Oil & Gas Law

Front 1

What are the duties of the executive interest towards the non-executive Interest?

Back 1

Depends:

Pre-1984 - Utmost G.F. & F.D
- Executive must act with due regard for the interest of the non-executive (Reas. Prudent Operator), but need not subordiante his interest to that of the non-executive interest
- may recover actual damages.

Post 1984 - Psuedo Fiduciary
- exemplary (punitive) damages for executive's breach of duty to non-executive - Magnes v. Guerra
- no duty to act solely for benefit of executive, but to exercise diligence that landowner would exercise to secure profits, etc.

Front 2

In distinguishing a deed from a lease, what factors determine whether an instrument is a deed?

Back 2

1. Essential elements of a valid deed:
(a) parties,
(b) Description of matter to be conveyed
(c)Valuable consideration
(d) Words of Conveyance & execution,

2. Conveys "all" said minerals w/o limitation or qualification

3. "In and under the land"

4. grantee to "have and hold minerals forever."

5. Grantor to have none of minerals, but only "1/8 of net proceeds"(LRI)

Front 3

Which estate is the dominant estate if minerals have been severed from the surface estate?

Back 3

Mineral estate is dominant

Front 4

What is the standard of liability for surface damage by the mineral estate holder

Back 4

Negligence standard, not strict liability.

Front 5

What are the rights of the dominant estate?

Back 5

1. MIO has right of ingress & egress, and
2. Rule of Reasonable Use - Surface use as “reasonably necessary” to develop minerals, w/ due regard for rights of surface owner

Front 6

What are the limitations on the dominant estate?

Back 6

(1) the common law accommodation doctrine; and
(2) Chapter 92 of the Texas atural Resources Code on surface platting of suburban tracts of land.

Front 7

What is the accommodation doctrine?

Back 7

The owner of the mineral rights (usually the lessee) has the obligation to accommodate the uses of the surface owner if:

(1) its use of the surface will substantially impair existing surface uses;

(2) the mineral owner has reasonable alternatives available; and

(3) the alternative is available on the leased tract.

HOWEVER: If only 1 reasonable manner for surface use exists to produce minerals, MIO has right to pursue this use, regardless of damage to the surface

Front 8

When does the accommodation doctrine NOT limit the dominant mineral estate?

Back 8

When only 1 reasonable manner for surface use exists to produce minerals, then MIO has right to pursue this use, regardless of damage to the surface

Front 9

How can mineral interest owners protect their estate?

Back 9

MIOs can bring suit for various torts such as:
1. trespass,
2. nuisance,
3. negligence, or
4. slander of title against mineral estate

Front 10

What is Slander of Title?

Back 10

- Malicious publication of false statements that injure the π’s title to property or its market value

- Malice is Required – no good faith belief in validity of claims – deliberate w/o reasonable cause

- Must show loss of particular sale or lease

Also:

Duty to release title upon expiration (lessee’s duty)
(1) Cloud will remain on title (affects complexion of title)
(2) If there is cloud on title, and you cannot find lessee, you can file suit to remove it (quiet title)

Front 11

What are the different types of trespasses that may occur against mineral estate?

Back 11

1. Geophysical trespass
2. Drilling w/ dry hole (damages to lease or speculative value)
3. Drilling w/ production (conversion of minerals)
4. Slantwell Drilling

Front 12

What is a geophysical trespass against a mineral estate?

Back 12

(1) Surface owner gives permission (or entry w/o permission) – explores from surface w/ seismic operations

(2) Right to explore belongs to mineral owner, an no one else

(3) Well settled in TX that mineral owner may sue geophysical trespasser for trespass, but not for conversion of the information, nor the right to obtain information

Front 13

What is the appropriate remedy in TX for a geophysical trespass?

Back 13

Suit in Assumpsit – Minority (TX)

(a) May sue for value of contract that should have been negotiated (based in K law)

(b) Liability based on amount of market value of the right to conduct seismic surveys (per acre)

Front 14

What is the remedy for a physical trespass on a mineral estate that results in a dry hole?

