Oil & Gas Flashcards

Question

Who has the right to authorize geophysical tests on property; mineral or surface owner? Where there are leases held by production; during the secondary term, where do you go; mineral owner or lessee? If tests are run, must the results be furnished to non-consenting co-tenant?

Answer 1

Mineral Owner. Mineral Owner. Statute of Anne provides for accounting or profits only; this has no profit expectation

Answer 2

COA: must show Physical Invasion (must be surface/subsurface entry b/f there is liability); no liability for a subsurface fracture that starts on one’s property and subsequently affects property of other owners & Damages: diminished value (the difference in value before and after trespass); speculative value then award nominal damages; can get diminution in speculative value by trespassing and drilling a dry hole by Exclusion: both co-tenants have right to be on the whole land; one co-t or lessee tells another co-t they have the exclusive right to explore for and produce

Answer 3

Must show: publication must be false must suffer injury (show actual damages) show malice (free of spurious claims that may adversely affect the value of property); SOL - run at time of publication; some Js on time of notice; Damages: TX: must have actual or frustrated sale (diff. in K price before/after) OK: recover on evidence of slander kept purchasers at bay

Answer 4

Trespass damages are diminished value; may bring a claim for conversion (exercise dominion or control over someones real property); ejectment (profits) GFT: comes onto the land, begins producing while having an honest belief they have the right Subj: honest and reasonable belief Obj: consider surrounding circumstances then validity Measure of Dam: Tresp. entitled to remove equipment but cannot destroy the productivity of well; pay the value of what I took minus my cost, a fair royalty which is what you would pay if you had done it the right way BFT: comes onto land and produces while in bad faith; may do so through getting into another persons formation under their land; not allowed to recover damages; gets all money and doesn't get to offset any cost Punitive Damages

Answer 5

this is ownership, and it’s calculated on the standard in which I guarantee to you that we can successfully defend the title Recov. failure of title at surface then lose surface cov. of title in O&G then recover from lessor the amount paid for title plus interest Good Faith Trespasser conveys to Good Faith Purchaser: owners may sue gfp under conversion, but gft gets to deduct costs

Answer 6

1: good faith purchaser purchases from the good faith trespasser; the good faith purchaser is also a converter (trespasser); if the true owner decides to sue the good faith purchaser for trespass (conversion); the purchaser would be allowed to deduct costs of its vendor good faith trespasser 2: true owner decides to sue the good faith purchaser; he will not get to deduct costs if he purchaser from a bad faith trespasser

Answer 7

relates to surface owner (severed/not-severed); Un.Sev.: AP of surface will retain title to unsevered minerals; Sev.: only obtain by mining or extracting; doesn't really apply Const. AP: color of title to whole, in actual AP to part, then give whole based on Const. AP.; limitations: many ct. const. AP for surface but not sub-surface Req.: paying royalty for period of SOL (not in OK); well located on tract (even if part of pooled unit); 7y SOL

Answer 8

Dormant Mineral Act: after 20y of nonuse the severed mineral estate will revert back to present surface owner; grace period; KS; must give then notice and 30d time to fix it, if not then its yours IE: reasonably necessary surface easement to do thing that explore for and produce; i.e.: pipes, stations; Mineral Estate is dominant and surface is servient AD: surface has pre-existing use then cannot impair or preclude the pre-existing use; mineral owner if no other choice then have no liability, but if reasonable alternative then liable for damages Restore Land: Must pay surface owner for damage & restore to original condition after production ceases; problems: remediation could cost more than FMV; some ct. allow to collect FMV plus remediation costs, but once remediation is complete the land is only worth FMV C&I: “this lease also covers and includes any and all lands owned or claimed by lessor adjacent or contiguous"; Oil co. want this to protect themselves from bad surveys AA: purported to convey all interests, and then afterward you inherit more, it will pass to the lessee

Answer 9

HC: sets the term of the lease (duration); “This lease shall be for a term of ___ years from this date, called ‘primary term,’ and as long thereafter as oil or gas is produced”; primary term: exploratory period of the oil and gas lease, no production, the lease terminates at the end of this period, and no secondary period.

Answer 10

UDC: modifies the primary term of the Habendum Clause (special limitation); “if operations for drilling are not commenced one year from the date, the lease shall terminate as to both parties, unless…” ``` Lessee 3 things: commence drilling before AD (acts on premises in good faith w/ continuing diligence); don't have to penetrate surface (preparatory activities suffice) pay delay rental payments (b/f AD): subject to CL principles of tender; must tender correct amount; late/wrong amount then automatic termination do nothing (lease terminates) ``` Change: gives 30d period and if don't receive ownership info within that period then can rely on old ownership info. Exceptions: agency, 3p, beyond control then no automatic termination waiver and reviver: lessor accepts improper tender then waived ambiguity: improper interpreation causes improper tender bc the instrument is ambitious; lessor must give lessee notice and opportunity to cure Mutual Mistake: made by both parties (acreage)

