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Oil and Gas

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QuestionAnswer
Real Property -incl. petroleum as it is found in cavities of rock, coal in ground unmined, sand or gravel while in its original bed, etc. -severed mineral, royalty, & leasehold interests, for the duration of a freehold estate. -10yr SoL
Personalty -Turns upon duration of interest -Oil & gas rights=real property cuz of potentially perpetual duration but once produced oil & gas are personalty
Net Profits Interest -entitles a person to a share of the proceeds from production in the oil & gas field -analogous to a nonparticipating royalty which, when "accured" is personal prop -"unaccrued" royalty interests are real prop -SoL=4yrs
Theories of Mineral Interest 1. Nonownership Theory 2. Ownership in Place (Colorado) -WY hasn't clearly adopted either rule, nore has the distinction involved legally significant consequences
Nonownership Theory -No person owns oil & gas until it's produced. -Landowner=incorporeal right to explore for, develop, & produce oil & gas, but ownership is established by production
Incorporeal Interest -an estate granted by an oil & gas lease which authorizes only the right to use land -these rights can be abandoned
Ownership in Place Theory -Landowner owns all substances, incl. O&G, which underlie her land, subject to rule of capture by adjacent landowners. -Rights to O&G are corporeal in states that have adopted this theory
Corporeal Interest -is an estate in land which includes the right of possession of the land, similar to title -these rights cannot be abandoned
Coalbed Methane? -Many crts=ownership in place -WY S.Crt=rejected this method as inconclusive $ noted that both ownership in place & rule of capture juris, crts have concluded that gas owner entitled to all gas it can capture, yet the coal owner owns the coalbed methane
Coalbed Methane: Federal Interest -U.S. S.Crt=congress did not intend the term "coal" to include coalbed, in determining intent of Congress in reserving "all coal" from lands patented under the Coal Lands Act of 1909 & 1910
Rule of Capture -a landowner acquires title to O&G prodcued from wells properly drilled on his land, even when production drains O&G from under adjoining owner's land w/out consent of owner of those lands. -Landowner doesn't incure liability to adjoining owner for damag
Correlative Rights -Limitation on nonliability under rule of capture-opportunity given owner of each prop in pool to produce, so far as it's reason'ly practicable to do so w/out waste, the owners just & equitable share of the O&G/both -Duty to not injure pool or cause wast
Owners Correlative Rights Owners, in common source of supply enjoy Right against: 1.waste of extracted substances; 2.spoilage of common source of supply 3.malicious depletion of common source of supply & 4.right to fair opportunity to extract just & equitable share of O&G in
Other limitations on Rule of Capture -Conservation Laws: dealing with well spacing, pooling, unitization & waste-preventing measures -O&G Conservation Act of 1951 purpose=prevent waste to protect correlative rigths, modification to Rule of Capture
Mineral Interest Estate -Estate in fee simple in & to the minerals -May consist of: entire, fractional in mineral interest, or interest in indiv'l minerals in fee, fee simple defeasible, or estate for life/term of years
Mineral Estate Interest: Severed Mineral Fee -Possession of surface doesnt automatically give landowner poss. of minerals -Landowner may create separate estates in fee simple/lesser estate in surface & mineral estate (severed mineral fee) -horizontal or vertical -2 estate created: Mineral & Surfa
Methods of Severence Mineral estate can be severed by: A deed 1.conveying the minerals or interest in the minerals 2.conveying the land but reserving or excepting an interest in the minerals 3.a land K excepting the minerals, or 4.a jdgmt of the crt
Effect of Severence -grantee of mineral estate acquires the interest of landowner/grantor, which is the exclusing right to enter upon the land, explore for, & extract all of the O&G -owner of minearl right holds executive right
Conditions for Entry on land for O&G operations 1.O&G operator providing req'd noitce 2.O&G operator attempting good faith negotiations 3.Securing written consent or waiver of surface owner for entry onto land; & 4.obtaining an excecuted surface use agrmt providing for comp to surface owner for dama
Notice to Enter Land -to all surface owners:written notice of proposed O&G operations. -must disclose plan of work & operations to enable surface owner to evaluate the effect of O&G operations on surface owners land. -must be given not > 180 days or < 30 b4 commencement
Notice must also contain: 1. The dates on which planned operations will begin 2.the proposed facility locations & access routes related to oper includ locat of roads/well/well pads/seismic locat/pits/reservs/ pwr lines/pipelines/compressor pads tank batteries/other facilities
Notice must also contain: cont... 3.names/address/telephone and fax #s & email of the O&G operator 4. an offer ot discuss & negotiate in good faith any proposed changes to the proposed plan of work, & 5. a copy of the Act
"Split Estate" Statute (the Act) -an attempt to resolve the difference btwn the surface owner and mineral estate owner -Right to Enter Land -Notice to Enter Land -Surface Use Agrmt -Application for Drill Permit -Damages -SoL: 2yrs after damage discovered/shouldve been
Surface Use Agreemtn -after notice is given, the parties must attempt good faith negotiations to reach a surface use agrmt to protect the surface resources, reclamation activities, timely completion of reclamation of the disturbed prop and pymt for damages caused by O&G opers
Application for Drill Permit -Prior to applying for permit, an O&G operator must file a statment w/ the commission including the surface owner's name, contact address, telephone #, & other relevant info, certifying notice of the O&G operations was given, & parties attempted GF neg.
