Oil and Gas Outline, Professor Tim West, Spring 2014
I. The Rule of Capture
a. The rule of capture generally exists to show that one may bring the hydrocarbons below his land to the surface. It establishes, however, that there is no ownership of individual hydrocarbons until they are brought to the surface. As long as an extraction of hydrocarbons is performed on legally owned property, oil can be brought up to the surface even if it was technically also under the land of a neighbor (Kelly v. Ohio Oil).
i. You have the legal right to drill on your own land and have the legal right to draw up all of that oil even if that oil currently resides under your neighbors land.
b. The rule of capture greatly limits trespass claims in oil & gas law. Even if a lessee drills next to the land of another, he will still not be in violation of any law due to the rule of capture. This changes if someone is using a slant drilling method (where the drill itself would go under the land of the other party), but this is quite uncommon. An owner of neighboring land cannot sue for the value of oil or gas removed (Kelly).
i. There is also no trespass under the ground when hydraulic fracturing techniques are used (Coastal Oil and Gas Corp. v. Garza Energy Trust).
1. Trespass will require a showing of actual, permanent harm to the property. None shown in Coastal. Injury of simply taking oil and gas below you is not injury enough to sustain a suit due to the rule of capture.
2. T Sup Ct says trespass against royalty (non-possessory interest) requires actual damage and rule of capture means the trespass caused no damage
3. Didn’t go so far as to say fracing across line was not a trespass but rather was not an actionable trespass
A. Concurrence: Tresspass is altogether discounted for fracing
B. Dissent: Drainage made possible by fracing is not “natural” drainage as envisioned by the law of capture. Majority failed to consider real issue: whether fracing across lease line is trespass.
II. Limits and Obligations of Ownership
a. Limits on the Rule of Capture: The rule of capture allows for one to drill on his own land and draw gas from the land of another. However, the rule of capture is limited by nuisance, trespass, police power, and the correlative rights doctrine.
i. You must act properly and safely when drawing gas from a well. You are allowed to shoot and drill as much as you want, but you have to safely store something like nitroglycerine. It cannot be stored closely to a well (would satisfy a nuisance claim) (People’s Gas v. Tyner).
People’s Gas v. Tyner –
There was a gas well 200ft from Tyner’s home. People’s Gas wanted to shoot the well with nitroglycerin which fractures the porous rock This is not a safe operation as you are blowing up things that are inherently explosive. Tyner argues that People’s Gas having the nitroglycerin is a nuisance in itself. People’s Gas argues that it has an inherent unlimited right to get the gas under the Rule of Capture. CT HOLDS – for Tyner and states that the Rule of Capture is not so broad as to excuse a nuisance (or create a danger to your neighbor)
Note: (1) Where a nuisance argument arises apply a “balancing test” – Balance the importance having this much more gas for the public against the harm that nay be caused to others.
(2) Rule of Capture also subject to limitations imposed by a cities police powers. Example: City ordinance prohibiting the drilling of oil and gas wells within the cities watershed to prevent possible contamination to the water supply.
Fair Share Doctrine:
This doctrine applies between owners of correlative rights. Basically
it says that each operator should, within reasonable limits, have an opportunity equal to
to that afforded other operators to recover the equivalent of the amount of recoverable oil and gas underlying his property. It protects current and/or potential innocent pumpers from negligent and/or wasteful operations that injure or destroy the common source or supply. Based on production and conservation limits. An owner is only allowed to produce a certain amount of his share of the oil and gas. Neighbor also has a right to his fair share of the supply.
Wronski v. Sun Oil Co. –
Case deals with maximum extraction regulations, or allocation limits. Where a producer exceeds the allocation limits (here 75 barrels a day), a state may impose an injunction or other penalty. Issue in this case was whether the neighboring producer has a right/cause of action. CT HELD that the neighboring producer does have a cause of action under the Fair Share Doctrine. Ct held that any violation of an allocation order will constitute conversion of oil from the pool, subjecting the violator to liability to all the owners of interests in the pool.
Landowners brought action against oil company alleging that oil company illegally overproduced oil from three wells and that illegally overproduced oil was drained from beneath plaintiff’s lands. The Circuit Court, St. Clair County, Halford P. Streeter, J., entered judgment in favor of landowners for compensatory and exemplary damages, and oil company appealed and landowners cross-appealed. The Court of Appeals, Holbrook, J., held that:
(1) in absence of authority for State Supervisor of Wells to decide issues heard by trial court, doctrine of primary jurisdiction was inapplicable;
(2) evidence was sufficient to support findings that oil company systematically, intentionally and
illegally produced wells in amount over that allowed by proration order, and that one-third of such illegally produced oil was drained from property of plaintiffs;
(3) violation of proration order constituted conversion of oil from pool, and subjected oil company to liability to owners of interest in pool for conversion of illegally obtained oil;
(4) where oil company was intentional and willful converter, determination of damages by royalty method of determining value in situ and adding exemplary damages was improper, and landowners should have been awarded value of oil at time of conversion;
(5) where conversion occurred over such an extended period of time that it was difficult to fix market price of oil, highest price during period should have been utilized in computing damages, and
(6) where plaintiffs were adequately compensated by damage award, decision of oil leases was not appropriate.
Determi
-overriding royalty
-non-participating royalty
Production payment is share of production or value or proceeds, free of costs of production that terminates when agreed sum is paid
Net Profits interest is payable only if there is a net profit. Royalty is payable even where expenses exceed revenue. It is important that the parties carefully define what they mean by net profits. Like a royalty expressed as fraction or % of production and is non-operating.
Lease of Ownership Interest: Grant, Duration, and Termination
a. Leases result from the transaction between two private parties. The idea is that the lessee wants to explore without being obligated to own the land.
1. Lessee seeks the right to develop the leased land for an agreed term without any obligation to drill. If production is obtained, the lessee wants the right to maintain the lease for as long as is profitable.
2. Lessor wants the lessee to find and produce oil because will allow him to collect his royalty.
i. Hunt Oil v. Kerbaugh: The mineral estate is the dominant estate. The mineral estate has the right to use so much of the surface as reasonably necessary, but must have due regard for the surface rights. There is no right to use more of or do more to the surface estate than reasonably necessary.
1. Accommodation Doctrine: Where there is an existing use by the surface owner that would otherwise be precluded or impaired, and where there are alternatives available to the lessee, the rules of reasonable use may require the adoption of an alternative.
ii. Granting Clause: This clause sets out = the scopes of the rights granted. It must address:
1. What rights are given to use the land
2. What substances are covered (oil, gas, both?)
3. What land and what interests are subject to the lease (identify land and interests covered by the lease)
iii. Payment: 1) bonus (initial payment) followed by royalties based on oil and gas production
The basic clauses:
The Granting Clause:
I. defines what right are give by the lessor, describes the property, sometimes covers specific substances, often contains a “mother hubbard clause” which provides that the grant will cover other lands owned or claimed by the lessor in the area, even if they are not specifically described.
II. In Tex., protects the lessee against inaccuracies in a legal description caused by incorrect surveys, careless location of fences, or other such mistakes, but does not act to convey large tracts of land the parties have not chose to grant in the lease.
