Oil and Gas Law in a Nutshell
Author:
Lowe, John S.
Edition:
7th
Copyright Date:
2019
29 chapters
have results for Oil and Gas
Appendix of Forms 443 98 results (showing 5 best matches)
- Lessee, at its option, is hereby given the right and power to voluntarily pool or combine the acreage covered by this Lease, or any portion thereof, as to the oil and gas, or either of them, with other land, lease or leases in the immediate vicinity thereof to the extent hereinafter stipulated, when in Lessee’s judgment it is necessary or advisable to do so in order to properly develop and operate said leased premises in compliance with the Spacing Rules of the Railroad Commission of Texas, or other lawful authorities, or when to do so would, in the judgment of Lessee, promote the conservation of oil and gas from said premises. Units pooled for oil hereunder shall not substantially exceed 80 acres each in area, and units pooled for gas hereunder shall not substantially exceed 640 acres each in area plus a tolerance of ten per-cent thereof in the case of either an oil unit or a gas unit, provided that should governmental authority having jurisdiction prescribe or permit the creation...
- The term “agreed share” as used herein means _______. Royalties to be paid by Lessee are: (a) on oil, the value of the agreed share of that produced and saved from said land. It is mutually agreed that the value shall be the price currently offered or paid by Lessee for oil of like gravity and quality in the same field. The volume of oil upon which royalty payments are based may be determined either by metering and sampling or by tank gauges. After such measurement, all or any part of the oil may be transported to locations on said land or other lands and commingled with oil from other lands. Lessor may at any time or times, upon 90 days written notice to Lessee, elect to take Lessor’s agreed share of oil in kind, in lieu of such ...provided that such election must be for a period of at least one year, and upon such election Lessor’s share shall be delivered at the wells into storage furnished by Lessor or to the credit of Lessor into the pipeline to which the wells may be connected...
- If prior to discovery of oil, gas or other hydrocarbons on this land, or on acreage pooled therewith, Lessee should drill a dry hole or holes thereon, or if after the discovery of oil, gas or other hydrocarbons, the production thereof should cease from any cause, this Lease shall not terminate if Lessee commences additional drilling or re-working operations within sixty (60) days thereafter, or if it be within the primary term, commences or resumes the payment or tender of rentals or commences operations for drilling or re-working on or before the rental paying date next ensuing after the expiration of sixty (60) days from the date of completion of the dry hole, or cessation of production. If at any time subsequent to sixty (60) days prior to the beginning of the last year of the primary term, and prior to the discovery of oil, gas or other hydrocarbons on said land, or on acreage pooled therewith, Lessee should drill a dry hole thereon, no rental payment or operations are necessary...
- The royalties to be paid by Lessee are as follows: On oil, one-eighth of that produced and saved from said land, the same to be delivered at the wells or to the credit of Lessor into the pipe line to which the wells may be connected. Lessee shall have the option to purchase any royalty oil in its possession, paying the market price therefor prevailing for the field where produced on the date of purchase. On gas, including casinghead gas, condensate or other gaseous substances, produced from said land and sold or used off the premises or for the extraction of gasoline or other products therefrom, the market value at the well of one-eighth of the gas so sold or used, provided that on gas sold at the wells the royalty shall be one-eighth of the amount realized from such sale. While there is a gas well on this Lease, or on acreage pooled therewith, but gas is not being sold or used Lessee shall pay or tender annually at the end of each yearly period during which such gas is not sold or...
- If both oil and gas are discovered in said land in quantities deemed paying quantities by Lessee, then Lessee shall drill the number of wells herein provided for an oil discovery with respect to the portion of said land which in Lessee’s opinion is capable of producing oil in paying quantities and Lessee shall be entitled to retain all of said lands for the term hereof.
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Chapter 8. Essential Clauses of Modern Oil and Gas Leases 185 135 results (showing 5 best matches)
- In addition, there has been confusion about the constituents of oil and gas. In the early part of the 20th century, courts in Oklahoma held that casinghead gas (gas produced with oil from oil wells) was neither oil nor gas. Therefore, a lease covering only oil and gas did not entitle the lessee to casinghead gas. More recently, a lessee successfully argued that helium is gas within the meaning of “oil and gas” as used in an oil and gas lease. See
- Oil and gas wells may produce valuable substances in addition to oil and gas. For example, helium, carbon dioxide, or sulphur may be produced with oil and gas. Lessees generally want the right to anything of value that is produced with oil and gas.
