Oil & Gas (Texas Bar Exam)

Front 1

What is the rule of capture?

Back 1

A landowner has the right to capture as much of the minerals underlying his estate as possible without incurring liability for drainage of his neighbors.

Front 2

What limits the rule of capture?

Back 2

The doctrine of correlative rights, which states that every o&g owner has the right to produce a fair share of the minerals underlying his property.

Hint 2

This serves to exempt negligently or illegally produced minerals from rule of capture protection.

Front 3

What are the rights of the mineral interest owner?

Back 3

1. The exclusive right to explore, produce, and develop the minerals
2. reasonable use of the surface estate
3. the right to lease the minerals (the executive right)
4. the economic benefits of o&g lease (bonus, royalty, delay)

Front 4

When must the MI owner accommodate the surface owner/

Back 4

1. surface has pre-existing use
2. MI owner has reasonable alternative upon the lease

Hint 4

MI's alternative cannot be unreasonably costly

Front 5

What interests are created by an o&g lease?

Back 5

1. Working interest: right to explore, produce, & develop
2. Royalty interest: a share of production free of costs

Front 6

What is a Non-Participating Mineral Interest/

Back 6

An interest, separate and apart from the lease, which grants the right to receive a royalty on the production but NOT the right to lease the minerals.

Hint 6

In this way, the NPRI holder does NOT participate in the leasing transaction.

Front 7

What is a Non-Participating Mineral Interest?

Back 7

An interest, separate and apart from the lease, which creates the right to a share of all economic benefits (bonus, delay, royalty) but no right to lease the minerals.

Front 8

How is a non-participating interest created?

Back 8

It is either granted from, or reserved by, one who holds the executive right.

Front 9

What are the rights of cotenants in the o&g?

Back 9

Each cotenant can produce his undivided share, but must account to other cotenants for rightful share of profits (revenues minus costs of well operation). Cotentant may ratify the lease of another to share in production.

Hint 9

Note: costs of dry hole are not addressed against revenues in this calculation

Front 10

What are the rights of a life tenant in o&g?

Back 10

1. Leasing: LT & remaindermen must join to validly lease.
2. Benefits - common law: LT gets income, delay rentals & interest on bonus & royalty; Remainder get bonus & royalty in escrow
3. Open mines doctrine: LT gets all existing lease benefits; remainder gets nothing until assume control of property
4. Trusts pre-Trust Act: LT gets delays, 72.5% of bonus & royalty, plus interest on the rest; Remainder get 27.5% of bonus & royalty.
5. Trust post-Trust Act: LT gets delays, plus equitable share (~85%) of all other proceeds; Remainder get equitable share (~15%) of all other proceeds

Front 11

If a property is subject to a mortgage and an o&g lease, which will prevail?

Back 11

First in time.

Front 12

What are the basic types of trespass upon a MI?

Back 12

1. Ordinary trespass: lease expires but lessee remains
2. Slant well drilling
3. Wrongful drilling of dry hole
4. Geophysical & seismic trespass

Hint 12

REMEDIES:
1 & 2: injunction and damages
3. Damages equal to lost bonus
4. Waive tort and sue in contract assumpsit

Front 13

What determines the extent of damages for drilling trespass?

Back 13

Good faith:
Honest & reasonable belief in superiority of title merits credit for costs of drilling which benefited rightful owner
Bad Faith: Liable for GROSS production value of the well

Front 14

What are elements of slander of title?

Back 14

1. Publication of false claim of title
2. Done with malice
3. Resulting in rightful owner losing a specific sale/lease opportunity

Hint 14

DAMAGES: Diff btwn market values at time of slander and with cloud removed.

Front 15

When will adverse possession of the surface give rise to AP of the severed MI?

Back 15

When AP commenced prior to severance.

Front 16

What is the primary term of an o&g lease?

Back 16

A fixed period during which lessee has no obligation to conduct drilling operations.

Front 17

What is the secondary term of an o&g lease?

Back 17

A period during which the lessee holds the lease so long as minerals are produced in paying quantities.

Front 18

What is production in paying quantities?

Back 18

When the formula "revenues, minus lessor's royalty, minus operating costs" yields a positive figure.

Hint 18

NOTE 1: Drilling costs are not deducted.
.

Front 19

What are common law exceptions to PPQ?

