Oil and Gas II

Question 1

Bank Draft Process

Answer 1

Lease and bank draft viewed as one transaction in Texas
i. Lessee gives bank draft to lessor (typical in mail w/ initial offer)
ii. Lessor signs and gives bank draft back to lessee
iii. Lessee approves bank draft payment to lessor

Question 2

Third Party Standing to assert breach of contract

Answer 2

a third party can assert rights as a third party beneficiary to a contract it did not sign when the primary parties entered into the contract with the clear and express intention of benefitting the third party

Question 3

Negligent Misrepresentation

Answer 3

Must represent an existing fact.
1. A promise of future conduct is not enough.
2. A promise to do or refrain from doing a future act does not constitute an existing fact.

Question 4

Promissory Estoppel

Answer 4

Does not create a contract where none existed before. It will however prevent a party from insisting upon his strict legal rights when it would be unjust to allow him to do so. It requires: (1) a promise;(2) foreseeability of reliance thereon by the promisor;(3) substantial reliance by the promisee to his detriment.

Question 5

Condition Precedent

Answer 5

Unless a clause has a pretense of “subject only to”, “on condition that”, “provided that”, “if” etc., treat the clause as a covenant.

Question 6

Statute of Frauds

Answer 6

contracts for sale of real estate must be in writing and signed by the person to be charged. Additionally, the writing must furnish the data to identify the property with reasonable certainty.

Question 7

Parole evidence

Answer 7

may be used to explain or clarify the written agreement, but not to supply the essential terms.

Question 8

Apparent Authority

Answer 8

When a principal either knowingly permits its agent to hold himself out as having authority or acts with such a lack of ordinary care as to clothe its agent with indicia or authority.
1) Only the principal’s conduct is relevant for determining if apparent authority exists.
2. Silence may constitute a manifestation when, in light of all the circumstances, a reasonable person would express dissent. Failure to express dissent will be taken as a manifestation of affirmance.

Question 9

Commencement of Operations

Answer 9

Unless the clause specifically requires otherwise, commencement of operations on a n adjacent tract for slant drilling will be commencement of operations on the intended bottom-hole lease

Question 10

License

Answer 10

When slant drilling, a company needs to get a license from both the surface owner of the drill location and the mineral owner who’s subsurface real property the wellbore will trespass through before hitting the bottom-hole

Question 11

Rule 37

Answer 11

Rule 37 suits do not stop or suspend operations for slant drilling that required a Rule 54 (directional drilling) permit. This rile is to determine if the operator can produce a tract smaller than a field allowable.

Question 12

Rule 54

Answer 12

Rule 54 (Directional Drilling) is issued when: (1) conditions on the surface of the ground prevent or unduly complicate the drilling of a well at a regular location prescribed by the well spacing rules in effect; or (2) where it can be shown to be advantageous from the standpoint of the operator to drill more than one well from the same surface to location to reach a spot where several wells would normally be drilled as prescribed by the well spacing rules there in effect.
(Rule 54 only affects surface rights and has no notice requirements, so Humble didn’t need to know what was going on with these permits.)

Question 13

Anti-dilution Provision

Answer 13

Unless otherwise stated, the anti-dilution provision will apply to both vertical and horizontal wells. Compliance with field wide rules does not preclude application of anti-dilution provision.

Question 14

Damages

Answer 14

The rule of capture does not apply to horizontal wells. Plaintiff/rightful owner can only receive damages resulting from production from his land because the pools were invalid.

Question 15

General Rule for Accommodation Doctrine

Answer 15

i) Existing surface use; that
ii) would be substantially impaired by the mineral lessee’s activity; and
iii) mineral lessee has a reasonable alternative available on the leased premises.

Question 16

How much of the surface can the mineral estate use?

Answer 16

As much as is reasonably necessary to develop the minerals

Question 17

Who holds burden of proof?

Answer 17

Surface Owner

Question 18

Getty

Answer 18

created accommodation doctrine

Question 19

Sun Oil v. Whitaker

Answer 19

Mineral estate is still dominant so a lessee cannot be forced to go off lease to not impair existing surface use. Alternative must be on leased premises.

Question 20

Davis

Answer 20

Only when conduct of the lessee destroys or substantially impairs the surface owner’s use of the surface does the question arise as to whether that conduct is reasonably necessary.