Answer 11

“commencing w/ the first day of the second year, if the lessee has not commenced drilling, or terminated the lease by surrender, then lessee SHALL pay…”; K obligation; law affords a forfeiture right (eliminates liability for prospective rental payments and obligations); paid up lease (rentals paid up front)

Answer 12

TX: Production = production in paying quantities - a profit however small over operating expenses; and you may maintain the lease into the second term; where paying quantities involves ability to market the product OK: hydrocarbon particles coming out of ground then producing; having a well capable of producing; implied covenant that lessee has to market production 2: Arithmetic standard: quantity is sufficient to warrant use in market, income exceeds cost then satisfied Marginal Well Standard: if reas. prudent operator w/ eye for making profit would hang in and continue to operate well then good. ``` Costs: Operating Cost (list cost): expenses incidental to operating a well on a daily/monthly basis (ordinary & recurring expense) ``` Sunk Cost (capital cost): involved in drilling and completing the well (establishing production, extraordinary and largely non-recurring in nature) Theory: Lessee should be able to recover as many costs as possible

Answer 13

TX: must be marketing OK: implied covenant to market Oil: may store oil in tanks to market Gas: store gas in ground and must have pipeline, or funding for one, or a long-term reserve of gas; must market wi reas. time Damages: breach of implied warranty to market wi reasonable time

Answer 14

constructive production by express language to satisfy secondary term; clause that modifies the secondary term of the oil and gas lease (habendum clause) where the payment is drafted as a substitute for production, and as the language says “while royalty is so paid, said well is held to be a producing well by language expressed hereof…” TX: no market for gas, the lessee may shut in the well and pay shut-in gas royalty payments to maintain the secondary term of the lease; BUT if there was a market available, not matter how low, they could not invoke the shut-in gas royalty clause OK: (to market w/in reasonable time in gas lease) and if you’re paying consideration as constructive production when you’re not producing, that fact will mitigate the reasonable time and extend it to a longer time period Draft: AD rolls around and payments not made Special Limitation: TX: AUTO TERMINATE AR: So long as capable of production of paying quantities then good so treat as covenant Implied Obligation to Market: lessee has a reasonable time to market, and failure to market in that time will result in a breach of the covenant and either damages or rescission as the remedy

Answer 15

Cessation of Production: production ceases for any reason, you have 60 days to commence drilling or reworking; consider factors: cause for termination, duration, lessee exercised due diligence in restoring production Dry Hole Clause: drill a dry hole, you have 60 days to commence drilling; looking at dry hole then primary term date rolls around then gives a second chance Continuous Drilling Clause: drilling at the end of the primary term, you are allowed to continue to drilling and finish the well Force Majeure Clause: frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties (strike, terrorism, sabotage)

Answer 16

3 things: power of attorney for lessee to pool lessor's interest operations anywhere on pooled unit will be treated as if the operations are anywhere on leased unit expands habendum clause & gives you benefit of constructive production that holds and satisfies the sec on term Apportions royalty btw units on surface acreage basis Req.: no vol. pooling unless pooling clause in lease must adhere to conditions and restrictions pooling must be done during primary term unless production Must pool in good faith GF: not considered bad faith when pool right before end of primary term to avoid lease termination restriction may only allow pooling after production; no restriction then can pool whenever States: TX: vol. pooling is restricted by TX spacing regulations; 1 well drilled in a geographic area; need required distances from boundary line and other well AR: prescribe sections and place unit within section then everyone within unit gets their share; maximum area that may be efficiently and effectively drained by one well Ineffective: no pooling found and lessor is entitled to all proceeds Pugh: only that part of the lease that is included in the unit shall be maintained by the unit production; severs the acreage not used; can modify both, but usually on secondary term Anti-d.: you cannot dilute the lessor’s royalty interest by pooling just part of the lease to the pooled unit RAC: divides a lease as drilling or proration units are formed, w/ the result that production from one unit propels the lease into the secondary term only as to land w/in the productive unit

Answer 17

Oil: typically (1/8); lessor has title to 1 barrel but lessee has implied obligation to market Gas: lessor has promise from lessee to pay; lessee has title and lessee markets Market Value: what a willing buyer would pay a willing seller Amount Realized: gas sold at well TX: gas purchase K is executory; sold when delivered to pipeline; sale occurs on lease then get proceeds, but if off the lease then market value OK: sale occurs when gas-purchase K is executed, so long as arms length transaction, and in good faith MV: comparable sales of gas in time, quality, quantity, and availability of marketing outlets from which you can determine what the market value is for a willing buyer and willing seller Istate: creates two monopolies; one at the production end and one at the distribution end K: promise to take it and pay and if don't then will pay anyways Recapture provision: allows them in the future to deduct a % of what they paid for and didn't take

