Oil & Gas

Question 1

The __ __ __ __ limits the rule of capture and gives every oil & gas owner a right to __ __ __ __ oil & gas in a __ __ resevoir __ her property.

Answer 1

The DOCTRINE OF CORRELATIVE RIGHTS limits the rule of capture and gives every oil & gas owner a right to FAIR OPPORTUNITY TO PRODUCE oil & gas in a COMMON resevoir BENEATH her property.

Question 2

The three situtations where an oil & gas owner is protected by the doctrine of correlative rights are …

Answer 2

(1) Negligently draining oil or gas—e.g., driller on adjacent tract negligently drills a blowout that drains the common resevoir;
(2) Illegally draining oil or gas—e.g., producer on adjacent tract produces in violaiton of Railroad Comm’n order or regulation;
(3) Draining stored gas—e.g., if producer on adjacent tract produces on gas resevoir that contains stored (reinjected) gas, then storer is entitled to compensation for drainage of stored gas after carrying burden of showing how much of the drained gas was stored and not native.

Question 3

Until __, a fee simple interest in property owns __ the surface interest __ the minerals beneath.

Answer 3

Until SEVERANCE, a fee simple interest in property owns BOTH the surface interest AND the minerals beneath.

Question 4

The mineral interest owner’s rights are …

Answer 4

(1) the right to development—the exclusive right to use the surface estate as reasonably necessary explore, produce, and develop minerals;
(2) the executive right—the right to lease the minerals interest;
(3) the traditional economic benefits of an oil and gas lease (unless otherwise agreed).

Question 5

The traditional economic benefits of an oil and gas lease include …

Answer 5

(1) bonus—an upfront payment for sigining the lease, usually based on a certain amount per acre leased (e.g., $10/acre);
(2) royalty—a fractional share of any oil & gas produced that is free of production costs (usually 1/8);
(3) delay rentals—compensation for deferring drilling during the primary term of the lease;

and

(4) production payments—a fractional share of all oil & gas that may be produced that is free of production costs until lessor has received a sum certain.

Question 6

The dominant mineral estate doctrine means that …

Answer 6

… the mineral estate is dominant over a surface estate and the owner of a mineral estate may use the surface estate as REASONABLY NECESSARY to develop oil & gas.

Question 7

According to the Accommodation Doctrine, a __ __ __ must accommodate __ of the __ __ __ if __ of the following conditions are met: …

Answer 7

According to the Accommodation Doctrine, a MINERAL INTEREST OWNER must accommodate USES of the SURFACE ESTATE OWNER if BOTH of the following three conditions are met:

(1) PREEXISTING USE—the surface owner’s use was preexisting; and
(2) REASONABLE ALTERNATIVE AVAILABLE ON THE SURFACE ESTATE—the mineral interest owner has a reasonable alternative (not unreasonably costly) that is available without having to take action on surface somewhere other than the surface estate.

Question 8

Unless agreed otherwise, the traditional lessee’s interests created by an oil & gas lease are …

Answer 8

(1) a FEE SIMPLE DETERMINABLE, which is determinable on the passing of the primary term without production and without the lessee paying delay rentals;
(2) a WORKING INTEREST, which is the exclusive right to explore, develop, and produce; and
(3) an OBLIGATION TO ALL COSTS, which applies to 100% of exploration, production, and development.

Question 9

Unless agreed otherwise, the traditional lessor’s interests created by an oil & gas lease are …

Answer 9

(1) a POSSIBILITY OF REVERTER, which is a future interest in the minerals possessory only on the passing of the primary term without lessee’s production and without lessee paying delay rentals;
(2) a ROYALTY INTEREST, which is a share of production that is free of production costs.

Question 10

A nonparticipating royalty interest (NPRI) is …

Answer 10

… is created when when a mineral estate owner conveys ONLY her royalty interest to a grantee or reserves ONLY her royalty interest to herself when conveying the mineral estate; their owners DO NOT PARTICIPATE in any LEASE, but they still retain a royalty interest.

