Oil & Gas Outline

History, Accumulation, and Ownership

1. Introduction (pgs. 1-9) A. 3 areas of oil and gas activity

I. Upstreama. Exploration; production (majority of this course)

II. Midstreama. Pipelines to gather and transport productionb. Plants to process productionc. Marketing

III. Downstreama. Refineriesb. Gas Stations

B. Standard Oil was the first fully-integrated oil and gas companyC. Independents are non-fully integrated oil and gas companiesD. Upstream operations are much more profitable than downstream

2. Ownership (pgs. 20-50; 50-113) A. Most oil and gas in U.S. is privately owned- this is called fee ownership

I. Fee simple absolute- surface and mineral ownershipB. Largest O&G owners are the railroads (gov’t gave rights as incentive to build RR)C. 2nd largest owners are timber companies (wanted to control surface rights to protect their timber

operations)D. Federal Government sold off many of its mineral rights; now they retain themE. Del Monte Mining & Milling Co. v. Last Chance Mining & Milling Co. p. 20 [ownership prior to

capture]I. Hard rock (no O&G)II. Question of whether company could chase a vein of silver beyond boundaries of its own

claim.III. SCOTUS says no- cujus est solum, ejus est usque ad coelum et ad inferos (To whomsoever

the soil belongs, he owns also to the sky and to the depths)IV. But, Silver doesn’t migrate…V. NOTE: gas and oil migrate, so the ad coelum doctrine doesn’t apply.

F. Land descriptions I. Land Ordinance Act of 1785: mandated a rectangular system of surveying land

a. Township line: E/W line; Range line: N/S lineb. Township divided into 36 section – each 640 acres (1 square mile)

II. Legal description of property: specific location of a section – can only have one legal description per property

a. Form: Section – Township – Range -> Sec. 24, T6N, R16Wb. Further broken down into quarters (NW, NE, SW, SE) – use smaller quarters within

each to get more accurate placementIII. Examples:

a. Section 36 T3W, R6S (Weld County, CO) (T= township line; R = range line)b. W ½ NE ¼ (the west half of the northeast quarter)

G. Rule of Capture I. Kelly v. Ohio Oil Co. p. 27

a. Plaintiff sued defendant for conversion for drilling wells near the lease line and causing oil and gas to migrate from plaintiff’s land towards defendant’s

b. Court applies the rule of capture- whatever gets into the well belongs to the owner of the well, no matter where it came from.

Oil and Gas Outline – Page 1

c. RULE OF CAPTURE: If you are conducting lawful O&G activities on your land, and as a result of those activities, O&G migrates from other land, but is produced by your wells, the oil is yours.

d. POLICY: it’s difficult to prove the origin of oil and gas- this rule creates certainty; encourages development of oil and gas- drill your own well to protect yourself

II. Slant drilled wells: rule of capture does not apply to situations where the bottom of the well bore physically crosses into lands owned by others; the oil and gas produced from this type of well belongs to the owner of the land under which the well bottoms.

III. Champlin Exploration, Inc. v. Western Bridge & Steel Co., Inc. p. 30 [what rule of capture does NOT apply to]

a. Champlin owned a refinery that had leaky storage facilities- oil leaked and flowed onto defendant’s land, who captured it with trenches.

b. Rule of Capture does not apply once the oil and gas has been extracted.c. Once crude oil is brought above the surface, it is personalty and is not subject to

the rule of capture. (Champlin got its oil back)d. EXCEPTION TO THE RULE OF CAPTURE:

Once the product is produced (“lifted”) from underground, it is no longer real property, it is personal property. And once it is personal property, the rule of capture no longer applies.

IV. Texas American Energy Corp. v. Citizens Fidelity Bank & Trust Company p. 33a. Gas was re-injected into underground formation for storage. b. The re-injection of the gas underground did not change its status as personalty (from

Champlin)i. Storage reservoir needs to be defined with certainty

3. Correlative Rights (pgs. 40-50) A. GENERAL RULE:

The right of each mineral owner to get their fair share of the oil and gas located in the common reservoir.

I. This is your fair percentage of the minerals located in the reservoir, usually determined on a per-acre basis.

II. Don’t have to exercise your correlative rights; but if you do nothing and your rights are adversely affected, there is no remedy available.

III. If your actions prevent another person from exercising his correlative rights, the issue is actionable.

B. Protecting Correlative Rights is one of the main duties of O&G commissionsC. To determine who owns the rights to minerals, you have to back to the time the surface and mineral

estates were united in one owner and trace ownership of the minerals forward.D. People’s Gas Co. v. Tyner p. 40

I. Gas Company drilled a well 200 feet from Tyner’s house. The company then dumped nitroglycerine into the well to re-work the well.

II. Tyner filed for an injunction on the grounds that this was a nuisanceIII. Court agreed. It was a nuisance (balancing property rights between owners)- People’s actions

interfered with Tyner’s enjoyment of his property b/c of the nitroglycerine.E. Allowables

I. Set by O&G commissions, they regulate the amount of production that can come out of wells (production per day; monthly average both methods of regulation)(Colorado doesn’t use them)

II. Used in Texas, Oklahoma, MichiganF. O&G Trespass

I. Good faith- you have to pay the value of the oil undisturbed- you can deduct the costs of production (“mild” rule)


II. Bad Faith- a willful trespasser is liable for the enhanced value of the oil at the time of the conversion without deduction for expenses or for improvements by labor. (“harsh” rule)

G. Wronski v. Sun Oil Co. p. 44I. Michigan O&G commission set field-wide allowables; Sun violated allowable by 150,000

barrels (of which overproduction 1/3 came from the plaintiff’s land –shown using expert testimony)

II. Sun argued the rule of capture. Court Said NO- rule of capture doesn’t apply where there is a law violation.

III. Held that sun converted plaintiff’s gas (stole it)-> applied the harsh rule of trespass (but punitive damages struck down b/c the harsh rule already included punishment)

H. Elliff v. Texon Drilling Co. p. 49I. The rule of capture was limited by the correlative rights doctrine, which protects owners from

negligent or wasteful operations that injure or destroy the common source of supply.II. In other words, because Textron wasted rather than used or marketed the gas and distillate,

the rule of capture did not protect Textron from liability for drainage

4. Ownership Interests (pgs. 50-55) A. “Fee” refers to the totality of private rights in the landB. Complete severance of mineral rights- when an owner either conveys the estate, reserving the mineral

rights, or conveys the rights themselvesC. The 4 Incidents of Mineral Interests

I. The right to use the surface; a. As reasonably necessary to explore for, develop, and produce the minerals (can be

implied b/c of its necessity for accessing the minerals)II. The right to incur costs and to retain profits (right to develop)

a. “working interest”- vested in one who has the rights to use the surface, to incur costs, and to retain profits

b. “net profits interest”- an owner who only has a right to share in any profits of an operation

III. The right to alienate; a. A mineral interest owner may transfer all or portions of their mineral interest to

anotherb. The right to alienate may be owned along with a smaller fractional interest in the

mineralsc. Executive right- the minority partner could force the sale of the entire mineral interest

if they had the executive right.d. Nonexecutive mineral interest- the other owner’s interest

IV. The right to retain lease benefits a. Bonus- initial cash payment that serves as consideration for executing and conveying

the leaseb. Delay rental payments- periodic rent payments made prior to development by the

lessee (keeps lease from expiring for nonproduction)c. Shut-in royalty payment- after development, Lessor may be entitled to these royalties

where gas is discovered but not yet produced, or if production temporarily ceasesd. Royalty- a share of the production free of production costs owed to the lessore. Each of these incidents may be separately carved from the complete mineral interest

D. Types of Royalty InterestsI. Nonparticipating royalty - conveyance of a royalty interest (or a fraction of a royalty interest)

to a non-participating party by the fee owner or mineral interest ownerII. Landowner’s royalty or lease royalty - the lessor’s reserved royalty under an O&G lease

(typically 1/8 of prod.)III. Overriding royalty - a royalty carved from the lessee’s working interest

a. NOTES:


i. The owner of a royalty interest is entitled only to a share of production as expressed in the instrument creating the royalty interest (no right to use surface, no right/obligation to incur costs, no right to share profits)

ii. People owning only a royalty interest cannot execute an O&G lease (this is a nonexecutive interest; you can still convey the royalty interest itself.

5. How Title to O&G Estate Can be Lost (pgs. 55-77) A. Classification issues (depends on jurisdiction)

I. If the interest is classified as personal property, or a non-possessory interest in real property, common law rules of abandonment can apply

II. If the interest is a possessory interest in real property, common law adverse possession rules can apply.

B. Adverse Possession (must be open and notorious for the statutory period)I. Can’t AP gov’t propertyII. If mineral interest is not severed, AP of the surface will include title to the minerals

a. Conveyance of mineral interest after AP of surface has begun will NOT stop or suspend the running of the limitation period for the mineral interests.

III. Surface AP cannot establish title to a previously severed mineral interestIV. If there is an outstanding O&G lease, and adverse possessor must take action against the

minerals themselvesV. In most states, an O&G lease is not open & notorious- Adverse possessors must go after the

minerals themselves, but don’t need to be successful. (will need to attempt development of the minerals for the statutory AP time)

VI. Tacking applies to O&G lease: get to tack on to another person’s time on the land to shorten your statutory time needed to maintain AP

VII. POLICY:a. Quiet title to property has been presumed abandoned (explains why statutory period

is so long) – same concept with minerals: rightful owner has disappeared. Without this principle, chain of title ceases and no one knows what to do with the land.

VIII. Diederich v. Ware p. 57a. Facts: Ware (D) acquired, by adverse possession, an interest in the mineral estate

previously owned by Diedrich (D).b. Issue: Where the mineral rights have been severed from the estate, may the surface

owner or another third party gain title to such rights through adverse possession? HOLDING: yes.

c. Rule: Where the mineral rights have been severed from the estate, the surface owner or another third party may gain title to such rights through adverse possession by penetrating the mineral estate.

C. AbandonmentI. Will occur only when there has been a lack of use of the interest coupled with the owner’s

intent to abandon their interest.a. Not all states allow abandonment:

i. “Ownership-in-place” states- the mineral interest owner has a freehold estate in real property that can’t be abandoned

ii. “Exclusive-right-to-take” states- the mineral interest is classified as a nonpossessory interest in real property, which can be abandoned (as can any interest carved out of the mineral interest)

A) If the interest is abandoned, it returns to the estate it was carved from.

1) POLICY: returning an O&G interest to the surface estate frees that estate of its burden and permits the owner to more completely utilize and enjoy his property


b. If the interest passes the classification and is able to be abandoned:i. Must fulfill 2 elements to abandon:

A) Lack of use- nonuse alone will not support abandonmentB) Intent to abandon- trial court must find either: 1) the owner’s

future use of the right could result only from a palpably unsound business judgment; or 2) the owner has given further indication of his intent to abandon.

c. Very difficult to prove because courts traditionally view it as depriving someone of his rights – therefore, there must be some demonstrable act of abandonment.

i. Gebhart – Heirs abandoned mineral rights so they didn’t have to pay inheritance taxes

II. Dormant Mineral Legislationa. ONLY APPLIES TO SEVERED MINERAL ESTATESb. In the case of a severed estate, if the minerals have not been developed over a certain

period of time (usually 18-20 years), then the mineral owner must take some kind of affirmative act to claim or reinforce its title to the minerals. If not, the surface owner becomes the beneficiary of the whole estate.

i. Purpose: the mineral owner is gone, never to be found. In that instance, absent this type of legislation, minerals won’t ever get developed (issue of public policy).

ii. (Louisiana – 10 years)iii. Not every state has this legislation (around here: Neb., Kan.)iv. Indiana law – S.Ct. issue of violating due process

A) No notice requirement for taking over mineral rightsB) Court: did not violate due process – ample publicity/notice as far

as the existence of dormant mineral legislation; mineral owners should have been on notice that they had to take some action to perfect their title

c. Mineral interests often held by lots of owners, complicating development of mineralsd. 2 types of statutes to remedy this:

i. Statutes designed primarily to terminate mineral interests and reunite them with the interest they were carved from (usually the surface estate)

A) Indiana’s statute worked automatically; stood up to due process challenge

ii. Statutes designed primarily to identify and locate mineral interest ownerse. Scully v. Overall p. 71

i. Facts: the Scullys (P) sought to perfect their title to a piece of property by extinguishing the rights of Overall (D), the mineral interest owner, in the property.

ii. Issue: Is a mineral interest extinguished if it has not been used for over twenty years? HOLDING: no.

iii. Rule: Under Kansas law, a mineral interest is not extinguished, even though it has not been used for over twenty years, until the surface owner serves notice of the lapse to the mineral owner, and the mineral owner fails to file a statement of claim to the interest.

6. Trespass A. SEE ABOVE FOR GOOD FAITH / BAD FAITH TRESPASSER RULESB. Geophysical Trespass

I. Problem on page 79:a. Only the mineral owner can approve this decision (this activity will provide

information about whether there are minerals below the surface)


i. Determination as to whether B or the lessee can give permission is dependent on the terms of the lease – if in the lease, B gave the lessee the exclusive right to explore, B no longer has the right to decide – if the lease does not give the exclusive right to explore, B retains the right to decide

b. Any tenant in common (anyone who owns an undivided interest in the minerals) has permission to do so

i. Don’t need to get surface owner permission, but it would be stupid not to [surface act agreement]

c. In the case of severed minerals, the mineral estate is the dominant estatei. Parties must have intended this to be the case because otherwise, the mineral

owner would have no right if the surface holder could prevent the development of the minerals below

ii. Gravely prevent the development of O&G (public policy reasoning)II. Enron Oil & Gas Co. v. Worth p. 79

1. Facts: Enron Oil & Gas (P) sought a temporary injunction in order to restrain Worth (D) from preventing its entrance onto his property in order to conduct seismic operations in exploring for oil and gas

2. Issue: where the surface and mineral estates in a parcel of land have been severed, does the owner of the mineral interest possess the exclusive right of reasonable entry upon the surface property? HOLDING: yes.

3. Issue 2: did they have “standing” to conduct the title shue because they didn’t have the right to lease the minerals over which they were testing?

a. Didn’t have the right to develop the minerals because in conducting the testing on behalf of the mineral owners, it was acting as the agent of the mineral owners and the owners clearly had standing.

4. Rule: Where the surface and mineral estates in a parcel of land have been severed, the owner of the mineral interest has an exclusive right of entry upon the surface property for the purposes of exploration, development, and production of the minerals.

a. 2 key holdings: i. Any tenant in common has the right to develop its minerals and

to assign it to other parties to do so. ii. Shows efforts to get along with surface owners

5. Note: In Louisiana, 80% agreement of the mineral owners is required for geophysical testing (principle of fairness)

III. Grynberg v. City of Northglenn p. 84a. Facts: Grynberg(P), owner of a coal lease claimed that his coal lease lost market

value due to the discovery and publication of information by Northglenn (D) that the coal reserves on the property had no commercial value. Sued for geophysical trespass because the D physically removed core samples and analyzed.

i. Geophysical trespass: vibrations access the strata below the surface to determine whether there are minerals located there.

b. Issue: Where the surface estate has been severed from the mineral estate, is the mineral owner, rather than the surface owner, the one who has the right to consent to geological and geophysical operations? HOLDING: yes.

c. Rule: Where the surface estate has been severed from the mineral estate, the mineral owner, rather than the surface owner, is the one who has the right to consent to geological and geophysical operations.

IV. Kennedy v. General Geophysical Co. p. 91a. Facts: Kennedy (P) contended General (D) was liable in damages for obtaining

information about the oil and mineral reserves of his land without his permission.


b. Issue: Does an action for damages exist only where geophysical researchers have obtained information concerning the plaintiff’s land through trespass? HOLDING: yes.

c. Rule: No action for damages exists merely because geophysical researchers have obtained information about the oil content of land, unless such was gained through trespass.

