I. Introduction: Some Basic Legal Concepts
a. Vocabulary & Other Basics
i. 5 Phases of Oil Business
1. Exploration (this course)
2. Production (this course)
3. Transportation
4. Refining
5. Marketing
ii. Terms
1. Integrated Oil Company – large or small that does all 5 phases of the business
2. Sedimentary Rock – Oil & Gas are only found in this type of rock, never igneous rock
3. Porosity – amount of empty microscopic space in rocks; oil is found in rock not caverns
4. Permeability – the interconnectedness of the open spaces in the rock – if they are not interconnected there is no way to get it out
5. Viscosity – The thickness of the oil. Low viscosity oil can get through tight spaces. High viscosity oil can’t.
6. Lessor – landowner who signs the lease
7. Lessee – company that has the lease
8. Correlative Rights – different persons own same interests in the same property
9. Extraneous Gas – Gas reinjected into a reservoir for storage after once being expreacted.
10. Fracing – Fracturing through explosives or vibrations that increases permeability of rock.
iii. Types of Recovery
1. 25% Primary recovery
a. natural reservoir pressure
b. mechanical pumping
2. 25% Secondary recovery – widely used and economical
a. injecting water under pressure to push oil out and flood
3. 25% Tertiary recovery – some is economic
a. injection of pressurized carbon dioxide
b. heat to generate steam and injecting
c. heat to set reservoir on fire and makes oil thinner and rises
d. noneconomic – injecting a surfactant (detergent)
b. Ownership of Minerals
i. Common Law
1. A landowner owns down to the center of the earth by extending downward the vertical boundaries of the land
ii. Clear Ownership States
1. Texas, Mississippi and New Mexico are clear ownership states where oil and gas can be owned in place as opposed to reduced to possession
iii. “Profit a prondre”
1. Some states use this. You have a property right to get the oil on your land just as you have the right to hunt on your land but no property interest in the oil itself until it is captured
c. The Rule of Capture
i. Elements
1. Drills well on land
2. At a legal location
3. Bottoms under their own land
a. Doesn’t apply to waterflooding
i. Waterflooding isn’t a trespass if allowed
ii. If not allowed, it can entitle other party to lost profits
ii. Basic Concepts
1. As oil migrates across property lines, it changes title
2. Remedy—go drill your own well// self help
3. ROC limits ownership of oil before its produced
4. Ownership in place
a. Own all substances underground but qualified by rule of capture
b. Ownership is lost if it migrates
5. Exclusive right to take
6. Don’t own it until you bring it up if it came from under your land
a. Oil while underground is realty
b. Oil isn’t personalty until produced
7. Title only lost through Common Law Abandonment
a. Not if just spilled on surface// still owned
b. Common Law Abandonment
i. Present intent to abandon
ii. Corresponding physical act showing intent
c. If Common Law abandonment, then finders-keepers applies
8. Remember, you do not own the oil and gas underneath your land, you own the fair chance to extract it.
iii. Re-Injection of Gas Problems (Extraneous Gas)
1. Texas Rule (Majority)
a. Oil and gas are minerals (realty) while undisturbed under the earth. They become personal property when extracted. Title to extraneous gas is not lost when it is re-injected into the earth because it has one been severed. Title can only be lost through abandonment.
2. Kentucky Ru
lease estate is the dominant estate.
ii. Rule of Reasonable Necessity
1. Since the lease estate is the dominant estate it is impliedly authorized to make use of the surface as reasonably necessary to produce and remove minerals. These rights are to be exercised with due regard to for the rights of the owner of the servient (surface) estate.
2. If the surface owner wants to limit the actions of the lessee, the surface owner has the burden of showing the lessee’s actions are not reasonably necessary, but this is not an easy burden for the surface owner to meet.
3. Going beyond reasonable necessity is trespassing. It is not a balancing test.
iii. Accommodation / Due Regard Doctrine
1. The general rule is reasonable necessity, but if”
a. Pre-existing use by surface owner
b. Proposed conflicting use by lessee
c. A reasonable alternative is available on the lease itself (not neighbors land, lessee can’ t be forced to leave the lease)
i. If ALL THREE exist, then the accommodation doctrine kicks in and the lessee is required to go beyond the rule of necessity to accommodate the other party.
iv. Other Limits
1. No Need to Clean-up
a. Unless there is a special clause, the lessee is under no obligation to surface owner to clean the surface. Even an environmental mess will not give a surface owner remedies under the lease. Have to use common law.
2. Subsidence
a. Subsidence is when the ground becomes less dense from drilling and there are spectacular sink holes. The only limit concerning subsidence for a lessee is that they are liable for negligent or willfully malicious subsidence.