- The oil and gas lease is the core legal document of oil and gas development in the United States. An oil and gas lease is structured very differently from an ordinary real-property lease. The key to understanding oil and gas leases is (1) to identify the fundamental goals that a lessee (the oil company) has in leasing, and (2) to bear in mind the nature of the transaction between the lessor (the mineral owner) and the lessee. The first factor is important in understanding why leases are structured as they are. Courts often refer to the second factor in resolving disputes.
- To avoid disputes, most oil and gas leases cover more than just “oil and gas.” For example, the granting clause (paragraph 1) of the Texas lease in the Appendix covers “oil and gas and all other hydrocarbons.” The California and Pennsylvania leases contain similar language. The reference to “all other hydrocarbons” is intended to make clear that the lease applies to liquid and gaseous hydrocarbons even if they are not considered to be oil and gas. Other commonly used lease formulations include “all hydrocarbons and other substances produced therewith” or “oil, gas and all other minerals.” Because general references may be ambiguous, the more specific, the better.
- “Lessor . . . hereby grants, leases and lets exclusively to lessee the land described below for the purpose of [searching for, developing, and producing oil and gas] . . . together with all rights, privileges, and easements for lessee’s operations on said land and
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Chapter 5. Creation and Transfer of Oil and Gas Interests 69 71 results (showing 5 best matches)
- There is no doubt that a grant of the minerals by a mineral deed severs the minerals from the surface. But what if the grant is not by a mineral deed but by an oil and gas lease? In states like Texas that hold that an oil and gas lease conveys an estate in the oil and gas to the lessee, it is clear that an oil and gas lease severs the minerals from the surface. In many states, however, an oil and gas lease gives the lessee something less than an estate in the oil and gas—a , a profit in gross, or a license. By the logic of the common law, creating such interests probably would not sever the minerals from the surface. Professors Howard Williams and Charles Meyers argued, however, that an oil and gas lease should be treated as a severance of the minerals from the surface for purposes of adverse possession because the rights of entry and use given by an oil and gas lease are substantially identical to those of a mineral deed.
- How much oil and gas does A earn? Does A become owner only of the oil and gas that will be drained by the well he has produced? Does A earn title to all of the oil and gas in the formation under the spacing unit, which may cover an area larger than that the well actually drains? Or does A acquire title to all of the oil and gas in the formation under the entire 640 acre tract? Finally, what about oil and gas in deeper (or shallower) formations not being produced by the adverse possessor’s well? Are they earned?
- Disputes over delivery and acceptance are more common in oil and gas conveyancing than in other real-property conveyancing because oil and gas interests are usually created and transferred without formal “closings,” gatherings at which the deed or lease is signed, witnessed and acknowledged, and the agreed consideration paid. Often, oil and gas transactions are done by mail, or in stages. As a practical matter, the moral for grantees is “Get the deed or lease in hand.” There is a strong presumption that an instrument in the possession of its grantee has been delivered and accepted.
- Even an informal writing such as a letter may satisfy the Statute of Frauds, but oil and gas interests generally are created and transferred by formal and recordable legal documents entitled “deed” or “lease.” Oil and gas conveyances look very much like their real-property counterparts. The Appendix includes example mineral and royalty conveyances.
- Other instruments commonly used in creating and conveying oil and gas interests include assignments of interests, grants of right of way, mortgages, deeds of trust and numerous documents very much like documents used in real-property conveyancing. As a general rule, the principles of law that control real-estate conveyances govern the adequacy and effect of oil and gas instruments.
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Glossary of Oil and Gas Terms 495 117 results (showing 5 best matches)
- The fundamental principle of oil and gas law that there is no liability for capturing oil and gas that drains from another’s lands. The owner of mineral rights in a tract of land acquires title to the oil and gas produced from wells drilled on the land, though part of the oil and gas may have migrated from adjoining lands.
- The right to search for, develop, and produce oil and gas (and other minerals) from land, as well as (in some states) the right to present possession of the oil and gas in place. The mineral interest is granted by an oil and gas lease. See also and
- Casinghead Gas
- The second stage of oil or gas production, typically involving injection of water or gas or both to maintain or restore a high pressure differential between the formation where the oil or gas is located and the borehole. See also and
- Gas-Oil Ratio
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Chapter 2. Ownership of Oil and Gas Rights 13 64 results (showing 5 best matches)
- principle. They rationalized that since oil and gas were a part of the soil, the owner of the land owned the oil and gas in place, in addition to the exclusive right to explore for, develop, and produce. Ownership was limited, however, by the fugacious nature of oil and gas; the ownership right to a particular barrel of oil or MCF of gas would be terminated if the oil and gas migrated to the land of another. These courts typically characterized oil and gas rights as a estate in the land, and the right to individual molecules of oil and gas as a determinable interest that terminates automatically when they are captured by another owner.
