OIL AND GAS LAW OULINE
Spring, 2013
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Are there any environmental implications? Water use, contamination, disclosure?
o New Source Performance Standards require NESHAP review for wildcat, low pressure, and fractured wells
o When did they apply (what situations), who do they apply to, and what are the basic requirements?
What type of Ownership Interest? Mineral ownership or a lease?
o Fee interest, leasehold interest, surface interest, royalty interest, mineral interest
PART 1: PRIVATE LAW ISSUES
PART 1: Definition of Terms
I. Definition of Terms
a. Wellbore: Any hole drilled for the purpose of exploration or extraction of natural resources (oil, gas, etc.)
b. Land Ordinance Act: Defined rectangular surveys of land laid out from Prime Meridian line, based on
lines of longitude (vertical), and Base Lines on lines of latitude (horizontal)
c. Equal Footing Doctrine: Based on the premise that beds of navigable waters should not be surveyed,
because they are reserved in trust for future states
d. Tight Sandstone Formation Fracking: Pump fluid at high pressure down into cracks in rock, then pump
proppants (sand) open the cracks, then drain fluid so cracks are open for oil or gas to flow to wellbore
i. Based on hydraulic length (distance fracking fluid travels from the well), the propped length
(distance the proppants travel from the well), and the effective length (shorter distance where the
process actually improves production)
ii. Buffer Zone- enough rock between the reservoir and the well
a. Types of Ownership Interests
i. Fee Interest in Oil & Gas – own both surface land and interest in minerals
ii. Mineral Interest – Segmented interest (ownership in place- ownership of the oil and gas OR in nonownership states, the right to use the property to explore and produce)
1. Only person with mineral interest can lease out the rights to mineral
ii. Surface Interest – Interest after the mineral interest has been severed (land-minerals)
1. So excludes minerals part of the surface (like if silver vein starts on the top, person with
mineral interests can’t mine right on the surface)
WHAT POLICIES ARE IMPLICATED IN OIL & GAS LAW?
b. Promotion of Production
i. Rule of capture as opposed to the common law rule shows legislative/judicial emphasis on production
c. Efficiency
i. Prevention of waste, both physical waste of the resource (Eiliff) and economic waste through drilling
additional wells (Pattie – prioritized prevention of waste over maintaining spacing limitations
ii. Baumgartner v. Gulf Oil: Sued operator for the unit designated during the mineral interests in the field
was merged, using secondary recovery, injected water to increase pressure in the field
d. National Security: Articulated in concurring opinion in Coastal Oil & Gas
i. Want to promote domestic production to increase tax revenue locally, and energy independence
ii. Internationally, countries normally have public ownership of hydrocarbons (more like the public trust)
iii. Public good – national security issue – then society can cumulatively decide, but maybe private
ownership in US happened by accident (wanted to preserve mineral rights but didn’t appreciate where
the resources were going to be – didn’t reserve mineral rights
e. Against Forfeiture of Estate
i. Like in Pack where cessation of production wasn’t enough to end the secondary term (but minority op.)
ii. Or in Superior Oil v. Devon where court found if damages can make you whole, then no cancellation of
lease. Court’s strong preference for non-forfeiture of a lease
f. Rights of Others: Protect Property Interests and correlative rights – want the greatest good for the greatest
number, sometimes prioritize one landowner over another (Pickens)
II. PART 2: Private Ownership
WHAT OWNERSHIP RIGHTS DOES AN OWNER HAVE IN HYDROCARBONS UNDER THEIR LAND BEFORE EXTRACTION?
a. (1) THE AD COELUM DOCTRINE: THE RIGHT TO EVERYTHING ABOVE AND BELOW THEIR LAND
i. Common Law Ownership Rule- “Whoever owns the soil, owns the land below and above”
1. Surface rights determined ownership of mineral rights, limited rights to explore or drill
2. Chance v. BP Chemicals: Ad Coelum doctrine doesn’t confer absolute ownership to the
subsurface, just includes the right to exclude invasions that actually interfere with property
owners’ reasonable and foreseeable use of the subsurface
3. Browning Oil v. Luecke: Court refused to apply traditional rule of capture to a horizontal well
bore – the oil should be apportioned on the basis of amount produced from each tract
ii. Doctrine of Extra-Lateral Rights: Modifies the original maxim- owner of a lode claim can mine their
entire depth even though such veins depart from a perpendicular line in their course downward
1. Del Monte Mining: One’s lease only extends below their surface lease, does not include
subsurface territory on another person’s tract of land, so under the Ad Coelom doctrine,
wouldn’t be allowed to go beyond your sub-surface lease, BUT because of the exception under
the extra-lateral rights doctrine, allowed follow the mineral seam into neighbors sub-surface
III. THE RULE OF CAPTURE
a. But as the hydrocarbon extraction industry progressed, rights in oil and gas were subject to being lost by
drainage from operations on other land – so ownership rights were understood in light of the rule of capture
i. The rule of capture prevents the royalty interest owners of natural gas lease from recovering damages
against a neighboring well operator for trespass or conversion. A mineral rights owner has title to all
production from a lawful well bottomed on the property, even if the oil and gas flowed to the well from
beneath another owner’s tract. (Coastal Oil v. Garza – leasee later bought next tract, royalty issues)
1. Maybe something different if issue of malicious or reckless or illegal conduct (not in Kelly), but
those isn’t the facts presented. Hydrocarbons are too attenuated from surface property rights.
ii. Whatever gets into the well belongs to the owner of the well, no matter where it came from and no
matter what the driller’s intent was. Otherwise, it’s nearly impossible to tell with any certainty what
amount came from under another’s land (Kelly v. Ohio), but disagreed in Eiliff (said that once a well
has been tested and developed, possible to determine how much has been extracted)
iii. Coastal Oil & Gas v. Garza Energy. Salinas said Coastal breached their leasee’s implied covenants to
develop Share 13 and to prevent drainage by buying the neighboring lot and drilling there instead.
1. Holding: The only injury claimed was the loss of the oil and gas- but they never had the right
to that in the first place so there is no viable claim for
a. Judicial Deference: Allowing recovery for gas drained takes the power form the RR
Commission to regulate oil and gas, and gives it to the juries (court declines to do this)
b. Best argument: Should sue for breach of implied covenant to protect against drainage
2. Concurring: TX needs its energy – doesn’t want this to upset precedent
a. Not just non-actionable, but secondary production water flooding isn’t a trespass at all
b. Should defer to the RR Commission’s expertise in this area
3. Dissent: Rule of capture only applies if the well was legally established on a neighbor’s
property, but not legally established if it was trespassing
a. The majority is changing the rule of capture – “legally” doesn’t mean everything except
what is prohibited by statute or rule or the Commission – a trespass is illegal
iv. Kelly v. Ohio: D drilled right by plaintiff, some malice because no other reason to place wells so close
1. Holding: The right to drill and produce oil on one’s own land is absolute, and can’t be
controlled by a court or an adjacent landowner. (motive is immaterial to legality)
2. Oil is like a mineral that moves in the soil, and only when it is extracted does it become the
personal property of the person into whose well it came.
3. No physical trespass in Kelly, whereas they were in Delmonte – literally going over and
mining, but only allowed because of the Doctrine of Extra Lateral rights
WHO OWNS HYDROCARBONS BEFORE THEY’RE EXTRACTED?
b. (1) OWNERSHIP IN PLACE: SURFACE “OWNS” CARBONS UNTIL THEY’RE CAPTURED BY SOMEONE ELSE
i. Landowner owns all oil and gas that underlie his land. However, this form of ownership is qualified by
operation of the rule of capture, thus, if hydrocarbons migrate, whether naturally or by another’s
extraction, then ownership is lost. (CAN’T ABANDON)
ii. Policies For: Allows people to decide when to drill, can wait for highest prices (total economic effic.)
iii. Policies Against: Creates more expense overall because more trespass claims can be brought
c. (2) NON-OWNERSHIP: OWNER HAS RIGHT TO TAKE, DOESN’T “OWN” CARBONS UNTIL EXTRACTED
i. Landowner does not own oil and gas under land, just the exclusive right to capture such substances by
operations on his land. Once reduced to dominion and control, substances become the object of absolute
ownership, but until capture, the only right in the hydrocarbons is the right to capture. (CAN ABANDON)
1. Applies when oil and gas is draining/migrating onto adjacent lands, NOT when wellbore
physically crosses into neighbors lands (surface ownership determines legality of slant drilling)
ii. Policies For: (1) Pro-Production: Incentivizes people to drill on their wells first (Kelly v. Ohio)
a. Want policies that encourage the most valuable use of the land (efficiency)
b. Discourage free riding – don’t let people sue neighbors to get money from their drilling
c. Need these hydrocarbons for our national economy, and for state taxes (Coastal Oil)
2. (2) Ease in Administration: Can’t figure out another way to apportion the rights
a. Decrease liability – trespass is SL, so liable if you take someone else’s gas
b. Prevent litigious society – nobody would want to drill if liable so risk of overproduction
then goes to the risk of underproduction (then whole price of oil goes up everywhere)
1. (3) Judicial Economy: Helps create a self-help remedy (just drill your own well!) no courts
iii. Policies Against: Resulted in the overproduction of oil fields – incentivized over-drilling (hot oil)
1. No incentive to buy small properties, just buy neighboring land and drain (Coastal Oil, dissent)
2. Lets people expand the boundaries of their leases by a unilateral decision at neighbor’s expense
WHAT OWNERSHIP RIGHTS DOES SOMEONE HAVE IN HYDROCARBONS ON THE SURFACE, AFTER THEY EXTRACTED?
IV. Ownership After Extraction
a. Once oil is drawn out through plaintiff’s well, it becomes the well owner’s property. (Hail v. Reed)
i. The hydrocarbon owner doesn’t lose title to the escaped hydrocarbons unless he abandoned them, by
showing knowledge of the spill, but not cleaning it up and recovering it. (Champlin)
ii. To resolve issues of salvaged oil (from “gushing” wells or blowouts), courts use law of abandonment of
personal property – look at awareness of spill and action after, want to reward people for efforts though
b. When previously extracted hydrocarbons are subsequently stored in well-defined reservoirs whose integrity
is maintained, the title to such oil or gas is not lost. (Texas American)
i. Hydrocarbons don’t become owned by those owning the surface above the storage fields.
c. Hail v. Reed: Defendant trespassed onto plaintiff’s land and stole three barrels of oil- defendant claimed he
could take it because it once was underground and might have flown away eventually
i. Holding: Still the property of the person who owns the well and extracted it. Even oil drawn by a
wrongdoer belongs to the person who owns the well.
d. Champlin Exploration v. Western Bridge: Refinery was leaking, so it dug trenches to recover the
substances, but adjacent landowners doing the same thing, collected the carbons in trenches and sold them
i. Especially when the re-captured good could be easily blended back into the marketable stock without
treatment (recovery of lost property was still on his premises – no intent to abandon)
ii. When oil escapes, the owner loses possession, but retains title, unless they abandon it
e. Texas American v. Citizens: Extracted NG in TX then piped into KY, put back in reservoir before resale
i. Holding: No rule of capture applicable to this case because they actually worked to extract it
1. Because the NG hasn’t escaped, it’s still within a defined possession of storage companies, and
not in its “natural habitat” - focus on whether the reservoir was well-defined and controlled
ii. Notes: Look at C/L doctrines like comingling/Adv. Poss., acquisition of storage by eminent domain
WHAT DUTIES DOES A LANDOWNER HAVE? WHAT ARE LIMITS ON THE RULE OF CAPTURE?
V.
Limits and Obligations of Ownership:
a. Correlative rights – right to explore to decide if they want to exercise rule of capture (nuisance, waste)
i. Correlative rights imply that every owner has reciprocal “obligations” to act in a manner that doesn’t
unreasonably interfere with other owners. These correlative rights are conditions on the rule of capture
to protect others overlying a common reservoir and to secure public interest in the oil and gas resource
1. All rights are relative. No owners can negligently or intentionally damage the reservoir to
impair ability of the other owners to exercise their capture rights.
b. (1) Nuisance: Nuisance is the unreasonable interference with the enjoyment of one’s property.
i. The owner has the right to do with he pleases on his own property as long as he does not interfere with
his neighbors. The right to drill is not outweighed by the right to live on your own land.
