Oil & Gas Outline - 1

Oil & Gas Outline - 1

OIL & GAS

I.Background

Recoverable Reserves 1989
Country / BB Barrels
US / 27
Mexico / 54
USSR / 59
Saudi / 255
Other OPEC (Abu Dhabi, Ecuador, Indonesia, Iran, Iraq, Kuwait, Nigeria, United Arab Emirates, Venezuela) / 504
(about  world reserves)

1

A.Reserves

1.production figures not significant in the long runreserves arewho can keep producing

2.defined as recoverable reserves

a.oil in the ground

b.technology (ability to produce oil in the ground)

c.cost of production compared to selling pricerecoverability increases with decrease in cost of production or increase in selling price

(1)increase in price increases recoverable reserves

(a)exploration

i)Alaska National Wildlife Refuge

ii)offshore

(b)drilling

(c)more expensive recovery technology

i)research

ii)use

(2)continuing production important

(a)once shut-in, danger of build-up of migrating hydrocarbons (natural gas)don't want explosion at the surface or invasion of water supply

(b)regulations require plugging to avoid safety hazards and environmental damage

B.Policy Issues

1.do our legal arrangements support efficient use of reserves (the most oil for the longest time)?

a.private law

b.regulations

2.other goals?

3.do you adapt legal system to underground structure and technology or force operations to conform to legal system?

a.ex: pocket formations with different surface owners most efficiently recovered by horizontal drilling

C.Reservoirs

1.origin of oil

a.theories

(1)organic theory: over millions of years, accumulation of microscopic plants and animals in shallow seas were overlain with silt; sank; heat, pressure, and chemical reactions led to complex hydrocarbons that separated into natural gas and petroleum; continued pressure on petroleum caused it to migrate into secondary source rock; oil migrated a second time into reservoirs

(2)inorganic theory: lightest and simplest hydrocarbon is methane (component of natural gas); methane on Jupiter's moon and in meteorites where there is no bacteria, so methane must be a building block of the universe and part of the earth's original components; methane probably at the earth's core; also subject to heat and pressure and migrated

b.which theory you believe makes a difference where you look

(1)under (1), only look near old, shallow sedimentary beds

(2)under (2), if you go deep enough, you'll find it anywhere

2.productive petroleum reservoir requires zone of permeable and porous rock

a.zone because oil and gas saturates rock (need a trap)

b.permeable: spaces between rocksallows flow

(1)tight sands: highly impermeable; very little space

c.porous: absorbent

3.substances in reservoir

a.gas

(1)free gas (absorbed in limestone or sandstone)

(2)gas cap

(3)solution gas (absorbed in oil, similar to carbonated drinkreleased by uncapping/drilling)

b.oil

c.water

2

4.drives

a.gas drive

(1)if gas released:

(a)oil more viscous and more difficult to produce

(b)pressure gone

(2)ergo, drill into oil so gas expands (downward), pushing oil out

(a)drill into oil: 35-50% produced

(b)drill into gas: 10% produced

b.water drive

(1)water pressure pushes oil to surface

D.Drilling Operations

1.Drilling Mud: clay, water, and chemicals pumped into well while drilling:

a.lubricate drill bit

b.circulate through the wellbrings up rock particles being drilled out

c.helps prevent blow outslikely to run into little pockets of oil or gas under enormous pressure; if drilling through the pocket, don't want gas bubbling up through it, so use fairly heavy mud

2.Enhanced Recovery Operations

a.secondary recovery:

(1)reinjecting natural gas

(2)waterfloodingpushing salt water into well, moving oil toward other wells

(3)firefloodingstart a fire in the hole to decrease viscosity

b.tertiary (enhanced) recovery:

3

(1)thermal recovery: steam injection through lateral extensions of previous well to thin the oil; very expensive

(2)miscible recovery: inject chemical decrease viscosity and separate chemical back out after recovery

(3)surfactant recovery: detergent effect to separate oil from grain of rock

II.RULE OF CAPTURE

A.Rule: Get Everything from Well Bottomed in Your Land, Even if Draining Neighbor

1.includes using technology to recover as much as possibleTyner (dropping nitroglycerin into well)

