Oil and Gas Topic List

Property Rights in Oil & Gas

Rule of Capture: nonliabil for causing o/g migration across

property resulting in drainage of o/g from under another
persons land.
Limits on Rule of Capture: correlative rights demands a right
to a fair opportunity to produce o/g from a common reservoir
under their property.
o Rule Of Capture does not Protect:
Negligently drilled oil and gas
Illegally drained oil and gas
Can be sued by neighbor if pumping out more
than legal limit
Stored Gas
Burden: on person storing gas to show that it
was stored
Types of O/G Interests:
o Fee Simple & Severance: FS owner of prop. Owns
surface and minerals belowbut may transfer less than
entire interest through severance.
Fee simple in Mineral estate: vested possessory
interest
Fee Simple in Surface
o The Mineral Interests Rights
Development Rights: explore, produce, and
develop minerls
Executive Right: right to lease minerals
Economic Benefits: under O/G lease including:
Bonus: upfront pmnt for signing lease (dollars
p/acre)
Royalty: fractional pmnt of O/G produced free
of costs (1/8)
o Exam Tip: a sum certain is not royalty
b/c must be fractional.
Delay Rentals: compensation for deferring
drilling during primary term of lease (dollars
p/acre)
o The Dominant Mineral Estate and the
Accommodation Doctrine:

Mineral Estate is Dominant: owner of mineral

estate can use surface as is reasonably necessary to
develop O/G.
The Accommodation Doctrine: mineral owner
MUST accommodate surface owner when:
Preexisting use: by surface owner
Reasonable Alternative: of mineral owner is
less destructive
Availability: of reasonable alternative on the
leased tract.
o Interests Created by O/G Leases: fee simple that may
last forever, but could terminate if no production.
Working Interests: lessees exclusive R to explore,
develop, and produce and obligation to pay all costs
of productions
Royalty Interest: lessors share of production free
of costs
Example: Lessee gets lease for 10 years and as
long thereafter as o/g is produced.
Lessee:
o fee simple determinable (o/g is real prop)
o Working interest (expl,devlp)
o K obligations under lease
Lessor:
o Possibility of reverter
o Econ benfits of K.
o Nonparticipating Royalty Interest: right to receive
royalty pmnts that where right holder does not own the
mineral interest and cannot participate in any leasing
transaction.
Mineral interest owner can convey
surface/subsurface with a reservation of 1/2 of all
royaltiesnpri
The new owners mineral estate will be
burdened with the npri
Mineral Owner will have to remit of royalty
pmnts to NPRI owner
Mineral owner still gets bonus, delayed rentals
and specified sums
Nonparticipating Mineral Interestan
undivided mineral interest in blackacre w/ lessee
reserving executive right on all of blackacre: lessor
has a NPMI and will receive ALL economic benefits.

Divided Ownership

Concurrent OwnershipCotenancy: every cotenant may

exercise development rights w/o consent of others but must
account to them their rightful share of profits.
o Profits: revenue minus costs
Costs: Reasonable drilling/operating costs, but dry
hole costs may not be assessed against the unleased
tenant.
Note: the leasing tenants ownership percentage is
multiplied by the royalty percentage and then
multiplied by revenues.
Note: non leasing tenants ownership percentage is
multiplied by the profits which could result in more
than what leasing Tenant gets
o Ratification: the cotenant may ratify lease and get her
ownership percentage share of the royalty percentage
o Partition: partition in kind (dividing prop) is preferred over
partition by sale unless in kind partition would be
inequitable (e.g., minerals distributed unevenly).
Successive OwnershipLife Tenants & Remaindermen
o Leasing: must have the life tenant and remainderman
signing or its invalidremaindermen may enjoin
development as waste b/c she could get nothing.
o Accounting
Common Law:
Life Tenant: current income and interest
100% delay rentals plus interest on bonus and
royalty.
Remaindermen: principal of bonus and
royalty but no possession until life tenant dies.
Open Mine Doctrine: life tenant gets all the
benefits of preexisting lease in place before life
estate created.
o Mortgagor/Mortgageefirst in time (lien), first in right
Mortgage records before lease executed:
lessees interest subject to mortgage lien
O/G Lease recorded before mortgage: lease cant
be foreclosed on b/c mortgage not include minerals
as an asset belonging to mortgagor and the
mortgagee was on notice of lease.
Marshalling the assets: mortgagee must sale
surface assets first to satisfy debt before selling
mineral estate.

