Oil and Gas - WIP Flashcards
(127 cards)
1
Q
What is the rule of capture?
A
A rule of non liability for causing oil and gas to migrate across property lines, resulting in “drainage” of oil and gas from under another person’s land.
e.g., A drilling on her 10 acres land causes drainage from a 40 acres radius, but her neighbors will have no right to share in the production.
2
Q
How might neighbors protect themselves from drainage by other people drilling?
A
Drill their own wells
3
Q
What are the limitations to the rule of capture?
A
Limited by the doctrine of “correlative rights”, which means that every oil and gas owner has a right to a fair opportunity to produce oil and gas from a common reservoir underlying his property.
4
Q
Under the doctrine of correlative rights, what does the rule of capture NOT apply to?
A
1) Negligently drilled oil and gas (e.g., well blowouts)
2) Illegally drained oil and gas (e.g., violation of a Texas government order)
3) Stored gas (e.g., gas produced from oil field and then reinfected into a depleted underground reservoir for storage)
5
Q
What type of property is stored gas?
A
Personal property
impacts a right to retain possession in contract to the rule of capture
6
Q
If a rival operator drills into a reservoir that contains stored gas, what can the owner do?
A
Sue for damages, because the rule of capture is no defense for the drainage of stored gas.
7
Q
Who has the burden to show that gas is stored, and not native, gas?
A
The storer.
8
Q
In terms of oil and gas interests, what does a fee simple owner of land have?
A
A fee simple owner of property owns both the surface and the minerals below the surface.
A property owner, however, may transfer less than her entire interest through severance.
9
Q
Hypo: Stevie owner Blackacre in fee simply (both surface and minerals). Stewie conveys a deed to Meg of “all the minerals in Blackacre”.
What does Meg have?
What does Stewie now have?
A
Meg has fee simple in the mineral estate, and a vested possessory interest in real property.
Stewie has a fee simple in the surface only.
10
Q
What rights does the holder of a mineral interest have?
A
1) Development right
2) Executive right
3) Economic benefits
11
Q
What is the development right of a holder of mineral interest?
A
The exclusive right to explore, produce, and develop minerals.
12
Q
What is the executive right of a holder of mineral interest?
A
The right to lease the minerals.
13
Q
What economic benefits does a holder in mineral interest have?
A
1) Bonus: an upfront payment for signing the lease
2) Royalty: a fractional of any oil and gas produced that is free of cost (usually 1/8)
3) Delay rentals: compensation for deferring drilling during the primary tern of the lease
14
Q
Who is dominant and servient when a mineral estate and surface estate have been severed?
A
The mineral estate is dominant when severed from the surface estate.
The owner of the mineral estate can use the surface as if reasonably necessary to develop the oil and gas.
15
Q
What is the accommodation doctrine?
A
Requires the mineral owner to accommodate surface uses, but only under the following three conditions:
1) The surface owner has a preexisting use of the surface
2) The mineral estate owner (or lessee) has a reasonable alternative method of developing the oil and gas that is less destructive of the surface, but still allows the mineral estate to drill and produce economically. (cannot be unreasonably costly)
3) The reasonable alternative is available on the leased tract.
16
Q
What fee interest is created by oil and gas leases?
A
An oil and gas lease conveys a deed to a fee simple determinable.
The lease may last forever, but it may terminate if there is no production at the end of a specified time.
17
Q
What types of interests are created by oil and gas leases?
A
The Working Interest: gives the Lessee the exclusive right to explore, develop, and produce from the property as well as the obligation to pay all costs of production.
The Royalty Interest: gives the Lessor a share of the production that is free of the costs of production.
18
Q
What interest does a mineral estate holder have when they grant an oil or gas lease?
A
The mineral estate holder retains a possibility of reverter, and economic benefits under the lease contract (bonus, royalties, and delay rentals)
19
Q
What is a nonparticipating royalty interest (NPRI)?
A
A right to receive royalty payments held by someone other than the mineral interest owner,
If the mineral owner conveys (by sale, gift, or will) her right to receive royalty payments to another but retains ownership of the mineral estate, that person has an NRPI.
The NPRI owner may not “participate” in any leasing transaction.
