Oil and Gas – Spring ‘01, Prof. Reed
1. Introduction to Oil and Gas
1. Five Phases of the Business
1. Upstream Processing
2. Downstream Processing
2. Horton’s Rule: Literal interpretation of a document – strong in TX
3. Correlative Rights: When more the 1 person has right to reservoir must protect them
II Law of Capture and Private Ownership
1. Law of Capture:
1. Oil comes from rock – sedementary rock (limestone) permeable – the gut of the organism has positive buoyancy when they die they lose this and sink to the bottom. The guts inside the exoskeleton rot and decay and create oil and gases.
2. Rocks are pourous, if pores are connected then the rock has porosity (30% is good)- the pores must have oil or it is dry hole. If there is oil then it is producer. Poor communication = low permeability
3. European law – govt owns the mineral under the land (hence royalty), TX had this rule from 1840-1895
2. Ownership Prior to and at Extraction
1. Del Monte Mining: (OLD rule) whoever has the fee of soil owned all from the heavens above the surface to the core below. Early on, oil was considered fugacious (constantly moving).
2. Note: Mining lode claims – the owner of the lode has the right to mine all veins lodes and ledges throughout the entire depth.
3. Kelly v. Ohio Oil: the court said that once he extracts the oil it is his
1. Rule of capture – there is no liability for capturing oil and gas that drains from another’s land. The owner of the tract acquires title to the oil and gas that he produces. It is a rule of non-liability.
1. if land owner drills on his or her land- bottoming the well in accordance w/laws then land owner owns all production no matter where they bottom out.
2. Others who are drained are deemed covered by self-help
1. Property rt of ownership – do what you want w/ land as long it is lawfu
1. The gov’t can claim the property by power of imminent domain
2. If it is mine I can use unless the gov’t takes it and pays me for it
4. If the land owner has a well, drills and produces in accordance w/laws then he owns all the production.
5. Rule of capture modifies the ownership in place theory-the owner of the well does not own the oil underneath, he merely has the exclusive right to capture it
1. Ownership of Extracted Oil and Gas
1. Champlin Exploration – gas in its natural state is subject to the rule of capture but once it is captured it remains the property of the one who captured it until it is abandoned, once captured – oil is personalty.
1. Can lose title via abandonment
2. In order to abandon property it takes:
1. An intent to abandon (forgetting is insufficient)
2. Corroborated by some physical act that confirms intent
3. Rule of Capture does not apply to oil and gas after it has been severed
4. Oil spills are now covered by act of 1990.
2. Texas American: oil or gas becomes personal property when produced, ownership is not lost by mere loss of possession, reinjection.
1. Since it is personal-you have security, falls under the UCC
2. When gas is reinjected it remains personal property.
1. If it is reinjected back into the ground and escapes – then it is subject again to the rule of capture – Hammonds KY only
2. TX-rule of capture does not apply to reinjected gas at all – but in KY it does until they overturn Hammond
3. Once gas is severed it is personal and not real property. It is not subject to the rule of capture – Texas
3. Humble Oil v. West: when a land owner re-injects gas into a reservoir before all the native gas is extracted ( not liable for royalty interest on the injected gas but are for the native gas) – BOP is on the injector to show how much native gas remained
3. TX RR commission administers law for oil and gas, Barrell of Oil = 42 gal.
2. Conduct Permitted in Extraction Process
1. People’s Gas v. Tyner: Rule of capture includes the right of artificial increase in the flow, however can be liable in tort. Here, they were shooting the well
1. Tort theory- private nuisance interferes w/right to enjoy property
1. Merely making a well flow more than it normally would is not a coa b/c of the theory of self-help
1. Majority-permitting a lessee to sweep oil from under property of a neighbor by evasive techniques is beyond the rule of capture
2. Minority-conducting secondary recovery methods can be liable to adjoining mineral owners that are drained of oil and gas on a theory of nuisance or trespass
3. TX-rejects liability for nuisance or trespass where drained party refused a fair proposal to participate in enhanced recovery program if state conservation agency has approved program
3. Distinguish –
r each owner has a duty not to engage in any activity injuring the common reservoir. Such as:
1. Drilling too many wells
2. Drilling wells in imprudent locations and
3. Producing at too high a rate
3. Conservation: Modifying and Limiting the Rule of Capture
1. Regulating Drilling, Well Completion and Plugging
1. Larson v. Oil & Gas Conserv. Comm.: Violation of correlative b/c did not make the right findings- WY did not have § to prevent waste
2. State wide spacing patterns-normally 40 acres (§19 of TAC)
1. Field rules – Supersede state wide rules
2. When staff receives application, there is hearing w/public notice (30 days) so that anyone that wants to can be heard
1. Commission conducts the hearing with a hearing examiner
2. Hearing examiner hears evidence and makes finding and determines approval
3. These findings are a recommendation to commissioner
4. Commissioners will most likely put these into law.
3. The losing party can appeal to Travis County District Court for everything except appeal of forced pooling
1. Dist. Ct will review the record made in administrative arena – usually substantially affirming what the hearing court stated
2. Reviewing Admin findings and orders. 2 grounds of contention
1. The order violates a statute or the constitution and
2. The order is not supported by substantial evidence in the record (far more common)
3. This process is a state thing – Congress does not get involved.
3. Well Spacing Exceptions
1. Exceptions justified for two reasons
1. To protect the correlative rights of owners against drainage or
2. To prevent waste of oil and gas
2. Pattie: Correlative Rts. Supercede conservation as long as no waste
The courts and conservation agencies have generally allowed a well to be drilled to offset drainage when A will be drained by B b/c the well spacing provision does not