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Oil and Gas
University of Mississippi School of Law
Pace, Niki L.

Professor Pace Oil and Gas Fall 2014

· Trespass and Mineral Ownership:

o Page 115 terms – fee interest (whole estate, endures forever), mineral interest (mineral fee, endures forever)

o Problem page 122 – We want to conduct geophysical testing. See timeline. O only owns the surface and the right to explore is tied to the mineral interest. You just need permission from the mineral interest owner. Some states require both owners of a mineral interest and some just require one. If you can’t get permission, you may be able to use a neighboring property to get the exploration data you need.

o Enron Oil & Gas Co. v. Worth – The Worths owned the surface land and Enron was trying to explore because they owned the mineral interest. Agent of Enron offered to pay $5 per surface acre plus other reimbursements. Trial court stated that Enron’s permits did not grant it the right to drill and remove hydrocarbons and therefore did not have the right to go upon the land to conduct seismic testing; Enron appeals and appellate court holds that the permits did transfer to Enron the right of ingress and egress on D’s land for the purpose of conducting geophysical exploration; court basically ruled that the owner of a tiny % of the mineral interest can authorize geophysical operations; joinder of the other interest owners is not required

§ Notes: exclusive right to take state – your relief is an injunction; real property owner state – your relief is to claim trespass

o Kennedy v. General Geophysical Co. – Kennedy owned the surface and Geophysical wanted to explore the mineral interest; Kennedy said no, so Geophysical had to conduct exploration from a neighboring plot along the edge of Kennedy’s plot. Kennedy suing two oil companies for alleged trespass via vibrations and for securing info. About minerals under the surface of Kennedy’s 339 tract of land; oil companies never placed any jugs or receiving sets on Kennedy’s land; court found that oil companies were not negligent or malicious in their actions and Kennedy was not entitled to exemplary damages because no actual damage had been sustained

§ Geophysical trespass – who owns the information – terms usually depend on the lease but it is custom that the lessee is going to own the seismic data (in other words the person who is leasing the mineral interest from the surface area)

§ Geophysical “Trespass” Actions – traditional trespass, assumpsit, loss of speculative value, interference

o Humble Oil & Refining Co. v. Kishi – “loss of speculative value” case; Kishi owned all surface rights and 3/4 of the oil and mineral rights and Lang owned the other 1/4 of mineral rights; they granted a lease to Humble Oil Co. to enter upon land a drill oil wells and take the oil; lease was dated 12/23/19 but not signed by Lang until 1/29/20; supposed to only last three years from its date unless Humble was finished drilling prior to the end of the lease; no drilling had begun, but in January of 1923 oil was discovered on an enjoining tract of land; Humble began drilling on 1/23/23 claiming that the lease had not expired; Lange consented to the entry (so no trespass) under Humble’s claim; Humble failed to find oil and relinquished possession in May; now the lease had no value since oil was not discovered; trial court ruled in favor of Kishi but only rewarded him $1 in nominal damages finding that the damages were uncertain; appellate court reversed and allowed Kishi a judgment of 3/4 of the market value of the lease

§ Wyoming Defense to loss of speculative value – “The truth was found.”

o Kidd v. Hoggett – “slander of title” case; Plaintiff Hoggett sued Kidd and others and is attempting to remove an unreleased but expired oil and gas lease and also suing for damages; trial court removed the cloud and awarded damages against Kidd in the amount of $8,400; only Kidd appealed arguing that P did not prove malice for his slander of title claim and that lease was still in force, the evidence shows no malice, and the action for damages is barred by SOL; appellate court affirmed original judgment; court found there was malic because the Defendants were trying to convince the owner that production was likely when it really wasn’t; lying shows malice

§ Slander of title – five elements: 1. publication by defendants 2. publication is false 3. malice, see slide

§ Fee simple absolute gives you ownership over the surface and mineral interest

o Diederich v. Ware – Diederich says they got the deed to the property in 1859 and it doesn’t mention severing the mineral interest from it; Ware owned a 56 surface acre tract and his deed did not mention the mineral interest so he’s been using two oil wells for 32 years open and notoriously; trial court ruled that Ware had acquired title to the minerals under his tract by adverse possession through two sunken wells that Ware had been operating; Diederich is claiming royalties from the tract that they own oil rights to; Ware owns the surface; court rules in Ware’s favor in states that the operation of the two oil wells for the statutory period cut off right of anyone else to drill or extract oil because Ware and his predecessors were working the oil wells under color of title, satisfying the adverse possession