20
Q
HYPO: Lois owns Blackacre in fee simple and conveys the following royalty deed: “Lois grants to Brian a 1/16 royalty in Blackacre”. If Lois leases to Big Oil for a 1/8 royalty, what does Brian have?
What if it conveyed “1/16 OF royalty on Blackacre”?
A
1) 1/16 of all production (a fixed, flat NPRI)
2) 1/16 of 1/8 royalty interest
21
Q
What rights do cotenants of concurrent ownership in a mineral interest have?
A
Every cotenant can drill and produce or lease his undivided interest without the consent of the cotenants, but he must ACCOUNT to the others for their rightful share of the PROFITS from production.
22
Q
What are profits derived from production and leases?
A
Revenues minus costs
23
Q
What is included in “costs”
A
Includes all reasonable drilling and operating costs on productive wells. Dry hole costs, however, MAY NOT be assessed against the unleased tenant.
24
Q
Can one cotenant enjoin another from leasing or drilling without their consent?
A
No. Every cotenant may lease without permission from the other cotenants.
25
Can a cotenant enjoy royalties from a lease if they did not consent to it?
No, they can only obtain profits each year.
26
What can a dissenting cotenant do to obtain royalties rather than just profits?
The cotenant can RATIFY the underlying lease.
However, once ratified, they cannot change their mind and seek a profit share as an unleased cotenant.
27
What is a cotenant's right of partition?
A cotenant has an absolute right to partition property in a judicial proceeding.
Courts prefer partition in kind (division) rather than partition by sale, unless dividing the property is inequitable (e.g., mineral reserves distributed unevenly)
28
In successive ownership cases, what is required to lease the property?
Neither the life tenant nor the remainderman can grant a valid oil and gas lease without the joinder of the other.
29
Once a valid lease has been entered into, how are lease benefits to be divided if the life tenancy grant is silent?
CL: Life tenant gets current income and interest, including 100% of delay rentals plus interest on bonus and royalty, and remainderman gets principal of bonus and royalty (but does not take possession until life tenant dies.
Open Mine Doctrine: Where a lease was in place prior t the creation of the life estate, the life tenants gets all benefits under the existing lease.
30
What is the general rule for priority in mortgages on oil and gas leases?
Basic property law: First in time, first in right.
31
What is the rule for when a mortgagee records before a lease is executed?
The lease survives a mortgage foreclosure, but the surface rights still terminate.
32
What is the rule for when an oil and gas lease is recorded before the mortgage?
Lease cannot be foreclosed against because the mortgage did not include the minerals as an assert belonging to the mortgagor, and the mortgagee was on notice of the lease.
33
What does it mean to "marshall" the assets?
At foreclosure, the mortgagee must sell the surface assets first to try to satisfy the loan, before selling the mineral estate.
34
HYPO: Lois mortgages to Bank in exchange for a $250,000 loan. Lois then leases the mineral rights to Big Oil. When Lois defaults on the load, what happens?
Big Oil's lease survives foreclosure, but its surface rights terminate, and Lois's rights as lessor will transfer.
Big Oil's best option is to repurchase surface rights at foreclosure sale.
35
What are examples of interference with oil and gas interests by trespass?
1) Ordinary trespass
2) Slant well drilling
3) Drilling dry well
4) Geophysical or seismic trespass
5) Secondary recovery operations NOT a trespass
36
What constitutes ordinary trespass of an oil or gas interest?
When the lease expires but the lessee stays on the tract, the lessee is a trespasser.
REMEDY: Injunction and damages (including punitive)
37
What is trespass by slant well drilling?
Bottoming a well underneath someone else's tract.
REMEDY: Injunction and damages (including punitive)
38
What is trespass by drilling dry well?
Damage to the speculative lease value. If a wrongful lessee entered and drills a dry hole, the lessor loses the lease value that he could've received before the world found out the land was dry.
REMEDY: Lost bonus.
39
What is geophysical or seismic trespass?
When someone on adjacent land explores lessor's land using seismic vibrations, and gains information lessor's mineral potential.
REMEDY: Sue in assumpsit - the market value of a contract for the right to do seismic exploration.
40
What is a secondary recovery operation?
e.g., repressing an oil field by injecting saltwater, which invades another tract and causes a neighboring well to drown out.
