Oil and Gas
Pearson
Introduction
Physical Characteristics of Oil & Gas:
Early law analogized oil/gas to ferae naturae or water that flows underground. The fact that the oil/gas will move is what differentiates it from real property
Basic terms
Specific gravity—ratio between the weights of equal volumes of water and another substance measured at standard temperature
A.P.I. degrees—inverse ratio of specific gravity (higher A.P.I usually means better price for the oil)
Viscosity—an inverse measure of the ability of a fluid to flow
Permeability—capacity for transmitting a fluid
Porosity—a measure of the void spaces in a material (determines how much gas can be contained in reservoir)
Wildcat well—the first well drilled
Offset well – those wells drilled after the wildcat
Types of production
Primary production—natural energy propels petroleum to the well bore (gas expansion, water encroachment, and gravity)
Pressure maintenance—injection of a fluid into reservoir when reservoir starts showing decreased pressure
Secondary production—performed when pressure is nearly gone from reservoir. Typically, water is pumped from an input well. Water circulated from the input well pushes oil remaining in reservoir to the production well
Tertiary production (enhanced recovery)—thermal methods and fluid injections (using chemicals that improve sweep efficiency over water).
Haphazard drilling lead to large percentages of oil becoming stuck in the ground à lead to rise of regulation of oil/gas production
The Rule of Capture and Correlative Rights (primary recovery)—Exam note: For operator, must make sure that all modifications to rule of capture complied with (must discuss this topic if exam presents scenario where neighboring landowners have competing wells and there is possibility of drainage claim.
The Rule of Capture, generally stated, is that owners of a tract of land have title to the oil or gas produced from the wells on his land, though some of that oil or gas may have flowed from adjacent lands without consent of the owner of those lands, and without incurring liability to him for drainage. See Philips Petroleoum v. Stryker, 723 So.2d 585 (Ala. 1998). As interpreted by Alabama courts, “absent negligence, waste, or fraud, the owners of oil and gas rights have no protection against drainage resulting from vertical drilling on adjacent tracts, but under the rule of ‘go and do likewise’ they are not liable if their activities drain oil or gas from adjacent tracts.” NCNB Texas Nat. Bank, N.A. v. West, 631 So.2d 212 (Ala. 1993).
Modifications to the Rule—all must be complied with by anyone asserting claim on the oil/gas
Correlative Rights: Although the rule of capture permits landowners to extract oil and gas that may flow from underneath land owned by another, adjacent land owners have correlative rights to a common reservoir underlying the adjacent parcels of land. Ala. Code § 9-17-2; Philips Petroleoum v. Stryker, 723 So.2d 585 (Ala. 1998). This means “that (1) each owner of land in a common source of supply of oil and gas has legal privileges as against other owners of land therein to take oil or gas therefrom by lawful operations conducted on his own land; (2) that each owner has duties to the other owners not to exercise his privileges of taking so as to injure the common source of supply; (3) and that each such owner has rights that other owners not exercise their privileges of taking so as to injure the common source of supply.” Eliff v. Texon Drilling Co., 210 S.W.2d 558 (Tex. 1948) (quoting 1 Summers, Oil and Gas, Perm.Ed., § 63).
For example, negligent waste or destruction of the oil and gas in a common reservoir is not protected by the rule of capture. Eliff v. Texon Drilling Co., 210 S.W.2d 558 (Tex. 1948). In Eliff, the fire caused by a blow out at the respondent’s well caused a fissure to spread to petitioners’ well, making it unusable. Such “waste and destruction of petitioners’ gas and distillate was neither a legitimate drainage of the minerals from beneath their lands nor a lawful or reasonable appropriation of them. Consequently, the petitioners did not lose their right, title and interest in them under the law of capture.” Id.
State oil and gas boards/conservation statutes: Ala. Code § 9-17-19 modifies the rule of capture in that it creates a cause of action for legal damages if a landowner can prove a neighboring landowner violated any of the state’s oil & gas regulations.
