Presentation: Oil & Gas Chapter 5: Oil and Gas Lease as an FSD 5.pdfProfessors Wells Presentation: October 4, 2017. 2 Oil & Gas Leasehold: Preliminary Comments 1. Statute of Frauds

Oil & Gas Chapter 5: Oil and Gas Lease as an FSD Professors Wells

Presentation:

October 4, 2017

2

Oil & Gas Leasehold: Preliminary Comments

1.  Statute of Frauds

2.  Consideration

3.  Leasehold Interest

3

Habendum Clause: Production in Paying Quantities Consumers Gas Trust Company v. Littler

Consumer Gas Trust Company v. Littler, 70 N.E. 363: 1.  Facts

2.  Court reasoning

“The obligation to explore is such an essential part of the contract, though implied, as must be treated as a condition which, if not performed within a reasonable time, entitled appellee to claim a forfeiture under the agreement that, “in default of complete compliance on the part of the second part, or his assigns, renders this lease null and void.”

4

Oil & Gas Leasehold: Sample Lease Habendum Clause

Paragraph 2 Subject to the other provisions herein contained, this lease shall be fore a term of ____ years from this date (called the “primary term”) and as long thereafter as oil, gas, or other minerals is produced from said land or land with which said land is pooled hereunder.

Lessor’s Issues: 1.  The above clause holds the lease for all minerals when Lessee may only explore for Oil & Gas.

Alternative: “oil, gas, or other liquid or gaseous hydrocarbons, and other minerals produced with oil and gas.”

2.  The above clause holds the lease for all zones whether not all zones are explored as long as there is one producing well at the end of the primary term: Alternative: Horizontal Pugh Clause

It is expressly agreed that this lease shall terminate at the expiration of the primary term as to all nonproducing zones, strata, or horizons more than thirty feet above or below the lowest zone, stratum, or horizon from which oil or gas is being produced at the end of the primary term,”

3.  The above clause holds the lease for all parts of the formation. Alternative: Retained Acreage Clause “and shall also terminate as to all horizontal acreage in any zone, stratum, or horizon not included within a proration unit or other area of horizontal acreage properly designated under the applicable statutes, rules, or regulations of the appropriate state oil and gas regulatory agency and allocated to a producing well,.”

5

Habendum Clause: Production in Paying Quantities Baldwin v. Blue Stem Oil Co.

Baldwin v. Blue Stem Oil Co., 189 P.2d 920: 1.  Facts


“The leases did not contemplate that any circumstance or conditions should excuse the lessee from performing the conditions of the leases on his part. By their terms ample time was given in which to drill a well. The lessee was compelled to take notice of the climatic conditions and of the topography of the country in the vicinity of the lands. . ..”

6

Model Lease Agreement: Force Majeure Clause

Paragraph 11 Should Lessee be prevented from complying with any express or implied covenant of this lease, from conducting drilling or reworking operations thereon or from producing oil or gas therefrom by reason of scarcity of or inability to obtain or to use equipment or material, or by operation of force majeure, any Federal or state law or any order, rule or regulation of governmental authority, then while so prevented, Lessee’s obligations to comply with such covenant shall be suspended, and Lessee shall not be liable in damages for failure to comply therewith; and this lease shall be extended while and so long as Lessee is prevented by any such cause from conducting drilling or reworking operations on or from producing oil or gas from the leased premises; and the time while Lessee is so prevented shall not be counted against Lessee, anything in this lease to the contrary notwithstanding.

7

Model Lease Agreement: Well Completion Clause

Paragraph 6 If at the expiration of the primary term, oil, gas, or other mineral is not being produced on said land, or on acreage pooled therewith, but Lessee is then engaged in drilling or reworking operations thereon or shall have completed a dry hole thereon within sixty (60) days prior to the end of the primary term, the lease shall remain in force so long as operations on said well or for drilling or reworking of any additional well are prosecuted with no cessation of more than sixty (60) consecutive days, and if they result in the production of oil, gas or other minerals, so long thereafter as oil, gas or other mineral is produced from said land or acreage pooled therewith.

