Oil, Gas & Mineral Law Spring 2016
Introduction: Basic Legal Concepts
Ownership of Minerals
Ownership of the surface extends to the minerals below
Fee Simple owners may transfer mineral rights by contract
Rule of Capture
RULE: Oil and Gas – a rule of on liability for causing oil and gas to migrate across property lines, resulting in “drainage” of oil and gas from under another person’s land.
Minerals belong to the first party to “capture” and possess them. Must exercise dominion and control of the property (Hammonds)
Minerals are real property – belong to the surface owner, when underground.
When gas migrates under “’P’s land, D’s rights cease.
Policy: “Drill, baby, Drill”
No liability to surface owners for captured gas
Judicial policy of ROC is to encourage exploration for Oil & Gas.
Rule of Capture Limitations
Doctrine of Correlative Rights – Every oil & gas owner has right to a fair opportunity to produce
Stored Gas – natural gas “captured” reduce to possession then reinjected into field for storage becomes personal property. Owner does not lose title.
Burden is on the storer to establish, calculate portion that is stored and not native gas. (Humble)
ROC cannot be used to shield misconduct that is illegal, malicious, reckless, or intended to harm another w/o commercial justification, should such case ever arise. (Coastal oil V. Garza Energy Trust)
ex: slant-hole drilling
Negligence/Waste – There is no liability for reasonable and legitimate drainage from the common pool. We do not think this immunity should be extended as to include the negligent waste or destruction of oil and gas.
No defense to negligently drained oil and gas (Eliff v. Texon Drilling)
Nuisance – Property rights must be exercised with due regard for others, can’t commit a nuisance.
Danger to Life – can’t be measured in $, no adequate remedy at law. (People’s Gas v. Tyner)
Violating rules of a conservation agency – illegal production
Rule: one who drains his neighbor’s land in violation of a valid order of a conservation agency is not shielded from liability by the Rule of Capture.
Interfering with a neighbor’s correlative rights
The Oil & Gas Lease as a Conveyance
Nature of the Oil and Gas Lease
Property Concepts: Bundle of Rights
Estates in Land
Leasehold – Possession and Control – relationship has special rights, duties, etc.
Present & future interests
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 form the surface estate.
Lease creates a defeasible fee
When you purport to lease minerals, you are going to capture them and make them personal property and alienate them – sell the minerals. At end of a lease you have to give it back does not make sense for minerals. (Cherokee Water co. v. Forderhause)
Use of Surface
Lessee must accommodate Lessor IF
Preexisting use by lessor
Lessee proposes an interference and
Lessee has a reasonable alternative that is available on the lease
Surface owner burden to prove that an alternative method is unreasonable (Merriam v. XTO)
Policy: develop mineral resources but permitting the utilization of the surface for productive agricultural uses
General Rule: the mineral estate has the right to use so much of the surface estate as is reasonably necessary to effectuate the mineral grant.
Tex. Natural Resources Code Sec. 91.753
15 days after drilling permit used, operator must notify surface owner
Notice not required if operator and surface owner K otherwise; or written waiver
Mineral estate is dominant – able to use surface of nonproducing lease. If it’s part of the pool, it’s part of the lease.
Clauses Affecting Duration of Lease
“To have and to hold” – sets forth duration of Lessee’s interest.
Primary Term – Fixed period, no obligations to drill
Secondary Term – indefinite; linked to production
i.e. “production in paying quantities
Once production stops, the lease terminate
cation of wells hauling lumber, proving water, etc. when good faith with subjective intent to continue is sufficient.
Watson v. Rochmill – Cessation after primary term due to mechanical problems
Lease still in effect when cessation of PPQ terminates lease, even if temporary.
Temporary cessation doctrine
When temporary cessation due to “sudden stoppage or mechanical breakdown or the like”
Acts diligently to fix
Due to mechanical breakdown
You fix the glitch and courts won’t determine it terminated.
30-60 Day Clause
Rogers v. Osborn lease is not sustained by 30-60 day clause if well that is “producing” during that period is not from primary term.
Trying is not enough, PPQ means PPQ
Samono v. Sun Typical 30-60 day clause determines what’s reasonable.
Courts enforce written words partied intended. 60 day was the outer limit which is reasonable.
Shut-In Royalty Clause
If you are not making a profit, there might be some reasons a reasonably prudent operator would still hold on to the lease. Which is why same contract around the PPQ doctrine and one is the Shut-In Royalty Clause.
Freeman v. Magnolia – automatic termination if payment is missed when shut – in.
Policy: contracts usually construed against oil company because generally who drafts the contract.
Skelly v. Harris – lease valid by production begin within 60 days. Operations off lease governed by pooling clause.
Blackmon v. XTO – Shut-in royalty clause as a covenant.
PPQ requirement not met, but it was Shut-In and Shut-IN Royalty was paid. When covenenat is breached the lessor has no right of reentry, unless express in clause, but has right to sue for damages only.