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TX Oil and Gas Bar


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What is the Rule of Capture?
Non-liability for drainage (only remedy is self-help -- drill your own well and drain it back)
What are the exceptions to the rule of capture?
1) negligently drained oil and gas (eg blowout) -- can recover damages for the loss to property interests

2) illegally drained oil or gas (eg violation of commission orders)

3) stored gas (eg reinjecting gas into a depleted underground gas reservoir)
What must an owner of stored gas prove?
Owner has the burden of proof to show how much of the gas withdrawn is native gas vs injected gas.
What are correlative rights
Owner rights in relation to each other (rule of capture is a correlative right. Owners of the same Field have rights relative to each other, but NOT rights relative to separate unconnected Fields.
"O has fee simple in Blackacre (surface/minerals). O conveys to Minnie "all of the minerals in Blackacre". What does O own?
Fee simple in the surface. Surface severed from minerals estate.
"O has fee simple in Blackacre (surface/minerals). O conveys to Minnie "all of the minerals in Blackacre". What does Minnie own?
Possessory estate in the minerals which is corporeal realty. It is a presently vested, possessory estate in the minerals.
What are the rights of a mineral interest owner?
1) Exclusive right to explore, produce and develop the minerals

2) Right to use the surface estate as is reasonably necessary to develop the minerals

3) Right to lease the minerals.

4) Right to develop the oil and gas herself w/o leasing (she would receive all profits
What does M usually receive in return for a lease of teh mineral estate?
1) Bonus - upfront payment for signing the lease

2) Royalty - fractional share of O/G produced. Usually 1/8, but negotiable.

3) Delay rentals - Payment for delaying the drilling of a well after teh first year of the lease.
Does the mineral interest owner have duty to develop Blackacre?
NO! - a mineral estate is NOT subject to abandonment for non-use even if the mineral estate owner never develops the minerals.
Bigg Oil wants to do seismic exploratory work on Blackacre. Who does he need to get approval from (surface/mineral owner)?
Only need permission of mineral owner, NOT surface owner.
B/w the mineral and surface estate, which is dominant?
The mineral estate is dominant and can use the S as is reasonably necessary to develop the oil and gas.
What is the accomodation doctrine?
M-estate owner must accomodate surface uses ONLY if the following conditions are met:

1) S owner has a PRE-EXISTING use of the S.

2) The M-estate owner, or lessee, has a REASONABLE ALTERNATIVE method of developing the oil/gas which is less destructive of the existing S use

3) The reasonable alternative is available ON the leased tract (M NEVER has to go off the land to secure alternatives -- eg can't force M to get surface lease on adjacent property for slantwell drilling)
M grants a lease to Bigg Oil "for 10 years and as long tehreafter as oil and gas is produced" (in return for the usual lease benefits)

What does Bigg now own?
A fee simple determinable

- Bigg owns lal the O/G underneath the tract as corporeal realty

- Exclusive right to produce and develop, including use of the surface

- Duties both express and implied under the lease. Eg contractual duty to pay M a 1/8 royalty on oil and gas produced.
M grants a lease to Bigg Oil "for 10 years and as long tehreafter as oil and gas is produced" (in return for the usual lease benefits)

What does M now own?
1) A possibility of reverter in the minerals

2) Lease benefits of: bonus, royalty, delay rental.

3) M NO LONGER owns O/G, so M cannot drill a well and produce.
M grants a lease to Bigg Oil "for 10 years and as long tehreafter as oil and gas is produced" (in return for the usual lease benefits)

What is M's relation to S?
M is lessor, B is lessee. M in NOT a cotenant with Bigg and has NO possessory rights to actually produce and develop the minerals.
H and W own Blackacre as a homestead.

H grants a lease to Bigg Oil "for 10 years and as long tehreafter as oil and gas is produced" w/o W's permission. What result?
Under the TX Family Code, neither spouse along can convey or encumber the homestead. Therefore, O/G leases by only one spouse are invalid.

If both H/W conveyed, then it would be FSD.
What is an NPRI?
Non-participating Royalty Interest owner. M can convey the right to receive a royalty share from any production of O/G on M's tract. This conveyance is separate from any O/G lease that M might convey to a lessee.
O owns Blackacre, conveys to X, reserving "1/2 of all oil and gas royalties".

1) what has O reserved

2) What does X own?

3) Does O have the right to lease?
1) O is an NPRI

2) X owns Blackacre in fee simple burdened w/ an NPRI

3) O has no right to lease (he is now owner of a non-participating royalty).
What is the definition of a royalty?
A COST-FREE fractional share.
What is an NPMI?
Non-participating Mineral Interest. Owner of an NPMI will receive fractions of the bonus or rentals.

