Oil & Gas Outline

History, Accumulation, and Ownership 1. Introduction (pgs. 1-9)

A. 3 areas of oil and gas activity I. Upstream a. Exploration; production (majority of this course) II. Midstream a. Pipelines to gather and transport production b. Plants to process production c. Marketing III. Downstream a. Refineries b. Gas Stations B. Standard Oil was the first fully-integrated oil and gas company C. Independents are non-fully integrated oil and a nd gas companies D. 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 ownership B. 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 them Milling Co. v. Last Chance Mining Mining & Milling Co. p. 20 [ownership prior to E. Del Monte Mining & Milling 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 line b. 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, R16W b. Further broken down into quarters (NW, NE, SW, SE) – use smaller quarters within each to get more accurate placement III. 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:

d.

If you are conducting lawful O&G 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. 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 a nd 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 facilitiesf acilities- 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. 33 a. 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 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 commissions C. 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 nuisance III. 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 regulation)(Colorado doesn‟t use

them) II. Used in Texas, Oklahoma, Michigan

F. O&G Trespass I. Good faith- you have to pay the value of the oil undisturbed- you can deduct the costs of production (“mild” (“mild” rule) 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 improvements by labor. (“harsh” rule) G. Wronski v. Sun Oil Co. p. 44

I. Michigan O&G commission set field-wide allowables; Sun violated allowable by 150,000 shown using expert barrels (of which which overproduction overproduction 1/3 came from the plaintiff‟s land – shown 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) Co. p. 49 H. Elliff v. Texon Drilling Co. I. 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 land

B. Complete severance of mineral rights- when an owner either conveys the estate, reserving the mineral rights, or conveys the rights themselves C. 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 acc essing 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 another b. The right to alienate may be owned along with a smaller fractional interest in the minerals c. 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 lease b. 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 ceases d. Royalty- a share of the production free of production costs owed to the lessor e. Each of these incidents may be separately carved c arved from the complete mineral interest D. Types of Royalty Interests Nonparticipating royalty- conveyance of a royalty I. Nonparticipating r oyalty interest (or a fraction of a royalty interest) to a non-participating party by the fee owner or mineral interest owner II. 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. ii.

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) People owning only a royalty interest cannot execute an O&G lease (this ( 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 property II. 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 interest IV. If there is an outstanding O&G lease, and adverse possessor must take action against the minerals themselves V. 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. 57 a. 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. Abandonment I. 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” place” states 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 pr operty


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 abandonment B) 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 – Heirs abandoned mineral rights so they didn‟t have to pay inheritance taxes II. Dormant Mineral Legislation a. ONLY APPLIES TO SEVERED MINERAL ESTATES b. 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.) Ka n.) iv. Indiana law – S.Ct. issue of violating due process A) No notice requirement for taking over mineral rights B) 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 minerals d. 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 owners e. 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 RULES B. 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 estate i. 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 bee n severed, the owner of the mineral interest has an exclusive right of entry upon the surface property for the purposes purp oses 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 mineral owners is required for 5. Note: In Louisiana, 80% agreement of the mineral III.

geophysical testing (principle of fairness) Grynberg v. City of Northglenn p. 84

a. 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. 91

a. 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: Garza: a. See http://www http://www.supreme.courts.state.tx.us .supreme.courts.state.tx.us/historical/20 /historical/2008/aug/050466.htm 08/aug/050466.htm for diagram b. Point to set up: Relatively imporous and impermeable and requires hydro fracking to access c. Problem: too close to own existing well – applies for exception to commission, rejected i. Closes off old well and drills new well ii. 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 pooling e. Whether T S.Ct. would find that as a result of fracking an intrusion of the f.

adjoining estate constituted an actionable trespass. If they found this to be the case, end to fracking. 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 trespass B) 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 damages 2) Note: this is the traditional traditional argument for for any “rule of of

ii.

capture” d iscussions iscussions 3) Note: right result, wrong wrong reason 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 = trespass

C. Physical Trespass Co. v. Kishi p. 98 I. Humble Oil & Refining Co. a. 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. ( page 103, footnote 1): IV. Champlain Refining Co. v. Aladdin (page


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 = c.

d.

e.

Champlain as a trespasser 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 Wrinkle: in conducting drilling operations, Champlain decided to conduct a slant hole into another formation formation while drilling – argued that should be entitled to deduct costs for this exploratory exploratory activity (because it was 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 costs 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 interest II. Publication by the defendant III. Falsity of the publication IV. Damages (what could have leased if not slandered) V. Malice; must prove either: a. Actual malice (will support punitive damages) or b. 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 – “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. 108 I. 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 r emove 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 coal IV. TXO gets quitclaim deed to tract from coal company a. Sought declaratory judgment for ownership b. 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 damages VII. 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 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 t he Rights Created (pgs.307-311) A. There is no “standard” form:

I.

II.

III.

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. 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 However, the Producer’s 88 88 is very common a. Includes a preferential rights (and possibly other provisions) b. Very popular c. 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.

II.

Two fundamental goals of the lessee: a. Lessee seeks the right to develop without any obligation to develop b. Lessee wants the right to maintain the lease for as long as it is profitable (if production is obtained) 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 leases I. States that follow “ownership-in- place place theory” theory” a. Courts view the lessee‟s interest as a fee f ee simple determinable estate estate in the O&G in place; therefore, granting language may or may not be significant. b. These are corporeal and possessory: Possessory remedies remedies of trespass and ejectment II.

III.

are available; abandonment doesn‟t apply exclusive-right-to-take theory” States that follow “exclusive-right-to-take 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 ejectment 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. IV.

