Oil and Gas- Spring 2011 I. Oil and Gas Geology A. Accumulation of Oil and Gas 1.

Organic Theory of Origin–generally accepted 2. Accumulation and Occurrence Things that make up a Petroleum Reservoir (O&G field) a. carbon and hydrogen from dead life b. decay and decomposition of C & H to form a mixture of hydrocarbons (petroleum) c. porous rock that allows migration of petro and displacement of salt water d. trapped oil sealed by salt water that forms a reservoir 3. Oil and Gas Segregation - gas is at the top, oil, then salt water 4. Reservoir Rock –very poruous and all the gas and oil is held in the pores 5. Geological types of Reservoirs a. Dome and Anticlines b. Fault Traps –due to mvmt under the earth oil is trapped by c. Unconformities –oil moves into another impermeable rock d. Dome and plug traps e. Reef Traps f. Combination traps B. Types of Production Processes 1. Conservation: Preventing waste and protecting correlative rights a. Common Law of Capture 2. Types of Production Processes - oil can’t move and lift itself so it is dependant on gas or salt water under high pressure to force oil upward through wells Gas Drive Reservoirs –gas will expand when pressure is reduced a. solution-gas drive - least effective - max 10 to 25% oil b. gas-cap drive - more effective - max 25 to 50% Gas-condensate reservoir -deep and under high pressure -cannot be produced rapidly and underground pressure must be maintained or gas will liquify

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Water Drive Reservoirs -water under pressure can life oil and gas -most efficient -30-50% oil –up to 70% -Depends on: i. physical nature of reservoir rock and of oil ii. care in completing well iii. rate of oil and gas production from field or reservoir as a whole C. Drilling a Well 1. The Drilling Rig and Related Equipment Components: a. power b. housing c. rotating d. circulating 2. Making Hole a. making a connection b. surface casing concerns i. groundwater pollution ii. loss of a hole iii. loss or damage to equipment iv. is a must if: 1. drill bit change 2. equip. lost down hole 3. well tests 4. drill pipe and collars are detached and hoisted out of ground and stored vertically on derrick c. production casing 3. Testing and Completion 1. to chose a casing point: a. give up and plug well based on indicators OR b. completion attempt Ownership A. Land Descriptions –fed. “rectangular surveying system 1. Equal Footing Doctrine of U.S. Constitution –lots can be surveyed under streams and lakes or “navigable waters” - unsurveyed water drew water lines for property along bank or shore - called meander lines describing riparian or littoral lands B. The Law of Capture: Ownership Prior to and at Extraction 1. Del Monte and Milling Co. v. Last Chance Mining and Milling Co.

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Issue: whether the appellee has the right to follow a vein of silver and lead-bearing ore beyond the western boundary of its mining claim on federal public land and beneath the surface of the appellant’s mining claim on federal public land Rule: Whoever had the fee of the soil owned all below the surface Principle: To whomsoever the soil belongs, he owns also to the sky and to the depths; Private ownership of Oil and Gas –ownership of land carries w/ it the use of its minerals sovereign state can’t interfere except for public benefit through severance tax. 2. Kelly v. Ohio Oil Co.-Issue: Did the oil company have legal right to drill the wells? Principle: The right to acquire, own, and enjoy property carries w/ it the right to use it as the owner pleases—motive doesn’t matter; Rule: No cause of action exists if one property owner drills w/in their own property. Rule: A neighbor does not have to approve a landowner’s reasonable use of his property everytime that owner decides to make an improvement. Rule of Capture: The landowner who extracts oil or gas from beneath his land acquires absolute ownership of those extracted substances even though they may be drained from beneath the land of another. Held: Ct. held Kelly had no cause of action. Whatever gets into the well belongs to the owner of the well (rule of capture). However, subject to following O&G regulations D. Theories of Ownership Examples: 1. ownership in place: TX – landowner owns all substances including o&g which underlie his land – qualified by law of capture 2. exclusive right to take: OK- landowner does not own the o&g which underlie his land – merely has exclusive right to capture by means of operations on his land E. Ownership of Oil and Gas after Extraction 1. Champlin Exploration Inc. v. Western Bridge & Steel Issue: Are refined hydrocarbons subject to the law of capture? Held: The owner of refined hydrocarbons does not, ipso facto, lose title to escaped hydrocarbons unless it can be shown that he abandoned them;Rule: Once O&G are extracted from the earth, they become personal property; Held: Once O&G is extracted from the earth, it becomes tangible, personal property and subject to ownership. He did not abandon. 2. Texas American Energy Corp. v. Citizens Fidelity Bank & Trust Issue: Whether the gas storage is personal property or whether stored gas is a real estate interest (which would have a real estate mortgage as an encumbrance). Held: Not controlled by Hammonds, stored gas is personal property as “goods” under UCC. Narrowly

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construed Hammonds. It doesn’t lose its personal property quality when you inject it in a proper storage reservoir. Once out gas back into ground for storage still personal property but court said must be put into storage facility and not injected back into the earth“reservoirs capable of being defined with certainty and the integrity of said reservoirs is capable of being maintained” –if not stored properly, then considered abandoned -if in storage tank and escapes, if attempt to reclaim, owner will not lose title – if no attempt to reclaim, then owner is deemed to have abandoned 3. Ellis v. Arkansas Louisiana Gas Co. - Unauthorized use by the gas company of an underground strata for storage of natural gas (only persuasive in OK) when have severed estate, and gas company is seeking permission to store gas in empty reservoir, must get permission from the surface owner b/c once porous space drained, mineral owner has no rights- still best to get permission from both mineral and surface owners In OK, utility company permitted by statute to condemn land for storage purposes Rule: One who reinjects gas or water into a reservoir loses ownership of the reinjection, the D cannot be held liable for trespass or damages; Reasoning: (1) The power to grant storage rights should be in the mineral interest owners. The owner of the severed mineral interest is like a license to hunt or fish. (2) If A owns a tract of land in fee simple and conveys to B all of the oil, gas, and other minerals in and under and that may be produced from that English view v. American view –The cavern is owned by surface owners— Applies to depleted gas reservoir; Held: This is persuasive, but not a binding opinion. As a practical matter get both surface and mineral owners. The surface owner alone should be compensated for use per se of a stratum. Correlative Rights –Conduct Permitted in the Extractive Process Kinds of Oil and Gas Interests 1. People’s Gas Co. v. Tyner Facts: Tyner seeks an injunction agst. oil company shooting nitroglycerin through a gas well a. public road proximity to residence b. highly explosive and could destroy life or property Owner has the right to do as he pleases but he must have due regard for others – owner of a lot may not erect and maintain nuisance on lot by which neighbors could be injured – if he does and injury is sustained, can get injunction if can’t be adequately compensated in damages Rule Maxim: Land always extends downward as well as upwards so that whatever is in a direct line btwn. the surface of any land and the center of the earth belongs to the owner of the surface

the original owner of the property could convey the ownership of the mineral estate. i. Sun Oil Co. Facts: P’s claim that sun oil overproduced oil from 3 wells and that oil was drained from P’s tracts fair share principle: places limits on the rule of capture to exclude operations in violation of conservation orders . –O&G conservation acts and regs limit right to capture. Correlative rights –the shared rights and duties of all landowners in the common source of supply a.each owner of the surface is entitled to his equitable and ratable share of recoverable o&g in common pool in proportion to recoverable reserves underlying land – 2 alternate methods for figuring damages: (1) harsh = willful trespassers liable for enhanced value at time of conversion (2) mild = innocent trespassers liable for value of oil as valued when undisturbed 3. Texon Drilling Co. Mineral interests – the mineral interest can be severed from the fee estate by grant or by reservation. Law of capture is limited by correlative rights doctrine –ex. of spoiling ii. By reservation. ii. the property itself could be conveyed. then he owns the entire bundle of sticks in the property analogy. Don’t waste! 2. Don’t violate conservation regulations 4. Wronski v. 4. Don’t spoil! –must do little fracs so that water supply is not spoiled 3. Fee simple absolute if A owns Blackacre in fee simple absolute. G.Right to retain lease benefits 2. with the conveyor reserving the mineral estate to himself. All parts of which are permeably connected so as to permit migration of O&G when pressure differentials are created by O&G production Kinds of Oil and Gas Interests 1.Right to incur costs and retain profits . Duties: 1.Right to alienate .Right to use the surface in order to exploit mineral interest . i. Common source of supply –an underground reservoir. Aspects of severed interest ownership: . Mineral interests can be severed from surface interests – can then be severed and split further Rights of Severed mineral Owner: . By grant. Eliff v.2. 3.

However. ii.Economic Waste: unnecessary development. Conservation Common Abuses . Overview of Regulatory Measures Modifying and Limiting the law of Capture Spindletop Wells in Pennsylvania everyone was going crazy drilling all sorts of shit started a "frenzy" all over country.Can make decisions as long as they are not arbitrary or capricious . i.Too many wells . they get power from the legislature .Environmental Protection Safety.IV.Fiscal Waste. which are often used for storage of oil and gas or for disposal of salt water. the courts often treat the surface owner as the owner of the vacant pores under the surface. Conservation A. Because of the madness it was soon decided that oil and gas needs to be conserved Problems .Too close together . Regulatory Measures Modifying and Limiting the Law of Capture 1.Migratory Nature of Oil: People didn't really understand the nature of gas and were afraid it would swim away.APA . and extract the minerals. the waste on top of the land . incurring unnecessary development costs 3. The rights of the severed surface owner are bordered by the rights just mentioned of the mineral interest owner (its almost like there is an easement on the property to allow for exercise of mineral interest owner’s rights).Rule of Capture: Everyone was following the rules . drilling way too many wells. plugging .Producing wells wide open Waste . develop.Must exhaust remedies through them first -Regulate 6 Categories i. Ultimately. it was decided that it needed to be taken care of in a non voluntary way . 2. Exploration Drilling ii. Administrative Agencies are in charge . well completion.Conservation legislation started sprouting up 4. and iii. The rights of a severed mineral interest owner include the right to use so much of the surface as is necessary to explore for.

but then produced oil also? Rule: Court said when the order was made everyone thought it would be a gas well. End Use Unit Operations vi.Limits the number of wells by distance . Co. and economic waste Pooling . Phillips Petr.Form shown on Page 62 Exception Well i.Geological formations . 52 Okla. just because it also produced oil doesn't mean that a new spacing order needs to be created Holding: No violation 2.1 1. Units are establised with respect to particular common source of supply iii.Depth .B.To prevent surface. . Okla. Regulating Drilling. usually with cement. Well Spacing Modification of the rule of capture . Environmental Protection 5.Specifies location . underground. Usually only one well per unit may be drilled ii. Stat. Well Completion.Usually require vertical drilling Plugging: .Completion report must be filled out . then they may pool their interest through one well.Usually requires plugging after operation Permits are to make sure the whole operation is up to snuff . exception well –being able to drill an additional well Purpose: . iv. and Plugging a. section 87. Corp.Surface casing must be used . Okla.To guard against pollution .If too many people own land in one area. Production and marketing v. They can also be forced to do this. b.Law of Capture required no permit Today we need a permit which .Wells must be plugged. Corp. v. Com’n Issue: Did the spacing order violate the Oklahoma statue in the sense that it said gas. Merideth v. Well Permitting Common Law . Com’n.

