Oil & Gas: Property Rights

Front 1

Rule of Capture

Non-liability for causing oil & gas to migrate across property lines when producing oil and gas from wells drilled on own land.

Back 1

Also applies to groundwater in TX, unless groundwater is regulated by specially created groundwater district.

Front 2

Limitations to Rule of Capture --> Doctrine of Correlative Rights:

Every oil & gas owner has a right to a fair opportunity to produce oil and gas from common reservoir underlying his or her property.

Back 2

Doctrine does not apply to:
- negligently drained oil or gas ("blowout")
- illegally drained oil or gas [in violation of Railroad Commission order]
- stored gas (gas reinjected into depleted underground reservoir storage- person who captured/reinjected owns. Storer's burden to show how much of gas withdrawn is native vs. injected gas.)

Front 3

Types of Oil & Gas Interests

Back 3

Fee simple owner of property owns surface & minerals below surface. Can transfer less than his entire interest through severance.

Front 4

Mineral Interest's Rights

1) Development Right: exclusive right to explore, produce, develop minerals; use surface estate as reasonably necessary to develop

2) Executive right to lease the minerals

Back 4

3) Oil and Gas lease benefits
- bonus [upfront payment for signing lease; amount per leased acre]
- royalty [fractional share of oil & gas produced free of production costs. In printed lease forms, royalty is usually 1/8; negotiable]
- delay rentals [compensation for deferring drilling during primary term of lease; acreage basis]

Front 5

**Dominant Mineral Estate & Accommodation Doctrine

When ME severed from SE, ME can use S as 'reasonably necessary' to develop oil & gas. ME can't use or injure SE in negligent ways.

Back 5

SE can try and trigger "accommodation" doctrine [ME must accommodate surface uses] only if:

1) S owner has preexisting use of S
2) ME owner or Lessee has a reasonable alternative development method that's less destructive of existing S use [*Alt. can't be unrea. costly to M]
3) Reasonable alt. is on leased tract. Can never be forced to go off tract for alternatives

Front 6

Lease may last 4ever; may expire if no production at end of specified number of years (or delay rentals improperly paid).

** O&G lease = deed conveying minerals as a fee simple determinable. Creates 2 interests:

1) Working interest: exclusive right to explore, develop and produce from property; obligation to pay 100% of exploration, development, production costs
2) Royalty interest: share of production free of production costs

Back 6

Lease has express/implied duties:
1) Pay royalty on produced O&G.
2) ME owner owns possibility of reverter (future interest) in minerals; gets typical benefits of bonus, royalty payments and delay rentals.
3) ME owner not a cotenant; no possessory rights to actually produce and develop minerals.

Front 7

Nonparticipating Royalty Interest (NPRI) Owners

NPRI does not own a mineral interest and has no right to lease the minerals [no executive rights]. Does not participate in bonus or rentals. Shares in royalty. Created by grant/reservation in deed.

Back 7

"Production payment"- ends w/sum certain- not a royalty.

Nonparticipating mineral interest owner (NPMI): lacks right to join in execution of oil and gas leases. May have right to share in bonus and delay rentals, as well as royalty under existing/future leases.