Oil and Gas Law – TX Bar (Essay) – Flashcards
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***What is the Rule of Capture?
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-Rule of Capture: the basic default rule for mineral rights in Texas is the "rule of capture." -it is a rule of NON-LIABILITY for causing oil and gas to migrate across property lines, resulting in "drainage" of oil and gas under another person's land. -neighbors have no right to share in production and can't get damages -neighbors could drill own wells
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***What are the limitation on the rule of capture?
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-limited by doctrine of "correlative rights" means that every oil and gas owner has a right to a fair opportunity to produce oil and gas from a common reservoir underlying his property
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***What does the rule of capture not apply to (3 things)?
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(1) negligently drilled oil and gas (eg well blowout) (2) illegally drained oil and gas (eg a violation of a Texas Gov Order); (3) Stored Gas: gas produced from one field then reinjected into a depleted underground reservoir for storage. Stored gas is for personal property
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What are the types of Oil and Gas interests?
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(1) Fee Simple Interest and Severance (2) Mineral Interest's Rights (3) The Dominant Mineral Estate and the Accommodation Doctrine (4) Interests created by Oil and Gas leases
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Fee Simple interest and Severance, what are rules?
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-Fee simple interest and severance: a fee simple owner of property owns both the surface and the minearls below the surface -a property owner, however, may transfer less than her entire estate through SEVERANCE (eg Stevie has FS (in surface and minerals) can convey a deed that says "all of the minerals in blackacre, and conveyer would still have "fee simple in the surface)
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What are the rules on the mineral interest's rights?
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(1) DEVELOPMENT RIGHTS: the exclusive right to explore, produce, and develop the minerals (only need permission from the mineral estate owner to do stuff) (2) EXECUTIVE RIGHT: the right to lease the minerals (owner decides whether to lease it or not) (3) Economic benefits under an oil and gas lease
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Rights in mineral interests, what are the three things included in the economic benefits under an oil and gas lease?
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(i) BONUS=an upfront payment for signing the lease (dollars per acre) (ii) ROYALTY: a fractional share of any oil and gas produced that is free of the costs of production (usually 1/8) (iii) DELAY RENTALS: compensation for deferring drilling during the primary term of the lease (also based on acreage)
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When is a Mineral Estate Dominant?
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-The mineral estate is dominant when the mineral estate has been severed from the surface estate -the owner of the mineral estate can use the surface as is reasonably necessary to develop the oil and gas
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***What does the accommodation doctrine require of the mineral estate owner?
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-The accommodation Doctrine requires the mineral owner to accommodate surface uses, but only under three conditions: (i) the surface owner has a pre-existing use of the surface (ii) the mineral owner (or lessee) has a reasonable alternative method of developing the oil and gas that is less destructive of the surface but still allows the mineral estate to drill and produce economically (note the alternative method cannot be unreasonably costly) (iii) the reasonable alternative is available on the leased tract
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What are the rules on Interests created by Oil and Gas Leases?
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-An oil and gas lease conveys a deed to a fee simple determinable: the lease may last forever (ie as long as oil or gas is produced), but it may terminate if there is no production at the end of a specified time.
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An oil and gas lease creates what two sets of interests?
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(1)the working interest: gives the LESSEE the exclusive right to explore, develop, and produce from the property as well as the obligation to pay all costs of production (2) The Royalty Interest: gives the LESSOR a share of the production that is free of the costs of production
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**Non participating Royalty Interest (NPRI), what is it?
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NPRI: is a right to receive royalty payments held by someone other than the mineral interest owner. -If the mineral owner covneys (by sale, gift, or will) her right to receive royalty payments to another but retains ownership of the mineral estate, that person has an NPRI. -The NPRI owner may not "participate" in any leasing transaction (no right to bonus, delay rentals, but gets royalties)
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What is a Non participating mineral estate?
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NPMI: here the person making the conveyance has kept the executive right, and given mineral rights to someone else
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What is the difference between a conveyance that says "L grants to B a 1/16 royalty ON Blackacre" versus one that says "L grants to B 1/16 OF royalty on Blackacre"?
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"a 1/16 royalty": B gets 1/16 of all production (his NPRI) -"1/16 OF royalty" : B gets 1/16 of 1/8(the royalty interest)
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what about divided ownership of a mineral interest?
