Oil and Gas Ouline-Spring 2008
I. Basic Petroleum Geology
a. Origin & Location of Petroleum
i. Origin — 2 theories:
1. Organic Theory: (most widely accepted):
a. Small organisms accumulated in shallow seas and were overlaid with silt. Through compression, temperature and bacterial action this became petroleum over the course of millennia. The petroleum then migrated out of that source rock to the reservoirs as we know them.
b. Under this theory all of O&G that exists has been discovered & supply is finite so U.S. more dependent on Persian Gulf where only large reserves are
c. Look for O&G where crustacean seas existed
2. Inorganic Theory (Gould’s theory):
a. Largely rejected, this is premised on the presence of methane throughout the universe, even where there is no possibility of life. The methane was trapped within the earth at the time of its formation and morphed into petroleum. Contamination by bacteria gives the impression that it is organic in nature
b. Under this theory, hydrocarbons are virtually inexhaustible so less dependence on the Persian Gulf
c. Look for deep fissures in the earth (under this theory, unlike organic theory where limited locations where can drill, can drill anywhere if drill deep enough, eventually will find methane (simply hydrocarbon gas)..
b. Types of Reservoirs
i. Domes and anticlines: reservoirs formed by folding of the rock layers or strata, and usually have the shape of structural domes
1. If you have this type of reservoir and you want to get maximum oil from it then, you drill down structure, away from the gas cap and the expansion of the gas cap—the gas provides the pressure to push the oil up, so you want to keep the gas in the reservoir
ii. Syncline or reverse dome: (inverted dome); the distinction between this & regular dome is in location of gas. In syncline, gas is around the edges; in anticline, gas is in the center.
iii. Salt domes (in anticline or faulted reservoir): indicates several reservoirs stacked on top of each other — the salt breaks through various layers & creates traps where oil can accumulate
iv. Water drive reservoir
1. Water provides the energy source for drilling the oil, by pushing the oil up from the bottom.
2. In these wells, the top of the well is the most efficient place to drill.
v. Fault traps: discontinuous pockets of oil in otherwise impervious material. These are formed by breaking or shearing and offsetting of strata (faulting). Traditionally disfavored by oil companies- smaller and harder to find
vi. Pockets of oil in what is otherwise an impervious & non-porous substance Conditions that would make drilling these (d & e) feasible:
c. Things that affect known recoverable reserves:
i. Known Resevoirs- what oil do we know is under the ground
ii. Technology- what technology do we have to produce that oil from the known reserve
iii. Price- does the cost of oil make it profitable enough to drill for oil and produce it?
iv. Legal system- what rules impact how much of the reserves can be produced
d. Substances Found in Reservoirs (these substances are immobile until begin drilling)
i. Gas – Usually found in two forms
1. Gas cap – gas travels w/ the oil and b/c it is lighter than oil, it travels to the top, forming a “gas cap.”
2. Solution gas – this is found in all oil reservoirs; liquid under pressure absorbs gas. [think about the way carbon dioxide absorbs into beer kept under pressure].
ii. Oil — Typically, the next layer beneath the gas cap.
iii. Water
1. Comate water – water that fills up the pores in the sand grains that absorb the oil.
2. Underlying layer of water – water is heavier than oil, so water in a reservoir will sink to the bottom of an oil reservoir.
II. Basic Legal Doctrines
a. Common Law Theories of Ownership and Development
i. Heaven to Hell Ownership: the old rule from hard rock mining was that whoever owns the surface soil owns all above and bellow it. Del Monte v. Last Chance (1898).
ii. Also the common law maxim: Cujus est solum, ejus est usque ad coelum et ad inferos. (To whomsoever the soil belongs, he owns also the sky and to the depths
1.In most countries other than US and Canada, the government has title to valuable oil, gas and mineral deposits, including those beneath otherwise private land.
b. CL Rule of Capture
i. From the common law–oil beneath your land is only yours if you capture it, i.e. bring it to the surface
1. Criticized for creating economic, surface, and pressure waste, results in inefficient production
2. The basic traditional remedy is self help, if someone is draining the oil under your land, drill your own well to offset them.
ii. Two statutory approach
right)
3. Right to bonus
4. Right to delay rentals
5. Right to royalty
iii. Grantor may make a partial severance, where they reserve one of the above rights, or sever only the estate as to certain minerals
c. Surface interest – what is left of the bundle of ownership rights after the mineral interest has been severed; these rights are residual to the mineral rights; whatever is not included in the mineral rights the surface owner has. Surface ownership is subject to the easement for developing the mineral interest. In other words, it is servient to the dominant mineral interest.
d. Leasehold Interest- The owner grants a “Working Interest”- gives the lessee the rights to use the surface, incur costs, and retain profits for a period of a time, with a possibility of reverter in the lessor
i. Ownership in place states (Texas) treat the lessee’s interest as a fee simple determinable
1. Corporeal and possessory
2. Common law rules of abandonment do not apply
3. Possessory remedies of trespass and ejectment available
ii. Exclusive right to take states (OK) treate the lessee’s interest as an irrevocable license
1. Incorporeal and non-possessory
2. Interest may be abandoned
3. Remedies of trespass and ejectment not available
a. Interest can only be protected by quiet title suit
iii. If a co-lessee (or co-owner of unleased portion) is carried by another lessee (does not incur costs of development), they will generally be said to have a “non-participating working interest”
e. Royalty interest — right to stated interest in production; share of production free of the costs of production.
i. Royalty interest does not bear costs of developing, drilling or production (though states differ as to their treatment of post-production costs).
ii. Types of royalty interest:
1.Landowners royaty-retained by the lessor
Overriding royalty-carved from the lessee’s working