V. Garza:a. See http://www.supreme.courts.state.tx.us/historical/2008/aug/050466.htm for

diagramb. Point to set up: Relatively imporous and impermeable and requires hydro fracking to

accessc. Problem: too close to own existing well – applies for exception to commission,

rejectedi. Closes off old well and drills new wellii. When new well was drilled, fracking penetrated property line between tracts

(fracturing constituted the trespass)d. Jury awarded for breach of covenant to reasonably develop, bad faith poolinge. Whether T S.Ct. would find that as a result of fracking an intrusion of the

adjoining estate constituted an actionable trespass. If they found this to be the case, end to fracking.

f. Court:i. Majority: tries to distinguish from prior cases suggesting actionable trespass

may be present A) Tries to make a distinction between subsurface and surface trespassB) Holding: actionable trespass requires injury and here, only claim

of injury is precluded by the rule of capture (if operating legally on your own lands, and legally capture oil & gas from other lands, you’re cool)

1) Because the gas technically was not his, no damages2) Note: this is the traditional argument for any “rule of

capture” discussions3) Note: right result, wrong reason

ii. Concurrence: energy independence – fracking is the greatest thing ever and it’s all good, just let it be (policy based discussion)

iii. Dissent: you need to make a decision regarding whether fracking = trespassC. Physical Trespass

I. Humble Oil & Refining Co. v. Kishi p. 98a. Facts: Humble (D) mistakenly believed it had the right under a lease, which had in

fact expired, to enter upon Kishi’s (P) land and drill for oil. In acting on its belief, Humble (D) wrongfully entered onto the land and committed trespass and ouster. Kishi (P) contended that the measure of damages should be the market value of the leasehold at the time of the trespass and ouster.

b. Issue: Is the measure of damages for unlawful trespass and ouster by a lessee whose lease has expired the market value of the leasehold at the time of the trespass and ouster? HOLDING: yes.

c. Rule: The measure of damages for unlawful trespass and ouster by a lessee whose lease has expired is the market value of the leasehold at the time of the trespass and ouster.

II. Other tenants in common cannot prevent the development of minerals by one of the other tenants.

III. Once you lease your mineral rights to another, you cannot develop them yourself.IV. Champlain Refining Co. v. Aladdin (page 103, footnote 1):


http://www.supreme.courts.state.tx.us/historical/2008/aug/050466.htm

a. Champlain had taken lease(s) from state of Oklahoma, then drilled several productive wells

b. Litigation – Oklahoma did not own the mineral rights, so they couldn’t lease = Champlain as a trespasser

c. Remember: when designated as a trespasser for these purposes, either good faith trespasser or bad faith trespasser

i. Good faith: checked the records, took leases from state, thought it was legit, but was wrong in the end (couldn’t have done more than what they did)

A) Get to deduct your costs – need only account to the aggrieved party whatever above the costs

ii. Bad faith: if you know that you are accessing and developing another person’s minerals without permission, then you must account to the party who owns the minerals from the first dollar you made

d. Wrinkle: in conducting drilling operations, Champlain decided to conduct a slant hole into another formation while drilling – argued that should be entitled to deduct costs for this exploratory activity (because it was prudent activity of developer)

i. Majority: only the costs that are incurred that benefit the aggrieved party can be deducted

ii. Minority: can deduct other prudent costse. Under ordinary circumstances, as a trespasser, allowed to remove equipment – even

though lose the wells, the mineral owner would have to repay for the value of the wells or you get to take it with you

7. Slander of Title A. Elements of Slander of Title:

I. Party against whom slander occurs must have title to the interestII. Publication by the defendantIII. Falsity of the publicationIV. Damages (what could have leased if not slandered)V. Malice; must prove either:

a. Actual malice (will support punitive damages) orb. Want of good faith/ want of probable cause (will only support punitive damages)

B. Comes up in connection with top leases (lease taken while there is another lease that is purportedly still in effect); lease still in effect = “bottom lease”

I. If careful in drafting top lease, will acknowledge existence of bottom lease, and note that top lease does not become effective until the bottom lease expires

II. Without this language, then you are slandering the leasehold title of the lessee of the bottom lease (both lessee and the lessor violating)

III. Two problems with this language:a. When does the primary term of the top lease begin? Does it go back to the original

anniversary date? Or does it go to when the lease actually begins?b. Rule against perpetuities – if trying to challenge a top lease, would say violated RAP;

to get around – “in no event however, shall this interest vest, no later than 21 years from the date of…”

IV. With top lease, generally pay a portion of the normal bonus with an agreement to pay the full bonus when/if the top lease vests

C. Kidd v. Hoggett p. 108I. Facts: Kidd (D) contended the trial court erred in awarding damages in a case to remove a

cloud on title based upon an unreleased oil and gas lease, due to the failure of Hoggett (P) to prove malice.


a. Texas law required, at termination of the lease, for the lessee to release the lease on record- Hogget refused to do so.

II. Issue: Is an action to remove the cloud of an unreleased oil and gas lease and to recover damages one for slander of title requiring a showing of malice? HOLDING: yes.

III. Rule: An action to remove the cloud of an unreleased oil and gas lease and to recover damages is an action for slander of title and requires a showing of malice.

a. Want of good faith (and thus malice supporting actual damages) was found because the defendants knew the well was not a commercial well, though they were leading the landowners to believe it was; that they could not furnish gas to an available market when they were representing to the landowner that they could not obtain a market. (said no market existed when one did)

D. TXO:I. Why he likes this case: slander of title case, O&G case, S.Ct. case (not common for O&G)II. Geologist determined lots of O&G under 1000 acre tract controlled by Alliance

a. Agreement to pay royalty and bonus was contingent upon title III. Reviewed title that conveyed certain mineral rights in the tract to a coal operator

a. Coal company believed only rights they had in the tract was to the coalIV. TXO gets quitclaim deed to tract from coal company

a. Sought declaratory judgment for ownershipb. Alliance claimed slander of title

V. Trial court: compensatory damages to Alliance ($19,000), punitive damages ($10 mil)VI. Had been looking for a case to take to S.Ct. to get a link between compensatory and punitive

damagesVII. S. Court opinion:

a. Stevens’ opinion – should be connection between compensatory and punitive damages; could be instances where punitive so crazy that would violate due process

i. But given circumstances of this case (pattern of bad behavior, TXO’s actions), on balance, can’t conclude that decision should be overturned

b. Scalia: no due process issue with compensatory damages (he views DP clause as guaranteeing DP @ trial = fair trial; NOT DAMAGES)

c. O’Connor: this is crazy! DP = can’t be punished arbitrarily (like in this case)i. Yes, conduct was reprehensible, but punishment doesn’t fit the crime


The Lease

I. Purpose of the Lease and Nature of the Rights Created (pgs.307-311)A. There is no “standard” form:

I. Most courts treat oil and gas leases as both conveyances and contracts.a. Mineral owner conveys a property right to an oil company to explore for and produce

oil and gas, reserving a royalty interest.b. Oil company accepts the right to explore and produce, burdened by certain express

and implied promises.II. Implied Covenants:

a. Lessee has exclusive cost-bearing right to explore and develop the leased property, potentially in perpetuity

b. Lessor has a cost-free interest in production or revenues or value, but has given the lessee the exclusive right to drill or produce

c. Because lessor’s royalty is dependent upon the quality and quantity of the lessee’s actions on the property, there are certain obligations the lessee must perform including: testing the premises, protecting the lease against drainage, developing it after hydrocarbons are discovered, and marketing production

III. However, the Producer’s 88 is very commona. Includes a preferential rights (and possibly other provisions)b. Very popularc. But, they can be changed

B. Most important thing to remember when analyzing leases: the intentions/goals of the lessor on one hand and the lessee on the other hand.

I. Two fundamental goals of the lessee:a. Lessee seeks the right to develop without any obligation to developb. Lessee wants the right to maintain the lease for as long as it is profitable (if

production is obtained)II. Lessor will receive immediate cash payment (“bonus”) and periodic payments called “delay

rentals” if available by the lease. If the lease proves productive, the lessor will also receive a royalty that is based upon the quantity of the production, its value, or the price the lessee receives when it is sold.

C. Legal understanding of O&G leasesI. States that follow “ownership-in-place theory”

a. Courts view the lessee’s interest as a fee simple determinable estate in the O&G in place; therefore, granting language may or may not be significant.

b. These are corporeal and possessory: Possessory remedies of trespass and ejectment are available; abandonment doesn’t apply

II. States that follow “exclusive-right-to-take theory”a. Courts classify the lessee’s interest as an irrevocable license or a profit a prendre

determinable; therefore, granting language not significant.a. These are incorporeal and non-possessory: may be abandoned and are not subject to

possessory remedies of trespass and ejectmentIII. Modern trend is for the courts to regard oil and gas rights as sui generis

D. Top Leasing: I. Top Lease : An oil and gas lease that is taken on property that is already subject to an oil and

gas lease. a. The party taking the top lease either believes the existing lease has terminated or they

intend for the top lease to take effect when, and if, the existing lease terminates.II. Cannot constitute slander of title because they take effect only after the base lease expires or

is terminated.


III. When drafting a top lease, include a clause at the bottom acknowledging the bottom lease and allowing for its expiration (top lease not good until the bottom lease expires)

IV. To avoid a violation of RAP, make the lease expire after 20 yrs.

II. Granting Clause: The Rights Granted by a Lease (pgs. 311-336)A. Must address at least three factors:

I. What rights are given to use the land;II. What substances are covered; and

III. What land and what interests are subject to the leaseB. Lessees are usually entitled to use of the land “reasonably necessary” in producing the oil

I. Building storage tanks, power stations, and structures upon he leased land to produce, store, and take care of production

II. To lay pipes on the land to gather productionIII. To build roads and residences for employeesIV. To construct salt water disposal pitsV. To conduct a waterflood program

VI. To conduct seismic testinga. Hunt Oil Co. v. Kerbaugh p. 312

i. Facts: Kerbaugh (D) contended that Hunt (P) did not have an unlimited right to conduct seismic exploration over his property

ii. Issue: does a mineral lessee have a right of reasonable access to the land to explore, develop, and transport minerals? HOLDING: yes.

iii. Rule: Mineral right lessees have a right of reasonable access to the land to explore, develop, and transport minerals.

A) Reasonable access: may be measured by what are usual, customary, and reasonable practices in the industry under like circumstances of place, time, and servient estate uses.

iv. THIS CASE INTRODUCES THE ACCOMMODATION (or DUE REGARD) DOCTRINE

A) If there are reasonable alternatives to the operator's plan, then the mineral owner must accommodate the surface owner and exercise these alternatives.

B) Cost to accommodate must not be so much greater that it would place an excessive burden on the mineral owner

b. Accommodation Doctrine: i. 3 requirements

A) There must be an existing use of the surface;B) The mineral lessee’s proposed use of the surface must preclude or

impair the existing use of the surface; andC) The mineral lessee must have a reasonable alternative available.

BOP for this lies with the lessor.c. Sun Oil v. Whitaker (pg. 319 notes):

i. Reasonable means must be on the least itself – can’t require them to take action off of the leaseholder.

d. General Principle: Mineral interest is dominant and surface interest is serviente. Liability for surface damage caused by operations

i. Several statutes (including a Colorado one) impose strict liability for surface damages caused by oil and gas operations

ii. Parties may limit the implied rights by express language in the leaseiii. Courts have upheld lease cancellation as a remedy for “continuous

unreasonable” breach of express surface use covenants


f. Obstruction Doctrinei. A lessor who obstructs the lessee either by denying access to te property or

by attacking the lessee’s title is precluded from denying the continued validity of the lease (the doctrine is predicated upon the implied covenant of quiet enjoyment- implied covenants run both ways)

VII. Limitations on the implied covenant to use of the surfacea. Must be related to removing minerals underlying THAT specific surface, not a

neighboring surface- that would be granting more than the mineral owner was given.C. Protective Terms

I. In Gross : Provision stating that the payments provided for in the lease are for the gross acreage described, rather than being calculated on a per-acre basis

a. Protects lessee from lease failure if it turns out that the lease inaccurately describes the number of acres in the property

II. Mother Hubbard clause : Generally provides that the lease is intended to cover all of the land owned by the lessor in the area

a. Used when property descriptions are likely to inaccurately locate property boundariesb. Can also include “after-acquired title language”

i. …All strips or parcels of land now owned by lessor or hereafter acquired…The land above described now owned or hereafter acquired by lessor.

III. Proportionate reduction clause : The clause permits the lessee to reduce lease benefits to the extent that the lessor owns less than the full mineral interest described

a. Protects lessee from paying twice for the same lease interestIV. Subrogation clause : Empowers lessee to protect its interest by paying taxes or mortgages

encumbering the property and then stepping into the shoes of the former creditorsV. Warranty clause : A promise to defend the lessee against future lawful claims and demands.

This is only breached when the lessee is physically or constructively ousted from the property.

III. Habendum Clause: Duration of the Lease (pgs. 336-413)A. Habendum : sets the lease’s durationB. Primary term : a fixed term of years during which the lessee has the right, w/o any obligation, to

explore for oil and gas and to drill for oil and gas on the leased propertyI. Could last as long as parties agree, though some states limit it to 10 yrsII. If you haven’t drilled by the primary term end?

a. You can pay delay rentalsb. If the lease allows, you could commence operations right before the primary term

endsIII. Implied Covenant to Test : the courts recognized an implied promise from the lessee to the

lessor that the lessee would test the leased premises by drilling a well within a reasonable time after acquiring a lease

a. In response, most oil and gas leases include a delay rental clauseb. Delay rental clause : Provides that the lessee can maintain the lease throughout the

primary term, without drilling, by paying periodic delay rentalsi. If a third party is at fault for a failure to pay delay rentals, the lease is

generally preservedA) Most people create either paid up leases (where all delay rentals have

been paid in advance), or will mail delay rentals via certified mail at least a month in advance.

ii. 2 types of delay rental clauses:A) “Unless” Clauses: If no rentals paid and no producing well drilled,

lease terminates automatically.B) “Or” clauses: by the end of the first year, you need a producing well

or you pay the delay rental; if you don’t pay the delay rental, a


simple breach of contract situation arises- doesn’t automatically terminate the lease.

IV. Schwartzenberger v. Hunt Trust Estate p. 337a. Facts: the Scwartzenbergers (P) firmly held to the position that the oil and gas lease

given to the Estate (D) had terminated when the Estate (D) paid an insufficient amount as delay rental despite notification that the mineral estate had more acreage than previously thought and that the total sum due as delay rental was thus larger because it was figured on a per acre basis.

b. Issue: Is termination of an “unless” oil and gas lease automatic if the lessee fails to drill within the specified period or to pay the delay rentals as called for in the lease? HOLDING: yes.

c. Rule: An “unless” oil and gas lease terminates automatically if the lessee fails to drill within the specified period or pay the delay rentals as called for in the lease.

V. Breaux v. Apache Oil Corporation p. 361a. Facts: Breaux (P) brought suit seeking to cancel an oil, gas and mineral lease, and to

recover delay rental payments, for Apache Oil Corp.’s (D) failure to commence drilling within the time indicated in the agreement.

b. Issue: Does to “commence drilling” a well, for purposes of a provision contained in an oil and gas lease, mean that substantial preparations for such drilling have been undertaken, as long as such measures have been commenced in good faith and with due diligence? HOLDING: yes.

c. Rule: To “commence drilling” a well, for purposes of a provision contained in an O&G lease, means that substantial preparations have been undertaken, as long as such measures have been commenced in good faith and with due diligence.

i. Here, building a board road and turn-around were substantial surface preparations, and counted as “commencement”

VI. Prof. Kuntz’s Explanation of “Commencement” a. “a lessee has commenced a well if operations have been conducted on the land in

good faith preparation for the drilling of a well for oil and gas and has continued the operations in good faith and with due diligence.”

C. Secondary Term : The extended period for which rights are granted to the lessee, subject to production being obtained.

I. Protects the lessee by allowing it to hold the leased premises indefinitely, so long as production continues

II. Clifton v. Koontz p. 367a. Facts: Clifton (P) sought to cancel an oil and gas lease on the grounds that production

in paying quantities had ceased.b. Issue: for a marginal well, what is the standard for determining if paying quantities

are being produced?c. Rule: the standard for determining if paying quantities are being produced by a

marginal well is whether or not a reasonably prudent operator would, for the purpose of making a profit, continue to operate a well in the manner in which the well in question is operated.

i. The court applied a base test- the term “paying quantities,” when used in the secondary clause of an oil lease habendum clause, means production in paying quantities sufficient to yield a return in excess of operating costs, and marketing costs

A) Since this well did not produce that much production, the court applied the reasonably prudent operator standard

ii. Factors a reasonably prudent operator would consider:A) The depletion of the reservoir and the price for which lessee is able

to sell his production; the relative profitability of other wells in the area; the operating and marketing costs of the lease; his net profit;


the lease provisions; a reasonable period of time under the circumstances; whether or not the lessee is holding the lease for merely speculative purposes.

iii. Evidence of “paying quantities”: showing that there were any facilities for marketing the gas or any nearby localities or industries which might have furnished a market

III. Stanolind Oil & Gas Co. v. Barnhill p. 379a. Stanolind had an O&G lease on Barnhill’s property, and a natural gas well capable of

production was drilled and finished by Mar. 31, ‘31b. There was no demand for sour gas (the only type produced by the well) so Stanolind

capped the well.c. The lease specified that if the well did not produce before Feb. 4, 1935, the lease

terminatedi. Stanolind found a buyer in October 1935

d. The court said that b/c there was no production, the lease automatically endedi. Production, in Texas, includes marketing the gas/oil within a reasonable

period of time after the minerals are discovered in paying quantitiesIV. The “Production” requirement

a. “produced” means “produced in paying quantities”b. 3 different rules

i. The discovery of either oil or gas will satisfy the habendum clause (Oklahoma & west va)

ii. Gas and oil are distinguished because oil may be extracted and stored economically without marketing whereas gas cannot.

