Oil and Gas Outline

OIL & GAS – PROF. WEAVER
Chapter One: 
à           Mesh Conflicting Principles: 1) Rules of Petroleum Engineers; 2) Rule of Capture; 3) Fair Share (Correlative Rights); and Absolute Ownership Under Tract.
I.                     Law of Capture and Private Ownership (p. 9)
A.                  Rule of Capture – Ownership Prior to and at Extinction
1.                    Definition: a landowner is not liable to adjacent landowners whose lands have been drained as a result of the landowner’s drilling practices – to the discoverer and producer go the spoils. (People’s Gas v. Tyner)
2.                    Rationale for Rule of Capture: 
Pros:
a.                    Encourages production;
b.                   O & G are like animals and thus wild until captured, they move, therefore one owns it only while it is under land and if another capture it then it becomes that persons property.
Ex. If you sink a well on your land, and it drains oil and gas from neighbor, you own it w/o liability.
                                                Cons:
a.                    Inefficient b/c too many marginal oil wells are drilled to prevent drainage;
b.                   Causes the oil field to be depleted too quickly.
Ex. Spindletop – only 5% of the oil captured b/c the pressure was reduced too quickly.
3.                    Landowner’s Remedy Against Rule of Capture:
a.                    Self-help remedy – drill your own well. No damages or injunctions. (Kelly v. Ohio Oil)
b.                   The right to drill and produce oil on one’s land is absolute, and cannot be supervised or controlled by a court or an adjoining landowner – so long as operations are legal.
4.                    Limitations on the Rule of Capture:
a.                    Rule does not apply to hard minerals.
(1)      Common law said that whoever owns the soil, owned from the heavens to the center of the earth. (Del Monte Mining & Milling Co. v. Last Chance Mining & Milling Co.)
b.                   Does not apply to wasteful production.
(1)      Law of capture is limited by correlative rights doctrine (same as fair share principle) which protects owners from negligent or wasteful operations that destroy or injure the common source. 
(2)      Where you waste rather than marketing or using gas rule of capture doesn’t protect you from liability for drainage.
(3)      Eliff v. Texon Drilling – (Texon negligently drilled a well causing it to blowout, causing a large amount of natural gas to be drained from neighbors land)
c.                    Does not apply if there is illegal production (i.e. in violation of state regulations)
(1)      Fair Share Principle: each operator should have an opportunity to recover an amount of recoverable oil and gas under his property.
(2)      Rule: common law right exists to have a reasonable opportunity to produce one’s just and equitable share of oil.
(3)      Wronski v. Sun Oil – (Sun co. overproduced in violation of state fair share regulations, which resulted in drainage of oil and gas on the P’s land).
d.                   Does not apply to stored gas – only to native gas.
(1)      Rule: When previously extracted oil and gas is stored in natural underground reservoirs that are defined with certainty and integrity is maintained, title isn’t lost and the oil and gas don’t become subject to rights of the surface owner.
— Texas American v. Citizens Bank – P company stored