Oil and Gas Law
This Course deals with the
1. Landowner (lessor) who will lease land to lessee who will drill for oil.
2. Or sell off the land with rights to royalty from oil and gas found.
What is a property right:
1. An American traveling in a third world country, man on donkey woman walking barefooted, pregnant, holding two children. The American is outraged and confronts man. He states, unfortunately my wife does not own a donkey.
2. The lesson of the story, you have right to use your land the way you want (if it’s legal). Or not allow someone to use your land.
Mechanical pumping- at the max you will have 50% of the oil molecules.
I. Accumulation, Ownership & Conservation:
1. Oil is found inside sedimentary rock, this rock is porous (has small holes within it holding the oil). It is soft rock and easily crushed.
2. Porosity-How much oil can be there, if there is actually oil in there.
a. Permeability: the degree to the amount of pores within the rock
b. Oil shale: porous rock holding oil that can’t be drilled, it is mined, (strip mined or shaft mined). Then it is crushed, and boiled to extract the oil. It is not an economical system at this time.
2. The 3 stages of development of an oil field:
a. Primary production: uses the natural pressure in the reservoir to bring up the oil and pumping. (cheapest method)
b. Secondary production: injecting inert fluids, usually salt water, into the rock to push out the oil and to wash the rock.(a little higher in cost than primary)
c. tertiary: inject surfactants (detergents) to push and wash the formation out (the most expensive method of drilling). This method is too expensive to use at this time.
3. Other types of Oil removal:
a. thermal production: apply heat to the reservoir using steam or set on end of the reservoir on fire, to push the oil out and the heat makes the oil thinner and it flows easier.
b. horizontal drilling: use one well to reach multiple pockets of oil. Example:
Few wells are actual vertical, because the bit follows the path of least resistance. So it may end up on someone else’s property.
4. The purpose of drilling mud: it consists of a gelatin mixed with berate (sort of like ground seashells) and water. It is pumped downward through the drilling stem and out of the bit (lubricates the bit) and out and up the well, it washes the cuttings from the drilling out, it also contains any gases that come into contact with the drill bit until the casing can be applied.
B. Law of Capture and Private Ownership:
1. Law of capture: Oil doesn’t belong to anyone while it is underground. Once the oil comes to the surface, no matter where it came from (seeps from under someone else’s land), it belongs to the owner of the well. A landowner owns all of the production from the well no matter where the oil seeps from.
a. Private ownership: The landowner owns as far down vertically from his land as you can drill. The landholder has a property right to everything within his boundaries, including vertically down.
b. Oil and Gas can move: it does not necessarily stay in one place.
i. early courts: no property interest in oil & gas.
ii. current law: land holder does have a property interest in the oil and gas, and it is a protected right.
c. Later there were regulations made on how close a well could be placed to a border.
d. Self Help: if a neighbor is drilling, and oil beneath your property is coming up their well (migration when pressure put on the oil), the remedy is self help. Put up your own well and drill as much as you can.
2. Ownership of extracted oil and gas: once extracted the oil and gas are personal property. Title to personal property is not lost, while it leaked, unless it is abandoned. The owner may lose possession, but he retains title to it unless it is abandoned.
a. abandonment: (elements)
i. intention to abandon
ii. an overt act that corroborates the intention to abandon.
1) the longer the owner waits to retrieve the property, the less the intent to return.
b. intention to keep:
i. quick action to recover what they could
l. If they can’t prove this it is all treated as native gas.
4) eminent domain: a pipeline company may acquire storage facilities in underground reservoirs through eminent domain.
b. must not injure the reservoir: a limitation on the rule of capture, if you injure the reservoir, you aren’t protected by the rule of capture, because the damage results in waste
i. upon injuring a reservoir the party is liable to the adjoining landowners for any damage to their real or personal property as well as any oil drained or lost as a result of the negligence/ damage.
ii. A well owner has a right to artificially improve the flow of production without damage to the reservoir (nitro- glycerin charges)
1) could argue nuisance if the charges are disruptive to the landowners enjoyment that goes with the ownership of land.
C. Conservation: (limitation of rule of capture) there is a limit to the number of oil and gas wells produced on a specified amount of land. The rule of capture is modified by the correlative power of the state.
1. preventing waste:
a. limiting the location of wells
i. density (one well per 40 acres)
ii. distance (wells so far between each other)
b. limit production from a well: protects against waste and the adjacent landowners rights.
i. assign to each well “an allowable” a straight surface acreage allocation is the most common unless uni