Back 14

Wrongful lessee enters tract and drills a dry hole, proving land to be worthless for oil & gas

Remedy:
(a) measure of damages is loss of speculative value, even if trespasser acted in good faith

(b) In co-tenancy situation - Key is whether there was an ousting of a tenant - Humble Oil v. Kishi

Front 15

What is the remedy for a trespass against a mineral estate that resulted in production?

Back 15

Trespass w/ production = conversion of minerals.

Good Faith Trespass:
1. average market value of conversion at time converted, less any actual & reasonable costs incurred by good faith trespasser that benefit rightful owner (can’t deduct cost of dry wells)

Bad Faith Trespass:
1. highest market value b/w date of conversion and filing of suit
2. cannot deduct, or offset any costs

Front 16

In a trespass against the mineral estate, what is considered "bad faith" as a matter of law?

Back 16

Certain circumstances may be considered BF as matter of law, even when facts may suggest otherwise:

1. If you believe or are aware of any potential title issues (pendency of a suit, lis pendance, etc)

2. Threatened litigation (saber rattling) doesn’t per se indicate bad faith, but is a factor considered

Front 17

What is conversion upon lease termination?

Back 17

Once lease has expired, or terminates, any production thereafter is conversion, subject to rules concerning good faith v. bad faith

(a) Note: on good faith conversion, cannot deduct operating costs incurred prior to becoming trespasser, only those arising from the actual trespass & conversion

Front 18

What is slantwell drilling, and the ramifications of such?

Back 18

Well bottomed on land of another is trespass, regardless of the surface location of the well:

(a) Good Faith – average market value , less production costs

(b) Bad Faith – highest market value without credit for production costs

Front 19

What does NOT constitute a trespass against the mineral or surface estates?

Back 19

1. Mere Vibrations
2. Hydraulic fracturing
3. Waterflooding with Railroad Commission Approval

Front 20

What is the bottom line on trespass against the mineral estate?

Back 20

Results in Good Well

(1) Trespass & Conversion – relinquishment of well and equipment damages in value of converted minerals.

Good Faith - subtract drilling costs , and offset for cost of production

Bad Faith - relinquish well and pay damages for converted minerals based on highest market value between time of conversion & time of suit.

Dry Well, Poor Well, or Seismic Trespass:

(1) Loss speculative Value – diff. b/w value of land for leasing before and after tort

(2) Assumpsit – value of lease which would have been obtained but for the assumpsit

(3) Slander of Title – difference b/w an offer lost b/c of tort and value of land after tort

(4) Wrongful Appropriation of Information – based on value of info. wrongfully obtained

Front 21

When does adverse possession of the surface result in title to the minerals also?

Back 21

When surface and minerals have not been severed.

Front 22

Will adverse possession of the surface estate yield title to the mineral estate as well?

Back 22

Depends!

An adverse possessor takes what the owner, against whom he adversely possesses, had. Thus, adverse possession of an un-severed tract results in gaining title to both the surface estate and the mineral estate.

Front 23

How does one gain title by adverse possession to a severed mineral estate?

Back 23

AP of surface estate has no effect on ownership of mineral estate:

(b) Must run adversely against mineral estate in order to claim AP of mineral(explore & produce)

(c) Active Oil & Gas lease DOES act as severance b/w minerals and surface

(d) Principle – AP of surface gives no notice to ME holder, thus must AP mineral estate separately
(i) If you are going to mature title to minerals by direct AP, there must be sufficient subsurface activity as to impart notice to ME owner of the adverse possession

Front 24

May a lessee run adversely against a lessor?

Back 24

Yes - may run in 2 different ways:

AP of Leasehold Interest

(1) Lessee continues operating on land for statutory period after lease terminates, and lessee continues to pay royalties to lessor, who accepts them as if lease still in effect, lessee may gain AP of the leasehold interest.

AP of Mineral Interest

(1) If lessee operates on land w/o paying royalty, and no ousting, lesse may AP the mineral interest in FSD

Front 25

What is the rule concerning Adverse Possession & depth of possession?

Back 25

AP of minerals at any depth, gives right to entire subsurface estate, to center of earth

Front 26

May a co-tenant run Adverse Possession against the other co-tenant?

Back 26

Yes.

(1) You can oust the co-tenant in derogation of his title, and AP his share of the mineral estate

Front 27

What rights do co-tenants have in regard to minerals?