8

Habendum Clause: Production in Paying Quantities Stanolind Oil & Gas Co. v. Barnhill

Stanolind Oil & Gas Co. v. Barnhill, 107 S.W.2d 746: 1.  Facts


“[The lessee’s] estate, consisting of a determinable fee, determined upon their failure to produce oil or gas in paying quantities within such term, came to an end on February 4, 1935, as found by the trial court, after which they did not possess any interest whatever in the land. The lease did not exist. The term had closed, and the interest they procured by the lease was gone. It is not a question of forfeiture for failure to continue to develop the land, nor does it rest upon any other contingency. Appellants did not contract for a term which would depend upon the possibility of procuring a market for the product at some date subsequent to its express date of expiration.”

9

Habendum Clause: Production in Paying Quantities Shut-In Royalty Clause

Paragraph 3 * * * “while there is a gas well on this lease or on acreage pooled therewith, but gas Is not being sold or used, Lessee may pay as a royalty, on or before ninety (90) days after the date on which said well is shut in and thereafter at monthly intervals, a sum equal to one-twelfth (1/12) of the amount of the annual rental payable in lieu of drilling operations during the primary term on the number of acres subject to this lease at the time such payment is made, and if such payment is made or tendered, this lease shall not terminate and it will be considered that gas is being produced from this lease in paying quantities” * * *

10

Garcia v. King, 164 S.W.2d 509: 1.  Facts


“It has been generally held that ‘paying quantities,’ when used in this connection means paying quantities to the lessee. If a well pays a profit, even small, over operating expenses, it produces in paying quantities, though it may never repay its costs, and the enterprise as a whole may prove unprofitable.”

Habendum Clause: Production in Paying Quantities Garcia v. King

11

Habendum Clause: Production in Paying Quantities Clifton v. Koontz

Clifton v. Koontz, 325 S.W.2d 684: 1.  Facts


“In the case of a marginal well, such as we have here, the standard by which paying quantities is determined is whether or not under all the relevant circumstances a reasonably prudent operator would, for the purpose of making a profit and not merely for speculation, continue to operate a well in the manner in which the well in question was operated.”

12

Habendum Clause: Production in Paying Quantities Clifton v. Koontz

1.  What is the distinction between operating cost and well drilling and completion costs?

2.  Using the formula developed in Clifton v. Koontz, answer this question: Lessor sues to cancel on oil and gas lease on the grounds that the one well on the property which is holding the lease is not producing in paying quantities as required by the lease. Lessor contends that in determining whether or not the oil well is producing in paying quantities, Lessee must include the following items:

Ad valorem taxes Marketing Expenses Lease Acquisition Cost Administrative Expenses Pumping Expenses Well completion costs Labor and repairs 1/64 overriding royalty Depreciation (on production equipment)* Income Taxes Severance taxes Additional License and permits after

drilling and completion 3.  What time frame do you look at? In Pshigoda v. Texaco, the court reasoning looked at period before

reworking operations and period after reworking operations.

13

Habendum Clause: Temporary Cessation of Production Watson v. Rochmill

Watson v. Rochmill, 155 S.W.2d 783: 1.  Facts


“It appears to be well settled that under the terms of the lease, upon cessation of production after termination of the primary terms, the lease automatically terminated. The strictness of the above rule has been modified where there is only a temporary cessation of production due to sudden stoppage of the well or some mechanical breakdown of the equipment used in connection therewith, or the like.[PRONG ONE] Under such circumstances there are authorities which hold that the lessee is entitled to a reasonable time in which to remedy the defect and resume production. [PRONG TWO] In the case at bar, however, the cessation of production was not merely a temporary one.”