- which require purchasers to take production in patterns that minimize drainage from one tract to another. And
- Economic waste from over-drilling is likely to lead to physical waste. Once wells are drilled, each owner will feel compelled to produce them as fast as possible to drain the reservoir before his or her neighbors, to increase the chances of recovering drilling costs, and to maximize profits. Short-term overproduction from the reservoir is likely to result in long-term total recovery of a percentage of the oil and gas originally in place than what might be achieved by slower production. The natural expansion of oil and gas toward the lower pressure in the borehole will be dissipated among many boreholes with the result that more of the oil and gas in place will be left in the formation. In addition, overproduction of oil and gas may push down the price for the product. In the early years of the oil and gas industry, that happened often. When the price dropped below the point that operating revenues exceeded operating costs, producers plugged and abandoned their wells, and the...
- Incorporeal rights can be abandoned at common law, while corporeal rights cannot. The distinction has been applied in disputes over oil and gas rights. In the classic case of , the successors in interest to two corporations that had been dissolved in 1915 sued to quiet title to oil and gas rights leased by Stephens to Shell in 1956 and thereafter profitably developed. The California Supreme Court held that oil and gas rights were subject to abandonment in California, noting that an earlier case had rejected ownership- in-place theory as the law of California. The court reasoned that oil and gas rights were a oil and gas mineral rights, leasehold rights, and royalties are all subject to abandonment in a state following the non-ownership theory. By definition, no owner of any oil and gas right can have the right to present possession of the oil and gas in place in a non-ownership-theory state.
- No correlation exists between the ownership theory embraced by a jurisdiction and its classification of oil and gas interests as real property or personal property. The distinction between the ownership theories is whether or not the owner has a present possessory right to the oil and gas in place. The distinction between real property and personal property at common law turns on the duration of the interest rather than its possessory quality. If the interest’s duration is that of a freehold estate—a life estate or a fee estate—it is real property; otherwise it is personal property. By the logic of the common law, any oil and gas interest—whether a mineral right, a leasehold right, or a royalty—is an interest in land. Whether that interest is classified as real estate or personal property ought to depend upon its duration. Interests that are for “life or longer” should be classified as real property. Interests with a lesser duration should be classified as personal property....
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Chapter 6. Joint Ownership of Oil and Gas Rights 95 66 results (showing 5 best matches)
- Both grantors and grantees of oil and gas rights need to look closely at the terms of security instruments, however. The terms of the mortgage, deed of trust, or other document creating the security interest may make the creditor’s acquiescence essential to the creation of rights in oil and gas. Many mortgages and deeds of trust contain “due-on-sale clauses”; e.g., “if the ownership of any portion of the premises shall be changed . . . then, at the mortgagee’s discretion, the entire indebtedness secured hereby shall become immediately due and payable.” Others contain assignments of proceeds; e.g., “there are specifically assigned to the mortgagee all rents, revenues, damages, and payments . . . on account of any and all oil, gas, mining, and mineral leases, rights or privileges of any kind now existing or that may hereafter come into existence.” Such provisions may not be enforceable in some states, but they are certain sources of dispute between oil and gas interest owners and...
- Another special situation of joint ownership occurs when a fiduciary holds title or exercises rights of management for a beneficiary. Fiduciaries did not have the right at common law to lease for oil and gas development or to create other oil and gas interests because of the traditional view of waste that barred any change in the state of the property by a fiduciary. Many states have changed that rule for oil and gas leasing, enacting statutes that authorize a fiduciary to lease unless the trust instrument precludes it. Most trust instruments specifically confer upon the trustee the right to lease and to create other oil and gas rights. Therefore, as a general rule, fiduciaries are able to create and transfer oil and gas rights, even though these rights may extend beyond the term of the fiduciary relationship.
- At common law, neither a life tenant nor a remainderman could develop oil and gas, grant a valid oil and gas lease, or create any other oil and gas interest without permission of the other because neither possessed the full rights granted by a lease. A life tenant has the right of present use but must conserve the estate for the remainderman. Taking minerals would diminish the estate that the life tenant must conserve, and the term of the lease (typically “so long as oil and gas are produced”) might exceed the life estate. The remainderman on the other hand eventually will have full rights to the property, but the remainderman lacks the right to present use that a lease grants.
- One frequently sees defeasible-term interests in oil and gas. For example, O may convey to A mineral rights “for 10 years and so long thereafter as oil or gas are produced. . . .” Such language gives A rights that will terminate at the end of the 10 years without production, but that will be extended by production as long as production lasts.
