Texas Oil And Gas

Front 1

What is Ad Coelum doctrine? (Real Property)

Back 1

doctrine that says all fo the airspace above the sruface, and everything below surface to the center of the earth is vested to a legal land owner.

Front 2

What two estates does the Ad Coelum doctrine create?

Back 2

(1) real property estate
(2) mineral estate

Front 3

What is the OWNERSHIP-IN-PLACE Theory?

Back 3

In Texas, as a landowner, you own all the mineral(s) under your tract, BUT is is subject to the rule of capture.

Front 4

What happens to the characterization of minerals once they are extracted to the surface?

Back 4

convert from real property to personal property

Front 5

Define RULE OF CAPTURE

Back 5

a landowner who capture a natural resource (oil or gas) within his surface boundaries has primary ownership and no libality for draining it from adjacent lands.

Front 6

Under the Common Law RULE OF CAPTURE, what remedys would an adjacent neihbor have?

Back 6

only one.... to drill his own well to offset any draining by his neighber

Front 7

What are the limitations to the Rule of Capture (5)

Back 7

(1) personal property;
(2) correlative rights;
(3) Oil and Gas Conservation ACts;
(4) City and Munipalities (police power)
(5) negligence

Front 8

When would you claim Correlative Rights? (at common law)

Back 8

when your neighbor is guilty of waste or damage to the degree that inhibits you from exercising your equitable share.

Front 9

REAL PROPERTY APPLICATION: If Mona conveys to John an interest in his land, she must convey.....? unless....

Back 9

Mona must convey to John the GREATEST POSSIBLE ESTATE (RULE)....unless otherwise expressly reserved by Mona

ex. fee simple transfers fee simple

Front 10

When would Mona have an EXECUTIVE RIGHT?

Back 10

When Mona reserves an interest in the land...and the right to lease and manage the mineral estate.

Front 11

Can Mona transfer her Executive Right to someone else?

Back 11

yes

Front 12

Can Farah execute a Mineral interest lease if Mona actually owns the executive right? If Mona let Farah execute the lease...what duty has Mona violated?

Back 12

no... leases executed by anoting other than the executive right ower are invalid.

Mona has violated her duty of good faith and fair dealing

Front 13

Why does an Executive Interest NOT violate the Rule Against Perpatuities?

Back 13

Because executive interests are current interests in an estate.

Front 14

Executive interests waive what?

Back 14

the right to partition

Front 15

Mona (as owner of an executive interest) can develop her mineral estate herself, without what?

Back 15

without needing to transfer any rights to someone else

Front 16

Mona (as owner of the mineral estate) owns which estate? According to what Theory?

Back 16

Dominant Estate (Dominant Estate Theory)

Front 17

What does the Dominant Estate Theory grant Mona?

Back 17

The Theory grants Mona the right to enter onto the surface estate and use as much of the surface estate as is necessary for her to develop the minerals under the tract.

Front 18

What three ways can Mona violate the Dominant Estate Theory?

Back 18

(1) she uses it unreasonably and in excess
(2) her use does NOT benefit the development of her mineral estate; and
(3) her use violates lease provisions or the law

Front 19

Under the Accommodation Theory, what must Mona (as exectuve interest owner) do with the surface owner?

Back 19

accomodate the surface owner if the minteral interests use:
(1) substantially interferes with a
(2) preexisting use of the surface estate; and there are
(3) no alternative methods for Mona to develop

Front 20

What is a Landowners Royalty?

Back 20

A landowner royalty is the proportionate share of gross production of minerals, free of the cost of production.

Front 21

Waht is a Non-Participating Royalty

Back 21

interest in the royalty only, which is carved out of the landowner’s royalty. This interest owner owns ONLY a right to receive royalties

Front 22

What is a Overriding Royalty?

Back 22

An overriding royalty interest is a royalty interest in the lessee’s proportionate share of production (similar to an NPRI, except it is carved out of the leasehold estate).

Front 23

What is a Leasehold Interest?

Back 23

created by establishing both express and implied duties on the lessee by way of an oil and gas lease. The interest bears all of the risk and cost of production

Front 24

Types of Trespass onto a Mineral Estate (3)

Back 24

(1) ordinary
(2) slant well drilling; and
(3) geophysical

Front 25

What is Ordinary Trespass (MIneral Estate)

Back 25

Ordinary trespass occurs when one enters and possesses the mineral estate without a lawful right, such as continuing development and production past the expiration of a lease or drilling on the land without permission.