14

Habendum Clause: Temporary Cessation of Production Natural Gas Pipeline Co. of America v. Pool (Dissent)

Natural Gas Pipeline Co. of America v. Pool (dissent), 124 S.W.3d 188: 1.  Facts


“I would reject Watson v. Rochmill formulation to the extent it forces the automatic termination of leases, in which profitable production is not in dispute, when there is a temporary cessation of production that furthers the economic interests of both lessors and lessees. Cessations of production should no longer be accorded temporary status only when they are caused by sudden stoppage or mechanical breakdown, but should permit the factfinder to weigh whether temporary nonproduction furthered the core function of the lease.”

15

Habendum Clause: Temporary Cessation of Production Ridge Oil Co. v. Guinn Investments, Inc.

Ridge Oil Co. v. Guinn Investments, Inc., 148 S.W.3d 143: 1.  Facts


“Accordingly, although decisions at times have said that the temporary cessation of production doctrine applies when there is "sudden stoppage of the well or some mechanical breakdown of the equipment used in connection therewith, or the like,” or that the doctrine applies when the cause of a cessation of production is "necessarily unforeseen and unavoidable,” the circumstances in which this and other courts have applied the doctrine have not been so limited. The court of appeals in the present case correctly concluded that "foreseeability and avoidability are not essential elements of the [temporary cessation of production] doctrine.”

16

Model Lease Agreement: Temporary Cessation Clause

Paragraph 6 * * * “if after the discovery of oil, gas or other hydrocarbons, the production thereof should cease from any cause, this Lease shall not terminate if Lessee commences additional drilling or reworking operations within sixty (60) days thereafter” * * *

17

Habendum Clause: Substitute for Production Freeman v. Magnolia Petroleum Co.

Freeman v. Magnolia Petroleum Co., 171 S.W.2d 339: 1.  Facts


“It necessarily follows, conversely, that while the royalty is not so paid, the well will not be held to be a producer under that paragraph. Respondent did not pay the fifty dollars royalty on or before April 7, 1940.”

18

Model Lease Agreement: Shut-In Royalty for “Gas”

Paragraph 3 * * * while there is a gas well on this lease or on acreage pooled therewith, but gas is not being sold or used, Lessee may pay as royalty, on or before ninety (90) days after the date on which said well is shut in and thereafter at monthly intervals, a sum equal to one-twelfth (1/12) of the amount of the annual rental payable in lieu of drilling operations during the primary term on the number of acres subject to this lease at the time such payment is made, and if such payment is made or tendered, this lease shall not terminate and it will be considered that gas is being produced from this lease in paying quantities.” * * *

19

Habendum Clause: Substitute for Production Gulf Oil Corp. v. Reid

Gulf Oil Corp. v. Reid, 337 S.W.2d 267: 1.  Facts

December 9, 1943 Lease signed within 5 year primary term December 1948 (before December 9) Gulf begins drilling December 9, 1948 Primary term expires January 18, 1949 Drilling ends and well capped February 19, 1949 Shut-in Royalty is tendered November 1949 Gas is sold (and so the well is producing)


“If we accept, as we must, the conclusion that there was no production, therefore, no cessation of production and no abandonment, then in this case it necessarily follows that there was a gap between the completion of the well and production, and the lease terminated.”

20

Comparison of Model Agreement to Gulf Oil Corp v. Reid: Shut-In Royalty Clause

Paragraph 3 in Gulf Oil Corp. v. Reid “3. * * * where gas from a well producing gas only is not sold or used, Lessee may pay as royalty Fifty Dollars ($ 50.00) per well per year, and upon such payment it will be considered that gas is being produced within the meaning of Paragraph 2 hereof; * * *.