Question 21

Genco

Answer 21

Planned future surface use can trigger accommodation doctrine

Question 22

Merriman

Answer 22

Look to see if the specific surface use is impaired, instead of if the surface user has any industry use available that would not be impaired by the mineral owner’s activity. Surface owner is also not required to show that they have alternatives for accomplishing their original surface use. Surface owner’s other land doesn’t matter.

Question 23

Basics of Contract Construction

Answer 23

i) Documents pertaining to the same transaction should be construed as one contract.
ii) An agreement to transfer leases to be determined in the future is not a sufficient “meeting of the minds”

Question 24

Nucleus of Description

Answer 24

If a property description contains a nucleus of description, parole evidence can be used to explain parts of the description. Property must be identifiable to a reasonable certainty.
1) A recital of ownership (ARTI) does provide a nucleus of description.
2) Example: “My property in Scurry County.” This is okay even if grantor owns multiple properties within specified area.

Question 25

Essential terms of a contract

Answer 25

(1) time of performance; (2) the price to be paid; and (3) services rendered.

Question 26

Failure Rate

Answer 26

If over 10% of the land failed to meet the deep rights description, the contract would typically be void only where it is sold by a tract. If the land is sold on a per acre basis, and has adjustment clause, this can be overcome.

Question 27

Will a RRC Lease ID number suffice as a nucleus of description?

Answer 27

No

Question 28

Partial Performance

Answer 28

To make an otherwise invalid assignment enforceable it needs: (1) payment of consideration; (2) possession of property; and (3) permanent and valuable improvements to the land.

Question 29

Promissory Estoppel Recap

Answer 29

Must have a promise to execute an agreement that would satisfy the stature of fraud. It must be a particular agreement that has already been prepared.

Question 30

Partnership

Answer 30

Intent to form partnership not required. Factors that indicate partnership include sharing profits, joint participation and control of the business, and contributions (monetary or property) to the business. Showing that real estate interest is partnership asset must satisfy SOF.

Question 31

Void Documents

Answer 31

Agreements that are not enforceable on their face as a matter of law because of illegality, lack of capacity, or impossibility. 1. It is presumed that a party knows the contents of documents he signs, including all incorporated references. 2. The void document will not be revived by subsequent assignments, but because the assignments specifically incorporated all the parts of the void document they were enforceable on their own.

Question 32

What does a wellbore assignment actually convey?

Answer 32

i. "Insofar" is a limitation of the grant. ii. Wellbore Assignments- narrowest form of assignment. No leasehold rights are conveyed outside the wellbore, and to no depth below where the wellbore currently sits. However, a wellbore assignee could rework the wellbore and produce a depth already achieved, but it could not extend the wellbore horizontally. iii. The surface area conveyed is that only reasonably necessary to operate the well.

Question 33

How can an overriding royalty interest be saved from a wash out?

Answer 33

Extension or renewal clause will hold an ORRI past the termination of an OGML if the subsequent lease is: (1) New lease taken during primary term of old lease; and (2) terms are substantially similar. Or the new lease is taken through bad faith/fraud/collusion.

Question 34

Exception to wash out saving:

Answer 34

When a previous lease has expired and the terms are not substantially similar, the ORRI will not be attached to the new lease through the extension clause.

Question 35

Time factor

Answer 35

Take into account time, in Sunac, it was one year between the first lease and second lease.

Question 36

Partial Termination

Answer 36

If a lease contemplates partial termination, a court will favor partial termination. If express language in the lease provided otherwise, the ORRI would not have been extinguished.

Question 37

Compensatory Royalty

Answer 37

Alternative of drilling off-set wells. It is a royalty paid to a landowner whose land lies adjacent to a producing well, but on whose land no well has been drilled. Intended to compensate the landowner for losses suffered due to drainage due to production on adjacent property.

Question 38

When can a contractual performance be excused?

Answer 38

When a government regulation or law makes performance impossible. However, if the regulation deals with non-oil & gas related matters id will not relieve the obligor from their duty.

Question 39

Do royalty owners have standing to sue?

Answer 39

Yes. A royalty interest runs with the land and therefore standing travels with the interest owner. The fewer interest affected by drainage, the stronger the claim.

Question 40

Pooling ORRI

Answer 40

An assignee has the right to pool an ORRI belonging to the assignor if the instrument of assignment is silent on the matter, especially if the lease authorized pooling without the consent of the lessors.

Question 41

Determinable Pugh Clauses

Answer 41

When a disjunctive "or" is used to put the pugh clause in effect at the end of the primary term or after the end of continuous development, it triggers after the latter of the two options. Courts will not read an "and" into the clause.

