Oil And Gas Outline

Oil and Gas Summary Sarah Rowe Clutts 1. Land Description a. Townships: # the sections starting in the NE corner and move toward west-then down 1-then east, and move along like a snake (i) To describe the portion of the land, count how many township lines north or south of the baseline and how many rangelines east or west of the principal meridian (ii) Example: T2N, R3E IM= township 2 north, range 3 east, Indian Meridian) b. 36 Sections w/in a township: to describe a section w/in a township, work from smallest fraction and go forward (i) Example: SW 1/4 of SW 1/4 of section 2, T2N, R3E, IM. 2. Kinds of Oil and Gas Interests a. Fee Simple Absolute: A owns Blackacre in fee simple absolute then he owns the entire bundle of property sticks (sell, lease, explore, transfer, etc.) b. Mineral Interests: mineral interest can be severed from the fee estate by grant or reservation (i) By grant: original owner sells just the mineral estate (ii) By reservation: original owner sells surface but reserves/retains mineral estate (iii) Aspects of severed interest ownership: * Rights of severed mineral interest owner include the right to use so much of the surface as is reasonably necessary to explore for, develop, and extract the minerals. * It's the dominant estate c. Oil & Gas Leasehold Interest: created by mineral owner granting a O&G lease (i) TX: ownership in place theory, is a fee determinable estate where land owner retains possibility of reverter if certain thing do or don't happen (no paying quantities, or commencement, etc.) (ii) OK: Lessor subjects mineral interest to lessee and lease is a irrevocable license to go on land & extract oil & gas: get exclusive right to take oil & gas d. Non-Participating Royalty Interest (NPRI): A burden on the mineral interest where the grantor gives a royalty to a 3rd party (i) Happens where Able conveys royalty to 3rd party for sum of money even where no lease exists (ii) OR where oil & gas lease already existing and lessor says to 3rd party, I will sell you a royalty interest in this land (iii) 2 Ways of Creating NPRI * Able Grants Charlie a 4% NPRI of 100% * Grant reads: undivided 1/4 of royalties provided for in oil & gas lease now existing or which may be existing hereafter 1 e. Overriding Royalty Interest: interest is carved out of the working interest (lessee's interest) (i) Mineral interest owner has granted oil & gas lease (ii) Working interest then carves an interest out of his interest & grants it to someone else (say a geologist) (iii) Economically it's like an NPRI: COST FREE 3. Cost Free Interest & Meaning of Words a. TX: royalty interest cost free only until oil/gas gets to top of ground, once severed then any expenses after that (to get it to market) are borne proportionately even by royalty owner. b. OK: Marketable Product Rule: interest is cost free until the gas/oil is marketable, and once marketable costs are borne proportionately. (expenses getting it to be marketable are borne wholly by lessee c. Marketable Product Rule in OK does not apply to overriding royalty interests (??? So bear no cost ever?) 4. Getting comfortable with the Math: Getting Fractions into Percentages a. Mineral Interest owner typically gets allocated a 1/8 royalty on the production: 1st step when see a mineral interest owner granting an NPRI: do calculation for whatever the grantor would have gotten without granting that NPRI and then take the NPRI amount out of what he gets. (i) 1/8= 0.125 or 12.5% (ii) Example: Able grants to Charlie 4% NPRI. Then Able grants XYZ an o&g lease, and Able has a 1/8 interest in the production * Then Able bears the 4% out of his interest which you calculate by ignoring the npri first * Charlie gets 4% of the amount Able gets. or figure the 1/8 amount first and then give Charlie 4% of that amount. b. Percentages: * 1/8=12.5% * 1/16=6.25% * 3/16=18.75% * 1/32=3.125% 5. Distinguishing NPRI from MI a. Mineral Interest: (i) Mineral interest is a property interest and comes w/ all the bundle of rights associated including right to sell, use, lease, exploit, and will be able to come on surface & get oil & gas b. Royalty Interest: (i) Only afforded rights to portion of the production if achieved, but no leasing rights (ii) Does not participate in the leasing transaction at all (iii) No rights to bonus or delay rental payments 2 c. Magic Words: (i) NPRI: if language grants X a % in all oil & gas produced and saved from described land w/ nothing else then Court says NPRI (ii) Mineral: if says 4% in