Question 11

Unless otherwise specified by conveyance, NPRIs usually do not receive rights to …

Answer 11

… delay rentals, bonuses, or production payments.

Question 12

A nonparticipating mineral interest (NPMI) is …

Answer 12

… given to a grantee when a mineral estate owner conveys part of the mineral estate and RESERVES the EXECUTIVE RIGHT (right to lease); their owners DO NOT PARTICIPATE in any LEASE, but they still retain the economic benefits of the MINERAL INTEREST (bonuses, royalties, delay rentals, and production payments).

Question 13

If a deed reads O gives A “a 1/16 royalty” on Blackacre’s mineral interest, O later leases Blackacre mineral interest to B and reserves a 1/8 royalty, and B produces, then A gets__ and O gets __.

Answer 13

A gets 1/16 OF ALL PRODUCTION and O gets 1/8 ROYALTY OF THE LEASE MINUS THE 1/16 OF ALL PRODUCTION HE PAYS TO A.

Question 14

If a deed reads O gives A “a 1/16 of royalty” on Blackacre’s mineral interest, O later leases Blackacre mineral interest to B and reserves a 1/8 royalty, and B produces, then A gets__ and O gets __.

Answer 14

A gets 1/16 OF O’S ROYALTY (1/16*1/8 = 1/128 of all production) and O gets 1/8 ROYALTY OF THE LEASE MINUS THE 1/16 of that royalty (or 1/128 of all production) HE PAYS TO A.

Question 15

Every cotenant __ drill and produce or lease his undivided share __ consent of the other cotenants.

Answer 15

Every cotenant MAY drill and produce or lease his undivided share WITHOUT consent of the other cotenants.

Question 16

If a cotenant drills and produces or leases his undivided share, he must …

Answer 16

… account to the others fro their RIGHTFUL SHARE OF THE PROFITS OF PRODUCTION.

Question 17

Profits of production are calculated as …

Answer 17

… production revenues minus production costs.

Question 18

Production costs include __ __ and __ __ costs on __ __.

Answer 18

Production costs include REASONABLE DRILLING and REASONABLE OPERATING costs on PRODUCTIVE WELLS.

Question 19

When accounting to cotenants for their rightful share, a producing or leasing cotenant __ assess dry hole costs against unleasing cotenants.

Answer 19

When accounting to cotenants for their rightful share, a producing or leasing cotenant CANNOT assess dry hole costs against unleasing cotenants.

Question 20

An unleased cotenant may __ a lease that __ __ __ __, which will …

Answer 20

An unleased cotenant may RATIFY a lease that PURPORTS TO COVER HIS INTEREST, which will convert his rightful share of profits of production to a rightful share of the lessor’s interest.

Question 21

In Texas, a cotenant has an absolute right to __ property, which is a judicial proceeding and may be done either __ __ or by __ __, but __ __ is favored.

Answer 21

In Texas, a cotenant has an absolute right to PARTITION property, which is a judicial proceeding and may be done either IN KIND or by FORCED SALE, but IN KIND is favored.

Question 22

__ a life tenant __ a remainder man may grant a valid oil & gas lease without __ __ __ __.

Answer 22

NEITHER a life tenant NOR a remainder man may grant a valid oil & gas lease without JOINDER OF THE OTHER.

Question 23

Unless otherwise agreed, life tenant in a valid mineral lease gets …

Answer 23

(1) CURRENT INCOME & INTEREST—including 100% of delay rentals plus INTEREST only on bonus and royalty;

and

(2) ALL BENEFITS OF PREEXISTING USE AND LEASES—per the OPEN MINES doctrine, the life tenant takes the benefits of the property as used when she received the life estate.

Question 24

When accounting for life tenants by trusts existing before 2004 and the trust is silent as to grantor’s intent regarding distribution, …

Answer 24

(1) life tenant gets delay rentals plus 72.5% of bonus & royalty plus interest on remaining bonus & royalty;

and

(2) remaining 27.5% of bonus and royalty is reserved for remaindermen to take upon life tenant’s death.

