Natural Resources Law
Watson
Spring 2015
Ad Coelum Doctrine: landowner owns from hell to the heavens—this was modified because ONG is fungible
Rule of Capture: Owner of ME is entitled to extract all the ONG on his estate—no matter where it came from. Whatever gets into the well belongs to the owner of the well—no matter where it came from. Subject to correlative rights and conservation regulations
· The rule of Capture was adopted to benefit the public interest in plentiful energy by encouragement of ONG resources
Five limits to lawful rule of Capture
· Cannot capture by trespass
o Did the action cross the property line? You cannot drill on other people’s property
o Otherwise, you must shown damage or interference with use
· Cannot capture previously captured hydrocarbons
o Natural gas—it gets pumped back into the ground after it is extracted
· Cannot capture by enhanced recovery hyrdocarbons that the drained party could recover by primary recovery
o Putting pressure underneath the ground to displace the oil that the other neighbor could get to
· Cannot capture by negligent or wasteful actions
o This is traditionally considered a conversion
· Cannot capture in violation of state regulation(well-spacing rules, production limits etc.)
Correlative Rights Doctrine
· An owner who exercises the right to capture ONG is subject to the concomitant duty to exercise the right without negligence or waste
· Each common owner has a right to protection from negligent damage to the producing formation
· Positively stated, this doctrine provides that each owner of minerals in a common source of supply has the right to a fair chance to produce ONG from the reservoir substantially in the proportion that the quantity of recoverable ONG under his land bears to the quantity in the reservoir
· Gives an individual rights against another owner who negligently or wastefully uses the rule of capture
OWNERSHIP OF ONG RIGHTS
Conservation laws: states have enacted ONG conservation laws to regulate against physical and economic waste of the resource by:
· 1. Setting rates of production to ensure that the market for oil is protected from excessive production and depressed prices; and
· 2. Encouraging drilling practices that maximize efficient production
Unitization:
· Operators and Royalty owners accept a plan for development of the reservoir under single, centeralized management. Costs of production are allocated and owners of mineral rights receive pro rata shares of the total income
· It is the bringing together, voluntarily, or by order, some or all of well-spacing units over a producing reservoir for joint operations, usually to permit efficient secondary recovery operations
Well-Spacing
· Prevent over-drilling by limiting the number of wells that can be drilled in a given area
· Requires that wells be located far enough from the boundary lines and from one another so that excessive drainage will not occur
· Courts generally hold that a conservation agency may not permit spacing units to extend beyond the limits of an ONG pool because that would allow owners of nonproducing portion of the unit to confiscate their fair share of the owners of the production portions of the unit.
· Off-Set well: when you drill a well to protect your correlative rights
· Exceptions:
o To protect the correlative rights of owners against drainage
§ Otherwise it is an UnC taking, well can be drilled to offset drainage in this instance
o To prevent waste of ONG
§ Without a well-spacing exception, ONG cannot be produced by either mineral owner in an economically feasible manner
o Small-tract Problem
§ Arises when a mineral owner owns mineral rights in a tract too small or oddly shaped to conform to applicable spacing rules.
§ Usual Solution is forced pooling
ú Well Spacing Exceptions are usually accompanied by a reduced production allowable to prevent market-fluxuations/overproduction
Forced Pooling
· Similar to unitization—bringing together of small tracts or fractional interests in order to drill a well, usually to comply with well spacing requirements. Usually landowners pool their lands to drill a well by primary production techniques
· Forced Pooled owners are given the choice of
o 1. Agreeing to participate in drilling and pay their share of the costs
o 2.
share of production FREE of the costs of production. A royalty is paid out even if producing is a money-losing venture, and a royalty interest pays no production costs
o Royalty does NOT have the right to lease
§ Royalty interest owners have no right to grant an ONG lease because they have no right to search, develop or produce from the land
o Royalty does not share in lease benefits
§ No right to lease, means no rights in the lease benefits. Duh.
· Lessor Gets:
o Possibility of Reverter if the lease terminates
o Royalty
· Lessee
o Has to bear the costs/risks of production
o Pay royalty
o Otherwise: keeps profits
Other Kinds of Royalty Interests
· Overriding Royalty: ONG lessee may assign the lease reserving royalty—this amount IS CARVED OUT OF THE ONG INTEREST
· Non-Participating Royalty Interest: carved out of the mineral interest, entitling its holder to a stated share of production, without regard to the terms of any lease.
· Production Payment: A share of production from property, free of the costs of production, that terminates when an agreed sum has been paid. Usually occurs when ONG company assigns part of their leasehold interest
· Carried Interest: Typically a type of financing. It is a fractional interest free of some or all of the costs.
o Casing point- well has been drilled to desired depth and decision is being made whether or not to complete
o If carried out to “casing point” the owner of the CARRIED interest is not responsible for costs of drilling/testing, but liable for costs of completing/producing the well
o If free of ALL operational costs, it is the same as a royalty
· Net Profits Interest- like a ROYALTY, except payable ONLY if there is a net profit