Question 42

Pugh Clauses Generally

Answer 42

Pugh clauses sever unpooled acreage from pooled acreages.

Question 43

Horizontal Pugh Clauses

Answer 43

pooled acreage in a certain formation under production will not hold others

Question 44

Vertical Pugh Clauses

Answer 44

acreage laying outside the pooled unit will not be held by production in the pooled unit.

Question 45

Indivisibility Doctrine

Answer 45

Operators do not have to pay shut-ins as long as one well is in production. Also applies to all savings clauses.

Question 46

Covenant to Develop

Answer 46

If land is split into multiple parts, substantial development will hold all parts.

Question 47

Covenant to Develop in 5th Circuit

Answer 47

Implied Covenant places burden on each tract holder in a lease to develop his own acreage independent of the others.

Question 48

Miscellaneous Issues

Answer 48

i. Lessees want to be able to freely assign leases ii. Lessors may want to restrict assignability 1. Requiring lessor consent absent providing a remedy for breach has been held to be unenforceable (lessor could have conveyed all of his interest in the land and still have retained the power of consent) 2. Where there was a remedy for breach, however, it has been upheld (liquidated damages; termination of lease if lessee fails to comply with a "notice" requirement in lease)

Question 49

Support Agreements

Answer 49

Purpose is to spread risks/benefits among parties, who are interested in the same prospect

Question 50

Dry Hole Support Agreement

Answer 50

In exchange for well logs and other information, we will pay you if you drill a well and it is a dry hole.

Question 51

Lack of Consideration

Answer 51

Must be raised in answer to pleading

Question 52

Features of a Farmout

Answer 52

i) Duty ii) Earning Requirement iii) Interest Earned iv) number of wells v) Timing of Assignment vi) Miscellaneous Items vii) Structure and Tax Implication

Question 53

AMI

Answer 53

A certain geographic area in which the parties have a mutual interest and which provides that, if any party obtains an oil-and-gas interest in the area, the other parties have a right to participate in the interest.

Question 54

Notice Issue

Answer 54

A purchaser is bound by every recital, reference, and reservation contained in, or fairly disclosed by, any instrument in a chain of title.

Question 55

Property Description Issue

Answer 55

a. Reference to "said farmout agreement" in letter agreement was sufficient property description b. Reference to "lands in the area of the farmout agreement" in letter agreement is not sufficiently specific to know what is intended.

Question 56

Privity

Answer 56

AMI's run with the land because it has privity by way of assignment, and it touches and concerns the land.

Question 57

Does a farmee who earned acreage from a producing well have to give the farmor notice when he P&A's the well?

Answer 57

An exculpatory clause will not override industry custom and usage which is to provide notice before P&A. This argument is strengthen by the fact that the contract had no entireties clause, so parole evidence could come in because the contract was silent on this particular matter.

Question 58

Financing

Answer 58

The prevailing rate clause was an express provision, while the exculpatory clause only shields an operator from breaches of implied duties to conduct operations in a good and workmanlike manner or for tortious acts, unless it rises to the level of gross negligence or willful misconduct.

Question 59

Exculpatory Clause

Answer 59

Prevents non-operators from suing operator under a JOA. Gross negligence or willful misconduct will defeat an exculpatory clause, as will express terms in a JOA.

Question 60

JOA

Answer 60

Typically used where more than one lessee in a larger area wants to cooperatively develop the oil and gas for efficiency and to share risk and costs

Question 61

Exculpatory Clauses

Answer 61

If the clause applies then it requires the operator to engage in willful misconduct or gross negligence. If not, then the operator can be sued under breach of contract.

Question 62

Change in Language

Answer 62

"All such operations" to "Its activities under this agreement". "Activities" must show willful misconduct or gross misconduct.

Question 63

What is Gross Negligence?

Answer 63

Objective & Subjective. Did the operator know about the peril, but acted in a way that demonstrated he did not care about the consequences to others? Must be unjustifiable, or likely to cause serious harm is it grossly negligent.

Question 64

What is Not Gross Negligence?

Answer 64

An act that is merely ineffective, thoughtless, careless or not inordinately risky.

Question 65

AFE

Answer 65

Authorization for Expenditures

Question 66

AFE (General Rule)

Answer 66

The approval of an AFE is a commitment to pay one's proportionate share of all reasonable and necessary costs incurred until the objective formation has been reached.

