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6. Trespass
A. SEE ABOVE FOR GOOD FAITH / BAD FAITH TRESPASSER RULES
B. Geophysical Trespass
I. Problem on page 79:
a. Only the mineral owner can approve this decision (this activity will provide
information about whether there are minerals below the surface)
B. Comes up in connection with top leases (lease taken while there is another lease that is purportedly
still in effect); lease still in effect = bottom lease
I. If careful in drafting top lease, will acknowledge existence of bottom lease, and note that top
lease does not become effective until the bottom lease expires
II. Without this language, then you are slandering the leasehold title of the lessee of the bottom
lease (both lessee and the lessor violating)
III. Two problems with this language:
a. When does the primary term of the top lease begin? Does it go back to the original
anniversary date? Or does it go to when the lease actually begins?
b. Rule against perpetuities if trying to challenge a top lease, would say violated RAP;
to get around in no event however, shall this interest vest, no later than 21 years
from the date of
IV. With top lease, generally pay a portion of the normal bonus with an agreement to pay the full
bonus when/if the top lease vests
C. Kidd v. Hoggett p. 108
I. Facts: Kidd (D) contended the trial court erred in awarding damages in a case to remove a
cloud on title based upon an unreleased oil and gas lease, due to the failure of Hoggett (P) to
prove malice.
D. TXO:
I. Why he likes this case: slander of title case, O&G case, S.Ct. case (not common for O&G)
II. Geologist determined lots of O&G under 1000 acre tract controlled by Alliance
a. Agreement to pay royalty and bonus was contingent upon title
III. Reviewed title that conveyed certain mineral rights in the tract to a coal operator
a. Coal company believed only rights they had in the tract was to the coal
IV. TXO gets quitclaim deed to tract from coal company
a. Sought declaratory judgment for ownership
b. Alliance claimed slander of title
V. Trial court: compensatory damages to Alliance ($19,000), punitive damages ($10 mil)
VI. Had been looking for a case to take to S.Ct. to get a link between compensatory and punitive
damages
VII. S. Court opinion:
a. Stevens opinion should be connection between compensatory and punitive
damages; could be instances where punitive so crazy that would violate due process
i. But given circumstances of this case (pattern of bad behavior, TXOs
actions), on balance, cant conclude that decision should be overturned
b. Scalia: no due process issue with compensatory damages (he views DP clause as
guaranteeing DP @ trial = fair trial; NOT DAMAGES)
c. OConnor: this is crazy! DP = cant be punished arbitrarily (like in this case)
i. Yes, conduct was reprehensible, but punishment doesnt fit the crime
IV. Pooling Clause: Modifying the Granting, Habendum, and Royalty Clauses (pgs. 413-432)
A. Pooling Clause: Gives the lessee the right to combine the small tracts or fractional mineral interests
for drilling and apportions production to each interest.
I. Dilutes royalties on paying leases: bad if you own producing property; good if you dont own
producing property.
II. In theory, can get trapped by the fact that you agree to pooling
a. Holds the lease for the entire tract not just the pooled land (because the lease cannot
be destroyed until exploration and will continue until well is done producing)
b. How to get out of this:
i. Implied covenant for the development
B. Common terms in pooling clauses:
I. Requirement that the lessee obtain the prior approval of a conservation commission or record
a declaration of pooling
II. Limitations on which minerals the lessee may pool to develop.
III. Requirements that unit production be allocated on an acreage basis among the tracts in the
unit
IV. May provide for large or smaller units by referring to the regulatory commissions
recommendations
V. Some pooling clauses contemplate pooling only for purposes of securing development
a. Exercise of the pooling power to include previously developed property may not be
authorized
VI. Many limit the size of units that may be formed, which usually bars field-wide pooling
VII. Courts have held that the lessee cannot exercise the pooling power after the expiration of the
primary term.
VIII. Courts interpret pooling clause language strictly
IX. Pooling declarations only valid as of the date they were recorded- no retroactive pooling!
C. Effect of a pooling clause:
I. Expands lease grant by giving the lessee a power of attorney to pool the lessors interests
with those of others
II. Provides that operations anywhere on the pooled area will have the same effect as if they
were being conducted on any single lease included in the pooled area (constructive
production)
III. States that lessors agree to accept a royalty that reflects their proportionate acreage
contribution to the pooled area.