Otherwise: oil company should repurchase

the lease @ foreclosure.

Interference with Oil & Gas Interests

Trespass: four types of trespass against mineral rights

o Ordinary Trespass: lease
expiresinjunction/damages/punitive
o Slant Well Drilling: bottoming well below someone elses
tractinjunction/damages/possible punitive
o Drilling Dry Well: damage to speculative value b/c
wrongful lessee enters and rills a dry hole causing the
lessor to lose the lease value from putting world on notice
of dry holelost bonus
o Geophysical or Seismic Trespass: someone on adjacent
lands explores lessors land w/ seismic vibrations, and
gains info on lessors mineral potentionsue in assumpsit
mkt value of a K for the right to do seismic exploration
o Note: secondary recovery operations are not a trespass
If neighbor injects saltwater into field to repressure
her wells causing yours to drown out, this is not a
trespass but you could sue for nuisance damages
being lost oil value.
Trespass DamagesGood Faith/Bad Faith: must pay rightful
owner $$$ question is whether or not trespasser may pay
expenses of drilling from drilling income.
o Good Faith: honest and reasonable belief in superiority of
title, get credits for costs incurred in production if it
benefitted rightful owner (but not dry hole cuz dont
benefit owner).
o Bad Faith: liable for the gross value of production from
the well. (pay epxenses out of pocket)
Slander of Title
o Elements:
Publication of False Claim: of title to property
including false claims of valid lease
With malice; and
Loss of a specific sale or leasing opportunity:
by rightful owner b/c of disputed title possibility.
o Damages: difference between mkt value of lease @ time
of slander and value at trial w/ cloud removed.
Adverse Possession: key issue is whether and when the
mineral estate was severed from the surface estate.

o Possession Before Severance: adverse possessor gets

title to both
o Possession After Severance: Adverse possessor gets
title to surface
Must invade mineral estate by drilling to begin
separate act of possession

The & Gas Lease

The Granting Clause

o Purpose:
Rights given to lessor/lessee; and
Description of property
o Mother Hubbard Clause: first paragraph to pick up small
strips of land not specifically included in granting clause
b/c of mistakes in surveys.
only small strips, not large contiguous tracks picked
up.
Lease Termination Issues:
o Habendum ClauseProduction in Pay Quantities
(PPQ)
Purpose: sets forth duration of Lessees interest
Primary Term: fixed period w/ no obligation to
drill
Secondary Term: indefinite term linked to
production
Construction: construed against lessee/oil company
Paying Quantitesproduction is PPQRevenues
minus royalty pmnt minus operating costs
Must be positive number
o Common Law Exceptions to PPQ:
Temporary Cessation Doctrine: PPQ established
but sudden stoppage of well or some mechanical
breakdown wont expire lease
Factors:
o Short temporary shutdown
o Lessee acts diligently to fix
reasonably prudent operator
standard
o Due to a Mechanical breakdown or the
like
Marginal Well Doctrineseasonal peaks/lows of
production: When occasionally negative PPQ
average the yearly revenues and ask if a reasonably