What sort of environ cleanup liability might be covered when giving an o&g lease? 2. D. Corp. Okla. 52 Okla. v. Co. El Paso Prod. Endangered Species Act -Take provisions 3. Land Use Considerations a. upon application. If you are going to use .Location of the permitted well on each D&S unit. Com’n Exxon wanted to extend spacing around section 2 which already existed-in order to avoid economic waste wanted to use existing well – OCC has power to extend drilling and spacing unit to encompass land overlying edge of prospective common source – must be substantial evidence to support the extension 2. §87. It is not appealed and is final. Stat. If land is near a wetland. Clean Water Act –clean up liability for oil spills and hazardous substance spills b.C. v. Environmental Issues to be considered before Acquiring Oil and Gas Lease 1. when production hx indicates. Wetlands Protection a. notice and hearing and the OCC finds that any such spacing unit is located on the edge of a pool and adjacent to a producing unit. Reasoning: A commission can not modify its prior order. The only way this can be done is by finding newly discovered scientific or technical knowledge not available at the time of the order. Issue: When a company receives an order allowing production can an application for removal be granted even though there are no change of conditions? Rule: No. Okla. Can the activity take place on the land? ii. a permit is needed from the US Army Corps of Engineers. E. Creation of Drilling and Spacing Units by the OCC 1.1. Obtaining an Oil and Gas lease Two areas of concern: i.Fill Materials . Corp. Com’n Corp Comm has option and jurisdiction. but allows such exception where it may be reasonably necessary where it is shown. or for some other reason that to acquire the drilling of a well on the prescribed location on such spacing unit would be inequitable or unreasonable. Calvert Drilling Co. to leave unit intact and increase density or to de-space and re-space – total discretion Granting of Well Location Exceptions by the OCC 1.

d.C. This was not a taking Plain language of the act is clear Corps have jurisdiction c. Inc. Solid Waste Agency of N. U. Cook Co.Dredge Materials Navigable Waters is a Very Broad Definition b. Oil company bought old fertilizer land from Borden w/ inactive hazardous substance. . not enough water nexus here e. U. The Migratory Bird Act can not be used as a mechanism for navigable waters. 404(a) of the Clean Water Act –where the US Corps gets all the authority to grant permits Species Protection a. Riverside Bayview Homes Issue: Is the defendants development near "navigable waters" as defined by 404a and thus in need of a permit? Rule: Yes.S. CERCLA – 42 U. Loggers got in trouble b/c they were cutting down trees that birds were hanging out in. U. parties that created/arranged for transporting the hazardous substance b.S v. v. v. 6. owners/ operators of the property at the time waste was dumped iv. Borden. U. Leslie Salt Co.4. current operators iii. Borden was forced to cleanup under CERCLA b/c although he sold “as is”.S. Army Corps Engr. even though no hydrological connection –showing us how expansive navigable waters definition is. The word harm is to be construed broadly to include habitat modification. caveat emptor does not work under CERCLA Land Owner Concerns a. v. current owners of contaminated property ii. Under the EDA section 9 you have harmed these animals under the definition b/c you have taken away their home. v. Liability Considerations a. 9601-9675 Super fund law -EPA can order or define parties who are liable to cleanup hazardous substances -look to see who’s considered a PRP (potentially responsible person) i.S.S. Sweet Home Ch of Commun for Great Or. Coast Guard . Quaker State Corp. Pits that were in the past holding calcium chloride are wetlands. 5. Babbitt v. Holding: Navigable waters has intentionally been left as a broad definition by congress to protect against economic and environmental waste. Amoco Oil Co.

not liable under CWA. you cannot do so unless you get a NPDES permit 3. Getty Oil Co. Production Activities . Underground injection -safe drinking water act –ensures safe water by limiting contaminates 3. river. Co. Managing Drilling Waste SWDA --> RCRA EPA . NPDES permit requirements: -if you have a nexus w/ waters of the US. G. U.only way EPA can require you to clean up is if it presents and imminent danger to environment or public welfare 2. Abandoned site had discharged petro residue.Rule of Thumb: for o&g purposes if the waste is coming as a result of drilling. The P didn’t think it needed a permit to discharge into the stream. it will not be considered hazardous . Rule: Owner or operator is to be defined as of the date the substance is found and not at some date in the past Environmental Issues Respecting Drilling Operations 1. govt cleaned up and charged costs to current owner. into waters . Cose v. Managing Water Discharges a. Special Environmental Status of Oil -Sec. P brought an action under CERCLA to make D pay for cleanup of crude oil .EPA entirely prohibits discharges of drill cuttings. then the fed. Quivira Min. then you need a permit -look at what pollutant is going to be discharged (if it’s too hazardous you won’t get the permit) -look at safe drinking water act 2. P discovered pollutants dumped on property. stream. EPA The EPA require P to get a permit to discharge shit into the stream. Clean Water Act –prohibits discharge of pollutant from a point source.F. Under CERCLA you are strictly liable. etc. under CWA you are not. or body of water that affect interstate commerce is going to be regulated. Gvt didn’t meet BOP and discharge was not when occupied and therefore. Environmental Issues Respecting Production Activities 1. v.S. EPA comes back and says they did need a permit b/c anything that has anything to do w/ a creek.you handle those substance by discharging into underground injection wells 4. Waters of the US Revisited a. 311 of CWA –specifies what to do for oil spills -1990 oil pollution act –prevents new oil spills a.

Inc. denied cleanup by D. P’s bring action agst prior owners under the resource conservation and recovery act. Meghrig v. -restaurant property contaminated w/ petro. Purpose of Lease. and the lessor now has a possibility of reverter. but instead have the exclusive right to take theory. but trespass and ejectment do. Ct. Significance of Classification of Lease Interests 1. where there is ownership in place theory . tank bottom materials. OK v. if they do exercise the right they expect to have this right indefinitely 2. Lessor -Wants immediate royalties -Not contemplating a long delay in drilling 3. Hinds v. The claim was dismissed in tr ct.In Oklahoma. Not subject to trespass or ejectment.a lessee has a fee simple determinable estate in the mineral estate. Profit a pendre – exclusive right to take -Today. Nature of the Leasehold Interest. doesn’t have to be cleaned up c. inheritable Ellis: in OK. assignable. Cherokee Water Co. Lessor parted with interest in minerals and left with possibility of reversion . so abandonment does not apply. v. therefore.V. KFC Western. b. where we don’t have the ownership in place theory. cts regard o&g rights as sui generis –it’s own unique lease a. Phillips Petroleum Co. TX –Classification of Lease Interests . but not the obligation to drill (option contract) -Wants to keep the drilled lease for as long as it is profitable. –OK Mineral rights are devisable. Forderhause -TX R: severance may be accomplished by o&g lease as well as by mineral conveyance b. The interest is corporeal and possessory in nature.In Texas. CERCLA’s Petroleum Exclusion -not petro unless it’s gone through the refining process. Lessee -Wants the exclusive right. b/c crude oil tank bottom materials were not petroleum under CERCLA. grant of minerals gives to grantee right to explore and capture . The leasehold estate is considered to be an irrevocable license or a profit a Prendre. but the ct held that there was imminent and substantial endangerment at the time it was cleaned-element that must be proved and they proved it! Oil and Gas Lease A.

Simpson Landowner had surface rights and lessee had mineral rights and there was a dispute over surface damages. 318. 318. the two appraisers appoint a third appraiser. Hunt Oil v. Can’t violate the accommodation doctrine Oklahoma Surface Damage Act: 52 Okla. Accommodation Doctrine (Getty Oil -TX) (1) where have existing use by surface owner (2) which will be precluded or impaired (3) where under established practices in industry there are alternatives available to lessee whereby minerals can be recovered. Mineral estate is dominant estate ii. Lessee’s Use of the Surface 1. Dyco Petr. Santa Fe Minerals v. OK TX . the rules of reasonable usage of surface may require the adoption of an alternative by the lessee (not adopted by Kerbaugh court) – not a balancing test – burden of proof on surface owner to show mineral owner was unreasonable – surface use must be current or existing and not just proposed a. The ct. Stat. Principles: i. 2. but now we apply section 52 of the Surface Damage Act.2.Accommodation doctrine won’t apply. if land is not platted for use. the lessee and lessor must negotiate surface damages.3-Lessor must give written notice before they can enter and drill the land. 1. TX v. the operator must petition the District Court in the county of the drilling site to appoint appraisers to make recommendations to parties and the court concerning damages. Section 318. Smith . If no agreement. Kerbaugh -Severing the minerals from the surface impliedly creates in the mineral owner inherent surface right to find and develop the minerals. OK – No accommodation doctrine case b.B.3 318.Definitions 318. Notice shall include where and when the drilling is to occur. Can only make reasonable use iii. to determine surface damages. C. w/in five days of delivery or service of notice to drill. wrongly applied common law doctrine of reasonableness and necessity. Appraisers must be state certified general real estate appraiser in good standing with the Oklahoma Real Estate Appraisal Board. Landowner and lessee each appoint an appraiser.5-Prior to drilling. V.3-Lessee must engage in good faith negotiations w/the lessor. The o&g lease holds the dominant estate while the severed surface state is viewed as the servient estate 2.

Ward Petroleum Corp. says before you move in with heavy equipment. The landowners allowed the oil company to drill on the land. v. Turner P drilled the well and then reopened the well and drilled more. it is inappropriate to condition the receipt of that award on the posting of a bond or other security. The oil company let the appraisers go onto the land to evaluate what the surface damage was. if you haven’t already arrived at a damage agreement with the surface owner. 5. v. Appraisers are allowed to consider damages that have occurred or that will occur d. Stewart You can combine a tort action w/ you appt of appraiser’s action as long as the ct keeps it separate 4. personal inconvenience may only come in when it affects the value of the land. e. but that affected the use of an irrigation system that serviced the entire 160 acres) c. a. Groundwater Act =Reasonable allocation for the taking or using of water based on the # of acres . Comanche Resources Co. 3. OSDA does not contain any provisions for prejudgment interest. It is ok to consider the diminution in value of the parcel beyond the land actually taken if the oil and gas production efforts have a direct impact on the entire parcel (Consider a well on a farm where there was 8 acres in drill site. Once a damages award has been determined in favor of the landowner.The appraisers are supposed to determine the diminution of the FMV of the land has occurred and is going to occur as a result of the oil company’s occupation of the surface.D. If the Legislature had wanted to provide for exploration damages. Anadarko Petr. it easily could have said so. by seismic work) may be inherent to the mineral interest. says under the surface damage act the P owes for both drillings. it is not to be granted. Lessee’s Use of Ground Water 1. inconvenience is not a factor. v. Anschutz Corp. Sanders says that the right to exploration (i. b. but it is not covered in the OSDA – OSDA’s plain language only applies to the drilling and production operations.e. Sanford v. and unless prejudgment interest is allowed by statute. Ct. Function of the appraisers . but appraisers can look at future damage and current damage. The D wanted surface damages for e/ separate drilling. Corp. then you have to have filed a petition in the district court – the petition has to be filed before entering 6.

