Oil & Gas
Smith
Fall 2015
Petroleum Geology
Gas-cap Drive – want to drill down structure, as far away from the gas cap as possible. This forces the gas cap to expand into the low-pressure areas and push oil out into wells in low-pressure areas
Water Drive – want to drill up structure, at furthest point from the water
Basic Legal Doctrines
Rule of Capture
Doesn’t apply to slant hole drilling
Justifications: 1) Self-help, and 2) Administrability: It’d be hard to tell how much oil had been drained
Limitations on ROC
ROC only protects against liability of proper method of production
If improper, operator is liable
Duty not to engage in unlawful production
Can’t trespass, drill slant well; can’t overproduce (Wronski)
Duty not to waste or unreasonably injure the reservoir
Can’t be negligent
Duty to plug abandoned wells
Duty of care in manner in which you drill
State Regulations
Aim to 1) prevent waste and 2) protect correlative rights
Theories of Ownership
TX – Ownership in Place; own O&G in fee simple
Analogize to fee simple determinable on molecular basis
OK – Non-Ownership Theory; Exclusive Right to Take
Don’t own O&G until you reduce it to dominion and control
Analogize to wild animals; easement
Rights of Mineral Owner in TX
Right of Access and Development – can use surface estate
Right to Develop – right to incur costs and retain profits
Right to Alienate – can transfer/assign mineral estate to another
Right to Retain Lease Benefits – 1) Right to Execute Lease, 2) Right to Bonus, 3) Right to Delay Rentals, 4) Right to Royalty
O&G Lease – Interests Created
Lessee (Fee Simple Determinable) – gets all the rights of mineral estate except those specifically reserved in the lessor
Lessor (Possibility of Reverter) – usually retains right to bonus, delay rental, royalty,
Loss of Ownership through Non-Use
TX – Can’t abandon b/c ownership theory (unless AP)
OK – Can abandon since only have easement. Must show:
1) Severance
2) Non-Ownership jurisdiction
3) Elements of Abandonment: 1) Long and continued non-use; 2) Intent to abandon
Adverse Possession
Notice to proper owner (can be constructive)
Entry Before Severance of Mineral Estate: If APed the surface, then APed mineral estate too
Entry After Severance of Mineral Estate: Can’t AP just by APing the surface; must drill/produce for statutory period
Unintentional – P gets net value of production (D deducts costs)
Intentional – P gets gross value of production (D can’t deduct costs)
Geophysical (Seismic) – no trespassing b/c no physical entry
Coastal v. Garza – Court held D who fraced proppants crossing P’s boundary from fracing was protected by ROC, didn’t reach trespass issue. Concurrence: This simply isn’t a trespass. Majority has four reasons for its decision:
Self-help – P could’ve just drilled
Finding of trespass would undermine RRC’s authority
Difficulty calculating damages
Adverse impact on O&G production – biggest reason
FPL Farming – RRC permit does not shield lessee from liability
If plaintiff can prove trespass might be able to obtain an injunction
Distinguish from Manziel on basis that case simply said you cannot enjoin RRC from issuing a permit; didn’t rule out bringing an action for trespass
Distinguish from Garza on basis that Garza had a nonpossessory interest (have to prove damages to sue for trespass) and that Rule of Capture protecting Coastal is inapplicable in water flooding context
O&G Lease
Surface Use – Implied Right that lessee can access the surface for developmen
fter as gas is or can be produced”
To Prove Well Isn’t Producing in Paying Quantities:
Operating costs exceed income for reasonable amount of time
Issue: Are depreciation and overhead costs?
(excluding, drilling and equipment costs, SG & A, and depreciation). Income side not reduced for overriding royalties (value of entire working interest) because these are used to pay capex.
Reasonably prudent operator wouldn’t continue to operate the well
Rule of thumb is a year at a loss would satisfy this
Tough for lessor to say they know more about O&G business than the company
NOTE: Both prongs must be satisfied for LO to prove not producing in paying quantities
NOTE on BOP: If any oil being produced, BOP on LO to prove that the well isn’t producing in paying quantities. If no production at all, BOP is on LE to find some other savings clause that saves the lease
Savings Clauses
Shut-In Royalty – if well is capable of production but for some reason can’t/don’t want to produce, then LE can make payment and then LO will treat well as if it is producing and will maintain the lease
Termination – payment obligation very strict; must pay on time or lease terminates
Payment Date – must pay w/in one year of shut-in
Capable of Production – must be able to produce well by “turning the valve.” If well needs reworking then LE must find some other savings clause to maintain the lease
NOTE: LO should put provision in shut-in royalty limiting how long well can remain shut-in