1. People’s Gas: Nitroglycerine, never proved any subsurface damage, but the potential for
damage on the surface was enough to stop him from being allowed to use it to drill
2. Holding: Harm outweighs the benefit under the balancing test. Allows private right of action
for surface damage (nuisance), as blasting is an abnormally dangerous activity, but doesn’t
allow a case for the taking of oil and gas from under surface owner’s land (preempted by ROC)
a. Balance the value of the activity with the harm to the surface owner from that action
c. (2) Waste: Mineral owners have a correlative duty to other owners to exercise their rights under the rule of
capture in a non-negligent, reckless or wasteful way.
i. Each owner must exercise their right to capture so as not to injure common sources of supply. Thus, the
ROC could be interpreted to entitle neighboring property owners to extract gas not wastefully extracted.
1. If gas is negligently or recklessly wasted, neighboring property owners are entitled to damages
from the wasted gas that they could have extracted. This right is not limited by having a
possessory or non-possessory interest in the resource (lessors can sue for royalty lost).
ii. Defendants who negligently drilled a well so that a blowout resulted were liable to plaintiffs for the gas
drained form under their land and lost. Entitled to such damages as will reasonably compensate injured
parties for the loss sustained as the proximate result of the negligent conduct. Can determine about how
much oil and gas is recoverable from a common pool based on certain operating conditions. (Eillif)
1. Expert said damage was difficult to calculate, looked to amount of royalty from wasted gas to
determine damage amount (knew about 1M barrels had been lost, MV of those), court said no
2. Powell Method: Divide net sales derived from the sales of comparable gas, by total volume sold
iii. Eillif v. Texon: Sued for damages resulting from a blowout of a gas well on the neighboring property,
not enough drilling mud, well blew out, damaged land, cattle, 1M barrels lost, wells were contaminated
1. Holding: Defendants are entitled to gas lawfully captured under the rule of capture, but this
was negligently captured- so illegal because they injured the common supply source
PART 3: Types of Possessory Interests
HOW CAN SOMEONE LOSE TITLE TO THEIR LAND?
I. Ways to Lose Title: The Common Law doctrines of abandonment and adverse possession, two ways to lose
title to land, serve to extinguish title in a prior owner and establish title in a new owner.
a. ABANDONMENT
i. Land must always have an owner to prevent uncertainty in title. Only a non-freehold estate (non fee
simple) could be abandoned because the abandoned ownership would revert back to the landlord.
Similarly, one can also abandon an easement because it is a non-possessory interest in real property
with a servient estate for the easement’s ownership to revert back to. Unlike adverse possession,
abandonment doesn’t require a third person to assert a claim, just the owner’s non-use and intent.
1. Courts require a prima facie showing of a lack of use of the interest, and intent to abandon.
ii. Step 1: Can the interest be abandoned? – ONLY ALLOWED IN NON-OWNERSHIP STATES
1. Look to nature and duration of the right conveyed to determine interest conveyed
a. Legal title to a fee simple can never be abandoned, but incorporeal hereditaments
(intangibles, like an easement) can be (Gerhard v. Stephens)
b. Can be Abandoned: Available in a NON-OWNERSHIP IN PLACE jurisdictions
i. Owners possess a non-possessory interest, just extraction right, so can abandon
your right to extract, because then that right goes back to mineral owner
ii. KS: Lease is a profit a pendre – non-possessory interest so can abandon
iii. CA and OK: Right to take jurisdictions, so you can abandon it
c. Cannot be Abandoned: Impossible in an OWNERSHIP IN PLACE jurisdiction
i. Owners have a possessory interest in hydrocarbons until someone else takes it
ii. You can’t abandon something that’s tied to your land because there is nothing
to revert back to – would have to deed away rights, or someone else AP’s it
iii. TX: Oil and gas lease is fee simple determinable in minerals so can’t abandon
2. Step 2: Does the requisite intent to abandon exist?
a. To abandon property, the owner must show both (1) non-use, and (2) intent to abandon
i. Non-Use: Nonuse alone does not support a finding of abandonment of a
mineral right because its common to not use them for long period of time
1. Look at what’s normal under habendum clause, usually rights under
the lease expire before abandonment provisions become involved
2. As shown by: terminating production of wells, letting machinery rust
and deteriorate, tearing down pump houses, not physically going onto
the property for years (Rook v. James Russell Petroleum)
ii. Intent: Just like notice in adverse possession, a court would infer your intent to
abandon if you have notice of another’s attempt to possess your and you don’t
kick them off (not in Champlain), or if you verbally disclaim (Gearhardt)
1. Policy: Want to protect ownership interest, prevent people from
coming out of nowhere and claiming mineral rights you’re not using,
but want to be efficient so encourage people to use property?
iii. Gearhardt v. Stephens: D’s occupied surface, P’s waited 47 years until D’s struck oil. D claimed that
P’s interest was an incorporeal hereditament so could be abandoned, P claimed fee interest
1. Holding: Court found that the stock owning the mineral interest was a profit a pendre so a nonpossessory interest which would otherwise revert back to the servient estate if abandoned.
a. Stockholders – Didn’t abandon stock, but abandoned interest in real property – never
tried to establish ownership during actions for quiet title, never drilled on land
b. Family stockowners – Acquired the land by will, but refused the distribution because the
land was “of no value” (clear rejection of inherited stock, plus then 50 y of non-use)
iv. Policies in Favor: If something can be abandoned, promotes efficient use to have it be abandoned and
then put to use by someone who can put it in production
1. Litigation Options: Latches may be a good for a claim for minerals which rapidly change price
v. Duties with Abandonment: CERCLA holds strictly liable last owner/operator before abandonment
1. Owner/operator is to be defined as of the date of discovery of a spill and not at some date in the
past (administrative and speed issues – want to ID, get $ quickly and easily) (Quaker State)
b. ADVERSE POSSESSION
i. Ownership rights are lost through adverse possession if there is: (1) Objective notice of occupant’s
claim (ACTUAL, OPEN, NOTORIOUS, CONTINUOUS), and (2) failure of prior owner to timely respond to
occupant’s possession. Adv. Poss., as opposed to abandonment, is available in ALL jurisdictions
1. Adversely possessing one working part of a well-defined, severed mineral estate may be
deemed to be in constructive possession of the whole estate. (Deidrick v. Ware, majority)
a. Below the surface, there are no clear boundaries for defining the limits of the mineral
estate, but the court agreed to treat mineral and surface estates alike (but can’t set up a
fence, so try and use similar ways to establish the boundaries of what has been AP’d)
i. Experts showed that 800 acres had been affected, got mineral rights to 56
b. Test: Were there elements of color of title? Is there evidence, like the two experts, that
the Adverse Possessors exercised dominion and control over a specific tract?
i. Can determine by color of title (paying for this amount of land in taxes)
ii. Eiliff- When a field has been tested and developed, it’s possible to determine
with precision how much has been extracted from the field
2.
3.
4.
5.
6.
c. Minority: Adverse possession in oil or gas is limited to the oil or gas which is produced
by the wells which have been drilled (Deidrick v. Ware, dissent)
i. No possession of minerals until they are brought to the surface
ii. Would have been entitled to gas produced from the wells established under AP
POLICY FOR AP: Courts who favor a pro-production approach may be more lenient in granting
an adverse possession claim. They may think that those who keep land idle should be punished,
and those who put land to the best economic value should be rewarded.
POLICY AGAINST AP: Courts who favor a pro-ownership approach may be disinclined to allow
someone to adversely possess mineral interests which are under a pooling or
Surface and Mineral Rights Together: If someone AP’s the surface, get mineral interest too
a. But if surface owner leases out minerals, AP for surface continues, but just breaks the
amount of time continuously possessing the sub-surface.
Surface and Mineral Rights Severed: If the surface owner doesn’t own the mineral rights (sold
or leased them) then can’t AP them against the surface right owner. To acquire rights in the
mineral interest, there must be adverse possession of the mineral for the statutory period.
a. After severance, title to the minerals can’t be gained through adverse possession without
a penetration of the mineral estate (Deidrick v. Ware)
Mineral Rights Pooled: It may be difficult to establish a successful AP claim against a pooled
interest. In Hunt Oil v. Moore, Hunt’s initial entry was permissive (under a lease) so the court
demanded a clear act by Hunt ousting other shared mineral interest owners to start an adverse
possession claim. Similarly, in pooling, it may be difficult to clearly provide effective notice to
other interest holders.
a. Pooling is intended to
b. Further, it seems unfair to allow one person to adversely get title to everything if they
originally had a fractional share, and others were voluntarily enticed to pool their
interests.
c. D
d. D
e.
Hunt Oil v. Moore: No hostile holding without repudiation of Hamilton’s 1/10 mineral
interest title, evidenced by acts/declarations clearly manifesting intent
ii. Deidrick v. Ware: Defendant had sunk two wells on the corner of the property in 1924 and had been
using them openly, notoriously and continuously since then – got AP against mineral owner.
1. Holding: Because the mineral owner’s predecessors had actual and timely notice that oil was
being taken from the tract under an adverse claim and they didn’t try to stop them within the
15-year statutory period, they lost their rights to the ENTIRE mineral estate.
a. But when were they on notice? Were allowed to explore under the lease, but may have
repudiated the real owner under color of title with the warranty deed exercised in 1859.
b. Actual (drilled wells), open and notorious: Owner could see the wells being drilled on
his land, mineral owner didn’t act and didn’t kick them off for 32 years
c. Unlike surface estates, there are no clear boundaries for determining the limits of a
mineral estate, thus any method chosen may be somewhat arbitrary. Can’t have any
“immediacy of use” for liquid or gaseous elements.
2. Dissent: Can’t have “boundaries” of fugacious minerals under ground – only AP what you take
f.
II.
c. LIBERATIVE PRESCRIPTION
i. Liberative Prescription: Similar to SOL- A mode of barring actions as a result of inaction
1. Can be used as a defense to bringing adverse possession ejectment or abandonment claims
2. Louisiana: Mineral servitude extinguished even in the absence of adverse possession
a. Using liberative prescription servitude terminates for non-use after 10 yrs
3. Good faith exploration/production interrupts running of the 10 year period
Transgressions Upon Ownership
a. GEOPHYSICAL TRESPASS
i. A trespass is the unlawful intrusion onto another’s property. Geophysical trespass occurs when the
intrusion is in the form of seismic testing. Seismic information is valuable because it’s a roadmap to
hydrocarbons. However, there is a general disproval of intentional side-seismic shooting if the owner
of the mineral interest doesn’t get the benefit of that data and interpretation information. In contrast, a
minority of courts doesn’t find damage to revealing absence of mineral rights. (Martel v. Hall Oil).
ii. Can the Right to Shoot Seismic Be Severed from the Mineral Interest?
1. YES: Mineral interest owner can lease away right to shoot seismic without leasing away the
mineral interest. Divisibility is permissible as long as servient owner’s estate does not become
unreasonably burdened. If deed is silent, mineral interest owner has reasonable use of surface.
a. Incident to a mineral interest owner to have the right to reasonable use of the surface,
because without it, what’s the point? When a mineral estate is divided among multiple
owners, each owner becomes tenants in common with the others – can enter upon the
land to explore and drill, but not to the exclusion of the others. (Enron v. Wirth)
iii. Is Shooting Seismic A Trespass?