This is not trespass because public policy favors more oil and gas.
REMEDY: Can sue for nuisance damages for value of lost oil and gas, however.
41
What are possible reductions in damages for good faith trespassing?
If the trespasser had an honest and reasonable belief in the superiority of his title, he will get a credit for costs incurred in production If the costs benefited the right owner.
42
What are damages for bad faith trespasses?
A bad faith trespasser will be liable for the gross value of production from the well.
43
What is required to establish slander of title?
To prevail in a tort action for slander of title, plaintiff must prove"
1) Publication of a false claim of title to the property (including false claims of a valid lease)
2) With malice; and
3) Loss of a specific sale or leasing opportunity by the rightful owner because no buyer wanted to purchase property with disputed title
44
What is required for adverse possession of oil and gas interests?
The key issue is whether and when the mineral estate was severed from the surface estate.
1) If possession begins prior to severance: The adverse possessor gets title to BOTH the surface and mineral estate
2) If possession beings after severance: The adverse possessor gets title to the SURFACE ESTATE only. To get title to the mineral estate, the adverse possessor must establish a separate action of possession.
45
What is the purpose of the granting clause?
The granting clause sets for:
1) The rights given by Lessor to Lessee, and
2) A description of the property
46
What is a Mother Hubbard clause?
The first paragraph usually contains a clause to pick up SMALL STRIPS of land not specifically included in the granting clause because of mistakes in surveys or descriptions.
47
What is the habendum clause?
The habendum clause sets forth the duration of Lessee's interests in the premises.
Typically there is a:
1) Primary term, which is a fixed period during which Lessee has no obligations to conduct drilling operations, and
2) Secondary Term, which is indefinite but normally linked to required production. Failure to produce during the secondary term results in TERMINATION of the lease.
Example: "This lease shall remain in force for three years from this date and as long thereafter as oil and gas is produced from said land."
48
How are oil and gas leases construed?
Oil and gas leases are construed AGAINST the Lessee, unlike typical contract
(Oil and gas leases are usually drafted by the oil company)
49
What are paying quantities?
In Texas, "production" means production in paying quantities (PPQ). The formula for PPQ is:
Revenues - Lessor's royalty - Operating costs
50
What is required of the PPQ in order for the "production" requirement to be met and a lease to stay in effect?
The total PPQ must be POSITIVE in order for the production requirement to be met.
51
What is the Temporary Cessation Doctrine?
Once PPQ requirement is established, a temporary cessation due to a "sudden stoppage of the well or some mechanical breakdown or the like" will not terminate the lease.
Key factors:
1) A short, temporary shutdown
2) Which Lessee acts diligently to fix;
3) That is due to a "mechanical breakdown or the like".
52
What is the Marginal Well Doctrine?
Some wells only produce PPQ during some months of the year. The test for a marginal well is "wether a reasonably prudent operator would continue to operator the well to make profit, not merely for speculation."
53
What is the Doctrine of Repudiation?
An equitable rule that can extend the lease if the Lessor obstructs the Lessee from developing the lease.
54
What is a delay rental clause?
These clauses authorize Lessee to delay drilling or commencing production during the primary term by periodically paying a stipulated amount to the Lessor.
55
What is the effect of an "unless" delay rental clause?
If the clause states "The lease shall terminate UNLESS Lessee shallowing pay Lessor the sum of $___ in delay rentals", then the clause creates a CONDITION of the lease.
REMEDY: The lease terminates automatically.
56
What is the effect of an "or" delay rental clause?
If the clause states "Lessee agrees to either drill a well OR pay delay rentals," then the clause only creates a COVENANT between Lessor and Lessee, and the lease does not terminate automatically.
REMEDY: The Lessor must sue for breach of contract; damages would be equal to the unpaid amount of rentals.
57
What is the effect of accepting a late delay rental?
If the late delay rental had terminated the lease, then it comes alive again based on the "loose theory of estoppel".
It usually requires some proof of:
1) An act by Lessor,
2) Upon which Lessee has detrimentally relied
58
What is an assignment clause?
Some leases may contain a clause that allows one or both parties to assign their rights under the lease, but that no changes in ownership is binding on the other party until a certain time after notice of the assignment.
