Texas Oil And Gas

Front 1

Rule of Capture

Back 1

Applies to water, oil, gas
- You get what you drill, even if depletes others
- Doesn’t Apply to:
1 – negligently drained oil/gas (blowout)
2 – Illegally drained oil/gas (against Railroad Commission)
3 – stored gas = personal property

Front 2

Which estate is dominant? Surface or mineral?

Back 2

Mineral = dominant estate
Surface = serviant

Front 3

As a mineral interest owner, what rights?

Back 3

1 – right to explore, produce and develop minerals
2 – right to vote surface estate as reasonably necessary to develop minerals
3 – right to lease minerals
4- right to develop oil/gas yourself w/o leasing
5 – no duty to develop land/minerals

Front 4

If O grants an oil and gas lease to Big Oil, what does he receive in return?

Back 4

Bonus, Royalties, Delay Rentals

Front 5

When must Mineral owner accommodate Surface owner?

Back 5

1 – S owner has preexisting use of the surface
2 – M owner has a reasonable alterative method of developing oil/gas which is less destructive of the existing surface use but is still economical to M
3 – reasonable alternative is available ON the land (eg, can’t force slantwell)

Front 6

How long does an oil/gas deed/lease last?

Back 6

Is determinable – can last forever but may expire if there is no production for X # of years

Front 7

O conveys Blackacre to X reserving “1/2 of all oil and gas royalties.” What do O and X own?

Back 7

O = NPRI
X = Fee Simple determinable with mineral estate burdened by an NPRI

Front 8

5 Kinds of Trespass in Oil/Gas and their Remedies

Back 8

1 – ordinary trespass (lease expires = Injunction and damages
2 – Slant well drilling = Injuction and damages
3 – Geophysical or seismic trespass = Sue in assumpsit
4 – Damage to the speculative lease value (showing that land not worth anything, loss of bonus) = Lost bonus
5 – fracturing a well = Injunction and damages

Front 9

Is authorized secondary recovery operation a trespass?

Back 9

No, public policy favors recovering more o/g BUT can maybe sue for damages

Front 10

Slander of Title

Back 10

1 – publication of false claim to title of property
2 – done with malice
3 – resulting in rightful owner losing *specific* sale or lease opportunity b/c no buyer wanted a lawsuit w/ slandering party

Front 11

What damages for trespass?

Back 11

If bad faith = all losses, no credit for costs
If good faith = credit for reasonable costs that *benefited* rightful owner

Front 12

General rule for Adverse Possession for Minerals

Back 12

If AP for unsevered estate = gets minerals
If AP of severed surface estate = no minerals

Front 13

General rule of Cotenancy

Back 13

Every cotenant can drill and produce or lease his undivided share w/o consent but must account to others for their share of profits

Front 14

Proportionated reduction clause

Back 14

“If lessor owns an interest less than he has conveyed, royalties and rentals to Lessor reduced proportionately.”
- traditionally Lessor conveys full rights even when only owns portion

Front 15

Mother Hubbard Clause

Back 15

“Lease also covers and includes all land owned by Lessor adjacent to land described above”
- purpose is to pick up land from mistakes in survey or AP over few inches, etc.

Front 16

Habendum Clause

Back 16

“This lease remains in effect for __ yrs and as long thereafter as o/g is being produced”

Front 17

What typical lease clause would save a lease when no production b/c no pipeline?

Back 17

Shut-in Gas Royalty Clause – pay per well per month royalty = constructive production

Front 18

Production in Paying Quantities

Back 18

Determines whether oil producing enough to keep lease in effect
- Revenues – Lessor’s Property – Operating costs

Front 19

Marginal well doctrine

Back 19

Whether a reasonably prudent operator would continue to operate well to make profit, not just speculation
- Ct gives well reasonable amount of time to demonstrate profitability as long as is producing SOME o/g

Front 20

Temporary Cessation of Production Doctrine

Back 20

Keeps lease in effect after temporary shutdown
1 – short, temporary shutdown
2 – lessee acts diligently to fix
3 – due to mechanical breakdown “or like”
- maybe any reasonably prudent biz decision

Front 21

What are the 2 equitable inroads to the courts usual strict construction of “production in paying quantities” under the habendum clause?

Back 21

1 – marginal well doctrine
2 – TCOP – temporary cessation of production doctrine

Front 22

Delay Rental Clause

Back 22

If operations are not commenced before X date, lease terminates UNLESS Lessee pays rentals to delay drilling

Front 23

Late Delay Rentals

Back 23

If Lessee doesn’t pay rentals, lease automatically terminates
BUT if Lessor accepts late payment, lessor is estopped from denying validity of lease

Front 24

If Lessor assigns 1/2 of rights to 3rd party w/o notice to Lessee, and Lessee delivers late delay rentals to Original Lessor, does that revive lease as to 3P?

Back 24

No, they are now cotenants.

Front 25

What is needed to have “commercial drilling”?

Back 25

1 – objective physical acts
2 – subjective good faith intent

Front 26

Pooling clause

Back 26

Allows Lessee to hold several tracks under lease w/ production of just 1 well
- the 1/8 royalty is split among tract owners based on acreage pooled
- Lessee can pool all or any acreage under lease
- keeps lease alive for ALL land on lease

Front 27

General Rule for Pooling and NPRIs

Back 27

Executive Right Owner (mineral estate owner w/ right to lease) has no power to pool *Nonparticipating* interests
- so NPRIs get no royalties from pooling well if not on property

Front 28

What can an NPRI do if land is pooled?