1. NO: Vibrations from seismic are not a trespass absent actual physical damages. (Kennedy)
a. Kennedy v. General: Was told that General wouldn’t “shoot” his land without paying
for the right to do so, but they “shot” near the land, and then recorded the measurements
b. Holding: No trespass on plaintiff’s land because there is no physical invasion with the
vibration. Seismic is transitory, temporary, a physical effect without injury, and there
were no receiving sets on plaintiff’s land, no information was taken about the land.
i. Remedy for vibrational injuries is damages, not injunction
ii. But there is a conflict of authority” as to whether one who
produces vibrations and material damage is liable irrespective of
negligence
iii. Court emphasized that the “offending” company wasn’t trying to be sneaky
iv. But plaintiff didn’t proffer expert that their land pattern could be extrapolated
iv. Is The Use of Secondary Recovery A Trespass?
1. NO: Water intrusion from the use of secondary recovery methods is not an intentional trespass.
a. A landowner can inject substances into a formation that migrate to the land of others,
even if it results in the displacement of certain substances under certain land (like
displacing oil with water). The ROC applies even when substances are injected into the
reservoirs to induce migration. The oil under plaintiff’s lease was protected by the rule
of capture, and the Commission authorized the injection. (Baumgartner, unitization)
b. If it were, considered a trespass nobody would do it, and the state would suffer.
2. YES: Some discussion in Coastal Oil that the proppants used by Coastal on the neighboring
tract physically trespassed onto the land below Salinas. However, it is unclear whether the court
would have supported this argument. The court struck down the plaintiff’s argument fracking
was argued to be “unnatural,” by finding that all drilling involves a non-natural human
interaction. There was a disagreement between the dissent and the majority opinion about
whether the effective length of a fracture, the shorter distance where the fracking process
actually improves production, could be fairly determined. The majority believed this was a
question of fact for the jury and experts, but the dissent believed that the hydraulic length, or
the distance fracking fluid travels from the well), and the propped length, the distance the
proppants travel from the well, could be fairly determined, but the effective length could not.
v. DAMAGES FOR LOSS OF SPECULATIVE VALUE: (COME INTO LAND AND GET INFORMATION ABOUT IT)
1. After the person unlawfully shoots seismic, they then have access to the information about the
land’s capacity to produce. This loss of speculative value is the difference in the amount that
the mineral owner could have leased it before and after, or the value of land with potential, and
the value of the land with now known quantities of hydrocarbons. (but some courts would say
no damage because no right to sell what you don’t have in the first place Martel v. Hall Oil).
vi. Whose permission do you need to shoot seismic?
1. MAJORITY: Only need one mineral interest owner’s permission to get seismic permit
2. MINORITY: LA Mineral Code req’s consent of 80% of mineral owners for a seismic permit
vii. DAMAGES FOR INTRUSION INTO PROPERTY
1. A lease of mineral interests who enters the land after termination of the lease and termination of
the right to enter is liable to his non-consenting lessor for injury from such unlawful entry.
2. Phillips Petroleum: Owner of a mineral estate subjected to unauthorized seismic operations
could waive trespass and sue in assumpsit for reasonable value of use/occupation of property
a. Assumpsit- Value of lease that should have been obtained by a trespasser
b. Trespasser comes onto property and does something that would have required the lease,
then damages from what the lease would have required to conduct that activity
c. Does not matter that the right asserted was in good faith, it was wrongfully asserted, and
the value of the right determines the damages.
3. Humble Oil: 3 year lease to Humble exclusive right to enter on land and drill, no activity in 3
years, so lease expired, then neighbor found oil, so Humble came back onto land
a. Holding: The law protects the property right to enter upon the land, drill wells, and
remove oil to exhaustion, if one pays royalties on oil extracted.
b. But because the well drilled was a dry hole, there were no damages for conversion
c. Can have just one owner’s consent to shoot seismic (Enron), but to drill, need
permission of all (even though one co-tenant said he could come back, invalid)
viii. DAMAGES FOR EXTRACTION OF MINERALS AFTER TRESPASS: (COME INTO LAND AND TAKE SOMETHING)
1. Conversion: Unauthorized/wrongful assumption and exercise of dominion and control over the
property of another to the exclusion or inconsistent use with the owner’s rights
a. If they wrongfully interfere and produce something, then have a right in trespass and
conversion – equitable accounting to determine how much
2. GOOD FAITH: Value of trespasser’s production minus costs to produce (Philips Petroleum)
a. Trespassers’ assertion of title must have been made in good faith for them to avoid the
“harsh” measure of damages rule (like if you’re a co-tenant)
b. Don’t get “damages” if their activities were beneficial (if you can use the holes drilled)
3. BAD FAITH: Value of trespasser’s production, without getting production costs back
a. Probably bad faith if drilling while litigation over rights is going on, after lease expired
b. SLANDER OF TITLE
i. Slander of title is a claim involving real estate in which one entity falsely claims to own another
entity's property. Slander of title is harmful not in the way that unjust enrichment by seismic intrusion
is, but because it impedes the true owner’s ability to profitably convey their interest in land to others.
1. One must prove that the entity falsely claiming title was acting with: (1) malice, or with a bad
motive or gross indifference/reckless disregard for the true owner’s interest, that they (2)
publicized a statement, (3) that falsely (4) claimed another’s interest in property, (5) the result
of which causes some a financial harm (like a loss of a sale or loss of a potential new leasee)
ii. Damages for Slander of Title- Difference between the offer that you had and lost, and what the next
offer would be, or the difference in value of land after its been slandered.
1. Kidd v. Hoggett: 10 year lease to Kidd, well shut-in, Hoggett tried to execute a new lease to
third party buyer, but Kidd refused to vacate, so other potential lessee backed out
a. Holding: A leasee has a duty to release an expired oil and gas lease (sometimes implied
or express in the contract, but regardless a duty at common law)
b. Need proof of bad faith – proven here by them lying about having a productive well,
refusing to give it up even though owners had another potential lease offer
i. Proved malice because of his refusal to give lease over, well wasn’t producing,
earning only 25 cents a day, never sold oil even when a buyer approached them
ii. Doesn’t matter that D’s say if they drill now, they know where the reserves are
because they need an actual producing well, not the potential of one
PART 4: Lease Interests
WHAT FORMS OF OWNERSHIP CAN BE LEASED OUT?
I. Introduction
a. A lease is a private transaction between two parties. A leasehold interest is similar to a mineral interest,
where the lessee receives all incidents of mineral interest except those reserved in the lessor. The lessor
usually retains right to bonus, delay rental, shut in and/or production royalty AND retains an interest in
the possibility of reverter/reversion (for when lease expires).
i. Depending on the jurisdiction, the leasee’s interest is a profit of determinable duration (nonownership, can abandon), or a fee simple determinable (ownership in place, can’t abandon).
b. A mineral interest is commonly divided into four “incidents”
i. (1) Right to use surface: Right to use as reasonably necessary to explore or develop and produce
minerals (like easement, either implied or express)
ii. (2) Right to incur costs and retain profits/develop: Mineral interest is both a cost-bearing and a
profit-sharing interest
iii. (3) Right to alienate: Interest is alienable so all or a portion is transferrable
1. Right to alienate is an executive right – non-executive mineral interest if you can’t alienate it
(can limit right to alienate to just a right to lease or something)
iv. (4) Right to retain lease benefits: Mineral interest owners can execute oil and gas leases and under
the leassee can reserve certain benefits in the lessor (lessors usually retain)
1. Pay lessor a bonus at first, then delay rental payments to the lessor before development then
lessor can get shut in royalty payments if gas is discovered or not produced (nominal payment
from time when well drilled until the gas is marketed)
a. Overriding royalty interest is not connected to ownership of the minerals under the
ground — it is just a right to a portion of the proceeds from production and expires
when the lease has expired and production stops. It can be reserved in a lease.
2. After production, a lessor is entitled to royalty (share of production profits free of costs)
3. Royalty Interest owners can reserve a portion of profits either in cash, or in kind (actual oil)
a. Production Payment- Property interest reserved from a mineral interest – reserving half
of production until you receive $x of production (interest terminates when paid)
b. Have a well capable of production but you don’t produce from it, then have to pay the
lessor a royalty for not producing (shut in royalty)
c. Lessee Ownership Interest Types:
i. If the right to alienate is used, the interest transferred is a leasehold interest.
ii. Farm Out Contract: Assignment of part or all of an oil, natural gas or mineral interest to a third party
iii. Offset Operator: Anyone who has an active lease on an adjoining property for Oil & Gas purposes,
iv. Partial Severance – When you convey property but reserve part of mineral interest
1. Usually keep a fractional part of minerals, or an interest in certain minerals but not others or
fractional part of certain minerals
Participating Working Interest
INTEREST
CREATED:
COSTS:
PROFITS:
ROYALTY:
Interest in the minerals
Right to reasonable use of the surface
(Decides how or where to explore and
develop)
Can incur costs
Can retain profits
Carve out overriding royalty interest or
a right to profit reserved by person
subletting their interests (non-working)
Non-Participating Working
Interest/Carried Interest
Right to receive royalty, no access
to surface or decision-making
power
No right to incur costs
Entitled to % of net profits
Royalty reserved in lease
determines the non-participating
royalty owners share of production
v. Louisiana doesn’t recognize “common law” mineral and royalty interests
Royalty Interest
Lessor’s reserved royalty under
a lease, can’t use surface or
execute a lease
Usually non-participating
No right to incur costs
Entitled to a share of value or
revenues (oil or money)
Doesn’t get lessor’s lease bonus
1. Mineral Servitude – exclusive right to explore and develop minerals
2. Mineral Royalty – right to share in gross production (no costs of production)
3. Both automatically terminate if holder of servitude fails to exercise exploration and
development rights for 10 years
II. Lease of Ownership Interest
WHAT IS INCLUDED IN A LEASE?
a. What Does the Lease Include?
i. The granting clause defines the breadth of what is being granted under the lease, and establishes:
1. (1) What substances are covered by the lease (oil, gas, coal, all minerals)
2. (2) What rights are given to use the land (WHETHER OR NOT THEY CAN POOL THE INTEREST!)
3. (3) What interests in the land are subject to the lease (what stick are you giving away?)
ii. The granting of a mineral right automatically grants the right to reasonable use of the surface
necessary and incidental to exploration subsurface. (Hunt v. Kerbaugh)
1. Measure the reasonableness of use the dominant mineral estate by what are the customary and
reasonable practices in the industry under similar circumstances and servient estate uses
2. Courts want to protect easement of reasonable use – otherwise mineral interest is invaluable
iii. Getty’s requirements of the accommodation principle
1. Can’t just do whatever you want with the surface land (Getty), rights of the mineral estate
owner are to be exercised with due regard for the rights of the owner of the servient/surface
estate mineral owner may be required to accommodate the surface owner when:
a. (1) Must be an exiting surface use
b. (2) Lessee’s proposed use must preclude or impair that existing use
i. Conduct must destroy/substantially impair surface owner’s use
ii. Mineral estate’s use of land must relate to the activities under that lease
iii. Look at the requirements by state zoning and regulations to determine respect
mineral estate must give to surface estate (notice or strict liability for damages)
c. (3) And the mineral lessee must have a reasonable alternative available
i. Alternative on the leased premises – don’t have to pump water
iv. Hunt v. Kerbaugh: During exploration, Kerbaugh didn’t accept Hunt’s offer to pay for crop damage
1. Holding: Surface owner must show that under the circumstances, the use of the surface under
attack is not reasonably necessary to prevent mineral estate from using surface land
a. Hunt allowed to shoot seismic. Not a balancing test of reasonableness of use (Getty),
but here court said first, examine the alternatives available, and if they exist, then
balance them against the mineral and surface owners’ interests and inconveniences
i. Burden of proof on servient estate owner but they showed no reasonable
alternative methods that Hunt could have used
b. Mineral estate is dominant over surface estate (surface estate is servient to mineral), but
under the Accommodation Doctrine, the lessee has the right to pursue mineral
production regardless of surface damage if there are no reasonable alternative methods
b. How Long Does the Lease Last?
i. The habendum clause of a lease determines the primary and secondary term for which the lease is
valid. A primary term is a set number of months or years during which the lessee can either choose
to explore or not. However, a lease is valid through the secondary term as long as a well is
producing, and terminates when the well no longer produces.