Front 26

What is Slant Well Drilling Trespass (MIneral Estate)

Back 26

Drilling a well at an angle under a tract which the driller does not have permission to drill, whether intentional or unintentional,

Front 27

What is Geophysical Trespass

Back 27

a surface owner cannot grant a right to explore the mineral estate. Indirectly gathering information on another’s mineral estate does not create a trespass, though entering the property of another to conduct research could constitute a trespass to the mineral estate.

Front 28

What is Hydraulic Fracturing?

Back 28

occurs when fluid is pumped into a well at such a high pressure that the reservoir rock is cracked with tiny fissure lines, thus allowing gas to flow more easily from impermeable formations.

Front 29

What has the Surpreme Court of Texas decided about Hydraulic Fracturing?

Back 29

has held that these cracks are not like slant wells and the rule of capture applies to any gas produced from a well that has been hydraulically fractured.

Front 30

What is the SOL for Trespass damages? (Mineral Estate)

Back 30

two years

Front 31

What is the primary disctintion needed to determine trespass liability?

Back 31

good faith or bad faith

Front 32

What are the damages awarded for trespass in good faith?

Back 32

fair market value of the mineral produced at the time the minerals were produced, less the production and operating costs, if they benefited the holder of the mineral interest

Front 33

What are the damages awarded for trespass in good faith?

Back 33

fair market value of the mineral produced at the time the minerals were produced

Front 34

Who has the rights to bring trespass claims?

Back 34

Both the lessor and lessee have a right to seek monetary damages. However, a lessor’s remedy is lost royalties, while the lessee is subject to any costs or credits given to a good faith trespasser

Front 35

can a mineral estate owner eject a trespassor?

Back 35

yes ...A mineral estate owner can eject the trespasser.

Front 36

What are the elements of Slander of Title (4)

Back 36

(i) publication, (ii) which is false, (iii) made with malice (willful, deliberate, or actual, without a good faith belief), (iv) causing financial loss (loss of specific sale), and (v) the owner owns an interest in the estate being slandered.

Front 37

What are damages for Slander of Title

Back 37

The measure of damages is the difference between the fair market value before the slander and the fair market value after the slander.

Front 38

Slant Drilling can/cannot be used to adversly obtain mineral rights?

Back 38

can(NOT)

Front 39

How can someone adversly possess mineral rights when the estaets are (UN)severed?

Back 39

by usual and normal rules of real property adverse possession

Front 40

How can someone adversly possess mineral rights when the estates are SEVERED?

Back 40

possessor can adversely possess only the mineral estate by drilling and producing continuously for the statutory period.

Front 41

What is the Doctrine of Relation Back?

Back 41

provides that title relates back to when adverse possession began. Therefore, look at the time when adverse possession begins to determine if the minerals have been severed from the surface estate or not, and then apply the applicable rule.

Front 42

What rights to Mineral Rights Co-Tenants have?

Back 42

Each co-tenant has the right to possess the whole of the mineral estate and lease the mineral estate. Each co-tenant may explore, develop, and produce without the consent of the other co-tenants.

Front 43

What msut a producing co-tenant account for in regards to a non-consenting co-tenant?

Back 43

must account to a non-consenting co-tenant for her proportionate share of the production,

Front 44

After a co-tenant accounts their proportionate share to the non-consenting tenant, what can a co-tenant recover? if anything?

Back 44

producing co-tenant may recoup his exploration, development, and production costs from the non-consenting co-tenant’s share in production.

Front 45

Who is liable for dry holes? who is not reliable?

Back 45

non-consenting co-tenant, however, is not liable for dry holes.

Front 46

when does the non-consenting tenant begin recieving his proportionate share?

Back 46

non-consenting co-tenant begins receiving his proportionate share of the proceeds only once the well reaches pay-out (makes enough money to cover the costs of exploration, development, and production).

Front 47

What are three rights of a non-consenting co-tenant?

Back 47

(1) Enter into a seperate lease
(2) Ratify Existing Leases
(3) Do nothing and be treated as a carried working interest partner

Front 48

What does Ratifying Existing Lease mean?

Back 48

affirmative act in which the non-consenting co-tenant accepts the terms of the lease as if the non-consenting co-tenant executed the lease. Acceptance of royalties may constitute a ratification, and a non-consenting co-tenant may not “un-ratify” acceptance.