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-ownership of a mineral interest can be in one person, but may also be concurrent or successive
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****What is the rule on concurrent ownership of a mineral interest?
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-Concurrent ownership: Cotenancy=Every cotenant can drill and produce or lease his undivided interest without the consent of cotenants BUT he must ACCOUNT to the others for their rightful share of the PROFITS from production
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**Concurrent ownership=what are profits and what are costs? What about dry hole costs?
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PROFITS: are revenues minuS costs COSTS: include all reasonable drilling and operating costs on productive wells ------Dry Hole Costs: may not be assessed against the unleased contenant
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In concurrent ownership of mineral interest, what is the rule on ratification?
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-Ratification: the cotenant can always ratify the underlying lease. However, once ratified he can't his mind and seek a profits share as an unleased cotenant
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In concurrent ownership of a mineral interest, can a cotenant partition?
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Partition: in Texas, a cotenant has an absolute right to partition property in a judicial proceeding.(aka one tenant wants to lease but other doesn't, seek a partition in kind) -Courts favor partition in kind (dividing the property) over partition by sale, unless dividing the property is inequitable (eg mineral reserves distributed unevenly)
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what are the rules on a life tenant and remaindermen regarding leases?
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Rule: neither the life tenant nor the remainderman can grant a valid oil and gas without the joinder of the other -All FI holders must join the lease!!
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Accounting-Once a valid lease has been entered into, how are lease benefits to be divided if the life tenancy grant is silent?
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-Common Law: (i) LIFE TENANT gets current INCOME AND INTEREST, including 100% of delay rentals plus interest on bonus and royalty (ii) REMAINDER gets principal of BONUS and ROYALTY (but does not take possession until life tenant dies) -EXCEPTIONS: (i) Agreement: the life tenant and remainderman can opt out of the default rules by agreeing otherwise (ii) open mine doctrine: Where a lease was in place prior to the creation of the life estate, the Life tenant gets all benefits under the existing lease
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What are the rules on accounting when life tenancy is created by trust?
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Rule: The trust act applies if the life estate was created in trust, and the trust is silent about how the receipts are to be allocated
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**Under the Trust Act amendments in 2004, the default accounting allocation to life tenancy created by trust is?
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(1) LIFE TENANT: all nominal DELAY rentals PLUS 85% of all proceeds (royalty, bonus, shut in royalty, production payments, and delay rentals that are nore than nominal) (2) REMAINDERMAN: 15% of all proceeds (remains in escrow until life tenant dies)
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***What are Three rules on Mortgagor/Mortgagee?
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-basic property law: "first (lien) in time, First in right (1) MORTGAGEE records BEFORE lease executed: Lessee's interest will be subject to mortgage lien (2) Oil and gas lease is recorded before the mortgage: Lease cannot be foreclosed against because the mortgage did not include the minerals as an asset belonging to the mortgagor and mortgagee was on notice of the lease (3) "MARSHALLING" the assets: at foreclosure, the mortgagee must sell the surface assets first to try to satisfy the loan, before selling the mineral estate
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Interference with Oil and Gas Interests: What are the four types of trespass against mineral rights?
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(1) ORDINARY TRESSPASS: when the lease expires but the lessee stays on the tract, lessee is a tresspasser. (Remedy: injunction and damages (including possible punitives) (2) SLANT WELL drilling bottoming a well underneath someone else's tract. (Remedy: injunction and damages, including possible punitives) (3) Drilling DRY WELL: damage to the speculative lease value. If a wrongful lessee enters and drills a dry hole, the lessor loses the lease value that he could have received before the world found out the land was dry. (remedy: lost bonus) (4) GEOPHYSICAL or seimic trespass: when someone on adjacent land explores lessor's land using seismic vibrations, and gains information lessor's mineral potentional. (remedy: sue in ASSUMPSITassumpsit- the market value of a contract for the right to do seismic exploration) (5) Secondary recovery operations are NOT a trespass
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***What are the rules on trespass damages, good faith versus bad faith?