59
What is a Commencement of Drilling Clause?
If the delay rental clause states "if operations for drilling are not COMMENCED on or before [date], the lease shall terminate unless" Lessee pays rentals, "commencement" depends on two factors:
1) Objective physical acts done on the leased premises
2) Subjective good faith to pursue the drilling operation.
60
What is a Defensive ("Savings") Clause? And examples?
To hold a lease beyond the primary term, the Lessee needs PPQ. If delay rentals are not holding the lease, then the Lessee must satisfy a defensive or "savings" clause.
1) Shut-In Royalty Clause
2) Dry Hold, Continuous Operations, and Cessation of Production Clauses
3) Force Majeure Clause
61
What is a Shut-In Royalty Clause?
A shut-in royalty clause provides that when a well ceases PPQ due to market conditions, the Lessee can hold eh lease by paying shut-in royalties.
Example: "But while there is a gas well but gas is not being sold, used, or marketed, Lessee may pay as royalty the monthly sum of $___, it will be considered that gas is being produced in paying quantities."
62
What is a Dry Hole Clause?
Provides that if Lessee drills a dry hole, she can maintain the lease by starting to drill another well within the stated time.
63
What is a Continuous Operations Clause?
Covers the situation where, at the end of the primary term, operations have commenced, but there was not yet actual production.
64
What is a Cessation of Production Clause?
Provides that if a well ceases producing, Lessee can maintain the lease by commencing repairs within the stated time.
65
What can happen if a lease contains all three Savings Clauses?
The savings clauses can be tacked together over time.
66
What is a Force Majeure Clause?
Excuses performance, or extends the time for performance, because of unforeseeable factors beyond Lessee's control.
Example: "Should Lessee be prevented from complying with any conditions or from drilling or producing oil or gas by operation of force majeure, then while so prevented this lease shall be extended."
67
What is a Pooling Clause?
A pooling clause allows Lessee to hold several tracts under lease with PPQ from just one well located on one of the tracts.
The royalty from the one well is typically split between the various tract owners.
Courts require that the Lessee exercise pooling in good faith.
68
What is the relationship between Pooling Clauses and NPRI's?
The executive right owner has no power to pool the nonparticipating interests, even though he has the power to lease the nonparticipating interests.
Hypo: Marge sells an NPRI of “1/2 of all royalties” to Bart, and then 15 acres of her 40 acre tract are pooled with Homer’s 600 acre tract, as above. Big Oil drills a well on the 15 acres that are pooled. What is Bart’s royalty?
--> 1/2 of 1/8 of all production. Bart is not bound by the pooling agreement.
69
What is the cost-free nature of royalties?
Paid based on production "at the well", meaning royalties are free of the costs of production.
They are NOT free of post-production costs, such as transport.
Absent contrary language in the lease, Lessors must share post-production costs in proportion to their royalty interest.
Example:
Big Oil owes a 1/8 royalty to Marge under the lease. Big Oil sells the gas for $3.60 per MCF (1,000 cubic feet) after processing the gas at a plant 10 miles away from the well. The processing and transport costs total 40 cents per MCF. What royalty does Big Oil owe Marge?
--> 1/8 of $3.20
70
What is a "market value" royalty payment?
Payments based on the "market value at the well where the minerals are sold or used off-premises.
The "market value" of oil or gas is defined as the price that similar minerals currently sell for in the spot market at the time the oil or gas is produced.
71
What is a Division Order?
Tells the Lessee how to divide the proceeds from the well among all the various lessors, NRPI's and working interest owners.
The Lessee prepares the D/O for each owner; if the owners sign the D/O as correct, the Lessee then pays the owners their checks on the basis of the D/O. Division orders are not deeds or contracts, but they have their own set of laws governing their legal effect.
72
What is the common law approach to D/Os?
Under the common law, DOs were binding until revoked., even if the provisions differed from the lease language. A Lessor was required to revoke an inconsistent DO to receive the correct payments going forward.
73
What is the 1991 DO Act approach?