D. Whether an exercise of pooling power is valid involves two issues:
I. Is the exercise in accord with the terms of the pooling clause?
a. If no, it is not effective as to the lessors interest
II. If yes, is it a good faith exercise?
a. If yes, then valid.
b. If no, implied duty of good faith is breached and lessor may have remedies
E. Amoco Production Co. v. Underwood p. 418
I. Facts: Victory Petroleum (D) entered into a pooling arrangement calculated to prevent several
of its leases from expiring
II. Rule: Pooling arrangements must be made in good faith by the lessee.
a. Pooling simply to keep leases from expiring is not a legitimate purpose.
F. Situations in pooling:
I. Pooling after production:
a. Some modern leases allow for pooling after production
b. Concerns that adding acreage after production will diminish the interest of the lessor
on the already producing property
Oil and Gas Outline Page 17
c. Cannot pool a producing lease with one that is valueless for O&G purposes- Imes.
i. Where a real necessity and purpose existed, there may be an exception
Gillham v. Jenkins, p. 425
II. Pooling immediately before primary term expires:
a. Raises doubts about the lessees good faith
i. But, does not constitute bad faith in and of itself.
III. Gerrymandering:
a. May be a factor of bad faith
b. S.W. Gas Prod. Corp. v. Seale, the court looked at other evidence of bad faith
i. A considerable portion of the tract to be pooled was NOT potentially
productive; and
ii. Obtaining a new lease for the nonproductive tract to be pooled in return for a
promise to pool permitted Hayes to protect his lease block from competing
fringe wells.
A) Johnson was going to give a lease in return for an agreement to pool
his nonproductive land with Seales productive land- Seales interest
is unfairly diluted by Johnsons
IV. Pooling for Exploration and Orderly Development:
a. Exploratory units: Created by a lessee of multiple leaseholds within a prospect area
to unitize all leases to from a single exploratory unit
i. Usually created where some of the unit leasehold acreage consists of federal
land
A) BLM must approve exploratory pooling involving federal lands
ii. Allows lessees to develop a wildcat area where drilling and development
costs are high w/o risking the threat of competition.
V. Limits on Pooling:
a. Anti-Dilution Provisions: Seek to protect lessor by limiting the extent to which the
lessors royalty can be diluted by pooling
b. Pugh Clauses: At some point in time (any defined point of time) all of the lands
under the lease not part of a producing unit will come back to the lessor.
c. Retained Acreage Clauses: Divides a lease as drilling or proration units are formed,
with the result that production from one unit propels the lease into the secondary
term only as to land within the productive unit.
VI. Estoppel:
a. Where the lessee either acts beyond the scope of the pooling clause or does not act in
good faith, the lessor may, by his conduct, be prevented from contesting the lessees
actions.
G. Division Orders: An authorization to one who has a fund for distribution from persons entitled to the
fund as to how it is to be distributed (lays out how royalties will be disbursed to interested parties)
I. All parties entitled to production by %
a. Better add up to 100%!
II. Once you sign a division order (agreeing to what you own), it is binding until it is revoked
III. Cant use division orders to amend leases.
4. Allowables
A. In many states, the conservation agency does NOT set general proration unit allowables
I. In these states, except for exception wells, production is still governed by the rule of capture
(Colorado included)
B. To assure the maximum recovery of oil, well production may be restricted to a maximum efficient rate
of recovery (MER)
I. The most efficient rate at which a well can produce without impairing the efficiency of
reservoir drive with consequent physical, underground waste.
C. To prevent inefficient dissipation of gas, some wells in a field may be assigned smaller than normal
allowables
D. Payout occurs when the proceeds of production attributable to working interest owners are
sufficient to cover drilling and completion costs
I. To allow for more rapid recovery of these costs, new wells may be assigned higher
allowables until payout is reached
E. Allowables may be transferred to other wells when transfer would help to conserve reservoir energy
or to protect correlative rights
F. Commissions often need to curtail production from wells with high gas-oil ratios.
G. Pickens v. Railroad Commission p. 164
I. Facts: Pickens (P) and other owners of land in an oil field contended that the Commissions
(D) order prorating the amount of oil which could be produced by each owner was
unreasonable because it failed to protect their correlative rights
II. Issue: Is a proration order fixing the rate at which various owners of oil in an oil field can
produce valid where it is reasonably supported by substantial evidence? HOLDING: Yes.