Paragraph 3 in Lease in Appendix A while there is a gas well on this lease or on acreage pooled therewith, but gas is not being sold or used, Lessee may pay as royalty, on or before ninety (90) days after the date on which said well is shut in and thereafter at monthly intervals, a sum equal to one-twelfth (1/12) of the amount of the annual rental payable in lieu of drilling operations during the primary term on the number of acres subject to this lease at the time such payment is made, and if such payment is made or tendered, this lease shall not terminate and it will be considered that gas is being produced from this lease in paying quantities;

Continuous Operations Paragraph in Gulf Oil Corp. v. Reid: Required abandonment for 60 day Paragraph 6

“If at the expiration of the primary term, oil, gas or other mineral is not being produced on said land, or on acreage pooled therewith, but Lessee is then engaged in drilling or reworking operations thereon or shall have completed a dry hole thereon within sixty (60) days prior to the end of the primary term, the lease shall remain in force so long as operations on said well or for drilling or reworking of any additional well are prosecuted with no cessation of more than sixty (60) consecutive days to elapse between the abandonment of one well and the commencement of drilling or reworking on another well until production is obtained, and if they result in the production of oil, gas, or other mineral, so long thereafter as oil, gas or other mineral is produced from said land or acreage pooled therewith.”

21

Habendum Clause: Substitute for Production Vernon v. Union Oil Co. of California

Vernon v. Union Oil Co. of California, 270 F.2d 441: 1.  Facts

“Where gas from a well producing gas only is not sold or used, Lessee may pay as royalty $50.00 per well per year, and upon such payment it will be considered that gas is being produced.”


“Where a well is capable of producing only negligible quantifies of liquidate condensate, the need for such protection persists. In such a case, the constructive production provision would be applicable. But, where the well is capable of producing liquid condensate in paying quantities, i.e., where it would be reasonable to operate the well to produce liquid condensate alone, the need for protection ceases as does the application of the constructive production provision.”

22

Model Lease Agreement: Shut-In Royalty for “Gas”

Paragraph 3 * * * “while there is a gas well on this lease or on acreage pooled therewith, but gas is not being sold or used, Lessee may pay as royalty, on or before ninety (90) days after the date on which said well is shut in and thereafter at monthly intervals, a sum equal to one-twelfth (1/12) of the amount of the annual rental payable in lieu of drilling operations during the primary term on the number of acres subject to this lease at the time such payment is made, and if such payment is made or tendered, this lease shall not terminate and it will be considered that gas is being produced from this lease in paying quantities.” * * *

Note: The Vernon v. Union Oil Co. of California problem remains if the well is not a “gas well.” The “problem” is resolved if the language is changed to apply to a “well capable of producing gas in paying quantifies.”

23

Habendum Clause: Substitute for Production Rogers v. Osborn

Rogers v. Osborn, 261 S.W.2d 311: 1.  Facts

Dry Hole Clause "If prior to discovery of oil or gas on said land Lessee should drill a dry hole or holes thereon, or if after discovery of oil or gas the production thereof should cease from any cause, this lease shall not terminate if lessee commences additional drilling or reworking operations within sixty (60) days thereafter. . . .

Drilling and Reworking Operations Clause If at the expiration of the primary term oil, gas or other mineral is not being produced on said land but lessee is then engaged in drilling or re-working operations thereon, this lease shall remain in force so long as operations [omitted: on said well or for drilling or reworking of any additional well] are prosecuted with no cessation of more than thirty (30) consecutive days, and if they result in the production of oil, gas or other mineral so long thereafter as oil, gas or other mineral is produced from said land

2.  Court reasoning “[W]e hold that the second word operates as used in the second sentence does not include additional wells commenced after the expiration of the primary term. This sentence means that if production results from the continuous prosecution of the very operation being engaged in by the lessees upon the expiration of the primary term, the lease is good. This is not to be confused with the lessee’s rights to drill additional wells under the “dry hold” and “if production ceases”

sentences.”

24

Model Lease Agreement: Continuous Operation Clause

Paragraph 6 * * * “If at the expiration of the primary term, oil, gas or other mineral is not being produced on said land, or on acreage pooled therewith, but Lessee is then engaged in drilling or reworking operations thereon or shall have completed a dry hole thereon within sixty (60) days prior to the end of the primary term, the lease shall remain in force so long as operations on said well or for drilling or reworking of any additional well are prosecuted with no cessation of more than thirty (30) sixty (60) consecutive days, and if they result in the production of oil, gas, or other mineral, so long thereafter as oil, gas or other mineral is produced from said land or acreage pooled therewith.” * * * Note: The above non-bolded text, including the struck-through text, was in the lease in Rogers v. Osborn but the bolded language was not in the lease discussed in Rogers v. Osborn but is in the lease in the Appendix.

