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84 Cards in this Set
- Front
- Back
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fractionalization
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fractionalization (of ownership)--the various ways various types of property interests (e.g., mineral interests, royalty interests, working interests) are created and divided
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oil and gas operations are generally characterized AS:
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Exploration - finding oil and gas
Production - producing oil and gas Transportation - moving the product from the well head to the refinery Refining and Processing - converting crude into usable products Marketing - selling oil and gas products |
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upstream activities
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exploration and production (“E&P”)
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downstream activities
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all others (transportation, refining/processing, marketing)
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traps
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reservoirs typically occur where porous and permeable rock formations abut impermeable formations (such as shale) caused by anomalies such as faults or anticlines called traps
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reservoirs
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oil and gas accumulates over geological time, about 4.5 billion years, found in space of porous and permeable sedimentary rock; those spaces are called reservoirs
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rule of capture
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CL rule of nonliability; no liability for draining oil and gas beneath a neighbor’s land
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ad coleum rule
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notion that one owns everything below his land; the rule of capture modifies it
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horizontal severance
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fee owner has right to convey minerals BELOW his land WITHOUT giving up the surface
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correlative rights doctrine
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an owner of oil and gas has the right to a fair opportunity to produce his fair share of the oil and gas in a common reservoir
PP--everyone has a fair chance to get his fair share of the minerals in the common reservoir |
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CL limits to rule of capture
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anyone who does ANY of these is NOT shielded from liability by the rule of capture; all stem from “fair share” principle of correlative rights doctrine (6)
trespass--e.g., if A “slant-hole drilled” his well so that it was under B’s land BUT accessing the common reservoir negligence--e.g., if A negligently allows his well to catch fire and destroy the oil in the common reservoir, THEN the rule of capture will NOT shield him from liability AND he will be held liable for other’s loss of oil! (Elliff v. Texon Drilling Co.) nuisance waste violating rules of conservation agency--RoL: one who drains his neighbor’s land in violation of a conservation commission is not shielded from liability by the rule of capture interfering with neighbor’s correlative rights |
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secondary recovery operations
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procedures whereby water or other liquids are injected into the reservoir to move oil and gas trapped in the rock formation (and not recoverable by primary recovery techniques) toward the well bore
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secondary recovery operations AND relation to rule of capture
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relation to rule of capture? law is still developing, BUT rule emerging: no liability where the drained party refused to participate in a “fair” proposal to participate in an enhanced recovery project approved by the Railroad Commission
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oil production and rule of capture
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“If oil, once capture, escapes and flows from A’s land to B’s, B does NOT gain title to it, UNLESS he can show A intended to ABANDON it”
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gas production and rule of capture
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“because of its physical character, the only economical way to store” natural gas is in depleted reservoirs!"
IF A pumps “extraneous gas” (gas produced elsewhere) into a depleted reservoir that mostly underlies A’s land but some migrates to a portion of the reservoir that underlies B’s land, B IS LIABLE IF HE PRODUCES THE GAS |
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When might produced oil and gas be subject to the rule of capture?
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PRINCIPLE: produced oil and gas is not subject to the rule of capture UNLESS it is intentionally abandoned or handled so recklessly that a court infers an intent to abandon
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ownership in place theory
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landowner owns all substances, including oil and gas, which underlie his land, QUALIFIED by the rule of capture
may be described as “fee simple estate in the reservoir” (i.e., the rock formation containing the oil and gas) BUT a “fee simple determinable in the actual molecules of oil and gas” |
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fractionalized ownership in oil and gas
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in oil and gas, fractionalized ownership is the RULE, NOT the exception!
fee ownership is the “whole bundle of sticks” |
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severance
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when the fee holder transfers less than the whole bundle of sticks
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vertical severance
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severing part of the fee (surface and mineral) to one person, and the other part of the fee (surface and mineral) to others
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horizontal severance
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severing the surface and mineral rights of ownership
following a horizontal severance, there are distinct mineral and surface estates |
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surface estate
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surface estate holder has rights to all use of the land EXCEPT those specifically held to the mineral estate holder
residual in nature |
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mineral estate
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development right--right to develop the minerals and the obligation to pay the costs of development
right to lease, a/k/a the executive right right to economic benefits under the lease-- bonus--compensation for granting a lease delay rentals--compensation for deferred drilling royalty--share of production which is free of the cost of production economic benefits to mineral estate mnenonic--DEE (development right, executive right, right to economic benefits) |
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development right
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right to develop the minerals and the obligation to pay the costs of development
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right to lease
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a/k/a the executive right
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right to economic benefits
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bonus--compensation for granting a lease
delay rentals--compensation for deferred drilling royalty--share of production which is free of the cost of production |
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bonus
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compensation for granting a lease
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delay rentals
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compensation for deferred drilling
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royalty
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share of production which is free of the cost of production
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economic benefits to mineral estate mnenonic
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DEE (development right, executive right, right to economic benefits)
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co-tenancy
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transferring a portion of the entire mineral estate creates a co-tenancy
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conveyance
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transferring an individual incidence of mineral ownership (e.g., the executive right, royalty, etc.) is a conveyance
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What does an oil and gas lease do re: lessor and lessee?
