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Oil and Gas
South Texas College of Law Houston
Read, Frank T.

Oil and Gas
 
1. Accumulation, Ownership and Conservation
a.   Accumulation
i.    Five phases of the Oil Industry
1.   Exploration – (hunting and drilling) Upstream
2.   Production – Upstream
3.   Transportation – Downstream
4.   Manufacturing/Refining – Downstream
5.   Marketing – Downstream
ii.    Oil and gas law is a body of law built on property and tort law and covers upstream process
iii.   Terminology
1.   Integrated Company – A company who does business in all five phases of the business; somewhere (verticle integration) – seven sisters
a.   ExxonMobil (U.S.), Shell (Dutch), Chevron (U.S.), BP (British), Total (French)
2.   Christmas tree – valves sticking out of the ground
3.   Horsesneck – pump jack seen in Texas
4.   Lessor – landowner who signs the lease
5.   Lessee – company that has the lease
6.   Correlative Rights – different persons own same interests in the same property, all person’s rights must be protected
iv.   Finding Oil
1.   Generally it is not found in caverns, but found inside soft porous rock – it is trapped by rock
2.   Geophysics are the only way to find oil, it finds the traps, but the only way to discover oil is through drilling
3.   Two Attributes to find a commercially viable field
a.   Porosity – The microscopic spaces that exist in a rock
b.   Permeability – The Interconnectedness of the porous spaces – must be interconnected to withdraw oil
4.   Oil only starts migrating or moving when the integrity of the trap is ruptured – this usually happens when the trap is punctured (oil rig)
5.   Oil is thought to be found in locations that were once underwater and created by sedimentation – where the exoskeletons and “guts” of animals fall to the ocean floor
a.   Others believe that it was formed in the center of the Earth and pushed towards the surface by pressure
b.   Can’t be found in igneous rock
v.   Methods of Production
1.   Primary Method – 25%
a.   Natural Flow, Mechanical Pumping
2.   Secondary Method – 25%
a.   Water Pumping
3.   Tertiary Method – 25%
a.   Heating, Detergents
b.   These are usually not economic because the method is more expensive than the oil
vi.   Future of the Oil Industry
1.   Deeper you go the more likely you will find gas rather than oil – maybe even pure hydrogen
2.   Oil Shale – High Porosity, low permeability
a.   Strip Mine, Crush the Rock, then Heat the rock – may become economic with higher priced oil
vii. Alternative Fuels
1.   Coal – can be turned into gas or gasoline(initial cost is high), Nuclear Energy (Fusion vs. Fission – waste problems), Wind Power, Solar Power – No good battery
viii. History of Oil
1.   Courts once thought that oil was migratory (fugacious) in nature, and that you didn’t possess it until you produce it. That was once true, but now it doesn’t more unless the integrity of the trap is disturbed by natural (volcanic, tectonic) or man-made forces (drilling), in most cases. Otherwise it goes into the ocean. Commercial o/g is not disrupted until drilled.
a.   The state owned the oil – you had no property interest and state could stop you from producing (like wild game is even today)
b.   Private Ownership of Oil – The Development of Law
i.    Common Law Rule
1.   Whoever had the fee of the soil owned all below the surface (this case was about solid minerals, silver and lead); can’t follow the vein under neighbor’s property – Del Monte
2.   Landowner owns all the minerals between a vertical extension downward of his boundaries on land
3.   Doctrine of Extralateral Rights – The owner of a lode claim may exclusively mine all veins, lodes and ledges throughout their entire depth, even if they extend beyond the staked boundaries of a lode claim
4.  

e extremely thick oil in the ground which cannot be produced
iv.   Types of Waste:
1.   Economic waste – Cost too much to drill a new well when we have a well that currently works
2.   Underground Waste – Leaving oil in the ground, overproduction, causing gas loss and leaving thick oil
3.   Surface Waste – Open storage
4.   Strongest waste argument: if you can show producing this well will get oil that is not otherwise obtainable that is physical waste, and you drilled a well in good faith to get to another source and to drill a second well would be economic waste, you will probably get an exception
b.   Protect Correlative rights of the various parties owning the land
i.    All of the parties who have a property interest in the oil and gas situated in a common reservoir have a legal right to develop and produce that oil and gas. However, each owner is also bound by a legal duty not to engage in any activity that would injure that common supply – protection from negligent damage to the producing formation – can’t overproduce and flood the market (production is restricted)
ii.    The correlative rights doctrine gives an individual right against another owner who negligently or wastefully uses the rule of capture
iii.   In striking a balance between conservation of natural resources and protection of correlative rights, conservation is superior to protection of correlative rights – Denver
1.   You can not prevent waste without violating correlative rights to some degree