The Act, which applies to DO's executed AFTER 1991, set forth several rules that apply to royalty interest owners (RIO):
1) DOs are binding until revoked - as under the common law. So a RIO can revoke a mistaken DO but can't get past underpayments
2) A DO can never contradict a lease. If it does, it is invalid; if it was never valid a RIO should get past underpayments.
74
Implied Covenants - What is the standard of performance for Lessee's of oil and gas leases?
Reasonably Prudent Operator
Oil and gas leases contain an implied covenant that Lessee acts as a reasonably prudent operator.
This is not a FIDUCIARY standard, and operators do not have to drill and produce if they would not make a profit.
A lessor would have the burden to prove that the Lessee can recover oil and gas at a profit.
75
If a Lessee fails to drill any wells, can Lessor sue for breach of covenant?
NO. Lessee never promises to drill. If it doesn't drill, the lease just terminates, and no damages are owed.
76
What is the implied covenant to Protect Against Drainage?
The Lessee must act as a reasonably prudent operator to protect the leased premises against drainage. Lessor must prove three elements:
1) Substantial drainage
2) Lessee could drill a profitable well to offset drainage, and
3) Damages
77
What must be shown to prove profitability?
Expected revenues would exceed drilling and production costs
78
What are the potential remedies for a Lessee failing to protect against drainage?
Damages in the amount of royalties Lessor would have received from the offset well, and a CONDITIONAL DECREE directing Lessee to either drill or forfeit the lease.
79
If two Lessors had leased to the same Lessee, does the implied covenant to protect against drainage for that Lessee still apply?
Yes, the standard applies to a common lease.
80
What is the Implied Covenant to Market?
Lessee has an implied covenant to market the oil and gas:
1) Within a reasonable time; and
2) At the best price realizable.
The Lessee's action in marketing are judged by the reasonably prudent operator standard.
81
What is the Implied Covenant to Develop?
In Texas, there is an implied covenant to develop an oil and gas lease.
The TEST for breach of the covenant is whether the Lessor can prove a reasonable expectation of profit from additional drilling, regardless of where the proposed well is located. (HIGH BURDEN)
82
HYPO: Lisa has leased to Big Oil, which has drilled one producing gas well at 5,000 feet. Lisa thinks that Big Oil should do more to explore and develop the tract by testing for production at 10,000 feet. Lisa brings suit alleging that Big Oil has breached the implied covenants to explore and develop the tract. What result?
FAIL. She must prove that it would have been profitable for Big Oil to drill additional wells.
83
Is there an implied covenant to explore?
NO
84
What the relationship between NPRI/NPMI's and a holder of an executive right?
Nonparticipating interest owners such as NPRIs and NPMIs rely on the executive right owner to realize income from their interests.
Executive right holders' duty depends in part on their conduct.
85
What are the duties of an executive right holder?
1) Utmost good faith and fair dealing
| 2) Fiduciary standard
86
What is the duty of utmost good faith and fair dealing?
The usual duty owed to nonparticipating interest holder.
The executive right holder must act with due regard for the nonparticipating owners, and be willing to execute a lease on the same terms as a reasonably prudent landowner would if there was no nonparticipating interest.
87
What is the fiduciary standard for executive right holders?
When the executive engages in egregious self-dealing, courts will impose a fiduciary standard, meaning the executive must subordinate his interest to those of the nonparticipating interests.
STANDARD: Good faith, absent evidence of self-dealing
REMEDIES: Cancellation of the executive right, cancellation of certain leases, and damages.
88
HYPO:
Eric and Kenny are mineral cotenants on Blackacre. Eric owns the executive right, making Kenny an NPMI. Eric leased the rights to Big Oil in 1995, and his share of the 1/8 royalty was Kenny’s sole source of income. In 2006, Eric leases Blackacre to Super Oil for a 1/8 royalty. Big Oil never drills a well and withdraws from the land when the economic recession hits in 2007. Kenny has to declare bankruptcy. Has Eric breached his executive duty?
No, because the typical standard if GOOD FAITH, absent evidence of self-dealing.
89
How do you determine what is included in the "mineral estate"?
If the lease is silent or ambiguous regarding ownership of certain substances, consider the following:
1) Is the substance one of the nine that belong to the surface as a matter of law? (see other card)
2) If not, is the date of the ambiguous conveyance after 1983? If before, use "surface destruction" test. If after, use "ordinary and natural meaning" test.