1. MAJORITY: Production means actually extracting and producing hydrocarbons
a. Production means marketable (Rogers v. Osborn)
i. “If you discover but don’t produce” so discover is like capable of production
and then produce is like market
b. POLICY: Protects the royalty interest owner by encouraging consistent production
i. Also allows use of a Shut-in royalty clause to which allows company to pay
royalty even if it’s not producing and keep lease into the secondary term. This
shut-in royalty clause is meant to provide a substitute for actual production
where there is a capable well, but the lessee has made a provision in the lease to
protect itself in jurisdictions where “production” is defined as actual production.
c. Rogers v. Osborn: Activity at the well was done in an effort to clean the well not to
produce any oil or gas, no production after primary term expired
i. Holding: Secondary term would have been extended if the well had gas in
paying quantities, but it was shut-in, the shut-in royalty payment had to start
before the end of the primary term to extend the lease – but they didn’t pay it
1. The “reworking operations” extended it for 30 days, but no production
after, and they couldn’t drill a new well to extend the lease otherwise a
lessee could just keep drilling new wells and lease would never expire
ii. Dissent: Drilling a new well could be “reworking operations” and whole point is
to have some producing well, so why does it matter if it’s the first or the second
well? Look at desired result – person wants royalty and well 2 is producing
2. MINORITY: Production means capable of being produced in paying quantities (Pack)
a. Under this definition, oil companies are protected for their investment and their
interests are not forfeited if they are forced to temporarily suspend operations
i. POLICY: Pro-lessee because no forfeiture for temporary suspension
b. Pack v. Santa Fe: Lessees intentionally overproduced in the winter when prices were
higher, and slowed/stopped production in summer, lessor claimed secondary term over
i. Holding: Lease could not be terminated under the habendum clause so long as
the interruption of production in paying quantities does not extend for a period
longer than reasonable or justifiable in light of the circumstances involved.
ii. As long as the well was capable of producing in paying quantities, didn’t matter
if the product was actually marketed. Cessation of production by itself will NOT
deprive the lessee of the extended-term lease under any circumstances.
iii. Strict interpretation would require constant production, and any brief cessation
would break the lease –isn’t practical (policy against forfeitures, good business)
c. How you Can End the Lease?
i. Termination of Leases
1. Several things in the clause that could result in lease termination, including the habendum
clause (which dictates the primary and secondary term duration), and a termination clause.
a. A force majure clause is meant to relieve a lessee from harsh termination from
circumstances beyond his control that may otherwise result in forfeiture of the lease.
b. A lessor can demand forfeiture if one of the clauses covering the duration or
termination of the lease has been triggered (discussed in Baldwin), or as a remedy for a
breach of an implied covenant
c. If demanding the remedy of cancellation for breach of an implied covenant, notice and
demand is required, with some exceptions (as explained in Superior Oil). The dissent
strongly disagrees, but in the end it’s a dissent.
d. But no punitive damages for breach of lease contract (Amoco)
2. In general, unless provided for by statute or expressly provided for in the lease, cancellation is
not available as a remedy for simple failure to pay royalties (see Cannon), as the
habendum clause is independent of the royalty clause, and courts disfavor forefitures.
3. Pearlman v. Pioneer: Lessee wanted to use the “Perlman method” which was more waterintensive to extract gas, Commission wanted more testing first, delayed his permit
a. Under the force majure provision, the lease wouldn’t terminate, because whatever
happened was outside of his control (requirement that the cause of the breach can’t be
foreseeable, and it has to be out of your control)
b. Holding: FM clause didn’t apply. An actual, not possible, material hindrance from
governmental regulations must be apparent before performance is excused, and the
party must try and get around the condition before it can be found to be an obstruction.
c. But this was foreseeable and he could have worked around it
d. REMEDIES FOR BREACH: The habendum clause and the royalty clause are separate. Therefore, your
remedy for violation of a royalty clause cannot be to cancel and terminate the lease.
i. (1) CANCELLING/FORFEITURE OF THE LEASE:
1. General rule against forfeiture – don’t interfere with parties’ reasonable expectations of having
an interest in that land for a certain amount of time, and normally an overly-harsh remedy
a. Some states permit cancellation without an express clause (ND, LA) or other states
allow if it’s explicitly put as a remedy in a contract provision
b. May be inefficient to make the operator leave, and a new operator come in
2. Lessor has the right to exercise forfeiture of the lease if the lessee breaches their implied
covenants, under certain circumstances (which are present). (Baldwin v. Kubetz)
a. Trying but not succeeding is no excuse for non-performance of an obligation unless
impossibility arises out of the nature of an act, not the inability of obligor to do it.
3. Cannon v. Cassidy: Lessees didn’t pay lessors for about 11 months – lessors wanted to cancel
the lease and quiet title to the real property
a. Holding: Lessee’s failure to pay royalty under the lease isn’t enough to declare
forfeiture, unless they were given that power under the lease (but they weren’t)
b. Can get damages, but no equitable cancellation of the lease for failure to pay royalty
ii. (2) DAMAGES: If there is no specific provision for lease cancellation, damages are normally the only
remedy, Parties can be made whole from damages, no need to cancel the lease
1. A party can request an accounting, or to make the other party account for what they owe
2. Rescission – Repudiation showing intention to breach contract (ex: Mobil Oil, get $158M)
3. Expectation Damages: Amount that you would have received had the contract been performed
e. Rights under the Lease
i. Coastal Oil & Gas v. Garza Energy: Salinas said Coastal breached the leasee’s implied covenants to
develop Share 13 and to prevent drainage (also later brought a claim for trespass)
1. Lessors with a reversionary interest have standing to bring an action for subsurface trespass
causing actual injury (normally trespass is strict liability), because loss of gas is a permanent
injury to their reversion interest.
2. Maybe would have been actually injured by the proppants had they caused injury to the field?
WHAT DUTIES ARE IMPLIED INTO LEASES?
I. Royalty Issues: Implied Lease Covenants
a. Interpretation of Lease Covenants
i. Contra preferentum: Normally drafted by lessee, so construe against them, to the benefit of the lessor.
1. Ex: If they had wanted constant production, wouldn’t they have excluded a shut in clause?
ii. Don’t look at public policy: Don’t modify a contractual term based on public policy because you want
to respect individual freedom to contract
1. Don’t care that maybe they want to rip off the public by making more money in winters (Park)
iii. Important Provisions: Need to negotiate lease properly, include provision for attorneys fees (assume
everyone acts in good faith, K law provides for bad times.
1. Worried about incentive to engage in an efficient breach – when it’s cheaper to breach and pay
damages, then to abide by the terms of the contract
b. Implied Covenants
i. Implied covenants are default rules in an area where contract terms ultimately govern. Covenants are
implied into a contract should a conflict arise for which the parties did not contract specific remedies.
Although modern contracts are comprehensive, there are many areas that parties do not address,
either because the default rules are preferable, or because negotiations might fail.
c. Royalty Interest – Interest in either a share of production (share of oil and gas produced) or a share of the
revenues (royalties from what’s pumped) free of production costs
i. Frequently implied covenant issues are brought as royalty cases where lessor says that lessee owes
more royalties because they breached some covenant (not making as much money as they should)
d. (1) IMPLIED COVENANT TO DEVELOP
i. The implied covenant to further develop applies after the lessee first starts producing, and during the
time the lease is extended into the secondary term with production. But when production starts, lessee
has to act “with reasonable diligence in developing the lease as would a reasonable and prudent
operator under similar circumstances” with regard to mutual interest of both lessor and lessee
1. Before a lease will be cancelled for breach of the covenant to develop, a lessor must give the
lessee notice and the opportunity to cure the breach within a reasonable time. An implied
covenant if you’re producing, and lease is held by the fact that you’re producing
a. Lessor’s reasonable expectation of profit isn’t determinative of whether lessee has
complied with the implied covenant to further develop
b. Lessee bears the cost of development, so look to their reasonable expectations of profit
to determine if they’ve been a reasonable operator (Superior Oil)
ii. Superior Oil v. Devon: Lessors tried to cancel and execute a new lease from lessee’s failure to drill
1. Holding: Covenant not breached because there was insufficient notice to the lessee, and
because the court doesn’t like forfeiture of a property interest without due process protections
2. Rule: The lessor’s reasonable expectation of profit isn’t determinative of whether lessee has
complied with the implied covenant to further develop.
a. Lessors should have given Superior notice, demanded production, and brought an
action to cancel the lease if they didn’t respond
b. Don’t want to deprive lessor of royalty payments OR being able to lease to someone
else AND want “prudent development of oil and gas resources” (BALANCE!)
3. Dissent: Should have cancelled the lease, and don’t need notice because that’s an equitable
arrangement. Want to prevent unnecessary forfeitures, but lessee didn’t take steps to correct
breach, and didn’t indicate that he would undertake further development
e. (2) IMPLIED COVENANT TO MARKET
i. Because some costs are required to create the product from which the royalty interests are derived, the
implied covenant to market developed to allocate these pre- and post-production costs. As the end
goal is ultimately to sell a product, marketability and production go hand in hand. It is important in
drafting a lease to ensure consistency in terms. However, at times it is ambiguous whether
“production” means creating a product that is “marketable,” and in turn, what “marketable” means.
1. THEORY 1 (TX/LA): Non-operating interests must bear their proportionate share of costs
incurred after gas is extracted/severed at the wellhead (produced when extracted)
a. “Marketability” – No costs until its taken out of the ground, but then one its extracted,
non-operating interest holder has to start contributing to any subsequent costs.
2. THEORY 2 (KS/OK): Implied covenant to market obligates lessee to incur post-production
costs necessary to make the gas in an acceptable condition to market
a. “Marketability” – Might need to refine it before it’s acceptable to market
i. Lessee bears the costs of complying with implied covenants of marketability
ii. Looking at end user v. refiner, size of the markets, who has the benefit v.
burden, where/what is the “market”
b. Costs incurred after the gas is “marketable” to further enhance its value (like refining)
can be charged against nonworking interest owners as long as the royalty revenue
increase proportionally with the costs assessed
i. Lessor benefits because they can potentially get a more refined product
before they’re forced to contribute to the costs.
c. Garman v. Conoco: Conoco took post-production processing costs out of the
overriding royalty payments to Garmans, but Garmans think these costs to convert raw
into marketable gas shouldn’t be charged against nonworking interest owner
i. Holding: Overriding royalty interest owner aren’t obligated to share in
costs. Non-working interest owner do not have to pay costs incurred to
establish a marketable product –have to pay for additional “enhancement”
d. Policy- Lessor doesn’t have access to market, lessee does
i. What’s the point of the lease if you have an implied covenant to market, but
sharing the costs of marketing? Lessors lease so someone else deals with it
e. Policy- Lessee makes all production decisions, can just give them the burden of
making good marketable too, have greater expertise
i. All operations are integrated – can’t divide up the roles easily and company
is in the best position to make something marketable
f.
(2) IMPLIED COVENANT TO PROTECT FROM DRAINAGE
i. The lessee has a duty to protect the interests of the lessor. Frequently this duty arises in issues of
claimed insufficient royalty payments because of a lessee’s failure to protect from loss of the carbons.
ii. Lessees have a duty to protect from drainage even if it’s field wide. Lessees is obligated to: (1)
develop the premises, (2) protect the leasehold, (3) and to manage the lease.
1. Lessor is entitled to recover damages from lessee for field-wide drainage if they prove:
a. (1) Substantial drainage of the lessor’s land, and (2) that a reasonably prudent operator
would have acted to prevent substantial drainage form the land
2. Standard of Care: What a reasonably prudent operator under similar circumstances would do
3. Reasonable Efforts: Drill additional wells, rework existing wells, seek regional regulation,
voluntary unitization, administrative relief, etc.
iii. Amoco Production v. Alexander: Water-drive field where water and oil occupy the same reservoir
1. Facts: Alexander’s claim Amoco intentionally slowed production on down-dip wells, but sped
up production in the up-dip wells that they also leased from other people
2. Holding: A reasonably prudent operator would try and get as much money out of each lease as
possible, so they had a duty to protect from field drainage. But issue because lessor and
lessee’s interests aren’t always aligned – just looked at Amoco’s duties to THIS lessor here
g. (4) IMPLIED COVENANT TO MANAGE/OPERATE DILIGENTLY
i. Requires lessee to act diligently to get the gas out for the benefit of the lessor. This obligates lessees
to conduct incidental acts that may be reasonably necessary to accomplish the extraction. Extension
of the reasonably prudent operator standard, established in Amoco.
