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Flashcards in Oil & Gas Deck (78)
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1

A landowner who owns the land in fee simple absolute owns two separate estates. What are they?

1) Surface Estate

2) Mineral Estate

2

How much did a landowner own at common law?

The AD COELUM DOCTRINE states that the owner owns the airspace above the surface, and all the subsurface to the center of the Earth.

3

Can the surface estate and the mineral estate be split?

Yes. They can be severed.

4

What is the Texas rule as to what a landowner owns?

OWNERSHIP-IN-PLACE THEORY - Texas follows this. Provides that mineral interest owners actually own the minerals under their tract; but, ownership is subject to the RULE OF CAPTURE.

5

What is the Rule of Capture?

States that anyone who LEGALLY OR LAWFULLY drills on their own property owns ALL MINERALS THAT ARE PRODUCED from their well (INCLUDING MINERALS THAT MAY HAVE COME FROM ANOTHER'S TRACT).

6

Although the Rule of Capture is the basic rule in Texas, what are its limitations?

1) It does not apply to personal property (oil and gas that has already been extracted);

2) Limited by the doctrine of Correlative Rights - Correlative rights means that everyone is entitled to their FAIR SHARE of production from a reservoir and NO ONE CAN NEGLIGENTLY DAMAGE THE RESERVOIR;

3) Police Power - Governmental, state, and city regulations may also limit the Rule of Capture; AND

4) The Rule of Capture is limited by NEGLIGENCE.

7

T/F - Mineral interests are highly fractionalized and several people can own a mineral interest in the same tract.

True

8

T/F - A conveyance will generally convey the greatest amount possible, unless it is severed or reserved from the conveyance.

True

Thus, a deed conveying real property will pass the entire estate (surface and mineral, including all characteristics) unless it is severed.

9

What are the four characteristics (bundles of sticks) of owning a mineral interest?

1) Executive leasing rights - a mineral owner has the exclusive right to enter into an oil and gas lease to develop the minerals. This does not violate RAP;

2) Exclusive right to develop the minerals under your tract;

3) Ingress and egress - The right of ingress and egress is known as the Dominant Estate Theory, which states that the mineral owner may enter the surface estate and use as much of the surface estate as is REASONABLY NECESSARY to develop the minerals underneath that tract.

4) The right to RECEIVE MONETARY LEASE BENEFITS.

10

What are the limitations on the right of ingress and egress?

1) Reasonableness;

2) Use of the surface tract must benefit the materials DIRECTLY UNDER that surface tract;

3) The terms of the lease; AND

4) THE ACCOMMODATION DOCTRINE

11

What is the Accommodation Doctrine?

States that a mineral interest owner must accommodate the surface owner's use IF:

1) There is a SUBSTANTIAL interference;

2) With a PRE-EXISTING USE; AND

3) There are ALTERNATIVE METHODS to develop the mineral acreage in question.

12

What is a Royalty interest? What are the different types?

A share in the production FREE OF PRODUCTION COSTS.

The three types are:

1) Landowner Royalty - proportionate share of the gross production of minerals, free of production costs;

2) Non-Participating Royalty (NPRI) - a royalty interest CARVED OUT of the land owner royalty interest (ONLY rights are to royalties / NOTHING ELSE);

3) Overriding Royalty (ORRI) - Carved out of the LESSEE'S REVENUE INTEREST (the oil company's revenue interest).

13

What is the name of the interest granted to the lessee under the terms of an oil and gas lease? Is it like a royalty interest?

This is the LEASE HOLD INTEREST, also known as the WORKING INTEREST.

It DIFFERS from a royalty interest in that the leasehold interest BEARS ALL COSTS AND RISKS associated with drilling the wells.

14

How does "trespass" operate on a mineral estate.

There are three common instances of trespass in oil and gas law:

1) Ordinary Trespass - unlawful drilling into another's mineral estate. If minerals are actually produced, then a claim for trespass AND CONVERSION will arise;

2) Slant Well Trespass - drilling from one tract into and under an adjacent tract without permission;

3) Geophysical Trespass - gathering geophysical data DIRECTLY from under the tract without permission.

15

What are the damages that are available for a trespass claim on the mineral estate? What if an oil & gas lease is in place?

The amount of damages for a trespass will depend on whether the trespasser acted in GOOD FAITH OR BAD FAITH:

1) Good Faith - If trespasser has acted in good faith, but has unlawfully produced minerals, then the mineral interest owner would be entitled to receive the FAIR MARKET VALUE of the minerals produced, VALUED AT THE TIME OF THE PRODUCTION. HOWEVER, the good faith TRESPASSER will be entitled to recover the COST TO DRILL THE WELL.

2) Bad Faith - If the trespasser acts in bad faith, then the trespasser shall be liable in the amount equal to the FAIR MARKET VALUE of the minerals produced, VALUED AT THE TIME OF PRODUCTION. The TRESPASSER will NOT BE ENTITLED TO RECOVER THE COSTS TO DRILL THE WELL.

If an Oil & Gas Lease is in place - BOTH the lessor and the lessee have a right to seek monetary damages. A lessor's remedy is LOST ROYALTIES, while the lessee can sue for the FMV of the oil and gas. BOTH CAN SUE TO EJECT THE TRESPASSER.

