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Flashcards in Oil & Gas Deck (25):
1

Rule of Capture

Subject to regulation by TX Railroad Commission; authority & duty :
1) prevent waste (maximize efficient recovery of oil & gas)
2) protect correlative rts (assure each owner in common pool has fair opportunity to produce oil & gas under his land; &
3) protect environment to prevent air & water pollution

2

Leasehold Interest (Working Lease or Operating Lease)

Rt granted by oil & gas lease to lessee. Rts & obligations determined by lease.

3

Royalty Interest

Rt to share of production free of costs of production. Non-possessory. Owner has no rt to develop or to lease mineral interest. Types:
1) Landowner's or lessor's royalty paid under terms of lease
2) Nonparticipating royalty interest (NPRI)
3) Overriding royalty

4

Cotenants

- must account to each other for any proceeds from production from jointly owned land (developing cotenant must account to any non-consenting cotenant for that co-tenant's proportionate share of profits (value of what produced minus cost of production)
- custom to make leasing easier: lessee takes lease from all persons who seem likely to have an interest in desired tract & treats each as if he owned 100%
- non-consenting T can ratify lease thereby electing to receive a royalty share from date of ratification forward rather than waiting for "payout" (when operator has recouped costs)

5

Proportionate Reduction Clause

"If lessor owns less than he has conveyed, royalties & rentals in lease will be reduced proportionately." Allows lease lessee to reduce royalties to correct fractional share if production obtained (gives developer chance to do due diligence, title wrk to determine who really owns what)

6

Successive Ownership: Life Tenants & Remaindermen

Neither life T nor remaindermen may, w/o joinder of other, commence extraction or execute a valid lease.

7

Life Tenant & Remaindermen Jointly Signed Lease

If both have jointly signed lease, 1 of 4 rules will govern division of royalties, bonus & delay rentals:
1) Express Language - follow express language of grant that created tenancies
2) Common Law - favors remainderman. Corpus reserved for remainderman, interest or current income goes to life T
3) Open Mines Doctrine - favors life T. Life T entitled to all lease payments if, at time life estate vests, testator already executed lease on tract
4) A Life Tenancy Created in Trust - if no specific instructions given to trustee on how to distribute then TX Trust Act fills in gap statutorily

8

Adverse Possession

- AP takes what owner had (unsevered tract gives title to both surface & mineral estate)
- to AP severed mineral estate, must posses minerals for statutory period (drilling & production for that period)
- title earned relates back to time of its beginning (paper transactions, such as conveying deeds, doesn't toll SoL)

9

9 Substances Belonging to Surface Owner as Matter of Law

1) building stone
2) limestone
3) caliche
4) surface shale
5) water
6) sand
7) gravel
8) near-surface lignite or coal
9) near surface iron-ore

10

Severance Deeds BEFORE June 8, 1983, Surface Destruction Test

Does any reasonable method of producing substance destroy surface? If so, substance belongs to surface owner.

11

Severance Deeds AFTER June 8, 1983, Ordinary & Natural Meaning Test

If substance at issue is considered to be a mineral in the ordinary & natural meaning of the word, even if removal would cause destruction of surface (surface owners may have surface destroyed by strip mining). Mineral owner must compensate surface owner for damages for loss of surface use when conveyance is a general one of "other minerals". If mineral specifically deeded, mineral owner only liable for negligently inflicted damage.
- mineral owner's dominant use of surface continues to be restricted by Accommodation Doctrine (must give "due regard" to surface owner.

12

Accommodation Doctrine

- lessee must "reasonably accommodate" lessor use of surface
- limited to obtaining minerals under the land - can't use adjacent owner's surface to transport or store minerals obtained from adjoining parcel of land
- accommodate when:
1) there's existing use of land
2) lessee's use of land impairs lessor's existing use
3) & under established industry practices, there are alternatives available (located on tract)
- surface owner must generally show particular surface activities not "reasonably necessary" to extract

13

RAP in Oil & Gas Context

Conveyance of a future interest that is conditional on expiration of underlying fee simple determinable may not vest w/in a life or lives in being plus 21 yrs. Possibilities of reverter not subject to RAP (considered presently vested). All RAP problems can be avoided by including a time limit (ex: This top lease (or NPRI deed) must vest w/in 21 yrs of the date of its execution).