A NPRI would only receive royalties. Much less common to have an NPMI than an NPRI.
Weaver conveys to Barb: "Weaver grants to Barb 1/16 OF royalty on Blackacre". What does Barb get?
1/16 OF 1/8 = 1/128
Weaver conveys to Barb: "Weaver grants to Barb 1/16 royalty on Blackacre". What does Barb get?
1/16 of the production - Barb owns a fixed flat 1/16 NPRI
Weaver conveys to Barb: "Weaver grants to Barb 1/16 royalty on Blackacre". What does Weaver get?
1/8 - 1/16 = 1/16 (the 1/16 NPRI comes out of the 1/8 Lessor's royalty)
Weaver conveys to Barb: "Weaver grants to Barb 1/2 of all royalties on Blackacre". What does Barb get?
Half of everything Weaver negotiates (eg if Weaver negotiates for 1/8, then Barb gets Half of 1/8 = 1/16)
What are the 4 kinds of trespass?
1) ordinary trespass (eg lease expires but lessee stays on the tract

2) slant well drilling

3) geophysical or seismic trespass

4) damage to teh speulative lease value (eg wrongful lessee enters and drills a dry hole on tract and lessor loses the lease value (the bonus money) that he could have received before the world found out that his land was dry.
What are the remedies for trespass?
Ordinary trespass and slant well drilling = injunction and damages

geophysical or seismic treaspass = waive the tort and sue in assumpsit (on the contract which would have been entered into) for the market value of the right to do seismic exploration

damage to spec lease value = the lost bonus.
How have TX courts ruled on MERE VIBRATIONS?
Mere vibrations passing thorugh another's land do NOT constitute trespass when the explorer never enters upon the surface (however, those cases involved facts favoring the explorer). See pg 9 O&G barbri
Do authorized secondary recovery operations constitute a trespass?
No - not a trespass and no injunction.

TX Supreme Court has held that repressuing operations approved by the RRC do NOT constitute a trespass and no injunction will issue b/c public policy favors recovering more oil and gas. Court left open possibility of suing for damages.
What damages does a trespasser owe?
Depends on whether trespasser is found to be a good faith or bad faith trespasser.

Did trespasser have an "honest and reasonable belief" in the title to the minerals?

If bad faith, no credit for costs (eg exploration, drilling)

If good faith, credit for reasonable costs that benefited Rightful Owner (eg no credit for dry holes).
What rights does a cotenant have drill?
Cotentants may drill w/o the consent of other cotenants. Cotenant must account to the other cotenants for their share of the profits from production.
What is the general rule of adverse possession?
Adverse possession of the surface of an unsevered estate picks up the unsevered minerals also.

If S and M are severed, then adverse possessor only gets the surface.

Look to see whether S&M estates were severed at the BEGINNING of the adverse possession
How can an adverse possessor of a severed S & M estate get adverse possession of the M estate?
Actively drill the severed mineral estate.
Can a Lessee who produces under a lease that has expired acquire title to the lease by adverse possession?
Yes. An oil/Gas lease grants a deed to a FSD. This FSD is a possessory interest in real property and can be adversely possessed if all the statutory reqs are met. (See BarBri O/G Outline pg 11)
What is the general rule for cotenancy?
Every cotenant can drill and produce or lease his undivided share w/o the consent of the otehr cotenants, but must account to the others for their rightsful share of the profits from production.
What costs are included in calculating profit?
Costs include all reasonable drilling and operating costs ON PRODUCTIVE WELLS.

EG - Dry hole costs are not included when calculating profit of unleased cotenants.
Can a co-tenant enjoin another cotenant from leasing, drilling and producing?
NO - Absolutely NOT!
If an unleased cotenant does NOT want to wait a year or more to recoever 1/4 of the profits from a well, what can they do?
Ratify the lease. By ratifying the lease, they become a Lessor under the lease and share the royalty to the leased cotenant.

NOTE: If the lease only included the 3/4 that the other cotenant owned, the 1/4 cotenant would NOT be able to ratify
What can cotenants do to entice development of the land?
Partition - Partition in kind is favored over partition by sale.

Partition in kind - land is split up as separately owned estates.

Partition by sale - Sell the land and give the cotenants their respective share of the proceeds.
Husband (H) dies and expressly grants: "a life estate in the minerals under Blackacre to Wife (W), remainder to Son (S)"

Can wife grant a valid lease on Blackacre?
No - life tenants cannot commit waste against remaindermen
Husband (H) dies and expressly grants: "a life estate in the minerals under Blackacre to Wife (W), remainder to Son (S)"

Can Son grant a valid lease on Blackacre?
No - he has no present interest (only a future interest)
Husband (H) dies and expressly grants: "a life estate in the minerals under Blackacre to Wife (W), remainder to Son (S)"

If W leases can son enjoin development as waste?
Husband (H) dies and expressly grants: "a life estate in the minerals under Blackacre to Wife (W), remainder to Son (S)"

If W and S join in executing a lease, is it valid?
Yes. This is the only way to get a valid lease w/ life tenants/remaindermen. They must both join in executing the lease.
Husband (H) dies and expressly grants: "a life estate in the minerals under Blackacre to Wife (W), remainder to Son (S)"

How do you divide lease benefits when the life tenancy grant is silent?
Common law uses two methods of distribution - the "common" common law and the open mine doctrine.