- Prairie Oil v. Allen
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Preface v 5 results
- Because of the value of oil and gas resources, there are numerous secondary sources and research materials available. Those that I have used in preparing this book include Eugene Kuntz,
- All things change over time, and environmental and climate concerns and growing demand will eventually cause a shift to other forms of energy. But for now, and for the foreseeable future, we live in a “petroleum world” in which oil and gas resources are likely to become more and more valuable. For this reason, commercial and property lawyers, as well as people who work in the oil and gas industry, need to understand the legal principles that control oil and gas exploration and development.
- The first oil well in the United States was drilled in 1859 to a depth of 69 feet. In the century and a half since then, the United States and the rest of the world have developed economies that are based on oil and gas as their major fuel sources. More than 35 percent of the energy used in the United States comes from oil and nearly 30 percent from natural gas. Coal, another fossil fuel, provides another 15 percent.
- I acknowledge the support of the many research assistants at SMU’s Dedman School of Law and The University of Tulsa who have helped me research and prepare various editions of this book—some now nearly as gray-haired as I am. These include Chinonso Anozie, David W. Cias, Brynna Krough, Nugent “DJ” Beaty, Eric Camp, Ashley Songer, Monika Ehrman, A. Z. Scott Goldberg, Ann Lane, Laura A. Hudock, Matthew T. McLain, Jamey Seely, Richard K. Vangelisti, Dona K. Broyles, Gregory N. Fiske, Laurie A. Patterson, David Keehn, James Arlington, Kenneth L. Wire, David P. Page, Jeffrey R. Fiske, Arthur H. Adams, Tommy H. Butler, Michael F. Miller, Joseph G. Staskal, Curtis L. Craig, Michael D. Cooke, Steve E. McCain, Harley W. Thomas, Laura E. Frossard, Mark S. Rains, Thomas J. Wagner, Charles E. Molloy, and Robert W. Kennard. Special thanks are due to Larry D. Vredenburgh, Ph.D., Norman J. Hyne, Ph.D., and Christopher S. Kulander, Ph.D., for help with Chapter 1, to John Taft Lowe, Kathryn June,
- This book focuses upon the legal rules that govern development of privately owned mineral rights in the United States. I have chosen that focus because most mineral rights in the United States are owned privately, though the federal and state governments own hundreds of millions of acres—approximately 30 percent of all mineral rights. Also, the rules for governmentally owned resources in the United States tend to be based on those for private lands.
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Chapter 3. Kinds of Oil and Gas Interests 43 31 results (showing 5 best matches)
- Oil and gas interests are generally created and conveyed like real-property interests, but the names given to the interests created may be unfamiliar even to those familiar with real property transactions. Also, the characteristics of certain interests are peculiar to oil and gas law. In this chapter we will consider commonly encountered oil and gas interests and their characteristics.
- The right to search for, develop, and produce oil and gas (and other minerals) from land, as well as (in some states) the right to present possession of the oil and gas in place.
- Under Louisiana’s civil-law regime, an owner of land does not own fugacious minerals, so oil and gas rights cannot be severed from surface rights. A may be imposed upon land in Louisiana, however, giving its holder the right to search for, develop, and produce oil and gas. A mineral servitude creates rights similar to those of a severed mineral-interest owner in a common-law state.
- Royalty interests are among the most commonly encountered oil and gas interests. A is a share of production, or the value or proceeds of sale of a part of production, free of the costs of production, when and if there is oil and gas production on the property. Oil and gas royalties are usually expressed as fractions (e.g., 1/8 of production) or percentages (e.g., 20% of production), but royalty interests for other minerals are often stated as a stipulated amount of money (e.g., $4.00 per long ton).
- As a practical matter, the mineral interest’s right to present possession of the oil and gas in place that some states recognize matters little. The only certain method of determining whether oil or gas is present is to drill a well to test the property. Therefore, the right to surface use to produce holds the real economic value of the mineral interest.
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Chapter 13. Oil and Gas Taxation 399 48 results (showing 5 best matches)
- In most respects, taxation of oil and gas transactions is consistent with general tax principles, which are beyond the scope of this book. There are at least three concepts, however, that are peculiar to oil and gas taxation and fundamentally important to oil and gas operations. They are (1) the property concept, (2) the intangible-drilling-cost deduction, and (3) depletion.