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(1) GOOD FAITH: if the trespasser had an honest and reasonable belief in the superiority of his title, he will get a credit for the costs incurred in production if the costs benefited the rightful owner (2) BAD FAITH: a bad faith trespasser will be liable for the gross value of production from the well (note goodfaith/bad faith is generally a fact question)
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Slander of title, what are the elements? what are the damages?
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Elements: to prevail in a tort action for slander of title, P must prove: (1) Publication of a false claim of title to the property (including false claims of a valid lease) (2) with Malice and (3) loss of a specific sale or leasing opportunity: by the rightful owner because no buyer wanted to purchase property with a disputed title Damages: measured by the difference btw the market value of the lease at the time of the slander and its value at trial with the cloud removed
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***Adverse possession: Texas rules of adverse possession apply to oil and gas interests, what is the key issue?
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Key issue: is whether and when the mineral estate was severed from the surface estate (1) Possession begins PRIOR TO SEVERANCE: the adverse possessor gets title to both the surface and the mineral estate (2) Possession begins AFTER SEVERANCE : the adverse possessor gets title to the surface estate only. to get title to mineral estate the adverse possessor must establish a separate cause of action of possession
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***In an oil and gas lease what is the GRANTING CLAUSE purpose? and what is the mother hubbard clause?
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-Purpose: the GRANTING CLAUSE sets forth (i) the right given by Lessor to Lessee, and (ii) a description of the property -MOTHER HUBBARD CLAUSE: the first paragraph usually contains a clause to pick up small strips of land not specifically included in the granting clause because of mistakes in surveys or descriptions
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***Lease termination issue-What is the purpose of a HABENDUM CLAUSE
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-HABENDUM CLAUSE requires production in paying quantities (PPQ) -Purpose: the habendum clause sets for the duration of Lessee's interests in the premises. Typicallly there is (i) a PRIMARY TERM which is a fixed period during which Lessee has no obligations to conduct driling operations and (ii) a SECONDARY TERM, which is indefinite but is not normally linked to production
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What does not count as production?
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-mere drilling is not production -Discovery is not production
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What are rules on construction of a habendum clause?
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-Construction: oil and gas leases are construed against the lessee unlike typical contracts=oil and gas leases are usually drafted by the oil company
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$$$$What is "paying quantities"? What is formula for PPQ?
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-in texas, "production" means production in paying quantities (PPQ) -The formula for PPQ is: REVENUES minus LESSOR'S ROYALTY minus OPERATING COSTS
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***What are the common law exceptions to PPQ?
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(1) Temporary Cessation Doctrine (2) marginal well doctrine (3) Doctrine of Repudiation
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What is the Temporary Cessation doctrine CL excpetion to PPQ? What are key factors?
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-TEMPORARY CESSATION DOCTRINE: once PPQ is established, a temporary cessation due to a "sudden stoppage of the well or some mechanical breakdown or the like "will not terminate the lease" Key Factors: --(1) A short Temporary shutdown --(2) which lessee acts diligently to fix --(3) that is due to a 'mechanical breakdown or the like"
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$$$***What is the MARGINAL WELL DOCTRINE exception to PPQ?
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-MARGINAL WELL DOCTRINE: Some wells only produce PPQ during some months of the year =Test for a marginal well is "whether a REASONABLY PRUDENT OPERATOR would continue to operate the well to make a profit, not merely for speculation
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What is the doctrine of repudiation exception to PPQ?
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Doctrine of Repudiation: an equitable rule that can extend the lease if the Lessor obstructs the Lessee from developing the lease.
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What is a DELAY RENTAL clause in an oil and gas lease?
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DELAY RENTAL-these clauses authorize the Lessee to delay drilling or commencing production during the primary term by periodically paying a stipulated amount to the lessor.
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$$$What are the rules on "UNLESS" versus "OR" dealy rental clauses in an oil and gas lease?