2.can't damage neighbor's surface

a.Tyner enjoined nitroglycerin use on surface

b.Rylands v. Fletcher explosion that causes fractures on neighbor's land is inherently dangerous activitystrict liability

c.maj: fractures and shock waves aren't physical intrusion, so no trespass

d.Geo Viking v. Texlee Operating when fracking fails, damages only for predicted increased oil production from under client's land, not neighbors because fluid being pushed under neighbor's land

(1)damages holding, not trespass suit

(2)maybe just damages too speculative beyond boundary [maybe preventing double recoveryneighbor can still try to produce]

3.if not bottomed on your land, liable for damages for trespass and may be enjoined

4.correlative rights: neighbors' rights in a common reservoir

a.can't be negligent

(1)rule of capture concerned with nonliability for correct method of productiondoesn't protect against negligence injuring plaintiff Eliff ( would have been able to produce but-for 10-year blowout caused by ;  wasted 's gas by burning it)

b.can't waste (injunction available)

(1)developed from spite-fence theory

(2)if neighbor can't get pipeline connection, can't vent just to reduce neighbor's production (no valid economic purpose)

5.limits developed due to changes in technology, knowledge

B.History

1.developed because traditional mineral law didn't workdon't own everything above and below because it moves

2.water and wild animals analogyfugaciousget it while you can

a.have exclusive right to hunt on your own land Pierson v. Post

b.could lure animals onto your land from your neighbors Keeble v. Hickeringill

4

C.Remedy: self-help onlydrill offset wells as close to first well and boundary as possible

1.result: dense drilling

D.Policy Rationales

1.judicial conveniencedidn't know where it was coming from in early 19th century

2.promote the industryincentive to exploit (albeit maybe too much incentive)

a.if you enjoin production from draining a neighbor and require accounting, may shut down exploration and development where reservoirs might cross a boundary

b.order of accounting assumes we can determine how much is therecan't tell at beginning because don't know size or shape of reservoir or whether it's draining [and don't know what technology will be by the end of production]

c.person getting accounting has to pay share of expenses and should pay additional charge for risk explorer took to find reservoir

3.even if rule doesn't make sense, too late in TX, OK, & LA where layers of law built on rule of capture

a.could have another rule where not well-developed (MA, HI, or international)

b.fairness goes to discoverer

E.Regulations try to ameliorate effects of rule of capture

1.setoff from boundary

2.spacing and density rules

III.OWNERSHIP

A.Ownership/Non-ownership States

1.distinction

a.ownership states: own oil in place, but lose title if drained

b.non-ownership states (OK & LA): not owned until produced; exclusive right to explore and produce on your own property

(1)stretched wild animal analogy too far

2.tax ramificationsnot part of property if you don't own it

a.OK fixed by statute and taxes unowned hydrocarbons anyway

b.TX responded by adopting ownership in place

3.storage ramifications

a.Hammonds (KY) not a trespass

b.Lone Star Gas v. Murchison (TX) Lone Star pumping gas into existing reservoir for storage; Murchison leased over reservoir and began producing; H: Texas is an ownership statealready produced once, so title not lost without abandonment

c.acquisition of rights to depleted reservoir:

(1)ownership statebelongs with surface because no minerals

(2)non-ownership state: went with minerals and stayed there (easement/profit)

(3)safer bet: pay both

B.fee interest: ownership of both surface and mineral rights in fee simple absolute

1.surface interest

a.all rights not included in mineral interest

b.subject to easement of mineral interest owner or its lessee to use as much of the surface when, where, and as is reasonably necessary to search for, develop, and produce the minerals

2.mineral interest (common law)

a.TX: mineral fee

b.implied easement appurtenant by necessity for surface use to search for, develop, and produce minerals

c.power to sell minerals

(1)create cotenancy if dividedeach owns undivided interest

d.right to benefits under an O&G lease (as lessor)

(1)signing bonus

(2)delay rentals: payments for maintaining the lease without development

(3)shut-in royalty: payments for maintaining the lease without production

(4)royalty: payments for lessor's share of production

e.executive right: power to deal affirmatively with minerals in manner that it affects someone else's rights (potential to receive income)

(1)severance of executive right

(a)not mere agency

(b)permanent right to execute leases that affect rights indefinitely

(c)can transfer among cotenants, but can't sever from mineral estate

(2)duty of executive to nonexecutive

(a)duty to lease before terminable interest reverts?