90
What are the nine substances that are part of the surface estate as a matter of law?
1) Building stone
2) Limestone
3) Caliche
4) Surface shale
5) Sand
6) Gravel
7) Water
8) Near-surface lignite
9) Iron ore
91
What is the surface destruction test?
(Pre-1983 Test)
If any reasonable method of extracting the substance would destroy the surface, it belongs to the surface estate.
92
What is the ordinary and natural meaning test?
Asks whether the substance is a "mineral" in its ordinary and natural meaning.
Prospective, so it does not disturb the rule regarding the nine substances.
93
What mineral test would "open pit mining" fall under?
Surface destruction test, so it is party of the surface because open pit mining destroys the surface. (if pre-1983)
94
What mineral test would "solution mining" fall under?
Surface destruction test, but it would satisfy as surface minerals because solution mining doesn't destroy the surface.
95
If a mineral COULD be mined with a method that destroys the surface, what test would you apply?
The surface destruction test, because if ANY method of mining it could destroy the surface, then the surface destruction test grants rights to the surface owner.
96
What is the non-apportionment rule for conveyancing?
When property is subdivided AFTER an oil or gas lease has been entered into, the owners of the subdivided interest are not entitled to apportioned royalty payments.
They are entitled, however, to an apportioned delay rental.
97
Nonapportionment hypo
Wendy has leased Blackacre, 40 acres, to Big Oil. Then Wendy sells 10 acres of Blackacre to Clyde. What has Clyde bought?
Clyde has surface estate on 10 acres subject to BO's reasonable use.
Possibility of reverter on the mineral rights of the 10 acres
Right to delay rentals on the 10 acres, and royalties on the 10 acres he bought.
98
If a property is subdivided after an oil and gas lease has been entered into, and a well on one portion is draining the interest on another portion, does the owner of the drained portion have a claim against the common lessee for breaching the covenant to develop his portion properlY?
NO. The covenant to develop applies to the entire acreage as a whole, not to individual portions created by subdivision.
99
If a property is subdivided after an oil and gas lease has been entered into, and a well on one portion is draining the interest on another portion, does the owner of the drained portion have a claim against the common lessee for breaching the covenant to protect against drainage on his portion?
NO, the covenant against drainage only protects the property as a whole, not subject to the subdivision.
100
What is a community lease?
When two or more contiguous property owners enter into a single lease covering all of their property.
In Texas, this creates an IMPLIED pooling agreement.
101
Community Lease Hypo:
Kyle owns 30 acres and Kenny owns 10 contiguous acres. Kyle and Kenny sign a single lease for the entire 40 acres to Big Oil with a 1/8 royalty. Big Oil drills a well on Kenny’s 10-acre tract. The lease is silent on the issue of how royalties are to be distributed. Who gets what?
In the community lease, the lessors share royalties in proportion to their ownership interests.
102
What are the general rules to remember regarding fractional interests?
1) Deeds are construed against the Grantor. If a deed is ambiguous, Grantor usually loses
2) The "Four Corners" Rule requires that courts try to harmonize all the clauses in a deed to give effect to each clause
3) Courts read the terms of deeds very literally. So, for example, there is a difference between the "land conveyed" and "the land described".
103
What is the Duhig Doctrine?
In a three-or-more party chain of conveyances in which the Grantor seemingly conveys more than 100% of the mineral or royalty interest, the Grantor will bear the loss.
104
Duhig Hypo:
Kyle deeds Blackacre to Clyde, reserving a 1/2 mineral interest. Clyde deeds Blackacre to Wendy, reserving a 1/2 mineral interest. Who owns the minerals?
Kyle owns nothing, and will be estopped to deny the conveyance.
105
What interest is created in the following language:
“Oil, gas, and other minerals produced and saved.”
Royalty interest
106
What interest is created in the following language:
“Oil, gas, and other minerals in, on, or under [Blackacre].”
Mineral language
107
What interest is created when royalty language and mineral language is mixed?
In Texas, a mixture of these terms indicates that a mineral interest was created.
108
Language hypo (assuming 1/8 royalty):
Stan conveys to Kenny “1/2 of all the oil and gas royalties” on Blackacre.