- Oil and gas taxation is usually covered in a course separate from the basic course in oil and gas law. But a basic understanding of the fundamental rules of oil and gas taxation is essential for any lawyer practicing oil and gas law in the United States, as well as for mineral owners and industry landmen or managers; routine transactions may have important tax implications. This chapter considers taxation of oil and gas operations on a transactional basis. For a more comprehensive discussion, see
- Concurrent ownership is traditionally the favored form of entity for oil and gas operations among those active in the oil and gas industry. When parties jointly own and operate properties, each owns a separate property for tax purposes, and the tax results are approximately the same as if the parties were active partners. The Tax Reform Act of 1986 contained a special provision exempting concurrently-owned working interests in oil and gas from the passive investment rules. On the other hand, liability of a non-operating party is effectively limited to the amount of its investment. The operator is treated as an independent contractor, liable for its own torts and contractual obligations. There are important and growing exceptions to this rule, however, that impose liability upon nonoperators by strict liability theory or by statute.
- Congress originally enacted percentage depletion as a special incentive to promote oil and gas production. It was broadly available and usually more advantageous for taxpayers than cost depletion. In 1975, at the height of an oil shortage, the Tax Reduction Act of 1975 repealed percentage depletion for oil and gas produced after December 31, 1974. Exceptions to repeal were provided in § 613A, however, one of which is for independent producers and royalty owners. Since 1984, taxpayers qualifying as independent producers or royalty owners have been permitted percentage depletion at a 15% rate for a total of 1,000 barrels of oil or six million cubic feet of natural gas per day to the extent of 50% of the taxable income from the property and, with certain adjustments, to the extent of 65% of the taxpayer’s taxable income for the year. In 1990, Congress modified the deduction to allow for a higher rate (16–25%) of percentage depletion for marginal properties or “stripper” oil when the...oil
- Under cost depletion, the taxpayer who owns an interest in an oil and gas property deducts the basis in the property from the income as oil and gas are produced and sold. Cost depletion is calculated by a formula set forth in
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Chapter 9. Oil and Gas Lease Savings Clauses 251 112 results (showing 5 best matches)
- Shut-in royalty clauses are usually limited to gas. For example, the language quoted above applies only to “gas wells.” The limitation arose historically because it is unlikely that an oil well will be shut in for lack of market. There are still some parts of the country where the distances are so great or the terrain so rough, however, that oil wells are shut in periodically. Furthermore, conservation commissions often prohibit operators from flaring natural gas when there is no available market for it, causing wells that produce oil as well as gas to be shut in until operators can arrange gas marketing or recycling. Finally, the distinction between a “gas well” and an oil well or an oil and gas well is unclear. Shut-in royalty clauses should be drafted to apply to both oil and gas.
- “If at the expiration of the primary term, oil, gas or other mineral is not being produced on said land, but lessee is then engaged in drilling or reworking operations thereon, this lease shall remain in force so long as operations are prosecuted with no cessation of more than thirty (30) consecutive days, and if they result in the production of oil, gas or other mineral so long thereafter as oil, gas or other mineral is produced from said land. . . .”
- Inevitably, oil and gas wells stop producing from time to time. Equipment must be repaired or replaced. Chemical reactions in the wellbore may require that the well be “reworked.” Few oil or gas wells produce constantly over their lives, so it is unlikely that lessors and lessees intend that the habendum clause requirement of “production” mean “constant production.”
- “5. If prior to discovery of oil or gas on said land Lessee should drill a dry hole or holes thereon . . . this lease shall not terminate if Lessee commences additional drilling or re-working operations within sixty (60) days thereafter. . . . If at the expiration of the primary term oil, gas or other mineral is not being produced on said land but Lessee is then engaged in drilling or re-working operations thereon, with no cessation of more than thirty (30) consecutive days, and if they result in the production of oil, gas or other minerals so long thereafter as oil, gas, or other mineral is produced from said land.” (Italics added).
- is logically unassailable. There will always be a delay between completion of drilling operations and the beginning of production. The delay may be only a few days for oil production or for production from a gas well located close to a gas pipeline. It may extend for months or years in the case of gas wells not serviced by pipelines or in times of economic recession. If an operations clause in an oil and gas lease is to have practical meaning, it should extend the lease so long as the lessee is making diligent efforts to produce and market.
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Chapter 14. Oil and Gas Contracts 419 60 results (showing 5 best matches)
- Although oil and gas contracts other than leases are not covered in most courses in oil and gas law, anyone who works in or with the oil and gas industry should be familiar with some of the types of contracts used in development and operations. These include:
- Gas division orders cannot be used to cure title defects or amend leases, as the Texas Supreme Court noted in ; they are not contracts. Oil division orders, however, have been described as an offer for a unilateral contract that can be accepted by a purchaser who takes oil and sends payment for it. That description does not fit gas division orders as they affect royalty owners, for the lessor under an oil and gas lease does not generally have the right to take gas in-kind and so cannot sell it.