(b)duty to obtain highest royalty?

(c)standards:

i)just don't defraude.g., don't classify as surface damages when it bears no relationship to injury to surface and is really royalty with a different label

a)too lownonexecutive can't protect himself

ii)maj: utmost fair dealing: good faitharms'-length transaction

a)prudent landowner test: act as any other reasonably prudent landowner would act if she owned all mineral rights, i.e., would do the same thing if no other mineral interest

b)if Garcia owns a 5-year terminable interest and Smith turns down offered lease, must decide if Smith would have refused if Garcia not around Hope v. Pickens

c)if trying to wait 3 years, can't do it

d)if think offer too low and can get better, okay

e)look at whether lease consistent with others in the area

iii)fiduciary standardwhat trustee owes beneficiarymust ignore your own self-interest and only do what's in the best interest of the beneficiary

a)would have to accept highest royalty even if not best deal

b)only applies if transaction suggests fiduciary relationship (e.g., elderly grandmother gives fee with executive right)

iv)Texas appeared to take intermediate standard until Manges v. Guerra (~1986)

a)Manges v. Guerra lease covering 25,000 acres of Manges ranch; Guerra family owned nonparticipating mineral fee; Manges leased to himself for 1/8 royalty and $5 bonus (total, not per acre); Guerras get $2.50 + 1/2 of 1/8 royalty; Manges reassigned to someone else for 1/2 of production once well had paid out (1/2 of 7/8)

b)court implied fiduciary duty applied; Guerra would have won under any standard

c)now courts trying to get around Manges language and use middle standard

d)ex: Mims v. Bill similar to Guerra but not as egregious: Bills convey to Mimses and retain 1/4 of royalty; when area becomes a hot prospect, Mims lease to their son for 1/8 royaltybare minimum; 2-3 months later son reassigns lease to Henderson Clay Productsretaining 1/16 overriding royaltyif son and parents treated as unit, 3/16 overriding royalty but lease only says 1/8Bills say 1/4 of 3/16, not 1/4 of 1/8; Mimses effectively engaged in self-dealingtransferring interest in property to member of immediately familycould have leased land directly to oil companyonly purpose was limiting Mimses royalty

e)self-dealing inherently suspect; if significantly higher benefit to executive or family member, violates the duty

f)5th Cir. approach: unjust enrichmentis the benefit the executive is claiming as his alone one that would be normally shared with someone owning the type of interest the nonexecutive has Sheldon v. Exxon

3.mineral servitude (civil law)

a.right to search for, develop, and produce minerals

4.adverse possession

a.ownership state: no adverse possession because mineral owner has separate fee simple Bodcaw Lumber Co. v. Goode (AR 1923) (mineral owner hadn't been around for 30 years and hadn't authorized anyone else to explore)

(1)statute of limitations never starts running because surface owner not using mineral estatecause of action never accrues in nonmineral owner

(2)theoretically possible for either fee simple owner to adversely possess the other estate, but must possess it for the statutory period

(3)once severed, tends to stay that way

b.nonownership state: can be abandoned like easement or equitable servitude if evidence of intent not to use it Gerhart v. Stevens (CA) (mineral owners abandoned because hadn't used in decades and some evidence of intent not to use again)

(1)subject to prescription for nonuse after 10 years

(2)interrupted by good faith discovery and production operations on the land or land pooled with it

c.trend: dormant mineral interest acts

(1)if mineral owners don't assert rights in 20 years (explore, drill, or authorize someone else to), the estate terminates

(2)except for MN where terminated interest split between state and surface owner, all give mineral estate to surface owner

(3)legislative reaction to Bodcow

5.other minerals

a.reasons for controversy

(1)mineral estate valued as interest in oil and gas

(a)possible because oil and gas traded so often

(b)other minerals not paid for

(2)strip mining will destroy surface

(a)for uranium, coal, or lignite, federal law requires surface reclamation, but not for other kinds

(b)strip mines usually 6-stories deep; may cover 2,000-10,000 acres in SW and MW

(c)not just losing surface for 10-20 years until reclamationserious disruption

b.OK: narrowest constructionjust oil, gas, and what comes with it

(1)if they wanted to convey more, they would have said so

(2)problem: makes surplusagereads phrase out

c.ejusdem generistraditional rule of construction used in many states; when construing, list of specific followed by general term; general only includes things like specific terms

(1)if other minerals means minerals like oil and gas, what characteristic?