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) 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 lease B. 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 production III. To build roads and residences for employees IV. To construct salt water disposal pits V. To conduct a waterflood program VI. To conduct seismic testing a. Hunt Oil Co. v. Kerbaugh p. 312 i. Facts: Kerbaugh (D) contended that Hunt (P) did not have an a n 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: 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: 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 preclud e or impair the existing use of the surface; and C) The mineral lessee must have a reasonable re asonable 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 – can‟t require them to t ake action off of the leaseholder. d. General Principle: Mineral interest is dominant and surface interest is servient e. 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 lease iii. Courts have upheld lease cancellation as a remedy for “continuous unreasonable” unreasonable” breach of express surface use covenants


f. Obstruction Doctrine i. A lessor who obstructs the lessee either by denying access to te property or by attacking the lessee‟s lessee‟s title is precluded precluded from denying denying the continued

VII.

validity of the lease (the doctrine is predicated upon the implied covenant of quiet enjoyment- implied covenants run both ways) Limitations on the implied covenant to use of the surface a. 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 stating that the payments payments provided for in the lease 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 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 boundaries b. Can also include “after -acquired title language” i. …All strips or parcels of land now owned by lessor or hereafter acquired…The acquired…The land above described now owned or hereafter acquired by

III. IV. V.

lessor.

Proportionate Proportionate reduction clause : The clause permits the lessee to reduce r educe 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 lea se interest 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 creditors 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 duration B. 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 property I. Could last as long as parties agree, though some states limit it to 10 yrs II. If you haven‟t drill ed by the primary term end? a. You can pay delay rentals b. If the lease allows, you could commence operations right before the primary term ends III. 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 clause b. Delay rental clause: Provides that the lessee can maintain the lease throughout the primary term, without drilling, by paying periodic delay rentals i. If a third party is at fault for a failure to pay delay rentals, the lease is generally preserved A) 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. automatically.


B) “Or” clauses: by the end of the first year, 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 automatic a utomatically ally terminate the lease. IV. Schwartzenberger v. Hunt Trust Estate p. 337 a. 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 acrea ge 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 automatically if the lessee fails to drill within the specified period or pay the delay rentals as called for in the lease. Corporation p. 361 V. Breaux v. Apache Oil Corporation a. 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.

c.

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. Rule: To “commence drilling” a well, fo r 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 counted as “commencem “commencement” ent” VI. Prof. Kuntz’s Explanation of “Commencement” a. “a lessee has commenced a well if operations have been conducted on the land in

C.

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.” 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. 367 a. 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 th e manner in which the well in question is operated. i. The court applied a base test- the term “paying quantities,” when used in the

ii.

secondary clause of an oil lease habendum clause, means production in paying quantities sufficient to yield a return in excess of oper ating costs, and marketing costs A) Since this well did not produce that much production, the court applied the reasonably prudent operator standard 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. 379 a. 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, „31

b. c. d.

There was no demand for sour gas (the only type produced by the well) so Stanolind capped the well. The lease specified that if the well did not produce before Feb. 4, 1935, the lease terminated i. Stanolind found a buyer in October 1935 The court said that b/c there was no production, the lease automatically ended i. Production, in Texas, includes marketing the gas/oil within a reasonable period of time after the minerals are discovered in paying quantities

IV. 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 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: clause: lessor will accept payments in proportion to ownership of each party; if one party pays properly and one doesn‟t, doesn‟t, the non- paying paying party‟s interest in the lease ends. The Lessor MUST 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) International Corporation p. 381 a. Pack v. Santa Fe Minerals, Division of Santa Fe International i. 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 b.

pay shut-in royalties due to a marketing decision Freeman v. Magnolia Petroleum Petroleum Co. p. 387

i.

ii.

Facts: Magnolia (D) was late in tendering a stipulated royalty payment and Freeman (P) brought suit to cancel the lease with Magnolia (D). 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 equipment or repair.

II.

III.

IV.

V.

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. 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 termination iii. Lessee‟s efforts to restore production 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. 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. 22 i. 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 f acts that rendered all the savings clauses useless. 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 majeure d. Perlman v. Pioneer Limited 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 good if you don‟t 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 commission or record a declaration of pooling II. 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 r egulatory commission‟s commission‟s recommendations V. Some pooling clauses contemplate pooling only for purposes of securing development a. Exercise of the pooling power to include previously developed property may not be authorized VI. 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 strictly IX. 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 others II. 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 ac cord with the terms of the pooling clause? a. If no, it is not effective as to the lessor‟s interest II. 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 Underwood p. 418 I. Facts: Victory Petroleum (D) entered into a pooling arrangement calculated to prevent several of its leases from expiring II. 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 production b. Concerns that adding acreage after production will diminish the interest of the lessor on the already producing property


II. III.

c. Cannot pool a producing lease with one that is valueless for O&G purposes- Imes. i. Where a real necessity and purpose existed, e xisted, there may be an exception Gillham v. Jenkins, p. 425 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. Gerrymandering:

a. May be a factor of bad faith b. 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 nonproductive tract to be pooled in return for a promise to pool permitted Hayes to protect his lease block from fr om 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 IV.

is unfairly diluted by Johnson‟s 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”

V.

i. Usually created where some of the unit leasehold acreage consists c onsists of federal land A) 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.