Front 49

What his a Carried Working Interest?

Back 49

non-consenting co-tenant entitled to her fair share of the production, but because she is considered a working interest owner, she must also bear her proportionate share of reasonable production costs.

Front 50

Non Consenting Co-Tenants bear her proportionate share of reasonable production costs. However...?

Back 50

the non-consenting co-tenant bears no risk of the drilling costs, because her interest is carried. With a carried interest, the operator bears 100% of the cost to drill and accounts for the non-consenting co-tenant’s share in the cost. Once the non-consenting co-tenant’s share of the costs has been recouped, the non-consenting co-tenant begins to be paid. However, if the well never reaches “pay-out,” then no money is taken from the non-consenting co-tenant because she has no risk.

Front 51

Co-tenants can partition the mineral estate by __?

Back 51

agreement

Front 52

What happens if co-tenants of mineral rights cant agree to a partition arrangement?

Back 52

seek judicial order

Front 53

What is a partition in kind?

Back 53

Texas courts favor physical division of the mineral estate into equal tracts if equitable. This remedy is generally available for undeveloped mineral tracts based on the assumption that each portion of the tract is of equal value.

Front 54

What is a partition in sale?

Back 54

when a partition in kind would result in an inequitable division,

Front 55

When is a checker board approach favored by courts?

Back 55

For larger tracts, if a co-tenant cannot show inequality of the resources or value of the resources, Texas courts suggest a “checkerboard approach.”

Front 56

How are proceeds from a partition in sale allocated?

Back 56

The mineral estate is sold to the highest bidder; each co-tenant shares in the proceeds.

Front 57

What is recievership?

Back 57

if the inability to identify a co-tenant will result in damage (such as drainage), he may also seek a court-appointed receiver to manage the mineral interest.

Front 58

What are the elements required to partition? (3)

Back 58

i) Joint ownership;

ii) Possessory interest; and

iii) Estates of equal dignity (not quantity).

Front 59

At common law, a life estate could not damage or devalude the land under what doctrine?

Back 59

doctrine of waste

Front 60

At common law, Why cant life estate tentants and remainderman develop oil or gas resources independently?

Back 60

because neither party possessed full property rights.

Front 61

At common law, What doctrine regulates why a remanderman cannot develop oil or gas resources independently?

Back 61

doctrine of trespass

Front 62

At modern law, life tenant and remaindermancan explore, develop, and produce oil and gas subject to the following limitations: (3)

Back 62

i) A life tenant cannot drill new wells or enter into new leases without the consent of the remainderman, as this is waste;

ii) A remainderman cannot grant new leases for exploration and production without the consent of the life tenant; and

iii) A life tenant and remainderman must jointly consent to new drilling and new leases.

Front 63

When are bonus/royalties and delay rentals used as payout determinatons?

Back 63

when there is no agrement as to the division of proceeds betwteen a life tentant and a remainderman from an oil and/or gas lease.

Front 64

How are bonus and royalties paid out bewteen life tenant and remainderman?

Back 64

placed in interest bearing account, and the interest is paid to the life tenant for life, and princapal is paid to the remainderman upon the life tenant's death.

Front 65

How are delayed rentals paid out bewteen life tenant and remainderman?

Back 65

paid to the life tentant for life, and the remainderman upon the life tenants death

Front 66

What are dealy rental payments?

Back 66

sum of money payabel to thelessor by the lessee for the privlaege of deferring the commmendcment of drilling operations or the commendment of production during the primary term of the lease

Front 67

What is the Open-Mines Doctrine?

Back 67

when a lease has been executed priro the creationof the life estate, the life tenant is entitles to all proceeds paid under the lease in effect at the time of thelife estate is created. The lease,not the actual dirlling of a will,opens the mine

Front 68

What is the exception to the general rule for pay outs to life tenants and remainderman?

Back 68

Open Mines Doctrine

Front 69

You do not apply the Open-Mines Doctrines to ....? (2)

Back 69

new leases or extensions

Front 70

What happens when successive mineral interests are created by a trust?

Back 70

trustee may execute oil and gas leases.

Front 71

The terms of the trust instrument control what? (2)

Back 71

(1) trustee’s power to lease; and
(2) the terms by which a lease must be executed.

Front 72

What happens with the trust instrument is silent?