A) Discovery of gas sufficient, but if only oil, it must be actually extracted to satisfy the habendum clause

iii. Mere discovery of oil and gas will not satisfy the habendum clause; in both cases the product must be extracted. (MAJORITY RULE)

D. Divisibility clause: lessor will accept payments in proportion to ownership of each party; if one party pays properly and one doesn’t, the non-paying party’s interest in the lease ends. The Lessor MUST be informed if you divide the lease.

E. “Savings Clauses” I. Shut-in royalty clause- permits lessee to maintain the lease without production because wells

capable of production are shut-in by paying a royalty in lieu of production. (the usual effect of failure to pay the shut-in royalties properly is lease termination)

a. Pack v. Santa Fe Minerals, Division of Santa Fe International Corporation p. 381i. Facts: lessees (P) appealed cancellation of leases after they temporarily

ceased production in order to achieve the highest prices for gas while complying with state production restraints

ii. Issue: Does a lease expire when a lessee stops production and opts to pay shut-in royalties due to a marketing decision? HOLDING: no.

iii. Rule: A lease does not expire when a lessee stops production and opts to pay shut-in royalties due to a marketing decision

b. Freeman v. Magnolia Petroleum Co. p. 387i. Facts: Magnolia (D) was late in tendering a stipulated royalty payment and

Freeman (P) brought suit to cancel the lease with Magnolia (D).ii. Rule: a lease provision for a royalty payment to declare a potential well a

producing well is an absolute and unconditional agreement which must be timely exercised under the provisions of the lease.

A) Lessee’s effort to tender the royalties 4 months later could not revive the lease once it expired.

c. To pay shut ins, your well must already be capable of production!


d. “Capable of Production” means a well that will produce in paying quantities if the well is turned “on” and it begins flowing, without additional equipment or repair.

e. How long can you pay shut-in royalties?i. Not indefinitely. Taken on case-by-case basis. Most leases limit to 2-3 yrs.

II. Cessation of production clause : Specifies what the lessee must do to maintain the lease if production ceases, even for a brief period. (makes more certain the doctrine of temp. cess.)

a. Temporary Cessation of Production Doctrine- there has been a temporary cessation of production, rather than a permanent cessation, when a lease, though not producing, is one that a reasonable prudent operator would continue to hold.

b. What’s temporary? Factors:i. The period over which the cessation extends

ii. The cause of the terminationiii. Lessee’s efforts to restore production

III. Dry hole clause : Specifies what a lessee must do to maintain the lease for the rest of the primary term after they drill an unproductive well.

a. Makes clear that the lease can be maintained by paying delay rentals for the rest of the primary term.

IV. Operations Clause : Provides that the lease will be continued so long as operations for oil and gas continues on the premises

a. Rogers v. Osborne p. 397; p. 22i. Facts: Rogers (P) took action to terminate an oil and gas lease that Osborne

(D) claimed had been kept alive by drilling and reworking of a well dug before the primary term ended and then further extended by drilling of and production from a second well commenced after expiration of the primary term.

ii. Rule: if a lease term is extended under a reworking clause, the drilling of a second well after the primary term, but during the reworking period, cannot be used to further extend the term.

iii. This case is an example of a bad set of facts that rendered all the savings clauses useless.

V. Force majeure clause : Provides that the lessee will be held to be in compliance with the lease terms while the lessee is prevented by force majeure from performing

a. Typically, FM clauses specifically indicate problems beyond the reasonable control of a lessee that will excuse performance.

b. Lowe’s Analysis of Force Majeure : constructive production if:i. The event complained of is defined as a force majeure event by the language

of the clause,ii. Production is excused by the event defined as force majeure,

iii. There is a causal relationship between the FM event and the failure of production, and

iv. The lessee gives timely notice, if the clause requires it.c. Effect of a Force Majeure: the lease is extended by the period of the force majeured. Perlman v. Pioneer Limited Partnership p. 406; p. 23

i. Facts: Perlman (P) invoked the force majeure clause in his oil and gas lease with Pioneer (D), unilaterally concluding that state regulations prevented his performance of the contract.

ii. Issue: was the force majeure clause triggered?iii. Rule: Under a force majeure clause, an actual, material hindrance must

occur before performance is excused, not just the mere possibility or unsupported conclusion of the existence of hindrance.

A) An actual, material hindrance must occur before performance is excused.


IV. Pooling Clause: Modifying the Granting, Habendum, and Royalty Clauses (pgs. 413-432)A. Pooling Clause : Gives the lessee the right to combine the small tracts or fractional mineral interests

for drilling and apportions production to each interest.I. Dilutes royalties on paying leases: bad if you own producing property; good if you don’t own

producing property.II. In theory, can get trapped by the fact that you agree to pooling

a. Holds the lease for the entire tract – not just the pooled land (because the lease cannot be destroyed until exploration and will continue until well is done producing)

b. How to get out of this:i. Implied covenant for the development

B. Common terms in pooling clauses:I. Requirement that the lessee obtain the prior approval of a conservation commission or record

a declaration of poolingII. Limitations on which minerals the lessee may pool to develop.

III. Requirements that unit production be allocated on an acreage basis among the tracts in the unit

IV. May provide for large or smaller units by referring to the regulatory commission’s recommendations

V. Some pooling clauses contemplate pooling only for purposes of securing developmenta. Exercise of the pooling power to include previously developed property may not be

authorizedVI. Many limit the size of units that may be formed, which usually bars field-wide pooling

VII. Courts have held that the lessee cannot exercise the pooling power after the expiration of the primary term.

VIII. Courts interpret pooling clause language strictlyIX. Pooling declarations only valid as of the date they were recorded- no retroactive pooling!

C. Effect of a pooling clause:I. Expands lease grant by giving the lessee a power of attorney to pool the lessor’s interests

with those of othersII. Provides that operations anywhere on the pooled area will have the same effect as if they

were being conducted on any single lease included in the pooled area (constructive production)

III. States that lessors agree to accept a royalty that reflects their proportionate acreage contribution to the pooled area.

D. Whether an exercise of pooling power is valid involves two issues:I. Is the exercise in accord with the terms of the pooling clause?

a. If no, it is not effective as to the lessor’s interestII. If yes, is it a good faith exercise?

a. If yes, then valid.b. If no, implied duty of good faith is breached and lessor may have remedies

E. Amoco Production Co. v. Underwood p. 418I. Facts: Victory Petroleum (D) entered into a pooling arrangement calculated to prevent several

of its leases from expiringII. Rule: Pooling arrangements must be made in good faith by the lessee.

a. Pooling simply to keep leases from expiring is not a legitimate purpose.F. Situations in pooling:

I. Pooling after production:a. Some modern leases allow for pooling after productionb. Concerns that adding acreage after production will diminish the interest of the lessor

on the already producing propertyc. Cannot pool a producing lease with one that is valueless for O&G purposes- Imes.

i. Where a real necessity and purpose existed, there may be an exception Gillham v. Jenkins, p. 425


II. Pooling immediately before primary term expires:a. Raises doubts about the lessee’s good faith

i. But, does not constitute bad faith in and of itself.III. Gerrymandering:

a. May be a factor of bad faithb. S.W. Gas Prod. Corp. v. Seale, the court looked at other evidence of bad faith

i. A considerable portion of the tract to be pooled was NOT potentially productive; and

ii. Obtaining a new lease for the nonproductive tract to be pooled in return for a promise to pool permitted Hayes to protect his lease block from competing fringe wells.

A) Johnson was going to give a lease in return for an agreement to pool his nonproductive land with Seale’s productive land- Seale’s interest is unfairly diluted by Johnson’s

IV. Pooling for Exploration and Orderly Development:a. “Exploratory units”: Created by a lessee of multiple leaseholds within a prospect area

to unitize all leases to from a single “exploratory unit”i. Usually created where some of the unit leasehold acreage consists of federal

landA) BLM must approve exploratory pooling involving federal lands

ii. Allows lessees to develop a wildcat area where drilling and development costs are high w/o risking the threat of competition.

V. Limits on Pooling:a. Anti-Dilution Provisions : Seek to protect lessor by limiting the extent to which the

lessor’s royalty can be “diluted” by poolingb. Pugh Clauses: At some point in time (any defined point of time) all of the lands

under the lease not part of a producing unit will come back to the lessor.c. Retained Acreage Clauses: Divides a lease as drilling or proration units are formed,

with the result that production from one unit propels the lease into the secondary term only as to land within the productive unit.

VI. Estoppel:a. Where the lessee either acts beyond the scope of the pooling clause or does not act in

good faith, the lessor may, by his conduct, be prevented from contesting the lessee’s actions.

G. Division Orders: An authorization to one who has a fund for distribution from persons entitled to the fund as to how it is to be distributed (lays out how royalties will be disbursed to interested parties)

I. All parties entitled to production by %a. Better add up to 100%!

II. Once you sign a division order (agreeing to what you own), it is binding until it is revokedIII. Can’t use division orders to amend leases.

V. Royalty Payments (pgs. 432-528)A. Payments available in O&G lease:

I. Bonus : The initial payment received by the lessor for entering into the lease.a. Note: This is usually never reflected in the lease.

II. Royalty Payment : This is a periodic payment made to the lessor if the lessee successfully has a producing well.

a. Note: You may never actually get this because there is no guarantee that the lessee will drill or produce from a drilled well.

b. Expressed generally as a fraction or percentage of the production itselfi. It is NOT a percentage of net profits! You get the money even if the well is

not profitable.ii. You can take your royalty in kind (may need it for other ventures)


III. How one determines the value that the royalty is set:a. There is no one fixed royalty for fee royaltyb. Historically 12.5% because modeled after Fed – now 3/16 in Colorado; 20-25% in

Texasc. Extent that the lessee has to pay 20% - he only gets 80% of the production himself

i. Greater the royalty burden, the less attractive the opportunity is for the lesseeA) Can have base royalty + overriding royalty

B. General Principles:I. Landowner’s Royalty : Mineral owners grant leases in exchange for a landowner’s royalty and

a cash bonusII. Overriding Royalty : Lessee assigns lease to another, reserving the royalty themselves.

III. Nonparticipating Royalty : Reserved by landowner when they sell or transfer landIV. Note: when talking about royalties, usually only referring to gas

a. For oil it’s called “postings” – what purchasers will pay for the oil – average of the four highest postings in the field. If not four, highest price in the field. This is the market value for the oil in the field.

C. Ways to calculate royalties:I. Proceed lease : Get your percentage of the proceeds received from the sale of the gas

II. Market value lease : Market value at the well or the market value as determined by a net back method if none is sold at the well

a. If sold at the well, the market value is whatever the price is- same as proceed leaseb. If sold away from well, you calculate what the price received per MCF and then

deduct costs to get the gas to the selling pointIII. Piney Woods Country Life School v. Shell Oil Co. p. 435

a. Vela Rule: “Market value” refers to market value at the time of production and delivery rather than when the applicable sale contract was made

b. Tara Rule: “Market value” is equivalent to the price assigned in the sale contract, as long as the contract was made prudently and in good faith

c. Gas is “sold at the well” only if its value has not been increased by transportation or processing

i. Gas is sold “at the well” when the price paid is consideration for the gas produced but NOT for processing or transportation. (p. 287 of Nutshell)

d. Court adopted the Vela Rulei. The gas, which was not “sold at the wells” (because although title “passed”

at the wells, Shell still was processing it afterwards), was subject to royalty payments based on its market value or price “at the well”- meaning before processing.

e. This is an example of the Texas rule. Oklahoma adopted the Tara rule instead.D. Common Royalty problems:

I. Casinghead gas and Processed gas:a. Lessee generally has no duty to engage in extraction of liquid productsb. Lessee has no special duty to preserve residue gas where casinghead gas is used for

the extraction of natural gasolinec. Unless a court finds imprudent conduct in failing to engage in extraction or in flaring

or venting residue gas, the lessee is not liable.II. Production on which royalties are due:

a. Usually royalties are not due for gas used in production on the premisesIII. Free Gas Clauses:

a. Free gas clause runs with the land on the surface interestb. Allows lessor to use (either an unlimited amount or a limited amount) natural gas

from the well free of costc. Courts have held that lessees owe lessors the duty to use the same care in providing

free gas under a lease provision that a regulated public utility owed its customers.


IV. Remedies for Failure to Pay Royalties:a. Most states have statutory provisions that impose heavy penalties for improper

payment of royaltiesb. Cannon v. Cassidy p. 520

i. Facts: Cassidy (P) sought to cancel an O&G lease because Cannon (D) did not pay the royalties due thereunder for 11 months.

ii. Rule: An oil and gas lease may not be cancelled for the lessee’s failure to pay royalties without an express provision in the lease which authorizes cancellation (it’s just a breach of contract for which the lessee is liable)

iii. NOTE: lessors can help themselves by bringing an equitable action for an accounting for the unpaid royalties. The advantage of this route is that it shifts the burden from the lessor to the lessee to provide the amount due.

V. Division Orders:a. Usually are binding until revoked.b. Gavenda v. Strata Energy, Inc. p. 514

i. Gavenda transferred property but retained a ½ interest in the oil and gas royalties; a title opinion said they were entitled to a 1/16 interest (1/2 of the standard 1/8 royalty interest); division orders were based on this calculation, sent to Gavenda, who signed it. Later the error was discovered

ii. Generally, division and transfer orders are binding on royalty owners even when erroneous; however, where the orders were prepared by the operator itself, and the royalty proceeds are retained rather than paid to any other royalty owner, this rationale does not apply, and an action to recover from the operator would be proper.

A) This case turned on the fact that strata reserved the royalty money for itself; the proper remedy for underpaid owners in the typical case is an action against the overpaid owners for unjust enrichment.

VI. The Perfect Lease A. A proceed lease (no issue over market value)

I. 1/8 of proceedsB. Issue of what can be deducted

I. Rogers rationaleC. Lessor has to pay his portion of taxesD. Post production costs are deductible if the lease E. Garman v. Conoco, Inc. p. 465

I. Rule: When an agreement is silent, the owner of an overriding royalty interest need not pay a share of post-production costs.

a. COLORADO doesn’t do this- the producer must absorb all costs to get the oil into marketable condition.

F. Rogers v. Westerman (on file)I. Producer must also pay the costs to get the product to the first commercial market (includes

transportation costs)

VII. Implied Covenants A. Only apply when the lease is silent on the particular covenant

I. Express covenants (ex: federal leases), trump implied covenants of a subjectII. Lessor bears BOP except for federal leases, b/c gov’t never bears burden of proof


B. Implied covenants can be either in fact or in law:I. Implied in fact:

a. Courts hold parties must have intended these covenants to apply, but because the parties felt more comfortable with a shorter lease, did not provide for these in writing

II. Implied in law: a. Covenants were not initially agreed to by the parties, but the courts will imply the

covenanys in order to level the playing field (for the sake of fairness)i. Courts will imply the existence of a covenant in favor of the lessor

C. Covenants that run from lessor to lessee:I. The only implied covenant that courts have found run from lessor to lessee is the implied

covenant of “quiet enjoyment”.a. Once a lessor leases to a lessee, it can’t then change its mind, when the lease is in

effect, that it will develop the minerals or have someone else develop the mineralsi. This would be a breach of lease – agreed to not interfere with lessee’s rights

provided agree to the termsD. Reasonably Prudent Operator Standard:

I. Imposes obligations to act a. In good faith,

i. Presumed. Lessor must prove bad faith.b. Competently, andc. With due regard for the lessor’s interests.