Co. Lessee denied permit for groundwater. F. Lessee application to use the ground water was denied.Act applies to outside municipalities -->country . then damages are cost of remediation. Schneberger teaches us that the appropriate measure of damages is based on whether the damages to the land are temporary or permanent 1) If damages are permanent. Okla. Bd. if cost of remediation exceeds the diminution in value.Under the Groundwater Act. Ricks Expl. Apache Corp. . Granting Clause a. Schneberger v. OWRB won’t issue groundwater use permits “to an applicant who does not own the land on which the well is to be located. Oil (including but not limited to distillate and condensate) b.Since the effective date of the amendments to the Water Act. then that diminution becomes the measure of damages. b. 4) When there is a grossly disproportionate result in remedial damages then impose only total diminution in value Substances Granted by an Oil and Gas Lease 1. 3) However. people who have other interests in the land (like lessee) can apply for a permit for water. Co. then damages are diminution in value (difference in FMV of the land w/o the contamination and with the contamination). Okla. v. If you are a mineral owner or owners of severed minerals then you have a vested right to get a permit for surface water w/ respect to o&g operations. or hold a valid lease from the owner of such land permitting the withdrawal of water from such basin. Bd. Measures of Damages for Injury to Land 1. irrigation of land not exceeding 3 acres for growing garden orchards or lawns a. .E. . Unit Petr. 2) If damages are temporary.Exception –Ranch or farm land –any landowner has the right toe take water w/out a permit for momestic use Domestic use – use of water by a natural person or family or household Household purposes farm animals. Rule: Not only can surface owners get this permit. v. an oil and gas lessee has to have a water lease from the surface owner in order to use groundwater. Gas (including casing and helium and all other constituents) . Water Res.to make sure the ground water is not excessively used by anyone . Calculating damages to the land. Water Res.

. .fuel oil 4. drill. Some basic functions of the habendum clause . Natural Gas Methane-88% Ethane-4% CO2. Royalty – payment owner gets when oil produced 7.jet fuel 11.less than 1% 2.Associate Gas/Casing Head Gas: comes oil of a primary oil well producing crude oil expands and separates from crude oil Types of Oil and Gas 1.Meredith Case: All wells produce some gas . and produce oil and gas on the premises and retain benefits 3. develop.20 gallons. Production payment – payable out of production Habendum Clause 1.50 gallons. Delay payments – usually annual – paid to keep lease alive while land is not being produced and primary term running 5.less than 1% Butane. Royalty deed – conveys fraction of proceeds derived from sale of o&g 9. Mineral interest – severed from fee and can be created by grant or reservation – owner of this interest has right to explore.G. Shut-in Payments – for royalties – used in place of production to keep lease alive 6.refers to mineral and surface estates that have not been severed from each other 2.1+ % Helium. Keeping the lease alive during its primary term by making delay rental payments a. Overriding royalty interest – royalty carved out of working interest 10.less than 1% Pentane.less than 1% Hexane. Interests – lessee owns working interest and lessor owns nonparticipating royalty interest 8. Crude Oil From one barrel of oil (1 barrel=42 gallons) 19.61 gallons. Fee interest.72 gallons misc. H.less than 1% Propane. I. produces including Kerosene and asphalt Lands and Interests Granted by an Oil and Gas Lease 1.gasoline 8. Bonus payments – granted to lessor when he conveys mineral estate – money paid up front for granting the lease 4.

The secondary term of the habendum clause most often provides that the lease can go on indefinitely as long as oil and gas are produced in paying quantities. c. . delay rental terms can only keep the lease alive during the primary term. Exceptions to the “unless” term: sometimes. lessor’s acceptance of a later inadequate tender (essentially estoppel) 3. Dealing with the “unless” term. once you are in the secondary term of the lease) if you want to extend the lease without re-executing it. the court will apply equitable principles to save the lease. this terms says to the lessee “you either drill or pay. Habendum clause sets the primary term of the lease. (i. i. after that. ii. iv. failure of an independent third party (like the post office) 2. there is a mailbox rule provision – payment is deemed made when it is placed in the US Mail. ii. Basically. sets the length of the term that the lease will be in place. in both OK and TX. the lease automatically terminates. What the “unless” term is: limitation by which interest of lessee terminates immediately w/o notice once it has been extended past the primary term. ii. iii. [Note also the doctrine of revivor – if both parties just keep acting as though the lease were still i.b. Mailbox rule on delay rentals: Note that in our “Standard” lease form. For example: lease will last for 3 years unless oil and gas are produced in paying quantities [and remember that delay rental clauses are often structured to create a legal fiction of production]. the delay rental clause creates a special limitation on the duration of the primary term. The delay-rental clause (called the “drilling clause” in the Koontz treatise).e.” Imposes a special limitation on the term of the lease.. Remember. Remember. Note the strictness with which the “unless” term is often interpreted: If you don’t either drill or pay in the correct amount at the correct time to the correct people. you have to have drilled and be producing the well. failure to pay delay rentals on time does not result in forfeiture – it results in the termination of the lease. The function of the delay rental clause i. iii. such as 1. In essence. confusion or ambiguity caused by the lessor 4.

Doctrine of Obstruction i. The court will give the lessee a reasonable amount of time to commence. If lessor has obstructed the lessee from completing the operation or commencement. Hoover & Bracken: If the Delayed Rental qPayment is does NOT reach the lessor by the due date.” c. and if he fails to make the payment. The “or” clause: Lessee has a contractual obligation to make the delay rental payment.valid. The drill bit need not pierce the earth. Staking and flagging are not enough for commencement. A bad faith commencement will not be enough. the lease will not terminate. b. then the lessor has a cause of action for the payment. Habendum Clause Perpetuating the Life of a Lease by commencing a well: The meaning of commencement a. but they will also pay an additional sum that basically represents a payment of the delay rentals in advance 2. Drilling operations are commenced when substantial surface preparations to drill are sufficient for a commencement. Applies to both physical and legal obstructions. Schwartzenberger: failure to make or pay delay rental correctly results in automatic termination of lease c. then the lease is terminated.” v. “When the first material is placed on the leased premises or when the first work is done. but the lease does not automatically terminate if the payment is not made (in contrast to an “unless” clause lease) b. 3. ii. Alternatives to the “unless” clause in the lease 1. the commencement clause is rather specific. Paid-up leases: not only will lessee pay the up front bonus money. Under the Burkhart Lease Form. then the court may then just accept it as still being valid] 5. Kuntz’s idea on a basic statement of exception to the unless clause: “the event which will result in a termination of the lease is not simply a failure to drill or to pay delay rentals in strict compliance with the lease. d. Duer v. but is a failure to do so which may be attributed to the lessee’s fault or dereliction and is not attributable to circumstances beyond the lessee’s control. (physically blocking the gate or an injunction) .

e. Production in quantities sufficient to yield a return in excess of operating and marketing costs. to see if the well is profitable. Do not include overriding royalties. even though drilling and equipment costs may never be repaid and the undertaking as a whole may ultimately result in a loss. iii. There are no compelling equitable considerations to justify continued production from the unprofitable well operations. Paying Quantities in the Lease Form i. Koontz: litmus test – revenues derived from production must exceed current operating costs however small – only look to current production costs and not sunk costs – if fail test. iv. Look at the current ratio – so the math – and if the well is not producing at a profit. Producing in Paying Quantities: if perpetuate the lease into the secondary term by commencement. c.e. If not. Clifton v. v. look to see if – ii. Paying Quantities – TX rule i. would continue to operate the well. i. e. diligence in continuing of drilling operations – no need for drill bit to pierce the earth 4. the Christmas Tree. If so the analysis is over. lease is perpetuated indefinitely if producing in paying quantities b. Expenses in the Paying Quantities Context i.e. Look at the current ratio. i. good faith of lessee. Do not include the initial equipment costs. Only include those costs that are part of the lifting expenses. f. In TX. This is included in OK. Dreher v. Cassidy Limited Partnership . then ii. Breaux: OK and majority view: on last day of primary term. Ask whether a reasonable prudent operator (RPO). expecting to make a profit. oil co built road – P contended D did not commence drilling operations within the time specified – court said substantial surface preparations to drill are sufficient – FACTORS: acts on the premises. Do not include initial drilling costs. ii. lease may still be alive if a prudent operator would still be operating the well even at a slight loss – what time period do we look at? Court did not specify g. d. Paying Quantities – OK Rule i. Habendum Clause: Perpetuating the life of the lease by producing oil or gas in paying quantities: meaning of “paying quantities” a. revenues and expenses. do not include depreciation as an expense.

Horn: OK – only need capability of producing in paying quantities – producer can’t wait around . . . Amerada Hess Corp.only those expenses directly related to lifting operations can be included in determining if have paying quantities – depreciation should mandatorily be included – even if in the red. Legal test -any reason that a reasonable prudent operator who expected to make a profit from the lease would continue to operate h. Claims that the well is not producing in paying quantities. court said not directly related to lifting costs j. said that the lessor could not prove it wasn’t producing in paying quantities so it failed the 2nd prong of the two part test (TX) Test for paying quantities: 1. If the lessee passes then lease it good. Kaiser -what expenses can be deducted? Overriding royalties and admn expenses 5. etc. Actual Production v. If lessee flunks go to step 2. v. Do the math –litmus test -quantify the reasonable prudent operator standard by applying litmus test looking to operating revenues and operating costs of reasonable time to determine whether operations have been profitable. Mason v. Stanolind Oil & Gas Co. Stewart v. Barnhill: TX – need actual production in paying quantities within the primary term of the lease – majority view – best to have a shut-in clause incase production ceases so lease won’t terminate ii. Perpetuating the life of the lease by production: is actual production (in paying quantities) required. – although evidence conflicting.what expenses are properly deducted? (1) district expenses – too indirectly and remotely related to lifting operations so not included in determining whether well operates at a profit (2) administrative overhead (3) depreciation of casing. or will capability of production (in paying quantities) suffice? a. Hininger v. Ct. McVicker v.The lease has not produced w/ revenues exceeding expenses for 8 mths. Capability to Produce: i. Ladd Petroleum Corp. 2. doesn’t necessarily mean lease is cancelled – look to other circumstances which might exist i.

then the ct allows for a reasonable time for the operator to restore production. Com’rs v. cause of cessation ii.(1) gas mining lease did not terminate when actual production ceased longer than 60 days but well was still actually capable of producing gas. Rosenthal-TX. Anadarko Petroleum Corp. then lease will not terminate 2. better to take immediate action or suffer termination of lease 4. If our lease does not contain a 60 day of cessassion cl. will see a total cessaion and the lease will expire Factors: i.production decreased but hard to tell if had actually ceased production for 60 days – court held reasonably prudent operator test not applicable – in such a case. then the court will read in a capability factor into the habendum cl. Pack v. if production is interrupted b/ of activities that are mutually advantageous to lessor and lessee then it will most liely be viewed as temporary Factors for temporariness: i.for best price though – standard of reasonableness: diligent efforts must be made to market product – minority view – no need for shut-in clause J. State ex rel. Cessation of Production Clause – what if the lease contains a 60 day cessation of production clause and actual production ceases for more than 60 days? 1. the cts are very unlikely to view the cessation as temporary c. 3. and (2) so long as o&g is or can be produced. if there’s hiatus. Cessation Clause: if well ceases to produce. financial problems of lessee d. accidents ii. if cessaion is voluntary. time for repairs iii. Otherwise. Amoco . Santa Fe Minerals –OK. Common Law Doctrine of Temporary Cessation a. Thompson-TX.definition of production at issue – court defined as capable of producing in paying quantities and does not include marketing of product – production means same for all terms of lease – requires due diligence in seeking market – consistent with McVicker decision 3. Bachler v. v. if within 60 days commence either drilling of a new well or reworking and production restored. price fluctuations iii. the ct. diligence in making repairs b.