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

which the

lessor‟s royalty can be “diluted” by pooling

b. 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: 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 VI.

term only as to land within the productive unit. 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 revoked III. 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. usually never reflected in the lease. lease. a. Note: This is usually 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 actually get this because there there is no guarantee that that the lessee will drill or produce from a drilled well.

b. Expressed generally as a fraction fraction or percentage of the production production itself


III.

i. 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) How one determines the value that the royalty r oyalty is set: a. There is no one fixed royalty for fee royalty b. Historically 12.5% because modeled after Fed – now 3/16 in Colorado; 20-25% in Texas c. 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 lessee A) Can have base royalty + overriding royalty

B. General Principles: I. Landowner’s Royalty Royalty: Mineral owners grant leases in exchange for a landowner‟s royalty and a cash bonus II. Overriding Royalty: Lessee assigns lease to another, reserving the royalty themselves. III. Nonparticipating Nonparticipating Royalty: Reserved by landowner when they sell or transfer land IV. Note: when talking about royalties, usually usually only referring referring to gas “postings” – what purchasers will pay for the oil – average of the a. For oil it’s called “postings” four highest postings in the field. If not four, highest price in the field. This T his 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 lease b. If sold away from well, you calculate what the price received per MCF and then deduct costs to get the gas to the selling point III. 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 Rule i. 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 based on its market value or price “at “at the well” well” - meaning before processing. e. This is an example of the Texas rule. Oklahoma adopted the Tara rule r ule instead. D. Common Royalty problems: I. Casinghead gas and Processed gas: a. Lessee generally has no duty to engage in extraction of liquid products b. Lessee has no special duty to preserve residue gas where casinghead gas is used for f or the extraction of natural gasoline c. 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 premises III. Free Gas Clauses: a. Free gas clause runs with the land on the surface interest


IV.

b. Allows lessor to use (either an unlimited amount or a limited amount) natural gas from the well free of cost c. 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. Remedies for Failure to Pay Royalties: a. Most states have statutory provisions that impose heavy penalties for improper payment of royalties b. 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 t he lease which authorizes cancellation (it’s just a breach of contract for which the lessee is liable)

V.

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. 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, c alculation, 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. enrichment.

VI. The Perfect Lease

A. A proceed lease (no issue over market value) I. 1/8 of proceeds B. Issue of what can be deducted I. Rogers rationale C. Lessor has to pay his portion of taxes D. 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 subject II. 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) f airness) 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 minerals i. This would be a breach of lease – agreed – agreed to not interfere with lessee‟s rights provided agree to the terms D. Reasonably Prudent Prudent Operator Standard Standard : I. Imposes obligations to act a. In good faith, i. Presumed. Lessor must prove bad faith. b. Competently, and c. With due regard for the lessor‟s interests. II. Remedies: a. Damages are the most common remedy for breach of implied covenants b. Majority rule: lease cancellation may be awarded as a remedy for breach of implied covenants only upon a showing that damages are wholly inadequate E. 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 term II. 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 and B) 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 states

d. Issues: i. In most states, lessor must make a demand for development development before they can request lease cancellation A) Superior Oil Co. v. Devon Corp. p. 495 1) 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 lessee indicates that it it will not further develop, the notice notice requirement is waived. 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 ii.

(a) Colorado court would probably reach an opposite result Huge exception to this covenant: the express covenant to develop A) Gulf v. Kichee: Implied covenant only applies in absence of express covenant B) Exxon v. Emerald: E xpress covenant to develop 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 ar e deposits of minerals that might be profitably exploited to generate royalties b. Not universally universally recognized; recognized; some think it‟s subsumed subsumed within within the covenant covenant to develop c. 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: 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 drilled ii. The size of the tract and the number and location of existing wells iii. Favorable geological inferences iv. The attitude of the lessee toward further f urther testing of the land v. The feasibility of further exploratory drilling as well as the willingness of another operator to drill f. Elements: i. Additional exploration reasonably reasonably can be expected to be successful, and ii. The lessor‟s operator is behaving imprudently by failing or r efusing to explore further g. Geophysical testing fulfils this covenant (no drilling needed)


h. In Kansas, if the lessor can show show that there is no production 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 damages i. 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 fieldwide iii. This acts as an implied covenant to drill a well A) 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 drill

iv. This covenant applies EVEN IF you are paying delay rentals A) b/c lessors lessors can‟t protect protect themselves themselves from drainage

v. Applies during both primary term AND secondary term

b. Note: federal leases have have alleviated this problem problem because they require require drilling an

V.

offset well, even if there is no profit (this is because you don’t ge t 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) To Market

a. Requires lessee to use the diligence of a reasonable and prudent business person in finding a market and negotiating a sale b. To market within a reasonable time i. Can be a short or long time ii. Conduct must be judged upon what an experienced operator of reasonable re asonable prudence would have done under the facts existing at the time c. To market at an appropriate 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 Baptist Church of Pyote p. 455 A) Duty to get the highest market price with reasonable effort B) Rule: Oil and gas lease is subject to an implied covenant to d.

market at fair market value. To market and post production costs i. Garman v. Conoco

A) Where an agreement is silent, the owner of an overriding royalty interest need not pay a share of postproduction costs B) 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 incompetence ii. That the lessee has damaged the lessor by premature abandonment of a well capable of producing in paying quantities iii. That the lessee has failed to use advanced production techniques iv. That the lessee has failed to protect the lessor by failing to seek favorable f avorable regulatory action c. 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)


Conservation 1. Oil and Gas Conservation Commissions

A. Duties/purposes I. Protecting correlative rights II. Preventing waste a. Economic- drilling more wells than necessary (wasting ( 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 environment B. They accomplish this by regulating certain aspects of drilling and production I. Well Spacing Rules II. Well Spacing Exceptions III. 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 rights Conservation Commission p. 136 C. Larsen v. Oil & Gas Conservation 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 conclusion that the order properly properly takes takes into consideration consideration correlative correlative

rights? HOLDING: yes. III. Rule: To properly take into consideration the correlative rights of all concerned parties,

IV.

