Oil and Gas Outline

Oil and Gas Outline-AME
Spring 2010-Dzienkowski
 
Table of Contents
I.       Introduction to Petroleum and Petroleum Geology. 2
II.     Rule of Capture. 2
III.         Theories of Ownership. 3
c.       State Theory of Ownership of Minerals. 3
d.      Correlative Rights. 3
IV.         Common Patterns of Oil and Gas Ownership. 3
V.      Oil and Gas Conservation: Law and Regulation. 3
VI.         Small Tracts and Compulsory Pooling. 3
d.      Texas Rule 37 & 38 Exceptions. 3
i.        Rule 37-refers to boundary lines and distances (spacing rule)3
ii.       Rule 38-governs drilling density. 3
iii.          Voluntary Subdivision Rule:3
iv.          Century Doctrine. 3
VII.       Introduction to the Oil and Gas Lease. 3
VIII.      Granting Clause: Rights Granted in Oil and Gas Lease. 3
b.      Surface Use. 3
f.       In compliance with accommodation doctrine. 3
iv.          Dominant Estate Implied Rights. 3
d.       Land and Interests Granted. 3
IX.         Habendum Clause: Primary Term… 3
i.        Delay Rental3
ii.       Commencing Drilling. 3
X.      Habendum Clause: Secondary Term… 3
b.      Production in Paying Quantities. 3
iii.           Actual Production or Capability of Production. 3
f.       Force Majeure Clause. 3
XI.         Pooling Clauses in Lease. 3
c.       Good Faith Pooling. 3
XII.       Royalty Payments. 3
iii.           Piney Woods Country Life School v. Shell Oil Co.—Market Value. 3
c.       Implied Lease Covenant That May Affect Royalty. 3
XIII.      Implied Covenants***Very important part of the course. Will DEFINITELY be on the final3
a.      General3
b.      Drainage. 3
c.       Develop. 3
viii.        Implied Covenant to Further Explore. 3
d.      Diligent and Proper Operations. 3
XIV.           Division Orders. 3
XV.        Remedies for Failure to Pay Royalties. 3
XVI.           Misc. Royalty Problems. 3
XVII.         Operating Agreements. 3
XVIII.        Farmout Agreements. 3
XIX.           Drilling Contracts. 3
XX.        Executive Right3
XXI.           Meaning of Other Minerals. 3
d.       4 Tests for Definition of “Minerals”:3
XXII.         Shared Ownership. 3
 