Dry Hole Clause: purpose is to avoid possibility of abandonment – if drill dry hole. lessee became vested with an estate that endures as long as it conducts diligent operations to produce – 2 factors important to court’s determination that cessation was temporary: (1) mechanical difficulties – casing collapsed (2) 2nd well completed in same formation – court also cited with approval a TX case which said there was temporary cessation when there where (1) mechanical difficulties and (2) new well drilled in a different formation Savings Clauses as Substitutes for Production 1. (This is because to market gas. but lessees are unable to market the gas. no production is being made. actual hindrance must occur 5. Force Majeure Clause – (1) A way for a lessee to protect himself if operations are interfered with by causes outside the control of the parties and that could not be avoided by due care. failure to pay shut-in royalty payments will not necessarily cause the lease to fail if the well is capable of producing. BURKHART does not have a force majeure cl. Upon production. Shut-In Gas Royalty Clause a. need this to undertake additional operations 3. mechanical approach – court also held lessee cannot tack the reworking of the first well to the drilling of the second 4. (2) The lessee has a duty to make a reasonable effort to remove the FM condition should one occur.L. a. Rogers v. Continuous Operations Clause – have reasonable amount of time to start 2nd well if first not successful. if 2nd well not drilled within a certain time. lease terminates 2. must be successful in that well v. What is a shut-in gas royalty clause? When you have a well capable of producing gas. Perlman v. you pretty much have to connect the well to a pipeline. b. so they shut the well in. though capable of production. Osborn: dry hole clause not applicable b/c not dry hole in literal sense but not producing in paying quantities – court takes literal. In Oklahoma. since it is impractical to store natural gas). . Pioneer Limited Partnership -a force majeure clause is to relieve lessee from harsh termination due to circumstances beyond his control that would make performance untenable or impossible – however. Thus. (3) The FM must be of the kind that falls with in the clause in the lease. will not supersede specific terms bargained for and does not mandate event be unforeseeable before excusable – still need more than mere possibility of hindrance. Continuous drilling clause – deals with only one well.

Freeman v. Hladik v. Gard v. d. says that shut in royalties can’t be used just to wait out the market. Underwood: courts may allow pooling where there is good faith. Amoco v. Pooling Clause a. then oil co will go to OCC and ask to force pool – OCC . Lee .Prof.1(e) –two or more people have combined interest in land – land considered one tract nd not divided by ownership of acreage – if one party refuses to lease. on the other hand. § 87. 52 Okla. when valueless lands are pooled 4.what happens when Corp Comm creates unit which is different than voluntary unit? Spacing unit created by Corp Comm will supersede declared unit created pursuant to pooling clause b. Conflicts between unites established by exercise of Pooling clause a. Magnolia: TX – no royalty paid at end of primary term b/c well not producing –have to pay before end of primary term if clause is unclear as to due date – 3. Hart speculates that this clause isn’t as important in Oklahoma as it is in Texas (where capability of production means that you better just be able to turn the valve and have oil or gas produced c. Comm. i. OK court will not allow shut-in provision to terminate lease e. Conflicts between units established by exercise of pooling clause in oil and gas lease and units established by order of conservation agency b. Kansas. and when isn’t it? What if a lessee tries to employ the shut in royalty just to wait for a better market? We can get away with that in Oklahoma because we can extend a lease just by the capability of production from a well (as opposed to actual production). Evidence of bad faith is when not done in a reasonable amount of time. Stat. Kaiser – OK – shut-in provision not to be construed as limitation on conditions which would affect termination of lease – if miss payment. Gives lessee right to combine small tracts of land or fractional mineral interests for purpose of drilling on a spacing unit – keep lease alive beyond primary term in absence of actual production on all lands within unit – production anywhere within the unit is deemed constructive production for all leases within the unit – drilling of one unti well will satisfy leases of both owners – pooling after production is acceptable OK – pooling clause not that important b/c have drilling and spacing unit c. Force Pooling by the Oklahoma Corp. When is it okay to use the shut-in gas royalty clause.

Inc. MM Resources. then give up right to participate in mineral interests – if owner does not take optin to participate. it needed to go to the OCC for clarification iv. can. This was a private rights law all along and this was outside agency law. Okla. Ports of Call Oil Co. the ct. after de-spacing and re-spacing royalties from earlier well don’t change c. Tenneco Oil Co. OCC doesn’t have . Joint operating agreement can modify a forced pooling order by the OCC. Pugh clause –“embracing a portion of the leased premises” Does the habendum clause cover these lands? Yes. Huston Was the forced pooling order out of the Comission’s authority? Yes. Drawing the line between oil and gas disputes over which the OCC has jurisdiction and those over which it does not i. Com’n non-drilling owners of a divided interest in a spacing unit are entitled to a share in production from the unit well since they cannot drill their own well due to the one well per unit rule – right begins when unit is created vi. El Paso Natural Gas Co.1 (those created by Corp Comm only)– in a unit of 160 acres or more no oil or gas leasehold interests outside the spacing unit may be held by production more than 90 days beyond expiration of primary term iv.. v.then tell refusing owner they must either pay their share of well costs or agree to take a roylaty – if take royalty. Corp. v. –both parties had a forced pooling order that needed clarification. Com’n non-participating force poolee wanting reversal of pooling order – asserted was unconstitutional taking of property b/c not required to present geological data of how much o&g expected to produce– court affirmed b/c there was substantial evidence of present market value – no need to show chances of doing as well as participant v. Nilsen v. said it could not clarify. Unless you have a pugh clause iii. Eason Oil Co. –order designating P as the operator of the well. iii. ii. v. Statutory Pugh Clause – applies only to d&s units under 87. Grynberg & Assoc. OCC cannot give a $ judgment D. Ward v. v. v. Hadson Petroleum Corp. Howard Engineering. Corp. Inc. gets mineral compensation ii. Okla.Ct. under OK stat. Home-Stake Royalty Corp.

Sunray Mid-Continent Oil Co.to establish breach of implied covenant to drill protection well. Barnes v. Lanyon Zinc. Indian Territory Illuminating Oil Co. Rosamond . . v.jurisdiction of the claim b/c it was considered a private agreement of who was going to be the operator.another way to measure damages – amount of damages limited to drainage sustained from time well should have been drilled to date action instituted 2. Implied Covenants to Protect Against Drainage – Common Lessee -problem .2 views of these covenants: implied in fact: predicated on intent of parties – courts usually go with this view when classification has been material implied in law: quasi-K. North American Petroleum Co. .Define: unstated obligations that a lessee must perform that arise from the nature of the lease. is what is required. Implied covenants are as much as part of K as express covenants! 1.: whatever would be reasonably expected of operators of ordinary prudence having regard to the interests of both lessor and lessee. v.lessor complained that drills off land were draining oil from beneath his land – lessee did not offset by drilling more wells on lessor’s land – court cancelled lease to a depth of 100 feet and not further b/c lessee engaged in exploring there – since they were spending $$$ on exploration.lessor’s coowners had already settled with the oil co for damages when P brought suit – oil co argued SOL had run – court held that implied covenants run with the lease and breach is a continuing breach – can seek damages for 5 years previous to filing – implied covenant is implied in fact and as much a part of K as express covenants – damages figured same as in Brewster c. Implied Covenants . v. A plain and substantial disregard of this requirement constitutes breach of the covenant for the exercise of reasonable diligence. Implied Covenant to Protect Against Drainage a. McDaniel . obligations a party takes on as part of agreement – presumed from relationship of parties and object of the agreement .Brewster v. Knight . court did not think it was equitable to cancel lease to lower depth – damages = however much oil drained by thief is recoverable (910 barrels) b. Mack Oil Co. must have: (1) substantial drainage – evidence must show that protection well would (2) probably produce sufficient o&g to repay costs and return a reasonable profit (est at time lessee on the land and not some time after he is gone)– (3) reasonably prudent operator standard – D is not liable for future damage when lease relinquished d. J.

proof that lessee has acted imprudently in failing to develop (would prudent operator have drilled a well at that time?) a. Alexander . this implied covenant requires that the lessee act w/ reasonable diligence in developing the lease as would a reasonably prudent . Davis . Implied Covenant to Reasonably Develop a.analogous to common lessee situation b/c Feely had working interest in Davis in well – Feely contends Davis should be held strictly liable and that prudent operator defense was invalid – court said better position to allow operator to put on evidence he was acting as a reasonably prudent operator – burden of proof not shifted from P but allows D to answer charges of breach of duty – **OK court does not change rules in cases of common lessee or analogous situations 3. proof that additional development will probably be profitable (probable profitability) ii. Implied Covenant to Develop: applies during primary term – not triggered until lease is propelled into secondary term by production or some substitute – lessee must continue to develop even after well in production b. making exemplary damages not recoverable unless also have action in tort b.Feely entered into o&g lease with TXO – Davis received order from OCC for lay-down unit and named Davis as operator -– JOA between Davis and TXO . but extends to field-wide as well – Duties of a reasonable prudent operator to protect from field –wide drainage include: (1) drill replacement wells (2) re-working wells (3) drill additional wells (4) seek field-wide regulatory action (5) seek available admin relief – but no duty exists unless such amount of oil can be recovered equal to cost of expenses – b/c of Amoco’s conflict of interests which arose out of their common lessee status. court would not reduce standard to P just b/c had other lessors in same field.a. Amoco v. Implied Covenant to Further Explore a. so status as common lessee does not affect Amoco’s liability to P – lessor has burden to show substantial drainage has occurred and that offset well would have produce o&g in apying quantities – covenant is part of lease and contractual in nature.covenant to protect from drainage is not limited to local drainage. time element must be reconciled with establishing prudent operator rule – can’t show compliance with rule if eventually – not losing production but lessee slow in drilling which causes delay in production – 4. Elements of Breach of Implied Covenant to Further Develop: i. Feely v.

