OIL & GAS LAW
Professor Watson
Fall 2008
I. OWNERSHIP OF OIL AND GAS RIGHTS
a. Primary Recovery: Production of oil by direct pumping, or by utilizing the natural pressures in the ground
b. Secondary Recovery: The process of pumping water or steam gas into the ground to force upward oil that is not otherwise recovered by primary recovery
c. The Ad CoelumDoctrine
i. A common law principle which provides that the owner of property owned everything from the heavens above to the core of the earth
1. Adherence to this principle would have hamstrung development of the oil & gas industry as it would have conflicted with laissez faire
2. Modified by the Rule of Capture
d. The Rule of Capture
i. There is no liability for capturing oil and gas that drains from another’s land
ii. The owner of a tract of land acquires title to the oil and gas that he produces from wells drilled thereon, though it may be proved that such oil and gas migrated from adjoining lands
1. Under this rule, the landowner may extract oil and gas from wells drilled on her land, even though the landowner is draining oil and gas from neighboring lands
iii. Does NOT apply to oil and gas that has been previously captured
1. Generally the courts have reasoned that oil and gas becomes personal property when produced, so that ownership is not lost by mere loss of possession
iv. Using enhanced recovery techniques to sweep away (drain) reserves recoverable by an adjoining property owner by use of primary recovery techniques should not be protected by the rule of capture
e. The Doctrine of Correlative Rights
i. Each owner in a common source of supply has the right to a fair chance to produce oil and gas from the reservoir substantially in the proportion that the quantity of recoverable oil and gas under his land bears to the quantity in the reservoir
ii. Developed to curb the wasteful practices which either were the result of, or condoned by, the rule of capture
iii. Use of wasteful production techniques will bring liability, as will negligent damage to the ability of the producing formation to produce for others
1. Elliff v. Texon Drilling: whether the law of capture absolves Texon of any liability for the negligent waste or destruction of Eliffs’ gas and distillate, though substantially all of such waste or destruction occurred after the minerals had been drained from beneath the Eliffs’ lands
a. Each landowner should be afforded the opportunity to produce his fair share of the recoverable oil and gas beneath his land
b. 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 and gas therefrom by lawful operations conducted on his own land; that each such owner has duties to the other owners not to exercise his privileges or taking so as to injure the common source of supply; and that such other has rights that other owners not exercise their privileges of taking so as to injury the common source of supply
c. The right to take is not the right to WASTE
d. Held: the negligent waste and destruction of Eliffs’ gas and distillate was neither a legitimate draining of the minerals from beneath their lands nor a lawful or reasonable appropriation of them. Consequently, the Eliffs did not lose their right, title and interest in them under the law of capture
f. What is an offset well?
i
ered by deed or by reservation, the mineral interest includes an implied easement to use the surface in such ways and to such extent as is reasonably necessary to obtain the minerals under the property
a. Easement limited by a standard of reasonableness and an obligation to accommodate the uses of the surface owner if possible
iii. Mineral interests possess the following incidents in addition to the right of surface use in all states, regardless of ownership theory:
1. Right to surface use
2. Right to profits and the obligation for costs
3. Executive Right: Right to lease or sell the mineral interest, especially when severed from the mineral interest
4. Right to benefits under an oil and gas lease (monetary value)
a. Right to Bonus: when a lease is signed, right to any payment (by oil co.) to induce the lease
b. Delay Rentals: payments from oil co. to maintain the lease (avoid lapse) without development
c. Shut-in Royalty Payments: payments from oil co. to maintain the lease (avoid lapse) without production
d. Royalties: a share of production, or the value or proceeds of production, free of the costs of production, when and if there is oil & gas on the property
i. Kinds of Royalty Interests
1. Landowner’s royalty/lessor’s royalty: the interest in production retained by the lessor in the royalty clause of the oil and gas lease
