Oil and Gas Law I
Dr. Christopher Kulander Fall 2015
I. History & Ownership
A. Ownership and Correlative Rights
1. Pierson v. Post – fox case
a. A wild animal that is captured, remains wild and escapes – e.g. a fish in a net – or which is being otherwise chased remains a wild animal
b. But a wild animal that is either (1) domesticated or (2) removed from its natural habitat does not revert to the wild if it escapes.
a. Wild animal theory of oil
b. Oil and gas – “hydrocarbons” – formed from temperature + pressure + time
c. Reservoir pressure – a key to success
d. Reservoir types:
i. Traditional – structural and stratigraphic
ii. Chalk and coal-bed methane
iii. Shale gas
3. Oil and Gas Reservoirs (p. 10-20)
a. Oil and gas do not behave like a wild animal – they reside in reservoirs like water in a sponge.
i. Parts: Source, conduit, trap, seal
ii. Non-traditional plays – shale gas, CBM
iii. In traditional plays, components separate by density: gas, oil, water (although these can mix).
b. Oilmen (and therefore courts) had little understanding
4. Geologic time
5. Reservoir Rock
a. Cap Rock (top)
b. Reservoir Rock (porous and permeable): gas (least dense, sits on top), oil (medium density), salt water (brine, most dense, bottom)
c. Source Rock (bottom)
6. For commercial production, petroleum must accumulate in a “trap” of sedimentary rock:
a. With sufficient size and “porosity” (pre space) to hold a commercial quantity of oil or gas;
b. With sufficient “permeability” (connecting pore spaces to allow the oil (given its “viscosity”) or gas to flow through the reservoir; and
c. With sufficient “natural reservoir energy” (pressure)
7. Ownership of Minerals in the USA
a. Private ownership of oil and gas real property leads to the problem of “fractionalization” of ownership
i. Expensive title work
1. Specialized work/continuing liability
2. Unrecorded instruments
3. Time constraints for development – title opinions
ii. Difficult leasing logistics
1. Must get valid signatures of all parties/avoid family fights
2. Negotiation of terms
iii. Problem of unleased interests
iv. Alienation of minerals from surface leads to conflict
8. Theories of Ownership
a. Ownership-in-Place – Owner of oil and gas rights owns right to search, develop and produce, plus a possessory right to the oil and gas in place beneath the owner’s tract. Followed in Texas, Colorado, New Mexico, Michigan, North Dakota, etc. (majority)
i. Creates mineral estate in land
b. Nonownership – owner of oil and gas rights owns right to search, develop, and produce (but no possessory right to oil and gas in place). Followed in Oklahoma, Cali, Louisiana (Minority)
i. Creates a profit a prendre.
c. Remember, none of this had to be the way it is. The differences are case law driven.
d. But effect of both theories is that mineral rights are property, not contract rights.
e. Generally treated like property rights both by owners and courts.
i. Conveyances, not contracts.
ii. Corporeal/Incorporeal distinction.
1. Abandonment, forms of action, classification.
9. US Public Ownership of Natural Resources
a. Federal government owns 30% of the land area of the 50 states (662 million acres)
B. Ownership (p. 20-40)
1. Ownership Prior to Extraction
a. The role of surface boundaries
b. Describing surface boundaries
i. Surveys with lots of error
ii. Baseline – regional line east to west
iii. Prime Meridian Line – where crosses baseline
iv. 36 squares – 36 square miles
v. Township – divide each square into 36 squares
1. 1 starts in the northeast corner, and the numbering snakes back around
2. Squares at the top are narrower because of the curve of the earth’s surface
3. Numbers along the east and west sides are called lots because you might have to take off a little bit
vi. Township lines run north and south
2. Texas History – Land grants to railroads
a. Goal: to get settlers west. Texas had lots of land to give away.
b. Railroad stringers run east to west across the US.
c. Texas Railroad Commission is now a very powerful regulatory body governing oil and gas
3. Del Monte Mining (p. 20)
a. Can you take ore beneath Whiteacre if you only own the adjacent Navyacre?
b. Heaven or Hell theory of ownership:
i. Mexican law has changed – no longer private
ii. Most countries do not have private ownership
iii. If strictly interpreted, means you own just what’s below you
iv. Ad Coleum doctrine – ownership from the sky above to the center of the earth.
c. Cartesian Survey of Land
i. Land ordinance act of 1785
d. Problem: Sam owns B and is mining a seam of silver bearing ore and is about to begin from beneath adjacent A, owned by Alice – He can’t do that because he broke the plane
i. Horizontal Drilling
ii. You can drill through some one else’s ownership (owning layers?)
4. Private Ownership of Minerals (Note 3 p. 21)
a. Private land: surface and mineral estate part of one fee estate
b. No government ownership unless the patent granting land says so
c. Advantages of
i. What about the storage right itself?
e. TxAm failed to record its storage right?
i. Lessor could sell to bona fide purchaser
f. What about a prior recorded lease? What about the lessors recording a mortgage on the mineral estate? Who has rights then?
i. Storage space may not be mineral owners!
11. Gas Storage Particulars
a. Who to take the lease from
i. A question of pore space ownership
ii. Rights of severed mineral/surface rights owners are (first) determined by the serving instrument
1. If made clear, get lease from that party
iii. Consult state law
iv. In the absence of language, most courts have ruled that both estate owners have a concurrent rights – so get from both
b. Neighboring estates: question of TRESPASS
c. 4 parties own surface/mineral owners. Not unless show damage
i. Ohio case – property rights include right to exclude invasions that actually interfere with the property owner’s reasonable use
ii. But negligence and damage not allowed – must prove up the damages, however
e. Generally, stored gas cannot be acquired through adverse possession
i. Open and obvious standard
12. Texas Relinquishment Act
a. About 10% of Texas’ revenues from o&g on tax lands
b. Before 1895, all patents for lands in Texas included mineral rights.
c. After 1895, Texas realized the value of oil and gas and classified certain unpatented land as mineral lands
i. After 1895, Texas sold lands pursuant to acts, and under those acts the state classified the land before the sale as either grazing, mineral, agricultural, or timber land. Almost all lands not previously sold by the state by 1895 were in west Texas, and the state classified most of those lands as mineral lands. If the lands were mineral classified, the statutes provided that the state must retain all minerals when it was sold
ii. Therefore any lease by the surface owner was VOID!!! (BAR)
d. These owners complained that their surface use was being disrupted.
i. In response, beginning in 1919, the Texas legislature began passing a series of statutes called relinquishment acts, relinquishing to the landowners the state’s oil and gas rights in the land patented as minerals between 1895 and 1931, retaining a 1/16th royalty interest for the state.