II. Remedies:a. Damages are the most common remedy for breach of implied covenantsb. Majority rule: lease cancellation may be awarded as a remedy for breach of implied

covenants only upon a showing that damages are wholly inadequateE. SIX COVENANTS:

I. To Test/Drill (Explore) a. Lessees are subject to an implied covenant to test leased premises by drilling within a

reasonable time; not really used anymore when the lease contains a delay rental clause

b. Applies, if at all, during the primary termII. To Reasonably Develop

a. Implied covenant to further develop the leasehold, if you can develop the leasehold at a profit

i. Defense: always have to develop at a profit – this is still a good defense when being pushed into action like now with Niobara

ii. This also applies to deeper zones of a lease – so if you drill shallow wells, lessor may still bring suit as breach of implied covenant to develop

A) However, lessor would need to prove that others in the area have drilled deeper, at a profit

iii. Elements the Lessor must show:A) That additional development probably would have been

economically viable andB) That the lessee has acted imprudently in failing to develop

b. Top lease – taking a lease on top of an existing lease (from lessor)i. Companies will ghostwrite a letter to lessee that they are violating the

implied covenant to develop (when seeking “hotspots” for O&G)c. Viable covenant, adopted in all statesd. Issues:


i. In most states, lessor must make a demand for development before they can request lease cancellation

A) Superior Oil Co. v. Devon Corp. p. 4951) Rule: Notice and a reasonable time to act must be given a

lessee of oil and gas rights prior to cancellation of such rights for a failure to fully develop them.

2) If, by words or conduct, a lessee indicates that it will not further develop, the notice requirement is waived.

3) Dissent – no reason to provide notice to a party that already has notice of the profitability of the wells

4) Majority: Neb. law requirement that notice be first provided – must be ignored and then can force the breach of covenant

(a) Colorado court would probably reach an opposite result

ii. Huge exception to this covenant: the express covenant to developA) Gulf v. Kichee: Implied covenant only applies in absence of express

covenantB) Exxon v. Emerald: Express covenant to develop

1) Court: Exxon complied with express covenant to drill a specific number of wells. Therefore, implied covenant does not apply.

C) Several states that have passed statutes that require that deeper zones be developed or released (LA, ND, KS) – this obviates the need for the implied covenant

III. To Further Explore a. Breached if the lessor alleges that the lessee acted imprudently in failing to explore

undeveloped parts or formations of the land to determine whether there are deposits of minerals that might be profitably exploited to generate royalties

b. Not universally recognized; some think it’s subsumed within the covenant to developc. Clifton v. Kutz:

i. Court: rejected implied covenant to further explore – jurisprudence demonstrates no requirement to develop without profit

d. Colorado is the only state which has adopted the implied covenant to explore i. COLORADO: you don’t need to show profitability, only need to show

unreasonableness by the lessee in not exploring further under the circumstances

e. Circumstances relevant to this determination:i. The period of time that has lapsed since the last well was drilledii. The size of the tract and the number and location of existing wellsiii. Favorable geological inferencesiv. The attitude of the lessee toward further testing of the landv. The feasibility of further exploratory drilling as well as the willingness of

another operator to drillf. Elements:

i. Additional exploration reasonably can be expected to be successful, andii. The lessor’s operator is behaving imprudently by failing or refusing to

explore furtherg. Geophysical testing fulfils this covenant (no drilling needed)h. In Kansas, if the lessor can show that there is no production from a subsurface part

of the land covered by the lease, and that initial production began at least 15 yrs before the action was commenced, a presumption arises that the lessee has breached and violated this implied covenant


i. Some leases address this issue using retained acreage clauses- any areas not drilled on or pooled are severed from the lease

j. Liquidated damagesi. In Texas, a liquidated damages provision is only valid if 1) liquidated

damages are a reasonable forecast of just compensation or 2) damages could not have been accurately estimated w/o difficulty

ii. Liquidated damages clauses are presumptively valid, since the BOP is on the party claiming the damages provision is unreasonable.

IV. To Prevent Against Drainage a. Amoco Production Co. v. Alexander p. 480

i. An oil and gas lessee must act as a reasonably prudent operator to protect lessee against field-wide drainage.

ii. This is the first case that ordered an operator to act to prevent drainage field-wide

iii. This acts as an implied covenant to drill a wellA) But, if you can’t drill the well at a profit (if it costs $1m to drill, that

must be considered in what is a profit), you don’t have to drilliv. This covenant applies EVEN IF you are paying delay rentals

A) b/c lessors can’t protect themselves from drainagev. Applies during both primary term AND secondary term

b. Note: federal leases have alleviated this problem because they require drilling an offset well, even if there is no profit (this is because you don’t get to negotiate the terms of a federal lease)

i. Compensatory royalties – pay feds royalties they would have received if you had drilled the well (can choose this option if you don’t believe you should drill an offset well because it won’t be very viable)

V. To Market a. Requires lessee to use the diligence of a reasonable and prudent business person in

finding a market and negotiating a saleb. To market within a reasonable time

i. Can be a short or long timeii. Conduct must be judged upon what an experienced operator of reasonable

prudence would have done under the facts existing at the timec. To market at an appropriate price

i. Lessees have an implied duty to exercise good faith in marketing gas, especially where the interests of the lessor and lessee do not coincide.

ii. Amoco Production Co. v. First Baptist Church of Pyote p. 455A) Duty to get the highest market price with reasonable effortB) Rule: Oil and gas lease is subject to an implied covenant to

market at fair market value.d. To market and post production costs

i. Garman v. ConocoA) Where an agreement is silent, the owner of an overriding royalty

interest need not pay a share of postproduction costsB) Applies during the primary term (in Colorado)C) Lessees are not allowed to deduct production costs required to make

the gas marketable from royalty payments.D) Where the gas was marketable, and subsequent production costs

were incurred to enhance the value of already marketable gas, such subsequent costs may be shared by the lessors and lessees provided that certain conditions are met

1) Under these circumstances, the lessee has the burden to show that such costs were reasonable, and that the actual


royalty revenues increased proportionately to the costs assessed against the royalties.

VI. To diligently and properly operate a. As a lessee, if you have the possibility of appropriate relief that would allow you to

benefit your lessor, you are required to do so.i. Kitchen Sink Portion: Have to exercise proper environmental controls/

b. Claims for a breach of this covenant usually are in one of four categories:i. That the lessee has damaged the property by negligence or incompetenceii. That the lessee has damaged the lessor by premature abandonment of a well

capable of producing in paying quantitiesiii. That the lessee has failed to use advanced production techniquesiv. That the lessee has failed to protect the lessor by failing to seek favorable

regulatory actionc. Often used by courts to remedy future problems even though they don’t fall clearly

within the other categories 1. Baldwin v. Kubetz p. 508

a. Rule: Failure to obtain government approval will not discharge the covenant of diligent operation if the failure is due to the neglect of the applicant (Kubetz, the sublessee, was not diligent b/c he screwed up the application)

VIII.


Conservation

1. Oil and Gas Conservation Commissions A. Duties/purposes

I. Protecting correlative rightsII. Preventing waste

a. Economic- drilling more wells than necessary (wasting $$ on unnecessary drilling); protecting prices- overproduction can drive prices too low

b. Physical- overproduction will prematurely decrease reservoir pressure, diminishing ultimate production from the reservoir

III. Protecting the environmentB. They accomplish this by regulating certain aspects of drilling and production

I. Well Spacing RulesII. Well Spacing ExceptionsIII. Product Regulation (allowables; gas-oil/water-oil ratios; unitization)IV. Small Tract Problem

a. Texas grants well spacing exceptions to small tract owners (with an allowable sufficient to recover their “fair share” of the oil and gas under their property, even if this is not enough to make production profitable)

b. Majority rule: forced pooling is used to protect correlative rightsC. Larsen v. Oil & Gas Conservation Commission p. 136

I. Facts: Larsen (P) contended that the field-wide spacing order of the Commission (D) was improper due to lack of the requisite findings of fact to support its conclusion.

II. Issue: Must a field-wide spacing order be based on findings of fact supporting the promulgating body’s conclusion that the order properly takes into consideration correlative rights? HOLDING: yes.

III. Rule: To properly take into consideration the correlative rights of all concerned parties, field-wide spacing rules established by the proper authority must be based on the following findings: 1) the amount of recoverable oil in the pool; 2) the amount of recoverable oil under the various tracts; 3) the proportion that #1 bears to #2; and 4) the amount of oil that can be recovered without waste.

IV. Why this is an interesting case: so rare to find a court overturning an O&G Commission (typically found in WY and TX)

V. This is an exception to the general rule that courts are loathe or reluctant to second-guess the O&G commissions – either because they feel the commissions have the staff and expertise to make the factual determinations or the courts aren’t interested enough in O&G to get involved in the evidentiary process (TX, WY, OK not so reluctant)

2. Exploration & Well Permitting A. Conservation acts of most states prohibit drilling an O&G well without a permit. B. Permits specify the maximum depth of the well and the targeted geological formations.C. Regulations typically mandate specific equipment & materials to be used in the well (e.g., steel

casing, high pressure valves, etc.)D. Drilling Procedures are also typically regulatedE. Status reports are required upon completion of the wellF. Permission must specifically be granted to conduct directional or horizontal drilling


3. Well Spacing & Density A. Spacing

I. Can only locate well (not locating surface-wise, where the well is bottomed) within X distance of an existing well

II. Regulates space between well and adjacent lands that you don’t owna. Most regulations establish spacing or drilling unitsb. Special field-wide orders may govern known oil or gas reservoirs

III. What this does: mitigates against the rule of capture, taking into consideration how much your new well will drain the existing wells.

IV. To determine what lands are underlain by a common reservoir for well spacing purposes, drilling is required. New Mexico, North Dakota, Utah, and others have dealt with this as such:

a. A state-wide spacing rule governs drilling of wildcat wells (those drilled in unproven areas)

b. Upon a wildcat discovery, the commission will hold a hearing and issue a temporary spacing order establishing initial spacing and density pattern for the area. (based on all the acreage the agency thinks overlays the reservoir)

c. After initial development proceeds for a specified period or until more information about the reservoir is available, the conservation agency will hold another hearing and issue the final spacing order.

B. Density: I. How many acres you have to control in order to drill the well.II. Economic motivations – one well in this area is sufficient to drain this area (not so much

of a concern now)III. What happens if you don’t have the density?

d. Ask another to voluntarily pool (if they agree, execute a pooling agreement to drill one well – then file with the state)

i. If they don’t agree, can force pool (file an application for a force pooling order) – highly unlikely to not be accepted by the court

A) If they elect to not be a party to the pooling agreement, the other parties in the lease can collect income from the drilling and “reward” for taking the risk of drilling the well (aka “risk penalty”)

B) In Colorado, 1/8 royalty is paid to non-participating partiesii. If federal lands are involved – execute a “communitization agreement”

A) This is not the same as a community lease – everyone owns their separate tracts and combine under a single lease

iii. If you want more than one well in a voluntary pooling agreement, you will need further permission

A) If you force pool, you will need to submit another application for a force pooling order

e. If you can’t voluntarily pool, there is a third option:i. You can apply to the commission for exception relief

A) If you can’t comply with the commission’s regulations, application for exception relief will allow the commission to consider the requirements and waive them if they see fit

B) This requires a showing of good causeC. Pattie v. Oil & Gas Conservation Commission p. 150

I. Plaintiffs tried to get an exception to the well spacing requirements b/c their property laid on the edge of the reservoir and the mandated well location was outside the predicted edge of the reservoir. Oil v. gas reservoirs.

II. The legislation creating the commission didn’t mention protecting correlative rights


III. Court said that not considering correlative rights constitutes a deprivation of property w/o due process of law, and if the law was not flexible enough to allow the rights to be considered, it would be unconstitutional

IV. Court found the law to be flexible enough, and granted an exception.D. Exxon Corp. v. Railroad Commission p. 153

I. Facts: Exxon (P) sought to set aside an order of the Commission (D) granting BTA oil producers a permit to drill a well under a waste exception provision to its statewide spacing rules.

II. Issue: Can the present existence of a well at the site of a proposed exception location be a factor considered in granting an exception location permit to prevent waste?

III. Rule: An exception location well may be permitted to prevent waste, and the presence of an existing well at the proposed location can be properly considered in making such a decision if it was drilled and completed legitimately in good faith and not as a subterfuge to bolster a later exception request.

IV. What motivated Exxon to oppose BTA?a. Exxon had no interest in D production and didn’t want lessor to pressure Exxon into

drilling into this formation. Here, if BTA would have been forced to drill a new well, they wouldn’t have done so and therefore, no pressure on Exxon to develop.

V. Prolong the life of an existing well and also the exception well will save the cost of drilling an additional well.

E. These cases are demonstrating the power of the commission – on one hand, established rules & regs; on the other hand, can grant exception relief if merited to relieve the applicant form the inequities of having to comply with the requirements.

4. Allowables A. In many states, the conservation agency does NOT set general proration unit allowables

I. In these states, except for exception wells, production is still governed by the rule of capture (Colorado included)

B. To assure the maximum recovery of oil, well production may be restricted to a maximum efficient rate of recovery (MER)

I. The most efficient rate at which a well can produce without impairing the efficiency of reservoir drive with consequent physical, underground waste.

C. To prevent inefficient dissipation of gas, some wells in a field may be assigned smaller than normal allowables

D. “Payout” occurs when the proceeds of production attributable to working interest owners are sufficient to cover drilling and completion costs

I. To allow for more rapid recovery of these costs, new wells may be assigned higher allowables until payout is reached

E. Allowables may be transferred to other wells when transfer would help to conserve reservoir energy or to protect correlative rights

F. Commissions often need to curtail production from wells with high gas-oil ratios.G. Pickens v. Railroad Commission p. 164

I. Facts: Pickens (P) and other owners of land in an oil field contended that the Commission’s (D) order prorating the amount of oil which could be produced by each owner was unreasonable because it failed to protect their correlative rights

II. Issue: Is a proration order fixing the rate at which various owners of oil in an oil field can produce valid where it is reasonably supported by substantial evidence? HOLDING: Yes.

III. Rule: A proration order fixing the rate at which various owners of oil in an oil field can produce is valid where it is reasonably supported by substantial evidence.

H. Denver Producing & Refining Co. v. State p. 169I. Facts: Denver (P) believed that the production limits set by the State Commission effectively

penalized high gas-oil ratio wells and thus did violence to correlative rights.


II. Issue: May a state consider the protection of correlative rights to be secondary to the conservation of natural resources in striking a balance between the two? HOLDING: yes.

III. Rule: In promulgating rules regarding the production of oil and gas, a state must operate within a rule of reasonableness but it acts properly in that context by considering protection of correlative rights as being secondary to conservation of natural resources.

I. Market Demand AllowablesI. Calculating Market Demand (p. 185)

a. A determination of the maximum allowable production figure for the state as a whole;

b. A determination of the share of this top allowable that shall be allocated to each producing field in the state; and

c. A formula for the ratable distribution of this field allowable among the operators therein.

II. This is prohibited in Colorado!

5. Production Regulation – Pooling and Unitization: A. Difference between pooling and unitization:

I. Unitization :a. Historically, been primarily federal lands (now, less so)b. Formation of a large unit, which is intended to develop, to drill a number of wells, to

develop the entire reservoir (contemplates multiple wells, but does not require)c. Not the same as “units” in Texas = the amount of land that is attributable to the well

that is being drilledd. Historically, unitization agreements have been comprised of large amounts of land

that have been scaled down as wells are drilled.II. Pooling : only focused on a single well

B. Small Tract Exception (aka Texas Mineral Pooling Act)I. This act has been described as an act to encourage voluntary pooling, rather than an act to

provide compulsory state action.II. Only applies to fields discovered after Mar. 8, 1961.III. Applicants for pooling orders must exhaust efforts to reach an agreement to pool with other

interest owners within the proposed proration unit, otherwise they cannot be granted a pooling order.

IV. If the applicant’s offers for voluntary pooling are not fair and reasonable, the railroad commission cannot compel pooling

V. Small tract exception: could drill a well on 10 acres, even though the mandatory density was 40 acres. Then, (b/c TX had the ability to do this) to promote fairness, if drill well on 10 acres, offsetting well on 40 acres – used allowables to regulate how much production you could get from your well. Still got to protect correlative rights.

VI. Because formula was complicated, TX S.Ct. got involved and started reversing commission’s decisions – demanded some sort of compulsory pooling system

VII. Note: compulsory pooling system may not always be available – field predates the enactment of the mandatory pooling

C. Carson v. Railroad Commission p. 213I. Carson (P) appealed from a decision upholding the Commission’s (D) forced pooling order,

contending that the offer made by BTA (D) to Carson for voluntary pooling was not fair and reasonable

II. Rule: An offer by an operator who has drilled or proposes to drill, allowing a royalty owner to share on an acreage basis, is not per se a “fair and reasonable” offer.


