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Oil and Gas
South Texas College of Law Houston
Festa, Matthew J.

Oil, Gas and Mineral Law
Spring 2016
Chapter 1 – Introduction
Ownership of Minerals
Del Monte Mining & Milling Co. v. Last Chance Mining & Milling Co.
Common Law: Ownership of surface extends to the minerals below
Surface owners may transfer mineral rights by contract (conveyance)
Rule of Capture
Hammons v. Central Kentucky Natural Gas Co.
Minerals belong to the first party to capture and possess them
Exercise dominion and control – personal property (once extracted)
When in the ground, real property
Rule of Capture – First to capture the OGM obtains ownership.
Gas migrates under A’s land, B’s rights cease.
Cannot slant-drill
Producers are not liable for causing O&G to migrate across property lines, resulting in “drainage”
Drill your own well
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.
Lone Star Gas Co. v. Murchison
Extraneous Gas – Extracted gas that is being re-inserted elsewhere.
Once Gas is captured, O&G is personal property not subject to recapture.
Reinjected gas still belongs to the one who extracted it.
Burden is on the storer to prove that gas is stored and not native.
Humble Oil & Refining Co. v. West
Producer re-injected gas prior to depleting field, causing co-mingling of native and stored gas.
Burden is on the storer to establish and calculate portion that is stored and is not native gas.
No obligation to pay royalty on re-injected gas.
People’s Gas Co. v. Tyner
If extraction is going to be a the well may have to be moved.
Property rights must be exercised with due regard for others
Elliff v. Texon Drilling Co.
The Rule of Capture is not a defense to negligently drained oil and gas, which causes waste.
Rule of Capture is a policy that leads to efficiency. Negligent (limitation to rule of capture) waste is not efficient.
Coastal Oil & Gas Corp. v. Garza Energy Trust
Fracking which breaks the rock under another’s land may be trespassing but there are no damages because the Rule of Capture permits it.
Chapter 2 – Oil and Gas Lease as a Conveyance
Nature of the Oil and Gas Lease
FSD with possibility of reverter to O
Conveyance as long as something happens or until something stops happening.
Cherokee Water v. Forderhouse
O&G lease is an actual sale in FSD and is not subject to same laws as LL/T
Option and preferential right to purchase applies to OGL
Concord Oil Co. v. Pennzoil
When lease executed, grantor no longer owns OG in mineral estate, but retains a possibility of reverter in mineral estate and reserves royalty interests.
Mineral Estate concepts:
Mineral estate is dominant estate
Mineral estate owner can use surface as is reasonably necessary to develop OG
Use of Surface
Getty Oil v. Jones
Accommodation doctrine: (exception to rule that mineral estate is dominant estate)
Lessee must accommodate Surface owner if: (surface owner has burden to prove)
Pre-existing use by surface owner;
Lessee proposes an interference; AND
Lessee has a reasonable alternative that is available on the lease
Texas Natural Resources Code (sec. 91.753)
Notice requirement:
15 days after drilling permit issued, operator must notify surface owner
Notice not required if (1) operator and surface owner K otherwise; or (2) written waiver
Sun Oil v. Whitaker
Implied grant of reasonable use includes right to use water from leased premises as may be reasonably necessary to effectuate the lease.
Merriman v. XTO
To prove a violation of accommodation doctrine, surface owner must prove (1) the Lessee’s use completely precludes or impairs surface owner’s existing use AND (2) there is no reasonable alternative available to surface owner to continue existing use.
TX Natural Resources Code – Chp. 92:
Mineral Use of Subdivided Land
Key Operating Equip v. Hegar
Consequence of pooling is that “production and operations anywhere on the pooled unit are treated as if they have taken place on each tract within the unit.”
Clauses Affecting Duration of Lease
Habendum Clause:
Sets forth the term of the Lessee’s interest.
Primary term is fixed period with no obligations to drill.
Secondary term is indefinitely linked to production (PPQ = production in paying quantities).
Once production stops, lease terminates and reverts back.
Cheyenne Resources v. Criswell
Oil Co. could not meet PPQ because of Lessor’s actions = Exception to PPQ requirement.
Garcia v. King
Lease did not state specifics in paying quantities, but court held PPQ.
Just bc lease is not specific do

tain lease for remainder of primary term after drilling an unproductive well
Dry hole clause did not authorize drilling of second well to hold lease by production bc primary term terminated before second well commencement.
Samano v. Sun Oil Co.
Typical 30-60 day clause determines what is reasonable
When cessation of production clause gives # of days stoppage past that time will end lease even if operator makes reasonable efforts to get it going again.
Shut-In Royalty Clause
Covenant NOT condition
Freeman v. Magnolia Petroleum Co.
Failure to pay shut-in royalty on due date will terminate lease even if payment is attempted later.
Skelly Oil Co. v. Harris
A clause in lease gave Skelly 60 days after well completed to produce.
Production after 60 days = valid lease
Blackmon v. XTO Energy, Inc.
Well capable of PPQ when shut in
Hydrocarbon Management, Inc. v. Tracker Exploration, Inc.
Shut-in royalties can only be used when well is capable of PPQ.
If RRC shuts you down well is not capable of PPQ.
Capable also means allowable
Well cannot be shut-in just bc it’s a bad well and pay shut-in royalties to hold lease. No PPQ = termination of lease.
Force Majeure Clause
A lease of K clause that provides that lessee will not be held in breach if lessee is prevented by performing by force majeure (literally a superior force).
Typically FM expressly indicate problems beyond the reasonable control of lessee (act of God).
A party cannot maintain a lease by virtue of FM clause if party caused condition.
FM clause does not hold up against an UNLESS clause. If condition not met, lease terminates.
Perlman v. Pioneer Ltd.
Under a FM clause actual material hindrance must occur before performance is excused not just the possibility of such hindrance.
Gilbert v. Smedley
Bankruptcy proceeding will be an excusable force majeure.