1. If a lease provides that “lessee would observe customary field practices and modern methods
to save oil and gas which may be saved at a reasonable profit,” then lessee is obligated to act
in such a manner to ensure that he will secure permits and successfully produce.
ii. Baldwin v. Kubetz: Numerous fire code violations, and used inadequate equipment that allowed
numerous oil and gas overflows, couldn’t get needed permits to drill, claimed beyond his control
1. Holding: A lessee cannot take advantage of a suspension clause form governmental regulation
if he was responsible for the non-compliance with governmental regulation
2. Trying but not succeeding is no excuse for non-performance of a contractual obligation unless
impossibility arises out of the nature of an act, not the inability of obligor to do it.
a. An assignee or sublessee who is in possession is bound to perform the terms of the
principal lease or any sublease that he holds
b. Zoning doesn’t prevent drilling as long as it’s probable that there is oil, just had to
show that they were allowed to drill there (D’s fault for not complying)
II.
Royalty Issues: Distribution and Division
a. Distribution of Royalties
i. Market Value: Divide net sales derived from sales of comparable gas, by total volume sold (Powell
Method) – but court declines to decide – is a question of fact (or use comparable gas data)
1. Comparables, actual sale prices after processing minus sales costs (narrow)
ii. “MV” Majority (Vela): MARKET VALUE AT TIME OF PRODUCTION AND DELIVERY
1. Determine MV by value at the time of production, NOT revenue received under sales contract
2. Piney Woods v. Shell: Shell was paying royalties on the revenues from sale of sweet gas under
their long term K, not on market value, could sell sour gas, but decided to process it further
and sell it as “sweet gas” – but who pays for this extra refining?
a. Holding: Gas can’t be sold until it’s brought to the surface (otherwise selling the right
to produce). Royalty is “MV at the well” meaning time of production and delivery
b. Gas sale K is executory and the sale is executed only upon production and delivery
c. Court doesn’t care that Shell might be getting screwed by having to pay lessors more
for gas if “market value” goes up beyond what they’re getting in the K price
i. Part of risk of negotiating – could have protected against it in K
3. Policy: Would decrease long-term contracts (incentivizes selling on the spot market or setting
the price at the time of trade), guarantees profit for lessor (but not necessarily lessee)
iii. “MV” Minority (Tara): MARKET VALUE SET FORTH IN CONTRACT (if K in good faith and prudent)
1. Policy: Nobody’s tied to the market, all tied to contract, so nobody maximizes
a. When prices are rising shouldn’t require lessee to pay lessor an increasing percentage
of total revenue. Unfair to lessors – they get smaller share of market value if they
think price will go up –destroys this expectation if “MV” is the same as “proceeds”
2. Might promote efficient breach – so that’s bad because don’t want them breaching and selling
at market value (guarantees that lessee will still make some money)
b. Division & Transfer Orders
i. Division Order: Division orders are an agreement and authorization procedure to distribute proceeds
from sale of oil and gas – direct to whom and in what proportion to distribute royalties
1. Whole point of a division order is to pay once, know division, provide clarity – so not their
fault if nobody tells them it’s not correct
ii. Transfer Order: Transfers right to the distributions to a new party
1. Way for company with many royalty interests to keep track
iii. General Rule: Division Orders are Binding Until Revoked
1. Courts generally enforce the prohibition against unjust enrichment from of a division order
error. Yet it is inefficient to sue the company, who has to sue the third party unjustly enriched
a. Want person to sue the party unjustly enriched, instead of the company to prevent
them from paying twice (producer/payer is protected).
b. Person who got less than they were supposed to has a cause of action against the
person who is unjustly enriched
2. Exception: If the producer, and not a third party, is unjustly enriched the division orders are
non-binding – the party unjustly enriched have to pay back what it profited at royalty owner’s
expense, don’t have to pay the total amount, but just the difference in royalty paid and owed.
a. Here the person who is unjustly enriched is the lessee, not a third party (Gavenda)
b. If operator prepares wrong orders and keeps benefits, previously held that division
orders weren’t binding (Stanolind Oil v. Terrell)
III. Problems in Royalty Payments
a. Casinghead Gas & Processed Gas
i. Is lessee under a duty to extract liquid products from the casinghead gas or wet gas?
1. Look at the “prudent operator” standard – if they would have done it then the lessee is not liable
2. Most leases have provision about casinghead gas and extracted liquids but if not – royalties paid
on market value at well or in the field (normally no royalties on liquids extracted after gas sold)
b. Production on Which Royalties are Due
i. Maybe royalties not due on production used for operations on the leased premises – or no royalties for
gas recycled (most leases have no ‘free use” clauses – implied?)
c. Free Gas Clauses
i. Sometimes can write in a provision that you get to heat your home with the gas for free up until X
amount - warranties that you’re not responsible for injury
1. Generally run for the benefit of the lessor with the mineral title to the land but the free gas clause
runs with the surface interest
d. Fixed Gas Royalty: Before 1930s just flat rate for gas produced ($50-200/year) because had no value
i. Then rising prices amended royalty clauses to give fractional interest
PART 2: PUBLIC LAW ISSUES
PART 7: Land Use Regulations
I. Regulation for Land Use
a. Pooling and unitization are two methods used to address spacing and density issues while reducing waste
and preventing confiscation (an interference with an owner or lessee’s chance to recover, either through
drainage or administrative difficulties)
b. Pooling: ROC encourages people to drill wells to get the value of the hydrocarbons, but too many wells
are inefficient and aren’t good for the reservoir, creating price fluctuations. State agencies responded by
creating density and spacing regulations, and production limits but then certain people with small tracts of
land, need to pool with others to get a tract of land big enough to constitute a spacing unit. Pooling is the
process of combining several tracts of land to share production costs and royalty benefits.
i. Voluntary Pooling – Individual landowners privately agree to pool units
1. Executed as a community lease, allowed as long as in good faith
2. Spacing regulations dictate where a well can be located, but pooling just allocates costs
3. Can be done under a Pooling Clause Executed by Lease (“lease has right to pool leases”)
4. Texas Pooling Act: Requires an applicant for a pooling order to exhaust all of the
opportunities that you have to voluntarily pool the land, negotiate in good faith
1. Want people to try and get together – benefits people who have the land but don’t have
the resources to pay for everything all together
2. But in Texas, no requirement that you pool the combined pieces in the unit to get the
permit to drill, can just do it on your own land. {Rule 37 (TX Rule – Pickens)}
ii. Compulsory Pool – Mandatory on owners by an agency, landowners can petition
1. Like if landowners can’t comply with spacing limits unless there is pooling (not ever in KS)
2. Delegated Pooling – delegates regulation power to cities to carve out drilling units
iii. Judicial or Equitable Pooling – When a will is drilled on a unit that’s of the mandated size (like 40
acres), the land within the well is automatically a unit (seen in Mississippi)
iv. Where mineral rights are voluntarily divided, the lessee granted right to drill is owner of all oil
produced from that well without liability to the other lessee. ROC trumps in this case. (Pickens)
1. When Pickens secured the leasehold right, were on notice that they couldn’t drill a well
except to prevent waste (decided by where RR Commission decided best place to drill was)
v. The right to protect against confiscation/drainage is conditional. Lands voluntarily subdivided after
Rule 37 is in place aren’t protected from confiscation. Permits can be issued to protect against waste,
but not confiscation. Otherwise incentive to split lands, defeats the purpose of spacing requirements.
vi. Compulsory pooling is not an interference with DP rights. He didn’t lose any property, he still has a
mineral interest and a right to a royalty. Thus, THERE WAS NO TAKING, and because he had notice of
the pooling, and had opportunity to be heard and participate, there is no DP violation. (Bennion)
1. The agency has the authority to use whatever powers are reasonably necessary to effectuate
its implied or express duties, and these penalties are safeguards to incentivize voluntary
pooling, which best protects all owners’ correlative rights.
vii. Ryan Consolidated v. Pickens: Four .4 acre lots, Pickens offered to pool, Ryan refused, Commission
granted Pickens’ permit request to drill but denied Ryan’s
1. Holding: Court upholds the rule of capture (Pickens has the right to everything produced
from his well – don’t owe Ryan’s anything). No taking because you never had the right to do
the action, so doesn’t matter that one lessee granted permit and the other wasn’t
2. Dissenting: Ryan deprived of minerals without due process of law - can’t uphold the rule of
capture if you’re defeating its purpose of letting people drill on their own land.
viii. Bennion v. ANR: Board fixed location so Bennion prevented from drilling. Refused first voluntary
pooling order, but then well produced so Bennion wanted in. Then Bennion refused participation in
drilling second well, Board modified order allowing Bennion to receive royalty and working interest
if he pays 100% surface equipment costs, 100% operating costs and 175% of drilling costs
1. Holding: Statutory non-consent penalty was consistent with public interest, and constitutional
(no taking or DP violation), and Board was allowed to modify a forced pooling order
a. In the absence of a voluntary agreement to the treatment of additional wells within a
pool, a state agency has the implied authority to modify a pooling order.
2. Non-consent penalty protects participating parties by compensating them for the risk they
assume in drilling the well, and protects non-consenting parties by allowing them to receive
revenues plus a royalty from a well whose drilling costs they aren’t liable for.
a. Statute says in the public interest to prevent waste, recover oil and gas and to protect
correlative rights (he exercised his correlative rights by joining in with voluntary pool)
3. Commission allowed to modify as needed to prevent waste or to protect correlative rights
a. Unitization
i. Unitization is a similar pooling of mineral interests, but unlike pooling, it is done on a field-based
instead of a well-based foundation. Unitization is intended to space out the units across an entire field
to encourage efficiency with primary and secondary production. Unlike pooling, which dictated
where one well on the tract would be located, unitization determines where all wells on the field will
be located to maximize recovery through strategic well placement. Royalty interests are determined
based on geographic considerations (production at time of unitization, your surface’s porosity,
amount under your land). Unitization should be used early in the field’s development to be beneficial.
1. Pooling must be made in good faith by the lessee and designations can’t be made to undercut
the royalty owners’ interests. Bad faith: (1) not necessary to make fixed unit requirements, (2)
pooling right before lease expiration, (3) unproductive property included and unproductive
property excluded, (4) no additional pooling plans (Amoco Production).
1. Especially applicable with advanced recovery techniques
2. Can arise from regulatory/compulsory or from voluntary (rare) unitization
2. There is no due process violation for unitization. Parties retain the right to a royalty interest,
and penalties for non-joinder are just incentives to voluntarily share risks and costs (Baum)
1. Protects all involved parties’ correlative rights by maximizing total recovery
ii. Baumgartner v. Gulf Oil: Sued operator for the unit designated during the mineral interests in the
field was merged, using secondary recovery, injected water to increase pressure in the field
1. Holding: The oil passing under plaintiff’s lease was protected by the law of capture and the
injection was authorized by the Commission.
1. Wells under unitization abide by the Rule of Capture and the ROC applies even
when substances are injected into the reservoirs to induce migration.
2. Rule: Correlative right isn’t a right to drill, but a right to recover – protected value is the
hydrocarbon itself (if you can’t get it out profitably then there’s no value there). A land owner
can inject substances into a formation that migrate to the land of others, even if it results in
the displacement of certain substances under certain land (like displacing oil with water)
1. Doesn’t matter that Section 16 wasn’t included in the order which allowed the
introduction of water into the reservoir – no way to differentiate
2. Plaintiff entitled to get what he could have gotten with no unitization, but he isn’t
allowed to profit from the unitization secondary recovery methods without paying
iii. Amoco Production v. Underwood: Underwood sued Amoco claiming they “gerrymandered” the
leases for their pecuniary gain without taking the mineral owners interest into account. Leases would
have expired but because they were Unitized, Amoco’s lease from the Underwoods was still valid
1. Holding: There was evidence of bad faith from the letter trying to “hold the majority of the
leases” to prevent them from expiring.