Back 27

(1) Co-tenants have equal executive right
(2) Co-tenants own undivided interest in whole tract, and can explore, drill, produce, or lease w/o consent of other co-tenants as production of mineral estate is enjoyment of the estate (enjoyment - not waste)
(3) Co-tenants share in profits according to their ownership interest in the tract (i.e. ½, etc.)

Front 28

How do developing co-tenants and non-developing co-tenants share in production of oil & gas?

Back 28

Co-tenants share in profits according to their ownership interest in the tract (i.e. ½, etc.)

Co-tenant who conducts operations = developing co-tenant
(i) Gets prorata share of royalty under agreement (free of cost of production b/c non cost bearing)

Co-tenant who does nothing or opposes = non-consenting co-tenant
(i) pro-rata share of net production value: Market value of Prod. O&G – cost of producing wells
(ii) Lessee may also subtract prorata share of reas. operating expenses (extracting & marketing)

Note: non-developing co-tenant may ratify the agreement - becomes developing co-tenant.

Front 29

How does a lessee become a co-tenant in a mineral estate?

Back 29

When the owner leases his undivided interest to a lessee, the lessee becomes the co-tenant in the mineral estate (for the duration of the fee simple determinable granted by the lease).

Front 30

What is the rule regarding ratification of a lease by a non-developing co-tenant?

Back 30

A Non-consenting co-tenant can ratify lease purported to cover his interest, thus electing to receive a royalty share under the agreement from date of ratification forward, rather than waiting for profits once well has reached “payout” (operator has recouped costs)

Front 31

What is a joint operating agreement?

Back 31

(1) Because each cotenant has right to separately lease his undivided share, may be two or more different lessees conducting operations on same tract
(2) Usually, lessees enter into a joint operating agreement which provides for sharing of costs and sharing of profits (more economical)

Front 32

May a co-tenant trespass against another co-tenant?

Back 32

Yes.

(1) Developing Co-tenant must not, exclude other cotenant from exercising the same rights and privileges
(2) Exclusion is trespass against other cotenant (ousting of co-tenant)

Front 33

What is required to form an "Implied Joint Mining Partnership?"

Back 33

IJMP Requires 3 Things:

(a) Joint Ownership;

(b) Agreement to Share Profits & Expenses; and

(c) Joint Management (mutual agency between partners)

Note: (1) One who advances money, or instrumentality of mining does not thereby become a “mining partner”

Front 34

When does a co-tenant have a right to partition their interest?

Back 34

Every co-tenant has right to partition their interest, no matter how small (absolute right), and no matter of inequities caused.

May be in kind, or by forced sale.

Partitioning is a judicial proceeding.

Front 35

What are the rights of remainderman and life tenants in regards to the mineral estate?"

Back 35

(1) Remainderman has no right of possession,

(2) Life Tenant is obliged not to commit waste

(3) Right to explore minerals must be executed by BOTH life tenant and Remainderman, but may agree to division of rents and royalties

(4) UOA, life tenant not entitled any part of corpus (royalties & bonus), only to income (delay rentals)

Front 36

What are the rules concerning the distribution of economic proceeds from an oil & gas production among remainderman and life tenant?

Back 36

Division of Royalties – 4 Rules:

RULE 1: Express Language

(a) follow express language of grant that creates life estate, or in any agreement b/w life estate & remainderman

(b) If grant of life estate is silent as to distribution of lease payments, apply rules 2-4

RULE 2: Common Law - Favors Remainderman

(a) Corpus (royalties & bonus) – go to remainderman

(b) Income or Interest (delay rentals) – goes to life tenant

RULE 3: Open Mine Doctrine – Favors Life Tenant

(a) Life tenant entitled to receive all lease payments (bonus, delay, royalty) for all leases executed by grantor of LE before LE vested.

(b) Need not have producing wells on land for open mine doctrine to apply

RULE 4: Life Tenancy Created in Trust

(a) Absent specific instructions to trustee on distribution of lease proceeds b/w life tenant & remainderman, Texas Trust Act fills gap statutorily (differs – pre & post Jan 1, 2004)

Front 37

Who has the duty to preserve the corpus for the remainderman?

Back 37

Producer has duty to pay life tenant, and

Life tenant has obligation to preserve corpus for remainderman.