Back 28

Can ratify K and get share of royalties (would get NPRI interest x royalty x percentage of pooled land)

Front 29

5 Basics Rules of Divison Order Act

Back 29

- applies to D/O executed after 8/26/91
1 – D/O are binding until revoked
2 – D/O can never contraict or change lease or relieve express/implied obligations
3 – D/O can clarify royalty settlement
4 – Lessee/Payor owing royalties can withhold payments w/o interest ONLY
- there is title dispute
- payee refuses to sign standard D/O
5 – Lessee/Payor has no right to w/hold payments b/c Lessor refuses to sign D/O w/o authorized standard items

Front 30

General Rule on D/O

Back 30

D/O is binding until revoked and it can clarify methods of paying royalty but it is not binding to extent changes or contradicts lease

Front 31

“Standard” items on D/O

Back 31

1 – effective date of D/O
2 – description of property
3 – fractional or decimal interest and types of interests (mineral, royalty) claimed by payee, w/ title assurances
4 – authority to suspend payments for title disputes
5- provisions for valuation of settlements to the payee

Front 32

General Rule for Implied Covenants

Back 32

O/G lease contains implied covenants that lessee act as reasonably prudent operator
*NOT a fiduciary standard owed to lessor

Front 33

Implied Covenant to Protect Against Drainage

Back 33

There must be
1 – substantial drainage (by another party nearby)
2 – Lessee could drill a *profitable* well to offset draining will
*Profitable = expected revenues exceed drilling AND production costs

Front 34

Remedy for drainage

Back 34

Damages (royalties lessor would have gotten) PLUS conditional decree or order – drill or forfeit lease

Front 35

3 Implied Covenants

Back 35

1 – To protect against drainage
2 – to market
3 – to Develop
*No implied covenant to “EXPLORE”

Front 36

2 Tests for determining whether M or S owns minerals

Back 36

1 – old “surface destruction test” – if any reasonable method for producing substance would destroy substance, it belongs to S
2 – “Ordinary and Natural Meaning” test

Front 37

Steps for Determining Ownership of Minerals

Back 37

1 – Is it one of the 9 that belongs to surface as matter of law? (building stone, limestone, caliche, surface shale, sand, gravel, water, near surface lignite, iron ore)
2 – If no, look to date of conveyance/severance of M/S:
Pre 6/8/83: surface destruction test
Post 6/8/83: ordinary and natural meaning test

Front 38

If Co wishes to mine uranium using nondestructive method, even though strip mining is available, who should he lease from, S or M?

Back 38

Pre 83 = S: if any method destroys, belongs to S
Post 83 = M b/c uranium = “ordinary and natural” mineral BUT must accommodate S if there is reasonable, practical method

Front 39

Does the dominant mineral estate doctrine apply to hard minerals post 83?

Back 39

No, mines must pay for surface damage AND accommodate S if there’s a reasonable and practical method

Front 40

What circumstances trigger use of MIPA?

Back 40

*Is a Forced Pooling statute
1 – MIPA applies only to fields discovered after 3/8/61
2 – must first make a fair and reasonable offer to pool voluntarily

Front 41

A leases 40 acres to Co then sells 10 of those acres to B. What does B have?

Back 41

1 – possibility of reverter in mineral estate
2 – ownership of surface (subject to Co’s reasonable use)
3 – right to delay returns on 10 acres if any
4 – right to royalties from any well on its 10 acres, but not on other 30! (use MIPA)

Front 42

Duhig Doctrine

Back 42

Deeds construed against Grantor
- “A to B reserving 1/2 minerals, then B to C reserving 1/2 minerals” will be construed as B reserving A’s 1/2 interest (so B has no mineral rights)
- must say “in addition to any prior mineral reservation”

Front 43

Royalty or Mineral interest? What fraction?
“1/2 of all O/G royalties”

Back 43

Royalty interest in 1/2 of 1/8 = 1/16 of all production

Front 44

Royalty or Mineral interest? What fraction?
“1/2 of all O/G produced, marketed and saved”

Back 44

Royalty interest of 1/2 of production cost free (HUGE! Basically unleasable)

Front 45

Royalty or Mineral interest? What fraction?
“1/2 of all O/G in, on, under and that may be produced”

Back 45

v. common
1/2 Mineral interest = cotenant

Front 46

Royalty or Mineral interest? What fraction?
“1/2 of 1/2 of usual mineral royalties of Blackacre cost free”

Back 46

Royalty of 1/2 x 1/2 x 1/8 = 1/128

Front 47

Royalty or Mineral interest? What fraction?
“1/2 of O/G in, on or under Blackacre”

Back 47

½ of mineral interest = cotenant

Front 48

Royalty or Mineral interest? What fraction?
“1/2 of all O/G rights, including ½ of bonus, rentals, royalties and profits, but X reserves exec right”

Back 48

NPMI (nonparticipating mineral interest), owner of ½ mineral interest but X can lease all mineral