Oil & Gas Law
Introduction: Some Basic Legal Concepts
Ownership of Minerals
A landowner owns down to the center of the earth by extending downward the vertical boundaries of the land (heaven to hell)
Characteristics of Oil and Gas
Oil while underground is realty
Oil after brought up is personalty
Title only lost through CL abandonment
Present intent to abandon
Corresponding physical act showing intent
Finder of abandoned property gains title
The Rule of Capture
The owner of a tract of land acquires title to the oil or gas which he produces from wells on his land, though part of the oil or gas may have migrated from adjoining lands.
As oil migrates across property lines, it changes title
No liability for reasonable and legitimate drainage from the common pool, so long as wells operate within the spirit and purpose of conservation statutes and orders of the RRC
Remedy – go drill your own well/self-help
Ownership in place
Own all substances underground but qualified by rule of capture
Ownership is lost if it migrates
you own the fair chance to extract the minerals.
Doctrine of Correlative Rights
every oil & gas owner has a right to a fair opportunity to produce oil & gas from a common reservoir underlying their property (aka “Fair Share Rule”)
CL limitation on the rule of capture.
Reinjected gas – personal property and title is not lost if extraneous gas is reinjected into the ground
Commingling – storing extraneous gas with natural gas.Person who co-mingles has burden of proving which percentage is natural gas.If burden not met, they owe royalties on all comingled gas, if burden met, they only owe royalties on the correct percentage.
property rights must be exercise with due regards to others when draining gas, can’t commit a nuisance (interference with right to enjoy land)
CL limitation on the rule of capture
rule of capture is not a defense, can’t negligently drain gas, causes waste
CL limitation on the rule of capture
Fracing – law of trespass does not apply to fracking, rule of capture does.
Law already affords the owner who claims drainage full recourse.
Allowing recovery for the value of gas drained by hydraulic fracturing usurps to courts and juries the lawful and preferable authority of the RRC to regulate O&G production.
The RRC is vested with the power and charged with the duty of regulating the production of oil and gas for the prevention of waste as well as for the protection of correlative rights.
Determining the value of oil and gas drained by hydraulic fracturing is the kind of issue the litigation process is least equipped to handle.
Law of capture should not be changed to apply differently to hydraulic fracturing because no one in the industry appears to want or need the change.
The Oil & Gas Lease as a Conveyance
Nature of the Oil & Gas Lease
Fee simple owner of property owns both the surface and the minerals below.
Property owner may transfer less than her entire interest through severance of the mineral estate from the surface estate.
Vests lessee with title to oil and gas in place.
Will revert to grantor upon the failure of the lessee to obtain production during the , or failure to timely pay delay rentals.
Leases generally provide that they will remain in force after primary term as long as oil or gas is produced in paying quantities.
A determinable fee can be abandoned.
A determinable fee can be conveyed as well as inherited by heirs.
Mineral Deed v Lease
Mineral deed conveyance
pure conveyance with no possibility of reverter.
It cannot be abandoned and does not end.
Conveys 100% of the minerals forever and any rights to them.
Lease (Determinable Fee)
Conveys a fee simple determinable with the possibility of reverter.
The lessee granted 100% of the mineral estate so long as the determinable fee lasts.
The lessor usually does this in exchange for a contractual right in connection with the lease, which usually include the payment of royalties, delay rentals, and bonuses.
Use of the Surface
Rule of Reasonable Necessity
Since the lease estate is the dominant estate it is impliedly authorized to make use of the surface as reasonably necessary to produce and remove minerals.
Implied grant of reasonable use extends to and includes the right to use…from the leased premises in such amount as may be reasonably necessary to carry out the lessee's operations under the lease, absent an express limitation thereon.
Grant of the oil carried with it the grant of the way, surface, soil, water, gas and the like essential to the enjoyment of the actual grant of the oil.
Accommodation / Due Regard Doctrine
Pre-existing use by surface owner
Proposed conflicting use by lessee
A reasonable alternative is available on the lease itself (not neighbors land, lessee can’ t be forced to leave the lease)
Then the accommodation doctrine kicks in and the lessee is required to go beyond the rule of necessity to accommodate the other party.
These rights are to be exercised with due regard to for the rights of the owner of the servient (surface) estate.
Burden of proof:surface owner by a preponderance of evidence
The lessee’s use of the surface not reasonably necessary because of non-interfering and reasonable ways and means of producing the minerals available to lessee,
Use of these means will obviate the abandonment by surface rights holder of existing use of the surface,
Alternatives available to surface rights holder would be impractical and unreasonable.
Going beyond reasonable necessity is trespassing.
Merriman v. XTO Energy, Inc., 407 S.W.3d 244 (Tex. 2013).
Tarrant County Water Control & Improvement Dist. Number One v. Haupt, 854 S.W.2d 909, 911 (Tex. 1993).
To establish a violation of the accommodation doctrine, the surface owner must first prove that “(1) the lessee’s use completely precludes or substantially impairs the existing use, and (2) there is no reasonable, customary, and industry-accepted methods
ages would not furnish adequate remedy, a court could conditionally order termination if a connection and actual production were not commenced within a reasonable time.
Relatively recent holding by Texas supreme court.
This change in wording can change the effect of the habendum -> (may be able to) have an OK ruling with this – can contract for an OK rule.
Temporary Cessation of Production Doctrine
A temporary cessation of production (due to mechanical problem) will not kill a lease.You have a reasonable time, considering the facts of the case, to begin production.
Because cessation was caused by lawsuits and subsequently an obstruction in a gas line that required laying of a new line.
Efforts to restore a well were undertaken until it was determined that the casing in the well collapsed; lessee plugged and abandoned that well and drilled a new one.
Pipeline pressure was greater than wells' pressure.
Lessee's contract with pipeline purchaser expired and negotiations for new contract underway.
Mechanical breakdown of equipment used in connection with production.
Exception to general proposition that cessation of production will terminate a lease.
Foreseeability and avoidability are not essential elements.
Habendum is indivisible.
Where one lease secures two tracks, and production on one tract secures both tracts under the lease, shutting down production on the one tract can negate the lease on both tracts.Example of strict application of property law.
Delay Rental Clause (“unless”)
Substitute for Production
Delay rentals are basically substitutes for production during the primary term.It’s a clause in the lease that allows purchase of the right to delay drilling.
It is a condition on title (not a covenant), it merely says if you don’t drill the well, or pay, then the lease terminates. If you’re not sure, you should over pay.
Court’s Rules on Delay Rentals
You must pay the right amount, to the right parties, on the right date, in the proper manner or you do not have a substitute for production.
Generally, lessee picks the lease form, courts will strictly adhere to the four corners.
It does not pay to economize when purchasing parachutes.
If there is any dispute about what the lessor is entitled to, pay the maximum amount the lessor could possibly be entitled to.This will result in overpayment of delay rental, but that is better than losing a lease for not paying exactly what is due.