Back 19

1: Temporary cessation: A short, temporary cessation, which lessee acts diligently to fix, and due to mechanical breakdown or the like
2. Marginal well doctrine: A well which is not profitable during some months of the year may still have PPQ if a reasonably prudent operator would continue to work the well for profit

Front 20

What is a Delay Rentals Clause

Back 20

A clause which allows the lessee to delay drilling or production during the primary term by paying rentals to lessor.

Hint 20

This can be made a covenant upon which lessor may sue for breach (termination "OR" rental), or it may be a condition upon which lease automatically ends (termination "UNLESS" rental).

Front 21

What outcome if lessor accepts late delay rentals under an "unless" clause?

Back 21

The lease is revived.

Hint 21

NOTE: If revivor occurs, but lease has been assigned w/o lessee's knowledge, the revivor is not effective as to assigned interest.

Front 22

What is a shut-in royalty clause?

Back 22

A defensive clause allowing lessee to hold a lease on payment of rentals when the lack of market for the minerals destroys possibility of PPQ.

Front 23

What is a dry hole clause?

Back 23

A defensive clause granting lessee a grace period to commence drilling of another well if dry hole is produced.

Front 24

What is a continuous operations clause?

Back 24

A defensive clause which allows the drilling or reworking of a well to substitute for production.

Front 25

What is a cessation of production clause?

Back 25

A defensive clause which allows lessee to hold a lease on a well that has stopped producing, if lessee commences repairs w/in a stated period of time.

Front 26

What is a pooling clause?

Back 26

It is a powerful clause which grants the lessee the power to hold leases on several contiguous tracts as a pooled unit by producing from a well located upon one of the tracts.

Hint 26

This clause must be exercised in good faith.

Front 27

What is a Pugh clause?

Back 27

A clause limiting the effect of a pooling clause such that any portion of a tract not included in a pooled unit is severed from the pooled-unit well.

Front 28

What is the effect of a pooling upon an NPRI?

Back 28

None. The lessor cannot pool the NPRI. If the well for the pooled unit is drilled on the tract subject to the NPRI, that interest takes royalties free of pooling. If the well is drilled off of that tract, the NPRI takes nothing.

Hint 28

NOTE: The NPRI may ratify the pooling and take royalties from the pooled portion.

Front 29

What costs does a royalty avoid?

Back 29

Production costs. The royalty is subject to the costs of post-production treatment.

Hint 29

NOTE: The effect is that the royalty is equal to a portion of the price of the minerals after post-production costs are deducted.

Front 30

What is the "market value" issue regarding royalty clauses?

Back 30

Common language in royalty clauses calls for minerals sold off-lease to be valued based on the market value. A long-term contract for off-lease sale which ceases to track the market value will create a discrepancy between the royalty paid and the actual sale price of the minerals.

Front 31

What is the power of a division order over the proceeds paid to owners of economic interests in a well?

Back 31

1. A D/O is binding until revoked
2. A D/O cannot contradict a lease and can necessitate redress of past underpayments in violation of lease
3.A D/O can clarify that royalties are being paid based on "amount realized" rather than "market value"
4. Lessee can withhold royalties free of interest lessor refuses to sign a D?O containing only standard terms.

Front 32

What covenants are implied in an o&g lease?

Back 32

1. Lessee must act as a reasonably prudent operator
2. Protect against substantial drainage, that damages the lessor's interest, which lessee could remedy by drilling a profitable well
3. Market the minerals within a reasonable time and at the best price, as would be done by a reasonably prudent operator.
4. Reasonably develop the lease as an RPO if there is a reasonable expectation of profit.

Hint 32

NOTE: "Market value" term in royalty clause negates implied covenant to market.

Front 33

What duty does an executive right holder owe to a non-participating interest?

Back 33

The duty of utmost good faith. This duty will be ratcheted up to fiduciary if the executive right holder is found to have engaged in egregious self-dealing.

Front 34

What substances belong to the surface?

Back 34

1. By statute: building stone, limestone, caliche, surface shale, sand, gravel, water, near-surface lignite, and iron ore.
2. Subject to pre-6/8/83 conveyance: any substance the mining of which would destroy the surface use
3. Subject to post-6/8/83 conveyance: Any substance which is not a mineral by its ordinary and natural meaning