. 1957) - H & W conveyed a mineral interest to Caldwell, (predecessor to Dils). The granting clause in teh deed provided for a 1/64th mineral interest, "subject to" a prior oil and gas lease which granted a 1/8th royalty under that lease and all future leases.

Crt held that the question is whether the granting clause includes the "subject to" clause. If it was considered alone, Dils would be entitled to 1/64th interest, but the court construed the royalty under the future leases as the same as that under the then-existing lease. Dils was entitled to the 1/8th interest.

Front 21

Transfers Subsequent to a Lease

Transfers by the Lessor: Two Grants Theory Not Applied

Back 21

Alford v. Krum (1984)- O executed an O & G lease to XYZ. O then executed a mineral deed to A conveying a 1/16th mineral interest, subject to the lease to XYZ but also including a 1/16th of production. The lease also had a future lease clause, giving A a 1/2 mineral intrest in teh land, if the elase was forfeited.

Crt attempted to harmonize the granting clause and the "subject to" clause but it held that the granting clause prevailed. Thus, they ignored the two grants theory. The crt also looked at the conflict existing between the granting clause and the future lease clause and held that the granting clause prevailed.

Front 22

Transfers Subsequent to a Lease

Transfers by the Lessor: Return to Two Grants Theory

Back 22

Luckel v. White (1991) - reinstated 2 grants theory, said even if actual intent can be discerned don't look at that but intent as if it is inferred from the 4 corners of the document

Front 23

Transfers Subsequent to a Lease

Transfers by the Lessor:

Herein of the Assignment Clause and related Lease Provisions -

Necessary Parties and Joinder of Parties

Back 23

Royal Petroleum Corp. v. Dennis - The court states that necessary parties to a suit are those who have or claim a direct interest in the object and subject matter of the suit and whose interest will necessarily be affected by any judgment rendered therein. The court held that where interests of part owners of royalty interest were to terminate if oil and gas production ceased, such part owners of royalty interest were necessary parties. The court reasoned that if the lease was terminated the judgment would not be binding on them, but would terminate their rights for all practical purposes (as point would be moot). Therefore, in the interests of equity, trial court has broad discretion to join such necessary parties. However, the royalties owners were not indispensable parties.

Mineral interest is not a necessary party b/c if the lease terminates, the mineral rights owner's interest would not be effected.

Front 24

Transfers Subsequent to a Lease

Transfers by the Lessor:

Herein of the Assignment Clause and related Lease Provisions -

Apportionment v. Non-apportionment

Back 24

Non-apportionment - the elase royalties are not apportioned among the owners of the subdivided property. Instead, the owner of the tract w/the producing well is entitled to all of the royalties due under the lease. Texas follows the rule.

Apportionment Rule - Each of the owners of the mineral or royalty interests in the several parcels subject to the lease is entitled to a share of the royalty paid upon the production of the well.

Front 25

Transfers Subsequent to a Lease

Transfers by the Lessor:

Herein of the Assignment Clause and related Lease Provisions -

Apportionment v. Non-apportionment

Application of the Non-Apportionment Rule

Back 25

Central Pipeline Co. v. Hutson (Ill 1984) - After executing and O & G lease w/out a royalty proration clause, Tyler conveyed the land to her children by conveying it in section.

Where a landowner executes and O & G lease w/out proration of royalties clause and later conveys the land to others in sections, any royalties produced from the wells on a particular section of the property belong to the owner of that section and need not be shared w/the owners of the other sections.

Japhet v. Mcrae (Tex.) - Crt concluded that the non-apportionment rule was teh better rule. it is based o the idea that O & G is real estate until it is severed. It is not right to take away the property of one person and give it to another.

Front 26

Transfers Subsequent to a Lease

Transfers by the Lessor:

Herein of the Assignment Clause and related Lease Provisions -

Apportionment v. Non-apportionment

Other Factors that will lead to apportionment in non-apportionment states

Back 26

1. pooling and unitization agreement
2. community leases
3. entirety clauses

Front 27

Transfers Subsequent to a Lease

Transfers by the Lessor:

Herein of the Assignment Clause and related Lease Provisions -

Apportionment v. Non-apportionment

Entirety Clauses

Back 27

such clauses provide that if the leased premises are ever owned severally or in separate tracts, all royalties accruing under the lease shall be treated as an entirety and shall be divided among and paid to the separate owners in the proportion that the acreage owned by each bears to the entire leased acreage.