(a)other hydrocarbons (coal and lignite)

(b)fugaciousnot coal, but includes helium and gaseous sulfur; liquids and gases only, not solids

d.ambiguousdon't know what parties thought; admit extrinsic evidence of what parties intended to convey

(1)in Texas, would litigate every deedoutside of urban areas, every tract has a deed with that kind of language; deeds are from 1920s-40sparties dead

e.general intentnot practical to find specific intent of the parties, so construe by what parties in that situation generally understand it to mean

(1)any substance that has value if extracted (Professor Kuntz)

(a)in west Texaswater is a mineral; in east Texas, sand is a mineral

(b)federal government has adopted the rule for its reservationsreserved other minerals in western homesteads

(2)surface destruction test (CJ Greenhill): Smith doesn't intend for Garcia to be able to injure or destroy retained estate; if extraction by destroying the surface, not a mineral; shaft mining okay

(a)surface destruction, not just surface damage

(b)strip mining problem

i)date of deed: grant in 1950; no one dreamed of strip mining uranium or lignite 200' below the surface in 1950 because the technology didn't exist, so no intent to strip mine then

ii)current technology: if litigation in 1982, uranium is no longer strip minedextracted by drilling holes; inject highly acidic or alkaline solution to dissolve uranium ore and pump it back up

iii)TX: if at any time between severance of estates and now, strip mining may have been a reasonable way to extract, substance didn't go with mineral estate (case where no one proposing strip mining held for surface owner)

(c)problem: can't tell from deed who owns it; must know how deep and history of technology

(3)ordinary and natural meaning testif usually thought of as a mineral, it is one

(a)what people generally thinkGallup poll test

(4)Moser (Tex.)

(a)1983 opinion changed from surface destruction to ordinary and natural meaning test, but if Smith conveyed to Garcia in 1978, Smith assumed uranium belonged to him; decision seems to say it now belongs to Garciaproblem if Smith gave uranium lease within the last 5 years

(b)1984 opinion:

i)any conveyance using other minerals after 6/8/83 uses ordinary and natural meaning test

ii)any conveyance before 6/8/83 uses surface destruction test

a)can use old opinions

b)minerals: oil, gas, sulfur, uranium, gold, silver (minerals as a matter of law)

c)not minerals: sand, gravel, limestone, water, lignite (at least close to surface)part of ordinary composition of soil

(c)can't grant something you don't have, so ordinary and natural meaning test can't be applied to take interest someone has as a result of pre-1983 conveyance

i)1978 conveyance from Smith to Garcia of oil, gas, and other mineralssurface destruction test applies; because uranium would have been strip mined sometime after 1978, Smith owns surface and uranium; 1992 Garcia conveys all he owns to Morales; ordinary and natural meaning test applies to 1992 grant, but Garcia can't convey what he doesn't have, so Morales doesn't get uraniumSmith still gets it

ii)if Smith conveys oil, gas, and other minerals to Garcia in 1978, then surface only to Jones in 1992, Smith still has the uranium

(d)redefines rights of dominant and surface estate owners to protect surface owner

i)if substance named, owner of substance has implied right to use surface as reasonably necessary without compensation (except for excessive use or negligence)

ii)if substance not named, miner must compensate for injury

6.fractions

a.own land subject to fractional right and try to convey, but retain another fractional interest

(1)ex: Owen owns 1/4 of oil and gas in Blackacre in fee simple; Smith owns 3/4 of oil and gas and the surface; Smith conveys to Jones with language reserving undivided 1/2 interest in minerals; 1/2 of all minerals or 1/2 of what Smith owneddoes Jones get 1/4 or 3/8?

(2)TX: depends on whether 1/2 of land described or interest conveyed Averyt v. Grande, Inc. (although not the intent in the case)

(a)granting clause description of land almost invariably includes everything (without exception for outstanding interest), then conveyance, then reservation

(b)if it says 1/2 of minerals in land described, keep 1/2 of total; Jones gets 1/4