§ You can only adversely possess something that that person owns (see slides – because O only owned surface in one example, A only adversely possesses the surface; if O owned both, A can adversely possess both)

§ Abandonment – two step process of analysis: abandonment only applies to personal property so depends on whether the state considers minerals personal property or not; you can’t abandon real property; Second: was their intent present to abandon? Nonuse of minerals is not enough. Has to be more.

o Scully v. Overall – The scullys (Ps) appealing a judgment in favor of Overall and others (Ds) that held that the Kansas mineral interest lapse statutes entitle a mineral owner to preserve the interest by filing a statement of claim within 60 days after the surface owner files a notice of lapse; appellate court affirmed; mineral interest was not extinguished or vested in the surface owners after 20 years of nonuse, when the mineral interest owners filed a statement of claim within 60 days from the publication of notice

· The Lease:

o Granting Clause: Nature of a lease – it is a conveyance and a contract; is an option to develop, not an obligation (but lease can expire if you don’t develop in some cases); more like a deed than a lease in some aspects; if you have a 20 year lease and you find oil in year 19, you get a right to maintain development for a productive lifetime of the well; lessor and lessee “share the land”

§ Goals of lessee – 1. option but not obligation to drill 2. right to maintain lease for well’s economic life

§ Hunt Oil v. Kerbaugh – Kerbaughs are surface owners; they are appealing from a court order enjoining them from interfering with Hunt Oil and Williams Oil (Ps) geophysical exploration over Kerbaughs property; Hunt Oil and Williams Oil are drilling holes and putting dynamite in the holes and blowing it up to get their seismic reads; Kerbaugh is saying that the dynamite discharge is screwing up their water spring and that there are still open holes on the property; Hunt Oil and Williams Oil did originally make a good faith offering of money to the Kerbaughs; Kerbaughs asserting that oil companies don’t have an unlimited right to conduct the exploration and court should not have granted injunctive relief; court conditionally affirms stating that the oil companies were not required to show their proposed activities were the most reasonable or even that other alternatives were unreasonable; owner of mineral rights in North Dakota has right to use what is

mically without marketing, whereas gas cannot be economically stored above ground

§ The discovery of gas is sufficient, but if oil is discovered, the oil must actually be extracted in order to satisfy the habedum clause

o Mere discovery of oil or gas will not satisfy the habendum clause, but in both instances the product must actually be extracted

§ Constructive production: savings clauses are substitutes for production or constructive production because they state that the specified occurrences or actions will be considered to be production for purposes of the lease

· Shut-in royalty clause: provides that the lease will be maintained if a well capable of producing is shut in

o Freeman v. Magnolia: the court says that so long as the shut-in royalty is paid, the well shall be a producing well

§ Pg 252 n. 1: shut-in royalty clauses can be tricky to define as a condition or covenant. If the “constructive production” is defined as a leasehold well capable of production in paying quantities, then the lease should not terminate if shut-in royalties are not paid. If language makes proper payment the “constructive production”, then failure to pay shut-in royalties properly causes lease termination.

§ Pg. 255 n. 4: shut-in royalty fees are available only when the well can actually produce in paying quantities and must not require additional work; shut-in wells arose out of concern that there would be no market for gas. “Capable of production in paying quantities” means a well that will produce in paying quantities if the well is turned “on,” and it begins flowing, without additional equipment or repair. A well would not be capable of producing in paying quantities if the well switch were turned “on,” and the well did not flow, because of mechanical problems or because the well needs rods, tubing, or pumping equipment.

· Cessation of production clause: there must be a temporary, not permanent, cessation of production and this occurs when a lease, though no producing, is one that a reasonable prudent operator would continue to hold. The lessee seeking the cessation of production doctrine carries the burden of establishing that the cessation is “temporary.”

o The following factors are considered by the court: (1) the period over which the cessation extends, (2) the cause of the termination, (3) lessee’s efforts to restore production.

o Rogers v. Osborn: there are two different wells; the first well is trying to be reworked but has not actual production and the second well commenced after the expiration date; since the first well never started production, it could not “cease” and by ceasing give the lessee 60 days in which to commence additional drilling.

· Dry-hole and operations clauses:

o Dry-hole clause: describes an unsuccessful drilling operation from which no benefit is derived other than obtaining additional geological data; a dry hole is a well that is unsuccessful in that it does not satisfy the requirements of the other provisions of the lease that require the drilling of a producing well.

o Well-completion clause: permits