Flashcards
Oil & Gas (TX)
Cards in this deck (31)
- 1Limitations to the Rule of CaptureRule of Capture does NOT apply to:
1) Negligently drilled oil and gas
2) Illegally drained oil and gas
3) Stored gas - 2Bonus, Royalty, and Delay Rentals1) Bonus - Upfront payment for signing lease
2) Royalty - Fractional share of any oil and gas produced (usually 1/8)
3) Delay Rentals - Compensation for deferring drilling during the primary term of the lease - 3Dominant Mineral Estate and AccommodationThe mineral estate is dominant when it has been severed from surface estate; owner of mineral estate can use surface as reasonably necessary; Accommodation doctrine requires mineral owner to accommodate surface uses (generally)
- 4Non-Participating Royalty Interest (NPRI)A right to receive royalty payments held by someone other than the mineral interest owner; may not participate in any leasing transaction
- 5Concurrent Ownership: CotenancyEvery co-tenant can drill and produce or lease his undivided interest without the consent of the co-tenants, but he must account to the others for their rightful share of the profits from the production
- 6Trespass in Oil & Gas1) Ordinary Trespass - When the lease expires but the lessee stays on the tract
2) Slant well drilling
3) Drilling Dy well
4) Geophysical or Seismic Trespass - 7Trespass Damages1) In GOOD FAITH - Credit for costs incurred in production if costs benefitted rightful owner
2) In BAD FAITH - Liable for gross value of production from the well - 8Slander of Title1) Publication of a False Claim
2) With Malice
3) Loss of specific sale or leasing opportunity - 9Adverse Possession1) Possession begins PRIOR to severance - AP gets title to BOTH
2) Possession begins AFTER severance - AP gets SURFACE ONLY unless he actually possesses mineral estate - 10Granting Clause/Mother Hubbard ClauseGranting clause sets forth the rights given by lessor to lessee, and a description of the property
*Mother Hubbard is a clause that picks up SMALL STRIPS of land not specifically included in the granting clause because of mistakes in surveys or descriptions - 11Habendum ClauseThe habendum clause sets for the duration of lessee's interests in the premises;
Usually there is:
1) A primary term (fixed period with no obligations to conduct drilling) and
2) Secondary term (indefinite but normally linked to production) - 12Production in Paying Quantities (PPQ)In Texas, "Production," means PPQ, which is Revenues MINUS Lessor's royalty MINUS operating costs - if a positive number exists, there is PPQ
- 13Delay Rentals1) "Unless" delay rentals - clause creates a condition of the lease, lease terminates automatically
2) "Or" delay rentals - clause creates a covenant between lessor and lessee, lease does NOT terminate automatically (must sue for breach of contract) - 14Commencement of DrillingObjective physical acts done on the leased premises AND a subjective good faith intent to pursue drilling operation
- 15Dry Hole, Continuous Operations, and Cessation of Production ClausesDry Hole - Lessee can maintain lease after dry hole by starting to drill another well
Continuous Operations - At the end of primary term operations have commences, but no actual production yet
Cessation of Production - If a well ceases producing, lessee can maintain lease by commencing repairs - 16Force Majeure ClauseExcuses performance, or extends the time for performance, because of unforeseeable factors beyond the lessee's control
- 17Pooling ClauseAllows lessee to hold several tracts under lease with PPQ from just one well located on one of the tracts; royalty typically split
- 18Pooling Clause and NPRIsExecutive right owner has no power to pool NPRIs, even though he has power to lease the NPRIs
- 19Cost-Free Nature of RoyaltiesRoyalties are paid based on production "at the well;" this means royalties are free from costs of production, but not free of POST-PRODUCTION costs, such as transportation
- 20Division OrderA D/O tells lessee how to divide the proceeds from the well among the various lessors, NPRIs, and working interest owners; BINDING UNTIL REVOKED; Can NEVER contradict a lease - if it does it's invalid, was always invalid, and royalty owners get past underpayments
- 21Standard of PerformanceReasonably Prudent Operator - Operators do not have to drill if they would not make a profit
- 22Implied Covenant to Protect Against DrainageLessor must prove:
1) Substantial drainage
2) Lessee could drill a profitable well
3) Damages - 23Implied Covenant to MarketLessee has implied covenant to market the oil and gas within a reasonable time and at the best price realisable
- 24Implied Covenant to DevelopIf there is a reasonable expectation of profit, lessee must conduct additional drilling
- 25What is a Mineral? The Ordinary & Natural Meaning TestTo determine if a substance belongs to the surface or mineral rights, the applicable test is whether the substance is a "mineral" in its ordinary and natural meaning
*NOTE: This is only for post-1983 contracts; if before, use "Surface destruction" test - 26Surface Substances as a Matter of LawNine substances that belong to the surface estate as a matter of law:
1) Building stone
2) Limestone
3) Caliche
4) Surface shale
5) Sand
6) Gravel
7) Water
8) Near-Surface Lignite
9) Iron Ore - 27Conveyancing - Non-apportionmentWhen property is subdivided AFTER an oil and gas lease has been entered into, owners of the subdivided interest are not entitled to apportioned royalty payments, but ARE entitled to apportioned delay rentals
- 28Fractional Interest Problems (Generally)1) Deeds are construed against GRANTOR
2) "Four Corners" Rule - Courts try to harmonise all the clauses in a deed to give effect to each clause
3) Courts read terms of deeds very literally - 29Duhig DoctrineIn a three-or-more party chain of conveyances in which the Grantor seemingly conveys more than 100% of the mineral or royalty interest, GRANTOR will bear the loss
- 30Drilling Permits and Spacing RuleRRC requires a permit before ANY well can be drilled; applicant must have minimum of 40 acres to drill
*EXCEPTION: If the land was subdivided into small tracts BEFORE oil & gas was discovered in the area - 31Plugging WellsRRC enforces duties to plug in the following order:
1) Operator
2) Non-Operator with a Working Interest
3) The State