REMEMBER: Life tenants love the OTC (Open Mines, Trust Act, Common Law)

See pg 15 of BarBri outlines for details.

The Trust Act applies if the life tenancy is created in trust and the trust is silent about how receipts are to be allocated by the trustee b/w the LIfe Tenant and the Remaindermen. Depending on when the trust was established (before or after 1/1/2004, you will apply different Trust Act rules).
What is the rule for mortgages and leases?
First (line) in time is first in right. If the mortgage came first, then the Bank can foreclose and destroy the lease. The lessee will have to repurchase the lease at the foreclosure sale if it wants to keep the lease. However, bank will have to sell the surface assets first to try and satisfy the loan before selling the mineral estate (eg "marshalling" of assets). A subrogation clause could protect the Lessee.

If the O/G lease precedes the mortgage AND is recorded, lease cannot be foreclosed against, b/c the mortgage did not include the minerals b/c lease conveyed the minerals to the Lessee.
What is a Mother Hubbard Clause?
Purpose is to pick up small strips of land not specifically included in the granting clause b/c of Mistakes in surveys or land descriptions, or adverse possession of a strip of land b/c of misplaced fence.

Eg: "This lease also covers and includes all land owned by Lessor adjacent to the land described above."
Under the Open Mines doctrine, how are payments split among the life tenant and the remaindermen?
Whe na lease has been executed prior to creation of a life estate, the life tenant is entitled to all bonus payments, delay rentals and royalties paid under any lease in effect prior to creation of the life interest. Remaindermen get nothing

HOWEVER: If an O/G lease in force at the time of creation of the life estate expires and a new lease is executed after creation of the life estate, the open mines doctrine does NOT apply.
Under the Trust Act, how are payments split among the life tenant and the remaindermen?
For trusts BEFORE 1/1/2004:

LT gets: Delay rentals + 72.5% of bonus + royalty + interest on 27.5%

R'DER gets when LT dies: 27.5% of bonus + royalty escrowed

AFTER 1/1/2004:
LT gets: Nominal Delay Rentals + Equitable share (85% presumed equitable) of all other proceeds (bonus, royalty, shut-in royalty, Delay rentals that are more than nominal and production payments that bear no explicit interest factor)

R'DER gets when LT dies: Equitable share (15% presumed) of all other proceeds (bonus, royalty, shut-in royalty, delay rentals more than nominal, etc)
Under the Common law, how are payments split among the life tenant and the remaindermen?
LT gets: Delay rentals + interest on bonus and royalty

R'DER gets: All bonus + royalty in escrow
What is a typical Habendum Clause?
"The lease shall be for __ years from this date (called the primary term) and as long as oil, gas or other minerals are produced (secondary term)
What does "production" mean in a habendum clause?
It means "production in paying quantities" (PPQ). It does NOT include mere discovery
What are some clauses that could prevent a lease from dying as a result of not satisfying the secondary term of a habendum clause?
1) Force majeure

2) Shut-in gas royalty clause (generally, can only be paid on wells that are capable of producing in paying quantities)
What is the formula for "production in paying quantities" (PPQ)?
PPQ = Revenues MINUS the Lessor's royalty in the lease MINUS operating costs

NOTE: Drilling costs are NOT included in operating costs.
How are habendum clauses generally construed?
Generally, construed striclty AGAINST THE LESSEE
What is the Marginal Well Doctrine?
The test for a marginal well is "Whether a Reasonably Prudent Operator (RPO) would continue to operate the well to make a profit, not merely for speculation"

As long as the well is still producing some oil/gas and is not completely shut-in, Lessees have a reasonable amount of time to show that the well is capable of profitable production.
What are the key factors for the Temporary Cessation of Productoin (TCOP) Doctrine?
1) a short temporary shutdown

2) Which the lessee acts diligently to fix; and

3) which is due to a "mechanical breakdown or the like"

NOTE: Unclear whether waiting for market conditions to improve qualifies, however dictum in TX Supr Ct stated that "foreseeability and avoidability" are not essential elements of the TCOP doctrine.
What is the effect of a "cessation of production clause" upon the TCOP doctrine?
The express clause will control (eg if it says you have 60 days to commence operations, then you have 60 days).
Compare the marginal well doctrine w/ the TCOP doctrine
Marginal well applies ONLY to marginal wells, but allows them to have fairly long spells of unprofitable production as long as they are expected to return a profit in the long run