Commonly inserted by the lessee.

Front 28

Transfers Subsequent to a Lease

Transfers by Lessee: Relationship of Transferor and Transferee

Implied Covenants and the Relationship Between Transferor and Transferee

Back 28

Cook v. El Paso Natural Gas CO. (10th Cir. 1977) - There are two adjacent tracts of land. The owner of TI executed an O & G lease to Cook. Cook then assigned his lease to El Paso and maintained an overriding royalty interest. El Paso owned a well on T2. Cook sued claiming that El Paso's well was draining T1 and that El Paso had violated an implied covenant to protect agst drainage.

Crt held that there was an implied covenant on teh part of an O & G lessee or his assignees to protect the leasehold from drainage, and it covers the owner of an overriding royalty interest. El Paso had to pay compensatory damages.

RPO standard does not apply to situations like this where the lessee or assignee is involved in draining the well.

Front 29

Transfers Subsequent to a Lease

Transfers by Lessee: Relationship of Transferor and Transferee

Implied Covenants and the Relationship Between Transferor and Transferee
(TEXAS RULE)

Back 29

Tidelands Royalty B. Corp. v. Guild Oil Corp. (1986) - O owns T1 and T2. O executes and O & G lease to Gulf for both tracts. Guld assigns an overriding royalty interest in T1 to A. Guild develops a well on T2. Can A claim the benefit of an O & G lease between O and Gulf to protect T1 from drainage?

Crt held that where there is a common lessee, the overriding royalty interest owner can make a claim based on a covenant in the lease between O and Gulf (the lessee). If there is no common lessee, then there is no implied covenant to protect A from drainage caused by offshore wells operated by 3rd parties adjoining lands.

Front 30

Transfers Subsequent to a Lease

Transfers by Lessee: Relationship of Transferor and Transferee

Implied Covenants and the Relationship Between Transferor and Transferee
(ARKANSAS RULE)

Back 30

McNeill v. Peaker (Ark 1973) - McNeill, who assigned an O & G lease to Peaker and reserved and overriding royalty interest claimed that Peaker had breached an implied covenant to reasonably develop and protect agst drainage.

Crt held that Arkansas law does not receognize implied covenants on teh part of an assignee of an O & G lease to an oil payment onwer whos it not a lessor.

Front 31

Transfers Subsequent to a Lease

Transfers by Lessee: Relationship of Transferor and Transferee

Fiduciary Duty Between Transferor and Transferee

Back 31

Sunac Petroleum Corp. v. Parkes - O executes an O & G lease to A. A makes an assignment to B , reserving an overriding royalty interest from this lease or any renewal or extension. A's lease dies and O executes an O & G lease to B. A wants to keep his overriding royalty interest based on the language of the assignment.

Crt held that there are two issues:
1. the assignment between A & B was not extended or renewed. The old lease had expired; the new one was not an extension.
2. the existence of the language "extension or renewal" DID NOT create a fiduciary relationship between the assignor and his assignee.

Front 32

Transfers Subsequent to a Lease

Transfers by Lessee: Relationship of Lessor and Transferee

Whole or partial assignment - Situation

Back 32

O executes an O & G lease to A, and then assigns her interest to B. The relationship between O & B will depend on whether A assigned all of her interest or only a portion of her interest.

Front 33

Transfers Subsequent to a Lease

Transfers by Lessee: Relationship of Lessor and Transferee

Whole assignment

Back 33

If A assigns all of her interest then B, as an assignee of A, is liable to the lessor b/c a lease is an agreement which concerns real property; therefore, both teh benefits and the burdens which touch the land will run w/the land. B is not liable prior to the time of assignment

Front 34

Transfers Subsequent to a Lease

Transfers by Lessee: Relationship of Lessor and Transferee

Partial assignment - Types

Back 34

Depends on what parts of the lease were assigned. A can assign:
1. indivisible portion of the lease
2. divisible portion of the lease

Front 35

Transfers Subsequent to a Lease

Transfers by Lessee: Relationship of Lessor and Transferee

Partial assignment - Indivisible Portions of the Lease

Back 35

Action on one part of the lease will be effective on other part of a segregated lease.