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. 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 secondguess 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 mandate specific equipment & materials to be used in the well (e.g., steel casing, high pressure valves, etc.) D. Drilling Procedures are also typically regulated E. Status reports are required upon completion of the well F. 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 own

a. Most regulations establish spacing or drilling units b. 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 the lease can collect collect income 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 non-participating parties If federal lands are involved – execute – 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, agreement, you will need further permission A) If you force pool, you will need to submit another application for a force pooling order ii.

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 regulations, application for exception relief will allow the commission to consider the requirements and waive them if they see fit f it B) This requires a showing of good cause C. Pattie v. Oil & Gas Conservation Conservation Commission 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 correlativ e 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 unconstitutional IV. Court found the law to be flexible enough, and granted an exception. Commission p. 153 D. Exxon Corp. v. Railroad Commission 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 p resence 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 develo p. 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 wo rking 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 Commissions often need to curtail production from wells with high gas-oil ratios. G. Pickens v. Railroad Commission Commission p. 164 I. Facts: Pickens (P) and other owners of land in an oil field contended that the Commission‟s 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 H.

produce is valid where it is reasonably supported by substantial evidence. Denver Producing & Refining Co. v. State State p. 169

I. 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

I.

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. Market Demand Allowables Allowables

I. 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 same as “units” “units” in Texas Texas = the amount amount of land that is attributable attributable to the well that is being drilled d. Historically, unitization agreements 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 pooling system may not always always be available – field predates the VII. Note: compulsory pooling C.

enactment of the mandatory pooling Carson v. Railroad Commission p. 213

I. Carson (P) appealed from a decision upholding the Commission‟s 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 unit B. May be issued despite opposition by some interested owners C. May be issued after drilling D. Intended to protect the correlative rights of owners E. 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 c harged 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 Commission p. 239 I. 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 Commission authorized Anderson to participate in the

working interest by paying Ellison a proportionate share of production costs in exchange for production proceeds. Alternatively, Alternatively, Anderson was to receive $800 per acre as a rental from Ellis. a. He could either participate as a working interest owner b. 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 penalties I. Others have a range of risk penalties a commission may use, and others simply give the Commission 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 occurs I. 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 III.

receiving its share of the revenues from that well as long as it agrees to p ay its share of the operating costs Operator had not sought risk penalty – didn‟t – 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 penalty V. 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) unitization) or by order of an administrative 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 substantially II. 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 Corp. p. 292; p. 103 C. Baumgartner v. Gulf Oil Corp. I. 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 app ropriate 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 c ompel 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 interest II. 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, however C. Royalty interest: Derives from the lease – owner of the minerals leases its interests to another party and takes back a royalty I. 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 r oyalty payments or actual interest in the minerals a. Issue: Is the interest in future royalty themselves? D. Overriding royalty: created by the assignment I. Note: royalties and overriding overriding royalties are are referred to as “burdens”

2.

Judicial construction of disputed language A. Court will attempt to ascertain intent by examining the language in dispute B. If still unclear, the court will apply “canons” of contract construction I. Deed should be construed to convey the largest possible estate II. Instruments construed against the party who drafted them III. Handwritten or typed language prevails over inconsistent printed language IV. Granting clause prevails if there is an irreconcilable conflict among the clauses in a deed V. Specific description prevails over a general description C. If still unclear, the court will consider extrinsic or parole evidence

3. 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 leg b. Right to execute a lease leg (executive right) c. Right to rentals leg d. Right to bonus leg e. Right to royalties leg f. 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. 531 I. 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 C.

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

ii.

Under mineral interest: you’re responsible for the production and have to pay 1) Practically, would lease out out this interest so not have to to pay to develop interest, have to pay the costs – royalty interests are cost iii. If own the mineral interest, free iv. This isn’t always true – in some circumstances, may depend on the reservations 1) If royalty interest is only in the existing lease, royalty interest will will be extinguished at the end of the lease (whereas mineral would continue) 2) Royalty owner does not not get to share in bonuses, bonuses, delay rentals, shutin 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) prevails 4. 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 interest

a. Because it connoted an interest in what came out of the ground b. Also, language concerning production and saving relates r elates to royalties. II. A grant of rights in and under the land creates a mineral interest a. Because it refers to the minerals in the ground B. French v. Chevron p. 554 I. 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 production II. Rule: When a grant deed contains apparently conflicting language, a court must III.

harmonize and give effect to the whole.

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 a rguing 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 r ight 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” participatory” in O&G – don‟t – 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 called “ Executive Right” IV. Note: TEXAS would not not agree with this 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 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 th e development of the oil and gas interest (Unqualified ownership is absolute

II.

B.

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) Prairie Oil & Gas Co. v. Allen 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 productio n b. Rule: A tenant in common has the right, without consent of his cotenants, 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 th e net proceeds from such production. (co-tenants only get a percentage of net profits, not of total production as a royalty owner would) The Community Lease

I.

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 interpretation ii. Texas presumes that the parties intended to pool their royalty interests 1) Overcome with clear evidence to the contrary in the lease itself iii. 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 agreement a. 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 a bout 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 c ompel partition in the broadest terms, unqualified by any showing of equitable grounds. 6. Successive Ownership and Nonpossessory Interests A. Life Estates and Remainders Remainders I. Welborn v. Tidewater Associated Oil Co.

p. 578 a. 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 title b. Rule: a remainderman may not make an oil and gas lease t o 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 le ases 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, HOWEVER, the life tenant gets to keep the interest accrued from any royalties.

II.

III.

“Open Mines” Doctrine

a. 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 estate b. 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 estate i. 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. Hynson v. Jeffries p. 581; p. 46 a. 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 Fees I. 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 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. Creditors I. 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 III. IV.

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

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 Servitudes I. 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. development. III. A prior owner‟s right to use the surface estate usually has priority over subsequently created created easements. 7. Terminable Interests A. Archer County v. Webb p. 593;

I. II.

Archer held a royalty interest that was for f or 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. 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 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 interest C. 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 th us, 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 – where the statute refers to “other minerals”. What is the i ntention? 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 t he mineral estate as a matter of law. c.