Back 72

,the Trust Act requires a trustee to execute leases under a mandated formula with requirements for the division of proceeds, such as all delay rentals going to the life tenant, and the remainderman receiving production payments.

Front 73

When can creditor or mortgagee of the surface estate prevent exploration, development, and production?

Back 73

when such actions will damage the value of a security interest that attached prior to the mineral estate being severed from the surface estate.

**REMEMBER PRIOR TO ESTATE SEVERENCE

Front 74

What happens if If a lien attaches prior to the mineral estate being severed from the surface estate (an oil and gas lease is a severance?

Back 74

the lien will be considered superior to the lease.

Front 75

What happens if lien is forclosed upon (presuming lien attached prior to the mineral estate being severed from the surface estate)?

Back 75

lien holder may foreclose upon the mineral estate if the sale of the surface estate will not satisfy the amount of the lien.

Front 76

When should a leessee aquire to protect its lease against a superior lien?

Back 76

the lessee must obtain a subordination agreement from the lien holder.

Front 77

Oil and Gas leases create what kind of conveyance?

Back 77

oil and gas lease is a fee simple determinable conveyance

Front 78

What are the seventeen essential clauses for a oil and gas lease?

Back 78

(1) granting (2mother hubbard (3) habendum (4)primary (5) secondary (6) meaning of produced (7) temporary cessation of productoin doctrine, (8)delay rental (9)paid-up provision (10) dry hole (11)operations (12) force majeaure (13) shut-in royalty (14)pooling (15) entirety (16)royalty (17) take or pay

Front 79

What is the granting clause?

Back 79

(i) describes the rights the lessor is granting to the lessee, and
(ii) describes the property subject to the lease.

Front 80

EXAM NOTE: Often an issue arises as to whether the holders of the mineral estate can destroy the surface estate to collect such “minerals” for their own use.

Back 80

EXAM NOTE: Often an issue arises as to whether the holders of the mineral estate can destroy the surface estate to collect such “minerals” for their own use.

Front 81

What is necessary to include within the granting clause?

Back 81

It is often necessary to determine what minerals constitute “other minerals.”

Front 82

What is the Surface destruction test? When was it used?

Back 82

used prior to 1983 to determine "other minerals"... If the mineral was near the surface and the method of mining this substance would consume, destroy, or deplete the surface, then the mineral belonged to the surface estate.

Front 83

What is the Ordinary and Natural Meaning Test? When did it start being used?

Back 83

used after 1983.... if the substance is ordinarily defined as a mineral, then it would belong to the mineral estate owner,

Front 84

What are excpetions to the Ordinary and Natural Meaning Test

Back 84

except for water, sand, gravel, building stone, limestone, clay, surface shale, and “near-surface” coal and iron ore.

Front 85

What is the Mother Hubbard clause?

Back 85

lease provision that grants the lessee an interest in small strips of land, adjacent or contiguous to the described land, which were accidentally omitted from the legal description of the property.

Front 86

How will courts inteprete broadly written Mother Hubbard clauses?

Back 86

courts will construe the provision as granting ONLY small strips of land which were mistakenly omitted from the legal description.

Front 87

What is the Habendum Clause?

Back 87

establishes the duration of the lease and typically designates a primary term and secondary term for the lease.

Front 88

Identify the primary and secondary terms in "“The lease shall be for ___ years from this date, and as long thereafter as oil and gas, or other minerals are produced"

Back 88

“The lease shall be for ___ years from this date (the primary term) and as long thereafter as oil and gas, or other minerals are produced (the secondary term).”

Front 89

What is the primary lease term?

Back 89

maximum period the lessee can hold the lease without drilling (but may still be required to pay delay rentals to maintain the lease if required under the lease).

Front 90

What is the secondary secondary term?

Back 90

period of time that the lease is maintained beyond the expiration of the primary term.

Front 91

What is the general rule about maintaining secondary terms?

Back 91

general rule is that in order to maintain the secondary term, the lessee must be actually producing minerals in paying quantities.

Front 92

Definding "produced" generally means there must be?

Back 92

must be actual production in paying quantities during the primary term to extend the lease into the secondary term.

Front 93

What is the two part test to determine paying quantities for purposes of defining 'produced'

Back 93

i) Litmus test: Has the well made enough money to cover the expenses of operating over a reasonable period of time (not necessarily making a profit)? If so, then it is producing in paying quantities.

ii) Objective test: If the well is producing but is not making enough to cover expenses, then would a reasonably prudent operator continue to operate the well for other reasons than mere speculation? If so, then it is considered producing in paying quantities.