- All oil and gas agreements are subject to the general rules that govern contracts. In the U.S., a promise becomes a , a legally binding agreement, only if there has been an offer and acceptance of clear and unambiguous terms relating to a subject matter that is not illegal or contrary to public policy, supported by consideration, between two persons or entities with the legal capacity to contract. Generally, oil and gas contracts must meet all the requirements for binding legal agreements.
- Gas-contract reservations provisions are the other side of the coin of commitment provisions. In a long-term contract, the reservations clause identifies what gas the producer may produce from the committed properties that it need not deliver to the purchaser. Typically, reservations clauses permit producers to provide their lessors with free gas for domestic and farming purposes if their leases so provide. Typically, also, they permit producers to use gas produced for operations on the lease premises. Reservations clauses may also give producers the right to use gas on or off the premises for oil-lifting or repressuring operations and to process gas produced to remove valuable liquids from the stream before or after delivery to the purchaser. Short-term contracts usually do not include reservations.
- Many lease royalty owners refuse to sign division orders, and courts generally hold that signing a division order is not a precondition for payment of royalty. The lease sets forth the agreement between the lessor and the lessee, and it usually says that the lessee “shall pay” royalty on gas. Oil royalty may be a different matter, however, at least practically. Most leases provide that the royalty owner is to receive oil royalty in kind. If a royalty owner has to market his or her own oil, the royalty owner will find it difficult to find a buyer who will accept it without the protection of a division order. Even if the lessee has an implied duty to find a market for royalty oil if the lessor chooses not to take in kind, it would be consistent with the language of the royalty clause to find a concomitant implied obligation of the lessor to cooperate by signing “usual” documents of transfer.
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Chapter 1. The Formation and Production of Oil and Gas 3 20 results (showing 5 best matches)
- Because crude oil, natural gas, and salt water are commonly produced simultaneously, the producer to remove the natural gas and perhaps through a to separate oil and water. The oil is then stored, piped, or trucked to the refinery, and the gas put into a pipeline. The diagram that follows shows a typical production configuration.
- Usually, oil and gas are found together and in the presence of salt water, as the result of their formation process. Where gas is produced as a byproduct of oil production, the gas is called
- Oil and natural gas are found in sedimentary rocks formed by ancient seas. The generally accepted theory for petroleum’s origin is that sediment from rivers and remains of marine plants and animals accumulated on sea floors, forming layer upon layer of sediment and organic residue. As layers were buried deeper and deeper, they were compressed and subjected to increasing pressure from the overlaying sediment. Increased pressure generated heat, which acted upon the sediment for tens to hundreds of millions of years and transformed the organic material into crude oil and natural gas.
- Oil and gas are the liquid and gaseous forms of petroleum, a chemically complex substance composed of hydrogen and carbon with trace amounts of oxygen, nitrogen, and sulphur. Petroleum occurs in gaseous, liquid, and solid states, depending upon its physical composition, temperature and pressure.
- and . When the amount of pore space is relatively large, geologists say that there is “high porosity,” meaning that the rock contains a relatively large area within which oil and gas might accumulate. Geologists describe rocks in which the pore spaces are well-interconnected, as highly “permeable.” High permeability is as important to oil and gas production as high porosity, because permeability permits petroleum, which is lighter than water, to float upwards through the original seawater contained in the pores of permeable rocks, to collect, and to flow towards a borehole.
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Chapter 11. Implied Covenants in Oil and Gas Leases 335 84 results (showing 5 best matches)
- Problems with the implied covenant to market usually involve the sale of natural gas rather than oil. One reason is the difference in the physical characteristics of oil and gas. Oil is easily stored, and usually is sold on a “spot” basis from the storage tank or pipeline in which it is placed after production. Until the mid-1980s, almost all gas produced was sold into pipelines under long-term contracts. There were often delays of several years between completion of a gas well, negotiation of a gas contract, and extension of pipelines to take the production. Even today, a significant portion of the natural gas marketed is sold under contracts ranging in duration from a few months to several years, rather than on a true “spot” market. Another reason that most marketing-covenant problems involve gas rather than oil is that lease royalty clauses generally provide for payment of oil royalty in kind, so that an unhappy lessor can make his or her own arrangements for sale. In contrast,
- “After the discovery of oil, gas, or other hydrocarbons in paying quantities on the lands covered by this lease, or pooled therewith Lessee shall reasonably develop the acreage retained hereunder, but in discharging this obligation Lessee shall not be required to drill more than one well per eighty (80) acres of area retained hereunder and capable of producing oil in paying quantities, and one well per six hundred forty (640) acres of the area retained hereunder and capable of producing gas or other hydrocarbons in paying quantities, plus a tolerance of ten percent in the case of either an oil well or a gas well.”