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oil and gas lease reallocates the incidents of mineral ownership between the lessor and lessee
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working interest
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working interest--acquired by the lessee, the exclusive right to develop the property. and entitlement to (production)-(royalty)
HOWEVER--lessee assumes ALL costs of exploration, development, and production |
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working interest, restated in property "fees'
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lessor has a fee simple determinable that terminates at the end of the lease
i.e., during the period of the lease, the lessee gets ALL incidents of mineral ownership, EXCEPT those explicitly reserved to the lessor in the terms of the lease! |
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royalty interest
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royalty interest--retained by the lessor, share of production minus cost
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possibility of reverter
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possibility of reverter--reversionary interest also held by lessor, all incidents of mineral ownership transfer back to lessor
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FUN FACT--royalties are...?
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a hedge against uncertainty, used when value is speculative (which is why they’re also used in artistic productions)
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types of royalties! three kinds common in oil and gas
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lease royalty interest (LRI)
overriding royalty interest (ORI) nonparticipating royalty interest (NPRI) |
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lease royalty interest (LRI)
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lessor’s interest in production created under the lease
will explictly delineate the amount paid, e.g., “royalties to be paid by lessee are as follows: on oil, ⅛ of that produced and saved from said land…” most common type of royalty used |
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overriding royalty interest (ORI)
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non-cost-bearing interest carved out of the working interest (i.e., the lessee’s interest)
generally used to compensate the geologist who developed the project or someone else who has assisted the lessee |
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nonparticipating royalty interest (NPRI)
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conveyed or reserved by a present or former mineral or royalty owner
e.g., X sells the family homestead, Blackacre, and moves to the city but, in his deed to the buyer, Y, X reserves "½ of any royalty Y may receive on production from Blackacre." Under this reservation, X is entitled to a share of the royalty on production from Blackacre if oil or gas is ever found and produced from the property. may be perpetual OR limited in time carved out of the lessor’s interest (like LRI), as opposed to ORI, which is carved from the lessee’s since it does not pertain to a particular lease, it DOES NOT end when the lease ends |
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similarities in all types of royalties
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All royalty interests are forms of compensation that hedge against uncertainty.
All royalty interests are non-cost bearing interests. They are not required to pay any part of the cost of exploration or production. All royalty interests are non-possessory. Royalty owners do not have any operating rights. They have no right to develop or lease. |
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executive right
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the power to lease, which is one of the incidents of mineral ownership
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executive interest
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a person whose interst in the mineral estate includes the power to lease has an executive interest
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non-executive interests
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include ALL types of royalty interests (which by definition have no power to lease)
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naked executive interest
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executive interest that has been severed from all other incidents of mineral ownership
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Q: when the executive interest is severed from the other interests of mineral ownership, is it an alienable property right?
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RoL: a naked executive right is a fully alienable property right (i.e., transferable by conveyance, will or inheritance)
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What is the unusual relationship between the executive and non-executive interest holders?
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the non-executive interest holders are dependent on the executive interest holder to lease his/her interest on favorable terms!
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What duty does the executive interest holder owe to the nonexecutive interest holder?
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OPEN QUESTION, with two possible answers--utmost good faith and fiduciary
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utmost good faith v. fiduciary duty
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utmost good faith--requires the executive to act with due regard for the interest of the non-executive and be willing to execute a lease on the same terms and conditions as a reasonably prudent landowner would do if there was no non-executive interest
HOWEVER! in Manges v. Guerra the TX SC confused the utmost good faith standard with the fiduciary standard! unclear which one they actually applied, and so today in TX, one can argue either one |
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concurrent ownership
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co-tenants
any co-tenant may explore/drill/produce or lease his share without the consent of his co-tenants “one co-tenant cannot exclude the other” |
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successive ownership
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life tenants and remaindermen
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developing and nonconsenting co-tenant
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developing co-tenant bears entire risk, may not look to nonconsenting co-tenant for contribution
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carried interest to payout
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IF the well is a “commercial producer,” the developing co-tenant must share the benefits on a pro-rata basis
may recover the nonconsenting co-tenant’s share of the cost out of those benefits the nonconsenting cotenant may ratify his share immediately to begin receiving immediate cash BUT must also immediately pony up his share of the costs |
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SEE PRACTICE QUESTIONS ON P. 17
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SEE PRACTICE QUESTIONS ON P. 17
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what options does the developing cotenant have to deal with the nonconsenting cotenant OTHER THAN “carrying” him to payout? 3 options--
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forced pooling
joint operations under a joint operating agreement (JOA) partition |
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forced pooling
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can apply to Texas Railroad Commission for forced pooling order
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joint operations under a joint operating agreement (JOA)
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consensual K arrangment which provides for the sharing of costs and accting of profits and places one of the cotenants OR lessee in charge of operations
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partition
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any cotenant in TX has the absolute right to partition the property, either by judicial decree diving the property in kind or forced sale
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successive ownership
common problems |
the leasing problem and the accounting problem
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the leasing problem
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Q: “As between the Life Tenant and Remainderman, who can grant a lease?”