Front 38

How may a mortgage or deed of trust create a potential problem for lessees of mineral estates?

Back 38

Mortgages & Deeds of Trust:

(a) first in time, first in right

(b) potential problem if mortgage or deed of trust record is executed prior to oil & gas lease

(c) If prior right exists, and you produce, you have drilled the bank a well

Front 39

What is "marshalling the assets" and what, if any, effect does it have upon the mineral estate?

Back 39

Marshalling the Assets (Upon Foreclosure)

(a) Court orders surface assets to be sold first to pay off debt

(b) If sale of surface assets is not enough to cover the debt, only then will lender foreclose against mineral estate.

Front 40

What 2 things may a lessee do if he finds there is a mortgage, or deed of trust on the land he'd like to execute a oil & gas lease upon?

Back 40

Lessee can have holder of mortgage or deed sign a Subordination Agreement:

(a) Bank subordinates their interest to you (helps them get paid faster)

Lease may also include a Subrogation Clause

(a) Allows lessee (at its option) to pay any of the lessor taxes, mortgages, or other liens on land

(b) Liens are then subrogated to lessee, who has right to enforce it, and apply rental and royalty payments towards it

Front 41

What are the lessees two main goals when entering into an oil and gas lease?

Back 41

Lessees have the following two goals when entering into an oil and gas lease:

a. they want the right, but not the obligation, to explore and develop the leased land for an agreed term; and

b. if they obtain production, they want the right to maintain the lease for as long as it is profitable to produce

Front 42

Which party are oil & gas leases construed against and why?

Back 42

Construed against the lessee because they typically prepare the oil & gas lease.

Front 43

What is the purpose of the granting clause?

Back 43

Granting clause sets for the rights that are granted to the lessee.

Generally, O & G leases will cover all of the "oil and gas and all other minerals."

However, in TX no lessee has claimed the right to mine minerals like coal under a lease clearly intended to cover oil & gas and substances produced jointly with oil & gas, such as sulfur or other gases.

Front 44

What uses are permitted by the granting clause of the oil and gas lease?

Back 44

(1) An oil and gas lease gives a lessee an implied right to use the surface as is reasonably necessary to explore, develop, and produce oil and gas from the land because the mineral estate is dominant.

(2) However, the granting clause typically describes many uses the lessee may make of the property, such as conducting seismic tests, erecting storage tanks, and laying pipelines, in addition to drilling wells.

Front 45

Which clauses of the oil & gas lease act to create a fee simple determinable condition?

Back 45

1. Habendum Clause

2. Temporary Cessation of Production Clause,

3. Defensive, or Savings Clauses

Front 46

What is the Habendum Clause?

Back 46

(a) Sets forth duration of lessee’s interest in premises being leased

(b) duration is stated for term of years, “and so long thereafter” as minerals are produced in “paying quantities”
(i) “so long thereafter…” – condition that deals with production, fixes ultimate duration of lease, longest possible time it may last

Not Necessarily Ultimate Determiner

(a) Habendum clause is not ultimate determiner of duration of O&G lease as the lease may provide elsewhere for modification of term stated in habendum clause

Front 47

What is the primary term as set forth in the Habendum Clause?

Back 47

The primary term of an oil and gas lease is the period during which the lessee has an option of maintaining the lease without drilling by making delay rental payments

Front 48

What is the secondary term of an oil and gas lease?

Back 48

Secondary Term = P.P.Q

(1) The secondary term is the indefinite period of time granting rights to the lessee once production is obtained-i.e., "as long thereafter as oil or gas are produced."

(2) The words produced or production mean the lease may be kept alive after the primary term ends by production of oil or gas in paying quantities (PPQ). This is true even though the lease does not use the term "produced in paying quantities" and simply states "as long thereafter as oil or gas are produced."

(a) Mere discovery of oil or gas will not suffice to continue the lease. The lease will terminate automatically, and the mineral estate will revert to the lessor or his heirs and assigns.

Front 49

What are the two tests to determine whether there is production in paying quantities?

Back 49

2 Tests – Apply In Order:

1. Accounting Test

(i) Do revenues exceed costs?