- Professors Howard Williams and Charles Meyers suggested a synthesis of these theories. They argued that covenants are implied both in fact and law from the contract-law principle of cooperation, which requires that parties to a contract cooperate to achieve its purposes. Because an oil and gas lease is a contract as well as a conveyance, the principle of cooperation requires certain conduct of the parties both as a matter of public policy (implied in law) and because the conduct was probably intended by the parties when they formed the contract (implied in fact). Others have explained implied covenants as a manifestation of the relational-contract nature of an oil and gas lease. Relational-contract theory proposes that since the long-term nature of oil and gas leases subjects lessors and lessees to complicated contingencies and unforeseen risks, the parties seek to establish a relationship for mutual benefit, and the lease contract becomes a framework for negotiation and resolution,...
- Some predict that implied covenants will become less important as lessors become more sophisticated and demand express covenants. Clearly, increasing oil and gas prices, which have led to higher bonuses and royalty percentages, cause lessors to pay closer attention to lease terms offered them and draft alternatives. To the extent that oil and gas leases are
- The implied covenant to market imposes upon a lessee the duty to use due diligence to market oil and gas produced within a reasonable time and at a reasonable price. The reasonable and prudent operator is a business person, and will seek to maximize profit. The implied covenant to market requires a lessee to use the diligence of a reasonable and prudent business person in finding a market and negotiating a sale.
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Chapter 7. Interpretive Problems in Oil and Gas Conveyancing 125 123 results (showing 5 best matches)
- The grant or reservation is of oil and gas “in and under and that may be produced from” or “in and under said land” or other language that describes oil and gas in place;
- The grant or reservation is of oil and gas “produced and saved” or “produced, saved, and marketed,” or other language that describes oil and gas after it has been produced;
- —general words that follow specific words are limited to things of the same kind or class as those specifically stated, so that a reservation of “oil, gas, and other minerals” reserves other minerals “like” oil and gas;
- —the actions of the parties contemporaneous with or subsequent to the conveyance are considered to establish the intention of the parties. If the negotiations concerned only oil and gas rights, only substances produced in conjunction with oil and gas are “minerals”;
- A different rule is usually applied to royalties on oil and gas production. In most states, lease royalties are not apportioned among the owners of subdivided property. Instead, the owner of the tract where the well that produces the oil and gas is located is entitled to all royalties due under the lease.
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Chapter 10. The Lease Royalty Clause 305 57 results (showing 5 best matches)
- The provisions for oil royalty assume that the lessor will be paid royalty provisions for gas royalty assume that the lessee will dispose of production and then compensate the lessor with a percentage of value or the proceeds of the sale. The difference in structure reflects both the physical and economic differences between oil and gas. Oil can generally be stored on the leased premises and sold periodically. It is generally not practicable, however, to store natural gas at the well. Furthermore, regardless of the purchaser’s identity or the length of the contract, the general rule is that the more gas one is able to commit to a contract, the better price one is able to obtain (or in a time of gas surplus, the more likely one is to obtain a purchaser). Therefore, gas royalty provisions in oil and gas leases commonly provide that the lessor will receive royalty in cash rather than in kind because that benefits both the lessee and lessor.
- obligations under an oil and gas lease,” but “may be used to clarify royalty settlement terms in the oil and gas lease.” What does that mean?
- The majority analysis has been that “production” occurs for royalty-calculation purposes when oil or gas is captured and held—at the wellhead or on the lease. By this view, the costs of transporting, compressing, and processing or cleaning, as well as severance and gross-production taxes, are charged proportionately against the royalty interest where gas is sold or valued “downstream” from the lease.
- “The royalties to be paid by Lessee are as follows: On oil, one-eighth of that produced and saved from said land, the same to be delivered at the wells or to the credit of Lessor into the pipe line to which the wells may be connected. Lessee shall have the option to purchase any royalty oil in its possession, paying the market price therefore prevailing for the field where produced on the date of purchase. On gas, including casinghead gas, condensate or other gaseous substances, produced from said land and sold or used off the premises . . . the market value at the well of one-eighth of the gas so sold or used, provided that on gas sold at the wells the royalty shall be one-eighth of the amount realized from such sale.”