II.

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 applicable to non-enumerated non-enumerated minerals ii. But court did not apply in this case Oklahoma Ex Rel. Commissioners of Land Office v. Butler p. 618

a. 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 mine rals, standing alone, does not include coal.

i.

The meaning of the words must be derived from f rom 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 substances I. Three methods to produce coalbed methane gas: 1) gob well; 2) horizontal borehole; 3) vertical degasification II. 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 mined c. 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” All” Clauses Clauses and related related issues a. 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 ambiguous c. Remanded to decide the parties‟ intent


B. Size of Fractional Interests I. 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.

ii.

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

II.

D.

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. Acoma Oil Corp. v. Wilson p. 655 a. After Acoma (P) and others, to whom a grantor had executed mineral deeds, filed suit su it 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 w hile 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. Proportionate Proportionate Reduction Clauses

I. II. III.

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. Also known as “lesser -interest” clauses Texas Co. v. Parks p. 662 a. Texas (D) contended it could reduce the rental under the proportionate reduction clause of the lease to reflect Parks‟ (P) interest in the land b. 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 proportionate reduction clause. 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 lease I. Hoffman v. Magnolia Petroleum 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 t he parties based on their proportional interest in the land – so when the land i. Absent an entireties clause, it’s every man for himself – 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, t erminated, original grant was the only grant that applied i. “covers and includes” & “subject to” – creates two different grants

d. 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

II.

covers the above-described land” 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 lesseelessee - 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

C.

possible, by looking at the document as a whole to determine the parties’ intent Nonapportionment Nonapportionment Doctrine

I.

II.

III.

IV.

Nonapportionment 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, subdivisions, but belong exclusively to the owner of the land where the producing well is located Entirety Clause- a mineral lease or deed provision specifying that royalties 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 nonapportionment rule. Japhet v. McRae p. 686 a. 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. Thomas Gilcrease Foundation v. Stanolind Oil & Gas Co.

p. 692 a. 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 Leasing I. 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 Lessor’s Interests I. Veal v. Thomason p. 703 a. 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 gra nts or reserves mineral royalty in such b. Rule: A contract effecting land which grants B.

land constitutes the owner of such royalty the owner of an estate in such land. Effect on Royalty and Related Related Interests I. London v. Merriman p. 707

a. After London (D) executed a single oil and gas lease for two tracts tr acts to McCord (D), the Merrimans (P), owners of a nonparticipating royalty 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 roy alty 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

Terminable Interests C. Effect on Terminable I. Edmonston v. Home Stake Stake Oil & Gas Corporation 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 Transfers 1. Assignments (pgs. 724-756)

A. Commonly, Commonly, assignors reserve an a n overriding royalty interest for themselves when assigning the lease I. Usually not a specific number or percentage mentioned; usually provide 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.

E. F.

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 t he first lease. Cook v. El Paso Natural Gas Co. p. 741 I. 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. Oag v. Desert Gas Exploration Co. p. 748

I.

A habendum clause and its modifying clauses in an oil and a nd 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. 750 I. Koethe‟s (P) predecessor leased oil and gas rights with the reservation that nonproduction would terminate the lease II. 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 will support the the drilling of the well as as follows…” b. Usually monetary support – relatively modest in comparison to what the party would earn if there was a greater benefit to drilling c. Encourages the party who may drill the well to actually drill the well and apportions some of the risk to the supporting party

B. 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 then I will assign you an an interest in the well well or lands b.

involved Typical: I farm out to you my interest interest in Blackacre, and if if you drill a well on Blackacre and complete it, I will will assign you all right, right, title, and interest interest I have in Blackacre

i. ii.

NOT a lease No obligation on the party receiving the agreement to actually perform 1) No penalty, but you don‟t don‟t get the interest if you you don‟t perform perform

iii. 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:

II.

and continuous drilling operations” Martin v. Darcy p. 767; p. 78

a. Duty imposed b. Earning factor c. Interest earned d. Number of wells subject to agreement e. Timing of issuance of assignment assignment III. Motive: Farmor wants to find someone to develop the minerals a. 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 minerals a. The original owner will retain a royalty b. If you‟re just holding a lease, you will assign it to the farmee and retain an overriding royalty interest V. Not generally recorded- that means there could be other farmout agreements floating aroundbut, 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 interest a. Produce to earn – farmee entitled to assignment only by completing a well capable of producing in paying quantities b. Drill to earn- farmee earns ear ns interest by drilling to a required depth c. TIME: unless there‟s a compelling reason to fix a deadline, better to require “diligent 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 Interest I. 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 Interest I. 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 acreage II. 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. 773 I. Westland Oil (P) brought an action to enforce an agreement giving it interests in future oil and gas leases II. Rule: A party obtaining an interest in an oil and gas lease is bound to honor previously G.

existing interests disclosed in the instrument under which it obtains the interest. Joint Operating Agreements Agreements I. Primary thing it does: designates the operator – the party that is going to drill the wells a. Note: operator is NOT NOT a dictator, but you do get get considerable power power

II.

III.