Berry v. Tidewater Associated Oil Co. - O executes an O & G lease to A. A assigns to B the eastern half of the property. Thus, you have one tract and A owns the west half and B owns the east half. B/c teh land has been segregated, the question is whether drilling on one portion of the land extends the lease beyond the primary as to the other portion as well

Crt held that YES - the drilling of a well by the org lessee on a portion of the lease that he retains after subsequent assignment of another part, or payment of delay rentals keeps the lease alive as to both the assigned and the unassigned potions. Thus, under the habendum clause, production on one segregated tract is construed as production on all tracts. Same rule applies to delay rentals.

Front 36

Transfers Subsequent to a Lease

Transfers by Lessee: Transfers Subsequent to a Lease

Transfers by Lessee: Relationship of Lessor and Transferee

Partial assignment - Indivisible AssignmentRelationship of Lessor and Transferee

Partial assignment - Transfers Subsequent to a Lease

Transfers by Lessee: Relationship of Lessor and Transferee

Partial assignment - Divisible Portions of the Lease

Back 36

Action on part of the lease WILL NOT be effective as to the other part of the segregated lease.

Cosden Oil v. Scarborough - O executes an O & G lease to A, who assigns B 420 acres. The question is whether B is obligated to reasonably develop his segregated portion?

Crt held that the implied covenant to develop under an O & G lease can run w/the land and be "divisible" which means that each assignee of a portion of the leasehold is obligated to reasonably develop his portion of teh leasehold to keep his portion of the assigned leasehold alive. Thus the assignee is responsible for some of the same things as the assignor.

Interests are divisible if they touch and concern the land and there is privity. Unless you negate such provisions expressly, they will be binding.

TX all of the recognized implied covenants are divisible.

Front 37

Transfers Subsequent to a Lease

Transfers by Lessee: Transfers Subsequent to a Lease

Transfers by Lessee: Relationship of Lessor and Transferee

Partial assignment - Indivisible AssignmentRelationship of Lessor and Transferee

Partial assignment - Transfers Subsequent to a Lease

Transfers by Lessee: Relationship of Lessor and Transferee

Distinction Between Assignment and a Sublease

Back 37

Hartman Ranch Co. v. Associated Oil Co. (Cal. 1937) - O executed a lease to A and then A subleased to B. O wanted to sue B, the sublessee for breaching the implied covenant to protect the land from drainage. B argues, that as a sublessee, O can't sue him for breach of an implied covenant.

Crt held that O, the original lessor cannot sue the sublessee on the parent lease for breach of an implied covenant. However, O can sue B for the breach of an implied covenant based on the sublease, breach of an implied covenant based on the sublease where the sublessee assumes the parent lease.

Front 38

Transfers Subsequent the Lease

Transfers b the Lessee: Relationship of Lessor (Or His Successor in Interest) w/Lessee-Transferee

Back 38

O executes an O and G lease to A; A then assigns his interest to B. What is A's liability after A assigned the lease?

Kimble v. Wetzel Natural Gas Co. (w.Va 1950) - There is a free gas clause in the original lease whereby the org lessee was obligated to furnish the org lessor w/free gas. The lease went through a lot of assignments. The original lessor is now suing the original lessee to enforce the clause.

Crt held that the original lessee remains obligated. As logn as the lease is in effect, it can be enforced; the covenant runs w/the land. As a general rule, unless the lease contains a clause that excuses the lessee from further liability, the original lessee will be liable to the lessor for breach of a covenant subsequent to transfer.

Front 39

Transfers Subsequent the Lease

Securities Regulations

Back 39

1. O & G leases fall under the Blue Sky laws. A security interest includes an interest in or under an O & G lease.
2. Sales can be exempt from securities regulations provided that certain requirements are met.
3. Violation of securities regulations can lead to stringent penalties, including everything from fines, to prison, to civil liability.
4. Yellow Page EXEMPTION - there is an UNWRITTEN agreement in the O & G business that if an O & G deal falls through, the parties may sue under contract, but they wont' sue under security laws.

Front 40

Pooling and Unitization

Problem of Small Tract Well

Spacing & Allowables - Allowable

Back 40

The amt of O & G which the RRC of Tex will permit a well or field to produce under proration orders issued by the RRC.

RCC determines the allowable for a field by calculating how much O & G the state of Tex should produce in a given period and prorates that amt all over the field in Texas. They then break down how much each well should produce.