Amoco Production Co. appliances and equipment to save all O&G and other products produced from said premises. Only CO. . Proper remedy would be conditional lease cancellation of unexplored formation – but give lessee another chance before cancellation 5. 6. Factors to market: (1) market within a reasonable amount of time (2) market at a reasonable price b. and LA have adopted the theory that the lessee is subject to a duty to explore – OK and TX have rejected a freestanding implied covenant to explore further . however.OK S.reasonable time case – o&g co waited 7 years before marketing b/c no pipeline in area – lessor accepted royalties but refused to execute shut-in agreement – court considered: (1) reasonable time and (2) due diligence and found oil co had used due diligence and that time was foreseeable b/c in wildcat country c. Bristol v.Lessee has prematurely abandoned a well . If this right could not be exercised.operator – lease cannot be canceled for breach of implied covenant to develop without notice to the lessee beforehand b. the lessor would be at the mercy of his lessee. there are occasions when the only protection a lessor has is through the exercise of this reserved right. Ct in Mitchell stated that existing legal machinery adequate to handle exploration controversies – any such controversy handled in covenant to further develop d.Forfeitures are discountenanced in law. Implied Covenant to Market –within a reasonable time a. observe customary oil field practices and modern methods. Complaints by lessors on the covenant . KS.Lesse has failed to use advanced production techniques . Implied Covenant to Operate Diligently and Properly a. some say highest price – duty to use good faith d. First Baptist Church of Pyote reasonable price case – duty to market at best price obtainable – some courts say reasonable price.Lessee has damaged the property . Colorado Oil & Gas Corp. Use diligence. v. . How is this different from the covenant to further develop? The implied covenant to further explore deals with lessee’s failure to explore undeveloped parts or formations and their duty to test an unproven horizon while the implied covenant to further develop is when lessee fails to develop in known producing formations c. which may be saved at a reasonable profit.

Kubetzlessee failed to obtain zoning exception for further drilling – tried a couple of times but eventually gave up – D cannot excuse nonperformance of his obligaion by showing he tried but was unable to perform. Bishop -breach of implied duty to protect by not seeking proper administrative relief – lessors contended well was oil well while lessees contended was gas well – wells on adjacent lands producing oil and flaring gas b/c no pipeline available (waste!) – lessee did relent and produce for 6 weeks which did result in a waste of gas. If the lessee mishandles the lessor in kind's share of the proceeds. Royalty Payments A. since the royalty owner doesn't take its share in kind then the lessor is viewed as the agent.holding that that the parties' oil and gas lease could not be cancelled because the lessees failed to pay the accrued royalties even where that failure was a violation of the express terms of their lease with lessors because that remedy was not expressly provided for by the parties lease. It's the rare lessor that actually takes his share of the royalty-in kind lease-by implication. Cannon v. . Cassidy .Ct. General Principles Land owner lessor actually owns 1 out of every 8 barrels that come out of the ground. Remedies for failure to pay royalties a.3 types . b. Union Oil Corp. b.filing a suit does not suspend duty to protect against drainage – should have applied for permit to drill offset wells 8. Gas royalty clause is poorly worded. Rule: An ogle cannot be canceled for lessee’s failure to pay royalties. VI. .S. Kubetz . not unless the impossibility arises out of the nature of the act to be done 7.Baldwin v. The Market Value Royalty problem 1. then the lessee has a conversion claim. Spaeth v.. Includes a duty to “seek administrative relief” a. Sinclair Oil and Gas Corp.Lessee has failed to protect the lessor by seeking favorable administrative action. did not hold lessee liable for refusing to produce oil when would have resulted in waste of gas but did hold liable b/c failed to seek administrative relief – not liable as operator if relied on experts advice – duty to test and complete in another zone can only be imposed by showing probable profitability and that lessee has waited an unreasonable amount of time after notice – duty to further develop extends to same well bore b. Royalty clause -lessor should get its share of the proceeds derived. Baldwin v. v. unless it is expressly provided for in the lease.

2) For gas sold at a point off the leased premises.1. etc. but at the market value as it existed at the well head.Middlestat -OK case that adopted the marketable product rule d. market value 2. Piney Woods v. then lets have the royalties be based at the market value. Market value gas royalty clause has two facets: i.Garman –CO-marketable product rule-once the oil hits the top of the ground. You should be accountable to the owner for his share of the proceeds--lots of class action lawsuits that show that the law is going in favor of the lessor in these disputes. if it's not yet a marketable product. Look at where the point of sale occurs ii. b. CO VIEW .30-40 yrs ago the lessor's cost free royalty means free of production costs (money that the oil company spent to acquire the leases. then the lessee bears all those costs until it is marketable. gathering.QUESTION: WHERE DOES THE POINT OF SALE OCCUR? Two Views For gas sold at the well: 1) Royalties are based on the proceeds received at the well. If the point of sale is off the leased premises (if the gas is transported elsewhere and maybe processed). OK VIEW . Costs of marketing.The royalty is to be paid for the value "at the well" a. All costs after production should be born by the lessee c. then we are through w/ production and in the post-production part. --post-production costs that you deduct from the royalty check that you write them. . Shell Oil I . Royalties are based on the market value at the well. If the point of sale is at the well head then the market value clause -we will calculate the royalties that whatever cost the lessee gets at the well head iii. View here is that after the fluids hit the top of the ground. TX VIEW and traditionally . proceeds . money it took to equip it and operate it). Majority Rule (taken from Vela case in TX): (Used in Piney #1) . market gas 3.What are the expenses the lessee can legitimately deduct? the marketable product rule =100% of the costs to bring the oil to the ground to make it a marketable product belong to the lessee . 2. KS VIEW -Schneburger -KS case that adopted the marketable product rule e.Different things that lessees may want to deduct for: Processing Transportation Gathering .Issue here.

MS. MT Minority rule (taken from Tara case in OK): market value is equivalent to the price assigned in the sale contract.Costs incurred to make the gas marketable were to be borne solely by the lessees.sets forth each owners percentage of the proceeds in order to assure proper parties are paid proper amount . says that the lessor's may be charged w/ all costs that have to do w/ marketing. This case is based on marketable product rule.Document prepared by purchaser to and signed by various owners of rights of proceeds. Costs of Production vs. Howell v. -P contended post-production costs incurred to convert raw gas into marketable product – some costs chargeable but not all 3. Mittelstaedt v. 4. while costs incurred subsequent to the gas being marketable were to be shared proportionately between the lessees and the lessors. 6. these costs may be deducted no matter if it's sour gas. as long as it's reasonable. KS. processing. Piney Woods v. Followed in OK. any cost incurred after is not production cost but post-production cost and lessor must bear a proportionate share of the cost which will be deducted from the royalty 2. Texaco Inc. pays creedence to the language of the leases. Ct. TX fel as though this was fair b/c they were paying more. Followed in TX. Basically. Lessor has a cost-free interest but when bring oil and gas to the surface.market value means the vale at the time gas is extracted and sol rather than when the applicable sale contract was made.traditional view –royalty computed at the well from proceeds received but no sale at wellhead b/c is sour gas and must be processed before can market – compute market value: royalty based upon value before gas processed or transported b/c leases calls for royalty based on market value at the well Rule: The lessor shouldn't be held responsible for the processing costs. Our Ct says that an intracompany type sale cannot be considered an affiliated sale at all. Santa Fe Minerals . Shell Oil II . –Texaco was getting money from selling residue gas then they gave the royalty owners a share of the gas then this liquid was divided. C. Proportionate costs of production costs may be given to the lessor. as long as that contract was made prudently and in good faith. Garman v. and AR B. The ct. Division Orders . Rogers v. Costs Subsequent to Production 1. Inc. LA. We don’t follow CO rule to pay attention to if the clause says the mouth of the well. Westerman Farm Co.OK RULE!!!! – lessor must bear a proportionate share of costs if lessee can show (1) costs enhanced value of already marketable product (2) costs are reasonable (3) actual royalty revenues increased in proportion with the costs assessed against nonworking interest owners 5. . Conoco.

the division orders are not binding. . the underpaid lessor must get the money from the overpaid lessor..If an assignee steps in the shoes of any royalty owner. 570. (2) interest was to be compounded annually. Gavenda: when oil co keeps part of profit then party can sue oil co – oil co liable for whatever portions of royalty it retained VII. It was held that: (1) heirs of property owner were owners of property entitled to proceeds from gas produced from well before and after order of heirship. Lawyer looks at the County records and finds out who owns the land. Purpose . some degree of wrongful intent or motive had to be proven. b. 581. C.Suit was filed by alleged owners of gas producing well seeking damages for operator's failure to pay working interest revenues. sec. Natural Gas Market Sharing Act 1. c. but rather. 540 2. 52 Okla Stat.Where the operator prepares erroneous orders and retains the benefits. and (3) treble damages could not be imposed on mere showing that revenues had not been paid. Rights Accorded under Oklahoma Law to a Working Interest Owner Who Lacks a Contract for Sale of His Share of Gas Produced from a Well A. they will be sent a transfer order and the lessee will pay the assignee. Process . rather than monthly.Lawyer works up the lease title opinion. Production Revenue Standards Act a. Stat. Maxwell v. . Distinguishing between Mineral Interests and Royalty Interests .Division order analyst looks at the title again. sec.To get their money back.Division orders are sent to the interest owners to sign up and signify that this is the way they should be paid. 52 Okla.1 3. Samson Resources Co.1-581.Protect lessee from lessors claiming they are not being paid their requisite amount. .10 B.100% Division Order: the operator/producer and purchaser enter into order then producer makes another division order setting forth who really owns percentages – saves admin costs and allows purchaser to hold onto $$ $ for awhile – purchaser gets indemnity protection from producer (doesn’t work if producer bankrupt) – purchaser more careful then in 80’s but these orders still exist a. Stat. . . . sec. Timely Payment of Production Proceeds to the Various Parties Entitled Thereto 1. 52 Okla.The drilling opinion is a detailed look at the title. . The original royalty owner must give the lessee notice of the assignment.

