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Oil and Gas
University of Dayton School of Law
Watson, Blake Andrew

Oil and Gas Law Outline
Fall 2008

I. Recovery

Artificial reservoir repressuring operations:

1. pressure maintenance: involves the injection of a fluid into a reservoir just beginning to show production and pressure decline

2. secondary recovery: used on worn out fields, water flooding is a common method used

3. tertiary/enhanced recovery: includes a number of processes such as chemical flooding, steam injection, and steam flooding

Fundamental elements of petroleum exploration:

· leasing the land
· careful geological study of it
· making a location for a test well
· clearing the legal title to the land
· drilling the well

The basic legal instrument in this area is the oil and gas lease

There are two types of interests: mineral interest and royalty interest

The unit of measurement for natural gas in the BTU (British thermal unit) which is its capacity to heat

MMBtu: the abbreviation for one million BTU’s, one of the standard units of measurement for natural gas

Distillate and crude oil are measured in barrels

Distillate: the wet element of natural gas that may be removed as a liquid, used interchangeably with “condensate” and “natural gasoline”

Native gas: gas originally in place (in contrast to injected gas)

Note: In a government survey; One section equals 640 acres

The Nature and Protection of Interests in Oil and Gas

Some Basic terms and concepts:

Conversion: wrongful taking of personal property (if oil and gas is personal property, then the cause of action is conversion))

Trespass: an invasion of an interest in real property (if oil and gas is part of the realty then the cause of action for injury to real property is trespass)

Real property: land and any structures built on it

Lessor: one who rents property to another

Lessee: one who rents property from another

Easement: (an interest in land) a right of use over the property of another

Nature of Ownership in Oil and Gas

The Rule Of Capture: one who captures the resource has ownership and therefore there is no liability for capturing oil and gas that drains from another’s lands

Under the classic rule of capture, a landowner has only one option when someone is draining oil and gas from beneath his property: drill his own offset well to intercept the flow.

The rule of capture encourages wasteful drilling and the dissipation of pressure (straws in Ice Cream soda analogy: everyone sticks their straws in and tries to suck up a much as possible; in oil production this leads to inefficient pumping and limits the total amount recoverable)

The Rule of Capture has been modified or limited in many states. The following case illustrates the doctrine of correlative rights as a limitation on the rule of capture

Elliff v. Texon Drilling Co.

Facts: P owned surface and certain royalty interests in the oil and gas. P’s lands overlaid 50% of huge reservoir. D’s were drilling east of P’s land and caused the well to blow out and crater, which drained large quantities of gas and distillate from under P’s land. P argues that D was negligent (failing to use drilling mud of sufficient weight) in permitting the well to blow out. D argued that under the law of capture, P had

e Louisiana Mineral Code, ownership of land does not include ownership of oil. The owner has a non-possesory right to produce oil.

There are two theories of ownership: Non-ownership (followed in Ok., La., Ca., and Wy.) and the Ownership in place theory (followed in Tx, NM., Co., and Kan.)

Non-ownership: owner of oil and gas rights did not own oil or gas until it has been captured. Until capture, the owner of oil and gas rights only has a right to explore, develop, and produce oil and gas

Ownership in place: oil and gas rights are a fee simple absolute estate in the land, and the right to individual molecules of oil and gas is a determinable interest that terminates automatically upon capture by another

State regulation and the modification of the Rule of Capture

In Texas and other states, production may be restricted by state regulatory agencies.

In Ohio, the courts have rejected the rule of capture and replaced it with a rule that includes the correlative rights of the owners over the common source of supply.

Subsurface Storage of Gas

Because of the difficulty of storing natural gas above ground, many natural gas utilities and industrial users use depleted underground formations to store gas.

Many states have enacted statutes that regulate various aspects of gas storage.