Front 41

Pooling and Unitization

Problem of Small Tract Well

Spacing & Allowables - Well Spacing

Back 41

Regulating of the density or the number and the location of the wells over a common O & G reservoir for conservation purposes.

Regulation is accomplished by the RCC through Rule 37.

Front 42

Pooling and Unitization

Problem of Small Tract Well

Procedure

Back 42

If an operator wants to drill a well, she must get a permit from the RCC by filing a Form W1. If the minimum well spacing reqs are satisfied, then a regular permit will be issued.

Front 43

Pooling and Unitization

Problem of Small Tract Well

What if an operator wants to drill a well on a small tract of land but can't meet Rule 37 requirements?

Back 43

(1) the operator might want to seek a voluntary pool, which would entail combining one tract with another in order to meet the spacing requirements. (pooling is consensual, aside from a statute, there is no way you can be required to share the proceeds of production)
(2) the operator might want to get an exception to Rule 37 (2 situations which allow for exception: (a) prevent confiscation, which is most often granted (b) to prevent waste, seldom used)

3 Judicially Mandated Rules:
1. No matter how small the tract is, you are entitled to one well to prevent confiscation
2. In setting the allowable, the RCC may NOT cut the allowable down to a pt where the well could not be operated for a profit
3. neither the RCC or the crts could force a small tract owner to pool w/another tract w/out consent or w/out legis

Front 44

Pooling and Unitization

Problem of Small Tract Well

How will the RCC allocate production of a small tract?

Back 44

Rule 37 made it easier to get an exception that it did to pool. The RCC allowed small tract owners to produce more than they otherwise would had they owned a big tract.

Normanna Field - Atlantic Richfield v. RRC - The field was very small, 1/2 of an acre. There was gas in place worth 7K, but under the allowables formula, the owner of this small tract was permitted to produce gas with a value of 2.5 million.

Crt held that RCC's formula did not apply. The crt held that the RCC had a duty to come up with a proration formula which would conserve gas in the field, but would protect the interests of all parties w/out depriving them of their property. The RCC responded by creating a new formula ("Mineral Interest Pooling Act")

Front 45

Pooling and Unitization

Problem of Small Tract Well

Mineral Interest Pooling Act

Back 45

1. The Act is applicable to two or more separately owned tracts with a common reservoir; it applies to all interest which could be effected.
2. A party goes to the RCC and asks for pooling. The RCC, not the courts, now have the authority to force pooling.

Front 46

Pooling and Unitization

Definitions

Pooling

Back 46

It is the combination of small tracts of land into a single unit large enough to qualify for a drilling permit under applicable spacing rules.

Pooling is important because it prevents the drilling of unnecessary or uneconomical wells which would result in waste.

Front 47

Pooling and Unitization

Definitions

Unitization

Back 47

It is the bringing together of larger tracts for the purpose of jointly operating some or all of a common reservoir.

You combine for purpose of secondary recovery operations.

Front 48

Pooling and Unitization

Three Ways to Pool

Back 48

1. Voluntary Pooling
2. Involuntary Pooling
3. Community Leases

Front 49

Pooling and Unitization

Voluntary Pooling

Back 49

Pooling is a modification of the habendum clause and the other savings clause bc if land is pooled, operations need not take place on each specific property in order to maintain that lease.

Power to pool depends on:
1. whether or not the exercise of the pooling power falls under the authority granted under the lease;
2. whether the pooling was exercised in good faith or bad faith

a. the grantor has the duty to act in good faith,

b. the lessor has the duty to show bad faith.

c. the are different factors you can look at to determine bad faith: whether the tract was pooled at the end of the primary term; gerrymandering, which means the pooling of small portions of several leaseholds to keep the leaseholds on the big tracts alive

Front 50

Pooling and Unitization

Involuntary Pooling

Back 50

Pooling can be forced under the Mineral Interest Pooling Act (1965)

Front 51

Pooling and Unitization

Community Leases

Back 51

A community lease is a single lease executed on two or more racts or a situation where several owners execute a single identical lease. Where there are separate but identical leases, the leases must cover both tracts. The royalties are apportioned according to each lessee's ownership in the whole.

Front 52

Pooling and Unitization

Does production on one part of the lease perpetuate the primary term on the other part of the lease?

Back 52

YES - if the land has been pooled, even if part of a tract is not included in the lease, it is bound by production on another part of the lease. The lessee is bound by express and implied covenants in the lease as to acreage that is not included.