6. Compulsory Pooling A. At the request of an interested party, the [commission] may, or under some acts must, issue and order

pooling tracts and interests within a spacing unitB. May be issued despite opposition by some interested ownersC. May be issued after drillingD. Intended to protect the correlative rights of ownersE. Bennion v. ANR Production Co. p. 222

I. When, in response to a petition by ANR (P), the Board modified its prior pooling order to include a penalty on nonconsenting owners for their reasonable share of production costs for drilling a second well, Bennion (D), a nonconsenting owner, appealed the Board’s modification of its prior order

II. Rule: In the absence of a voluntary agreement as to the treatment of additional wells within a pool, a state agency has the implied authority to modify a pooling order.

a. In the amended order, Benion was charged a 75% penalty on top of the 100% of his share of the production costs.

b. This is a non-consent penalty, and is intended to reward the operator for taking the risk of drilling the well

F. Anderson v. Corporation Commission p. 239I. Ellison and Anderson owned portions of adjacent 40-acre tracts which were in an 80-acre

drilling unit. Ellison applied for a well, and all owners consented except Anderson. In its order granting Ellison’s petition, the Commission authorized Anderson to participate in the working interest by paying Ellison a proportionate share of production costs in exchange for production proceeds. Alternatively, Anderson was to receive $800 per acre as a rental from Ellis.

a. He could either participate as a working interest ownerb. Or lease his land for $800/acre bonus

II. Rule: The state was within its police powers; additionally, Anderson was not deprived of any property rights- he was given extra rights in others’ property

a. In Oklahoma, the Commissionn has lots of discretion. The order forcing Anderson to fish or cut bait is constitutional.

G. Colorado and other states have mandated risk penaltiesI. Others have a range of risk penalties a commission may use, and others simply give the

Commission broad discretion.H. Payout: ordinarily if force pooled and not want to participate, you don’t participate (in many states)

until such time as payout occursI. When your share of the total costs to drill the well II. When all costs have been recovered – non-participating party is entitled to start

receiving its share of the revenues from that well as long as it agrees to pay its share of the operating costs

III. Operator had not sought risk penalty – didn’t seek b/c didn’t think B would participate in the well

IV. Non-participating party, in all likelihood, that is subject to force-pooling, will be subject to risk penalty

a. Some states, where unleased mineral interests, no risk penaltyV. Payout: in the context of the risk-penalty

a. When payout occurs, non-participating parties acquire their original interests (+ risk penalty if applicable)

b. Requires that participating parties recover ALL OF THEIR COSTS


7. Unitization A. Bringing together, either by voluntary agreement (voluntary unitization) or by order of an

administrative agency (compulsory unitization) some or all or the well spacing units over a producing reservoir for joint operations.

I. Usually undertaken after primary production has dropped substantiallyII. Permits efficient secondary recovery operations

B. The Trees Oil Company v. State Corporation Commission p. 267*I. There were two reservoirs, Chester and Morrow, with Chester overlaying the Morrow

formation. Although originally separate, the two reservoirs were in pressure communication because of various well bores through both formations.

II. The Kansas unitization statute defined an oil and gas pool as "a single and separate natural reservoir characterized by a single pressure system so that production from one part of the pool affects the reservoir pressure throughout its extent."

III. Chesapeake was granted compulsory unitization by the state comm'n, which was appealed to and upheld by the district court, whose decision was appealed again.

a. Their plan was to use Trees' well as an injection well for the water flood project.i. Chesapeake said that if trees didn't participate, they would benefit unfairly by

doing nothing because the oil would migrate to their well, violating other owners' correlative rights.

IV. The court said that although it said "a single and separate natural reservoir," to say that these two reservoirs, which were in pressure communication, w\ere separate would disregard the legislature's intent.

a. "when the interpretation of some or one section of an act according to the exact and literal import of its words would contravene the manifest purpose of the legislature, the entire act should be construed according to its spirit and reason, disregarding so far as may be necessary the strict letter of the law."

V. Since this would be economic waste, to prevent unitization here would contravene the legislature's intent of preventing waste. It would also contravene the intent of protecting correlative rights because testimony showed that there would be migration and increased production on Trees' well even if it did not agree to participate, and that it should share in the costs.

VI. Court overrode the language of the statute to comply with legislative intent.a. Pressure communication was the true intent of the legislature

C. Baumgartner v. Gulf Oil Corp. p. 292; p. 103I. Baumgartner (P) sought recovery when Gulf Oil (D), as the operator for the unit project he

refused to join in, instituted a secondary recovery plan for oil (injecting water)II. Rule: Where a secondary recovery project has been authorized by the appropriate

authority, the operator is not liable for willful trespass to owners who refused to join the project (when they were given a fair opportunity to participate) when the injected recovery substance moves across lease lines.

D. Negative rule of Capture I. As a surface owner may capture substances migrating to his land from adjacent lands, he may

inject substances that may migrate through to the adjacent land of others even if this causes valuable substances under the land to be displaced with less valuable ones.

E. How do you compel unitization?


Titles and Conveyances

1. Overview:A. Main issue to address in this section: difference between royalty interest and mineral interest

I. In most states: royalty interest is referred to as a mineral interestII. Technically, they are both mineral interests

B. Royalty interest in some states: real property interest; in other states: personal property interest (not important for test)

I. All of this is by state law, howeverC. Royalty interest: Derives from the lease – owner of the minerals leases its interests to another

party and takes back a royaltyI. Holder of the lease (lessee) owns a leasehold interest, not the minerals

II. What we’ll see in these cases, assignments and deeds where there is reserved back some kind of interest in the instrument

a. Issue: Is the interest in future royalty payments or actual interest in the minerals themselves?

D. Overriding royalty: created by the assignmentI. Note: royalties and overriding royalties are referred to as “burdens”

2. Judicial construction of disputed languageA. Court will attempt to ascertain intent by examining the language in disputeB. If still unclear, the court will apply “canons” of contract construction

I. Deed should be construed to convey the largest possible estateII. Instruments construed against the party who drafted them

III. Handwritten or typed language prevails over inconsistent printed languageIV. Granting clause prevails if there is an irreconcilable conflict among the clauses in a deedV. Specific description prevails over a general description

C. If still unclear, the court will consider extrinsic or parole evidence3. Nature of the Interests

A. As in property law, mineral estates have a set of rights attached (which may be severed)I. THE MINERAL BUG

a. Right to develop legb. Right to execute a lease leg (executive right)c. Right to rentals legd. Right to bonus lege. Right to royalties legf. Expense-bearing body

II. All of the “legs” (or rights) of the mineral bug may be severed. (SEE P. 557)a. A royalty interest may be severed from the mineral interest (the mineral bug)b. A royalty interest is a nonparticipating interest

B. Bodcaw Lumber Co. v. Goode p. 531I. Bodcaw owned land in fee simple; he then sold it, reserving the mineral rights for the

property. Goode sued to quiet title when Bodcaw did not develop the mineral lease.II. RULE: Mineral rights can be separated from the fee to the surface of the land, creating

or reserving a right in perpetuity to such mineral rights.C. McSweyn v. Musselshell County, Montana p. 536

I. County sold land, reserving a 2.5% “mineral” interest; in reality, this was a royalty interest. II. Rule: a mineral interest is not inherently more valuable than a royalty interest

a. Depends on the court’s analysis of the value based on case facts.b. Although one is not more inherently valuable, one having a mineral interest may

lease production rights; one having a royalty interest may not, since production rights


must already have been granted for a royalty interest to exist. BUT, royalty interests don’t have production costs deducted

c. Why royalty interest is more valuable than a mineral interest:i. Under royalty interest: will receive 2.5% of 100% of productionii. Under mineral interest: you’re responsible for the production and have to

pay1) Practically, would lease out this interest so not have to pay to

developiii. If own the mineral interest, have to pay the costs – royalty interests are cost

freeiv. This isn’t always true – in some circumstances, may depend on the

reservations1) If royalty interest is only in the existing lease, royalty interest will be

extinguished at the end of the lease (whereas mineral would continue)

2) Royalty owner does not get to share in bonuses, delay rentals, shut-in payments (other incidental payments that mineral interest owner would receive) [ex where mineral worth more – lots of leasing, high bonuses]

d. Where contract differs from the deed – deed (last document) prevails4. Creation of Mineral and Royalty Interests

A. Barker v. Levy p. 545 (Attorney paid for legal work with an interest in minerals.)I. A deed granting rights to all minerals “produced and saved” on a particular piece of land

and omitting the words “in and under the land” creates a royalty interesta. Because it connoted an interest in what came out of the groundb. Also, language concerning production and saving relates to royalties.

II. A grant of rights in and under the land creates a mineral interesta. Because it refers to the minerals in the ground

B. French v. Chevron p. 554I. Facts: Pursuant to a deed which conveys both a mineral interest and “royalty interest only,” a

grantee (P) claimed rights to a fraction of all productionII. Rule: When a grant deed contains apparently conflicting language, a court must

harmonize and give effect to the whole.III. Court held this to be a fractional mineral estate including only the royalty interest, not a

royalty estate. a. Makes more sense why they were arguing if you consider the numbers: 1/656th of 1/8

of production (a mineral interest) vs. 1/656th of total production (a royalty interest).C. Anderson v. Mayberry p. 558

I. Mayberry and three co-owners executed deeds retaining nonparticipating mineral rights in the land. Mayberry contended that he had the right to execute O&G leases on the land.

II. Rule: A nonparticipating mineral interest contains no right to execute oil and gas leases!a. General meaning on “non-participatory” in O&G – don’t participate in the decision

to lease; therefore, even though he specified that he was not going to share in the delayed rentals and bonuses, he essentially identified the fact that he was not choosing the executive right to lease.

III. Note: right to lease is called “Executive Right”IV. Note: TEXAS would not agree with this result – based on French v. Chevron, the courts are

more literal – so that because delayed rental and bonus rights were enumerated, anything not specified was reserved


5. Concurrent Ownership A. Development and leasing by co-tenants

I. Law v. Heck Oil Co. p. 561 (MINORITY RULE)a. Law (p) owned 1/768 interest in minerals underlying a 131½ acre tract. Heck Oil (D)

held leases for the remaining interests. They tried to negotiate with law for a lease but refused to pay the $1000 bonus he demanded. Heck proceeded with drilling on the land, assuring law he would be paid. Law sued for an injunction to stop drilling.

b. Rule: An unqualified owner of an interest in oil and gas cannot, absent the spectra of irreparable injury (To other interests), be compelled to consent to the development of the oil and gas interest (Unqualified ownership is absolute ownership)

i. If cotenants were allowed to develop the estate without the consent of other cotenants, it would be waste as to the minerals of the other cotenants (except if drainage was occurring)

II. Prairie Oil & Gas Co. v. Allen p. 563 (MAJORITY RULE)a. Allen (P) came to own land from Good Land Co. in which Good Land Co. had

retained ownership of 9/10 of the minerals, but Good Land acted alone (without Allen’s consent) in bringing about oil production

b. Rule: A tenant in common has the right, without consent of his co-tenants, to develop and operate the common property for oil and gas, although he is liable in an accounting to his co-tenants for their respective shares of the net proceeds from such production. (co-tenants only get a percentage of net profits, not of total production as a royalty owner would)

B. The Community LeaseI. To facilitate mineral development, all of the various owners of the mineral estates

(underlying a piece of property) may join in a single lease, termed a “community lease”a. Not too common.b. In French v. George, the court treated such a lease as effectively pooling royalties

between lessor, meaning royalties would be paid to each owner based on the ratio between the area of their tract and the total acreage of the area covered by the lease.

i. Most states hold the intent of the parties governs interpretationii. Texas presumes that the parties intended to pool their royalty interests

1) Overcome with clear evidence to the contrary in the lease itselfiii. Oklahoma also presumes pooling, but allows rebuttal with language in the

lease, ancillary written or oral contracts, or by the conduct of the parties.C. Partition of Mineral Interests

I. Mineral interests may be partitioned by voluntary agreementa. The agreement is usually effectuated by cross-conveyances in which one co-tenant

conveys his interest in a specific portion of the land to the other cotenant, who conveys her interest in the remaining portion.

b. b/c of fears about receiving a non-productive portion of the property,i. Cotenants may partition the surface, where each parcel’s value may fairly be

assessed, but retain undivided ownership of the mineral estate.1) If this is done, an owner wishing to partition the minerals must

obtain a judicially ordered partition.2) Moseley v. Hearrell p. 574

1. Mosely sought to partition property in which Hearrell had a 49/128 interest

2. Rule: equitable grounds need not be shown in order for a co-owner of a mineral interest to enforce the right in partition


a. The statute conferred the right to compel partition in the broadest terms, unqualified by any showing of equitable grounds.

6. Successive Ownership and Nonpossessory Interests A. Life Estates and Remainders

I. Welborn v. Tidewater Associated Oil Co. p. 578a. Welborn held a 10 yr lease from the remainderman, and Tidewater acquired a later

lease from the life tenant and remainderman. Welborn sued for slander of titleb. Rule: a remainderman may not make an oil and gas lease to permit exploration

and production of the life tenant, but he may lease for exploration and production to commence thereafter.

i. Normally, the remainderman and life tenant must both join in a lease to begin production during the life estate

ii. If one party has obtained separate leases from the life tenant and remainderman, and if they are identical in term and provision, they merge and give that party the right to develop the minerals.

c. Wrinkle: royalty income for the development of the minerals – who do you pay it to?i. Remaindermen is entitled to the royalty income – but not until such time

that the remaindermen inherits the estate.ii. Life tenant is responsible for keeping the royalty in trust for the benefit of the

remaindermen. HOWEVER, the life tenant gets to keep the interest accrued from any royalties.

II. “Open Mines” Doctrinea. A life tenant has no interest in or right to open and work new mines not in operation

at the time he becomes vested with the estateb. In O&G, you don’t need a producing well, just an outstanding O&G lease on the

property executed prior to the vesting of the life estatei. Life tenants get a shot at all wells drilled under this existing lease. If it

terminates, and another lease is created, wells drilled under that lease are not protected by the open mines doctrine.

III. Hynson v. Jeffries p. 581; p. 46a. Trust held mineral interest. Hynson was to receive the income from the trust for her

life, then the income went to her husband’s decedents per stirpes.b. Rule: Under the open mines doctrine, the owner of a life estate in a trust holding

oil and gas interests is entitled to the entire royalty payments received from the production of those minerals, and not merely the interest earned thereon. Hynson got the entire royalty minus27.5%, which statute required to be added to the principal of the trust to account for depletion.

i. General rule is that to allow a life tenant to receive the entire royalty payment constitutes waste in that it is an injury to the inheritance.

ii. Generally, the life tenant is only entitled to interest earned on the investment of such royalties, absent expression of contrary intent in the document.

B. Tenants for Years and Holders of Defeasible FeesI. If a surface lease is prior in time to the O&G lease and the tenant seeks to prohibit the mineral

lessee form entering and drilling on the land, what happens?a. Oklahoma has treated such mineral leases as “subject to” the preexisting agricultural

lease and held the mineral lessee liable for all damage done to crops.II. Holders of defeasible fees, whether subject to a condition subsequent, possibility of reverter,

or executor limitation, may usually develop or lease the property for oil and gas without the consent of the future interest owner

a. The owner of the present interest is generally permitted to retain all proceeds of development.


b. BUT, courts have held that the owner of a defeasible fee commits waste by developing oil and gas where it is certain that the defeasible interest will terminate.

C. CreditorsI. Although secured creditors are usually deemed to have legal title to the land that has been put

up as security for a loan, the right to create rights in oil and gas is held by the debtor.II. Unless the owner of the security has waived its priority or executed a subordination

agreement, the debtor’s grantee or lessee receives the interest subject to the security.III. In the event of a foreclosure, the lease or other interest will be extinguished.IV. LAND CONTRACTS

a. The vendor typically retains legal title until the entire purchase is paid off.b. If a default, the premises are repossessed.

D. Owners of Easements, Covenants, and ServitudesI. Owner of an easement, covenant, or equitable servitude has no right to lease or develop the

minerals, but may prevent others from interfering with his right to enjoy his interest. II. In the case of restrictive covenants or servitudes that limit the use of property to a specific

purpose development of minerals may be barred unless all parties benefitting from the interest consent to development.

III. A prior owner’s right to use the surface estate usually has priority over subsequently created easements.

7. Terminable Interests A. Archer County v. Webb p. 593;

I. Archer held a royalty interest that was for a 15yr term, so long as production was maintained in paying quantities and was maintained. A well was completed but no production had continued. Court held the interest terminated.