prudent operator would continue to operate the well

to make a profit, not merely for speculation.
Doctrine of Repudiation: an equitable rule can
extend if lessor obstructs lessee from developing
lease.
o Delay Rental Clauses: allows lessee to delay production
during primary term for periodic pmnts of fixed amount to
lessor.
Unless v. Or Delay Rental Clauses:
determines outcomes of failure to pay delay pmnts
Unless: creates condition in the lease (fee
simple determinableterminates outmatically
or: creates covenant, no automatic
terminationlessor must sue for breach of K;
damages unpaid amount of rentals.
Late Delay Rentals: loose theory of estoppel
revives lease
Act of lessor accepting (cashing)
Lessee relies detrimentally
Notice of Assignment Clause: if notice is not
provided look for:
Acceptance of arreared late payment to revive
lease
Assignment w/o revived lease from acceptance
creating cotenancy with lessee/oil company
where new/assigned owner is cotenant (can
lease, drill, interest in profits see above)
Commencement of Drilling Clause:
e.g., if operations for drilling are not
commenced on or before [date], the lease shall
terminate unless
Commencement: depends on:
o Objective Physical Acts: done on
leased premises, e.g., building on road,
cutting down trees, or drilling water well
o Subjective Good Faith Intent to
pursue drilling operation
Defensive or savings Clauses: to hold a lease
beyond the primary term, Lessee needs PPQ. If delay
rentals are not holding the lease, lessee must satisfy
a defensive or savings clause:
Shut-In Royalty Clause: when well ceases
PPQ due to MKT conditions, lessee can hold the
lease by paying shut-in royalties. \

Dry Hole Clause: if the drilled hole is dry,

maintain lease by redrilling within stated time.
Continuous Operations Clause: maintain
lease when operations have commenced at
end of primary term, but no actual production.
Cessation of Production Clause: if well
ceases production, maintain by repairing within
stated time.
Force Majeure Clause: excuses performance
or extends time b/c of unforeseeable events.
o Note: force majeure should be written to
cover conditions or covenants depending
on if a delay rental clause is an or v.
unless clause.
Pooling Clause: allows lessee to hold several tracts
under lease with PPQ from just one well located on
one of the tracts.
Could cover less acres than total leased out
Royalty pmnt to each lessor under pooling
clause is (their pooled acres/total pooled acres)
x (1/8).
Pugh Clause: if only part of leased acreage is
pooled, the rest is severed unless lessee drills
or pays delay rentals on remainder.
NPRIs: cannot be pulled by owner having
executive right to lease.
o If pulled, the owner of the NPRI gets
royalty when oil is drilled from their NPRI
based on percentage ownership times
royalty percentage.
o NPRI owner may ratify pooling act and
get a royalty based on (percentage
ownership) (their pooled acres/total
pooled acres) (royalty percentage)
Royalty Clause
Cost-Free Nature of Royaltiesat the
well: free of cost of production but not postproduction costs.
o But not the cost of production
The Royalty Clause and Market Value:
mkt valueprice that similar minerals currently
sell for in the spot market @ time of
production.

Division Order: signed by Lessee and all

lessors, NPRIs, and working interest owners on
how to divide proceeds. Not a K or Deed
governed by its own law.
o Common Law Approach to D/O:
binding until revoked even if inconsistent
w/ leaselessor must revoke to get
correct pmnts.
o 1991 D/O Act: applies to post 1991
leases to set rules applicable to royalty
interest owners (RIOs)
D/O binding until revoked: RIO
can revoke mistaken d/o but cant
get past underpayments
D/O cant contradict lease:
invalid if so and RIO should get
past underpayments.

Implied Covenants

Standard of Performance: Reasonably Prudent Operator:

not a fiduciary standardlessor has burden to prove lessee can
recover oil and gas at a profit (including costs of drilling, not PPQ
standard).
Implied Covenant to Protect Against Drainage: lessee must
act as a reasonably prudent operator to protect against drainage
o Lessor Must Prove: Generally, expected revenues will
exceed drilling and production costs
Substantial drainage;
Lessee could drill a profitable well to offset drainage;
and
Damages.
o Remedies:
Damages: amount of royalties lessor shouldve
received
Conditional Decree: to drill or forfeit the lease
Implied Covenant to Market: O/G
o Reasonable time
o Best price realizable (.25 cents below other sales @
same day)
Implied Covenant to Develop: high burdenlessor prove a
reasonable expectation of profit from additional drilling,
regardless of where the proposed well is located.

o Note: there is no covenant to explore, but the covenant to

develop may be broad enough to require exploration.