Front 94

What does the Temporary CEssation of Production Doctrine say? When is it applied?

Back 94

A sudden production halt will not terminate a lease if the lessee has diligently sought to restore production within a reasonable period of time (usually a month or two).
--applied in the absence of a savings clause--

Front 95

When would you want to add a savings clause to an oil and gas lease?

Back 95

to allow the lessee to maintain the lease without actual production in paying quantities.

Front 96

What is the Delay Rental Clause?

Back 96

lease provision requires a payment to the lessor to maintain the lease when not drilling in the primary term.

Front 97

In re a Delay Rental Clause... what is the difference betwen UNLESS and OR

Back 97

a. In leases that provide delay rental payments using an “unless” clause, failure to pay the full delay rentals on or before this date will constitute a breach of a condition and will result in termination of the lease (e.g., a day late or a dollar short will terminate the lease).

b. In leases that provide delay rental payments using an “or” clause, failure to drill or pay delay rentals will be considered a breach of a covenant and will not terminate the lease, but may invoke a breach of contract suit.

Front 98

What is a Paid-Up Provision? When is it used?

Back 98

Some leases omit the delay rental provision and insert a paid-up provision, which provides that all rentals have been paid up front, and no rentals shall be due during the primary term. There is no obligation to drill during the primary term.

Front 99

What do you put in the oil and gas lease if you want to avoid obligations to drill during the primary term?

Back 99

a Paid-Up Provision

Front 100

What is the Dry Hole Clause?

Back 100

provides the terms in which the lessee may maintain the lease if a dry hole is completed.

Front 101

What is the general effect of a Dry Hole Clause?

Back 101

in order to maintain the secondary term, there must be actual production. If the well does not produce, there is no production, and the lease would terminate unless saved by a dry hole provision. The lessee would then be given extra time to drill another well.

Front 102

What is the Operations Clause?

Back 102

provision permits the continuation of the lease after the expiration of the primary term if the lessee is engaged in drilling operations at the end of the primary term.

Front 103

What is the general effect of a Operations Clause?

Back 103

actual production is generally required to maintain the secondary term. However, an operations clause substitutes operations for actual production to save the lease during its secondary term.

Front 104

What is the Force Majeure Clause?

Back 104

“acts of God” and other catastrophic events beyond the reasonable control of the lessee will excuse performance and extend the lease.

Front 105

What is the Shut-In Royalty Clause? When are they generally paid out?

Back 105

provision (typically in gas production leases) is a substitute for the production by allowing payment of shut-in royalties when wells are capable of production but are not actually producing
--generally paid out during secondary lease term--

Front 106

What is a Shut In Royalty?

Back 106

royalty payments payable to the lessor after development, BUT only when production is temporarily halted.

Front 107

What is the general effect of a Shut-In Royalty Clause?

Back 107

in order to maintain the secondary term, there must be actual production in paying quantities. If a well is shut-in, there is no actual production, and the lease would terminate unless a shut-in provision saves the lease.

Front 108

What is the Pooling Clause?

Back 108

allows a lessee to combine fractional mineral interests or small tracts to create a pooled unit. Production from anywhere on a pooled unit will be considered to be production on each tract within the pooled unit.

Front 109

What is an example of a Poolings Clause?

Back 109

A owns a 10 acre tract and B owns a 20 acre tract. A and B both lease to ABC Oil Co. which provides a pooling provision. If ABC pools both tracts to create a 30 acre pooled unit, then production on A’s tract will be deemed production on B’s tract as well.

Front 110

Lessees subject to pooling clausesmust act in good faith... they shall not include?

Back 110

shall not include known unproductive acreage in the pooled unit and shall not gerrymander a pooled unit for the purpose of maintaining leases.

Front 111

What is a Pugh Clause?

Back 111

provides that if only a portion of the leased premises is included in a pooled unit, then production on the pooled unit may maintain only the portion of the leased premises that are included in the pooled unit.

Front 112

What is the effect of a Pugh Clause on a Pooling Clause?

Back 112

protects the lessor from the lessee pooling only a portion of the leased premises, but maintaining the lease covering the entire leased premises. In Texas, production on any portion of the leased premises will hold the entire tract, unless a Pugh clause is included.

Front 113

What is the Entirety Clause?