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"UNLESS" vs. "OR" delay rental clauses: whether failure to pay delay rentals automatically terminates the lease depends on the language used. (1) "UNLESS" delay rental clause: if the clause states " the lease shall terminate UNLESS Lessee shall pay or Lessor the sum of money in delay rentals," then the clause creates a condition on the lease (ie the fee simple determinable). remedy: the LEASE TERMINATES AUTOMATICALLY (2) "OR" delay rental clause: if the clause states "Lessee agrees to either drill a well OR pay delay rentals" then the clause only creates a covenant between the lessor and lessee, and the lease does not terminate automatically. Remedy: the Lessor must sue for breach of contract; damages would be equal to the Unpaid amount of rentals ***ROYALTY is simply a COVENANT and not a CONDITION, so failure to pay royalty does not terminate the lease automatically
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What is a late delay rental in an oil and gas lease?
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LATE DELAY RENTAL: if lessor accepts a late delay rental payment, the lease comes alive again based on a "loose theory of estoppel" -and it usually requires some proof of (i) an act by lessor (ie cashing the check) (ii) upon which Lessee has detrimentally relied
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what is the rule on notice of assignment clause in oil and gas lease?
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NOTICE OF ASSIGNMENT CLAUSE: some leases may contain a clause that allows one or both parties to assign their rights under the lease but that no change in ownership is binding on the other party until a certain time after notice of the assignment
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what are the rules on commencement of drilling clauses in an oil and gas lease?
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COMMENCEMENT OF DRILLING: if the delay rental clause sates that "if operations for drilling are not commenced on or before (date) the lease shall terminate unless" Lessee pays delay rentals -"commencement depnds on two factors: (1) objective physical acts: done on the leased premises, eg, building a road, cutting down trees, or drilling a water well (2) subjective good faith intent to pursue the drilling operation
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Defensive or Savings Clauses
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To hold a lease beyond the primary term, the Lessee needs PPQ. If delay rentals are not holding the lease then the Lessee must satisfy a defensive or "SAVINGS" clause.
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What are the three types of Defensive "Savings Clauses"?
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(1) SHUT IN ROYALTY Clause (2) Dry Hole, Continuous Operations, and Cessation of Production Clause (3) FORCE MAJEURE Clause
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Shut in royalty clause definition
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A SHUT IN ROYALTY CLAUSE provides that when a well ceases PPQ due to market conditions the Lessee can hold the lease by paying shut in royalties
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Dry Hole, continous Operations, and Cessation of production Clauses definitions
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(1) DRY HOLE CLAUSE: provides that if Lessee drills a dry hole she can maintain the lease by starting to drill another well within the stated time (2) CONTINUOUS OPERATION CLAUSE : covers the situation where at the end of the primary term operations have commenced but there was not yet actual production (3) CESSATION OF PRODUCTION clause: provides that if a well ceases producing, Lessee can maintain the lease by commencing repairs within the stated time
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Force majuere Clause definition
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Excuses performance or extends the time for performance because of unforeseeable factors beyond lessee's control. ***exam tip: look to see if the force majeure clause covers only covenants or also conditions
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POOLING CLAUSE; General Rule
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A POOLING CLAUSE eallows lessee to hold several tracts under lease with PPQ from just one well located on one of the tracts. The royalty from the one well is typically split between various tract owners. -courts require that the lessee exercise pooling in good faith. (rem: a PUGH CLAUSE says that if only part of the leased acreage is pooled the rest shal be severed, but have to have that in the lease too)
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Rules on Pooling Clause and NPRIs
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the EXECUTIVE RIGHT owner has NO POWER TO POOL the NONPARTICIPATING INTERESTS, even though he has the power to lease the non participating interests
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ROYALTY CLAUSE: what does the cost free nature of royalties mean?
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=the typical lease states that royalties are to be paid based on production "AT THE WELL" which means royalites are free of the costs of production -royatlies, however, are not free of post production costs such as transportation. -absent contrary language in the lease lessors must share post production costs in proportion to their royalty interest
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Royalty Caluse and "market value"
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many leases provide for royalty payemnts based on the "MARKET VALUE AT THE WELL" where the minerals are sold or used off premises. -the MARKET VALUE of oil or gas is defined as the price that similar minerals currently sell for in the spot market at the time the oil or gas is produced -therefore, the amount of royalty can differ from the fractional amount of what the minerals are actually sold for under a long term K.
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What is a DIVISION ORDER?