However, there are cases that hold that a lessee may not keep a portion of a property that is not included in the lease alive forever.

Front 53

Pooling and Unitization

Pugh Clause

Back 53

Meant to protect the lessor from the lessee who was trying to tie up unincluded portions of the land. Thus, the rule states that drilling operations from a pooled unit would only maintain a lease as to land included in the lease.

Front 54

Pooling and Unitization

Rist Rule

Back 54

Made the Pugh clause applicable to horizontal severances as well:

Example - Lessee A has mineral interests in T1 and T2, lessee executes a lease to B for teh mineral rights below 1500 ft. A produces on T1. The question is whether the production perpetuates teh lease on T2 that is above 1500 feet. If the lessee pools the leases, then production on T1 will keep T2 alive above 1500 ft.

Front 55

Public Lands

State Lands - History

Back 55

When TX got its independence from Mexico, it retained Mexico mineral law. Mexican mineral law gave all the mineral rts to the soverign.

When TX became a state, it began to classify particular state owned lands based on teh probability that the land contained minerals. Those lands were called mineral classified lands, but all the land containing minerals was not classified as a mineral land.

In minerally classified lands, the state released the mineral rights to the owners of the soil under a general release act. The last release act was effective Sept. 1, 1895.

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Public Lands

State Lands - General Release Act

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1. if you have a patent dated prior to 1895, then the state of TX has no interest in the minerals

2. If a title had its origin of the minerals outside of TX, the state has not right

3. after 1895, land that was not classified as a mineral land carried the minerals along with the surface in a patent.

4. after 1895, if the land was classified as a mineral land, the minerals were retained by the state unless the patent specified otherwise.

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Public Lands

State Lands - Mineral Relinquishment Act

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This Act was enacted in 1819 and purported to release to the owner of the soil an undivided 15th/16th of the undeveloped oil and gas.

The Act only applied to mineraly classified public school and sylum lands.

The Act covered a 36 year period between 1895-1931.

The Act only applies to oil and gas, not other minerals.

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Public Lands

State Lands - Mineral Relinquishment Act

The Role of the Owner

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The owner is appointed as teh agent of the state of Tx. The owner can search for oil and gas and the owner is entitled to 15th/16ths of all oil produced.

However, the owner does not own 15/16ths of the minerals. (Green v. Robinson Tex.)

The court held that teh landowner of such lands has no title or interest in the oil and gas even though the owner performs the same functio as a fee owner.

The state is simply using the surface owner as an intermediary.

B/c the 15/16ths language was confusing, the crt interpreted it to mean that the landowner had no title. The land owner cant' convey title to the oil and gas.

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Public Lands

State Lands - Mineral Relinquishment Act

The Role of the Owner - Owner's duties

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The only thing the landowner can do is to act as an agent for the state to execute oil and gas leases. As an owner, you have a duty to:

1. get the best price per acre; teh statutory minimum is 10 cents per acre.
2. convey a minimum of a 1/8th royalty.
3. follow the proper proceedings regarding:
(a) the proper forms used form the land commissioner;
(b) a proper recietation of the consdieration paid in the lease;
(c) a demonstration that bonus was paid;
(d) demonstrating the undivided interest of the landowner

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Public Lands

State Lands - Mineral Relinquishment Act

The Role of the Owner - Who is the Owner

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1. the party that executes the lease is the party that has the power to alienate the land.
2. the courts have refused to allow the party in possession to execute a lease on behalf of the state.

(Glass v. Skelly - The court upheld the right of the life tenant to execute a lease. A life tenant was considered an owner within the meaning of the Act. A life tenant was considered different from the owner of the surface for a term of years).

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Public Lands

State Lands - Mineral Relinquishment Act

The Role of the Owner - Other Lands That the state Has An Interest In

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State lands are vested in agents of the state who have the power to lease. The Commissioners of the General Land Office have the most power and rule making authority.

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Public Lands

Federal Lands

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1. Uncle Sam owns a lot of land in the United States. Different statutes apply to federal leasing.
2. The federal gov't distinguishes between competitive and non-competitive leases.

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Public Lands

Federal Lands

Competitive Leases

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These are leases to land that have value. The gov't sells these leases.

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Public Lands

Federal Lands

Non-Competitive Leases

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These are leases to land that has no value. People acquire such leases by asking for it over the counter and through gov't lotteries.