- A key to understanding royalty disputes is to note that a lessor’s royalty historically been calculated at the well (where oil or gas is captured) while major markets—particularly for gas—are now often “downstream” from the well. Where royalty is due to the lessor in kind on the lease, as the oil royalty generally is, or where a lessee sells to an unrelated third party at the well, there are relatively few disputes. But where royalty is in cash and must be calculated based upon a hypothetical “market value” or by working back from the proceeds of a downstream sale price, disputes between lessors and lessees arise inevitably and often. The restructuring of the marketplace that occurred when oil and gas
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Chapter 4. Protection of Oil and Gas Rights 57 21 results (showing 5 best matches)
- Drilling an oil and gas well is the only sure way of “proving” a property. Drilling a dry hole or a poor well may “condemn” a property or a formation for oil and gas development by proving that commercially profitable amounts of oil and gas are not present. When that happens as a result of a trespass, the law permits a mineral owner to recover from the trespasser the damages the trespass has done to the lease value of the property.
- Martel v. Hall Oil Co., 253 P. 862 (Wyo. 1927)
- The final remedies for an owner who has suffered trespass are to eject the trespasser and demand compensation for the conversion of oil and gas production. The measure of damages depends upon whether the court finds that the trespass was in bad faith or good faith.
- The law of trespass against oil and gas rights is an application of the rules that apply to real property. If an oil and gas trespasser is found to have acted in bad faith, the trespasser is permitted no set off for expenses incurred or benefits conferred. Improvements upon the property and all income from them belong to the owner. Furthermore, unless the owner demands it, the trespasser will not be permitted to plug and abandon a well capable of commercial production; that would be waste. Most courts, such as the Alaska Supreme Court in willful and the facts as to motivation are within the control of the trespasser. Some courts, however, such as the Oklahoma Supreme Court in
- Because of the nature of the remedies, damage to lease value, slander of title, and assumpsit are claims that owners generally assert when trespass damages the economic value of the property. Where a trespasser benefits the property, as occurs when a trespasser discovers oil or gas in profitable quantities, owners typically prefer to assert conversion and ejectment. In appropriate circumstances, any of the remedies discussed may impose heavy burdens on a trespasser and provide an important negative incentive for the oil industry to respect the property rights of others.
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Table of Cases xxv 66 results (showing 5 best matches)
Outline 56 results (showing 5 best matches)
Chapter 12. Lease Transfers 383 25 results (showing 5 best matches)
- Oil and gas lease interests are frequently transferred. Oil companies trade leases to put together “blocks” that they can more efficiently explore and develop. Promoters often assign fractional working interests to investors who put up the money for drilling. The landman who acquired the lease, the geologist who developed the prospect, or others who were instrumental in structuring the venture may receive overriding royalties or other nonoperating interests as compensation. This chapter will discuss common problems presented by transfers of lease interests.
- Courts generally treat interests created from oil and gas leases as interests in real property. Interests are freely assignable unless reasonable limitations are imposed by the terms of their creation. Therefore, even without provisions in the lease expressly permitting assignment, a lessee may generally transfer all or any part of its interest.
- The conceptual difficulty is that the original lessee/later assignor cannot claim the protection of the covenants implied in an oil and gas lease. Lease implied covenants benefit the lessor and burden the lessee. Thus, if courts are to protect the original lessee/later assignor they must imply covenants from the lease assignment. Courts have been reluctant to imply covenants in assignments because an assignment is usually a “pure” conveyance and a transaction between sophisticated persons.
- Some jurisdictions have applied the assignment/sublease distinction to transfers of oil and gas leases. When the lessee has assigned the lease for less than the entire remaining term or reserving a right to reenter or an overriding royalty interest, some courts have held that a sublease is created rather than an assignment. Louisiana recognizes the distinction routinely. The distinction has been largely ignored by courts in other states, however, because it is not recognized by the customs and usages of the industry.
- Is a lease transferee entitled to protection from covenants of warranty implied in the assignment from the original lessee? The transferee is protected by the covenant of warranty of the lessor found in most oil and gas lease forms, but the language of an assignment generally does not support implied covenants of title. The language of assignments may differ substantially, however, and in some states the use of particular words of grant may imply some covenants. Therefore, assignments of leases often specify whether covenants of title are intended.
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Index 525 25 results (showing 5 best matches)
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- and the Nutshell Logo are trademarks registered in the U.S. Patent and Trademark Office.
- The publisher is not engaged in rendering legal or other professional advice, and this publication is not a substitute for the advice of an attorney. If you require legal or other expert advice, you should seek the services of a competent attorney or other professional.
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- Publication Date: July 3rd, 2019
- ISBN: 9781640201156
- Subject: Oil and Gas Law
- Series: Nutshells
- Type: Overviews
- Description: This text provides authoritative coverage of the legal rules that govern the development of privately owned mineral rights in the United States, which often also apply to government-owned resources. It covers topics such as the nature, protection, and conveyance of oil and gas rights, leasing, and taxation. The 7th edition tracks recent developments in the law and expands Appalachian coverage.