Back 113

provides for apportionment of royalties in the event of subdivision of the property after execution of the lease. Generally, the owner of the producing tract is entitled to royalties.

Front 114

What is an example of an Entirety Clause?

Back 114

A owns 40 acres, leases them to ABC Co., and then sells 20 of those acres to B prior to production. If ABC Co. drills on B’s 20 acres, then A would not be entitled to any portion of the royalty unless there is an entireties clause in the lease or in the deed to B.

Front 115

What is a Royalty Clause?

Back 115

provision creates the real property interest known as the landowner’s royalty interest and establishes the lessor’s proportionate share of production to receive payment.

Front 116

What is the result of failure to pay royalties?

Back 116

The requirement of payment is a covenant, the failure of which to pay will result in monetary damages, but generally will not terminate a lease.

Front 117

What is the Amount Realized?

Back 117

amount of money the oil and gas company receives for the sale of the minerals.

Front 118

What is the pay-out structore for Amount Realized Oil and Gas lease agreements?

Back 118

result in the lessor receiving a percentage of the net proceeds the oil and gas company receives from the sale.

Front 119

What is the Market Value royalt payout?

Back 119

what a reasonable purchaser would pay for that substance at that location. Most leases provide that the lessor is to be paid based on the market value at the well.

Front 120

What is a general problem with Market Value Royalty pay-out?

Back 120

most gas is not sold “at the well,” so the market value is generally a theoretical figure.

Front 121

In order to determine the market value at the well, courts look at three factors:

Back 121

i) If there are direct sales from the wellhead, these transactions are a good indication of what a reasonable purchaser would pay at the well;
ii) If there are no direct sales from the wellhead, but there are direct sales from nearby wells, those transactions are a good indication of what a reasonable purchaser would pay at the well; and
iii) If there are no direct sales from the well or comparable nearby wells, then the court looks at the market value at the actual point of sale and deducts the amount of money it costs to get the minerals from the wellhead to the actual point of sale. This is known as the netback method.

Front 122

What is the Take or Pay Clause?

Back 122

requires the purchaser to pay the lessee for a percentage of the gas that the lessee can produce, whether or not the purchaser actually takes it. Lessors generally do not benefit from these payments, because no gas is actually produced.

Front 123

What is a Division Order? and when is it applied?

Back 123

Prior to distributing royalty payments to the lessor, the lessee will mail a contract to the lessor called a division order. The division order indicates how the royalties are to be calculated and describes the lessor’s ownership interest.

Front 124

Why does lessee requsts taht the lessor sign the division order?

Back 124

to insure that the lessor agrees on how the lessee is going to pay the royalties.

Front 125

What happens when the less(or) signs a division order? What happens if they refuse to sign it?

Back 125

division order is considered binding on the lessee, and revocable by the mineral interest owner.

If the lessor refuses to sign a division order that complies with the statutory requirements, the lessee may suspend royalty payments.

Front 126

What is a Warranty Clause?

Back 126

provision provides for the right of the lessee to recover damages or indemnification if the lessor has bad title.

Front 127

What is Assignmetn or Change of Ownership Clause?

Back 127

provides that the lessee can rely on initial land records received and has no duty to later ascertain the true ownership of the mineral interest.

Front 128

What is a Notice to Cure Clause

Back 128

provision provides that the lessor must notify and allow the lessee an opportunity to remedy any lease breaches. This provision will not save the lease from a breach of a condition.

Front 129

What is a Proportionate Reduction Clause

Back 129

provides for the right of the lessee to reduce delay rental and royalty payments if the lessor owns less than the entire mineral estate.

Front 130

What is a Subrogation Clause?

Back 130

provides that the lessee may pay the mortgage and taxes of the lessor and then assume creditor status. The clause protects the lessee from the inability to obtain a subordination agreement.

Front 131

What is a Seperate Ownership Clause?

Back 131

provides that the lessee may sever portions of the lease to provide for assignment without affecting the remainder of the lease. The assignee has responsibilities to the lessor for its portion of the lease, which could otherwise affect the lessee’s performance.

Front 132

What is a Equipment Removal Clause?

Back 132

provision provides that after the termination of a lease, the lessee may enter and remove any remaining equipment.

Front 133

What is a Surrender Clause?

Back 133

provision provides that the lessee may terminate the lease as to all or any portion of the leased premises. The lessee remains liable for any breach.

Front 134

Lessees are subject to the objective standard of?