Question 25

When accounting for life tenants by trusts existing after 2004 and the trust is silent as to grantor's intent regarding distribution, ...

Answer 25

(1) life tenant gets nominal delay rentals plus an equitable share (85% presumed equitable) of all other proceeds; and (2) remaining equitable share of all other proceeds is reserved for remaindermen to take upon life tenant's death.

Question 26

If a mortgagee executes and records before a mineral lease is executed, ...

Answer 26

... any subsequent mineral lessor's interest will be subject (junior) to the mortgage lien.

Question 27

If a mineral lease is executed and recorded before a mortgage is executed, ...

Answer 27

... any subsequent mortgage will be will be junior to the mineral lease and the lease cannot be foreclosed upon because the mortgagee-lender is presumed to have knowledge of the lease.

Question 28

According to the doctrine of marshalling the assets, ...

Answer 28

... a foreclosing mortgagee must sell surface interests and assets of mortgaged property to satisfy a debt before selling the mineral interests of the mortgaged property.

Question 29

The fourt basic types of oil & gas trespass are ...

Answer 29

(1) ordinary trespass---e.g., the lease expires, but the lessee holds-over; (2) slant-well drilling; (3) wrongful dry well---e.g., when trespassing lessee enters and drills a dry hole, the trespasser is liable to the mineral interest holder for the value (bonus money) he would have received before the world found out the field was dry; (4) geophysical or seismic trespass---e.g., the trespasser PHYSICALLY ENTERS and explores on the land.

Question 30

Respectively, remedies for the following are: (1) ordinary trespass:__; (2) slant-well drilling:__; (3) wrongful dry well:__; (4) geophysical or seismic trespass:__.

Answer 30

(1) ordinary trespass: INJUNCTION & DAMAGES (INCLUDING POSSIBLE PUNITIVES); (2) slant-well drilling: INJUNCTION & DAMAGES (INCLUDING POSSIBLE PUNITIVES); (3) wrongful dry well: DAMAGES FOR LOST BONUS ONLY; (4) geophysical or seismic trespass: TORT IS WAIVED AND SUIT IS ON ASSUMPSIT FOR THE CONTRACT THAT WOULD HAVE BEEN ENTERED INTO FOR THE MARKET VALUE OF RIGHT TO EXPLORE.

Question 31

Drainage caused from fractures formed by siesmic exploration performed on the surface of an adjoining tract or repressuring beneath an adjoinging tract is __ __ because ...

Answer 31

NOT ACTIONABLE because DRAINAGE FROM MERE FRACTURING IS PROTECTED UNDER THE RULE OF CAPTURE.

Question 32

A __ __ trespasser has an __ & __ belief in the superiority of his title and damages against him will be reduced by ...

Answer 32

A GOOD FAITH trespasser has an HONEST & REASONABLE belief in the superiority of his title and damages against him will be reduced by HIS COSTS INCURRED IN ANY PRODUCTIONS BENEFITING THE RIGHTFUL OWNER.

Question 33

A bad faith producing trespasser is liable for ...

Answer 33

... the gross value of production from the well (all revenues without subtracting costs).

Question 34

In Texas, a trespasser drilling during the pendency of a lawsuit over the land is a __ __ __, unless ...

Answer 34

BAD FAITH TRESPASSER, unless he is also a COTENANT TO AN UNDISPUTED FRACTIONAL INTEREST OF THE MINERAL ESTATE.

Question 35

Slander of title is ...

Answer 35

... a cause of action in tort resulting from: (1) publication of a false claim of title ot the property; (2) done with malice; and (3) causing the rightful owner to lose a specific conveyance opportunity about the land.

Question 36

When possession begins before surface and mineral interests severance, adverse possession of the surface gives the adverse possessor ...

Answer 36

... title to BOTH interests.

Question 37

When adverse possession begins after surface and mineral severance, adverse possession of the surface gives the adverse possessor ...

Answer 37

... title to the surface estate only; the adverse possessor must separately establish title to the mineral estate.