Dedicator Retains Rights -a statutory dedication involves a severance of the surface & mineral estate of the street on dedication -dedicator of land to city for streets and twons retains the mineral rights
Costs of Production -Lessee is responsible them -all costs incurred for exploration, development, primary or enhanced recovery, abandonment operations, or transporting the oil to the storage tanks or the gas to market pipeline.
Consideration -in an O&G lease often consists of an agrmt to deliver to the LR a share of the product (royalty) as well as cash at exectuion of the instrument (bonus), plus annual delay rentals. -LR can take consid in kind
Volumetric Production Pymt -Producer sells its prdoduction for a limited duration in exchange for capital funds. Buyer receives a share of the O&G produced for a limited time, free of the costs of production. -Its production pymt interest is a real prop interest of limited duratio
Bonus -a pymt to induce a LR to execute a lease stricly representing cash consideration or a down pymt; the term also includes an amt pd or agreed to be pd for an extension of the O&G lease
"Gathering" to collect gas and move it to a pt where it can be processed or transported for use -all costs associated with that acticity are costs of production and non-deductible from royalties
Time -proceeds derived from sale of production from any well producing O/G must be pd to persons legally entitled to them no later than 6mos after the 1st day-of-the-month following date of the 1st sale. Interest of 18% per annum will be assessed on late pymts
Types of Royalties -Landowner Royalty -Overriding Royalty -Nonparticipating Royalty -Perpetual Royalty
Royalty Defined -the mineral owners share of production, free of the costs of production
Landowner Royalty often 1/8 of the product is reserved to the owner for permitting another to develop the resource
Overriding Royalty -a share of the production, carved out of the lessee's interest under an O&G lease
Nonparticipating Royalty Characteristics: 1. such share of production is not chargeable w/ any of the costs of discovery & production owner has no right: 2. to do any act or thing to discover & produce the O&G 3.to grant leases, & 4.to receive bonsues or delay rentals
Perpetual Royalty -is one not limited to time
Lessee's Financial Responsibilities -LE is entitled to drill & operate wells under an O&G lease, paying the LR a royalty & retaining the remainder, the working interest. LE pays all costs of production out his interest.
Lessor's Financial Interest -the mineral owner who has executed a lease is entitled to pymt of a royalty on production. -LR's interest is free & clear of production costs
Concurrent Ownership: Rights of Co-Tenants -co-tenant has pwr to lease & develop concurrently owned interests, must accnt to other co-tenant their proportion of net value(market value less cost of extracting & marketing) -can't exclude other co-tenants from exercising same rghts to develop & leas
Rights of Lessee -lessee becomes co-tenant with other co-tenants of lessor -upon production, lessee must accnt to any nonconsenting co-tenant for that perons proportionate shsare of production less the proportionate share of reasonable & legit expenses
Partition 2 Types: Voluntary & Compulsory (judicial) partition 2 Methods: 1)In-Kind and 2)sale & division of proceeds
Voluntary Partition -by written agrmt or exchange of deeds
Compulsory (judicial) Partition -if there has been no development, partition is a matter of right -the fact that division of prop will result in great heardship & inconvenience is no reason for w/holding partition -proof of fraud or oppression may support denial of partition
In-Kind Partition -allocates specific portions to each owner & should be equitable -question of equality is primarily one of whether petroleum product, if any, underlie the lands equally
Sale and Division of Proceeds -if the presence of minerals is known, the uncertainty of values as to the actual location precludes the partitioning of the actual land in kind, and instead, the land must be sold and proceeds divided
Successive Interests -life tenant doesnt have rght to develop minerals (absent special circs) it is cons'd waste as to remainderman -LT entitled to income from rents/royalties from to lease -LT & future interest owners may ratify lease & agree upon division of proceeds
Successive Interests Cont -if there is neither consent nor facts giving rise to estoppel, the nonjoining owners of a future interest has been held entitled to recover all proceeds of development
Open Mine Doctrine -LT receives all royalties from wells producing under a lease in existence at the time the life estate came into being
Grant -if owner owns the surface and 100% of minerals, a warranty deed of land w/out any exceptions or reservations conveys land & all mineral rights -all itnerest of grantor pass to grantee unless specifically excluded
Reservations -res of an exclusive & unrestricted mining right is in effect a severence of the mineral estate that creates a fee simple estate in minerals in place
Reservation for Minerals Inplace -it's a reservation of an estate
Reservation of Right to enter and take minerals from land -it's an incorporeal right and doesn't give title unless minerals are mined
Reservation of Minerals on State-Owned Land -In Wyoming, all minerals on state-owned public lands are reserved to the state by statute
Overconveyance -occurs in transactions in which total of the fractions reserved & conveyed is greater than 100% -problem arises when there is a warranty deed -if a quitclaim deed is used, GR would've coveyed only his interest, so the Grantee would have fewer expectati
Overconveyance: Duhig Rule --if a grantor doesn't own a lare enough mineral interest to satisfy both a grant & a res of minerals in a warranty deed, the grant must be satisfied first because the obligation incurrred by the grant is superior to the res
Duhig Rule Cont... -doesn't apply to leases -proportionate reduction cluase takes care of the issue of overconveyance in leases
Royalty Grant -Language: "oil and gase produced and saved"=nonparticipating royalty interest
Mineral Interest Language= "in and under"
Surface and Subsurface Trespass -Bad faith trespasser is liable for the value of minerals produced at the surface, not entitled to offset costs of drilling well -Good Faith trespasser liable for value of minerals before production, usually given credit for drilling costs
Burden on Trespasser -to prove good faith -Test: INTENT: ask -did trespasser give notice of adverse claim b4 entry & drilling? -was drainange from adjacent land taking place? -was trespasser's belief, had right to drill reasonable? -did trespasser rely on advice of couns
Burden on Trespasser -before receivng credit for drilling costs, GF trespasser must show the prop has been improved (benefit to rightful owner) and enhanced by his actions.