Production payment a. Mineral rights may be severed. Will continue only until the stated sum of money is received. a. To clarify a MI. the document will be the prevailing factor.5% of 100% of the production.5% x $500k = $12.5% of 1/8 x $500k = 2. it is the party that the lease was received from that bears the burden. in that they may be conveyed or retained.·2. If production is $500k.50.5% royalty of oil.·Undivided ½ interest in and to all royalty rights expressed in an ogle. say 1/8. Two ways to create an NPRI: i.5% MI. If the document is clear and unambiguous. 4. With a 2. The first thing the court looks at is the document itself. Characteristics of a MI a. If production was $500k. c. Right to develop b. Right to delay rental payments . 8. b. you get 2. Only gets money from the sale of production.1.5% of the royalty. Language of Conveyances a.5% x $62. you get 2. Right to lease c. thus it is a conveyance of the mineral rights. 3. Non Participating Royalty Interest (NPRI) a.500 = $1. you would get 2. Owner has nothing to do with the operation. you get 2. 9. If instrument says both – grant of a MI d. 6. A 2.562.5% royalty interest (RI) and a 2. 2. 5. If the court cannot construe the intent of the parties.500. parol evidence will be allowed. b. Money that will be received only as production occurs and only out of production. When a lessee receives an ogle burdened by an NPRI. When granting an ogle you are in a way granting a term of years lease. ii. gas and other minerals (OG&OM) produced and saved from the land. “Produced and saved” – connotes grant or reservation of a RI b.5% mineral interest (MI) are not the same. Express it as a certain % of gross production. Express it as a certain % of whatever royalty if provided for in an ogle covering the land. Owner does not see the fruits of the leasing transaction.5% RI. With a 2. “In and under” – grant of MI c. Ambiguous language is a question for the judge. 7. Right to bonus payments d. use “in and under” with language that allows ingress and egress.

Bodcaw . 1st would have signaled intent to create royalty interest and 2nd would have showed intent to create mineral interest – if had said “1/160 royalty interest” would have created royalty interest 14. Musselshell Country. Mcsweyn v. Barker v. Cotenants-e/ owns an undivided one half share of Blackacre 1. Mayberry -no right to rentals or bonus – court said if not recipient of these then impliedly give up leasing power also – H doesn’t agree and says still have econ interest so can neg size of royalty D. Montana .e. receive delay rentals) court said was conveyance of mineral interest but okay to strip some attributes away (even though looks like royalty after stripping court still labels as mineral due to language) 15.What if one tenant wants to drill a well on the land and the other co-tenant doesn't want to or objects? undivided interests in a piece of land – each party owns fractional share of each square inch of land (1)Concurrent Ownership: – 2 views exists re: whether one cotenant can lease land over protestations of other . Shared Ownership by Mineral Estate Concurrent Ownership --Development by Co-tenants . they will purport to convey their leasing power.conflict was reconciling language in deed – first ¶ appeared to convey mineral interest and second ¶ explicitly conveyed royalty only – several attributes of mineral interest stripped (leasing power. Levy .atty gets mineral deed in exchange for representation – whether deed created royalty interest or mineral interests in atty? Lease contained two important provisions that combined showed intent to create mineral interest: “1/160 part of all oil and gas that may be produced and saved” plus “in and under” – although if either provision had been alone. Severance of minerals results in two definite estates: mineral right owner has dominant estate 12. Anderson v. Chevron . 11. When one conveys a portion of their MI’s.Shared ownership interest by two or more people . French v. Right to royalty payments (you can also get this w/ a royalty interest) 10.more valuable to have mineral interest then royalty interest –2 ways to create non-participating royalty interest: (1) specify % of royalty interest (2) let it be fractional part of lease it tags along with2 ways to provide for an NPRI: (1) stated fraction of gross production (2) a stated fraction of royalty is provided for in any oil and gas lease covering the land in question 13.title to minerals beneath the surface is not lost by nonuser nor by adverse occupancy of the owner of the surface under the same claim of title. and does not reserve the right to bonus and rental payments.

Virginia views the extraction as creating waste. Reasoning: W. you go to the OCC and force pool. Allen-OK Rule: May make use of so much of the surface as might be reasonably necessary for operating drilling.2. Law v. Why is this law still so viable and important? b/c you miss people and you may think you have everything leased up. *Note 3. mining. This view stems from the statute of Westminister second 1285 borrowed from England.extraction w/o consent = waste. Not really true in OK. but they drilled anyway w/out consent. W. If Lizzie wouldn't consent today. Held: Lizzie can't stop the other cotenants from developing. 4. When can Lizzie ratify the lease granted to Skelly? Reasonable time? If the wells are barely producing. minority view – to permit oil co to proceed with development of land w/o cotenants consent would be to compel them to exchange real estate for personal property – court will not allow unless drainage will occur – court enjoined oil co from drilling w/o P’s consent (one cotenant can enjoin the other from committing waste). Cause of action for waste to protect cotenants enacted by the Parliament. but you don't. The drilling cotenants bear 100% of the risk of drilling a dry hole. One tenant can stop the whole show.368] -A cotenant's lessee will never knowingly drill with an outstanding interest out. Virginia sees oil and gas as real estate. There are a few . This man owns an interest in real estate and he can't be compelled to take them out of the ground and convert them into cash/realty. and marketing the same. Majority view: A cotenant w/out the permission w/out the other cotenants and no matter how small the cotenant's interest that wants to drill can do so w/out being subject to being enjoined – cotenant owes duty of accounting for proportion of net value of oil produced (market value – cost of extracting and marketing) – cotenant may extract oil and gas w/o consent of the other*extraction = enjoyment do no need for consent*cotenant gets nothing until well paid out (debits outweighed by credits) then will get share – here was 1/10 of proceeds Issue: What are the rights of the nonconsenting cotenants? Rule: e/ tenant has the right. 370] -majority of jurisdictions -will award a royalty interest rather than a net profits interest if a lease purporting to cover the entire premises is executed by one cotenant and the other cotenant ratifies the lease. etc. A co-tenant has a 1/768 mineral interest and wants to drill a well but the other cotenant objects. Prarie Oil & Gas Co. . He wanted a bonus of 1000$ and they thought it was excessive so objected to the drilling. Heck Oil Co. she can send a letter to Skelly ratifying the drilling and make herself a lessee. Net profits view [p. No remedy for cutting down trees.the statute would enjoin the tenant from wasting the property. [p. v. 3.

1501. cotenant of non-consenting cotenant 7. 372].1-. In absence of agreement to contrary. then nonconsenting cotenant will not owe other leasing/ consenting cotenant anything 8. Louisiana) 5. What if there's a nonconsenting cotenant and you go onto the land in question and drill a dry hole? When debiting the tenant's side. Partition of Mineral Interests 1. Mosely v. Law of Non-consenting Cotenants: nonconsenting cotenant does not bear in risk of dry hole – if no production. As far as the grant for partition. Blanchard case –gives the competing method of accounting. then in your estate you must prove by a preponderance of the evidence that there is a frustration of the objective of the estate and this section would not effectuate a …. If cotenant executes o&g lease with oil co then oil co becoemes in effect. has the right to decide what kind of partition (in kind or by sale). (PA. non-consenting cotenant may decide to ratify lease in order to receive royalty payment – can be accomplished by executing instrument with express purpose of ratifying lease for entire premises by cotenant or by accepting lease benefits 9. Kentucky. the court must grant it. 6. OK there is no need to invoke a partition remedy b/c you can force pool --Title 12 sec. statute governs: must show court frustration in development with cotenant could not be solved by force pooling – show by preponderance of the evidence Held: There is a statute on this subject. p. . If it conferred a benefit to the first well you may be able to add it to the second. court will have sale and split $$$ between owners 2. Oil company would have to bear the loss of a miscalculation of overpayment to one tenant and no payment to another. can we include the cost of a dry hole that we drilled before to the costs of a productive well. The ct. which is the weighted average [ex. Hearrell –TX .if you are seeking partition and what it is you are seeking partition of is the mineral estate. The magic words are "conferring a benefit". holders of undivided interest may ask court to partition the land – could be in kind (split land and give each tenant full interest in part of land) – where unfair or difficult to partition in kind. If you are a cotenant you have an absolute right to partition. Ratification – if well good enough to produce but won’t reach pay out. OK regards fraud and oppression as a viable defense. E.states that don't follow the Lizzie Allen approach -but that's not OK or TX law.absolute entitlement to partition under TX statute – equitable principles not material in determining if partition proper but only in how partitioned – some exceptions exist for fraud and oppression What about mineral estate? In OK.

This money must be put in a CD or invested. Life Tenant/ Remaindermen 1. Facts: Martha Smith (life tenant) goes to court and she is guardian of Garrett (remainder) as a minor and she has the authority to grant an o&g lease--primary term of 10 yrs. royalties from corpus invested for remainderman to get upon death of life estate – life estate owner to get interest from such royalties during lifetime . --the remainderman would be a trespasser. Hynson v. must have consent of both life tenant and remaindermen – life tenant does not have authority to produce oil and gas (commits waste) – remaindermen who produces oil and gas w/o consent of life tenant commits trespass. Rule: The life tenant. --they would be committing waste. The remainderman is entitled to this. b/c they have no present right to do anything. Trusts: in absence of contrary provision. recognizes that we should not bother w/ a partition suit. Jeffries . says that Welborn didn't have any title that was being slandered b/c he only had a contingent right if Smith (life tenant were to die).If you own both surface and minerals as a cotenant and you come seeking a partition. Open Mine Doctrine: (exception to CL rule) if mine opened before creation of life estate and future interest in land. but not now…must wait under life tenant dies. OK statute lists powers trustee may have including granting o&g lease that extends beyond term of trust 3. Rule: The remainderman acting alone cannot grant a presently effective o&g lease. life tenant may be entitled to continue and operate open mined mine and retain proceeds of such operation – court found the rule not applicable in Hynson b/c no wells opened before creation of life estate (no lease for drilling before trust) 5.beneficiary of trust argued was entitled to entire royalty and not just interest on royalty during her lifetime 4. if we can do the same thing with forced pooling. Both life tenant and remainderman need to decide who's going to get that up front bonus money. F. OK leg.to make o&g lease for immediate and present exploration and production. They need to agree on who's going to get the delay rental payment and the royalties. 2. There is still a term left of 6 years by the time she grants the second lease. If Bonus is never agreed upon--Advanced payment of the corpus of the estate. Later. cannot grant a presently effective o&g lease. CO Rule: unless agreement to the contrary. Welborn v. their right only is excersizable when they have a present interest Rule: Only when both the life tenant and remainderman come together can they grant an o&g lease that is presently effective. acting alone. Welborn claims that his lease is being slandered. Smith and Garrett grant a lease to Tidewater. Tidewater Associated Oil Co. . in that situation going to the OCC to force pool it will not take care of partitioning the surface estate. Ct.