Question 38

In Texas, mother hubbard clauses will not be read to include ...

Answer 38

.. large contiguous tracts of land.

Question 39

The __ clause sets for the rights given by lessor to the lessee and a description of the property.

Answer 39

The GRANTING clause sets for the rights given by lessor to the lessee and a description of the property.

Question 40

A mother hubbard clause in a lease provides that ...

Answer 40

... the lease covers all land owned by lessor adjacent to the land described.

Question 41

A habendum clause in a mineral lease generally ...

Answer 41

... has a PRIMARY TERM setting out a period during which the lessee has no obligation to drill and a SECONDARY TERM which has indefinite duration normally as long as minerals are produced from the estate.

Question 42

In Texas mineral leases, a well is "producing" when it is ...

Answer 42

... producing in paying quantities (PPQ), which occurs when REVENUE is more than ROYALTY PAYMENTS PLUS OPERATING COSTS; but drilling costs are sunk costs not factored into PPQ.

Question 43

If a well is PPQ, then the lessee's failure to produce __ __ __ UNLESS ...

Answer 43

... terminates the lease UNLESS the lessee may defend under (1) the TEMPORARY CESSATION DOCTINE, (2) the MARGINAL WELL DOCTRINE, (3) the REPUDIATION DOCTRINE, or (4) an EXPLICIT SAVINGS CLAUSE IN THE LEASE.

Question 44

According to the Temporary Cessation Doctrine,

Answer 44

... a sudden stoppage of the well will not terminate a lease if (1) the shutdown is short and temporary that is (2) from a mechanical breakdown or the like that (3) the lessee tries diligently to fix.

Question 45

According to the marginal well doctrine,

Answer 45

... as long as a lessee acts as a REASONABLY PRUDENT OPERATOR, he has a reasonable amount of time (as much as 17 months) to show that a low production well is capable of PPQ.

Question 46

According to the doctrine of repudiation, ...

Answer 46

... a lessee will not be required to PPQ during the period that the lessor obstructs the lessee from developing the lease.

Question 47

A __ __ clause authorizes a lessee to delay drilling or commencing production on during the primary term of the lease by ...

Answer 47

DELAY RENTAL CLAUSE ... paying a stipulated amount to the lessor.

Question 48

If a delay renatal clause reads "If opertions for drilling are not commenced by X , the lease shall terminate unless before X lessee pays" a sum certain to lessor and lessee neither commences nor pays, then ...

Answer 48

... the lease terminates.

Question 49

If a delay rental clause reads "Lessee agrees to either dill a well or pay delay rentals during the primary term" and lessee neither drills nor pays, then ...

Answer 49

... the lease remains alive and the lessor must sue for breech of contract.

Question 50

If a lessor accepts a late delay rental payment after a lease has terminated, then ...

Answer 50

... the lease is automatically revived because the lessor is estopped from denying its validity while accepting the late delay rental payment.

Question 51

If a lessor accepts a late royalty payment after a lease has terminated, then ...

Answer 51

... the lease is not revied, unless the lessee proves the formal requirements for estoppel, ratification, or revivor (including the statute of frauds).

Question 52

"Commencement of drilling" occurs when ...

Answer 52

... objective physical acts done on leased premises have been taken with the SUBJECTIVE INTENT to pursue the drilling operation to find oil and gas.

Question 53

The traditional savings clauses in a lease are ...

Answer 53

... clauses that keep a lease alive even though the lessee is not paying delay rentals or PPQ and include: (1) Shut-in royalty clauses; (2) dry hole clauses; (3) continuous operations clauses; (4) cessation of production clauses; (5) force majeure clauses; and (6) a pooling clause.

Question 54

A shut-in royalty clause provides that ...

Answer 54

... the lessee can keep the lease alive by paying certain sums called shut-in royalties to lessor when a well capable of PPQ is shut-in for lack of a marketability (e.g., waiting for pipeline connection, waiting for better market).

Question 55

A dry hole clause provides that ...