25

Habendum Clause: Substitute for Production Perlman v. Pioneer Limited Partnership

Perlman v. Pioneer Limited Partnership, 918 F.2d 1244: 1.  Facts


“We therefore uphold the district court’s conclusion that Perlman’s obligations under the Lease and Surface Agreement was not excused by a force majeure.”

26

Delay Rentals Corley v. Olympic Petroleum Corp.

Corley v. Olympic Petroleum Corp, 403 S.W.2d 537: 1.  Facts


“On the other hand, an oil and gas lease may expressly provide for the payment of delay rentals by the mailing of a check, draft, or other form of remittance to the lessors. In such a situation, the postal service is made the lessor’s agent to deliver the remittance and proper mailing, although it is never delivered, constitutes payment.”

27

Model Lease Agreement: Delay Rental

Paragraph 5 “If operations for drilling are not <commenced> on said land or on acreage pooled therewith as above provided on or before one year from this date, the lease shall then terminate as to both parties, <unless> on or before such anniversary date Lessee shall pay or tender to Lessor or to the credit of Lessor in ___ Bank at ____, Texas, (which bank and its successors are Lessor’s agent and shall continue as the depository for all rentals payable hereunder regardless of changes in ownership of said land or the rentals) the sum of ____ Dollars ($____), (herein called rentals), which shal cover the privilege of deferring commencement of drilling operations for a period of twelve (12) months. In like manner and upon like payments or tenders annually, the commencement of drilling operations may be further deferred for successive periods of twelve (12) months each <during the primary term>.” The payment or tender of rental under this paragrapy and of royalty under pargraph 3 on any gas well from which gas is not being sold or used may be made by the check or draft of Lessee <mailed or delivered> to the parties entitled thereto or to said bank on or before the date of payment. If such bank (or any successor bank) should fail, liquidate, or be succeeded by another bank, or for any reason fail or refuse to accept rental, Lessee shall not be held in default for failure to make such payment or tender of rental until thirty (30) days after Lessor shall deliver to Lessee a proper recordable instrument, naming another bank as agent to receive such payment or tenders.” * * *

28

Delay Rentals Mitchell v. Simms

Mitchell v. Simms, 403 S.W.2d 537: 1.  Facts


“The acceptance by Simms of that payment operates to estop him from claiming that the lease had terminated before the payment was made. *** The practical result of the estoppel which arose in December is the same as if Simms and wife had, by binding agreement in December, revived the lease. In neither instance would the rights and interests of the Leslie assignees in the land be affected.”

29

Delay Rentals Humble Oil and Refining Co. v. Harrison

Humble Oil and Refining Co. v. Harrison, 205 S.W.2d 355: 1.  Facts


“Where, as in this case, the lessee has in good faith made a mistaken construction of the lessors’ partial conveyance of their interests and lessee has made a payment in accordance with such construction, of which the assignee has notice, the duty rests on the assignee to notify the lessee of its mistake so that the lessee will have an opportunity to make a property payment of the delay rentals. Where the assignee, instead of giving the lessee such notice, remains silent, we hold that the assignee is estopped to assert that the lease has terminated as to his interest on the ground that the lessee has failed to pay to him a sufficiently large share of the delay rentals.”