Back 134

reasonably prudent operator... Whether an oil producer has operated as a reasonably prudent operator is judged in light of the facts, circumstances, and surrounding conditions shown by the evidence to have existed in the oil field during the relevant time perio

Front 135

Texas courts imply a duty in all oil and gas leases to? (2)

Back 135

(i) drill an initial well and (ii) reasonably develop the lease after production has been acquired.

Front 136

Absent express provisions to the contrary, Texas courts impose the following implied covenants: (6)

Back 136

(1) Covenant to protect against drainage
(2) Covenant to market
(3) Covenant for reasonable development
(4) Covenant to Further Explore
(5) Covenant to Test; and
(6) Covenant to Diligently and Properly

Front 137

In order for a less(or) to win on breach of covenant to protect against drainage, they must show? (3)

Back 137

i) Substantial drainage;
ii) That a reasonably prudent operator would drill to protect against the substantial drainage (well must be proven to be profitable); and
iii) Damages (measured by the yield of production absent the waste).

Front 138

NOTE: Note that when there is an express covenant regarding a lessee’s duty to avoid drainage from the leased premises, that covenant applies only during the primary term of the lease (i.e., only so long as the provision for the payment of delay rentals in lieu of drilling is effective). Thereafter, the implied standard is applicable.

Back 138

Note that when there is an express covenant regarding a lessee’s duty to avoid drainage from the leased premises, that covenant applies only during the primary term of the lease (i.e., only so long as the provision for the payment of delay rentals in lieu of drilling is effective). Thereafter, the implied standard is applicable.

Front 139

What is Covenant to Market?

Back 139

general duty exists to market production for the prevailing market price within a reasonable period of time.

Front 140

What is Covenant to Reasonable Development?

Back 140

Lessees have a general duty, upon discovery of oil and gas reserves, to use the best technology to begin production and produce a profit.

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Waht is Covenant to Further Explore?

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Beyond the covenant for reasonable development, there is no general duty to explore in Texas. Even once production is obtained within a particular reservoir, the lessee has no duty to explore for other reservoirs.

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What is Convenant to TEst?

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The general rule is that the lessee must act as a reasonably prudent operator and test the land by drilling in search of oil and gas within a reasonable time. This covenant does not apply to leases that provide for delay rentals or paid up provisions.

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What is Covenant to Operate Diligently and Properly?

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catch-all provision that requires the lessee to act as a reasonably prudent operator in administering the lease.

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How do Texas courts prefer to handle breachof implied covenants?

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would rather issue monetary damages in the form of lost royalties. However, if the lessor has provided a notice to cure the breach, and the lessee still fails to cure the breach, then the court may terminate the lease.

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EXAM NOTE: Examiners may ask whether a lessor may impose a duty to drill on a lease. In order to impose a duty, a lessor must be able to show that the lessee has the capacity to recover oil and gas worth more than the costs associated with drilling, producing, and marketing of the minerals.

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Examiners may ask whether a lessor may impose a duty to drill on a lease. In order to impose a duty, a lessor must be able to show that the lessee has the capacity to recover oil and gas worth more than the costs associated with drilling, producing, and marketing of the minerals.

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What does a deed create using 'in or under'

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deed creates a mineral interest

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What does a deed create using 'produced and saved'

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deed will create a royalty interest

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What happens if the deed uses “in and under” combined with “produced and saved,”

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courts will interpret the document as creating a mineral interest.

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Under Texas property law, a person who makes an offer to purchase only the mineral or royalty interest must include?

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conspicuous statement printed in a large type style stating that by executing the document, the person is selling part or all of the mineral interest.

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A person who conveys a mineral or royalty interest may bring suit against the purchaser if:

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(i) the purchaser did not give the notice complying with the above requirements; and (ii) the person has given 30 days written notice to the purchaser that a suit will be filed unless the matter is otherwise resolved

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A person who prevails in a suit against the purchase of the mineral or royalty interest may recover the greater of:

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i) $100; or
ii) An amount up to the difference between the amount paid by the purchaser for the mineral or royalty interest and the fair market value of the mineral or royalty interest at the time of the sale.

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A owns an undivided ½ mineral interest. A conveys to B an undivided ¼ out of my ½ mineral interest.

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The term out of in Example 1 means that the fraction being conveyed is a fixed fraction, and B will own an undivided ¼ interest. The ¼ interest is subtracted from A’s original interest, leaving A with an undivided ¼ mineral interest.

