Oil and Gas Law Outline
Kulander – Fall 2016
Formation and Production of Oil and Gas (Ch. 1)
Formation of Oil and Gas
O&G formed from temperature + pressure + time.
Material that turns into O & G= Keragin
Reservoir pressure is a key to success. Once the pressure is gone, oil won’t flow on its own.
Reservoir Types: Reservoir: space where oil and gas are inside of the rocks
Traditional: Structural and stratigraphic. (oil can flow through the pore spaces in a traditional reservoir)
Chalk and coal-bed methane: inside the coal is natural gas
Shale gas: tight formations where the hydrocarbons can't flow through the rocks; there isn't pore space for the oil to flow through
Two methods to get the tight hydrocarbons
Oil and Gas Reservoirs
O&G does not behave like a wild animal
they reside in a reservoir like water in the sponge
-Reservoir: a subsurface body of rock with sufficient void space (porosity) to store hydrocarbons and connectivity between those void spaces (permeability) to allow hydrocarbons to flow. (Sandstone, limestone, and dolomite comprise the majority of reservoir rock)
-OWC: Oil-Water Contact (where the oil and water meet in a reservoir)
Non-traditional plays: shale gas, CBM
In traditional plays, components separate by density: gas, oil, and water. (in decreasing order)
Traditional Reservoir – Source rock, salt water, reservoir rock, oil, gas, cap rock.
Two Types of Traditional Reservoirs
Structural Reservoirs: formed by stresses that cause deformation of the sedimentary rock comprising the trap and reservoir (folds and faults) Ex: Salt domes
Folds and Domes: reservoirs formed by folding of subsurface rock usually have a dome shape.
Anticline: elongated upward fold in the rock (not a trap by itself but when two are together they form a 4 way closure)
Faults: fractures or discontinuity in a volume of rock, across which there has been significant displacement relative to other side and therefore creates a trap
Salt and Overpressured Shale: Salt is more buoyant than the rock laid over it and migrates through the rock. Eventually it can move the rock above it in a way that will create a complex salt dome or salt wall that will act as a trap
Stratigraphic Reservoirs: formed by a change within the formation itself, such as changes in permeability and porosity caused by increasing cementation of the rock grains or changes in grain sizes, provide the trap and reservoir. Stratigraphic traps don't rely primarily on geologic structures and are therefore difficult to discover.
Channel Sandstones/Turbidites: most common stratigraphic traps are sand stone and limestone, which are sealed along their upper surfaces bychanges in permeability or the interlayering of sandstone or limestone with impervious shale or mudstone.
Such sandstone is found in ancient river channels
Turbidites are the bottom of the continental slope
Unconformities: columns of sedimentary rock layers that are subject to erosion and layers of younger sediment are deposited over the erosional surface and the strata will not be straight on top of each other but at an angle; this can create an impervious cap rock
Reefs: or carbonate reservoir is an oil and gas deposit found in an ancient reef made up of limestone or dolomite (the Delaware is a reef)
Hybrid Traps: components of the listed above traps combine to make traps
For commercial production, oil must accumulate in a “trap” of sedimentary rock.
With a sufficient size and porosity to hold a commercial quantity of gas.
With sufficient permeability to allow the oil or gas to flow through the reservoir.
Reservoir Height: (Net Pay) a measurement of the vertical thickness of a reservoir formation that contains prospective oil and gas and is open to flow.
Shale: a form of tight sandstone that generally has ample porosity but poor permeability, rendering traditional recovery unfeasible.
Drilling for Oil and Gas
Rotary Rig: Consists of a derrick structure, a string of pipe, a drill bit, circulating fluid, and a derrick-floor rotary turntable.
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.
Cable-Tool Rig: Pulverizes the rock by raising a heavy bit and letting it fall. Inexpensive.
Limited in application and depth. Rarely used today.
Production of Oil and Gas
Physical Dimension: Top of the well where valves and production equipment are located.
Legal Dimension: the location at/or in the immediate vicinity of the well, but in any event, on the “leased land.”
Crude oil is what comes out of the ground; 42 gallons is a barrel
Oil is stored, piped, or trucked to a refinery.
Gas is put into a pipeline.
Christmas Tree: A system of valves and gauges at the top of the well to control the flow of gas.
LACT: Lease Automatic Custody Transfer system; automatic measuring, sampling and delivery system at the surface that production will flow through right when it comes out of the ground
Over time, primary pressure might drop to such a level that petroleum will not longer flow into the wellbore.
Secondary recovery will likely begin. Operators will force gas or water into the reservoir to enhance pressure.
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.
Production of gas is measured by volume and/or heating value. (different gas's produce different amounts of heat when they are burned than others)
Volume: Mcf (thousand cubic feet)
Heating Value: MMBtu (million British thermal units)
1 MMBtu = 1 Mcf of gas having 1000 Btus/cubic foot = 1 Dekatherm
-Different types of gas has different amounts of carbon and hydrogen; the more complex the gas the more heat they produce
1 MMBtu = 1 Mcf of gas having 1,000 Btus/cubic foot = 1 Dekatherm
Post Production Activities: physical activities beyond the wellhead
Important because the operator can subtract mineral owners costs from post production costs (compared to production costs where they cannot subtract)
Reservoir Drives: pressures that applies pressure to the reservoir that causes oil and gas to be driven to the surface
Overburdened Pressure: reservoir pressure provided by the weight of overlying rock
Gas Drive: reservoir pressure is provided by the presence of a gas cap or solution gas drive
Water drive: encroaching water from below or the edge of the reservoir provides the reservoir-drive mechanism (b
3D: Combination of lots of 2D sections to see vertical and horizontal
Ownership of Oil and Gas Rights (Ch. 1)
Private Ownership (70% of US minerals are privately owned)
-The private ownership of minerals leads to the full development of the minerals
Problems with private ownership
Expensive title work
Specialized work/continuing liability
Time constraints for development
Problems of unleased interest
Alienation of minerals from the surface rights leads to conflict.
The federal government owns 30% of the U.S. mineral rights (mostly in the west) + oil and gas rights to 37 million acres of other private land
Texas owns 20.5 million mineral acres
Theories of Ownership
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.
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.
-Mineral estate created in the land
Followed by TX, CO, NM, MI, and ND. Creates a mineral estate in land. (Majority)
Owner of O&G rights owns rights to search, develop and produce but no possessory right to O&G in place.
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.
-Profit a Prendre created
Followed by OK, CA, and LA. Creates a profit a prendre. (Minority)
Both theories of ownership above treat mineral rights as property rights, not contract rights
-This is important in bankruptcy proceedings bc real property interests are secured creditors unlike contract rights which are treated as un-secured
Corporeal – An interest in the land includes the right of possession of the land.
Right of possession cannot be abandoned at common law.
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.
A leasehold interest could be abandoned.
Trespass, ejectment, and compulsory partition (possessory remedies).
Incorporeal – An interest in the land only includes the right to use the land.
Rights can be abandoned at common law.
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.
Royalty interest should always be considered incorporeal (TX).
There is no present right of production.