Atty Fees -Pentalty interest and atty's fees set forth in the Royalty Pymt Act do not apply to mineral trespass actions, w/out a pre-existing legal relationship--WY
Dry Hole -may damage land's lease value for O&G development by proving that there are not commerically profitable amts of O&G present, & a trespasser could theoretically be held liable for such damage if there are specific offers to lease the prop
Subsurface Trespass -Underground trespass occurs if a driller bottoms his well outside the surface limits of his tract (because of technology-this tresspass will become willful) -O&G Commission regulates drilling & spacing
Geophysical Trespass -Exploratory rights belong to mineral holder -Look at language in lease to determine whether a lessee has an exclusive right to explore & produce -WY-fed & state lessees do not have exclusie rights to make geophysical surveys -unauth info obtained=dama
Adverse Possession of Surface -if no severance of surface & mineral estates occurs, an adverse possessor's title will mature in both surface and mineral rights -if minerals have been previously severed from surface, adverse possession of the surface will not adversely possess mineral
Adverse Possession of Minerals -adverse possession requires: actual, open, notorious, exclusive, and uninterrupted working of the minerals for a stautory period of 10yrs (SoL doesn't begin to run until landowner knows or has reason to know of the trespass)
Adverse Possession of Severed Minerals -by mining operations (exploration & production) -Crts are split on whether drilling for O&G or other subsurface activity on a small part of the tract is constructive adverse possession of the entire mineral estate.
Judicial Interpretation of Oil and Gas Lease -consider leaes as contract, so when interpreting, one must look to the intent of the parties, to the language, to the four corners of the instrument, and to toher principles of construction fo Ks
Interpretation: Ambiguous Mineral Contracts -Intention is controlling -Intent determined by: 1)the terms of the instr. if the language is clear and unambiguous 2)rules of construction if there is a doubt as to intention or 3) parol or other extrinsic evid if instr is ambiguous
Interpretation: Unambiguous Mineral Contract -when the agrmt's language is clear and unambiguous, the WY Suprm Crt considers the writing as a whole, taking into acct relationships btwn various parts
Interpretation: Coalbed Methane WY Suprm Crt ruled that, in an oil and gas lease, the general intent of parties to the conveyance must be given effect. The ultimate conclusion regarding each minearl contract may vary
Implied Covenants -highly developed crt-imposed law which are as much a part of the lease as an express covenant -no covenants can be implied by conveyance in real estate "other than a conveyance of oil and gas or other minerals"
Common Implied Covenants -Implied Covenant: 1)to protect from drainage 2) of reasonable development and further exploration 3)to market the product 4)to conduct operations with reasonable care and due diligence
Implied Covenant to Protect from Drainage -obligation is on lessee -protect lessor from permanent loss of O&G due to migration of the hydrocarbons from leasehold to neighboring land -obligation is limited by Prudent Operator Rule
Prudent Operator rule -states that the lessee has no implied duty to drill an offset well if a reasonably prudent operator would not drill one
Implied Covenant of Reasonable Development and Further Exploration -Reasonable development=further drilling in known producing formation-strike a balance btwn lessor's interest in rapid production of minerals and the lessee's interest in reduced drilling and operating costs -Burden on Lessor to prove lack of
Implied Covenant to Market the product -when operator is unable to market the product because of the lack of an available market or pipeline connections, no forfeiture results if the operator exercises due diligence in finding a market w/in reasonable time
Implied Covenant to Conduct Operations w/ Reasonable Care and Due Diligence -catch-all provision covering acts or omissions not included in the more specific implied covenants; the duty is generally to accomplish the purposes of the lease
Created by: sachav3