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- a DIVISION ORDER, or D/O, tells the lessee how to divide the proceeds from the well among all the various lessors, NPRIs, and working interest owners. the lessee prepares the D/P for each owner, if the owners sign the D/O as correct, the Lessee then pays the owners their checks on the basis of the D/O. -DIVISION ORDERS are not deeds or contracts but they have their own set of laws governing their legal effect
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What is the common law approach to D/O?
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under COMMON LAW D/Os were binding until revoked even if the provisions differed from the lease language. A lessor was required to revoke an inconsistent D/P to receive the correct payments going forward
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$$**The 1991 D/O Act, The Act applies to D/Os executed after 1991. what are the five basic rules that apply to royalty interest owners (RIOs)
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(1) D/Os are BINDING UNTIL REVOKED: as under the common law. So a RIO can revoke a mistaken D/O but can't get past underpayments. (2) A D/O CAN NEVER CONTRADICT A LEASE. if it does, it is invalid; if it was never valid, a RIO should get past underpayments (3) but a D/O CAN CLARIFY ROYALTY TERMS in a lease. the statute seems to allow a D/P based on "amount realized" to "clarify" a royalty based on "market value" (4) lessee may withhold royalty payments without interest if there is a title dispute; or (ii) a RIO refuses to sign a standard D/O that contains statutorily authorized terms, including effective date, description of the property, fractional interest or provisions for the valuation of settlements. (5) lessee may not withhold payments to a RIO who refuses to sign a D/O because it contains items not authorized in the statute. this policy is to protect rios from d/os that might attempt to amend the lease unilaterally
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****Summary, what is the new general rule on Division Orders?
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-the new general rule seems to be that: (i) a D/O is BINDING UNTIL REVOKED; (ii) it can CLARIFY METHODS OF PAYING ROYALTY (iii) but it is NOT binding to the extent it changes or contradicts a lease (iv) except in market value cases
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IMPLIED COVENANTS : rule on standard of performance and the reasonably prudent operator
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**oil and gas leases contain an implied covenant that Lessee Acts as a REASONABLY PRUDENT OPERATOR. This is not a fiduciary standard, and operators do not have to drill and produce if they would not make a profit. A lessor would have the burden to prove that the Lessee can recover oil and gas at a profit (including the costs of drilling, not at the PPQ standard).
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Hypo: if Big Oil fails to drill any wells, can Lisa (lessor) sue for breach of covenant?
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NO. The lessee never promises/covenants to actually drill. Lease just gives them the right to drill.
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Rule on Implied covenant to protect against drainage
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Th Lessee must act as a REASONABLY PRUDENT OPERATOR to protect the leased premises against drainage. Lessor must prove three elements: (1) substantial drainage; (2) Lessee could drill a profitable well to offset drainage; and (3) damages.
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Hypo: what must lisa show to prove profitability on the part of Big Oil ?
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the expected revenues for Big Oil exceed the drilling and production costs --If court finds Marge proves substantial drainage and that Big Oil coudl have drilled a profitable well to offset: her damages are in the amount of royalties she would have got for the off set well or court decree saying drill or forfeit the lease
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Implied covenant to market rules
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-Lessee has an IMPLIED COVENANT TO MARKET the oil and gas (i) within a reasonable time and (ii) at the best price realizable. The Lessee's actions in marketing are judged by the reasonably prudent operator standard.
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Hypo: Big Oil sold gas on lisa's tract for 2.00/mcf. lisa shows that other lessees in the same field sold their similar gas at 2.25/mcf on the same day. Question: has big oil breached the covenant?
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-Yes. facts show its not the best price in the market relizable
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Implied covenant to Develop rule, test for breach, and exam tip
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In Texas there is an implied covenant to develop an oil and gas lease. -Test for breach of the covenant is whether the Lessor can prove a reasonable expectation of profit from additional drilling regardles of where the proposed well is located-this is a high burden to meet. EXAM TIP: while occasionally the covenant to develop may be broad enough to require exploration, DO NOT write that there is a covenant to explore!)
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***Summary: What are the covenants that implied in an oil and gas lease? RPS PAT MD
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(1) standard of performance; REASONABLE PRUDENT OPERATOR (2) Implied covenant TO PROTECT AGAINST DRAINAGE (3) Implied covenant to MARKET (4) Implied covenant to DEVELOP
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Title and Coveyance issues what is Executive Right?