14

Nature of Oil & Gas Lease

- if lessee does produce, its obligated to to pay royalties to lessor (& any NPRI interests that share in lessor's royalty)
- generally construed against lessee
- granting clause: sets forth rts granted to lessee
- generally, leases will cover all "oil & gas & other minerals" but no lessee has claimed rt to mine minerals like coal under lease clearly intended to cover oil & gas & substances that are produced jointly w/ oil & gas (sulfur or other gases)

15

Pooling

- process of bringing together several smaller tracts of land to form a drilling unit or production unit for 1 well
- in TX, executive rt owner doesn't have power to pool nonexecutive interests (such as NPRI or NPMI), even though executive owner has inherent rt to lease nonexecutive interests
- NPRI/NPMI no affected by pooling unless ratify pooling agreement (lessees must try to secure permission of non-participating interest owners to pooling, even though they have no power to lease) (lease pooling clause ineffective to pool them, even though it can be used to pool interests of lessors (mineral interest owners) who granted lease)
- if NPRI ratify pooling agreement to cover tract containing her royalty interest, she may receive royalties from production from pooled well she would not otherwise be entitled to b/c well located off tract upon which her NPRI based

16

Oil & Gas Lease Implied Convenants

Run w/ land (transferee of lease assumes all obligations imposed by original lease).
Standard of care: that of a reasonable prudent operator (RPO), considering interests of lessee & lessor in carrying out purpose of lease under same or similar circumstances (not a fiduciary to lessor); must act in good faith, competently, & w/ due regard for lessor's interests

17

General Implied Covenant to Act Categories

1) covenant to protect against drainage
2) covenant to reasonably develop
3) covenant to manage & administer lease (includes implied covenant to market)

18

Regulation

Railraoad Commission of TX (RRC) vested w/ power & charged w/ duty of regulating production of oil & gas for prevention of waste and protection of correlative rts.
Jurisdiction: all oil & gas wells in TX & persons owning or engaging in drilling & operating wells; & persons owning or operating pipelines in TX

19

RRC Powers

1) institute suits
2) hear & determine complaints
3) require attendance of W's
4) obtain issuance of writs & process necessary to enforce its orders
5) punish for contempt or disobedience of its orders
6) adopt all necessary rules for governing & regulating persons & their operations

20

Drilling Permits

- before drilling, operator must get permit from RRC & satisfy spacing & density requirements either by meeting them or showing entitled to exception

21

Spacing Rules

- control spacing & location of wells
- Rule 37: no well may be drilled nearer than 1,200 ft to any other well completed in or drilling to the same horizon & no well may be drilled nearer than 467 ft to any property line, lease line, or subdivision line (spacing places 1 well in center of every 40 acres)

22

Density Rules

- establish minimum # of acres for each drilled well
- RRC may establish field rules that vary spacing & density rules on a field-by-field basis

23

Drilling Permit Exceptions

- often granted to Rule 37 spacing rules
- granted only if applicant proves exception necessary to prevent waste or to prevent confiscation of property (most common)

24

Compulsory Pooling Act / Mineral Interest Pooling Act

- applies only to fields discovered after March 8, 19861
- allows RRC to pool separately owned tracts of land to protect correlative rts, prevent waste, or avoid drilling of unnecessary wells
- applicant must have made a fair & reasonable offer to voluntarily pool (& been rejected) before RRC will step in & force pooling

25

Reasonably Prudent Operator (RPO) Standard

Under implied covenants of a lease, lessee must act as would an RPO, taking into account interests of both lessee & lessor.
1) implied covenant to protect against drainage (lessor must prove substantial drainage & that RPO would act to prevent it)
- lessor may prove an RPO would pool tracts so that lessor receives his share of royalties