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

Oil and Gas

Michael Jones – Spring 2015

Exam: primarily MC

110 Answers

For the exam, need to know the general contents of the two oil & gas leases

· Regular Lease and Joint Operating Agreement

1. What does the royalty clause provide? Market values at the well…what does that mean?

2. What are delay rentals? What are shut in gas royalties (constructive production)?

3. What are operations?

4. What is force majeure?

5. Implied covenants; implied in fact, not lightly implied—must be obvious the parties intended to include them—implied out of necessity to effectuate the intent of the agreement.

6. Covenant to develop

7. Covenant to protect; exceptions—express provision overrides an implied covenant—except for an express offset provision not in compliance with law and delay rental will not trump duty to develop

8. Diligent operation required.

Overview of Oil and gas law in the United States

· Oil and gas rights extend vertically downward from the property line

· Unless explicitly separated by a deed, oil and gas rights, and all the minerals therein are owned by the surface landowner, unless severed

o Once severed from surface ownership, oil and gas rights may be bought, sold, or transferred, like other real estate property

Prior to and at extraction

· Unless mineral rights are severed, whoever owns the fee of the soil owns everything below the surface, limited by the extent of the surface rights (Del Monte Mining & Milling Co. v. Last Chance Mining & Milling Co.)

· Because oil and gas are fluids, they may flow in the subsurface across property boundaries

o In this way, an operator may permissibly extract oil and gas from beneath the land of another, if the extraction is lawfully conducted on his own property

§ An operator may not, however, angle a well to penetrate beneath property not owned by or leased to him – so in other words, the OG must flow of its own accord from under neighbors land

Rule of Capture vs. Correlative Rights Doctrine

· The two conflicting legal doctrines covering oil and gas extraction are the rule of capture, and the correlative rights doctrine

o Which of the doctrines applies in a particular case depends on state law, which varies considerably from state to state

§ The rule of capture gives land owners an incentive to pump out oil as quickly as possible to capture the oil of their neighbors (by legal means)

· Such practice may deplete the gas pressure needed to force oil out of the ground

o Correlative Rights Doctrine

§ Government agencies such as the Texas Railroad Commission therefore regulate extraction by individual owners

· In a way, a limit on the ROC

Ownership of EXTRACTED oil and gas

o Refined hydrocarbons that escape into the ground are not subject to the law of capture, unless evidence shows that the refiner abandoned them

o In other words, once captured, they are captured unless abandoned

§ Champlin Exploration, Inc. v. Western Bridge & Steel Col, Inc.

· Extracted oil and gas which are subsequently stored in underground reservoirs are considered as personal property, rather than as an interest in real estate

Lease

o Most often the company (the lessee) leases the mineral rights from the owner (the lessor)

o Major points in a lease include the description of the property, the term (duration), and the payments to the lessor (Royalty payments)

§ Lessees of mineral rights have a right of reasonable access to leased land to explore, develop, and transport minerals

· Unless the lease specifies otherwise (a “no-surface access” lease)

Term of the lease

· A lease remains in effect for a certain period of time, called the primary term, as long as the lessee pays the annual rental

o The lease expires after the primary term, unless drilling or oil and gas production has started on the lease

§ If production is established, the lease will remain in effect past the primary term, so long as the lease continuously produces oil or gas

· The lease can however, be revived by virtue of delay rentals

o Delay rentals are fees paid to the lessor, to delay production or commencement of drilling, without terminating the lease

§ To commence drilling a well under the habendum clause means that substantial preparations for such drilling has to be undertaken, as long as such measures have been commenced in good faith and with due diligence

Payments

· Payments to the lessor typically take three forms: bonus, rental, and royalty

· The bonus is an up-front payment made at the time the lease takes effect

· The rental is an annual payment, usually made until such time as the property begins producing oil or gas in commercial quantities

· The royalty is a portion of the value of any oil or gas produced from the lease

o In an “unless-delay rental” lease, a lessee agrees to pay delay rentals so long as the lessee is not drilling on the property

§ An “unless” oil and gas lease terminates automatically, if the lessee fails to drill within the specified time or pay the delay rentals as called for in the lease

Accumulation

o Oil reservoir – area of reservoir rock literally soaked with liquid oil & gas with ceiling cap rock to keep oil in the reservoir

o This is a trap, which prevents the oil from migrating out of the reservoir rock

§ The trap forms first

· Exploration is about finding the traps

o Faults (a break in the formation) and anticlines (an arch-like up fold) control the movement of O&G through the rock

o Exploration is the search for economic accumulations of

It affirms the right of an individual party to obtain insurance, not to protect the interests of the indemnitee

Township

surveying method for laying out property lines, each section is 640 sq acres (1 sq mi)

Surveys

Describe the land in SE TX by metes & bounds

o (Geographical and artificial markers are used to describe property boundaries)

o (Described in varas – unit of measurement equal to the distance traveled by a particular wagon wheel in Spain – 32.33” – close to a yard but not quite)

OIL, GAS AND MINERAL LEASE

TEXAS

THIS AGREEMENT made this ____________ day of ____________________________________________________________, 20______, between

___________________________________________________________________________________________________

______________________________________________________________________________________________,Lessor (whether one or more), whose address is________________________________________________________________________________ , and

______________________________________________________________________________________________ ______________________________________________________________________, Lessee,

whose address is: _____________________________________________________________________________________,

1.. GRANT. Lessor, in consideration of a cash payment and other good and valuable consideration in hand paid, of the royalties herein provided for, and of the agreements of Lessee herein contained, hereby grant, leases and lets exclusively unto Lessee the land described in paragraph 2 below, hereinafter referred to as leased premises, for the purposes of investigating, exploring, prospecting, drilling and mining for and producing oil, gas (the term “gas” as used herein includes helium, carbon dioxide and other commercial gases, as well as hydrocarbon gases), sulphur, fissionable materials, and all other minerals, conducting exploration, geological and geophysical surveys, core tests, gravity and magnetic surveys, for introducing or injecting fire, air, gas, steam, water, salt water, chemicals, and fluids or substances into any subsurface stratum or strata which is not productive of fresh water for primary, secondary and other enhanced recovery operations.