Tile and Conveyance Issues

Executive Right: exec right owners duty to NPRI/NPMI depends

on execs conduct:
o Utmost Good Faith & Fair Dealing: usual duty owed to
NPI owners
Due Regard to NPI owners
Reasonably prudent landowner: in signing leases
o Fiduciary Standard: imposed in egregious self-dealing by
executive so that he must subordinate his interests to
those of the NPIs.
Remedy: cancellation of executive right,
cancellation of certain leases, and damages
Conduct defines this standard.
o Note: Look for Self Dealing of Executive Right Holder.
o NPM/RI Damages:
Actual damages in amount of potential lease price
Void all Ks
Exemplary Damages (punis)
Surface Owners v. Mineral OwnersThe Meaning of
Minerals:
o Minerals: O/G are minerals as a matter of law but what
belongs to surface estate?
Surface Destruction Test: if any reasonable
method of extracting the substance would destroy
surface, it belongs to the surface estate.
Nine Substances Per Tx SC are minerals
Ordinary and Natural Meaning Test: New
prospective test leave nine minerals but asks
whether substance is a mineral in its ordinary and
natural meaning.
o Two-Step Process: where lease is silent/ambiguous
regarding ownership of a substances:
Step 1: is substance one of the nine?
Building
Gravel
stone
Water
Limestone
Near Caliche
Surface
lignite
Surface
Iron Ore
shale
Sand


Step 2: if not, is the date of the ambiguous
conveyance after 1983? (not date lease will be
entered into)
Pre-1983: surface destruction test
Post-1983: ordinary and natural meaning test
Conveyancing: nonapportionment and the Community
Lease
o The Nonapportionment Rule: property divided after
lease, does not entitle the owners to apportioned royalties
but entitled to apportioned delay rentals.
What is Received When Receiving Portion of
Leased Property:
Surface estate subject to reasonable use of
lessee
Possibility of reverter to mineral rights
Right to delay rentals and royalties only from
wells on the newly subdivided and purchased
property
Covenants: apply to whole/original property under
the lease.
o Community Lease: two+ property owners in a single
lease is an implied pooling agreement
Fractional Interest Problems and the Duhig Doctrine:
o General Rules to Remember:
Deeds Construed Against Grantor/lessee
The Four Corners Rule: courts must harmonize
all clauses in deed to give effect to each clause
Courts Read Terms of Deed Very Literally:
o 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.
Conveyance of a Mineral Interest vs. Royalty Interest:
when unclear
o Royalty Language: oil, gas, and other minerals
produced and saved
o Mineral Language: oil, gas, and other minerals in, on, or
under [blackacre]
o Mixed Language: indicates a mineral interest was
created

State Regulation
Generally:
o Policy: Railroad Commission regulates for three public
objectives
Prevent waste: and maximize recovery
Protect Correlative Rights: by giving owners in
common reservoir opportunity to recover their fair
share of minerals
Protect environment
o Methods: three majors ways
Drilling permits and spacing rules
Prorationing rules
MIPA and compulsory pooling
Drilling Permits and Spacing Rule:
o Rule: drilling permit reqd before any well may drill & must
have at least 40 acres to drill
o Exceptions: for small tract owners if
Confiscation: (i.e., drainage) is proven; and
Subdivision: by deed before O/G was discovered or
land leaseddoes not apply if subdivision was after
discovery or lease.
Prorationing: RRC regs max amount of O/G wells can produce
to:
o Prevent Waste: from premature dissipation of reservoir
pressure; and
o Protect Correlative Rights: so that each
operator/interest owner has fair chance to get fair share of
production.
MIPAThe Mineral Interest Pooling Act:
o Statute: for fields discovered after March 8, 1961, RRC
can force owners to pool and preempts Rule of Capture.
o Rules to Trigger MIPA:
Timing: field discovered after March 8, 1961.
Fair and Reasonable Offer: owners seeking
compulsory pooling must first make a fair and
reasonable offer to pool voluntarily.
Standard: fairness judged from standpoint of
partying being compelled to pool, at time of
the offer.
Plugging Wells
o Policy: operators must plug wells properly to protect
environment.
o Duty to Plug: falls in the below order

Operator: person responsible for physical control of

the well at the time is is about to be abandoned.
Non-Operator Who Owns a Working Interest
State of Texas
o No Duty To Plug: if you do not have a working interest.