1. Amoco picked which leases they wanted and included it in Unit, kept some even
though it didn’t need to just to meet Commission’s “spacing rules”
II.
Regulation for Hydrocarbon Conservation
a. Lessors pressure their lessees to expand their efforts to get any available hydrocarbons out, but sometimes
these desires are limited by administrative orders, or by economic considerations (extracting at a loss).
b. LIMITS ON WELL SPACING
i. To protect mineral right owners or lessee’s correlative rights, spacing orders usually prescribe a well
location based on distances from the unit boundary. Gas wells deplete more quickly and widely than
oil well, so they must be spaced further apart. Administrative orders similarly dictate the well spacing
requirements in that region (usually fixed, not amendable), but rare exceptions can be granted for
topographical problems or to avoid a residence.
ii. Texas Pooling Act: Requires an applicant for a pooling order to exhaust all of the opportunities that
you have to voluntarily pool the land, negotiate in good faith
1. §37 Spacing Rule: Requires a well to be more than 1,200 feet to any completed or drilling
well, and no well shall be drilled nearer than 467 feet to any property line
a. Relying the person who has the resources – who is in the best position to extract
b. Rely on the total lots to get the permit (couldn’t get them without the others normally),
but in Texas, no requirement that you pool the combined pieces in the unit to get the
permit to drill, can just do it on your own land owned
iii. Policy: Protecting private property rights to prevent people from ruining and depleting the reservoir,
hurt some to benefit more (but Kaldor Hicks efficiency – Whose correlative rights are protected?)
1. Maybe encourages development by keeping production open
2. Maybe shouldn’t give equitable exceptions – have spacing rights for a reason to keep
reservoir from depleting, so reward person who drills first (reward risk), no exceptions
3. Everyone would be before commission asking for exceptions all the time, inefficient, nobody
gets to drill, slippery slope, so want to encourage predictability, allow businesses to plan
iv. Pattie v. Oil Commission: Sumatra struck natural gas instead of the expected oil reserves, petitioned
the Commission to have special field rules implemented, Pattie petitioned for an exception to drill an
off-set to the Sumatra well 660 feet from the Sumatra well, granted Sumatra’s but denied Pattie
1. Holding: Spacing limitations would be an unconstitutional deprivation of property without
due process unless the Commission could make discretionary decisions looking at the
impacts of their spacing designation on neighboring properties.
2. Inequitable and unjust not to allow a property owner to have an exception to the drilling
pattern so that they could get their fair share of gas provided that the exception does not cause
waste. Statute allows, and requires Commission to consider “equitable” remedies
3. The court originally prioritized preventing waste over the protection of correlative rights,
however the Commission’s denial of Pattie’s permit meant that he was unable to protect
himself and exercise his correlative rights by drilling his own well.
a. On appeal, the private rights and due process issued mandated that Pattie be allowed
to exercise his correlative rights and drill, even though it would be more efficient for
the reservoir to produce with more consistent spacing restrictions
c. LIMITS ON DENSITY
i. Density limitations are another way for agencies to protect cumulative correlative rights, and to
prevent waste through the over-development of a field. Each state typically has their own density
limitations, and in certain cases exceptions are granted.
ii. Exxon Corp. v. RR Commission: Tried to drill into one field, produced then stopped, then raised
drilling to get into another field, but second well would only be 265 feet instead of the 1,200 feet
required under Rule 37, said they couldn’t afford to move and drill again
1. Holding: There is sufficient evidence of unusual reservoir conditions and economic hardship
to grant a Rule 37 exception – no bad faith. Can get exception locations that avoid a nonproductive area and get production from an area not being drained by existing wells
a. New well complying with the regulations isn’t economically feasible and even if they
do drill a new well, they wouldn’t be able to access the hydrocarbons that are already
under their well at Wedge #2 (so wasteful in two ways)
2. Exception for density limitation granted if there is proof of: (1) A need to prevent waste,
and (2) a showing of unusual reservoir conditions, and (3) exception requested in good faith.
a. Prevention of Waste: Avoiding drilling non-productive wells, and using existing well
b. Unusual Conditions: Drilling in an area not being drained by existing wells,
c. Good Faith: They did drill and produce from a deeper well before asked for exception
3. Exxon thinks that this will be a perverse incentive to get people to drill deeper wells and get
more exceptions – but fact-dependent inquiry to find good faith in drilling into formation
d. LIMITS ON PRODUCTION
i. Instead of limiting where a well can be drilled, production limits impose a cap on the total quantity of
hydrocarbons that can be produced from a specific area. These production limits were created in
response to situations like that seen in the Joiner story in East Texas where oil prices were hitting
record lows because of the large surplus in supply.
ii. Policy: Encouraging overall economic efficiency (extract slowly, keep prices high, more royalties)
1. Here by preventing waste, preserves people’s values in the land – so here preventing waste
and protecting private property rights go together
2. BUT if prices are high enough, this limitation may encourage efficient breach
iii. Joiner Story- East Texas: Fragmented ownership in East TX, no incentive for producers to slow
production, competition between independent producers and big companies
1. November 1932 – legislature passed a bill allowing market prorationing
a. Commission messed it up – set the production quota too high
b. Excess was “hot oil” (smuggled across state lines, sold elsewhere)
2. States formalized relationship under the 1935 Interstate Oil Compact – treaty among oil states
iv. Pickens v. RR Commission: Texas RR Commission’s order prorating the production allowable from
the Fairway Field, half going to the wells by their proportion of surface acreage to total acreage in
the field, and the other half by the proportion of their assigned acre-feet to total acre-feet in the field
1. Pickens thought it was unreasonable, permitted uncompensated drainage, DP violation
2. Holding: Commission’s order is supported by substantial evidence, given deference by court
a. Proration is usually set at an amount determined to provide for the most efficient
recovery of oil in the field, and meant to protect the correlative rights of owners on
these thinner tracts. No clear evidence that Pickens was hurt – draining toward him
b. Drainage was actually moving towards the Pickens’ tract and that the 50-50 formula
actually gave all the owners an equal opportunity to produce their in-place reserves
c. Water was pushing the oil up toward his wells, but the thinner sections would be
watered out first, then later the thicker ones
v. Denver Producing v. State: Commission issued an order establishing a limited producing gas-oil
ration of 2,000 cubic feet per barrel of oil, plaintiff was producing more, venting gas off
1. Holding: The order was not arbitrary and the conservation of resources is of more importance
than the protection of correlative rights. The Commission has the authority to promulgate
whatever order it believes is most useful in conserving the resources of the reservoir.
2. Denver was losing $30k a month by limiting, but Commission allowed to limit production
because keeping gas in maintains reservoir pressure, increases total quantity recoverable
3. Court believed that the 2,000 figure was reasonable – average of the gas-oil ratio for the
whole pool (but then they knew that a lot of people would be in violation)
a. Court said “don’t vent the gas into environment needlessly” – first env’tl discussion
PART 8: Environmental Issues in Oil and Gas Production & Extraction
I. Environmental Conservation
a. DISCHARGES
i. Waste Discharges: RCRA is a command and control statute for using and storing hazardous materials
1. Exemption- drilling fluids, waters/wastes associated with oil exploration, development or
production, natural gas or geothermal aren’t hazardous wastes
a. Wanted it to be intrinsic to and uniquely associated with oil and gas exploration and
production – not transportation or manufacturing
b. Is it from “down-hole” or was it used in exploration or drilling
2. But then EPA has authority under the “imminent hazard” provision
a. Whether something poses an “imminent hazard” – administrator can bring suit that
applies to all solid and hazardous wastes (no exemption for drilling fluids)
ii. Water Discharges:
1. Clean Water Act: Prohibits “discharge of a pollutant” (an addition of a pollutant to navigable
waters from a point source) unless the source of discharge obtains and complies with a permit
a. Specific “Oil and Gas Extraction Point Source Category” for NPDES under §402
b. Step 1: Decide if the water body is a “water of the US” or not
c. Step 2: If it is, decide if what is being discharged is a “pollutant”
i. “Pollutant” Excludes: (1) Water, gas or material injected into a well to facilitate
production of oil & gas (like for secondary production or hydro-fracking)
1. Water derived in association with oil or gas production and disposed of
in a well as long as the state determines that the injection and disposal
of the water doesn’t degrade the ground or surface waters
d. Step 3: If it is, then decide what category of permits apply, then what subcategory
i. Onshore: From low water mark of coast toward coast
ii. Offshore: From low water mark seaward
iii. Coastal: Onshore operation which takes place in or on waters of the US
iv. Agricultural: Can discharge if oil/grease limitation is not exceeded (35 mg/l)
v. Stripper: For wells that produce under 10 barrels per day, like secondary recovery
e. Amendment in 1987 for storm water permitting and for oil/gas/mining
i. Doesn’t require a permit for discharges from oil and gas production facilities that
are just channeling storm water but that don’t come into contact with pollutants
from the extraction process
2. Safe Drinking Water Act: Establishes drinking water standards by defining maximum
contaminant for water used in a public water system
a. EPA has minimum requirements for state underground injection control programs
b. Excepted from SDWA:
i. (1) Underground Injection: Injection of NG for storage or injection of fluids or
ii. (2) Propping Agents: for hydraulic fracturing) EPA of 2005 amended the Safe
Drinking Water Act to exclude hydraulic fracturing using fluids other than diesel
fuel from “underground injection” (but does include diesel fuel)
c. Can’t inject where it would endanger drinking water sources: If it can contaminate a
supply or something reasonably be expected to be a supply for public drinking water
d. Critical Aquifer Protection Area: Protects aquifer which is the sole or principal drinking
water source for area, and if contaminates would create significant public health issues
e. Wellhead Protection Area: Surface and subsurface area surrounding a water well or
welllfield supplying a public water system though which contaminates are reasonably
likely to move toward and reach water well or wellfield
iii. Discharge’s Impact on Endangered Species:
1. ESA comes up when you look at the surface use of the land for oil/gas exploration
2. Vibration if shooting seismic, clearing land for roads, spills, flaring of gas, emissions, migration
3. Babbit v. Sweet Home:
a. Holding: §9 prohibition on takings, which Congress defined to include "harm," was a
permissible construction of the ESA (congress had this accidental, but foreseeable threat
to endangered species in mind, so habitat modification should be included in “take”)
b. Stevens: (1) Congress gave broad administrative and interpretive power to the Secretary
of the Interior, and the ordinary meaning of “harm” under §9(a)(1)(B) would include
damage to habitat that hurts endangered animals
c. (2) Broad purpose/intent of ESA was to give broad protection to endangered species supports the Secretary’s decision to extend protection against activities that cause the
precise harms Congress enacted that statute to avoid
i. A broad view of “harm” might impinge upon private property/DP rights, but
taking the woodpecker might not be the same because you don’t own the bird
d. (3) Congress understood that section to prohibit indirect AND deliberate takings
i. Rejected argument that the Secretary's only means of preventing habitat
degradation is to use the § 5 authority to purchase the lands on which the survival
of the species depends (just one possibility – not exclusive)
b. CLEANUP
i. CERCLA Liability: Requires that the (1) site was a facility, that (2) defendant is a potentially
responsible party under §7, (3) that a release or threatened release of a hazardous substance occurred,
and (4) that the release or threatened release has caused plaintiff to incur response costs (necessary
and consistent with the National Contingency Plan)
1. Owner/operator is defined as of the date of spill discovery and not at some date in the past. Look
at administrative and speed issues – want to ID, get $ quickly and easily (Quaker St)
a. Priority to clean up first, don’t worry as much about fairness as getting it clean, and then
equitable remedies after for contribution later
2. Buying the property “as is” (caveat emptor) may protect you from common law liability, but it is
no defense to CERCLA statutory liability. (Amoco)
a. CERCLA creates joint and several liability so the owner was found to be liable, but was
able to sue a previous contaminating owner for contribution to recover cleanup expense
b. Amoco Oil v. Borden: Bought “as is,” later found out contaminated with radiation
c. Holding: The plain language of statute doesn’t impose any quantitative requirement on
the term “hazardous substance” so the radioactive materials on Amoco’s property are
hazardous substances under CERCLA
i. Response costs from cleaning up background contamination levels wouldn’t be
consistent with the NCP (so easy to prove what’s necessary or not)
d. Definition of “release” should be construed broadly
i. Borden met this by disposing of radioactive wastes, and those wastes emitted
radionuclides which qualifies under the Statue
ii. Radioactive “hot spots” exceeded the Inactive Tailings Standard – justified
response actions regardless of average contamination levels on the site
3. Quaker State v. USCG: Coast Guard noticed a sheen on the surface of water in PA, Quaker
State sought a declaratory judgment of whether it was “owner/operator” under CERCLA
a. Holding: Quaker State was not an owner/operator of the site during the time of the
release, so not liable under CERCLA – date of discovery is the relevant date for liability
i. USFS was owner at time of the spill discovery, so they’re strictly liable
b. The government didn’t prove when the exact date of discharge was, so the government
failed to meet their burden of proof
c. EMISSIONS
i. EPA New Source Performance Standards and National Emission Standards for Hazardous Air
Pollutants Reviews
1. Action finalizes several rules that apply to the oil and gas production industry and significantly
reduce emissions of air pollutants. More particularly, the action finalizes:
a. New source performance standards (NSPS) for the Crude Oil and Natural Gas
Production and onshore natural gas processing plant source category.