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EXECUTIVE RIGHT: non participating interest owners such as NPRIs and NPMIs rely on the executive right owner to realize income from their interests. Executive right holders' duty depends in part upon their conduct
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When "UTMOST AND FAIR DEALING" duty required?
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its the usual duty owed to nonparticipting interest owners. the executive right holder must act with due regard for the nonparticipating owners, and be willing to execute a lease on the same terms as a reasonably prudent landowner would if there was no nonparticipating interest
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When is a fiduciary standard imposed on the executive rights holder?
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when the executive engages in egregious self dealing courts will impose a fiduciary standard, meaning the executive must subordinate his interests to those of the nonparticipating interests. ---remedies include cancellation of the executive right, cancellation of certain leases, and damages. (note this is a unique situation in law, where the conduct defines the standard).
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Hypo: in 2010 eric mortgages all of blackacre to secure a 7 million dollar loan for himself. the lease was being drained by adjacent wells but no operator would lease the property because of the mortgage. Eric then leases to himself for a 1/8 royalty. Question: has Eric breached his excutive duty?
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Yes. this is self dealing and court will hold him to a fiduciary standard Damages: actual damages here measured by the actual lease price; could void K and exemplary damages
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***surface owners vs mineral owners -the mineral estate is dominant, but what is included in the mineral estate ?
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The Meaning of Minerals: deeds often convey the "mineral estate." Oil and gas are minerals as a matter of law but what about other mineral's---near surface minerals that can be strip mined (destroying the surface? ---the two tests are: (1) surface destruction test (2) ordinary and natural meaning test
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What is the SURFACE DESTRUCTION TEST?
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The Texas Supreme Court held in 1971 that near surface iron ore-technically a mineral--belonged to the surface estate, holding that if any reasonable method of extracting the substance would destroy the surface, it BELONGS TO THE SURFACE ESTATE. --judicial decisions established nine substances as belonging to the surface as a matter of law
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***What is ORDINARY AND NATURAL MEANING test?
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The Court in 1983, changed the test to one asking whether substance is a "mineral" in its ordinary and natural meaning. --new test was prospective, so it didn't disturb the rule regarding the nine substances
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TWO STEP PROCESS: if a lease is silent or ambigous regarding ownership of certain substances consider the following...what is step 1 ?
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STEP 1: is the substance one of the nine that belong to the surface as a matter of law: (i) building stone;(ii) limestone; (iii) caliche; (iv) surface shale; (v) sand; (vi) gravel; (vii) water; (viii) near surface lignite; and (ix) iron ore (EXAM TIP: dont worry if you can' memorize this list)
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TWO STEP PROCESS: if lease is silent or ambiguous regarding ownership of certain substances consider the following...what is step 2?
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-if the substance is NOT one of the nine that belong to the surface as a matter of law, IS THE DATE OF THE AMBIGOUS CONVEYANCE AFTER 1983? (1) IFpre -1983: use the "surface destruction test; (2) IF post-1983: use the "ordinary and natural meaning test.
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HYPO: in 1970, Stan acquired the surface and Kyle retained "oil, gase and other minerals" in Blackacre. In 1985, Lignite Co wants to purchase a lease to strip mine lignite. FROM WHOM SHOULD IT LEASE?
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Stan=the surface owner
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HYPO: in 1985, Uranium Co wants to purchase a lease to strip mine lignite. FROM WHOM SHOULD IT LEASE?
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Rights were created in 1970. Stan the surface owner (1) uranium not 1 of 9; (2) apply surface destruction test: open pit mine destroys surface
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HYPO: in 1985, Uranium Co want to purchase a lease to conduct solution uranium mining (using wells and water injection). FROM WHOM SHOULD IT LEASE IF SOLUTION MINING IS THE ONLY REASONABLE METHOD OF PRODUCTION?
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The method won't destroy the surface. (1) the mineral estate owner (i) not one of nine; (2) surface destruction test: here not destroy the surface
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HYPO: but if uranium could ALSO reasonably be mined with open pits, FROM WHOM SHOULD IT LEASE?