Pooling and Unitization: 9 Ala. Code Chapter 17, Article 3 sets standards for unitization of oil and gas operations. Petitioners must prove a formula by which owners will be compensated. Unitization plan will also include plans for artificially raising pressure to improve overall recovery. This plan must be approved by 75% of owners in the unitized area. If approved, everyone inside the unitized area shares in costs and profits of the well operation.
“Negative” Rule of Capture—Secondary recovery
The “negative” rule of capture applies whenever the well operations of one landowner involves injecting substances into the reservoir to sweep oil toward the production pump and that action causes oil to be swept from underneath an adjacent landowner. Two lines of cases on the issue.
No Recovery Permitted: When an adjacent landowner objects when given the opportunity to join a unitization plan and the unitization plan is approved by the state commission governing oil & gas in that state, then there will be no liability to that adjacent landowner. See Philips Petroleoum v. Stryker, 723 So.2d 585 (Ala. 1998) (Incorporates California Co. v. Britt à Will apply negative rule of capture. Stryker outside of and adjacent to Phillips petroleum and the unitization plan. Phillips claims Stryker lays outside of the reservoir. Stryker waits, then hires expert witnesses to say that the reservoir in the unitization plan expands outside the plan area into Stryker’s property. Stryker claims Phillips displacing valuable wet gas with cheaper dry gas by their operations. Supreme Court of AL reversed jury verdict for Stryker. Held that Stryker’s attempted claim was impermissible collateral attack on oil & gas board decision. AL Supreme Court at almost all times agrees with oil & gas boa
r exercise control over such gas.’” Northern Natural Gas Co. v. L.D. Drilling, Inc. (D. Kan. 2010).
A permit from the state to operate wells does not grant the right to produce storage gas. See Northern Natural Gas Co. v. L.D. Drilling, Inc. (D. Kan. 2010). Such action “weighs in favor of a finding of nuisance. Federal and state law recognize the importance of underground gas storage facilities and the public interests they further.” Id. Nuisance actions are not precluded even though the acts may otherwise be lawful. Ala. Code § 6-5-120.
Ownership Theories
Courts “look to the nature of the interest as well as its duration to define plaintiffs’ rights. Incorporeal interests, as distinguished from corporeal ones, may be abandoned, whatever their life, whether limited or unlimited in time, whether ‘fee’ or a term, whether perpetual or restricted.” Gerhard v. Stevens, 68 Cal.2d 864 (Cal. 1968).
Corporeal (ownership jurisdictions)
Key points: Fee simple is greatest interest you can own, possessory, “ownership-in-place,” and abandonment not possible.
Incorporeal (non-ownership jurisdictions
Key points: profit-a-prendre is greatest interest you can own, non-possessory, no ownership-in-place, and abandonment is possible (a fact question; not desirable if you are looking for certainty of title and predictability of results. See Gerard v. Stevens)
A profit-a-prendre, like other incorporeal hereditaments, can be abandoned. If abandoned, the interest returns to the estate out of which it was carved.
Abandonment: For there to be abandonment, “there must be a nonuser accompanied by unequivocal and decisive acts on the part of the [dominant tenant], clearly showing an intent to abandon. . . . [T]he owner’s nonuser itself may under some circumstances constitute such an act.” Gerhard v. Stevens, 68 Cal.2d 864 (Cal. 1968). When conflicting inferences can be drawn from nonuser, “the trial court must find either that the owner’s future use of the right could result only from a palpably unsound business judgment or that the owner has given a further indication of his intent to abandon.” Id.
Ocean Shore R.R. Co. v. Doelger, 179 Cal.App.2d 222 (Cal. Ct. App. 1960) (finding abandonment when evidence showed that the restoration of service would be prohibitively expensive and that effective competition with other carriers was realistically impossible).
For some of the consequences of how the interest is classified, see pp. 54-55 and the law review article mentioned in the syllabus.