ii. The final rule applies to three subcategories of fractured and re-fractured gas wells:
1. (1) Wildcat (exploratory) and delineation gas wells; (2) low-pressure gas wells (non- wildcat and
non-delineation gas wells for which the reservoir pressure is insufficient for a REC to be
performed), as determined by a simple calculation involving reservoir pressure, well depth and
flow line pressure at the sales meter; and (3) other fractured and re-fractured gas wells.
d. DISCLOSURES
i. Texas was the first state to enact disclosure legislation – worked with FracFocus
1. Maybe if there is a trade secret, they have to state the types of toxins that are not present
ii. Texas Commission: Disclosure Requirements
1. (f)(3): Request to challenge claim of entitlement to trade secret protection of hydraulic fracture
treatment chemical composition
2. Under C(2)(c): Can claim trade secret, but if a health professional asks, disclose (confidential)
3. Sierra Club wanted to expand “adjacent property” to 5,000 meters of a well site
II.
Regulation of Environmental Conservation
a. What federal statues apply to oil and gas development (CAA, CERCLA, OPA, ESA, CWA, SDWA)
b. WATER
i. Managing Produced Water: Water that is brought to the surface by oil production
ii. Policy: Concerned with water conservation in times of draught, managing wastewater, whose
responsibility, public or private?
iii. Historically was left in evaporation pools or percolation pits, or into surface waters
1. But after the Clean Water Act and the prohibition of “discharge of pollutants into waters of the
US” most produced water is injected into underground wells
iv. Rapanos v. US: Court construed “navigable waters” as “waters of the US”
1. “Waters of the US” does not apply to ephemeral streams –plurality
2. CWA has jurisdiction over non-navigable waters only if they are only relatively permanent,
relatively continuous bodies of water (streams, oceans, rivers and lakes)
v. SWANCC v. Corps: “Navigable waters” doesn’t include isolated gravel pits
1. Outlaws regulation of something twice removed
vi. Quivira Min. Co. v. US EPA: Discharge of pollutants from uranium mining facilities into gullies
1. Holding: Substantial evidence supports the administrator’s finding that both the creeks were
waters of the US because of the surface connection during high rainfall
a. If there is intermittent surface water connection to navigable streams, or an impact on
interstate commerce, it falls within the CWA’s authority under the commerce clause
2. Took the “substantial effects doctrine” approach to the Commerce Clause
a. It becomes part of an underground aquifer which connects with navigable waters
b. Don’t want to limit CWA to navigable waters because frustrates the purpose if you can
pollute tributaries that feed into navigable waters
c. PETROLEUM SPILLS
i. Oil itself and products used in its extraction can contaminate the environment. Oil spills are
predominantly regulated under the Clean Water Act and the Oil Pollution Act.
1. CERCLA: To determine applicability, look at whether a “hazardous substance” is involved
a. Petroleum Exclusion: Hazardous substance doesn’t include petroleum, or natural gas,
natural gas liquids, LNG, or mixtures
b. Coase v. Getty Oil: Storage stations had “crude oil tank bottoms”
i. Holding: The crude oil tank bottoms are not petroleum NOT within CERCLA
exception. CERCLA liability is imposed regardless of the concentration of the
hazardous substance as long as the contaminants are considered hazardous wastes
ii. CERCLA’s petroleum exclusion applies to unrefined and refined gasoline even
though that product has indigenous and additives that have individually been
characterized as hazardous substances BUT waste oil to which hazardous
substances have been added do not fall within the petroleum exclusion
1. Not a separable part that can be refined and made into useful product
2. Wastes are distinguishable from recyclables – if something is not
cleaned up and taken for repackaging or reuse, then it’s a waste
3. FOCUS: On refine-ability and re-sell-ability
2. Oil Pollution Act: Added to EPA’s oil spill prevention authority (expanded liability of a facility
owner or operator in the event of a spill)
a. Prohibits the discharge of oil or hazardous substances onto the navigable waters of the
US in quantities that may be harmful as determined by the President
i. “Harmful” if “may be harmful” or it violates a water quality standard, harmful to
public health or welfare or environment, or causes a film or sheen”
ii. Liable if you don’t pass the “sheen” test – gives EPA more authority to respond
and greater burden on owners and operators to pay for it
b. Requires owners and facility owners/operators to have proof of “financial
responsibility” through insurance, letter of credit, insurance bond
i. $350M for onshore (no limit for gross negligence, willful misconduct, violation of
an applicable environmental regulation), $75M for offshore spills
ii. Can get not only damages for injuries, but also for lost income
iii. Without the US government basically subsidizing offshore drilling, then none of
the smaller companies could drill
c. Reimbursement of private party cleanup costs, damages for injury to natural resources,
profits, earning capacity, real and personal property, subsistence use of natural resources
i. Government can also get payments to provide for reduction in tax, royalty, rental
and fee collections because of the spill
d. Amended the CWA to include a “Response Plan” for spills from facilities that could
cause a substantial harm to the environment
e. Expressly does NOT preempt state regulation
3. Clean Water Act: Immediate reporting and response obligations for any “owner or operator”
a. Fines (§311(b)(6-7)), cleanup obligations (§311(c, e)), reimbursement for government
cleanup obligations (§311(f))
d. INVESTIGATION
i. Emergency Planning and Community Right to Know Act: Requires people who have hazardous
material on site to give info to local fire department and emergency planning agencies about material
1. Imposes emergency planning obligations whenever there is an “extremely hazardous substance
in a certain “threshold planning quantity”
2. Even though petroleum isn’t by itself extremely hazardous, it might contain benzene in such
volume or concentration that it triggers a §304 report
ii. Occupational Safety and Health Act (OSHA): Hazard communication program
1. Presence of produced hydrocarbons over certain quantities trigger OSHA reporting requirements
PART 9: Public Ownership
I. Sovereign Lands and Operators
a. Federal public lands (30% of the land area of the US, eminent domain, mineral rights, etc.)
i. Includes onshore and offshore land (Outer Continental Shelf)
ii. Three miles offshore of coast belongs to state, but for TX and FL (9 miles out)
b. THE NATIONAL ENVIRONMENTAL POLICY ACT:
i. Encourages transparency, way to delay, way for smaller groups to challenge actions, forcing
government to weigh and consider alternatives
1. NEPA requires that federal agencies take a “hard look” at environmental consequences of
proposed actions – need an EIS if there will be “major federal actions significantly affecting
the quality of the human environment”
a. NEPA is purely procedural, not substantive
2. DNA – Don’t need to do another EA or do an EIS if one is already sufficient
(Documentation of Land use and NEPA Adequacy)
3. RMP – Resource Management Plan – long-term plan for certain block of federal land
(usually go through NEPA process when designating an RMP
ii. Pennaco Energy v. DOI: BLM field manager decided that two NEPA analyses satisfied the NEPA
requirements and allowed the agency to issue the leases
1. Issue: Did the BLM sufficiently satisfy their NEPA obligations before leasing the three
tracts in the Powder River Basin?
2. Holding: No. The IBLA decision was supported by substantial evidence in the record
3. Court thinks that the Boffalo EIS didn’t make up for the other EIS’ shortcomings
a. Covered the land but not the type of coal bed methane drilling (15 yrs old)
4. Court looked at Wyodak County case – BLM did an EA and issued a FONSI and said that
leasing would cause no impacts, then did an EIS three years later to analyze the impacts
a. Talked about CBM mining but it was a post-lease study, so didn’t look at whether
leases should have been issued, and there was a different geographic scope (didn’t
cover two of 3 parcels at issue)
5. BLM previously said in a budget request and a statement to Congress that existing NEPA
documents were insufficient to consider different environmental impacts of CBM mining
c. THE MINERAL LEASING ACT
i. Establishes lease provisions for oil and gas exploration and development leases on federal lands.
1. Interpreting Lease Provisions between Government and Private Parties
a. Same provisions apply between a company and US as between two private parties
i. Statutes provide default if parties don’t contract around it (Mobil Oil)
2. Under the Mineral Leasing Act, oil and gas lease in its extended term is terminated by
operation of law when paying production stops, unless one of the three exceptions applies:
a. (1) Reworking or drilling operations occur within 60 days after cessation,
b. (2) The Department has ordered or consented to suspension of operations, or
c. (3) If lessee places a well capable of production into production within 60 days of
receipt of notice to do so
3. Breach: If government said it would or did break an important promise, and therefore
substantially impaired the value of the contract to the companies, unless the companies
waived their right to restitution, the government must give the companies their money back
4. When one party repudiates a contract, by showing intent to breach, the other party is entitled
to restitution for a benefit conferred on repudiating party thru partial performance or reliance
ii. In Re Great Plains Petroleum: 10 year lease, BLM notified them of impending cancellation if they
gave no proof of production, said they were in bankruptcy, well shut in but capable of producing
1. Holding: Great plains shows no compliance with the statute to prevent the lease from
terminating, and no statutory exceptions apply. Bankruptcy proceedings are not an exception
to the lease termination provisions under the Mineral Leasing Act
iii. Mobil Oil v. US: Contracts with the US for $158M plus annual rent for 10 year leases giving rights
to explore and develop off of the North Carolina coast, went badly
1. The leases were conditioned on companies getting further government permits
a. But maybe they contracted for opportunity, or option to exclusively develop
2. Holding: Government didn’t allow the companies all of the opportunities it promised under
the contract, so it repudiated the contract, and owes the companies restitution payments.
a. Timely and fair consideration of the Exploration Plan was a necessary reciprocal
obligation, failure to do so made bargain illusory
3. There were no provisions in the statues in the contract allowing such a delay and therefore
there was a repudiation of the contract – OBPA changed the contract – subsequent statute
incorporated requirements, so can’t be relied on as a reason to delay
a. 4 year delay was a substantial breach, and no post-repudiation performance as waiver
4. Stevens (dissent): The parties knowingly assumed the risk that the states might object to the
project, gov’t breached not responding to the Exploration Plan within 30 days even though
the Plan was in approvable form, but the remedy is wrong
a. Should be entitled to damages from delay, but not full restitution damages
5. Government’s breach just delayed things from September to November 1990, then moving
forward was contractually precluded by North Carolina
a. Doesn’t think that “time was of the essence” for the companies because they waited
so long before filing the proposal and then filing the lawsuit
6. Potential Breach of Lease Damages:
a. Rescission – Repudiation showing intention to breach (would get full $158M back)
i. Bids might go down if people start thinking its too risky, no bids  non
compete process, want to keep good relationships with the big main oil
companies (US royalty)
b. Expectation Damages: Would have gotten nothing back, not guaranteed anything
II.