IV.

b. Ordinarily, party with the greatest interest (whoever brings the most land to the deal) is the operator – b/c have most money at stake i. 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) 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, development, operations and accounting. a. Defines the rights and duties of co-owners of O&G properties b. Pools the leases and fractional interests of the parties for operating purposes Authorization For Expenditure (AFE)- agreement concerning decisions to drill a. Specifies well location, well depth, and time within which it must be commenced b. Drafted prior to execution of the operating agreement c. Contains a costs estimate (NO COST CEILING unless contracted for!) Scope of the operator‟s authority a. Operators are empowered by the co-owners to be responsible for operations on a dayto-day basis b. Model form JOAs provide for narrow liability for the operator (“gross negligence or willful misconduct”)

c. Typical obligations/duties obligations/duties placed on Operator i. Initial exploration ii. Drilling operations iii. Manage all operations within the specified area iv. Carry certain amounts of insurance v. Maintain certain accounts vi. Hire legal and accounting assistance d. Limitations on Operator‟s authority i. 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 authority 1) 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 NONOPERATORS 1) For specified reasons, like bankruptcy or a refusal to carry out his duties 2) 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‟ Involvement Involvement i. Limited to approval or disapproval of proposed operations ii. If they participate in management or have the right to do so, they can be held jointly and severally liable with the operator operator as mining partners iii. M & T, Inc. v. Fuel Resources Development Co. 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 f.

obligates a party to pay its agreed-upon share of legitimate expenses. Blocker Exploration Co. Co. v. Frontier Exploration, Inc. p. 800

i.

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 operations – only operator does iv. Rule: The existence of a mining partnership is established where there is joint ownership, an agreement to apportion profits 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. 85 i. 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 drilling I. 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 tested II. All parties generally must consent to plug and abandon a well I. Additional development I. JOAs provide a system of incentives for participating parties and disincentives for nonparticipating parties II. Participating parties a. Must advance the share of the costs that those who decline would have paid b. 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 among the consenting parties III. Nonparticipating parties a. “Going nonconsent”- owners may refuse to participate in additional operations b. Nonconsenting ter the consenting owners Nonconsenting owners can can “back in” in” to the lease only af ter have recouped their costs plus an agreed a greed 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, af terwards, 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 reworkings i. Any party can propose a well; if the operator elects not to participate, they must still drill the well, or get someone else to drill K. Miscellaneous provisions, attachments, and exhibits I. Preferential right of purchase a. Gives JOA participants a preferential right to purchase the interest of any other party who has offered it for sale to a third party i. Compare with the right of first refusal in Corporations Corporations ii. Doesn‟t violate RAP II. JOA Exhibits a. Ex. A- identifies the contract area and sets out the parties‟ fractional interests b. Ex. C- establishes the procedure for billings, payments, and charges to the parties‟ joint account (usually (usually a form instrument) c. Ex. D- lists both the types and amounts of insurance the operator is required to carry d. 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 revenues B. 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 minerals A. If it was known that the lands were underlaid by a Known K nown Geological Structure, competitive competitive bidding was used. All other lands were leased over-the-counter (first-come-first-served) (first-come-first-served) B. In 1987, due to abuses a buses of the over the counter system, congress amended the mineral leasing act 3. New system. Almost all onshore lands must be offered under competitive bidding A. 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 issued 4. Resource Management Plan- identifies various resources and allocates lands to promote best interests of all. A. Sets forth conditions for development of each resource B. District-wide or area-wide basis C. BLM prepares a Environmental Impact Statement to consider the effects of specific project D. 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 production F. Highest bidder wins (oral bidding) i. Must submit the minimum acceptable bid, the total amount of delay rentals, and a fee ii. The remainder of the bonus is to be submitted within the acceptance G. Primary term i. Onshore 10 yrs ii. Offshore 5 yrs iii. May be extended for up to 2 yrs by paying delay rentals. r entals. 5. NEPA- environmental policy act A. Any action by federal agency subject to NEPA B. Must make detailed statement for any action significantly effecting the quality of the human environment C. May make an EIS or an EA (lots easier than an EIS) 6. Offshore lease different than onshore A. Different operational agreements – unit v. joint operating agreement B. Bidding week for offshore – can bid collectively I. Certain rules that must be followed 7. 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 respects 9. Indians – you have to deal with BIA 10. Note: completely separate separate royalty schedule


Guest Speakers 1. Steve Bain: “International Oil and Gas”

Practicing International O&G law both internationally and domestically – Kazakhstan A. Investment climate

I.

II.

Most of the Republic of Kazakhstan is desolate wasteland. Fairly sparse, with limited settlements = ideal for natural resources development and mineral development. 6th largest oil & gas reserve, 9th largest country in the world a. Lots of foreign investment into the country b. A lot of O&G in the N. Caspian and West – Kashagan Field (http://en.wikipedia.org/wiki/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 Siberia ii. 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‟s

1) This signifies a great deal of political stability, stability, which is good for business 2) However, if you want democracy, this is not the place to go

b. Being able to transport transport the oil out of the country: country:

i. ii.

Also known as “ways to get your O&G to the market”

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: stability:

i. Also known as “security of property rights” – this is why we have contracts ii. If expropriate, have to pay just compensation for it iii. Concession agreements – usually from the government itself, like a lease in the US – right to explore in that country 1) Joint operating agreement with multiple parties – national company, other operators – often done on a JOA J OA 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 c ountry 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 law II. 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


D. Finding the law

I. II.

III. IV.

In the US, easy to find what law applies and be able to access it In other countries, can be difficult to locate the law – lack of internet, limited resources a. And then the issue of translation i. Has it been translated? ii. Whose version do you trust? Difficult to track changes in the law 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 bureaucracies

I.

II. III. IV.

Necessary evil when dealing with other countries but often worse than here – virtually every agency you come into contact with Corruption – need to pay bribes to get proper licensing Note: no longer can deduct bribes as a business cost associated with working in another country By advertising the FCPA, can use it as a defense for not paying the bribe

F. Litigation

I.

II. III.

IV.

Complicated by the fact that usually dealing with parties in other countries – communication is much more difficult (easier with the internet, but still shitty) Also have to litigate in someone else‟s courts – how much do you trust another court? Disputes fall on a spectrum: a. Duels/wars – litigation – arbitration/mediation 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 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 government

I.