all oil & gas IN & UNDER then mineral interest (iii) Mineral Interest: if says both IN & UNDER and PRODUCED & SAVED then still mineral interest (iv) If says w/ rights of INGRESS & EGRESS then MINERAL INTEREST cause npri cant have this d. If grant gives a mineral interest but retains the leasing power & maybe even the delay rentals, still a mineral interest because of the mineral bug theory (i) The bundle of rights may be separated and kept: severed e. In OK: want to be really explicit and say "is the intention of the parties to convey a royalty interest as distinguished from a mineral interest 6. Law of Capture a. Owner of Blackacre: owner of the mineral interest, has the right to all oil & gas produced on the leased premises, even if some of the oil & gas lease was sucked form his neighbors land or the unleased premises. b. The rule is tempered/subject to the fact that all produced gas and oil must be in compliance w/ fed & state law regulations protecting waste such as maximum quantities which may be produced in a given month (correlative rights) 7. Ownership of Oil and Gas at the surface a. Once oil & gas comes to surface it becomes personal property and even if it escapes from the owner (say after put in storage underground) then, they still own it b. It is not longer subject to the law of capture (i) This means they could be subject to liability if it escapes and damages other property or contaminates water supplies (ii) They can sue for conversion if someone else then takes it 8. Ownership of Pore Spaces of exhausted reservoir a. Split of authority (i) Trend toward view that those spaces are owned by the severed surface owner (ii) OK: surface owner if the Sup Court was to answer it, but not case on this issue yet b. American Rule: pore spaces of exhausted reservoir owned by severed surface owner c. Answer matters because storage rights of the gas produced is important and so if can own the empty reservoir by getting rights from the owner then can store it there d. Prudent to get permission from both mineral and surface owners 9. Severed MI owner's dominant estate a. When the surface & mineral estates are severed, the dominant estate belongs to the severed mineral interest owner b. This gives him or his lessee the right to come onto the surface and use so much of it as is reasonably necessary to exploit those minerals 3 c. This is subject to the Surface damages Act, so have to pay for the damage to the surface (i) Must pay the sum of $ which represents the diminished amount of the FMV of the surface estate by reason of your use of it 10. Surface Damages Act a. Provisions (i) Lessee must give written notice to landowner saying when, where, how much land (ii) Must engage in good faith effort to arrive at agreement about damages before move in heavy equipment, w/in 5 days after notice (iii) If cant come to agreement then get appraisers * Each party gets appraiser * 2 appraisers then choose a 3rd * All 3 file report w/ court * If report not satisfactory can have judge sua sponte make exceptions * If still not worked out then can have jury trial on damages but get stuck with jury award and if less than appraisal report must pay other sides fees b. Surface Damages Act supersedes any conflicting common law rights c. Appraisers (i) Appraiser to determine diminution of FMV that has occurred and will occur due to oil company use of surface (ii) Personal inconvenience not taken into account unless affects FMV (iii) Can consider diminution in value of land beyond that used if oil & gas production have direct impact on entire parcel (irrigation for farm totally useless now) (iv) NO prejudgment interest d. OSDA does not apply to exploration damages, only drilling & production operations e. Groundwater Use (i) Under Groundwater Act, OWRB won't give permit "to an applicant who does not own land or have valid lease on land where well to be located (ii) Oil & gas lessee has to have a water lease then from surface owner in order to use the groundwater f. Calculating Damages to the Land (i) Appropriate measure of damages depends on if damages temp or permanent * If damages permanent: then diminution in value: different in FMV w/o contamination/use and with contamination/use * If temporary: cost of remediation, BUT if costs of remediation exceeds diminution in FMV, then diminution becomes the measure of damages g. TX: SDA not valid in TX, but if damage surface in extracting minerals, then liable for all damages! 4 

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