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STAN: surface owner cuz test asks whether ANY METHOD could destroy the surface
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HYPO: in 1984, Stan acquired the surface and Kyle retained the "oil and gas and other minerals" in Blackacre. In 1985, Uranium Co wants to purcahse a lease to conduct open pit uranium mining. FROM WHOM SHOULD IT LEASE?
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-lease from the mineral estate owner; apply ordinary natural meaning test
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Conveyancing: nonapportionment and the community lease: what is the nonapportionment rule?
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RULE: when property is subdived AFTER an oil and gas lease has been entered into, the owners of the subdivided interest are NOT entitled to apportioned royalty payments. -they are entitled to an apportioned delay rental
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if the owner leased 40 acres to Big oil and sold 10 acres to C, what did C buy? does C have any right to royalties on the other 30 acres? if it drains C's interest, can he argue it breached the covenant to develop 40 acres by not drilling on C's 10? Can C argue that Big breached its covenant against drainage?
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(1)all C bought was the surface estate on the 10 acres with a possibility of reverter on the mineral rights to the 10 acres and rt to delay rental on the 10 acrres and rt to royalty from any well on the 10 acres (2) no right to royalties on other 30 acres (3) covenant to develop applies to the 40 acres as a whole, so no breach to C (4) covenant against drainage applies to 40 acres as a whole so no breach to C
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What is a COMMUNITY LEASE? what is rule on royalties?
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where two or more contiguous proeprty owners enter into a single lease covering all of their property. --In TX a community lease has the effect of an IMPLIED POOLING AGREEMENT. -in a community lease, lessors share royalties in PROPORTION to their ownership interest
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Fractional interest problems and the DUHIG DOCTRINE, what are the General rules to remember?
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(1) deeds are construed against Grantor (leases are construed against Lessee). if deed ambigous Grantor usually loses (2) The "Four Corners" rule: requires that courts try to harmonize all the clauses in a deed to give effect to each clause (3) Courts read the terms of deeds very literally. So, e.g., there is a differene between the "land CONVEYED" and "the land DESCRIBED."
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HYPO: Eric CONVEYS a 1/2 mineral interest in Blackacre in the granting clause of the deed to Stan, but the deed then DESCRIBES all of the land in Blackacre and reserves to Eric "one-half of all royalties on the land DESCRIBED." What is Eric's royalty?
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-1/2 of 1/8th Royalty based on the land described. -NOT 1/2 of 1/8 (that's what cud get based on land conveyed).
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*****(tstd feb 11') What is the Duhig Doctrine?
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In a 3 or more party chaing of conveyances in which the Grantor seemingly conveys more than 100% of the mineral or royalty interest, the Grantor will bear the loss (if i convey more than i own, its my fault, so hold against me)
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HYPO: Kyle deeds Blackacre to Clyde, reserving a 1/2 mineral interest. Clyde deeds Blackacre to Wendy, Reserving a 1/2 mineral interest. WHO OWNS THE MINERALS?
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-Wendy, get nothing, BUT DUHIG, deeds are construed against the grantor. Clyde nothing (he is estopped). Kyle (1/2) and Wendy (1/3)
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$$$$$$$ (I ALWAYS FORGET THIS) Conveyance of a Mineral Interest (real property) versus Royalty interest (rt to get checks) WHERE AMBIGUOUS what are the rules?
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(1) ROYALTY Language: "oil, gas and other minerals PRODUCED AND SAVED." (2) MINERAL Language: "Oil, gas and other minerals IN, ON OR UNDER (Blackacre)." (3) MIXEDLanguage: In Tx, a mixture of these terms indicates that a MINERAL INTEREST was created
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Determine whether Kenny has received a royalty interest or a mineral interest and the ccorrect fraction that Kenny owns (assuming a 1/8 royalty): Stan conveys to kenny "1/2 of all the oil and gas royaties" on blackacre
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-Kenny has a royalty interest (1/2 of 1/8).
question
Determine whether Kenny has received a royalty interest or a mineral interest and the ccorrect fraction that Kenny owns (assuming a 1/8 royalty): Stan conveys to Kenny "1/2 of all the oil and gas produced, marketed, and saved."