Holders of defeasible fees. Fransen v. In order to acquire a lease covering the complementary future interest held by the landowners.production means actual enjoyment of tangible economic benefits which result from marketing – dealing with term mineral interest so OK not as lenient as w/ lessors/lessees – definition of production not the same for deeds as for leases 2. RLM Petr. H. possibility of reverter or an executory limitation may usually develop or lease the property for O&G without the consent of the reversion owner. Emmerich . D tries to bring a rig on the land but C says “NO!” 2. The Ag tenant is not mentioned and would probably not have a remedy. Situation-Surface and minerals are severed. Corp. A owns the surface. Archer County v. and B owns the minerals. b. C has an action for damages if D unreasonably damages the land. Solution a.6.OK statute split is 85% royalties is allocated to income and 15% allocated to principle G. Creditors: (mortgagee) deemed to have legal title to the land but right to create rights in oil and gas is held by lessor a. In this case. Terminable Interests 1. dissent said royalty deed and lease must be construed together 2. Absent language granting the term mineral interest owner the . Eckhardt . A grants an Ag lease to C. 3. the leaseholders would have needed to obtain a lease from the landowners. Subordination agreement – oil and gas lessee gets agreement from mortgagee to honor the lease. C plants wheat. Usually will do this because money was given based on the value of the surface. Webb .issue was what kind of production would maintain royalty interest past primary term – court said lease terminated at end of term b/c no express provision in royalty deed that payment of shut-in royalty would extend anything but the lease – however. Mineral estate is dominant and the surface estate is servient. Surface Tenants: Holders of Defeasible Fees: Mortgages 1. v. Uniform principle and Income Act: income from trust to be paid to life tenant – statute controls over CL – OK has version that applies only to life tenant / remainder situations created w/in creation of trust – not conventional situations. then CL applied. In OK. B then grants and ogle to D. the SDA says that surface damages are to be paid to the owner of the fee. 4. whether subject to a condition subsequent. Policy: life tenant entitled to enjoyment of land in same manner as it was enjoyed before creation of life estate 7. The mineral owners are to exercise their right and not injure the surface.The language of the conveyance indicated that the term mineral interest and the complementary future interest held by the landowners were separate and distinct estates.

A substance near the surface is part of the surface estate if it is shown that any reasonable method of production. then the MI owner is only liable to the surface owner for negligent surface damages. gas and other minerals” clause a. limestone. water. sand and gravel. OK Rule i. United States Steel Corp -TX Issue: Is Uranium included as a mineral? Rule: If the mineral within the ordinary and natural meaning of the substance it is included as a mineral. Beall –surface owner coveys land to Mims but reserves a ¼ npri. at the time of the conveyance or there after. however. calcihe. TX Rule: Upmost good faith dealing is required and this amounts to a fiduciary duty. iv. TX Rule i. the MI owner is liable to the surface owner for surface destruction. Executive Right in Mineral Interest –leasing power 1. The Mims get no bonus for leasing the land. Moser v. the successor to the mineral rights reservation did not have the authority to make the landowners' interest subject to the lease after the term mineral interest expired. Is the substance a constituent or component of oil or gas? c. Mims lease the land to the son John. deplete or destroy the surface. iron and coal. whether their presence or value is known at the time of severance. If there is a specific conveyance of other minerals. Free standing mineral owner interest (nonparticipating) does not have right lease minerals but does have an interest in the land 2. Rule of self dealing: The son had no duty. I. . This deal would give the Bealls ¼ x 1/8 =1/32=2/64 instead of ¼ x 3/16 =3/64. Mims v. he participated as a person whose interest are closely identified with those of the fiduciary. b. gas and other minerals” and Named Substances 1. would consume. John Mims leases out the land for 1/8 ri to the Hendersons.402] J.right to encumber the complementary future interest with a lease. Executing a mineral deed using the “oil. OK Rule: That good faith duty is quasi-fiduciary. lignite. gas and all other minerals clause includes all substances within the ordinary and natural meaning of the word. ii. Meaning of “oil. surface shale. A severance of minerals in an oil. If there is no specific conveyance. Held: Mims show enough evidence that they are guilty of self dealing and did not use good faith in dealing. *problem [p. Minerals that belong to the surface owners: stone. iii.

Overconyenance Duhig and its Progeny 1. no OK cases on CBM L. . What factual situation brings into play each doctrine: i. Now. Coal is not a component or constituent of oil or gas. and remove the same” held that the coal reservation encompassed CBM gas. This act authorized issuance of patents to individuals who had already made good-faith agricultural entries onto tracts later identified as coal land. B will get. b.Inconsitent cases. Ownership of Coalbed GasDoes a grant of coal carry ownership of coal bed methane gas (CBM gas)? 1. Two grant theory: Situation where the owner of the land has i. v. the problem comes up when B purports to reserve a mineral interest to himself. has made some other grant in the “subject to” clause c. Southern UTE Indian Tribe Facts: In response to homesteaders interest and fraud Roosevelt passed the 1909 act. mine. and only the deed. Duhig rule: If A grants BA to B by warranty deed (and Duhig only applies if you are dealing with a warranty deed). and A will have to give it up out of his share. The most natural interpretation of coal as used in the Acts was a solid rock substance and did not encompass CBM gas .The Duhig Rule. and then ii. the Duhig rule: 2. Amoco Production Co. Two-Grant theory. Duhig v. and Community Leases a. and whatever A has purportedly conveyed. and X reserves an undivided fractional mineral interest. and A reserves an undivided fractional intersest in the mineral estate. Peavy-Moore Lumber Co. then A has to bear out of his share the proportion that was already granted to X. Oklahoma Ex. B becomes a Duhig grantor when he grants a mineral interest to C (the Duhig grantee). Looking at the deed itself. and he fails to mention that there is already an outstanding . but fails to mention in the deed that X already has part of the mineral interest. granted an oil and gas lease (made a conveyance in the lease’s granting clause). Commissioners of Land Office v. and the right to prospect for. EXAMPLE: X owns Blackacre in fee simple. Rule: Extrinsic evidence is not allowed to show the intent of the parties -Oklahoma has a narrow view of what “other minerals” means i. Patents –reservations of “minerals” or specific substances and “other minerals” K. the Non-Apportionment rule. and grants Blackacre to B. Rel. what interest has A purported to convey to B. Butler Issue: Is Coal included as a mineral? Rule: Ejusdem generis –“other minerals” to be construed generally. but the issuance was to be subject to “a reservation to the US of all coal in said lands.d..

no interest is mentioned in deed to third party c. say X retained a ½ mineral interest. Then only that person gets the royalties – they don’t have to share it with the people who own the land that is now severed and is not where the oil well was located. the non-apportionment rule: 1. and in that case. Under the Duhig rule. and then B also purported to retain a ½ mineral interest. ii. or born entirely by the sons. Wilson . Acoma Oil Corp. The theory is that the instrument then conveys two separate interests. when at the time of the conveyance in question. Note that in Oklahoma. what the grantor purports to pass to the grantee is what shall pass instead of the presence or absence of a warranty (sometimes doesn’t matter if it’s a warrant deed or not) 5. there is a fraction in the granting clause. Owner of fee simple interest decides to divide a parcel. . A dispute arose over the issue of whether the burden of the 6. 3. first the mineral interest is owned by the third party and the other … b.5 percent royalty should be shared proportionately by the mineral deed holders and the sons. since he only had ½ interest to begin with – his purported reservation is deemed to be the interest of X). (Here. and their sons took over their interest in the property. and the other in the fruits of the oil and gas lease. Say the oil company drills a well on the land that is still retained by the original owner. because the successor landowners owned enough royalty interest in the tract of land to satisfy the previous royalty assignments without a reduction of any royalty from the "mineral acres" conveyed to the mineral deed holders. the various owners in severalty are apportioned part of the proceeds from the oil and gas operations 4.The successor landowners died.5 percent royalty were not applicable to the action. the grantor purports to convey a mineral interest to himself d. To Recognize a Duhig situation : a. and then somewhere else in the document you have a different fraction (that most often has to do with some mineral interest that is outstanding on the property). In the deed. Held: equitable estoppel and actual or constructive knowledge of the outstanding 6. The Duhig rule tells us that you estop B from asserting that he retains a mineral interest for himself.mineral interest in X. but all of the property is under one oil and gas lease. the two-grant theory: 1. v. selling some fraction and retaining the rest. we often do our drilling on spacing units. one in the estate mentioned in the granting clause. we estop B from asserting that he has retained a ½ interest. iii.

but that Jones’ interest is burdened by a 1/16 nonparticipating royalty held by Nguyen. unless production were had from a well upon the 90 acres? Held: He was entitled to sharing the royalties . The TX company paid 80$ instead to extend the lease. Hoffman v. Therefore.6. the lease has expired. Magnolia Petroleum Co. "Less and except all mineral interests" in the deeds also reserved the minerals. and Mrs. Facts: Mr. Duke and his wife grant an oil and gas lease covering the whole 320 acres tract to Harvey that provided for a 1/8th royalty.14/16 3. B. Then it is subject to the production interest clause. Issue: Whether the deed gave P a right to participate in any royalties under the lease. Arrowhead Homes. so that is what you have to pay for delay rental. The Dukes own a mineral interest in half of section 1. Wells are drilled on this lease and Hoffman is bringing suit for recovery of portion of the royalty on well that were drilled on a 320 acre tract. The lessee drills and obtains production. Duke own a 320 acre tract. v. He failed to say that the wells were on the 90 acre tract. Conveyances “Subject To” an Existing Lease 1. 455] Jones and Morales e/ owns an undivided half interest in the mineral estate in Blackacre. Boswell Energy Corp. Note 4 Are we going to apply the lessor interest clause from that 1/16 that was set out from the 1/8 royalty? Yes you apply it and you get 1/16. Parks and his wife own an undivided east half of the section. and purports to cover 100% of the mineral estate. Parks Facts: Mr. Proportionate Reduction Clause (a/k/a Lessor Interest Clause) 1. Ct said you wrote in you are going to pay him 160$ rental. Jones and Morales e/ execute separate. -The issue was whether the words. 8 months later. How much royalty must the lessee pay? To who is it paid? Morales – 1/16 Winn – 1/16 Jones – O ABC Oil Co. Oil and Gas Lease A. They own a net mineral acre interest of 160 acres. v.. E/ lease purpose provides for a 1/8 royalty. contains a proportionate reduction clause. VIII. 2. Basically those words suck because they are ambigious and nobody knows what the hell you are doing. they grant to Hoffman ½ undivided mineral interest to Hoffman in a 90 acre tract. and the controlling factor was the intent of the parties. Texas Co. Note 3 [p. but identical oil and gas leases. Inc.

