Chapter 1 Flashcards Preview

Oil and Gas I > Chapter 1 > Flashcards

Flashcards in Chapter 1 Deck (44)
Loading flashcards...
1

Private Ownership

Leads to fractionalization of ownership (which can cause problems).
i. Expensive title work
ii. Specialized work/continued liability
(Wrong title opinion, you get sued 20 years later)

iii. Unrecorded instruments
Who owns what and how much?
People might not know they own it?

iv. Time constrains for development (Think: Title Opinions)
Short time to do a lot of research

v. Difficult leasing options
Must get valid signatures of all parties and avoid family fights, even if there are 100 owners

vi. Negotiation of terms

(Everyone has to agree w/deal to get signatures)

2

Problems with Unleased interests

Unleased = Carried Interest; If it gets too big it is no longer profitable for the O&G co.

i. If you own 100% of the minerals, oil company comes to you – you get 20% royalty – oil company gets 80% profit = Worthwhile for O&G company
ii. You own 80%, neighbor owns 20%, 20% royalty; 20% owner cannot be found. O&G only gets 80% of 20% for the 80% owner.

3

Federal Ownership

The Federal Gov. Owns 30% of the land area in the 50 states. (662 million acres).

>25% of Oil Production & .25% US NG production come from federal other-continental shelf lands

85% of US offshore waters are off limits

4

Land Descriptions

1.Property rights associated w/O&G rely upon surface boundaries to define and identify the rights.

2.Most lands in the US are described in accordance w/ a federal “rectangular” surveying system mandated by Congress in the Land Ordinance Act of 1785. (Texas does not, NM does)




5

Range Lines/ Township Lines

Range Lines = E to W of the selected principal meridian (Principal Meridian = Prime Meridian)

Township Lines = N to S of the chosen base line

6

Townships:

Townships:
1. Interacting RL and TL = Squares of 6 miles on
` each side
(1 Section = 1 mi x 1 mi = 640 Acres)
2. Main adjustment = periodic full width (6mi)
“correction” to township lines

(Adjustment made based on the Earth not lying flat and the “grid” lying over it.)

7

Ownership in Place

(Corporeal): Creates MI:
Owner of the O&G rights owns the right to search, develop and produce. Plus, a possessory right to the O&G beneath the owner’s tract of land.

8

Non-Ownership

(Incorporeal):Owner of O&G rights own rights to search, develop and produce but no possessory right to O&G in place. (OK, CA, and LA/Minority)

Creates profit a pendre

Allows someone to take part of the land that someone else and produce from it

9

O&G Interests: Realty or Personalty?

Mineral interest is real estate, regardless of ownership theory. (Both estates and profits = real estate; interest's duration is that of a freehold estate)

Leasehold could be either (Both K and deed) (Most states = Real property)

Royalty could be either (Most states= Real Property)

10

Ad Coleum Doctrine

"Heaven and Hell Theory of Ownership": From the ground to the sky above.

11

Rule of Capture

Governs entitlement to O&G production:
1. A producer is entitled to all of the production form a well or wells drilled w/in the producer's land (Even if some of that production is drained from beneath the land of a neighboring land owner)

12

Limits to the Right to Capture

1. Allows each owner to act independently to develop resources & obtain title.
2. No landowner can negligently or intentionally damage the reservoir so it impairs the ability of other landowners to exercise their rights.
3. Each landowner’s right is “correlative” w/the neighboring landowners

13

Correlative Rights

i. Each landowner must be given the opportunity to recover (w/o waste) their fair share of O&G in common reservoir.
1. Each landowner has a duty to produce from a common reservoir w/o wasting O&G and negligently damaging reservoir.

14

Why Rule of Capture?

1. Initially belief that O&G acted as wild animals
2. Promotes self help: You don’t like it, drill your own well
3. Easier to administrate, hard to determine amount

15

Gas Storage: Who do you lease from?

1. A question of pore space ownership
2. Rights of severed mineral/surface right owners are first determined by the severing instrument
a. If made clear, get lease from that party
b. The severing instrument trumps

(Most states = SO; Texas: If pore space is inside a mineral, it belongs to the mineral owner)

16

Fair Share Principle

Within reasonable limits, each operator should have an opportunity equal to that afforded other operators to recover the equivalent of the amount of recoverable oil underlying his property.

17

Conservation Principles

i. Goals:
1. Prevent Waste: Surface, economic, & underground
2. Protect correlative rights
ii. Regulation:
1. Requires permit for drilling
2. Restrict Drilling

18

How can regulations restrict drilling?

Limits allowables (Number of wells and placement of those wells)

Provide “exception locations” to prevent waste or protect correlative rights
Rule 37 (TX): If you don’t have the required number of acres to drill

Restrict production by various types of prorationing

Compulsory “Forced” Pooling
i. To get certain amount of acres you must connect with certain parties (Can be forced or voluntary)

Compulsory Unitization
i. Across the field

Venting of gas

19

O&G Interest: Fee Interest

The owner has the totality of all private rights in the land; endures forever
i. Surface + Minerals

20

O&G Interest: Mineral Interest

A mineral fee may be carved from the fee interest and it endures forever.
i. Because it is a real estate interest both the estate and profits are real estate
ii. Split up O&G, Coal, etc. by depth time, (Life Estate, Fee Simple, etc.)

21

Rights Associated w/Mineral Interest

1. Right to Surface use
2. Right to Develop
3. Right to Alienate/Executive Right
4. Right to Retain Lease Benefits/Royalties
5. Possibility of a Reverter

22

MI: Right to Surface Use

i. The owner has the right to use the surface or subsurface as reasonably necessary to explore for, develop, and produce the minerals.

23

MI: Right to Develop

Working Interest (WI): Owner has right to use the surface, incur cost, and retain profits.

Carried Interest (NPI): Owner has only a right to share in any profits.

24

MI: Right to Alienate/Executive Right

The owner has the right to transfer all or portion of the mineral interest to others.

25

MI: Right to Retain Lease Benefits/Royalties

Bonus: Consideration from lessee to lessor for execution and conveyance of the lease.

Royalty: After production, the lessor is entitled to a share of the production or share of the value of production free of production costs.

Shut-In Royalty: After development, lessor may be entitled to payments when gas is discovered but not yet produced.

26

Possibility of a Reverter

Upon expiration, all incidents of the mineral lease revert back to lessor.

27

Leasehold Interest

The lessee receives all incidents of the mineral interest except those specifically reserved in the lessor.
i. Most states treat this interest as real property but it could be either
ii. Lease is both a contract and a deed

28

Surface Interest

The remaining interest have the mineral interest has been severed; not absolute
i. No interest in seeing minerals develop for the lack of getting paid

29

Royalty Interest: Lessor

Lessor Royalty: Royalty retained by lessor in an O&G lease. Expires w/lease; no cost of production

1.Lease will state “Royalty on Oil & One on NG: Landowner who owns 100% of minerals gets royalty of 20%

2.He can take 20% of O&NG in fee or get checks that is the equivalent of 20% barrel of oil

30

Overriding Royalty

Overriding Royalty: Granter/Reserved from the working interest side of an O&G lease. Expires w/lease.

1.Geologist Example: 1% of 8/8 ($1 out of $100)