Answer 18

HR: when lessee markets gas, any consideration lessee gets, the lessor should be entitled to their share ICM: lessee has to exercise good faith and diligence in finding a market (can't breach if there is no reasonable attainable market) lessee has to exercise good faith in negotiating a sale (highest attainable price) duty: upmost good faith and fair dealing Prod. Cost: Royalty is free of cost of production, but bears cost subsequent to production TX: gas severed at well head production complete and thus royalty owner has to attribute its fair share of marketing cost (compression, transportation) AR: lessee has to bear all cost of compression Remedies: penalties, attorney fees, interest from due date; nonpayment willful then statutory cancellation of lease AP: each lessee markets their share of production and pays individual royalty owner; if royalty payment comes from another tract of land then too bad for the other land owner (ROC) weighted average basis: take 1/8 and pay not only your royalty owner but everyone with land in the unit DO: title opinion tells dispersing party of proceeds of production to whom and how much they pay; good faith paying to wrong party is not defense; cannot go after dispersing party when relied to and indemnified by the lessor party; thus lessor party will be a interpleader

Answer 19

Unleased Mineral Owners 3 Options: participate in well: tender their proportionate share of drilling and completion costs; up front unleased interest can be permanently transferred: by state to leased mineral owner in O&G lease Option to be carried: doesn't pay cost, but costs will be deducted from proportionate share of production; leased mineral owner gets a risk factor of 400-500%; carried then 1/8 WI: particpate or carried; where carried your stuck with 1/8 even though you might have 1/4 in lease R. Stat.: South AR; co-t lost or unknown; petition ct. and they will offer for sale; will hold bonus, lease, royalties in account

Answer 20

If the substance is susceptible to being extracted/commercially mined, it’s a mineral; if not, it’s part of the surface; if surface must be tore up to extract then compensation to surface owner SDT: if it is a substance that can be commercially mined, it’s a mineral; BUT, if that commercial mining will disturb, deplete, or destroy the surface, then it is not a mineral, it’s part of the surface TX: look at the substance, then look at the mineral, and if that substance is in the plain meaning of the term, then it’s a mineral and included in the grant Strohacker: if in that area, at the time of the grant, that substance would have been recognized as a mineral in legal and commercial usage, it is a mineral; if not, then it’s not; based on county standard

Answer 21

Whole: fraction designated in a deed is stated to be a mineral interest in land described in the deed, the fraction is to be calculated upon the entire mineral interest Share: fraction designated in a reservation clause is stated to be a mineral interest in land conveyed by the deed, the fraction is to be calculated upon the grantor’s fractional mineral interest except where the granting clause purports to convey the entire mineral interest

Answer 22

if there is an outstanding mineral interest, then a grantor who reserves an undivided mineral interest for themselves may lose it if they purport to convey more than they own (their reserved interest will pass straight through to the grantee) Estoppel: grantor is not the true owner, and therefore has a failure of title, then when the grantor conveys to the grantee, the title will immediately pass through the grantor to the grantee; the grantor will be estopped from asserting an interest in the reserved mineral interest AR: Duhig applies to AR warranty deeds, but does not apply to quick claim deeds (has no covenants of title); uses estoppel by deed theory Avoid: say “subject to” an outstanding undivided interest, and in addition to that, there is being reserved for the grantor, a undivided mineral interest LD: land herein described is the physical description as opposed to the fraction share of the land; get the larger share

Answer 23

* production of oil well too fast can damage the underground integrity of the oil; mix it all up and reduce the ability to remove the substance * Space wells so they are not too close together & in TX boundary lines

Answer 24

560’ ellipse is implemented; Area is calculated per ratio of land per owner within the ellipse (band aid). Joint venture between all owners.

Answer 25

herein described and conveyed conveys all they have; thus the NPRI reservation the Go makes needs to be multiplied by the interest conveyed described land will convey only what you say: thus lessor owns 1/2 mineral interest with a 1/8R on O/G lease and conveys 1/8, then 1/64 reserved.

Answer 26

O owns ½, A owns nothing, B owns ½ (This is Duhig) b/c he only had 1/2 , he could not keep ½ and convey ½; estopped from making the reservation

Answer 27

i. Who gets the bonus? Whoever has the executive right. Here that is O and B. A just has the NPRI (right to share of production cost free). ii. Who gets royalty? If Duhig applies (and we are not sure) the result is: A gets 1/16, O gets nothing, and B gets 1/16. O’s interest, but not B’s was subject to the outstanding NPRI of 1/16. Norvell thinks that Duhig should apply here. If you do not apply Duhig, A=1/16, O=1/32, B=1/32.

Answer 28

State of Title: Regardless of whether you apply Duhig: A=1/8, O and B get nothing. yes

Answer 29

Under Duhig: A=1/16, B gets 3/32; O gets 1/32.

Oil & Gas Flashcards

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