II. Rule: A grant of royalty interest for so long as a commercially paying quantity of production is maintained requires actual production, rather than completion of a well capable of production.

8. Executive Right in Mineral Interests A. The right to execute oil and gas leases! ( a separate interest in land, and may be severed from the

other incidents of mineral ownership)B. Rationales for severing the executive right

I. Make it easier to execute leases, encourages mineral development when the mineral interest is fragmented

II. To rely on special skill or knowledge of one of the cotenants, who may have worked in the industry

III. To protect another interest, especially a surface interestC. Mims v. Beall p. 603

I. Beall transferred 200 acres to Mims, reserving a ¼ nonparticipating royalty interest. Mims leased the interest to their son Angus, who leased it to Henderson Clay in return for a 1/16 interest.

II. Rule: an owner of executive rights owes a duty of utmost good faith, and thus, a fiduciary duty to the nonparticipating royalty owner.

9. Meaning of “minerals” and named substances A. Generally:

I. Meaning of minerals in a private conveyance (private instrument) – trying to interpret what the parties to that instrument intended by the conveyance or reservation of certain enumerated minerals

a. Issue: what does “other minerals” mean in that context? II. Treaty/statute – where the statute refers to “other minerals”. What is the intention?

a. Assume that congress intended something


B. Grants and Reservations of “Other Minerals”I. Moser v. United States Steel Corp p. 612

a. Moser (p) contended that he, as surface owner, was entitled to the uranium deposits rather than the mineral estate owner

i. Moser had been granted a surface estate but the grantor had reserved “all oil, gas, and other minerals of every kind and character.”

b. RULE: title to uranium is held by the owner of the mineral estate as a matter of law.

c. If generic reference to “other mineral” includes the mineral and extraction of mineral would have substantial impact on value of surface estate, if extraction damages estate, mineral owner must account to surface owner.

i. Note: this is only applicable to non-enumerated mineralsii. But court did not apply in this case

II. Oklahoma Ex Rel. Commissioners of Land Office v. Butler p. 618a. Whether in a conveyance of land, a reservation of oil, gas, and other minerals,

includes coal?b. RULE: In a conveyance of land, a reservation of oil, gas, and other minerals,

standing alone, does not include coal.i. The meaning of the words must be derived from common understanding,

meaning that “other minerals” shall be limited to minerals similar in kind and class to “oil and gas”

1) What is important is those traits which a person of common understanding would find to be similar or dissimilar

ii. Ejusdem Generis- when specific words are followed by general ones, those specific words restrict the meaning of the general ones.

C. Ownership of Coalbed Methane Gas: Construing “coal,” “gas,” and other named substancesI. Three methods to produce coalbed methane gas: 1) gob well; 2) horizontal borehole; 3)

vertical degasificationII. Continental Resources of Illinois v. Illinois Methane, LLC. p. 625*

a. Dispute over who owned coalbed methane gas rights. Continental owned oil and gas in some leases, and oil, gas and coal in others

b. “Container space” doctrine:i. The holder of coal rights also holds the rights to the void after the coal is

minedc. Court held that coalbed methane gas found in coal seams and or in mine voids is

controlled by the coal estate.10. Conveyances and Reservations of Mineral and Royalty Interests

A. Size of Geographic Area: “Catch-All” Clauses and related issuesa. Catch-All Clause-a grantor or lessor states that the conveyance covers not only the

mineral or royalty interest in the area specifically described in the granting clause but also includes all other mineral or royalty interests that she owns in a general area, such as a named county.

II. J. Hiram Moore, LTD v. Greer p. 634*a. Deed conveyed at once everything (all property held in Wharton county) and nothing

(none of the property fell under the survey mentioned)b. The court said that because the specific grant failed, the unambiguous general grant is

rendered ambiguousc. Remanded to decide the parties’ intent


B. Size of Fractional InterestsI. Averyt v. Grande, Inc. p. 644

a. Rule: Where a fraction designated in a deed is stated to be a mineral interest in land that is described in the deed, the fraction is calculated on the entire mineral interest.

i. If the deed reserves a fraction of the minerals under the land conveyed, then the deed reserves a fraction of the part of the mineral estate actually owned by the grantor.

ii. If the deed reserves a fraction of the minerals under the land described, the deed reserves a fraction of the minerals under the entire physical tract, regardless of the part of the mineral estate actually conveyed.

C. Overconveyance: Duhig and its progenyI. Duhig v. Peavy-Moore Lumber Co. p. 649

a. Duhig was granted land and the grantor reserved a ½ mineral interest; Duhig conveyed the surface rights to P-M and reserved a ½ interest

b. Rule: A grantor is estopped from asserting a fractional interest in land that contradicts the purported grant.

c. Here, b/c there was no contradictory grant or assertion of right, no estoppel was imposed on Duhig, who was found to own ½ of the total mineral interest.

II. Acoma Oil Corp. v. Wilson p. 655a. After Acoma (P) and others, to whom a grantor had executed mineral deeds, filed suit

for breach of warranty and to quiet title, the trial court ruled that the unmentioned royalty burden should be proportioned among all the present mineral owners including Acoma (P) and Wilson (D)

b. Rule: Where a grantor conveys partial mineral interests while retaining partial mineral interests in the same tract of land without an explicit reservation, the mineral interests conveyed will not be burdened by an outstanding royalty so long as the grantor has retained sufficient mineral interests to satisfy the outstanding royalty.

D. Proportionate Reduction ClausesI. A lease clause that permits the lessee to reduce payments under the lease proportionately if

the lessor has less than 100% of the mineral interest.II. Also known as “lesser-interest” clauses

III. Texas Co. v. Parks p. 662a. Texas (D) contended it could reduce the rental under the proportionate reduction

clause of the lease to reflect Parks’ (P) interest in the landb. Rule: A lessee may not rely upon a proportionate reduction clause to reduce

lease payments where the parties clearly intended for a set lease payment based on the clearly described land grant.

i. Lease said the lease price was $160.00. Lessor owned ½ of mineral interest; Lease included a proportionate reduction clause. Lessee only paid $80, arguing that the clause meant that payment was for a proportion of the $160 in relation to the interest held. The court said that the intent of the parties was to pay $160. Why? The amount of acres included was 320. The delay rental of $1.00/acre was already reduced proportionately.

11. Conveyances of Interests in Leased Land A. “no increase of burden” clauses

I. no change or division in the ownership of the land, rentals, or royalties, however accomplished, shall operate to enlarge the obligations or diminish the rights or the lessee

B. Conveyances “subject to” an existing leaseI. Hoffman v. Magnolia Petroleum Co. p. 669

a. Duke executed an oil and gas lease on his land and then conveyed part of the land to Hoffman (P) by a deed also granting one-half the royalties due under the lease.


b. Entireties clause: in the event that the land is subdivided, land is treating in its entirety so that any well drilled under the lease is shared by the parties based on their proportional interest in the land

i. Absent an entireties clause, it’s every man for himself – so when the land is subdivided, the lessee pays to whomever owns the land on which the well is drilled

c. Court: “Two Grant Theory” – both grants apply; once lease terminated, original grant was the only grant that applied

i. “covers and includes” & “subject to” – creates two different grantsd. Rule: if, after executing an oil and gas lease on his land, a landowner conveys part of

the land by a deed also granting a right to a portion of the royalties due under the lease, the deed is construed as granting a portion of the royalties as to the entire leasehold just on the portion of the land conveyed.

e. To get around this ruling, include a Hoffman Clause: i. Provides that the conveyance is “subject to the said lease insofar as it

covers the above-described land”II. Concord Oil Co. v. Pennzoil Exploration and Production Co. p.672

a. Concord (P) was an oil and gas lessee under a mineral deed (the “Concord deed”), the granting clause of which described the interest conveyed as a 1/96 interest in minerals, but a subsequent clause of which stated that the conveyance covered 1/12 of all rentals and royalties. Pennzoil (D) was an oil and gas lessee- on the same property as Concord- under a lease executed by the successor of the same grantor of the Concord deed. Pennzoil (D) completed producing wells on the property, and Concord (P) brought an action to determine its interest and for damages. Concord (P) claimed the Concord deed unambiguously conveyed a 1/12 interest in minerals and Pennzoil (D) countered that it only conveyed a 1/96 interest

b. Rule: Any inconsistancies in a conveying instrument must be harmonized, if possible, by looking at the document as a whole to determine the parties’ intent

C. Nonapportionment DoctrineI. Nonapportionment rule- the majority doctrine that royalties accrued under a mineral lease on

land that is later subdivided during the lease term are not shared by the owners of the subdivisions, but belong exclusively to the owner of the land where the producing well is located

II. Entirety Clause - a mineral lease or deed provision specifying that royalties must be apportioned if the property is subdivided after the lease is granted.

a. For the lessee, the clause makes it clear that the lessee’s duties will increase if the lessor transfers a part of the leased premises. For the lessor, the clause avoids the nonapportionment rule.

III. Japhet v. McRae p. 686a. McRae (P) contended that he was entitled to a royalty interest in oil found on a tract

of land which was covered by the same lease as his land, though he had not developed his land.

b. Rule: royalties from oil production belong to the owner of the particular tract producing oil.

IV. Thomas Gilcrease Foundation v. Stanolind Oil & Gas Co. p. 692a. Gilcrease Foundation (P) owned partial, varying interests in separate tracts of land on

which Stanolind (D) held leases.b. RULE: Ownership in different interests in segregated portions of a leased tract

is an interest in separate tracts.


D. Top LeasingI. Hamman v. Bright & Co. p. 697

a. The Hammans (P) contended that their grant of a top lease, which would become effective if the existing oil and gas lease on the subject property terminated, conveyed vested possibilities of reverter and thus was not subject to the rule against perpetuities.

b. Rule: An agreement entered into in violation of a state statute (here the RAP) is illegal and void ab initio and, therefore, is not capable of approval.

12. Effects of Pooling on Property Interests A. Effect on Lessor’s Interests

I. Veal v. Thomason p. 703a. Veal (D)appealed from a court of civil appeals decision allowing Thomason’s (P)

action in trespass to try title in the absence of other lessor and royalty holder to proceed, contending that they were necessary parties to the action

b. Rule: A contract effecting land which grants or reserves mineral royalty in such land constitutes the owner of such royalty the owner of an estate in such land.

B. Effect on Royalty and Related InterestsI. London v. Merriman p. 707

a. After London (D) executed a single oil and gas lease for two tracts to McCord (D), the Merrimans (P), owners of a nonparticipating royalty interest in the western tract, brought suit for failure to protect against drainage when McCord (D) drilled successful gas wells on the eastern tract, in which London (D) held all the royalty interest

b. Rule: When the holder of the executive right attempts to authorize a lessee to pool the royalty rights of a nonparticipating royalty interest owner with other royalty interest owners, the nonparticipating owner may ratify the act. (Merriman ratified the act when they filed suit)

i. Once they filed suit, the rule that the execution of an oil and gas lease by more than one mineral interest owner effects a pooling of their interests applied.

ii. Absent consent, the executive does not have the legal right to authorize a lessee to pool the royalty rights of a non-participating royalty interest owner with other royalty interest owners

C. Effect on Terminable InterestsI. Edmonston v. Home Stake Oil & Gas Corporation p. 713

a. After Home Stake (D) contended that its mineral interest in the entire ¾ tract was extended by a compulsory unitization order, Edmonston (P) filed suit to quiet title to the ¾ section.

b. Rule: Where defeasible term mineral interests are involuntarily unitized with other property, production from the other property within the unit will operate to continue the term mineral interests only as to property actually included within the unit.

i. Only extended as to the tract within the unit. The other interests revert to the grantor.


Contracts and Transfers

1. Assignments (pgs. 724-756)A. Commonly, assignors reserve an overriding royalty interest for themselves when assigning the lease

I. Usually not a specific number or percentage mentioned; usually provide that you are reserving the difference between burdens of record and 20%. If your burdens of record are 12.5% (1/8 landowner’s royalty), this leaves a 7.5 % overriding royalty

a. What if the burdens exceed 20%? Then the overriding royalty is zero.B. If you’re assigning a partial interest in a lease, unless you have a divisibility clause in the lease, one

of you will have to pay 100% of delay rentals. Even if you contract for it in the assignment, if the lease doesn’t contain a divisibility clause, you could still lose the lease

I. Way Around? Grant the interest, reserve the duty of paying delay rentals in full, and require the assignee, by contract, to reimburse you for a portion of the rentals you paid.

II. MAKE SURE YOU INCLUDE A PROPORTIONATE REDUCTION CLAUSE!C. In jurisdictions where O&G leases create an interest in realty, assignments are subject to rules

governing conveyance of real property and contracts to do so are subject to the Statute of Frauds.D. Reynolds-Rexwinkle Oil, Inc. v. Petex, Inc. p. 732

I. When an assignment of an oil and gas lease expressly provides that any extension or renewal of the lease is subject to an overriding royalty, a new lease that is substantially similar to the first lease and that is procured by the assignee during the term of the first lease, is regarded, as a matter of law, as an extension or renewal of the first lease.

E. Cook v. El Paso Natural Gas Co. p. 741I. An individual who owns an overriding royalty interest in an oil and gas lease may

recover from a party owning an adjoining well which extracts gas from his lease.F. Oag v. Desert Gas Exploration Co. p. 748

I. A habendum clause and its modifying clauses in an oil and gas lease are indivisible.a. If the assignor assigns away a portion of the O&G rights, and the habendum clause is

fulfilled as to the portion of land retained, then it is not necessary that the assigned portion also satisfy the conditions imposed by the clause

G. Kothe v. Jefferson p. 750I. Koethe’s (P) predecessor leased oil and gas rights with the reservation that nonproduction

would terminate the leaseII. Rule: The implied covenant to develop imposed on an oil and gas lessee is indivisible as

to that acreage.


2. Joint Operating Agreements A. Support Agreement:

I. An incentive provided by the party who wishes the well to be drilled to the party actually drilling the well.

a. If you drill a well on X lands, I will support the drilling of the well as follows…”b. Usually monetary support – relatively modest in comparison to what the party would

earn if there was a greater benefit to drillingc. Encourages the party who may drill the well to actually drill the well and apportions

some of the risk to the supporting partyB. Farmout Agreements

I. Give the opportunity to another party to drill a well on the farmor’s lands (party receiving the agreement is farmee)

a. If you do a certain thing, then I will assign you an interest in the well or lands involved

b. Typical: I farm out to you my interest in Blackacre, and if you drill a well on Blackacre and complete it, I will assign you all right, title, and interest I have in Blackacre

i. NOT a leaseii. No obligation on the party receiving the agreement to actually perform

1) No penalty, but you don’t get the interest if you don’t performiii. Since no penalty, the timeframe involved is usually short (might require

operations to commence within 90 days of the agreement)II. Characteristics of farmout agreements:

a. Duty imposedb. Earning factorc. Interest earnedd. Number of wells subject to agreemente. Timing of issuance of assignment

III. Motive: Farmor wants to find someone to develop the mineralsa. May not have enough $$ to drill or may be nervous about the risk

IV. Party that drills the well will earn a lease from the farmor in the mineralsa. The original owner will retain a royaltyb. If you’re just holding a lease, you will assign it to the farmee and retain an overriding

royalty interestV. Not generally recorded- that means there could be other farmout agreements floating around-

but, since pretty short term, low risks to the farmee.C. Drilling Obligations

I. Agreements should be very clear about what is required for the farmee to earn an interesta. Produce to earn – farmee entitled to assignment only by completing a well capable of

producing in paying quantitiesb. Drill to earn- farmee earns interest by drilling to a required depthc. TIME: unless there’s a compelling reason to fix a deadline, better to require “diligent

and continuous drilling operations”II. Martin v. Darcy p. 767; p. 78

a. Darcy (P) obtained a judgment for lost profits in a breach of contract action arising out of a leasehold assignment

b. Rule: for a party to recover for lost profits, the transaction generating the profits must have been contemplated by the parties

D. Retained InterestI. Overriding royalty interests are common

II. Another type: an overriding royalty that equals the difference between a stated percent of production and any other royalties, overriding royalties, or production payments outstanding at the time of the farmout


III. Back-in provisions- allow the farmor to convert his overriding royalty into a share of the working interest once payout has occurred (could cause problems for farmor as to when “payout” has actually occurred

E. Earned InterestI. Usually, a farmee who complies with the drilling obligation receives the working interest in

the drill site acreage. He may also receive an interest in additional acreageII. Drill and earn- farmee receives a working interest only in the drill site when he completes the

well; he is, however, then entitled to earn a working interest in additional sites as he drills on them.

