Oil and Gas Outline

Oil & Gas Law

Pifer

Fall 2014

1) Which ownership theory applies in this jurisdiction?

General rule of real property ownership –

· Ad coelom: To whoever owns the soil, he owns to the sky and all below the surface inside property lines.

· Subsurface rights are severable from surface rights.

Rule of capture: the owner of a tract of land acquires title to the oil and gas which he gets from drilling on his land, regardless of the fact that some of the oil/gas migrated from adjoining lands (without trespass) – (Kelly v. Ohio Oil)

Ownership in place theory (majority rule):

· Landowner owns all substances under the land BUT qualified by rule of capture

o Ownership can be lost by migration – both owners own oil under their land but the one loses ownership when the oil migrates to the driller’s well

Exclusive right to take (OK, LA, CA):

· Owner merely has exclusive right to take oil and gas under the surface, but there is no ownership of the oil and gas until capture

· Mineral, leasehold, and mineral rights are subject to abandonment (bc there’s no present right of possession)

o Abandonment requires intent to abandon and extended period of abandonment

2) What limits apply to the rule of capture?

Correlative Rights – Those rights of each landowner, lessee, or operator in the common source of petroleum.

· Each common owner of formation has a right to protection from negligent damage to the producing formation

o The rights are limited by corresponding duties to the neighboring operator. The duties are to not take an undue amount of the petroleum or to do injury to the common supply. Operation and production is to be carried on only in such manner or amount as not to harm the rights of the others.

· The right to develop one’s own mineral interest must be exercised in a manner that does not unreasonably interfere with rights of others over a common pool.

· One producer of gas can enjoin a production technique used by another where that technique injuries or destroys the common source of supply. (Manufacturer’s Gas & Oil v. Indiana Natural Gas & Oil.)

· Negligence that caused well blowout and burn of large amount of oil and gas in common supply entitled adjoining owner to recover from Texon. Rule of capture doesn’t protect where hydrocarbons are wasted rather than sold or used. (Elliff v. Texon Drilling Co.)

· Offset drilling rule: a landowner is free to drill as close to the property line as he wishes and that the remedy for the neighbor is to drill an offset well

o “[E]very landowner or his lessee may locate his wells wherever he pleases, regardless of the interests of others. (Barnard v. Monongohela Natural Gas)

· A producer may resort to the use of all known lawful modern machinery and appliances, no matter how injurious to his neighbors (Jones v. Forest Oil)

Fair Share Doctrine

· Under the “fair share” principle, each owner of minerals in a common source of supply has the right to a fair chance to produce oil & gas from the reservoir in the proportion to the quantity of recoverable oil & gas under the owners land has to the quantity in the entire reservoir. à to prevent reasonably avoidable drainage of oil and gas across property lines that is not offset by counter drainage.

o Willful conversion damages à D is liable for value of oil at time of conversion with no deduction for D’s expenses incurred or improvements. If imposing these damages, court can’t also impose punitive damages.

o Innocent/non-willful conversion à D can deduct expenses from damages.

Nuisance

· Company can’t operate in such a way as to be a nuisance to a neighbor (Damages & injunction for neighbor if damages inadequate) – People’s Gas v. Tyner

Waste

· a person’s dominion over natural gas lawfully extracted is absolute, even to waste (legislature must act to prevent waste) BUT, “He must not disregard his obligations to the public, he must not disregard his neighbor’s rights.” Hague v. Wheeler

Conservation Orders

· Rule of capture doesn’t provide escape from liability for violations of valid conservation orders. (Wronski v. Sun Oil)

· Statutes designed to prevent physical and economic waste of resources.

· Work in tandem with correlative rights and fair share doctrine

· Well-spacing rules: limits the number of wells that can be drilled in a given area (prevents overdrilling and to prevent drainage from one tract to another)

o Majority rule – Spacing units can’t extend beyond the limits of oil/gas pool (bc then owners of non-productive portions could confiscate the fair share of the owners of productive portions on unit).

o Exceptions – to protect correlative rights of owners against drainage or to prevent waste

· Production Regulation/Prorationing Rules – limits on amount of production (daily, weekly, monthly) to ensure maximum efficiency, fair share, etc.

Escaped Hydrocarbons (Oil & Gas can only be “captured” once)

· Once captured, gas remains property of whoever captured it until abandoned – mere loss of possession doesn’t not cause loss of ownership.

· Gas that was previously captured leaked out of refinery and a nearby landowner dug trenches and pumped out the leaked gas – neighbor was liable for conversion, rule of capture provided no protection (Champlin Exploration v. Western Bridge & Steel)

· when previously extracted oil or gas is subsequently stored in underground reservoirs capable of being defined with certainty and the integrity of said reservoirs is capable of being maintained, title to suc