Oil and Gas Law Outline
Kulander – Fall 2015
I. Formation and Production of Oil and Gas (Ch. 1)
A. Formation of Oil and Gas
i. O&G formed from temperature, pressure, and time.
ii. Reservoir pressure is a key to success. Once the pressure is gone, oil won’t flow on its own.
iii. Reservoir Types
1. Traditional: Structural and stratigraphic.
2. Chalk and coal-bed methane.
3. Shale gas (most recent and future of natural gas production).
iv. Oil and Gas Reservoirs
1. O&G does not behave like a wild animal.
2. Non-traditional plays: shale gas, CBM
3. In traditional plays, components separate by density: gas, oil, and water.
4. Traditional Reservoir – Source rock, salt water, reservoir rock, oil, gas, cap rock.
5. For commercial production, oil must accumulate in a “trap” of sedimentary rock.
a. With a sufficient size and porosity to hold a commercial quantity of gas.
b. With sufficient permeability to allow the oil or gas to flow through the reservoir.
B. Drilling for Oil and Gas
i. Rotary Rig: Consists of a derrick structure, a string of pipe, a drill bit, circulating fluid, and a derrick-floor rotary turntable.
1. The derrick is assembled over the drill site. The drill is screwed into the bottom of a 30’ pipe, which passes though the rotary table. The circulating fluid is forced into the pipe and out through jets in the back and back to the surface.
ii. Cable-Tool Rig: Pulverizes the rock by raising a heavy bit and letting it fall. Inexpensive.
1. Limited in application and depth. Rarely used today.
C. Production of Oil and Gas
1. Physical Dimension: Top of the well where valves and production equipment are located.
2. Legal Dimension: the location at/or in the immediate vicinity of the well, but in any event, on the “leased land.”
ii. Crude oil is what comes out of the ground; 42 gallons is a barrel.
1. Oil is stored, piped, or trucked to a refinery.
2. Gas is put into a pipeline.
iii. Christmas Tree: A system of valves and gauges at the top of the well to control the flow of gas.
iv. Over time, primary pressure might drop to such a level that petroleum will not longer flow into the wellbore.
1. Secondary recovery will likely begin. Operators will force gas or water into the reservoir to enhance pressure.
2. Tertiary (enhanced) recovery is more advanced. Fire flooding, which heats oil in place in the rock to lower its viscosity and increase reservoir pressure, is used.
v. Production of gas is measured by volume and/or heating value.
1. Volume: Mcf (thousand cubic feet)
2. Heating Value: MMBtu (million British thermal units)
3. 1 MMBtu = 1 Mcf of gas having 1000 Btus/cubic foot = 1 Dekatherm
II. Ownership of Oil and Gas Rights (Ch. 1)
A. Private Ownership
i. Expensive title work
1. Specialized work/continuing liability
2. Unrecorded instruments
3. Time constraints for development
ii. Fractionalized ownership
iii. Alienation of minerals from the surface rights leads to conflict.
B. The federal government owns 30% of the U.S. mineral rights.
C. Theories of Ownership
i. Ownership-in-Place (Corporeal)
1. Owner of O&G rights owns right to search, develop and produce plus a possessory right to the O&G in place beneath the owner’s tract.
2. Characterizes O&G as a fee simple absolute estate in the land and the right to individual molecules of O&G as a determinable interest that terminates automatically upon capture by another.
3. Followed by TX, CO, NM, MI, and ND. Creates a mineral estate in land. (Majority)
ii. Non-Ownership (Incorporeal)
1. Owner of O&G rights owns rights to search, develop and produce but no possessory right to O&G in place.
2. Characterizes O&G as a profit a prendre, a right to go on the land and take some part of the land or a product of it.
3. Followed by OK, CA, and LA. Creates a profit a prendre. (Minority)
iii. Corporeal/Incorporeal Distinction
1. Corporeal – An interest in the land includes the right of possession of the land.
a. Right of possession cannot be abandoned at common law.
i. A leasehold interest may be a grant of the lessor’s right or use the land to search, develop, and produce and the lessor’ present right of possession, or it may be a grant only of the right to search, develop, and produce.
1. A leasehold interest could be abandoned.
b. Trespass, ejectment, and compulsory partition (possessory remedies).
2. Incorporeal – An interest in the land only includes the right to use the land.
a. Rights can be abandoned at common law.
i. No owner of any O&G right can have the right to present possession of the O&G in place in a non-ownership theory state.
3. Royalty interest should always be considered incorporeal (TX).
a. There is no present right of production.
D. Real and Personal Property
i. Interests that are for life or longer should be classified as real property. Interests with a lesser duration should be classified as personal property.
ii. Mineral interest is real estate, regardless of ownership theory.
1. Both estates and profits are real estate.
2. Interest’s duration is that of a freehold estate—fee simple or life estate.
iii. Leasehold interests could be either; lease is both a contract and a deed.
1. Most states treat as real property.
iv. Royalty could be either. Most states treat as real property.
v. O&G becomes personal property once it’s severed from the land by production.
E. Township and Range System
i. Established by Congressional fiat in 1785.
ii. Base line is the regional line that runs east and west in 6-mile intervals.
iii. The prime meridian line runs north and south in 6-mile intervals.
1. The range lines are not evenly separated as you move further north towards the pole.
2. The north/west sides are constantly corrected to make up for the sphere of the globe.
iv. The intersection of the base line and prime meridian line creates a 36 sq. mile township.
1. 1 Township = 36 Sections (1 sq. mile squar
rally recognized that permitting a lessee to sweep O&G from under the property of a neighbor by use of water-flooding techniques is beyond the scope of the rule of capture.
ii. Texas has rejected liability for nuisance or trespass where the drained party has refused a “fair” proposal to participate in enhanced-recovery operations.
1. Oklahoma allows an action for trespass and nuisance.
2. Texas Relinquishment Act
a. About 10% of Texas’ revenues come from O&G on state lands.
b. Before 1895, all patents for lands in Texas included mineral rights.
c. After 1895, Texas realized the value of O&G and classified certain unpatented land as mineral land.
i. After 1895, Texas sold land pursuant various acts, and under those acts the state classified the land before sale as “grazing land,” “mineral land,” “agriculture land,” 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 statues provided that the state must retain all minerals when it was sold.
ii. Patentee just got the surface—therefore any lease by surface owner was void.
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 the Relinquishment Acts, relinquishing to the landowners the state’s O&G right in the land patented as “mineral” between 1985 and 1931, retaining a 1/16th royalty interest.
ii. There were those who did not believe that the Legislature should have given away the State’s mineral rights, and they challenged the Relinquishment Act as a donation to the landowners of a part of the permanent free school fund in violation of the State constitution.
1. Greene v. Robinson held that Relinquishment Act unconstitutional; however, the Court construed the Act in a way that would pass constitutional muster.
a. It held that the act did not relinquish the O&G to the landowners; instead, it made the landowners the agent of the State for the leasing of O&G right, and granted to the landowner the right to one-half of all benefits accruing from those leases.
b. So, in effect, it made the landowner the holder of the leasing rights, but kept the mineral ownership in the State. It had very little to do with the actual language of the Act, but it was apolitical compromise crafted by the Court to attempt to satisfy both sides.