OIL AND GAS
I. Introduction
A. Law of Capture
1. Rule of Capture – The owner of the mineral estate is entitled to extract all the oil and gas on his estate no matter where he comes from. Subject to correlative rights doctrine and conservation regulations.
a) Exceptions
Railroad Commission – Regulates oil and gas industry
1) Not committing waste
2) Not negligent
3) He follows conservation laws.
b) Limitations
1) Common law limitations
A) Nuisance
B) Negligence
2) State Regulation – States wants to preserve natural resources and avoid waste
A) Spacing and density requirements (# of wells on a tract)
B) Production limits (# of barrels)
2. Theories of Ownership
a) Ownership in place – Landowner owns all substances, including O&G, which underlie his land. Such ownership is qualified, in the case of O&G, by the operation of the law of capture. If the O&G depart from beneath the owned land, ownership in such substances is lost. Texas has adopted this.
b) Exclusive right to take – Landowner does not own the O&G which underlie his land. He merely has the exclusive right to capture such substances by operations on his land. Once reduced to dominion and control, such substances becomes the object of absolute ownership, but until capture, the property tight is described as an exclusive right to capture. Can drill on your land only if you have the exclusive right to take it.
3. Ownership Prior To and At Extraction
a) Del Monte Mining & Milling
1) Minerals are part of realty until they are extracted. O&G. Once you take the oil out of the ground it is personal property.
2) Identifiable lode of minerals that can be identified.
3) Owners everything up and down. No limit. From the heavens to hell. Entitled to extract whatever is underneath the property as long as it does not extend to someone else’s property. Else liable for conversion.
b) Doctrine of exterlateral succession – For federal land, if you begin to mine, you can keep mining. The owner of a lode claim has the exclusive right to mine “all veins, lodes, and ledges throughout their entire depth, the top or apex of which lies inside the vertical side-line boundaries of the claim although such veins, lodes or ledges may so far depart from a perpendicular in their course downward as to extend outside the vertical side lines.
1) Applies only if the other land is federal land as well.
c) Oil and gas – Movable and able to migrate from one person’s land to another. Treated as migratory. Has a tendency to flow. Concept for minerals was never adopted for O&G.
1) Hypo: B and C drills. A brings lawsuit because B and C drill hole and drained his oil. A is lessee.
A) Lessee has the right to explore and develop the minerals. Has the exclusive right to extract the minerals from ground. What can he do to protect himself? Not entitled to injunction.
B) If C has a slanted well extending to someone else’s land, he is trespassing.
d) Benefits of lessee vs Owner in extracting minerals
1) Owner – Owns the surface and minerals. If he drills land he bears costs of drilling the land. He also gets profit. If dry hole, then out of costs.
2) Lessee – Owns mineral estate subject to right he owes to surface owner. Typical he needs to subtract royalty fees. Landowner has no obligation to pay expenses. If L drills a dry hole (no oil or gas), O is not out anything.
4. Ownership of Extracted O&G
a) Hypo – Oils leaks out of tank and permeates to the surface and ground. Owner tries to take back the oil. Owner of mineral estate sues. Argument was that once he flowed back to land it was realty not personalty. Oil owner entitled to get back oil.
1) Once personal property, always personal property, unless it is abandoned. Owner may lose possession but he still retains title.
b) Texas American Energy – Underground storage tanks. Banks wanted security interest in oil
1) Issue: Is stored natural gas personalty susceptible of encumbrance merely by a security interest agreement provided for in UCC Article 9 or is it realty you can only secure it as a mortgage?
A) Law says if gas escapes underground storage , it is treated as abandoned because you cannot identify it from any other gas.
B) Mineral estate owner owns the storage
2) If one person owns the mineral estate and another owns the surface estate. Gas storage rights should be obtained from the mineral estate owner. Look at documents that created documents. May have reserved or subtracted rights from mineral estate owner. Best way is to get lease from both of them.
A) What surface owner would want you to store natural gas underneath his land?! Must carry sufficient insurance to cover damages.
3) What happens if it fails to record RE lease? BFP takes it free and clear of lease. Also gets O&G.
5. Conduct Permitted in Extractive Process
a) People’s Gas Co v. Tyner
1) Nuisance Limitation – You cannot use mineral estate in such a way that creates a nuisance/injury to adjoining land.
b) Wronski v. Sun Oil Co
1) Correlative rights – Rights and duties of all landowners in the common source of supply. Only applies to a common source of supply. Existence of this that gives rise to correlative right.
A) This is the basis for regulation.
B) If no common source then RR commission regs don’t apply.
C) Doctrine of negligence – Applies to operator or equipment. Correlative rights doctrine protects owners from negligent or wasteful operations that injure or destroy the common source of supply.
2) Fair share principle – Within reasonable limits, each operator should have an opportunity equal to that afforded other operators to recover the equivalent of the amount of recoverable oil underlying his property. The aim should be to prevent reasonably avoidable drainage of O&G across property lines that is not offset by counter drainage.
A) Owner is entitled to produce his just and equitable share of the O&G in the pool, being an amount, so far as can be practicably determined and obtained without waste.
B) Violation of proration order, subject the violator to liability for conversion.
C) Damages – Willful trespasser is liable for the enhanced value of the oil at the time of conversion without deduction for expenses or for improvements by labor.
1] An innocent trespasser is liable only for the value of the oil undisturbed, and is entitled to set off the reasonable cost of production
D) Policy – Emerged t
oundary lines.
1. Exception – When state reg body issues spacing and density requirement it creates problems sometimes. When it makes mistake that causes drainage to existing property. RR can enter an exception. Do something contrary to what RR ordered as to spacing and density requirement. If correlative right not protection, person can apply for an exception.
2. Small tract exception – Person who only owns 1 acre but doesn’t have 40. Neighbor refuses to join tract.
a) Pooling – In other states, both tracts would be forced to pool their interests and drill one well.
3. Complaint that their correlative rights were impacted. People north had 640 acre requirement, south 160 acre requirement. RR Commission noted there was no evidence that this was a common source of supply. Burden of proof on person objecting to the decision of the RR Commission or the person who argues there is no common source (TX or OK). Presumption is there is a common source.
a) Curved formation touching all quads, but barely touching SE quad. Lessee is the same but landowners different in each quad. Should SE owner get royalty.
4. Modification – Conservation agency may modify its order whenever it is necessary to prevent waste or to protect correlative rights.
D. Well Spacing Exceptions
1. Offset well – when you drill a well to protect your correlative rights.
2. Types of exception locations
a) Where an exception location was permitted to prevent drainage to a neighboring well or to locate the well above the reservoir.
b) Permitted on a tract of land that is too small to be a drilling unit or too small to meet minimum distance requirements from boundary lines or neighboring wells.
3. Exxon Corp v. Railroad Commission- R37 Waste exception
a) Permit direct appeals from RR commission to TX supreme ct when decision deals with r37 exceptions
b) There can be a multitude of reservoirs in a location. There were 3 in the case:
Devonian, Montoya, Ellenberger
c) Must consider economic waste. Ie. Cost of potential dry hole
d) Test is whether the existing well was drilled and completed in the original formation legitimately and in good faith.
III. Regulating Production and Marketing
A. Assigned allowable – Amount if O or G that a well, parcel, field, or all fields within a state is allowed to produce over a given period. Protects correlative rights
1. Proration unit – Acreage assigned to a unit. Most commonly assigned on an acreage basis.
2. Allowable may be partially determined by the depth of the well, the net acre feet of reservoir beneath the proration unit, and the open flow capability of the well.
