Oil & Gas: Title & Conveyance Issues

Front 1

Executive Right: Duty of "Utmost Good Faith," Sometimes Fiduciary

Non-executive interest owners [NPRIs and NPMIs] rely on executive interest owner to realize income from interests. Duty owed by executive interest owner depends in part on executive's conduct.

Back 1

In most cases, duty owed is "utmost good faith and fair dealing." Requires executive to act w/due regard for non-executive interest and to be willing to execute a lease on same terms/conditions as a reasonably prudent landowner would.

In cases of egregious self-dealing, courts have imposed fiduciary standard; executive must subordinate interests to non-executive. Breach may include cancellation of executive right, cancellation of other leases that violate the duty, actual damages, exemplary damages.

Front 2

Surface Owners v. Mineral Owners

Back 2

ME is dominant and can use the surface as is reasonably necessary to develop the o&g under the tract, w/o paying surface owner.

Front 3

Meaning of Minerals

O&G are minerals belonging to M-estate.

Stripmineable minerals (lignite, uranium) often destroy SE.

Back 3

1971: TX SC surface destruction test--> if any reasonable method of producing mineral would destroy surface, substance belonged to SE unless ME owner had expressly reserved the iron ore.

1983: Is this substance in its 'ordinary and natural meaning' a mineral? If so, belongs in ME. New test is prospective and doesn't change previous holdings. Also, for hard-minerals, dominant ME doctrine would not apply as it does for o&g. While ME owner may own mineral, S-owner should be compensated for damages to S.

Front 4

Determining minerals ownership

1) Is substance one of 9 that belong to surface as a matter of law? Building stone, limestone, caliche, surface shale, sand, gravel, water (fresh and salt), near surface lignite and iron ore.

2) If not, is date of ambiguous conveyance that severed minerals pre- or post June 8, 1983?

If pre, use 'surface destruction' test
If post, use 'ordinary and natural meaning' test

Back 4

If lease from ME owner, must pay for surface damages to S and accommodate existing surface uses if there is a reasonable, practical method of doing so (rule also minimizes compensation owed to S as damages)

Front 5

* Conveyancing: Nonapportionment Rule contrasted w/Community Lease

Nonapportionment rule: when property is subdivided after o&g lease entered into, owners of subdivided interests are not entitled to an apportioned lease royalties. They are entitled to an apportioned delay rental. Owner of tract where well that produces oil and gas is located is entitled to all royalties due under lease (unless lease contains a subject to clause)

Community lease: several landowners of adjacent tracts sign single lease granting mineral rights in combined acreage to a single lease. Lease execution treated as pooling agreement; each lessor entitled to share in prouction (and royalties)

Back 5

2 rules to trigger MIPA (Mineral Interest Pooling Act):
1) MIPA applies only to fields discovered after 3/8/61
2) Must first make fair and reasonable offer to pool voluntarily

w/o MIPA, common law applies. MIPA- compulsory pooling by government.

Front 6

Community lease is the only example in TX oil and gas jurisprudence of implied pooling effect.

Back 6

Otherwise, pooling only if:
(1) Express pooling power is exercised in a lease clause;
(2) Compulsory pooling occurs by statute (MIPA) or
(3) Ratification of a pooling agreement by a NPRI

Absent pooling, the Rule of Capture applies

Front 7

Fractional Interest Problems and Duhig Doctrine

General Rules:
1) Deeds are construed against Grantor (leases construed against Lessee). So if a deed is ambiguous, Grantor usually loses

Back 7

2) "Four corners" rule requires courts try to harmonize all clauses in a deed to give effect to each clause. Only if clauses are absolutely inconsistent and in conflict should courts resort to other types of interpretation

3) Courts read deed terms literally. There is a difference between "the land or interest conveyed" and "the land or interest described."

Front 8

Duhig Doctrine

Applies in 3 or more party conveyances in which grantor seemingly conveys more than 100% of mineral or royalty interest. Grantor will bear loss of an overconveyance.

Back 8

Duhig also applies to overconveyances of royalty interests in a 3-party chain.

Because leases are construed against lessee (who usually drafts them), the Duhig rule does not apply to leases of fractional mineral interests.

Front 9

Conveyance of Mineral Interest v. Royalty Interest

Courts apply usual process of interpretation to ascertain party's intent from the instrument language.

Back 9

Royalty: "Oil, gas and other minerals produced and saved"
Mineral: "Oil, gas and other minerals in and under"

In TX, a mixture of these ("Oil, gas and other minerals in and under and produced and saved") indicates mineral interest.