-Included Costs

a. Lifting, Treating, & Transportation costs (monthly basis)

b. Labor & Repair Costs

c. Depreciation of equipment

d. Administrative & Overhead charges attributable to producing & marketing a particular well.

- Excluded Costs

a. Original Expenses (drill, completion, and equipment of well) – getting well online

b. Doesn’t matter if lessee ever gets his money back for original expenses.

2nd Test - Subjective Test (Marginal Well Doctrine)

- 2 Pronged Test

1. Do operating revenues operating costs over a reasonable period of time?

2. Would a reasonably prudent operator seeking to make a profit, and not holding for mere speculation, continue to operate under circumstances?

Factors:

1. Dry Well?
2. What is price of oil?
3. What are similar wells in area making?
4. Holding for speculative purposes or not?

Front 50

What is the formula for determining production in paying quantities (PPQ)?

Back 50

Net Revenues - Lessor royalties - operating costs = PPQ

** if resulting number is positive, no matter how small, there is PPQ

In other words, revenues to the lessee from oil & gas sold.

Minus lessors royalty ( not minus ORI)

Minus operating costs (but not capital costs - one time large costs like drilling, etc)

Front 51

Who has burden of proof to show that there has not been PPQ?

Back 51

Plaintiff (Lessor) has burden of proof to show well is not producing in paying quantities.


Difficult burden to meet, very expensive litigation and related expenses

Front 52

What is the common law "Temporary Cessation of Production Doctrine?"

Back 52

This common law doctrine operates to save a lease that has temporarily ceased to produce in paying quantities, when the lessee does not have a savings clause to expressly govern this situation.

The temporary cessation doctrine is an exception to the general rule that the lessee must always have PPQ, or a savings clause that operates as constructive production.

This rule reflects the reality that wells-whether marginal wells or very productive wells-will stop producing temporarily for equipment repair or replacement, etc.

To benefit from this doctrine, the "sudden stoppage" of production must be temporary and the lessee must diligently act to correct the problem

Front 53

Under the Temporary Cessation of production doctrine, what factors help determine whether the lessee acted as a reasonable prudent operator?

Back 53

1. How long well is shut down.

2. Cause of the shut down (TX SC indicated that cause need not be unforeseen or unavoidable)

3. Lessees efforts to restore production

** leases usually contain a provision (temp cessation of production clause) that establishes a certain amount of time wherein the lease may be saved.

** Express clauses trump TCOP Doctrine.

Front 54

What is the purpose of a savings (or defensive) clause?

Back 54

Acts as constructive production (substitute for production) that save the lease when NO ACTUAL production occurs.

Front 55

What are the main savings clauses?

Back 55

1. Shut in Royalty

2. Drilling Operations Clause (TCOP clause)

3. Dry Hole Clause

4. Temp. Cessation of production doctrine

5. Force Majeure Clause

6. Obstruction Doctrine

7. Delay Rental Clause

8. Pooling clauses

Front 56

What is the drilling operations clause?

Back 56

Constructive Production
(express provision similar to TCOP Doctrine)

Continuous operation clause extends the lease for so long as the lessee-operator exercises due diligence in equipping the well and getting it into production, which includes the marketing of the gas

(1) What constitutes marking within a reasonable time and with due diligence depends on the particular facts of the case at hand

Front 57

What is the dry hole clause?

Back 57

If lessee drills dry hole, but gets valuable info from drill core as to drilling of a new well, he can keep lease alive by starting to drill another well w/in stated time period (i.e. 60 or 90 days)

Front 58

What is the shut in gas royalty clause?

Back 58

Well capable of producing gas is shut-in for lack of market, lessee can hold lease by paying shut-in royalties while lessee diligently works to find a market for the gas

Does NOT apply to dry holes, or junked well - such will NOT hold lease. Must be capable of PPQ, just not being marketed & sold.

Does not ipso facto take precedence over every other clause which may affect term of lease

FAILURE TO PAY: similar to failure to pay delay rentals, must be right time, right amount or lease terminates.

Front 59

What is a Force Majeure Clause?

Back 59

Pertains to possible interruptions in drilling and operations caused by various specified acts

Where parties have defined contours of force majeure, those contours dictate application, effect, and scope of force majeure

Front 60

What is the obstruction doctrine?