Kenny has a royalty of 1/2 of 1/8
109
Language hypo (assuming 1/8 royalty):
Stan conveys to Kenny “1/2 of all the oil and gas produced, marketed, and saved.”
ROYALTY language = 1/2 of 1/8
110
Language hypo (assuming 1/8 royalty):
Stan conveys to Kenny “1/2 of all the oil and gas in, on, or under Blackacre.”
Mineral language = Kenny owns 1/2 of mineral estate as a cotenant
111
```
Language hypo (assuming 1/8 royalty):
Stan conveys to Kenny “1/2 of all the oil and gas in, on, or under and that may be produced” from Blackacre.
```
MINERAL language = 1/2 as cotenant
112
What are the three public objectives regulated by the Railroad Commission in Texas?
1) To prevent waste and maximize recovery of oil and gas
2) To protect correlative rights by giving all owners in a common reservoir the opportunity to recover their fair share of the minerals
3) To protect the environment
113
What are the methods the RRC uses to prevent waste and protect correlative waste?
1) Drilling permits and spacing rules
2) Prorationing rules
3) MIPA and compulsory pooling
114
What is the rule for Drilling Permits and the Spacing Rule?
A drilling permit is required before any well can be drilled.
The State's spacing rule requires that the applicant have a minimum of 40 acres to drill.
115
What are the exceptions to the Spacing Rule?
A small tract owner can get an exception to the spacing rule if:
1) Confiscation is proven, and
2) Subdivision: the small tract was subdivided by deed before oil and gas was discovered in the area or before the land was leased. Subdivisions into small tracts that occur after oil and gas is discovered or after the land was leased are voluntary subdivisions and are not entitled to a confiscation exception
116
What is prorationing?
The RRC regulates the maximum amount of oil and gas that wells can produce—both to prevent waste from the premature dissipation of reservoir pressure, and to protect correlative rights, i.e., to assure that each operator or interest owner has the chance to receive his fair share of production.
117
What is the Mineral Interest Pooling Act (MIPA)?
In fields discovered after March 8, 1961, the RRC can force owners to pool, i.e., share production from a reservoir. This compulsory pooling power preempts the Rule of Capture. It operates much like the default rules for allocating royalties in voluntary pooling agreements, with each interest owner getting a share roughly proportional to the relative size of her interest.
118
When is MIPA triggered?
1) MIPA applies only to fields discovered after March 8, 1961;
2) FAIR AND REASONABLE OFFER: Owners seeking compulsory pooling under MIPA must first make a fair and reasonable offer to pool voluntarily.
(Standard: Fairness always judged from the standpoint of the party being compelled to pool, at the time of the offer)
119
If a lease existed on 40 acres of land before 10 acres were conveyed to X, does X have the right to any royalty under the common law?
What can X do?
No, because the non-apportionment rule applies. The land was subdivided after the lease.
X can use MIPA to force pooling, if he makes a fair and reasonable offer first.
120
Can the RRC compel pooling on its own motion?
NO, only private parties can apply for MIPA pooling.
121
Can MIPA be applied to a land owned by continents?
NO, MIPA cannot be used to pool cotenants, only separate tracts.
122
What is the policy for plugging wells?
Abandoned and improperly plugged wells pose serious hazards to the public and tot the environment. Statutes require that operators plug their wells properly, but sometimes operators go bankrupt or otherwise fail to do so.
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What three parties will the RRC enforce a duty to plug?
1) Operator
2) Non-operator who owns a working interest
3) State of Texas
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What is the operator's duty to plug?
The first line of legal responsibility is in the operator, defined as the person responsible for the physical control of the well at the time it is about to be abandoned.
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What is the duty to plug for a non-operator who owns a working interest?
Non-operators may have liability for well-plugging even though they never had physical control of the well.
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What is the State of Texas' duty to plug?
If neither an operator nor a non-operator with a working interest can plug the well, the State of Texas will be responsible.
The State has established an oilfield cleanup fund that can be used to plug abandoned wells and to clean up pollution.
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Who has no duty to plug?
No duty to plug is imposed on:
1) Mineral interest owners
2) Royalty owners
3) Other interested persons who do not have a working interest in the well