Foreign Corrupt Practices Act a. Pay a thing of value, to a foreign official, for the purposes of getting business b. 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 always worth worth consulting with an FCPA FCPA expert if you have any doubts


2. Brian Tooley: “Royalty Litigation”

Perspective of trying cases in a foreign f oreign 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 speculation

II.

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. 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 royalties II. 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 condition b. Reasonable costs that enhance the productability of the gas for the royalty, can be figured into the issue. C. Rogers v. Westerman Farm 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 based on gas “at “at the well” well” or “at the mouth of the well.” well.” Part

II.

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. Two questions: a. Were the leases and assignments a ssignments 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 – 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. b. c. d.

From the well, it was useable – no impurities, no need to process at all Evidence that farmers were using the gas from the wells Argument: have parties selling gas at the well to nonparties @ 1/8 the cost Decision: marketable when sold at well; anything not sold at well was marketable when sold

i. ii.

20% of damages awarded to plaintiffs Appeal: if some gas marketable at well, and some gas sold elsewhere – all gas was marketable 1) 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


D.

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 Rodgers – at the well is not good enough and therefore silent I. 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 mark etable condition and also to transport it to the first commercial marketplace a. Doesn’t matter distance transport transport the gas, gas, the obligation obligation is to bring it to a commercial marketplace b. But a well could be a commercial 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 circumstances IV. Courts haven‟t stated that there is a fiduciary duty to t he lessor

V.

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 divided on this issue II. 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 contract F. Royalty clauses I. Overriding royalty: carved out of lessee‟s working interest share a. Mineral owners – 1/8 royalty b. Lessees – 7/8 (working interest) c. Overriding royalty: comes from 7/8 i. Compensation for services II. 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 – statutory provisions defining “cost of production” 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 allowance c. Who is transporting? You/affiliated company (price association calculation)? Thirdparty (accept price paid to third party)? d. Marketable product application rule – 4 part test e. Processing allowance if wet gas (against value of liquids) II. Indian leases: a. Govt has fiduciary duty to protect Indians b. Accounting for comparison rules i. Pay higher on two benchmarks H. Determining royalties

I. II. III.

Look at state in when determining royalties What type of royalty? Fee, feds, or Indians? 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 liable ii. Implied in law – if no longer own it, no longer liable – implied in fact iii. Rogers trial court court – WHEN YOUR LEASE OR OVERRIDING – LESSEE HAS OBLIGATION TO BEAR ALL POSTPRODUCTION 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 act a. Can file a notification of ownership of mineral rights and if surface developer wants to build on land, they have an a n obligation to notify the owners that developing on top of the minerals b. From assessor‟s office or notification of record 3. Reasonable accommodation doctrine a. Lessee has a duty to reasonably accommodate accommodate the surface owner in terms of where they are locating wells. If act unreasonably, have lost the right to the accessing a ccessing the surface – subject to trespass b. Not speculative – must be reasonably foreseeable 4. Colo. O&G commission a. Requires notification to surface owner and discussion b. 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&G 6. 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 located b. Consequences to landowner (may include leased lands as part of larger lar ger unit – diluted revenues; production 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: Context:

I. II.

III.

IV.

V.

VI. VII.

Bush National Energy Policy (May 2001) – the – the “Cheney” Task Force Why Bush administration is important: a. Every administration does two things: i. Builds on what was built before ii. Reacts to what was built before Drivers: a. Enron Fallout/Blackouts Fallout/Blackouts b. 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 gas Bush NEP Interior Focus: a. Provide access to domestic oil and gas b. Expedite oil & gas permitting c. Complete “high priority” (energy (energy areas) land use plans d. “impediments” to oil & gas development study – EPACT 2000 e. Address transmission f. Develop renewable energy Energy Policy Act of 2005 a. Oil & gas energy coordination offices from rental fees b. Permitting time lines for APDs, BMPs for f or BLM, tracking system c. Categorical exclusions for oil and gas – 5CXs d. Energy rights-of-way e. Renewably Energy on Public Lands (10000 mw – 2015) i. Geothermal updates; offshore wind; incentives 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 economic to use because market market is on the East Coast Coast 2008 – end of the Outer Continental Shelf moratorium a. OCS – Reaction to California oil spill

B. Obama Public Land Energy Policies:

I. II.

“An America Built to Last” – SOTU address 2008 campaign a. Transform US Energy Policy b. 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 years d. $50 billion venture capital for clean tech e. 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

III. IV.

f. Double CAFÉ in 18 years Energy policy was transformed as an economic opportunity In renewable energy – environme – environmental ntal groups joining with the government‟s government‟s position – promote reduction of carbon footprint to reduce global warming

C. Old Energy Reform:

I. II.

Salazar rejected BLM leases in Utah Hayes Report recommended: a. Improved “stakeholder” communications


III. IV. V.

b. BLM leasing criteria on lease parcel basis c. Inter-disciplinary team site-specific review Stiles Report drilling down on Utah 77: a. Conducts parcel-by-parcel review of Utah 77 b. Confirms and elaborates on Hayes recommendations GAO Categorical Exclusions (CX) Report: a. EPACT 2005 §390 CXs: “lack of clarity…in BLM‟s guidance” Impact Energy Resources 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.

II.

III. IV. V.

VI.

VII.