Back 60

Lessor may incur liability to lessee for wrongfully delaying operations on the property

Front 61

What is a well completion clause?

Back 61

A form of operations clause that applies only to the well that was started before the primary term ended and is being worked on when the primary term ends.

Such a clause does not permit the lessee to commence any additional operations by drilling a second, additional well

Front 62

What is the Delay Rental Clause?

Back 62

1. Acts to modify Habendum Clause

2. Delays the production requirement to keep lease alive
(as such, is type of savings clause -- creates the FSD)

Front 63

What are the attributes of the Delay Rental clause under the "unless" type lease (TX)

Back 63

General

(a) No obligation to commence drilling during primary term, but

(b) Must commence drilling operations OR pay delay rentals to keep lease alive

Condition Precedent

(a) Proper payment must be performed to keep lease alive while deferring drilling operations

Fee Simple Determinable (FSD)

(a) when condition is violated, lease automatically terminates & reverts back to lessor

Front 64

What are the requirements for sufficient payment of delay rentals?

Back 64

Payment must be:

1. In the Proper Amount
2. On or Before Due Date
3. Proper Persons
4. Proper Manner

Front 65

What is a "Paid Up" lease

Back 65

Lessee can put clause that includes a “paid-up” provision in lieu of delay rentals

Lessee pays bonus with an additional sum to “pay up” the lease through the primary term

Front 66

What are the 3 classes of problems in regard to delay rentals, and how are the problems dealt with?

Back 66

1. Lessee attempts to make timely payment, but misses it in good faith

(i) Probably terminates – Texas particularly harsh on this

(ii) Except if have provision “or shall make bona fide attempt to pay or tender, as herein after stated”


2. Lessee attempts to make timely payment, but 3d party interference

(i) Probably won’t terminate if mistake of 3d party, but

(ii) Depends upon circumstances


3. Lessee attempts to make payment timely, but lessor interference

(i) Lessor frustration acts as barrier against lessor to assert a claim (estoppel)

Front 67

How can lessee avoid termination of the lease for a good faith failure to strictly comply with terms of delay rental payments?

Back 67

Express Clause or Provision in lease:

"...or shall make bona fide attempt to pay or tender, as herein after stated..."

Front 68

How might equitable estoppel apply to delay rental payments that do not strictly comply with delay rental requirements?

Back 68

If lessee makes a mistake in payment of delay rental, but lessor subsequently accepts delay rental payment, and is silent as to the mistake, the lease may be revived, and lessor is estopped from claiming lease had terminated.

Front 69

How does change of ownership affect payment of delay rentals to lessor?

Back 69

Where there is a transfer of ownership- provision that says lessee will not be bound by any change in ownership (as for payment of delay rentals) UNTIL lessee has been furnished with written notice of transfer.


Notice of Change in Ownership

New owner must notify the lessee; if imposing that burden on the lessee, it would be a burden placed on him that he did not originally accept (b/c cannot bind lessee beyond what lessee agreed original lease)

Front 70

what is the standard royalty?

Back 70

1/8th of production (free of costs of production)

Front 71

What is the nature of a Royalty Interest (what type of interest is it?)

Back 71

A lessor's royalty interest or an NPRI's royalty interest is real property, whether or not payments are made in money or in kind.

The NPRI deed and the oil and gas lease convey real property interests.

However, once oil and gas have been produced at the surface, they become personal property.

Front 72

Does failure to pay Royalties terminate the lease?

Back 72

1. Paying royalties is an obligation under the lease.

2. When there is a failure to pay royalties, the lease does not end automatically.

3. The remedy is an action for damages for breach of contract.

4. Paying royalties is not a condition that keeps a fee simple determinable alive.

5. This is in contrast to the failure to pay delay rentals or the failure to pay shut-in royalties (which operate as constructive production under the habendum clause) on time or in the right amount.

Front 73

What is meant by gas sold "at the well?"

Back 73

At the well means a sale that takes place on the leased premises, even if it not right at the wellhead

Because of this "at the well" language, royalty owners must pay their share of post-production costs incurred for transportation, marketing, dehydrating, and compressing gas once it has reached the surface.

The "at the well" value is calculated using the work back method to deduct all actual and reasonable post-production costs incurred from the place of the first sale back to the wellhead.