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Oil and Gas
University of Wyoming School of Law
Stickley, Dennis

FORMATION AND PRODUCTION OF O&G
Oil and Gas found in sedimentary rocks
Sandstone, lime stone and shale
Shale is important b/c directional drilling and because geological formations are stratified.

OWNERSHIP OF OIL AND GAS RIGHTS
Rule of Capture
·         Rule of non-liability for drainage (People probably drill as close to others' property as possible)
·         Free to drain O&G from others w/o trespass
·         If A starts producing more, B's remedy is self-help.  Drill an offset well (inefficient and wasteful)

Owner of mineral fee = exclusive right to extract.  Ability to transfer in ground or after extraction is valuable.
o    Also changes what type of action you can bring to defend title.
·         Realty – Trespass – Quiet title (surface)
·         Personalty – Conversion – (sub-surface), Abandonment

Limits to the rule of capture
Wronski v. Sun Oil
·        To limit drainage – proration order on wells to limit production (fits better w/ correlative rights)
·        No matter what rule, police power of state can restrict property rights (e.g. proration order)
·        Conversion claim, remedy is money damages.
o    Mild rule – value of oil in ground
o    Harsh rule – value of refined oil after costs
·        Court knew intentional b/c violated proration order
·         Combat drainage & rule of capture with proration orders and well-spacing patterns.
o    In primary stages of production mainly rely on pressure to bring oil to surface.

WY legislature has said to “protect correlative rights” – 2 nuiances to correlative rights:
·         Each owner has the right to produce their fair-share & A cant drain B (cause of action is conversion)

Theories of ownership (non-ownership/ownership in place)
Boatman v. Andre
·        Rights were incohate b/c hadnt started to develop.  Until lease rights completed, contract not fully formed.
·        Lease gives right to explore and develop (which is an ownership right), but subject to reversion.  So, if you don’t complete requirements under the lease, lessor may recover ownership and re-lease.
·         Had been exploratory wells appellant's predecessor knew of
·        The big question w/ adverse possession is do you acquire the entire mineral estate?
·        Court holds adversely Possess ENTIRE mineral estate (too difficult to define w/ fugitive minerals)
·        Is abandonment possible?
·         Corporeal, NO (profit-a-prendre)
·         Incorporeal, YES, can abandon but MUST have intent to abandon
·        Cts. Hate abandonment and will try to keep a lease alive
o    Parties agreed to drill well and extract minerals.  It is the only way either party will see value
·        Dissent: No adverse possession until minerals brought to surface





KINDS OF OIL AND GAS INTERESTS
Mineral interests
Dominance of Mineral Estate – 4 rights (bottom of pg. 51)
·         Right to retain lease benefits = Royalty free of costs (and bonus, delay rental, shut-in)
·         Right of entry and use of surface
o    When conflict b/t surface and mineral, mineral estate is dominant.
o    Dominance depends on Jx. Many states have passed statutes & don’t have implied covenant to develop.
Hunt Oil v. Kerbaugh – Dominance of mineral estate
·         K says even though principle of dominance, consider reasonableness of use – “accommodation doctrine”           
o   Mineral owner does not have unlimited right
·         Reasonableness – burden on surface owner to prove mineral use unreasonable
o   Need expert on stand to explain alternatives
·         Implied covenant of ingress & egress (Rarely see this after 05 legislation describing rights)

·         Right to develop (incur costs and retain profit)
o    Can lease and shift costs of development to another (along w/ benefit) (High risk/ high reward)
·         Right to alienate = Executive – grant leases

Diedrich v. Ware  – Adversely possess surface and subsurface similarly – BUT, has to be real property

Royalty – only mineral owners receive – Once O&G produced, must pay royalty, becomes an interest in personalty, so actions in conversion (common law)

Statutory – Royalty payment act – there to insure mineral owners are timely and properly paid.  This statute is extended to cover Net-profit interests.  So similar, and statute is there to keep people honest and paying

Operators: owe fiduciary duty to other working interests and royalty owners.

Trespass
o    Drill into others' mineral estate
o    Drilling on surface w/o right of ingress/egress
o    Surface owner interfering with mineral owner/ lessee
Damages for trespass
o    Unintentional trespass w/ reasonable belief you can be there = Get to recover cost of well
o    Intentional trespass – DON’T recover costs
·         Once O&G reaches surface – becomes personalty and conversion is the proper CoA
·         SO – always plead in the alternative to cover everything & know what property interest concerned
Statute of limitations in WY = 4 years

Martel v. Hall
·         Barquin owned fee estate – outstanding mineral leases, and sells minerals to Martel
Race to extinguish leases ensues
Drill during cancelation of lease & Martel brings trespass – directed verdict for Hall at T.Ct.
Claimed damage to oil sands & damage to market value of lease
Claim maliciousness – Hall completely destroyed mineral interest
Judge decides b/c mineral estate was worthless, too speculative to give damages (Greenburg)

Kishi, damages awared in similar case – Wy cts are not interested in minerals in place, interested in production



Lease interest
Ferguson v. Coronado
1.       Coronado was original lessee, but didn’t have $ to extract properly, assigned lease but reserved overriding royalties
2.       Ferguson eventually owns company's operating leases and charges losses to extort money
3.       Issue is if net-profits interest is a property interest?
4.       Magic words are “PRODUCED AND SAVED” – This is the measure of royalties due
Saying net-profits leasehold estate is like a royalty interest, but not a part of mineral estate

