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Oil and Gas
South Texas College of Law Houston
Jones, Michael P.

Mike Jones, Oil and Gas, Fall 2011

CHAPTER 1: INTRODUCTION

Del Monte Mining v. Last Chance Mining: if you own the surface you own to the center of the earth below it. “Whoever had the fee of the soil owned all below the surface”

– This is a real property interest.

Hammonds v. Central Kentucky Natural Gas: (obsolete) but this case says that when oil/minerals is returned to the earth it becomes ferae naturae. Because it was ferae naturae, when they put it back in the earth it couldn’t be P’s property because it was everyone’s property.

Lonestar Gas Co. v. Murchison: LSG produced gas and then injected back into a reservoir that slightly overlapped on D’s land. D then started producing gas while claiming that the gas was ferae naturae, citing Hammond. This court says that Hammond is stupid and holds that the owner does not lose title by storing the same in an underground reservoir unless it is abandoned.

– So this is an exception to the Rule of Capture

– Rule of Capture which says: if you put a well in your property and operate it properly and within regulations, you are not liable for liable O/G that you drain from adjacent properties.

– You have equal rights to the same thing beneath your feet. “Go and do likewise.”

Rule Synthesis: you the surface and all the property underneath it, but only subject to the rule of capture which says (in this context) that you are not liable for O/G you drain from an adjacent tract. An owner, however, does not lose title by storing already captured O/G in a reservoir unless it is abandoned.

Humble Oil and Refinery Co. v. West

– West has royalties for gas recovered by Humble. Humble wanted to inject extraneous gas into the reservoir before it was depleted to preserve it as a storage reservoir for later. If Humble did not do this nearby water would fill the vacuum.

– May the West’s enjoin Humble from injecting gas in the reservoir until all recoverable native gas has been produced? No.

– Because Humble had commingled the gas they had to keep track reinjected gas (to preserve the reservoir) and new production (on which royalties are paid)

– Policy reasons for denying injunction: that reservoir was a backup facility for emergency use and peak times (winter months when people turn on the furnaces)

– If they granted the injunction Humble (Exxon) would pay West indefinitely because they would put gas in and keep paying royalties forever.

– Humble bought from the Wests all the land, which of course includes everything below it.

People’s Gas Co. v. Tyner

Police power can limit the rule of capture. PCG could normally shoot their well to increase flow, thereby taking from adjoining properties under the rule of capture. However, they were limited by the law which was put in place to limit blasting to safe levels.

– Rule of Capture permits artificial increase of flow as long as it complies with police power, doesn’t create nuisance, etc.

Elliff v. Texon Drilling Co.

– Rule of Capture is further limited by prohibiting negligent waste or destruction of O/G.

– Correlative Rights: the rights of owners over a common supply of hydrocarbons, i.e., a reservoir. Each oner has the right to produce his fair share of OGIP (oil and gas in place). Each must exercise his right with some regard to the rights of others.

Coastal Oil and gas Corp v. Garza Energy Trust (damages case, I think)

– Facts: Coastal was fracking and putting proppant across into the adjacent property, albeit 12k feet below the surface. This caused drainage from that tract.

– There is no liability for trespass or conversion when subsurface fracing projects onto an adjacent tract and causes a flow of O/G into the drilling tract.

– Why did rule of capture protect this action?

– P had ample opportunity to drill his own well (rule of capture)

– RRC is the lawful regulator of such activities

– Determining the value of O&G drained by fracking is the kind of issue the litigation process is not well equipped to handle.

– The Rule of Capture should not be changed to apply differently to fracking because nobody in the industry appears to want or need the change.

– Incorporeal property right can be trespassed against.

RULE OF CAPTURE SUMMARY

The rule of capture excuses liability for drainage from adjacent lands to a well in a legal location and legitimate operation.

Limitations:

1. Oil, once severed and not abandoned, is a personal property and not subject to the Rule of Capture.

2. The Rule of Capture is subject to the legitimate exercise of the police power of a governmental entity.

a. Tyner case: you can use nitroglycerin to shoot a well and increase flow, but not in the amount that was criminalized by statute.

b. Also statutes to prevent waste (allowables, Rule 37 and 38)

3. The rule of capture is limited to non-negligent operations.

a. Elliff v. Texon: negligent operation caused well “blowou

ee simple reverts to the grantor/lessor.

– It is a deed in place for oil and gas so you don’t own the oil and gas. You still have the right of reverter and you make your money on royalties from oil and gas but you don’t own it.

– Primary Term: the primary term exists because without it the lease would revert immediately because it nearly always takes time to develop, prospect, drill, etc…i.e., it takes a long time to produce oil. If the surface owner isn’t producing oil at the time of the signing, the estate would determine immediately.

– Maintained by either commencement of operations or delay rentals.

– Secondary Term: the extension of the lease past the primary term. The lease is held during this time by either continued production or savings clause payments.

– Defined by the habendum clause.

– Maintained by either production in paying quantities (sales and severance) OR savings clauses

Cherokee Water Co. v. Forderhause

– F executed an an oil and gas lease and never gave C the preferential right because they said it wasn’t a sale.

– “Sale” actually includes any purchase of FSD, FSA, FSSCS, etc. Any time the ME is subject to sale, lease, conveyance, etc., the preferential right to sale is implicated.

– “Lease” is a misnomer and an OGL is not subject to same rules of landlord/tenant.

– Conclusion: the OGL triggered C’s preferential right. Declaratory judgment rendered for C, giving C the option to buy the mineral estate.

Concord Oil Co. v. Pennzoil

– Basically, upon executing OGL, the grantor does not own the O/G anymore, grantor owns reverter and royalty right, both real property interests.

– When the lessor owns all the ME (8/8) and executes an OGL, the lessor conveys the entire ME (8/8) but retains a possibility of reverter in the entire mineral estate (8/8). The lessor always receives all rights that are bargained for in connection with the lease, which usually include the payment of royalties, delay rentals, and bonuses.