16

Define Slander of Title in a mineral rights scenario.

Mineral interest owner must prove FIVE ELEMENTS:

1) Publication;

2) False Statement;

3) Made with MALICE;

4) Causing ECONOMIC LOSS (specific sale); AND

5) The owner has standing

17

How is standing proved in a Slander of Title case?

Owns the mineral interest that was affected.

18

What are the damages recoverable for Slander of Title?

The measure of damages is the DIFFERENCE of the FMV BEFORE SLANDER and the FMV AFTER SLANDER.

19

Explain adverse possession of a mineral estate.

There are two separate rules used in applying adverse possession to the mineral estate:

1) Unsevered Estate - When the minerals and the surface estate are owned by the same person: If the adverse possessor adversely possesses the surface estate, they will obtain the mineral estate at the same time.

2) Severed Estate - When Owner A owns the surface estate and B owns the mineral estate: In order to adversely possess the mineral estate, the adverse possessor must ACTUALLY DRILL AND PRODUCE FOR THE STATUTORY PERIOD OF TIME.

THE DOCTRINE OF RELATION BACK APPLIES!

20

What is the doctrine of Relation Back?

Provides that the title relates back to when the adverse possession began.

Therefore, in order to determine which adverse possession rule to apply, you must look back to when the adverse possession began to determine if the mineral and surface estates were severed at that particular time.

21

Owners of undivided mineral interests in the same tract are called ___________.

Co-tenants

22

What are the rules with regard to co-tenants?

Either party can lease the ENTIRE MINERAL ESTATE WITHOUT THE CONSENT OF THE OTHER PARTY but NOT TO THE EXCLUSION OF THE OTHER PARTY.

23

What if one co-tenant doesn't consent to the lease by the other co-tenant?

Leasing co-tenant must account to non-consenting co-tenant who is still entitled to a FAIR SHARE of production of the minerals.

24

What does it mean to "account" to the non-consenting co-tenant? What are the non-consenting co-tenant's options?

Consenting co-tenant is considered a royalty interest owner. The non-consenting co-tenant is not.

Royalty interest owner's share is free of production costs. The non-consenting co-tenant does NOT retain a royalty, but is a mineral interest owner treated as a WORKING INTEREST OWNER. As such, they must pay their pair share of the cost to drill.

Non-consenting co-tenant has three options:

1) Enter into an oil and gas lease himself and obtain a royalty interest;

2) Ratify the oil and gas lease other co-tenant created and become a royalty interest owner that way; OR

3) Do nothing and be treated as a CARRIED WORKING INTEREST OWNER (meaning he starts paying and receiving after the well pays itself / doesn't pay anything out of pocket up front until his part of the production costs are paid off).

25

How does successive ownership (life tenant and remainderman) affect an oil & gas lease?

In order to have a valid lease from a life tenant and a remainderman, the oil and gas company must obtain a lease from ALL OF THEM.

Trespass - Because remainderman does not own a possessory interest, the remainderman could not develop because of trespass.

26

What doctrine applies to life tenants of mineral interests with regard to keeping up the property?

DOCTRINE OF WASTE - Because a life estate is temporary, a life tenant CANNOT DAMAGE OR DEVALUE THE LAND.

27

How are proceeds distributed when the lease hold interest is a life estate owner? Is there an exception to the rule?

General rule - If the life tenant and remainderman execute an oil and gas lease, RENTAL PROCEEDS ARE PAID TO THE LIFE TENANT and BONUSES AND ROYALTIES DUE UNDER THE LEASE ARE PAID TO AN INTEREST BEARING ACCOUNT.

The INTEREST off of that account is PAID TO THE LIFE TENANT.

The PRINCIPLE remaining upon the death of the life tenant is PAID TO THE REMAINDERMEN.

EXCEPTION IS THE OPEN MINES DOCTRINE - States that if an oil and gas lease is effective AT THE TIME THE SUCCESSIVE OWNERSHIP IS CREATED, then ALL proceeds under the oil and gas lease are to be PAID TO THE LIFE TENANT for so long as the lease remains effective.

ONCE THE LEASE TERMINATES OR THERE IS AN EXTENSION OF THE EXISTING LEASE (considered a new lease under Texas law), THE GENERAL RULE APPLIES.

28

Co-tenants have a legal right to partition. What is required to partition?

1) Joint ownership;

2) Possessory interests;

3) Equal dignity (same type of interest / not quantity); AND

4) The ownership must exists throughout the entire tract.

29

What are a court's options when co-tenants want to partition?

1) Partition in kind - equal tracts (generally applies to undeveloped tracts) OR checkerboard (generally applies to larger tracts;

2) Partition in sale - if the land is PRODUCTIVE or there is evidence that a FAIR DIVISION CANNOT BE MADE.

30

How do liens affect a mineral estate?

If a lien attaches prior to the mineral estate being severed from the surface estate (an oil and gas lease is a severance), then the lien will be considered SUPERIOR to the lease.

Example: If bank forecloses on Blackacre, and the oil and gas lease was taken after the date of the lien, the lease does not affect Blackacre.