Answer 55

... if lessee drills a dry hole, lessee can keep the lease alive by starting to drill another well on the estate within a stated period of time.

Question 56

A continuous operations clause provides that ...

Answer 56

... if the primary term ends before PPQ but while operations have commenced and were continuing, the lessee keeps the lease alive by continuing operations without cessation for a stated period.

Question 57

A cessation of production clause provides that ...

Answer 57

... if a well ceases production, the leseee can keep the lease alive by repairing and restoring production within a stated period.

Question 58

To keep a lease alive, lessees can __ their savings clauses so long as ...

Answer 58

... TACK; they do EXACTLY what each tacked savings clause requires (b/c they will be construed against the drafter).

Question 59

A force majeure clause provides that ...

Answer 59

... a lessee's performance is excused or postponed because of an unforeseeable event defined in the lease that actually prevents performance.

Question 60

A pooling clause provides that ...

Answer 60

... a lessee not PPQ on a tract may keep the lease alive by PPQ from a well on an adjoining tract it has leased and spliting the royalty from that well with the pooled lessors; lessees must exercise this right in good faith.

Question 61

A lessee who pools many leases into a gerrymandered unit with a very odd shape just days before one of the leases will expire will

Answer 61

... probably be found to have used his pooling rights in bad faith and the pooling will not save the lease from termination.

Question 62

A Pugh clause provides that ...

Answer 62

... when only part of an acreage has been pooled by the lessee, the lease will remain alive for the pooled unit and will terminate for the unpooled unit.

Question 63

NPRIs will be __ by a lessee exercising rights under a pooling clause, unless ...

Answer 63

UNAFFECTED ... unless the NPRI holder ratifies the pooling act.

Question 64

Unless otherwise agreed, a royalty based on production valued at the well gives the holder ...

Answer 64

... revenues free of production costs, but the holder must share in paying post-productions costs---i.e. dehydrating, pipeline compression, and transportation.

Question 65

Unless otherwise agreed, a royalty based on production valued by "market price at the well" gives the holder ...

Answer 65

... the price that similar product currently sells for in the spot market at the time the product is produced.

Question 66

A division order ...

Answer 66

... is a document written by a lessee informing a well's interest holders of their shares of the proceeds, which the interest holders will balance for themselves.

Question 67

Generally, division orders are __ __ __ , and interest holders paid under nonrevoked direct orders __ __ underpayments UNLESS the division order was executed before __ and __ the lease.

Answer 67

Generally, division orders are BINDING UNTIL REVOKED, and interest holders paid under nonrevoked direct orders CANNOT RECOVER underpayments UNLESS the division order was executed before AUGUST 26, 1991 and CONTRADICTS the lease.

Question 68

A payor on a division order can without payment only if...

Answer 68

(1) the payor has a reasonable doubt or dispute about title affecting distribution; OR (2) the payee refuses to sign the direct order, the direct order does not contradict the lease, and the direct order includes (a) an effective date, (b) a property description, (c) a fractional or decimal interest and type of interest claimed by payee, (d) authority to suspend payment for title disputes, and (e) provisions for valuation of settlements.

Question 69

The implied covenants in oil and gas leases are ...

Answer 69

(1) implied warranty of reasonably prudent operator standard of performance; (2) implied covenenant to protect against drainage; (3) implied covenant to market; and (4) implied covenant to develop.

Question 70

The implied covenant to protect against drainage requires ...

Answer 70

... that a lessee act as a REASONABLY PRUDENT OPERATOR to protect the leased premises from (1) substantial drainage that (2) the lessee could have offset by drilling a well profitable enough to PPQ and cover drilling costs (b/c lessee forced to drill).

Question 71

The implied covenant to market requires ...

Answer 71

... the lessee to market oil and gas as a reasonably prudent operator would (1) within a reasonable time at (2) the best price reasonable.

Question 72

The implied covenant to develop requires ...

Answer 72

... the lessee to develop and drill where there is a REASONABLE EXPECTATION OF PROFIT; but it DOES NOT REQUIRE EXPLORATION.