Question 67

AFE Basics

Answer 67

Just an estimate, not a ceiling on costs. Once a non-op consents they cannot pull out if drilling has started.

Question 68

Operator will not get costs when:

Answer 68

(1) bad faith; (2) excessive or unreasonable; or (3) unauthorized by AFE.

Question 69

Time is of the Essence

Answer 69

General Rule: Time is not of the essence for oilfield operation contracts. A party may recover for substantial performance of a contract, even though it is not literally met.

Question 70

Three Types of AFE

Answer 70

1) Turnkey- bid based on total project costs, start to finish 2) Footage- Based on depth of well. Specific amount per foot. 3) Daily rate- Price based on number of days worked.

Question 71

Assignment of Interests

Answer 71

Assignors will be liable if assignee cannot cover costs. Unless expressly provided otherwise.

Question 72

Mining Partnership

Answer 72

A special relationship peculiarly adapted to serve the mining industry for the purpose of imposing joint and several liability on non-operating interests in favor of third party businesses.

Question 73

Mining Partnership Elements

Answer 73

a. Joint ownership; b. Joint operation (actual involvement in operation must occur); and c. An express or implied agreement to share profits and losses.

Question 74

Ownership & Marketing Production

Answer 74

If operator is profiting on the side, must be accounted to non-ops.

Question 75

Elements of going Non-consent

Answer 75

1. Parties that opt out 2. Failure to respond within30-day response period 3. Decision is binding (can't change your mind 4. If operator starts work before end of notice period, other parties can take advantage of additional information before making decision. 5. Any additional proposed operations must fall within the geographical boundaries and depth of the contract area.

Question 76

Consent Costs Agreements

Answer 76

Three options: 1. Pay based on fractional interests 2. Pay based on proportionate share relative to the other consenting parties 3. (2),plus all or part of proportionate share of any non-consenting parties' share that the other consenting parties elected not to take.

Question 77

Leftover non-consenting shares

Answer 77

must be paid by the party proposing the operation

Question 78

"In-or-out" provision

Answer 78

once a party has gone non-consent, they have lost all interest in the proposed operation

Question 79

Alternate to "in or out"

Answer 79

allows non-consent back in only after a "surcharge" has been recovered.

Question 80

Preferential Right- ORRI

Answer 80

part of contract area, therefore it is subject to the perf right

Question 81

Pref Right w/ multiple property owners

Answer 81

Don't have to buy all, just the one your right was created from.

Question 82

Preferential Right- time limit

Answer 82

10 days to exercise

Question 83

When is a right invoked?

Answer 83

Majority Rule- Preferential right is not invoked unless the property being sold is the exact same package that the right is tied too. Texas Rule- Preferential right is invoked anytime any of the property tied to the right is being sold, regardless of if it's the whole package. Buyer can still skirt around the pref. right by including an additional property. Buyer can always counter to just his property and would then prevail.

Question 84

Preferential Right- General Rule

Answer 84

Once notice is given, the right matures into an enforceable option.

Question 85

Mutual Mistake

Answer 85

Parties must establish what the true agreement was, and that the instrument incorrectly reflects that agreement because of a mutual mistake.

Question 86

Unilateral Mistake

Answer 86

The mistake is of so great a consequence that to enforce the contract would be unconsciousable. (NOTE: If other party knew of mistake, then it was mutual.)

Question 87

Preferential Right- Vertical Integration

Answer 87

Will not trigger the right. Stock sales, not asset sales, will not trigger right.

Question 88

Gas Balancing Agreements

Answer 88

Typically a standard exhibit in a JOA; (2) terms of the gas-balancing agreement control over any conflicting language in a JOA; (3) without a gas-balancing agreement non-operator can take in kind its share of oil and gas (also can terminate any contract for the gas operator made; 1989 changed to required at least 10 days written notice and operator can defer for 90 days); (4) Operator is typically not responsible for non-operator's failure to accommodate his purchaser's pipeline; (5) Because of dynamic conditions in the gas market, don't assume that the language in the Model Form is appropriate for everyone's situation; (6) Percentage for make-up of underproduction in-kind; (7) operators failure to pay is not conversion or exemplary damages

Question 89

Balancing In-Kind

Answer 89

Under-produced party makes up its share through a temporary increase in its share of production. If practicable and available, it is generally the preferred remedy. May not be available because: no market for additional gas, reservoir is depleted, regulatory limits on production allowable

Question 90

Cash balancing

Answer 90

Made by periodic payments over time or a single payment

Question 91

Split-stream sales

Answer 91

Multiple purchasers of parts of the same production stream from one well. Courts will consider all equities when deciding between in-kind balancing vs. cash balancing.