III. Rule: A proration order fixing the rate at which various owners of oil in an oil field can
produce is valid where it is reasonably supported by substantial evidence.
H. Denver Producing & Refining Co. v. State p. 169
I. Facts: Denver (P) believed that the production limits set by the State Commission effectively
penalized high gas-oil ratio wells and thus did violence to correlative rights.
B. Business structures
I. What are three things that the international O&G investors would be primarily interested
about?
a. Political stability:
i. In Kazakhstan, they have had the same president since the 1980s
1) This signifies a great deal of political stability, which is good for
business
2) However, if you want democracy, this is not the place to go
b. Being able to transport the oil out of the country:
i. Also known as ways to get your O&G to the market
ii. Greatest concern: limited routes through Russia
1) Currently proposing the construction of alternate pipelines through
other countries and under the Caspian Sea
iii. Example of another country facing problems of getting oil to the market:
South Sudan they have a lot of oil, but because they are landlocked, there is
no way to actually get the resources to the market
c. Economic stability:
i. Also known as security of property rights this is why we have contracts
ii. If expropriate, have to pay just compensation for it
iii. Concession agreements usually from the government itself, like a lease in
the US right to explore in that country
1) Joint operating agreement with multiple parties national company,
other operators often done on a JOA form, but much longer (70
pages) but out by AIPN
F. Litigation
I. Complicated by the fact that usually dealing with parties in other countries communication
is much more difficult (easier with the internet, but still shitty)
II. Also have to litigate in someone elses courts how much do you trust another court?
III. Disputes fall on a spectrum:
a. Duels/wars litigation arbitration/mediation (ADR) dispute avoidance (building
relationships and knowing what youre getting into) prayer
b. Internationally, would prefer arbitration over litigation
i. Issues: where do you arbitrate? Whats the arbitration body?
ii. Usually quicker and cheaper than litigation
IV. Why put an arbitration clause in an international agreement?
a. There is no appeal from an arbitration award = final AND enforceable (specifically
on foreign parties in most countries under the 1958 UN Convention)
WHEN YOUR LEASE OR OVERRIDING LESSEE HAS OBLIGATION TO BEAR ALL POST-
PRODUCTION COSTS NECESSARY TO PUT THE GAS IN MARKETABLE CONDITION (IE IN A
PHYSICAL CONDITION THAT IS MARKETABLE FOR SALE)
OBLIGATION TO PAY ALL COSTS TO TRANSPORT THAT GAS TO A FIRST
WHETHER GAS IS IN A MARKETABLE CONDITION IS A QUESTION OF FACT
1. Landowners need to be more educated when the buy the land to know whether own minerals
required in contract
a. Title insurance companies are required to tell you if there is evidence that the surface
rights have been severed from the mineral rights
2. Mineral notification act
a. Can file a notification of ownership of mineral rights and if surface developer wants to
build on land, they have an obligation to notify the owners that developing on top of the
minerals
b. From assessors office or notification of record
3. Reasonable accommodation doctrine
a. Lessee has a duty to reasonably accommodate the surface owner in terms of where they
are locating wells. If act unreasonably, have lost the right to the accessing the surface
subject to trespass
b. Not speculative must be reasonably foreseeable
4. Colo. O&G commission
a. Requires notification to surface owner and discussion
b. Surface owner can request inspection whether reasonable accommodation & additional
measures that can be taken (not monetary issues)
5. Surface subdivided after mineral rights severed
a. Have a legal right to cross any parcel necessary in order to produce O&G
6. Unitization large area of leases treated all as one big lease
a. Own 10% of land, get 10% royalties, regardless of where the well is located
b. Consequences to landowner (may include leased lands as part of larger unit diluted
revenues; production under one = production under all hold the entire acreage) and
producer
c. Pooling smaller than unitization (more protective)
7. Terms are more negotiable than ever; royalty provisions especially most significant provision in the
entire lease
M. Notice:
I. How much do we want to tell the client to go out and investigate?
II. If they dont have constructive or actual notice do they have a duty to investigate?
a. Often will find something you dont want to know when investigating (i.e. bona fide
purchaser)
III. Prudent operator standard: check normal records