and oil and gas are thereafter produced under the lease from some portion of the leased premises. but prior to the development of the land and the production of oil or gas under the lease. Now. . and (3) prejudgment interest was not available. The Nonapportionment Rule 1. McRae . Rule: Oil is a part of the realty until brought to the surface and that it can be sold in place. Nonapportionment rule -You do not apportion oil Clause can be put in a lease to have oil apportioned -entirety (entireties clause)[p.Hoffman gets half the royalties Two grant theory: . they submit that this is what parties in Hoffman intended.Rule: Where the lessor of land for oil and gas.the leading case on the “subject to” clause-this case-although this decision has been influential in disputes. and all royalties accruing hereunder shall be treated as an entirety and shall be divided among and paid to such separate owners in the proportion that the acreage owned by e/ such separate owner bears to the entire leased acreage. There was a possibility of reverter w/ respect to the 90 acres and a ½ interest available. . shall be developed and operated as one lease. It is unjust to take away the property apparently belonging to one party and give it to another until it is shown that the latter party has been deprived of it. the royalties there from belong to the owner of the particular tract upon which the well is located and the owner or owners of other portions of the leased premises have no interest therein. subsequently to the execution of the lease. 482] ex. If you don’t put a subject to clause in the lease then you get the royalties for land that you have leased to another. covering existing lease and any future leases.- C. The parties may have never intended to convey anything beyond the 90 acres. Courts should not make contracts for people overturning those they have voluntarily and fairly made for themselves 2. Concord Oil Co. . The only way they have a COA is if there is draining. Holding construed one instrument as having two grants. nevertheless. The court resolved the conflict by showing that two grants were actually conferred. Japhet v.Action was brought to determine size of mineral interest conveyed by deed executed while grantor's interest was subject to producing lease. 2. sells a portion or portions of the land to others. they look to only 90 acres not all of the land.Arose whether there was a 2nd grant that covered an actual physical area. (2) deed conveyed possessory interest. Pennzoil Exploration and Production Co. the premises. It was held that: (1) deed created single estate of 1/12 of all rentals and royalties. . Submitted that this ruling as unsound. -if the leased premises are now or shall hereafter be owned in severalty or in separate tracts. it actually involved a conflict btwn the subject to clause and the granting clause. v.

b. Trespass and Related Actions 1. . a. 2. 2. but include the language: “This lease is granted on the lessor’s reversionary interest in the leased premises. then this communitizes or apportions the royalty interest Therefore. it is not important to include a clause in OK. Geophysical Trespass a. . and to just be smart. When the mineral and surface estate are severed. 3. Practice pointer: if you are asked to create a top lease. violated rule against perpetuities. A surface estate owner cannot. A geophysical trespasser is one who conducts geophysical operations on the land of another with out permission or consent. To avoid this. by himself. 4. E. but it doesn’t vest in possession until the bottom lease expires. then the nonapportionment rule applies. grant permission for seismic operations to be conducted on the land. The seismic explorer does not have to have the permission of all cotenants.A top lease is a lease that will vest if the other lease ever expires. If we have a drilling and spacing unit in the fact pattern. For good PR. This may not be the case if information is gained from the adjoining tract. be sure not to cloud the title of the bottom lessee. One cotenant can validly grant a permit for seismic operations to a party. and write it in some way that doesn’t violate the rule against perpetuities (say that it vests in interest right now.Problem with top leases is that they may violate the rule against perpetuities.If there's no entirities clause in the lease. Bright & co.held that: (1) oil and gas top leases. Top Leasing . but is subject to a lease interest recorded in _______ and will become possessory only upon the expiration of that lease. and is hereby vested in interest. b/c most oil and gas leases are drilled after the OCC has come in and made a drilling and spacing unit D. 1. Trespass a. There is no physical invasion. Hamman v. Mere vibrations from seismic operations do not constitute a trespass. you must get the permission of the MI owner to explore for minerals. include language like Fill out the lease just as you would otherwise. but (2) perpetual nonparticipating free royalty interest reserved by grantors in subsequent deed did not violate rule against perpetuities. . a person should get the permission of the surface estate owner as well. which were to become effective if and when existing oil and gas leases expired or were terminated.

Humble Oil & Refining co. They drilled until 1923 from the date of the lease. a. 6. 1920 (it was 1919) Humble looks as the lease (sees the drilling next door) and says let's take the position that our date ran at the face of the lease. (2) owner of lease could maintain action against city for unauthorized geophysical exploration. however. and (4) genuine issues of material fact existed as to liability of city. Cowden -that mineral owner had a cause of action in trespass only. the true owner is entitled to the recovery of the value of the O&G produced. but they must leave the equipment that cannot be recovered with out entry into the well. City of Northglenn -held that: (1) surface estate owner could not authorize city's exploration of land for minerals where surface and mineral estates were severed and separately owned. and (3) permission of all fractional mineral owners is not necessary for owner of undivided interest in mineral estate to transfer right to conduct seismic exploration to third party. If the trespasser is truly acting in good faith and a producing well is drilled. They do not have to leave and forfeit the equipment. what areas could reasonably be included in an agreement regarding such an exploration and would have to consider that compensation would have to be paid only for the area reasonably regarded as 'occupied' by the survey. which. (2) permits which mineral interest owners executed validly transferred to permittee right of ingress and egress upon surface for limited purpose of conducting geophysical exploration. b. L owns 1/4 minerals. 7. for purpose of determining damages. and that evidence was sufficient to sustain trial court's finding that the damages per acre amounted to $20 but that district court would have to establish.held that: (1) undivided mineral interest owner can separately convey right of reasonable ingress and egress upon surface for limited purpose of conducting geophysical exploration.5. If a good faith trespass results in a producing well. This is a form of punitive damages. v. Kishi .' 9. they are entitled to retain the costs of drilling the well. A bad faith trespasser does not get to recover anything.Good faith trespasser drills a dry hole will be liable for damages they created during that trespass Two cotenants entered into the same lease: Kishi owns surface and 3/4 of minerals. They drilled a dry hole. (good faith position). What liability did Humble have? He was a trespasser b/c he asserted a . could be waived for a suit in assumpsit for the reasonable market price of the use and occupation. K signs the lease Jan 9. worth . v. A good faith trespasser is liable for the ratable share of market value or the amount by which the drilling of a dry hole decreases the value of the mineral estate. (3) recording statute did not insulate city from liability. 8. Grynberg v. Phillips Petroleum Co. c. Enron oil & gas company v.

you must surrender possession. so the landowner was not entitled to damages for trespass. There is an outstanding oil and gas lease who own the lease and they get a well drilled just before the end of the primary term. 11. however they claimed that that had completed a well cabable of production. General Geophysical Co. publication by the D ii.The oil company employed the geophysical company to conduct geophysical operations in connection with oil exploration. The bad faith trespasser you don't get to deduct your well costs.property right he didn't have then Kishi would've been entitled to 3/4. The geophysical company sought the landowner's permission to conduct the operations on his land. then TX cts will deem you to be a bad faith trespasser. Kennedy v. Kidd v. financial damage v. an estate or interest in the property slandered *proof of a lost sale *lack of good faith and probable cause = malice 12. Hoggett -Hogget and his wife are land owners.in the face of a pending suit agst the true owner. if you have already had some wells and it drifted over to this guy's well --then you haven't conferred a benefit. TX cts . The Hoggets finally become suspicious and Kidd and Cherry keep refusing to release the lease so the Hoggets sue them. The court held that the landowner failed to prove physical damage to his land caused by the vibrations or that appellees obtained information about the subsurface his land via the geophysical operations. The true owner must send you the money to make you whole again as the lessee. By drilling the well and making a producer out of it then you have conferred a benefit to the true owner. malice iv. . Continuing validity of an oil and gas lease or ownership of an oil and gas interest 5 elements P must prove: i. enters judgment that you are a trespasser. The geophysical company conducted the operations on adjoining land. So the Hoggets bring a suit to clear the cloud in . if you come on anyway during the pending litigation. falsity of the publication iii. There is a company that buys gas from producers and buying gas from wells next door. 10. 510 Wyoming case -If you're a good faith trespasser you get to deduct your well costs. a. It's to the extent that he's conferring a benefit that he gets to recover costs for drilling the well. The court determined that the landowner could not recover exemplary damages because he failed to prove malice by appellees. L who owned the 1/4 consents 10. Slander of Title -From the time that the ct. However. p. The landowner refused. and so they continued the lease by paying a shutin gas royalty.

You need to show a lack of reasonable reason that they are holding a cloud on the title. AND d. . to drill for or extract oil on the property. If the adverse possessor is a squatter. and this was held to exercise dominion over the property. does not interrupt the running of the statute either as to the surface or minerals. If you go after money damages. On appeal. Continuous for the statutory period. ware . Ex. The elements of slander of title: Malice is an essential element of a slander of title suit. . Kimball Fadem put out some cattle and a fence on the land and proved that he did adversely possess the land. -X having approached the Hoggets that want to lease the property. f. diederich v. but prior to the completion of the statutory period. . but the ct is quite generous twds them. prove "special damages" -you have lost a specific opportunity to deal w/ your land in a certain way -lost money or suffered financial detriment for a claim of damages.the title. Open and notorious. Malice means an act of refusal w/ dileberate conduct without reasonable cause. Kimball's -Fadem's had granted oil and gas leases themselves. then the mineral estate adversely possessed is what the conveying document says.A production unit does not provide adverse possession if the unit well is not drilled on the land to be adversely possessed. the court affirmed the judgment because the operation of the two oil wells for the statutory period cut off the right of anyone else. but they reserved a 1/2 mineral interest.IF the adverse possessor is acting under color of title. e. c. including the claimant. The other element. Fadem c.When a person adversely possess the surface estate.title had actual and timely notice that oil was being taken from the tract under the adverse claim and made no effort within the 15-year statutory period to assert their rights. Adverse Possession – Elements a. they adversely possess the unsevered mineral estate as well. Adverse and under claim of right. then you have a claim for slander of title. The Fadems would take the 1/2 mineral interest that was never severed. This is bad faith conduct and they actually reach fraud in this case. 13. . and they loose that opportunity based on the cloud on the title.A severance of minerals by the lawful owner after adverse entry. Mr and Mrs Berry deeded this land to the Fadems. then only the mineral estate under the adversely possessed surface estate is adversely possessed . There was no severance of the minerals. An actual entry giving exclusive possession that is b.

The brother has leased the land to other people. . Cornelius was trying to do a sort of tacting and the ct. said he had to go through the elements of adv possession and this wasn't enough to show that he has adversely possessed the land. didn't buy it and said that you may not tact with respect to production elsewhere. Cornelius v. The ct. Cornelius' mother owned the interest in question and she conveys this land to her brother and Cornelius doesn't know this. Cornelius says since he's received royalties and paid taxes on the property then this means he has adv possessed it. He didn't even get the royalties b/c there was not actual production for the entire 15 yr period. Moody Bible Institute of Chicago The adv possessor is Cornelius. h. Atlantic Richfield v. In this case it was the lessees that were adv possessing it. and (3) prior quiet title judgment had no effect upon defendants' mineral interest rights where they were neither parties nor privies to quiet title action. (2) jurisdiction to decide quiet title action was properly with district court. Tomlinson .g.(1) mineral leasehold interest may not be adversely possessed either by drilling of and production of oil and gas from well drilled on separate tract of land within drilling and spacing unit created by Corporation Commission or by possession of oil and gas leasehold under claim of right for statutory period.

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