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A owns an undivided ½ mineral interest. A conveys to B an undivided ¼ of my ½ mineral interest

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The term of in example 2 conveys a fraction of a fraction, and the ¼ is then multiplied by the ½, resulting in A conveying an undivided 1/8 mineral interest.

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When to apply the Duhig Doctrine?

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deeds within a chain of title purport to convey more than 100% of the mineral interest, otherwise known as an overconveyance.

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How does the Duhig Doctrine work?

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an owner who reserves an interest, while purporting to convey more than he owns, will be estopped from claiming his reserved interest insofar as it is necessary to satisfy his conveyance (constructive notice of deeds filed of record does not apply to overconveyances). Essentially, interest is taken from the wrongdoer to give to the grantee.

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Duhig Example- O owns Blackacre in fee simple. O conveys Blackacre to A, reserving a ½ mineral interest. A subsequently conveys Blackacre to B, reserving an undivided ½ mineral interest, but failing to except the previous ½ interest reserved by O.

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The Duhig Doctrine estops A from claiming an interest in his reservation; his reserved interest passes to B.

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What is the formula to calculate royalty interest for mineral interest owners?

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Royalty Interest = Mineral Interest Percentage x Landowner Royalty – Non-Participating Royalty (“NPRI”)

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What is the formula to calculate royalty interest for workingl interest owners?

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Revenue Interest = Net Revenue Interest Percentage – Overriding Royalty (“ORRI”)

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What happens when several adjacent landowners execute a single lease covering all tracts

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an automatic pooling of each tract will occur, and each owner will be entitled to proportionately share in production from any tract.

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What is the purpose of compulsory pooling?

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to establish a unit and pool all of the interests in the unit containing the approximate acreage of a standard proration unit (not to exceed 160 acres for oil or 640 acres for gas, plus 10%) when:

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When is compulsory pooling done?

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i) Two or more separately owned tracts are in a common reservoir for which the commission has established the size of proration units;
ii) There are separately owned interests in oil and gas within an existing or proposed proration unit;
iii) The owners have not agreed to pool; and
iv) At least one owner has drilled or proposes to drill a well on the existing or proposed proration unit.

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What is unitilization

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field-wide pooling, which involves pooling every tract that shares the same reservoir.

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What state agency has regulatory control over oil and gas matters?

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texas railroad commission

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What is Rule 37 and Rule 38 respectively?

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Rule 37 establishes the minimum distance requirements between each well and from each well to each unleased property line. Rule 38 is a state density regulation that requires a minimum amount of acreage needed to drill a well.

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What are the Exceptions to Rule 37 and Rule 38? (3)

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(1) Confiscation;
(2) Waste; and
(3) Correlative Rights

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What is the Confiscation exception?

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Exceptions to Rule 37 and Rule 38 are permitted to prevent drainage or confiscation of oil and gas interests by allowing every landowner to drill one well.

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When is Confiscation not an Exception?

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if there is a voluntary subdivision where the small tract was created after the discovery of oil and gas or created with the intent to circumvent the provisions of Rule 37.

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What is the Waste exception?

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Exceptions to Rule 37 and Rule 38 are permitted to prevent waste, even on voluntary subdivisions, if unique considerations, such as an existing hole, are shown.

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NOTE: The Commission establishes well allowables—the amount of production each well is entitled to produce—to give each landowner the opportunity to produce her fair share.

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The Commission establishes well allowables—the amount of production each well is entitled to produce—to give each landowner the opportunity to produce her fair share.

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How does Texas define wells?

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(1) gas wells, which produce less than one barrel of oil per 100,000 cubic feet of gas; or
(2) oil wells.

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What is the importance of the 1991 Well Cleanup Fund?

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The plugging of wells is the primary responsibility of the operator, who must do so within one year from the abandonment of the well. In certain circumstances non-operators can also be liable, but not landowners or royalty interest holders.

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What are penalties for violating the 1991 Well Cleanup Fund?

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Violators are subject to fines and prohibition from continuing current operations or seeking new drilling permits.

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What is the Relinquishment Act?

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All public lands sold between 1895 and 1931 relinquish 15/16 of the mineral rights to the current surface owner.

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What is the result of the Relinquishment Act?

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The consequence is that a landowner can lease only mineral rights and forward (as a fiduciary) a 1/16 royalty to the state.