F. Westland Oil Development Corp. v. Gulf Oil Corp. p. 773I. Westland Oil (P) brought an action to enforce an agreement giving it interests in future oil

and gas leasesII. Rule: A party obtaining an interest in an oil and gas lease is bound to honor previously

existing interests disclosed in the instrument under which it obtains the interest.G. Joint Operating Agreements

I. Primary thing it does: designates the operator – the party that is going to drill the wellsa. Note: operator is NOT a dictator, but you do get considerable powerb. Ordinarily, party with the greatest interest (whoever brings the most land to the deal)

is the operator – b/c have most money at stakei. But anyone can be the operator, especially if they have a great deal of

expertise in drilling (e.g. horizontal wells, coal bed methane wells)II. Operating agreement- a contract among owners of the working interest in a producing oil or

gas well setting forth the parties’ agreement as to drilling, development, operations and accounting.

a. Defines the rights and duties of co-owners of O&G propertiesb. Pools the leases and fractional interests of the parties for operating purposes

III. Authorization For Expenditure (AFE)- agreement concerning decisions to drilla. Specifies well location, well depth, and time within which it must be commencedb. Drafted prior to execution of the operating agreementc. Contains a costs estimate (NO COST CEILING unless contracted for!)

IV. Scope of the operator’s authoritya. Operators are empowered by the co-owners to be responsible for operations on a day-

to-day basisb. Model form JOAs provide for narrow liability for the operator (“gross negligence or

willful misconduct”)c. Typical obligations/duties placed on Operator

i. Initial explorationii. Drilling operationsiii. Manage all operations within the specified areaiv. Carry certain amounts of insurancev. Maintain certain accountsvi. Hire legal and accounting assistance

d. Limitations on Operator’s authorityi. Cannot make certain decisions without consent of owners

1) E.g., to plug and abandon a well or release a portion of a lease, or to deepen a well.

ii. Cannot pool unleased mineral interests or royalties contributed to the Contract Area by non-operators unless it is given express power to do so

iii. Monetary limits on the Operator’s authority1) May not undertake projects involving expenditure of more than

$10,000 without permission of other owners…iv. Offshore JOAs require more consent from nonoperators

1) Often provide for a management committee to supervise the operator


v. OPERATORS MAY BE REMOVED BY NONOPERATORS1) For specified reasons, like bankruptcy or a refusal to carry out his

duties2) Also for good cause (gross negligence, willful misconduct, material

breach of operating standards, or material failure or inability to perform obligations – from 1989 model form)

3) A majority vote of at least two nonoperators (whose interests total at least a majority) is usually required to remove an operator

e. Nonoperators’ Involvementi. Limited to approval or disapproval of proposed operationsii. If they participate in management or have the right to do so, they can be held

jointly and severally liable with the operator as mining partnersiii. M & T, Inc. v. Fuel Resources Development Co. p. 793

1) FRD (D) backed out of a well drilling operation prior to the time the other investors wanted to stop

2) Rule: Signing an oil drilling Authority For Expenditure (AFE obligates a party to pay its agreed-upon share of legitimate expenses.

f. Blocker Exploration Co. v. Frontier Exploration, Inc. p. 800i. Seismic Company did work for operator but operator went bankrupt; Seismic

company pursued nonoperators for the debt. ii. Under the laws of mining partnerships, all members are jointly and severally

liable!iii. One element of mining partnerships is joint control over operations

1) In a JOA you don’t have joint control over operations –only the operator does

iv. Rule: The existence of a mining partnership is established where there is joint ownership, an agreement to apportion profits or losses, and joint operations in that the co-owners assume an active role in the operations of the venture

1) The typical JOA is not a mining partnership, unless nonoperators are sufficiently involved to satisfy the active role element of mining partnerships

2) In Blocker, rights to information, access and consultation did not constitute the required level of participation for a mining partnership.

g. Shell Rocky Mountain Prod., LLC v. Ultra Resources, Inc. p. 786*i. Shell overcharged Ultra for drilling costs, but claimed they were protected by

the exculpatory clause barring all lawsuits against Shell except those resulting from gross negligence or willful misconduct

ii. Rule: Exculpatory clause has no application to claims that an operator has failed to abide by specific and express contractual duties assigned in the JOA

1) Only applies to tortuous action and the implied duties which accompany the covenant of good and workmanlike performance

h. Atlantic Richfield Co. v. The Long Trusts p. 805; p. 85i. When a JOA requires the operator to sell gas “at the best price,” the operator

does not breach the contract by decreasing the purchase price in a gas purchase contract

ii. Under a JOA, an operator has a duty to avoid conflicts of interest as the seller of the gas.

H. Provision for initial drillingI. Parties enter into JOAs only after they have decided to drill a well, so:


a. Operators are directed to drill an initial well, the drilling of which must be commenced within a specified time

b. Also specifies depths to be reached and formations to be testedII. All parties generally must consent to plug and abandon a well

I. Additional developmentI. JOAs provide a system of incentives for participating parties and disincentives for

nonparticipating partiesII. Participating parties

a. Must advance the share of the costs that those who decline would have paidb. In return, they get the right to receive the share of production attributable to the

nonconsenting owners until the consenting owners have recovered their costs plus an agreed percentage (from 50% to 1000%!)

i. The share(s) that choose(s) to go nonconsent are distributed equally among the consenting parties

III. Nonparticipating partiesa. “Going nonconsent”- owners may refuse to participate in additional operationsb. Nonconsenting owners can “back in” to the lease only after the consenting owners

have recouped their costs plus an agreed upon percentage (penalizing the nonconsenting owners for refusing to participate)

c. To deny consent, just don’t respond.J. JOAs vs. FOAs

I. Once you draft an operating agreement, you are obligated to drill the first well- afterwards, no requirement to participate

a. If new wells(or reworking existing wells) are proposed, owners can choose to participate or not

b. The Operator is usually the one proposing new wells or reworkingsi. Any party can propose a well; if the operator elects not to participate, they

must still drill the well, or get someone else to drillK. Miscellaneous provisions, attachments, and exhibits

I. Preferential right of purchasea. Gives JOA participants a preferential right to purchase the interest of any other party

who has offered it for sale to a third partyi. Compare with the right of first refusal in Corporationsii. Doesn’t violate RAP

II. JOA Exhibitsa. Ex. A- identifies the contract area and sets out the parties’ fractional interestsb. Ex. C- establishes the procedure for billings, payments, and charges to the parties’

joint account (usually a form instrument)c. Ex. D- lists both the types and amounts of insurance the operator is required to carryd. Can also include gas balancing agreements, statements of nondiscrimination, tax

partnership agreements, etc.III. Area of Mutual Interest Clause (pp. 812-813)

a. Provides that any cash or acreage received under a bottom hole, acreage contribution, or other support agreement must be distributed proportionately for the benefit of all parties



Federal Lands

1. Federal Lands (833-906)A. Feds generated 12.6 billion from on and offshore oil leases

i. This is the third largest source of US Treasury revenuesB. Some say that the 12.5 % federal royalty is too low. Used to use a sliding scale, but not really any

more.C. If you fail to make a timely rental payment, the feds will let you reinstate the lease (at a cost- admin

fee, increased royalty (3/16))i. Half of federal royalties go to the states, but feds keep all of offshore revenues

D. 700m acres (30% of total US landmass) owned by U.S.i. Mostly public domain lands

ii. The balance is acquired lands (purchased, condemned, or gifted to government)iii. Also own 37m severed acres of mineral rights (in addition to the other 700m acres)iv. Managed by Bureau of Land Management, Mineral management service via DOI

1. Nat'l park service, fish and wildlife,, forest service, etc. manage federal lands in their jurisdictions.

2. Mineral Leasing Act requires leasing from federal government to develop mineralsA. If it was known that the lands were underlaid by a Known Geological Structure, competitive bidding

was used. All other lands were leased over-the-counter (first-come-first-served)B. In 1987, due to abuses of the over the counter system, congress amended the mineral leasing act

3. New system. Almost all onshore lands must be offered under competitive biddingA. Minimum bids exist- if not met, lands not leased. Put up for auction a second time- if still not leased,

then leased over the counter (not a common problem)B. BLM manages under the FLPA which requires a multi-stage decision making process that must be

satisfied before leases can be issued4. Resource Management Plan- identifies various resources and allocates lands to promote best interests of all.

A. Sets forth conditions for development of each resourceB. District-wide or area-wide basisC. BLM prepares a Environmental Impact Statement to consider the effects of specific projectD. To control an interest in a federal lease, must be a U.S. Citizen (corps too)E. Most feds related to this are in favor of productionF. Highest bidder wins (oral bidding)

i. Must submit the minimum acceptable bid, the total amount of delay rentals, and a feeii. The remainder of the bonus is to be submitted within the acceptance

G. Primary termi. Onshore 10 yrs

ii. Offshore 5 yrsiii. May be extended for up to 2 yrs by paying delay rentals.

5. NEPA- environmental policy actA. Any action by federal agency subject to NEPAB. Must make detailed statement for any action significantly effecting the quality of the human

environmentC. May make an EIS or an EA (lots easier than an EIS)

6. Offshore lease different than onshoreA. Different operational agreements – unit v. joint operating agreementB. Bidding week for offshore – can bid collectively

I. Certain rules that must be followed7. Can have fed that are subject to JOAs

A. Doesn’t require that feds participate in operating agreement – they get royalties, but they are not a party to a JOA


B. If a federal unit is formed (majority of lands are fed) – fed govt will be a party to that agreement and they will participate actively in forming agreement

8. States follow feds in many respects9. Indians – you have to deal with BIA10. Note: completely separate royalty schedule

A.


Guest Speakers

1. Steve Bain: “International Oil and Gas” Practicing International O&G law both internationally and domestically – Kazakhstan

A. Investment climateI. Most of the Republic of Kazakhstan is desolate wasteland. Fairly sparse, with limited

settlements = ideal for natural resources development and mineral development.II. 6th largest oil & gas reserve, 9th largest country in the world

a. Lots of foreign investment into the countryb. A lot of O&G in the N. Caspian and West – Kashagan Field

(http://en.wikipedia.org/wiki/Kashagan_Field)c. BUT very difficult to produce the oil because of the following reasons:

i. High pressure, sulfur issues, bordering Siberiaii. Caspian is a shallow sea – need to build islands to offshore drill

B. Business structures I. What are three things that the international O&G investors would be primarily interested

about?a. Political stability:

i. In Kazakhstan, they have had the same president since the 1980’s1) This signifies a great deal of political stability, which is good for

business2) However, if you want democracy, this is not the place to go

b. Being able to transport the oil out of the country: i. Also known as “ways to get your O&G to the market”ii. Greatest concern: limited routes through Russia

1) Currently proposing the construction of alternate pipelines through other countries and under the Caspian Sea

iii. Example of another country facing problems of getting oil to the market: South Sudan – they have a lot of oil, but because they are landlocked, there is no way to actually get the resources to the market

c. Economic stability: i. Also known as “security of property rights” – this is why we have contractsii. If expropriate, have to pay just compensation for itiii. Concession agreements – usually from the government itself, like a lease in

the US – right to explore in that country1) Joint operating agreement with multiple parties – national company,

other operators – often done on a JOA form, but much longer (70 pages) – but out by AIPN

C. Foreign investment law – code v. common law (Shiria law)I. In a civil law country (like France), there is no precedential value to the case and the decision

a. What matters in a civil law country is the code itself (ex: UCC)b. Shi’ria law – based on the Koran; mainly oriented to cultural issues (family, etc.)

i. Important for O&G because it covers middle east and Asia – where there is a lot of resources

ii. Egypt: for commercial purposes, not too restricted by Shi’ria lawII. Interest provisions in Shi’ria law – technically not allowed by the Koran:

a. Having interest appeals to the greediness in people and if people want to help someone else, they should do it for humanitarian reasons and not financial reasons

b. There are ways to work around this issues


http://en.wikipedia.org/wiki/Kashagan_Field

D. Finding the lawI. In the US, easy to find what law applies and be able to access it

II. In other countries, can be difficult to locate the law – lack of internet, limited resourcesa. And then the issue of translation

i. Has it been translated?ii. Whose version do you trust?

III. Difficult to track changes in the lawIV. Issues of due diligence to determine what you’ve committed to when buying land

a. Trying to find every document (see Syria)b. Ex he talked about: “Secret decree” from the energy minister – called all heads of

major oil companies and showed them the decree which authorized that companies would give certain shares of oil to farmers for harvest season

c. A little easier now with the internet and embassies, etc

E. Working with bureaucraciesI. Necessary evil when dealing with other countries but often worse than here – virtually every

agency you come into contact withII. Corruption – need to pay bribes to get proper licensing

III. Note: no longer can deduct bribes as a business cost associated with working in another country

IV. By advertising the FCPA, can use it as a defense for not paying the bribe

F. LitigationI. Complicated by the fact that usually dealing with parties in other countries – communication

is much more difficult (easier with the internet, but still shitty)II. Also have to litigate in someone else’s courts – how much do you trust another court?

III. Disputes fall on a spectrum:a. Duels/wars – litigation – arbitration/mediation (ADR) – dispute avoidance (building

relationships and knowing what you’re getting into) – prayer b. Internationally, would prefer arbitration over litigation

i. Issues: where do you arbitrate? What’s the arbitration body?ii. Usually quicker and cheaper than litigation

IV. Why put an arbitration clause in an international agreement?a. There is no appeal from an arbitration award = final AND enforceable (specifically

on foreign parties – in most countries under the 1958 UN Convention)

G. Working with foreign governmentI. Foreign Corrupt Practices Act

a. Pay a thing of value, to a foreign official, for the purposes of getting businessb. Two components:

i. Anti-bribery (see above)1) See also – UK Bribery Act

ii. Recordkeeping & penalties – must keep and reflect accurate records; investigators can review the records whenever

iii. NOTE: it’s always worth consulting with an FCPA expert if you have any doubts


2. Brian Tooley: “Royalty Litigation” Perspective of trying cases in a foreign territory and how to approach it

A. Implied covenant to market: I. Once you drill a well, you have to produce within a reasonable time

a. Can’t drill one well and hold the acreage b. Since the royalty owner’s benefit is from production, need to act reasonably, produce

and drill, can’t just hold for speculationII. Principal has been morphed through series of cases

a. Some courts (Colo.)b. Imposes on lessee to put gas into marketable state

B. Garman v. Conoco, Inc. 886 P.2d 652 (Colo. 1994).I. Issue: Where the instrument is silent, may the lessee, conduct what are called post-production

costs when calculating royaltiesII. Court: Absent a lease provision to the contrary, the implied duty to market precluded the

lessee from deducting costs incurred to make the product marketable.a. Cannot deduct post-production costs to put gas into marketable conditionb. Reasonable costs that enhance the productability of the gas for the royalty, can be

figured into the issue.

C. Rogers v. Westerman Farm Co. 29 P.3d 887 (Colo. 2001).I. Facts: dispute arising from oil and gas leases over royalty payments made by working interest

owners to royalty interest owners. Some of the gas under the leases was sold at the well, some was sold at the interstate pipeline, and some was used “in kind” by the lessor. The leases provide for royalties to be paid based on gas “at the well” or “at the mouth of the well.” Part of the dispute is whether this general language is significant in determining the allocation of costs between the parties. Specifically whether this language is sufficiently clear to set forth proper allocation between the parties of the costs of gathering, compressing, and dehydrating the gas prior to its entry into the interstate pipeline.