NEITHER may grant an oil or gas lease UNLESS he has the joinder of the other RoL: a lease by either, without the joinder or ratification of the other, is void |
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the accounting problem
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Q: when a lease is executed by both the life tenant and remainderman, how are the economic benefits under the lease--bonus, royalty, and delay rentals--divided between them?
principal/corpus--goes to the remainderman interest/current income--goes to the life tenant |
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principal/corpus re: the accounting problem
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royalty and bonus
proceeds invested, life tenant receives interest generated principal goes back to the remainderman after the life tenant dies NOTE--remainderman gets NO CASH until the life tenant dies! |
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exceptions to the common solution of the accounting problem
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agreement--can modify by K
open mine doctrine--where min opened PRIOR to creation of the life estate, life tenant is entitled to ALL production of the mine! executing the lease=”opening the mine” applies when lease executed PRIOR to creation of life estate IF lease in force EXPIRES and a new lease is created, open mine doctrine DOES NOT apply |
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SEE APPLICATION Q’S, P. 18
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SEE APPLICATION Q’S, P. 18
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perpetual interest
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perpetual interest--an interest that lasts forever
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term interest
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term interest--lasts a specified period of time
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defeasible term interest
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defeasible term interest--establishes conditions which contemplate the transfer of the interest to a different party
for purposes of a defeasible term interest, production means ACTUAL production, NOT “capable of production” shut in royalties |
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shut in royalties
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shut in royalties, while they may keep a lease alive, they will not allow a defeasible term interest to survive IF actual production is required
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unique legal status of an O&G lease
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by its form and function, an O&G lease is both a conveyance AND a K!
conveyance under which the lessor conveys to the lessee the right to explore for and produce O&G lessee receives a fee simple determinable in and to all O&G in place under the property covered by the lease lessee accepts lessor’s offer to use his land and explore for and produce O&G for consideration and certain express and implied promises |
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E&P of O&G requires three things
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land, capital, and technology
lessor contributes land oil company contributes capital and technology |
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lessee's contractual interest
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lessee wants option NOT obligation to drill and broad rights to explore and use the land, and to pay as little as possible for both
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In a K sense, what is bonus and royalty?
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bonus and royalty are both consideration paid by the lessee to the lessor
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What if you can't tell whether a particular payment is a bonus or royalty?
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RoL: an interest in production that extends over the life of the lease is royalty, regardless of what it is called
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dominant estate
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contained in the Granting Clause, ¶ 1 of the lease form
common statement: when severance between mineral and surface estattes, the mineral estate is the dominant estate means the surface estate is burdened with a servitude lessee has right of ingress and egress, also right to use as much of the surface as necessary for production because the mineral estate is dominant, the lessee DOES NOT have to pay for its surface use incidental to drilling OR for restoring it (absent K clause) |
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rule of “reasonable use” of surface estate by lessee
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limits the lessee only to that amount of the surface estate that is “reasonably necessary” to accomplish the goals of the lease
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What does the rule of “reasonable use” of surface estate by lessee generally include?
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generally includes geophysical exploration, drilling, building roads, installing machinery and storage tanks, and using “such water as is reasonably necessary to accomplish the purposes of the lease”
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accommodation doctrine
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If the proposed use of the surface by the mineral owner will substantially impair existing surface uses and the mineral owner has reasonable alternatives available, the mineral owner must accommodate the surface owner
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accommodation doctrine--test
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two part test--(1) impairment of existing uses and (2) lessee has reasonable alternatives available
legal standard to find liability? NEGLIGENCE low standard, easy for lessor to meet |
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SUMMARY & RoL of SURFACE USE ISSUES--
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lessee has right to use the surface in a way that is reasonably necessary to explore for and develop the minerals, subject to--
rule of reasonable use accommodation doctrine negligence statutes/ordinances/terms of the lease |
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Mother Hubbard clause
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cover-all clause that incorporates smaller tracts of land that may have been overlooked or accidentally omitted in the Granting clause
e.g., “The lease also covers adjacent or contiguous tracts owned or claimed by lessor” |
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interpreting a Mother Hubbard clause
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courts generally construe Mother Hubbard clauses to apply only to small tracts--large tracts that are adjacent to the property described in the Granting clause will not be included, even though they might technically fall under the language of the Mother Hubbard clause
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Habendum clause
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establishes the “ultimate duration” of the lease, the longest possible time that it may last
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