Purpose of leasing leasing reforms: reforms: a. Improve protections for land, water, and wildlife b. Reduce potential conflicts and protests c. Redefine EPACT §390 CXs May 17, 2010 – leasing reforms (Deepwater Horizon context) a. BLM IM 2010-117 (instruction memorandum) i. Land use plan review ii. Master leasing plans iii. Parcel-by-parcel review b. This administration being able to take a second bite of the apple at what the prior administration implemented What it did a. Additional NEPA b. Closer look at leasing decisions Master Leasing Plans (MLP): a. Focus: “reconsider RMP leasing decisions” b. Acts as an amendment to the leasing plan Mandatory MLP Criteria: a. Substantial portion not leased b. Majority federal mineral interest c. Interest in leasing; confirmed by discovery d. Analysis needed for resource/cumulative resource/cumulative impacts e. NOTE: not a lot of areas areas that met this criteria criteria Discretionary MLPS – 30 recommended by NGOs a. Colorado MLPS – 4 approved for review in on-going RMPs b. Utah MLPS – 5 approved for analysis c. Wyoming MLPS 0 21 proposed, 6 approved for analysis in on-going RMPs. “Jack Morrow Hills” MLP Template. d. Montana MLPS – 1

Lease sale parcel-by-parcel review: a. Frequency of lease sales – quarterly, but rotated b. Nominations to lease – trigger site visit/NEPA c.

VIII.

Wider public/split-estate surface notice

d. Inter-disciplinary parcel review and site visits e. Lease NEPA” Environmental Assessment (EA) f. Public comment on EA Western Energy Alliance v. Salazar

a. Challenged BLM‟s protest-related delay past 60-days b. WY Fed. Dist. Ct. – Secretary needs “to decide” whether whether or not to lease (or seek lessee waiver) within 60 day deadline i. Versus the argued point that the leases were to be distributed within the 60 days


ii.

IX.

X. XI.

Govt – requirement to issue the lease was 60 days after the Secretary decides the fate of the lease c. On appeal to 10th Circuit Categorical Exclusion Reforms: a. Western Energy Alliance: i. Secretary violated APA; nationwide injunction 1) Need “notice “notice & comment” comment” rulemaking ii. \No review of substance substance of CX re-write Wildlands Policy: a. A “second bite” at Bush -era RMP “wilderness characteristics” decisions b. Reject Secretary Norton 2003 Wilderness Settlement Results of Leasing Reforms:

a. Leasing down 44%

E. Changes on the Horizon:

I.

II. III. IV. V. VI.

Oil Shale: a. 2012 – House Energy bill (HR 3408) directs increased oil shale leasing b. 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 acres iii. November 2012 – final PEIS Fracking regulations BLM Venting & Flaring Regulation Onshore royalty reform a. Increase to raise royalty ffrom rom 12.5% to 18.75% “fair return” “Use it or lose it” incentives “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.

II. III. IV.

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. Note: ALWAYS a written written document – – but often asked by clients for a preliminary or oral opinion – but this is not the final opinion of the attorney Only attorneys sign opinions, but they can be drafted by almost anyone in the law office

a. Used to be done by in-house attorneys (Shell) 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 with b. Schedule of production interests – who to pay if get a good will c. 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 first II. Comments and requirements: a. Whether leasehold title is acceptable i. Must have some standard by which to judge if the title is okay ii. Generally accepted standards of title: 1) Good title: perfect title – patent, chain of title to current owner, 2)

3)

no breaks in chain of title, no ambiguous (rare) 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) 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) and title opinion opinion delays drilling II. Note: expensive process and 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 party

IV. V. VI.

Operating agreement will require a title opinion If interest is financed, will need a title opinion as part of loan proceedings Required for public companies from shareholders’ standpoint


D. Four types of title opinions: I. Drilling title opinion opinion – client – client wants so they know it‟s okay to drill the well (don‟t care about

II.

III. IV.

who to pay or when)

Division order title 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 drilled Mortgage title opinion opinion – client needs to borrow money to finance operations – only interested in their interests – need to know that who who acquired leases from had good good title, and that no other mortgages on the lease Acquisition opinion opinion – only interested in the interest owned by the company representing a. Lender will ask for acquisition opinion to use in loan b. Difference is how limited from mortgage title opinion (much bigger) c. Note: impossible to to complete title opinion opinion on whole interest 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 ac tivity b. Abstracts: i. Historically: summary of documents involved ii. Now: verbatim abstract – photocopy of all documents 1) Come from landmen & firm c. Colorado: grantor/grantee index i. Only way to get a tract index is from an abstractor a bstractor 1) Sometimes info can be wrong 2) Only one abstractor in an area 3) 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

II.

notice to the world once they are filed (failure to do so = malpractice) a. Clerk of recorder b. Registry of judgments/decisions c. Assessor’s office – who they think owns land & taxes paid d. UCC filings, liens Common industry practice to check federal records when dealing with federal leases a. 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 paid ii. Lease, protests, decisions – assignments of lease up to current iii. Can get a copy for $$$ c. Also on the internet i. Patents and plattes ii. Not everything, but some d. Historical index i. Like a tract index – everything that happened by section of land


III.

IV.

e. Special indexes: i. Mining claims, etc. ii. Less important State leases: a. Need to look at county records b. Also need to look at state records i. CO – good, WY – very good, UT – like WY ii. Platte & case files iii. Every state requires that every assignment and working interest approved by state – need to check for this Indian leases: a. Depending on tribe, records can be okay (Utah tribes best) b. Case file & platte c. 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 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 so meone conveyed something b. WY statute – can correct issues with affidavits H. Don‟t read every word of every document I. Abstracts range from 2000-30000 pages II. Mortgages & releases – if discharged & of record for 20 years – ignore III. 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 examinati on group, landmen reports, postlegislative meetings, word of mouth, RMLI presentations III. Key is to find the issues. L. Hardest part after finding issues: requirements I. Hard & soft requirements II. Make sensible recommendations based on the clients‟ interests and ba ckground 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 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. bo na fide purchaser)

III.

Prudent operator standard: check normal records


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