Question 92

Horizontal Drafting

Answer 92

First well in 1929 Texon.

Question 93

Casing point

Answer 93

horizontal wells are drilled as "completed wells"

Question 94

Air Quality- Aggregated Pollution

Answer 94

No aggregation of air quality pollution unless facilities are adjacent. If facilities are close enough then they can be considered one point source.

Question 95

Tort Cases

Answer 95

excessive noise, earthquake, water contamination, mental distress Causes of action- trespass, nuisance, negligence, and negligence per se

Question 96

Lone Pine Orders

Answer 96

In a class action lawsuit, a lone pine order requires the class plaintiffs to show a substanitive link between their injuries and the defendant's conduct. Essentially plaintiffs are required to establish a prima facie face. This cuts down on frivolous lawsuits, and helps courts organize the issues and control complex litigation.

Question 97

New Data during trial exhonerating plaintiff

Answer 97

Court should dismiss w/ prejudice

Question 98

Medical Gag Rule

Answer 98

Companies must tell doctors the trade secret chemical formulas used during drilling, but doctors are liable if they leak.

Question 99

If plaintiff forgets to introduce evidence about fracking what should court do?

Answer 99

Allow jury to bring it in as outside evidence because it would not be prejudicial if the company is using the technique

Question 100

Enjoining fracking for possible future health problems?

Answer 100

Find a better injury. No cause of action.

Question 101

City bans facking, but state issues drilling permit anyway.

Answer 101

State Law trumps unless a home-rule applies..

Question 102

Proration unit

Answer 102

acreage assigned to a well for purposes of assigning allowable.

Question 103

Correlative interval

Answer 103

Vertical interval between top/base of productive reservoir.

Question 104

Penetration point

Answer 104

Where horizontal drainhole enters correlative interval

Question 105

Terminus

Answer 105

End of horizontal drainhole

Question 106

Horizontal drainhole displacement

Answer 106

Distance from penetration point to terminus

Question 107

Kick-off Point

Answer 107

Whee well starts to go horizontal

Question 108

Take-point

Answer 108

The "wells" where oil flows into the horizontal pipeline.

Question 109

Take-Point Rule

Answer 109

Only the take points have to follow spacing rules. The pipelines themselves do not.

Question 110

Off-Lease Penetration Point Rule

Answer 110

Must give off-lease operators/mineral owners notice

Question 111

Stacked Lateral Rule

Answer 111

Horizontal drainholes from different surface locations are treated as a single well. This is different than a multipateral well.

Question 112

Box Rule

Answer 112

A well is deemed to be in compliance with spacing requirements, as long as it stays inside an imaginary box (stays between the lines)

Question 113

Horizontal Trespass

Answer 113

Whose consent is necessary to drill from off lease position? Get it from everyone.

Question 114

PSA

Answer 114

(i) Agreement between various mineral interst owners about allocation production. (ii) Operates like a pooling agreement but can involve multiple pools or a mix of pools and non-pools. (iii) RRC requires 65% of working interest and 65% of royalty owners agree to PSA.

Question 115

Allocation Wells

Answer 115

When you can't get 65% to agree.

Question 116

Clean Water Act (Old Rule)

Answer 116

Two step analysis: (i) Do the waters near the wetland area have a relatively permanent flow? (ii) Is the wetland "adjacent" to these waters? Does it have a continuous surface connection to the waters?

Question 117

Clean Water Act (New Rule)

Answer 117

Nexus test. Is there a significant nexus between the water or wetland in question and "navigable waters".

Question 118

What happens if my CWA permit is denied?

Answer 118

You're screwed. Force Majeure does not trigger.

Question 119

Endangered Species Act-Take

Answer 119

harass, harm, pursue, shoot, wound, kill, trap, capture, or collect.

Question 120

Endangered Species Act-Harm

Answer 120

significant modification or degradation of habitation where it actually kills or injures wildlife. Government can issue permit, if the taking is incidental to, not the purpose, of an otherwise lawful activity.

Question 121

Who is responsible under CERCLA

Answer 121

Potentially Responsible Parties

Question 122

Who is liable for CWA violation?

Answer 122

Owner when issue is discovered