Onshore and Offshore
a. Whether contract validity and interpretation disputes are bound by maritime or non-maritime state law
provisions depends on several factors. A contract about a ship relating to its use or to commerce or to
navigation or transportation by sea or maritime employment is subject to maritime law. Look at whether it
has a “salty flavor,” under Davis & Sons:
1. The work order at the time of injury
2. What work the crew under the work order actually did
3. Whether the crew was working on a vessel in navigable waters
4. Whether the work was related to the mission of the vessel
5. What the principal work of the injured worker was
6. What work the injured worker was actually doing at the time
b. Davis & Sons v. Gulf Oil: Parties entered into a “blanket” contract where terms were to be incorporated
by subsequent agreements – these agreements were work orders for specific services determined later
i. Holding: Maritime law controls. The blanket contract was not fully formed and it was amended so
that the work order required performance of maritime obligations. Fact specific inquiry involving
whether the act has sufficiently enough to do with a “vessel” for maritime law to apply
1. The deceased’s work was to oversee the vessel crew during repairs, so the whole agreement
was a maritime K, and so validity of the indemnity provision is governed by maritime law
2. If the injury occurs in the performance of a separable maritime obligation even though it is
provided for by a blanket contract that’s predominately non-maritime, the whole contract is
nevertheless subject to maritime law
c. Rogers v. Petroleo Brasiliero: US citizens who bought Brazilian bonds in US, 20 years old, Brazilian
government refused to exchange them for preferred shares claiming that opportunity had passed
i. Issue: Is the plaintiff’s claim sufficiently “based upon” an act that Petrobrás performed in the US
that has a connection with the commercial activity in Brazil?
ii. Holding: No. No apparent breach, but even if there was, there is no exception to the FSIA that
would give a US court jurisdiction to hear the case.
1. Look out for foreign sovereign immunity issues with state-owned oil companies
2. Need to make sure that the policies behind the FSIA are intact, no reason to stretch to find
that an exception applied – Congress wouldn’t have wanted US to hear the case
III. Agency Actions
a. All cases of public law arise by a Article III court’s review of an agency decision
i. Onshore: Dept. of Interior, oil and gas rights managed by BLM, FWS, USFS
ii. Offshore: BOEMRE (previously MMS)
b. Standard of Review for Final Agency Actions: Under the APA, the correct standard of review is whether a
final decision is A&C or otherwise not in accordance with the law.
1. Agency action is “final” if: (1) A secretary makes a decision or concurs, (2) If an assistant
secretary concurs because Sec delegates, (3) or if appealed from interior board of review
2. Because the IBLM agency decision was not A&C, it didn’t abuse its discretion in deciding
that an EIS was necessary (Pennaco Energy)
3. No relation between the findings and the expansive moratorium – no explanation of the
timeline (6 months) and length it would take to install new safety equipment, or to get
money available for a second spill, thus the moratorium was arbitrary and capricious
(Hornbeck v. Salazar)
c. Standard of Review for Statutory Interpretation: Under the common law, agencies should be given
Chevron statutory interpretation deference, and their decisions should be upheld if it is reasonable, and
based on a permissible construction of the statute
i. Other methods: An agency or a reviewing court can interpret a statute’s provisions by looking at the
plain text, the statute’s purpose, precedent on the topic, by using evidence of legislative intent, or
by examining policy values.
ii. Specific evidence of intent (stat/leg history) is more powerful in statutory interpretation than
general evidence (dictionary)
1. Legislative History – Discussion of the first passing the draft
a. Don’t know who wrote it, so mildly persuasive but not too much
2. Statutory history – Amendments of each passage of the statute, voted on
a. More legitimacy and persuasive because voted on by majority
IV. Litigation and Burdens of Proof
a. FRCP 16- Authorizes a court, at their discretion, to adopt “special procedures for managing potentially
difficult or protracted actions that may involve complex issues, multiple parties, difficult legal questions”
i. But a-symmetrical pre-complaint investigation, only required of P’s not the D’s
ii. Normally just have to survive the motion to dismiss (plead all elements)
b. FRCP 1- Just, speedy and efficient resolution of the case
c. FRE 702- Provides that expert testimony is admissible if scientific, technical, or other specialized
knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue – focus on
reliability and relevancy
d. Case Management Order- Sets out schedule of events about disclosures, discovery, depositions, etc.
i. Normally requires Plaintiffs, before full discovery and other procedures are allowed, to make a
prima facie showing of exposure and causation, expert affidavits with data describing each
plaintiff’s injuries caused by specific contaminants and ID of any specific disease, studies of
contamination on each property, name and numbers of doctors who treated the individuals, etc.
ii. Policies For: Judicial economy, needed to reduce costs of litigation and discovery
1. Reduces delay, reduces harassing litigation demanding settlement
2. Number of plaintiffs matters because of the information gathering logistics (Avila- over
1,000 P’s), number of defendants matters about the volume of documents needed
iii. Policies Against: Creates a higher pleading standard than is federally required under Twombley
1. Disadvantages underprivileged plaintiffs without access to information
2. Could just have limited discovery instead
iv. WHEN IS A CASE MANAGEMENT ORDER VALID?
1. Large number of plaintiffs (Lone Pine, Avila)
2. Large number of defendants (Strudley)
3. Government determination contrary to plaintiff’s claims (Lone Pine, Strudley)
4. In difficult cases of causation and varied plaintiff injuries
v. WHEN IS IT INVALID?
1. If the court thinks that the traditional courtroom procedures are sufficient (Hagy)
vi. Lone Pine: P’s alleged personal injuries from contaminated waters and depreciation in property
value because of the polluted waters from the landfill
1. Holding: CMO order was valid. Plaintiffs hadn’t established by expert evidence or the
R.O.D. report that they were damaged. 16 months after suit started, plaintiffs' counsel has
failed to provide anything that resembles a prima facie cause of action based upon property
diminution or personal injuries.
a. Reports by realtor expert said there was a depression in real estate values, but he
hadn’t inspected all properties. Plus these reports were inconsistent with the EPA
R.O.D. that indicates that there was no problem with ground water contamination,
nor indeed with the transport of pollution by air, ground water or surface water.
b. Further, Plaintiffs' attorney stated that the doctors and treating physicians contacted
by him were unwilling to commit to a causal connection
vii. Strudley v. Antero: Toxic tort – alleged D’s committed tortious acts while drilling NG wells in CO
1. Holding: CMO order was valid. Claim dismissed because plaintiff’s failed to meet their
burden of establishing a prima facie elements of their claims, including exposure, injury, and
both general and specific causation
2. Colorado Oil and Gas Conservation Commission conducted an investigation and concluded
that Plaintiffs’ water supply was not affected by oil and gas operations in the vicinity.
3. All Dr. Kurt conclusively opines on is that “sufficient environmental and health information
exists to merit further substantive discovery” – inapposite to the COGCC’s determination
that Plaintiffs’ well was not affected by oil and gas operations when they lived nearby
viii. Avila v. Willits Remediation Trust: Suing for damage from chrome plating facility
1. Facts: Litigation spanned 10 years in district court, the main appeal focuses on seven rulings
that applied to different subgroups, but that resulted in dismissal of all non-settling plaintiffs
2. Holding: CMO order was valid. Lone Pine order permitted on exposure and causation
Questionnaire because Plaintiffs had more than a year to provide responses. Additionally,
court granted extensions. Experts’ reports were lacking in exposure and causation elements.
a. No scientific support in the documents mentioned in Levin’s declaration for his
opinion that a combination of chemicals caused the injuries. The chrome-plating
industry and what flows from it are outside the areas of Levin’s expertise. No
relationship between the asserted effects of chemicals and plaintiffs’ injuries.
ix. Hagy v. Equitable Production: Plaintiff’s alleged that defendants contaminated their drinking
water supply by drilling four natural gas wells near their property, told to stop drinking water.
1. Holding: Plaintiffs' failure to comply with the Scheduling Order was not substantially
justified, the failure was harmless under Rule 37(c). No need for Lone Pine procedure
a. Plaintiffs' filed expert disclosures on time but report was insufficient (just stated his
qualifications and that he would testify to environmental engineering)
b. DENIED request for a Lone Pine order. Claims of efficiency, elimination of frivolous
claims and fairness may effectively be addressed using the consistency and
safeguards of the mandated rule (SMJ and motions to dismiss/sanctions)
2. Can allow an insufficient report if error was harmless (court has broad discretion)
a. (1) The surprise to the party against whom the evidence would be offered;
b. (2) The ability of that party to cure the surprise
c. (3) The extent to which allowing the evidence would disrupt the trial;
d. (4) The importance of the evidence; and
e. (5) The non-disclosing party's explanation for its failure to disclose the evidence.
e. Validity of Moratoriums
i. Hornbeck v. Salazar: Hornbeck sued for declaratory and injunctive relief against the Secretary
after DOI imposed 6 month moratorium on permitting for offshore drilling operations for new and
currently permitted deepwater wells in response to Deepwater Horizon explosion on 4/20
1. Holding: Just because one rig failed, doesn’t mean that all companies and rigs drilling new
wells over 500 feet universally present an imminent danger. Moratorium is arbitrary and
capricious. No sufficient relationship noted between the wide scope of the moratorium and
the factual findings – no mention of the 500 foot mark in the report, but that’s the definition
of “deepwater” used in the moratorium
a. The companies are suffering irreparable harm – it is only a matter of time before
more business and jobs and livelihoods will be lost, and so the public interest weighs
in favor of granting a preliminary injunction
ii. Town of Dryden: Case arising out of hydro-fracking of the Marcellus Shale portion in New York
State, in the Town of Dryden – indefinite ban through zoning ordinance
1. Holding: No clear expression of intent to preempt local zoning control BUT the town can’t
invalidate a permit issued by another governmental entity (used statutory interpretation)
a. Not preempted to the extent that town can issue the ordinance –NOT PREEMPTED
to the extent that it can issue the ordinance limiting the land use of where drilling can
happen, but IS PREEMPTED in terms of its regulation of how drilling can happen
i. State law preempts city about how drilling can happen, but not preempted
from determining where wells are drilled.
2. DEC regulates technical operational matters where operations are permitted by local law
(unclear how the severance of the ordinance plays out) because permit invalidation isn’t a
permissible remedy, it’s impinging upon regulation of industry under the OGSML
3. Clear legislative intent isn’t apparent because the OGSML doesn’t provide a mechanism for
considering local concerns, so it seems to grant zoning power to local municipalities
4. Where a statute contains an express supersession clause, the court should interpret it under
the plain meaning of the statute and in light of the relevant legislative history and underlying
purpose of the act in the absence of clear expression of legislative intent to preempt local
land use the statue shouldn’t be read as doing so
a. NY: A total ban on extraction is permissible where the legislature hasn’t restricted
municipal authority to regulate land use
State:
Ownership
Type:
“Production”
Definition:
“Market”
Definition:
Pooling
Texas
Ownership in Place
Louisiana
Kansas
Non-Ownership
Oklahoma
Non-Ownership
Theory 1: Produced
when extracted, then
share costs
Theory 1: Produced
when extracted, then
share costs
Theory 2:
Produced when
acceptable to
market, hurts
lessee
No pooling
Theory 2:
Produced when
acceptable to
market, hurts
lessee
Texas Pooling Act
Royalty
Interests
Seismic
Permit
Cases/Extras
Coastal Oil, Exxon
Corp (Rule 37
exception for equity)
No common law
“mineral or royalty
interest” – just
servitudes
Need consent of 80% of
mineral interest owners
Allows forfeiture of
lease without an express
clause
Mississippi
Allows judicial or
equitable pooling