II. Two questions:a. Were the leases and assignments silent under Garman? Did they specify how

royalties should be calculated and paid?b. If they were silent, what was necessary to prove that the gas was in a “marketable

condition”?III. What are defenses?

a. Statute of limitations – wrote to landowners & audited → undercharged for post-production costs, they paid back – whether 3 year, 5 year, or 6 year SOL applied

i. Court: six year SOL – six year from when they filed to date ii. Limits exposure from early issues

IV. Key: Is this gas marketable?a. From the well, it was useable – no impurities, no need to process at allb. Evidence that farmers were using the gas from the wellsc. Argument: have parties selling gas at the well to nonparties @ 1/8 the costd. Decision: marketable when sold at well; anything not sold at well was

marketable when soldi. 20% of damages awarded to plaintiffsii. Appeal: if some gas marketable at well, and some gas sold elsewhere – all

gas was marketable1) Reversed 20% damages

iii. Appeal to S.Ct.1) Lease language is silent. Doesn’t specifically mention that can

deduct post-production costs. (although says pay 1/8 gross


proceeds @ well or 1/8 of MV @ well if sold elsewhere, but doesn’t explain how to calculate)

1. Historically, unequal bargaining power between lessee and lessor

a. May not have been correct because at one point, this was regulated – no longer regulated, need different (out of context)

2. At the well language sneaky way of deducting post-prod costs

D. Rodgers – at the well is not good enough and therefore silentI. Want to deduct costs, need to say so in the lease or cannot deduct

II. Where lease is silent, lessee has obligation to bear all costs to put the gas in a marketable condition and also to transport it to the first commercial marketplace

a. Doesn’t matter distance transport the gas, the obligation is to bring it to a commercial marketplace

b. But a well could be a commercial marketplace – however, may not make sense for a commercial marketplace to occur until reach the interstate pipeline

III. Commercial marketplace:a. Because a factual issue – not sure how jury will be instructed or react depending

on the circumstancesIV. Courts haven’t stated that there is a fiduciary duty to the lessorV. Undecided issues in Colo.

a. Wet gas – which is the gas to calculate loyalties from?E. Proceeds leases v. market leases

I. Note: courts are divided on this issueII. TX: market value = market value; if get more than market value, get to keep the difference

III. OK: gas sold when enter into contract; market price effective when in contractF. Royalty clauses

I. Overriding royalty: carved out of lessee’s working interest sharea. Mineral owners – 1/8 royaltyb. Lessees – 7/8 (working interest)c. Overriding royalty: comes from 7/8

i. Compensation for servicesII. Colorado makes no distinction between royalty types

a. Other courts that do recognize distinction – if dealing with override, can deduct unless otherwise specified

III. WY – statutory provisions defining “cost of production” G. Fee royalties: where fee-owner of the land receives royalties

I. Federal leases: a. Series of fed regs – how to calculate royalties to govt.b. Provide for allowances (deductions) – include transportation allowancec. Who is transporting? You/affiliated company (price association calculation)? Third-

party (accept price paid to third party)?d. Marketable product application rule – 4 part teste. Processing allowance if wet gas (against value of liquids)

II. Indian leases:a. Govt has fiduciary duty to protect Indiansb. Accounting for comparison rules

i. Pay higher on two benchmarksH. Determining royalties

I. Look at state in when determining royaltiesII. What type of royalty? Fee, feds, or Indians?

III. If representing someone who takes leases:


a. Read the lease language!!! b. Ex: took lessee for a company in his name, assigned and then the lessee went belly

up. Assignment provision did not provide that the lessee was removed from liability.i. Implied in fact – original contracting party remains liableii. Implied in law – if no longer own it, no longer liableiii. Rogers trial court – implied in fact

WHEN YOUR LEASE OR OVERRIDING – LESSEE HAS OBLIGATION TO BEAR ALL POST-PRODUCTION COSTS NECESSARY TO PUT THE GAS IN MARKETABLE CONDITION (IE IN A PHYSICAL CONDITION THAT IS MARKETABLE FOR SALE)OBLIGATION TO PAY ALL COSTS TO TRANSPORT THAT GAS TO A FIRST WHETHER GAS IS IN A MARKETABLE CONDITION IS A QUESTION OF FACT

WHEN GAS IS IN MARKETABLE CONDITION – FURTHER COSTS THAT ENHANCE MAY BE DEDUCTED AND CALCULATED INTO ROYALTIES PROVIDED REASONABLE AND IN PROPORTION TO THE COSTS

Nuances to this issue: liquids in gas? What is marketable? Etc.

1. Landowners need to be more educated when the buy the land to know whether own minerals – required in contract

a. Title insurance companies are required to tell you if there is evidence that the surface rights have been severed from the mineral rights

2. Mineral notification acta. Can file a notification of ownership of mineral rights and if surface developer wants to

build on land, they have an obligation to notify the owners that developing on top of the minerals

b. From assessor’s office or notification of record3. Reasonable accommodation doctrine

a. Lessee has a duty to reasonably accommodate the surface owner in terms of where they are locating wells. If act unreasonably, have lost the right to the accessing the surface – subject to trespass

b. Not speculative – must be reasonably foreseeable4. Colo. O&G commission

a. Requires notification to surface owner and discussionb. Surface owner can request inspection – whether reasonable accommodation & additional

measures that can be taken (not monetary issues)5. Surface subdivided after mineral rights severed

a. Have a legal right to cross any parcel necessary in order to produce O&G6. Unitization – large area of leases – treated all as one big lease

a. Own 10% of land, get 10% royalties, regardless of where the well is locatedb. Consequences to landowner (may include leased lands as part of larger unit – diluted

revenues; production under one = production under all → hold the entire acreage) and producer

c. Pooling – smaller than unitization (more protective)7. Terms are more negotiable than ever; royalty provisions especially – most significant provision in the

entire lease


3. Rebecca Watson: “Public Lands” A. Historical Context:

I. Bush National Energy Policy (May 2001) – the “Cheney” Task ForceII. Why Bush administration is important:

a. Every administration does two things:i. Builds on what was built beforeii. Reacts to what was built before

III. Drivers:a. Enron Fallout/Blackoutsb. Oil – economic and national security concerns/global demand (insecurity put on the

system, unsettlement of the middle east)c. Natural gas – supply unable to meet demand

i. Clinton era had moved beyond coal fired power plants toward natural gasIV. Bush NEP Interior Focus:

a. Provide access to domestic oil and gasb. Expedite oil & gas permittingc. Complete “high priority” (energy areas) land use plansd. “impediments” to oil & gas development study – EPACT 2000e. Address transmissionf. Develop renewable energy

V. Energy Policy Act of 2005a. Oil & gas energy coordination offices from rental feesb. Permitting time lines for APDs, BMPs for BLM, tracking systemc. Categorical exclusions for oil and gas – 5CXsd. Energy rights-of-waye. Renewably Energy on Public Lands (10000 mw – 2015)

i. Geothermal updates; offshore wind; incentivesVI. 2007 – start to figure out how to develop unconventional sources of natural gas

a. Shale gas, tar sands, etc. (referred to as the “shale gale”)b. Note: Rockies oil not economic to use because market is on the East Coast

VII. 2008 – end of the Outer Continental Shelf moratoriuma. OCS – Reaction to California oil spill

B. Obama Public Land Energy Policies: I. “An America Built to Last” – SOTU address

II. 2008 campaigna. Transform US Energy Policyb. Cap & Trade – 80% CO2 reduction by 2050 (theoretically generate more fed money

– which would be reinvested in promoting renewable energy)c. $150 billion for clean tech over 10 yearsd. $50 billion venture capital for clean teche. 25% federal Renewable Portfolio Standards

i. Has not been passed because some states (SOUTH) do not have RPS because they’re run on cheap coal

f. Double CAFÉ in 18 yearsIII. Energy policy was transformed as an economic opportunityIV. In renewable energy – environmental groups joining with the government’s position –

promote reduction of carbon footprint to reduce global warming

C. Old Energy Reform: I. Salazar rejected BLM leases in Utah

II. Hayes Report recommended:a. Improved “stakeholder” communications


b. BLM leasing criteria on lease parcel basisc. Inter-disciplinary team site-specific review

III. Stiles Report drilling down on Utah 77:a. Conducts parcel-by-parcel review of Utah 77b. Confirms and elaborates on Hayes recommendations

IV. GAO Categorical Exclusions (CX) Report:a. EPACT 2005 §390 CXs: “lack of clarity…in BLM’s guidance”

V. Impact Energy Resources LLC v. Salazar (on appeal)a. Claimed that in lease withdrawals, the “Secretary exceeded his discretion”

D. Old Energy Reforms: Onshore leasing reforms: I. Purpose of leasing reforms:

a. Improve protections for land, water, and wildlifeb. Reduce potential conflicts and protestsc. Redefine EPACT §390 CXs

II. May 17, 2010 – leasing reforms (Deepwater Horizon context)a. BLM IM 2010-117 (instruction memorandum)

i. Land use plan reviewii. Master leasing plansiii. Parcel-by-parcel review

b. This administration being able to take a second bite of the apple at what the prior administration implemented

III. What it dida. Additional NEPAb. Closer look at leasing decisions

IV. Master Leasing Plans (MLP):a. Focus: “reconsider RMP leasing decisions”b. Acts as an amendment to the leasing plan

V. Mandatory MLP Criteria:a. Substantial portion not leasedb. Majority federal mineral interestc. Interest in leasing; confirmed by discoveryd. Analysis needed for resource/cumulative impactse. NOTE: not a lot of areas that met this criteria

VI. Discretionary MLPS – 30 recommended by NGOsa. Colorado MLPS – 4 approved for review in on-going RMPsb. Utah MLPS – 5 approved for analysisc. Wyoming MLPS 0 21 proposed, 6 approved for analysis in on-going RMPs. “Jack

Morrow Hills” MLP Template.d. Montana MLPS – 1

VII. Lease sale parcel-by-parcel review:a. Frequency of lease sales – quarterly, but rotatedb. Nominations to lease – trigger site visit/NEPAc. Wider public/split-estate surface notice d. Inter-disciplinary parcel review and site visitse. Lease NEPA” Environmental Assessment (EA)f. Public comment on EA

VIII. Western Energy Alliance v. Salazara. Challenged BLM’s protest-related delay past 60-daysb. WY Fed. Dist. Ct. – Secretary needs “to decide” whether or not to lease (or seek

lessee waiver) within 60 day deadlinei. Versus the argued point that the leases were to be distributed within the 60

days


ii. Govt – requirement to issue the lease was 60 days after the Secretary decides the fate of the lease

c. On appeal to 10th CircuitIX. Categorical Exclusion Reforms:

a. Western Energy Alliance:i. Secretary violated APA; nationwide injunction

1) Need “notice & comment” rulemakingii. \No review of substance of CX re-write

X. Wildlands Policy:a. A “second bite” at Bush-era RMP “wilderness characteristics” decisionsb. Reject Secretary Norton 2003 Wilderness Settlement

XI. Results of Leasing Reforms:a. Leasing down 44%

E. Changes on the Horizon: I. Oil Shale:

a. 2012 – House Energy bill (HR 3408) directs increased oil shale leasingb. Interior issues oil shale Draft PEIS

i. Reduces leasable acres from 2 mil to 461,965 acres’ii. Colorado goes from 360,000 to 35,300 acresiii. November 2012 – final PEIS

II. Fracking regulationsIII. BLM Venting & Flaring RegulationIV. Onshore royalty reform

a. Increase to raise royalty from 12.5% to 18.75% “fair return”V. “Use it or lose it” incentives

VI. “Road Map to Renewal” – allow more access to oil and natural gas to create jobs


4. Tom McKee: “Title Opinions” A. What is a title opinion?

I. A title opinion is the written opinion of an attorney, based on the attorney’s title search intro a property, describing the current ownership rights in the property.

II. Note: ALWAYS a written document – but often asked by clients for a preliminary or oral opinion – but this is not the final opinion of the attorney

III. Only attorneys sign opinions, but they can be drafted by almost anyone in the law officea. Used to be done by in-house attorneys (Shell)

IV. See handout for example of drilling and division order title opinion

B. What does a title opinion include?I. A title opinion will typically include the following sections:

a. Surface ownership – who do you need to get an agreement withb. Schedule of production interests – who to pay if get a good willc. Easements & right of way: fee property,

i. Federal leases – concern under right of way leasing act, need separate lease for federal right of way if it was granted before your lease

d. Mortgage of fee property prior to lease – need to get subordinated so not wiped out with foreclosure

e. Comments – important for anything regarding the mineral rights, the lease, or assignments of the lease (anything the client thinks they own)

i. Cover fee title/federal title firstII. Comments and requirements:

a. Whether leasehold title is acceptablei. Must have some standard by which to judge if the title is okayii. Generally accepted standards of title:

1) Good title: perfect title – patent, chain of title to current owner, no breaks in chain of title, no ambiguous (rare)

2) Marketable title: what looking for when buying home; willing buyer and willing seller would agree is okay – some curity statutes, something you tell them to do to make it marketable, or in some states, marketable title act (if title good for most recent 20 years and no adverse conveyance of title in that time, can assume title is marketable)

1. Under this, could be marketable for long ago deficiency (like tax sale 30 years ago)

3) Defensible title: not marketable because of some problem in chain of title, but have information which would make you conclude @ court you would win [found in affidavits] – provided interests are not too big, too valuable, and purchaser trusts the selling party

C. Why do clients want a title opinion?I. Clients want to know who owns the minerals, are the minerals leased, and does the

client own the mineral rights they think they have (primarily the schedule of ownership)II. Note: expensive process and title opinion delays drilling

III. Usually, title opinion is for an operator – looking at spacing unit, two units big (drilling horizontal wells)

a. Usually more than one working interest partyIV. Operating agreement will require a title opinionV. If interest is financed, will need a title opinion as part of loan proceedings

VI. Required for public companies from shareholders’ standpoint


D. Four types of title opinions:I. Drilling title opinion – client wants so they know it’s okay to drill the well (don’t care about

who to pay or when)II. Division order title opinion – client wants to know who to pay (royalty owners, overriding

royalty owners, etc.)a. Almost every opinion in his office is drilling & division order opinion

i. Things moving so fast that opinion can’t be completed by time well is drilledIII. Mortgage title opinion – client needs to borrow money to finance operations – only interested

in their interests – need to know that who acquired leases from had good title, and that no other mortgages on the lease

IV. Acquisition opinion – only interested in the interest owned by the company representinga. Lender will ask for acquisition opinion to use in loanb. Difference is how limited from mortgage title opinion (much bigger)c. Note: impossible to complete title opinion on whole interest acquired – will only have

to opine on specific sections

E. How to prepare the title opinion:I. How do you find what to look at to determine if the title is good?

a. County records (WY, UT, NE – tract index)i. More difficult for subdivided areas and those with lots of O&G activity

b. Abstracts:i. Historically: summary of documents involvedii. Now: verbatim abstract – photocopy of all documents

1) Come from landmen & firmc. Colorado: grantor/grantee index

i. Only way to get a tract index is from an abstractor 1) Sometimes info can be wrong2) Only one abstractor in an area3) Won’t let you use the tract index – need to form your own

F. What records are you trying to find?I. Need to look at county records – official repository of documents and give constructive

notice to the world once they are filed (failure to do so = malpractice)a. Clerk of recorderb. Registry of judgments/decisionsc. Assessor’s office – who they think owns land & taxes paidd. UCC filings, liens

II. Common industry practice to check federal records when dealing with federal leasesa. Offices of BLM

i. Master title platte – by township (patented, number of patent, rights of way, numbers and rights of way)

ii. O&G platte – by township (federal lease covering, rights of way, unit)b. With lease # - case file:

i. Rental receipts for federal lease/money paidii. Lease, protests, decisions – assignments of lease up to currentiii. Can get a copy for $$$

c. Also on the interneti. Patents and plattesii. Not everything, but some

d. Historical indexi. Like a tract index – everything that happened by section of land


e. Special indexes:i. Mining claims, etc.ii. Less important

III. State leases:a. Need to look at county recordsb. Also need to look at state records

i. CO – good, WY – very good, UT – like WYii. Platte & case filesiii. Every state requires that every assignment and working interest approved by

state – need to check for thisIV. Indian leases:

a. Depending on tribe, records can be okay (Utah tribes best)b. Case file & plattec. Industry practice to look at these records even if they suck

G. What do you find in the records?I. Deeds, patent (if fee land), mortgages, leases/releases, assignments of leases, liens

II. Most states – find affidavits (not official, and question whether entitled to be recorded)a. Regardless, helpful to know why someone conveyed somethingb. WY statute – can correct issues with affidavits

H. Don’t read every word of every documentI. Abstracts range from 2000-30000 pages

II. Mortgages & releases – if discharged & of record for 20 years – ignoreIII. O&G leases – only care about your stuff

I. What if you miss something?I. Usually clues throughout to tell whether missed something

J. How to write: Find, examine, organize documents

K. How do you know what the law is?I. If find the issue, can find the law.

II. Also have other resources: “dogtail” title examination group, landmen reports, post-legislative meetings, word of mouth, RMLI presentations

III. Key is to find the issues.

L. Hardest part after finding issues: requirementsI. Hard & soft requirements

II. Make sensible recommendations based on the clients’ interests and background and money

M. Notice:I. How much do we want to tell the client to go out and investigate?

II. If they don’t have constructive or actual notice – do they have a duty to investigate?a. Often will find something you don’t want to know when investigating (i.e. bona fide

purchaser)III. Prudent operator standard: check normal records


Documents

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