Overriding royalty carved out of lease (personalty b/c no production, no $)
Net profits interests are carved out of lease

Surface interest
Split Estate – Sever surface and mineral estate by deed – Issue of a warranty deed
·         Someone owns minerals separate from surface
·         More complicated by undivided ownership (cotenants)
·         As cotenant, have all rights as single owner (tough to determine if there is a trespass)

Enron v. Worth
·         Enron has geophysical exploration lease for minerals under Worth's property
o    App Ct says you CAN divide right to geo-phys exploration

Seismic Activities: Important info to determine if anyone will drill – makes or breaks property value
·         2D – depth and width – basic indication of existence of structures
·         3D – Composite over time to see if can identify structure under earth
·         4D – can monitor where drill bit is

Grynberg v. Northglenn (CO ct., ownership state)
·         NG didn’t get permission from Grynberg or state to do geo-phys exploration (Gryn didn’t record lease)
·        Clayton & Coors abandon leases b/c not commercially extractible coal
·        PRINCIPLE – even if you cant find a lessee, CAN ALWAYS find owner for permission needed

Ready v. Texaco
·         Difference between State & Fed if enough to just get permission from surface owner
·        MUST look at language of instruments to determine rights
·        In leases, look for “exclusive” right to explore. (absent in these leases)
·        Private property rights – MY LAND and info, affects my property value
·        POLICY – don’t waste time or money drilling where there are no minerals.  Should let people explore for minerals
·        COURT WILL NOT imply an exclusive right to geophysical exploration – MUST be explicit

Production payment
Champion Ventures v. Dunn
·         Issue – is the well a producer? (commercial well)
o   Profit over operating costs, no matter how small = producer
§  Even if don’t recoup development costs (this is purely a federal test for producing well)
·         Champ ventures, as operator, has rights and try to extract O&G
·         Dissent: says should at least collect reasonable rent




PROTECTION OF OIL AND GAS RIGHTS
S

     If you were going to convey the pore space, cant say “minerals,” MUST say “and the pore space in which they are located.” – But, statute gives operator right to drill through the pore space.

CBM & Shale gas – These cases reflect hydrocarbons previously thought to be a safety concern can become valuable. 

Newman v. RAG Wyoming Land Co. (2002)
·         Landowners owned surface and minerals
o    Leased “oil, gas, and casing head gas, and other minerals.” – Deeded minerals & reserved rt to lease surface
·         Party gets CBM lease from O&G owner and pays Coal owner royalties
o    Newman demands payments, and payments are escrowed instead of paid out – RAG indemnifies Torch
·         WY S.Ct:
o    Analyze “mined” “comingled” “extracted” as dictionary terms
o    At the time deed was granted – CBM was a dangerous byproduct (Some talk of enjoyment)
·         Ct holds that CBM remains w/ O&G, NOT COAL

In Federal cases, CBM was not reserved (CBM goes w/ O&G)
MT. S.ct says if you have all coal rights, don’t own CBM (CBM goes w/ O&G)
When you see “minerals” it is a case by case analysis – probably have to quiet title unless FED lease

The mineral/royalty distinction
Pg. 553 – form to grant a MINERAL interest
o    Key – “of the oil, gas, and minerals” &”in and under the LAND” &”ALL of the LAND” = mineral interest
o    Produced and saved = royalty/lease interest
·         “produced and saved”, but goes on to say rts of ingress/egress and other incidents of mineral ownership, this creates a different type of animal.

French v. Chevron
·         2 possible outcomes on how should be interpreted
o    1 party thinks % of all O&G produced (mineral interest)
o    Other thinks % of royalty (royalty interest)
·        In this case, started as mineral interest, but took out delay rental, bonuses and controls over mineral lease (executive rt & rt to develop)
·        Ct. says this is a net-profit royalty interest
o    ALL that is left of mineral estate is right to receive royalties (NPRI)

Fractional Interest problems – Right to develop – co-tenancy
Law v. Heck Oil (minority view – co-tenant cannot develop w/o consent from others)
·         Piss ant problem – owns 1/768 mineral interest and is a holdout
·         W.S.A. 1-32-119 – co-tenant can recover profits and recover for waste against another cotenant

Torgeson v. Connelly (majority view – co-tenants can develop w/o consent from others)
·         Quite title action brought by Connelly – Torgeson appeals
·         Recording interests:
o    Right to develop – took form of operating agreement – unique to federal O&G (Interest Torgeson has)
·         Connelly  – Says we hold the lease rights
o    Conveyance for indefinite term = realty
·         In this case – Secondary term that says hold for so long as producing
o    Lease for definite term = personalty
·         Defects in recording
o    WY stat – if you don’t record, void in terms of constructive notice
·         WY is a race notice Jx.  The first person to record has constructive title
o    In this case:
·         Torgeson – assignment, but NOT operating agreement recorded.  Also, did not record a legal description.
§  Does not get constructive notice protection b/c no legal description
·         Connelly – recorded in only one county, and NOT both counties the leases covered, so no protection