Question 73

The duty owed to nonexecutive interest holders is one of __ __ __ __ __ __, and requires the executive interest holder to ...

Answer 73

UTMOST GOOD FAITH AND FAIR DEALING, and requires the executive interest holder to ACT WITH DUE REGARD FOR THE NONEXECUTIVE INTEREST & WILLINGLY EXECUTE LEASES A REASONABLY PRUDENT LANDOWNER WOULD.

Question 74

If an executive interest holder engages in egregious self-dealing that harms the nonexecutive interest, the executive interest will be held to ...

Answer 74

... a fiduciary duty to subordinate his own interests to that of the nonexecutive's.

Question 75

The nine substances that are minerals as matter of Texas law are ...

Answer 75

(1) building stone; (2) limestone; (3) caliche; (4) surface shale; (5) sand; (6) gravel; (7) any water; (8) near surface lignite (coal); and (8) iron ore.

Question 76

For mineral conveyances before __, minerals are ...

Answer 76

BEFORE JUNE 8, 1983 ... (1) any of the nine substances defined by law; AND (2) any substance that ANY REASONABLE METHOD OF PRODUCTION would destroy the surface estate.

Question 77

For mineral conveyances AFTER __, minerals are ...

Answer 77

AFTER JUNE 8, 1983 (1) any of the nine substances defined by law; AND (2) any substance that is a mineral by its ORDINARY AND NATURAL MEANING.

Question 78

According to the nonapportionment rule, when property is divided after an oil & gas lease has been executed, ...

Answer 78

... the owners of the subdived interest are not entitled to an apportioned lease royalty payment, but they are entitled to an apportioned delay rental, and the implied covenant to protect against drainage will not apply for drainage from the former cotenants.

Question 79

If more than one estate owner enters into a lease with the lessee, then the lease will have a ...

Answer 79

... an IMPLIED POOLING effect because it is a COMMUNITY LEASE.

Question 80

The __ __ __ __ permits compulsory pooling if ...

Answer 80

MINERAL INTEREST POOLING ACT (MIPA); (1) the field is discovered after March 8, 1961; and (2) the claimant makes a fair and reasonable offer to pool voluntarily.

Question 81

The Duhig doctrine applies to ...

Answer 81

... any chain of three or more conveyances where a grantor has overconveyed his interest; because deeds are construed against grantors, the overconveying grantor bears any loss for overconveyances (including loosing title).

Question 82

Classic language creating a royalty is ...

Answer 82

... minerals produced and saved.

Question 83

Classic language creating a mineral interest is ...

Answer 83

... minerals in and under.

Question 84

Texas Railroad Commission Rule 37 requires ...

Answer 84

(1) PERMITS---a permit to be obtained before any well is drilled; (2) DIVISION---applicants for permits have at least 40 acres unless smaller tract owner can prove confiscation drainage and tract was subdivided before the land was leased or the oil was discovered.

Question 85

Texas Railroad Commission may issue rules limiting production so long as ...

Answer 85

... they prorate the limitation by the surface area acreage of the affected tract holders---e.g., owner of 40 acres surface will be able to produce four times what an owner of 10 acres surface could produce.

Question 86

The Relinquishment Act states that ...

Answer 86

... owners of land purchased from the state between 1895 and 1931 do not own the mineral interests to that land and may only exercise their executive rights to lease the minerals interests as agents and fiduciaries of the state; they may share equally with the state for all economic benefits of production, but they may not convey mineral interests (because they don't own them).

Question 87

The duty to plug wells is imposed on ...

Answer 87

(1st) operators---persons physically responsible for controlling the well immediately before abandonment or at cessation; and (2nd) nonoperators with working interests---e.g., lessees. BUT, landowners and royalty interest holders are NOT responsible for plugging.

Question 88

The Texas Railroad Commission may order well plugging upon a finding of ...

Answer 88

... POTENTIAL POLLUTION, and does not have to wait for actual pollution to occur.