The TCOP doctrine applies to any well, but only if there is a sudden stoppage of production, and Lessee has only a short time to restore production (not more than a few months at most).
What is the difference b/w the "paid or delivered" vs "mailed or delivered" clauses of
"mailed or delivered" = if mailed before deadline, but payment arrives late, that is ok -- lease does NOT expire

"paid or delivered" = must receive payment before deadline -- lease expires

NOTE: When lease allows lessee to pay rentals to a bank, bank's errors are not chargable to the lessee. However, bank has no agency power to bind the lessor by accepting a late or incorrect payment (only to receive payments made in accordance w/ lease terms).
What is the difference b/w an "or" type of lease and an "unless" type of lease?

eg "the lease shall terminate UNLESS on or before...Lessee shall pay to the Lessor" vs "Lessee agrees to either drill a well OR
W/ the "OR" contract, if the lessee has not drilled, then lessee receives the damages equal to unpaid amount of rentals. The "OR" form is used often in CA, but not TX, and does NOT create a condition of a FSD. Nonpayment is merely breach of a covenant.
Are delay rentals a covenant or a condition in an "UNLESS" lease?
In an "UNLESS" lease, delay rentals are a CONDITION of a FSD. If the Lessee chooses not to pay the rentals, the lease expires.
What is the difference b/w a covenant and a condition of a FSD?
Breach of a covenant does NOT cause a lease to terminate automatically. The remedy for breach of a covenant is damages.
What are some of the conditions of a FSD?
PPQ, Delay Rental Clause, Shut-in Royalties

NOTE: Shut-in royalties are a substitute for having PPQ
What is the general rule as to how acceptance of Late Delay Rentals affects the status of a lease?
If the lessor accepts a late delay rental payment, the lease comes alive again, based on the loose theory that the lessor is estopped to deny the validity of the lease.
How do delay rental payments affect Notice of Assignment clauses?
If Bigg Oil pays all delay rentals in a timely matter, but fails to pay the assignee, then the lease is still alive if the assignee never gave Bigg Oil notice of the assignment.

HOWEVER...if the delay rental payment is late, then the lease as to the assignee's portion is dead (doesn't matter whether or not notice of assignment was given).
What elements are necessary to satisfy a "Commencement of Drilling" clause?
1) Objective physical acts - done on the leased premises, such as building a road to bring in the rig, cutting down trees for the platform, drilling a water well, etc...

2) Done with subjective good faith intent to continue to pursue the drilling operation to find oil and gas
How are lease clauses construed?
Against teh lessee b/c the lease is almost always drafted and printed by the lessee.
What is a pooling clause?
It allows a Lessee to hold several tracts under lease w/ production from just one well located on one of the tracts. It is a powerful defensive clause or savings clause.
How is royalty split in a pooling clause?
The royalty is split between the two lessors based on the acreage each contributed to the unit well.
If part of the land covered in a lease is not included in a pooling clause, is the lease kept alive on the entire land?
Depends on whether the pooling clause holds all the "land covered by this lease". If so, then yes. However, the royalty is limited to the acreage included in the pooling clause.
What do courts require of a pooling agreement?
Must be done in good faith (can't gerrymander a unit w/ a very odd shape w/ crappy land w/ no intent to develop just to keep lease alive).
What is the general rule regarding pooling clauses and NPRIs?
The EXEC (executive right owner, the mineral estate owner w/ the right to lease) has no power to pool the NONPARTICIPATING interests (the nonexecutive interests), even though the EXEC has teh power to lease the NONPARTICIPATING interests.

Eg if land is pooled, NPRI will only receive his interest if the well is drilled on the land respective to the NPRI. If the well is drilled on another part of the pool, then he receives nothing

See pg 26 of Barbri O/G Handout
What is a remedy available to an NPRI in a pooling agreement?
He can ratify the pooling act that was illegal as to him and receive a share of teh royalty from the adjacent well. If he ratifies, he gets his interest x royalty x proportion of the acreage compared to pooled land

NOTE: As of 1984, NPRI's could recover both PAST and future royalties once they ratify a pooling agreement.
What costs are usually associated w/ a royalty?
Royalties typically are free of the costs of production, but NOT post-production costs, such as dehydrating, pipeline compression costs and transportation. Once oil oil or gas is produced at the wellhead on the surface, lessors must share the subsequent costs.
How does the TX Supreme Court define the "market price" of gas?
The market price/value of gas is defined as the price that similar gas currently sells for in the spot market at the time the gas is produced.
What is the general rule regarding Division Orders?
Division orders are binding UNTIL REVOKED.

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