answer
-Kenny has a royalty interest (1/2 of 1/8)
question
Determine whether Kenny has received a royalty interest or a mineral interest and the ccorrect fraction that Kenny owns (assuming a 1/8 royalty): Stan conveys to kenny "1/2 of all the oil and gas in, on, or under Blackacre."
answer
-kenny has a mineral estate (owns 1/2 of the mineral estate as a co-tenant)
question
Determine whether Kenny has received a royalty interest or a mineral interest and the ccorrect fraction that Kenny owns (assuming a 1/8 royalty): Stan conveys to kenny "1/2 of all the oil and gas in, on, or under and that may be produced" from blackacre.
answer
-Mixed Language: Kenny has a mineral estate (1/2 of mineral estate)
question
(note the rest of the stuff not super tested and if so its basic
answer
-thus not spend alot of time on state regulation stuff
question
Policy: the state of texas, through the Railroad Commission, regulates oil and gas production to serve 3 public objectives.....
answer
(1) to prevent waste and maximize recovery of oil and gas (2) to protect correlative rights by giving all owners in a comon reservoir the opportunity to recover their fair share of the minerals (3) to protect the environment
question
METHODS: The RRC has three major ways for preventing waste and protecting correlative rights.....
answer
(1) drilling permits and spacing rules (2) prorationing rules (3) MIPA and compulsory pooling
question
Drilling permits and the spacing Rule-what's the rule and the exceptions (2 of them)?
answer
Rule: a drilling permit is required before any well can be drilled. The State's spacing rule requires that the applicant have a minium of 40 acres to drill. EXCEPTIONS: a small tract owner can get an exception to the spacing rule if: ---(1) confiscation (drainage) is proven AND ----(2) SUBDIVISION: the small tract was subdivided by deed befoRe oil and gas was discovered in the area or before the land was leased. Subdivisions into small tracts taht occur after oil and gas is discovered or after the land was leased are VOLUNTARY subdivisions and are not entitled to a confiscation exception
question
What is the rule on prorationing ?
answer
-The RRC regulates the max amunt of oil and gas that wells can produce-both to prevent waste and to protect correlative rights, ie to assure that each operator or interest owner has the chance to receive his fair share of production.
question
MIPA-mineral interest pooling act, what's statute say?
answer
Statute: in fields discovered after marchc 8, 1961, the RRC can FORCE owners to POOL, ie share production from a reservoir. This compulsory pooling power preempts the rule of capture -is like default rules for allocating royalties in voluntary pooling agreements, each interest owner getting a share roughly proportional to the relative size of her interest.
question
What are the rules to trigger MIPA?
answer
(1) Timelione: MIPA applies only to fields discovered after March i8, 1961; (2) fair and reasonable offer; owners seeking compulsory pooling under MIPA mjust first make a fair and reasonable offer to pool voluntarily.(standard: fairness is always judged from view of party being compelled to pool, at the time of the offer
question
***(on exam in 05) Relinquishment act
answer
applies to state owned land sold to privae parties btw 1895 and 1931-mostly west texas -rule: state of texas owns the minerals, and the grantees own only the surface rights; they do have the executive right to lease the minerals on behalf o state and to share in the economic benefits of the lease equally with the state -the grantees (and successors in interest) owe a fiduciary duty to the State.
question
***(on exam in 09) What is the PLUGGING wells policy?
answer
-policy: abandoned and improperly plugged wells pose serious hazards to the public and to the enviornment. Statutes require that operators plug their wells properly but sometimes operators go bankrupt or otherwise fail to discharge this responsibility.
question
***(09) Duty to plug: the RRC will enforce the duty to plug in the following order:
answer
(1) OPERATOR: first line of legal responsibility is on the operator, defined as person responsible for the physical control of the well at the time it is about to be abandoned (2) NON OPERATOR who owns a working interest: thus, non operator may have liabiltiy for well plugging costs even though they never had physical control of the well. (3) THE STATE OF TEXAS: if neither an operator nor a non operator with a working interest can plug the well, the State will be responsible. State has established an oilfield cleanup fund that can be used to plug abandoned wells and to clean up pollution.
question
Who has NO duty to plug a well?
answer
1. MINERAL INTEREST HOLDER 2. ROYALTY OWNERS 3. OTHER INTERESTED PERSONS who do not have a working interest in the well.