 
I.            Introduction to Petroleum and Petroleum Geology
a.       Problems with Private Ownership of Mineral Rights:
                                i.      Fragmented ownership-Many owners, small interests, small tracts
                              ii.      Many transactions
1.      Creative, but high transactions costs, lessees (developers) controlled.
                            iii.      Good part: Competition
                            iv.      Bad part
1.      Over-drilling; Over production; Economic and physical waste
                              v.      Long term effect of private ownership
1.      Created business for legal, accounting profession
2.      Many disputes
b.      Real Property v. Personal Property
                                i.      Real Property: The ownership of land (i.e. owning a house)
1.      To own real property:
a.       Own a fee simple in lot A (all the ownership you can have) you own the surface, everything to the core of the earth, and to the top of sky. In US if own fee simple then you own the minerals. –Del Monte Mining
b.      This gives us the right to own oil and gas on our property.
                              ii.      Personal Property: Movable property (i.e. car)
c.       Mineral Ownership
                                i.      The Role of Surface Boundaries
1.      Del Monte Mining & Milling Co. v. Last Chance Mining & Milling Co. (171 U.S. 55 (1898)
a.       CL: whoever had the fee of the soil owned all below the surface.
b.      At CL owner of the soil may convey his interest in mineral beneath the surface w/o relinquishing his title to the surface.
II.            Rule of Capture
a.       Rule: the landowner who extracts oil or gas from beneath his or her land acquires ownership of the extracted substances even though they may have been drained from beneath the land of another.
                                i.      No liability for draining your neighbor
1.      Neighbor remedy: self help; drill off-set well if you see neighbor building a well
                              ii.      Rationale for Rule:
1.      Practicality
a.       Science is uncertain. Historically did not know how much you had or what was taken.
2.      Wild Animal Analogy
a.       Oil and gas is free-flowing and don’t know where it is going.
b.      Like wild animal you don’t own it until you capture it.
3.      Development of oil and gas
                            iii.      Is Rule of Capture Justified?
1.      Consequence of rule-Waste
a.       courts didn’t understand that the rule of capture would lead to waste; everyone drill on their land to get their share of oil and gas. Lots of oil rigs on small tracts
b.      Our system is trying to minimize economic waste, but giving private ownership probably won’t minimize waste.
2.      The more we know about the existence under earth, we can have a unified way of developing
3.      Rule of capture was developed with vertical drilling, does hydraulic fracturing and horizontal drilling change this.
b.      Kelly v. Ohio Oil Co.
                                i.      B=K sues A for draining B’s oil or gas
                              ii.      Look at in this style of case:
1.      If A acting lawful, move to rule of capture
a.       Under rule of capture B has no cause of action.
                                                                                i.      This case found in favor of ∆ b/c it is impossible to distinguish that product of the ∆ from that of the plaintiff, but all of said oil is so being taken by the said ∆ and converted to its own use.
                                                                              ii.      Petroleum oil is a mineral, and while in the earth it is part of the realty, and it forms part of some tract until it reaches a well, and is raised to the surface, and then for the first time it becomes the subject of distinct ownership, separate from the realty and becomes personal property.
2.      If unlawful then different result
a.       If someone trespasses onto your land and operates your well, the oil produced is the owner of the well.
b.      When the bottom of a well bore crosses into lands owned by others, the oil produced belongs to the owner of the land where the bore is bottomed
c.       Browning v. Luecke (Tx. 2000)-ct refused to apply the trad RoC to a horiz. well bore which produced oil from several tracts. The ct instead held the oil should be apportioned on the basis of the amt produced from ea tract.
III.            Theories of Ownership
a.       Champlin Exploration Inc. v. Western
                                i.      Escaped hydrocarbons. Neighbor collected and sold it. Champlin wanted it back.
                              ii.      Law of Abandonment: General Rule: once you have acquired ownership (extracted oil and gas from the earth), unless you have abandoned the property, you still have ownership of the property even if it escapes.
1.      The owner can get them back. Owner did not lose title to escaped hydrocarbons b/c no evidence of intent to abandon
2.      Abandonment requires intent to abandon
a.       If don’t make any attempt to recover it, and lost it, then abandoned.
b.      Even with a Gusher, oil is brought to the surface, so still owner’s property. Ct apply the law of abandonment
                            iii.      *Rule of Capture applies before the oil or gas is produced. But once it is produced it does not apply.
b.      Texas American Energy Corp v. Citizens Fidelity Bank
                                i.      Issue: Whether natural gas extracted and injected into a reservoir (storage tank) is personal property or real property.
                              ii.      Court holds that its personal property extracted natural gas and oil stored in underground reservoirs are goods
                            iii.      Rule: When previously extracted oil or gas is subsequently stored in underground reservoirs capable of being defined with certainty and the integrity of said reservoirs is capable of being maintained, title to such oil or gas is not lost and said minerals do not become subject to the rights of the owners of the surface above the storage fields.
1.      It has been stipulated that the gas reservoir has total integrity, and the gas cannot escape nor can it be extracted by anyone except Western. Using the feraenaturae analogy, Western has captured the wild fox, hence reducing it to personal property.
c.       State Theory of Ownership of Minerals
                                i.      States are split on ownership of minerals
1.      Ownership state
a.       Like Texas, owner of mineral estate is viewed to own mineral in state.
b.      Own minerals in place under your property (minerals under surface)
c.       Modified by rule of capture, if your neighbor drains you, then you have no action against them.
2.      Non-ownership state (LA)
a.       Don’t own it until you acquire it. But have exclusive right of access
b.      If neighbor drills a well and drains then you never owned it anyways.
d.      Correlative Rights
                                i.      General:
1.      Rights each owner has on a shared reservoir
2.      Imply every owner has reciprocal “obligations” to act in a manner that does not unreasonably interfere w/other owners overlying the reservoir.
3.      Correlative rights is opposed to rule of capture
4.      Mission of RRC
a.       Prevent Waste
b.      Protection of correlative rights
                              ii.      People’s Gas Co. v. Tyner
1.      Natural gas 200 ft away from Tyner resident. Wanting to shoot nitroglycerin into the earth to provide more natural energy in the reservoir.
2.      Law of nuisance has a role here
a.       Balancing the benefits of using the nitro with the risk to surrounding owners, the risk that it interferes with neighbors gas, harm to neighboring land owners.
b.      The owner of a lot may not erect and maintain a nuisance thereon, whereby his neighbors are injured. If he does so, and the injury sustained by such neighbor cannot be adequately compensated in damages, he may be enjoined.
3.      It has long been settled that a private citizen may maintain an action for a public wrong if he suffers an injury peculiar to himself, and not sustained by the public in general.
4.      Court granted the injunction.
                            iii.      Wronski v. Sun Oil Co.
1.      Overproduction was willful and intentional and awarded damages.
a.       Drained oil from neighbor
2.      Awarded gross profits rather than punitive damages
a.       Gross value of drained oil, could not offset production cost.
3.      Most important principle: rule of capture is limited by you must be operating under the purview of the state law. Have to be lawful.
IV.            Common Patterns of Oil and Gas Ownership
a.       Smith has a fee simple in Blackacre-tract of land
                                i.      Bought for $100K
1.      The IRS says it is all allocated to the surface unless you knew there was mineral potential below. Thus, basis in minerals is 0 for IRS purposes.
                              ii.      Fee simple indicate you own entire real property, surface and minerals
b.      Willie, oil and gas company, thinks there may be oil and gas under Blackacre.
                                i.      First step may be to get:
1.      shooting rights- (more like contract); or
a.       Flat fee-Willie pays flat fee to shoot the land
2.      Shooting option.
a.       Shooting rights plus an a