30

Delay Rentals Humble Oil and Refining Co. v. Clark

Humble Oil and Refining Co. v. Clark, 87 S.W.2d 471: 1.  Facts


“The fact that the new instrument contains the same terms as those contained in the old instrument, which was void, does not alter the fact that such terms became and are now terms of the new instrument. This being the case, the new instrument, duly executed as it was, effected a transfer to the Humble Company of the leasehold estate in the undivided interest of Margaret Coolidge in the land, regardless of the fact that the prior instrument is and was void.” It must be remembered that on June 6, 1931, Margaret Coolidge, together with her mother and sister, executed to the Salt Mount Corporation, for a consideration of more than twenty thousand dollars, a mineral deed by which the grantors assigned to said company not only one-eighth of the oil, gas and other minerals that may be produced from the 440 acres of land, but also treated the lease in controversy as still subsisting, and assigned to the Salt Mount Corporation one-eighth of the oil and gas royalties and one-eighth of the annual rentals arising under said lease. This was a ratification of the lease and it was revived

31

Delay Rentals Texas Co. v. Parks

Texas Co. v. Parks, 247 S.W.2d 179: 1.  Facts


“The facts of the instant case do not bring it within the rule as announced in the above mentioned case. In the instant case, appellant in its reply for admission, took the position that it owed $80 and that had been its position at all times. There was no pleading of mistake, fraud or accident, no plea for reformation, and no offer to pay more than $80. Under the facts of this case, appellees are not estopped to declare the lease terminated.”

32

Paragraph 10 * * * “Without impairment of Lessee’s right under the warranty in event of failure of title, it is agreed that if Lessor owns an interest in the oil, gas or other minerals on, in, or under said land less than the entire fee simple estate, whether or not this lease purports to cover the whole or a fractional interest, then the royalties and rentals to be paid Lessor shall be reduced in accordance with the nature of the estate of which Lessor is seized.” * * *

Delay Rentals: Model Lease Agreement

33

Delay Rentals: Problem Set on Page 5-56 thru 5-58

Problem 6 6/15/72

Lease Signed

Anniversary 6/15/72

D.R. Paid

8/72

Dry Hole

6/15/73

No D.R.

8/73

D.R. Payment here?

6/15/74

D.R. Payment here?

Is the lease still in effect? Yes at least through June 15, 1973. See ofHarrellv.Atlan8cRef.Co.,123F.Supp.70(E.D.Okla.1954). When must the next delay rental be paid? August 1973? June 15, 1974? See Superior Oil v. Stanolind, 240 S.W.2d 281 (Tex. 1951). “Should the first well drilled on the above described land be a dry hole, then, if a second well is not commenced on said land within 12 months from the expiration of the last rental period for which rental has been paid, this lease shall terminate, unless lessee on or before the expiration of said 12 months resumes the payment of rentals in the same amount and in the same manner as herein before provided.”

34

Commencement of Well Breaux v. Apache Oil Corp

Breaux v. Apache Oil Corp, 240 So.2d 589: 1.  Facts


“substantial surface preparations to drill are sufficient to be considered ‘commencement’ of drilling operations for the lease-clause purposes, such as making and clearing a location, delivering equipment ot the well site, and the like, provided that such preliminary operations are continued in good faith and with due diligence until the well is actually spudded in.”

35

Commencement of Drilling in Horizontal Wells

Horizontal Drainhole Displacement

Kick-Off Point

> <

> <

>

<

> <

Horizontal Drilling Deviated Drilling

Terminus

Correlative Interval

Penetration Point

A B C

Horizontal Well Diagram #1 (Overview of a Horizontal Well)

Surface: Able Surface: Brown Surface: Brown

Mineral: Bigg Oil Mineral: Bigg Oil Mineral: Bigg Oil

> <

> <

>

<

> <

> <

>

<

“Take-Points” (Perforations)

36

Pooling Clauses: Scott v. Pure Oil Co.

Scott v. Pure Oil Co, 240 So.2d 589: 1.  Facts


“However, each of these cases . . . give effect to the proposition that where the authority for the unitization so provides, the production in paying quantities from the well or wells on the area unitized may be imputed as the required production from each of such component tracts so as to continue such individual leases in force as to their entire acreage- that both within and without the unitized area.”

317 acres

535 acres 140 acres

675 acres

Unit Well

37

Pooling Clauses: No Pugh Clause Hypothetical

1.  Does the Unit Well hold the 535 acre tract? Does the Unit Well hold the 140 acre tract?

2.  How are royalties determined?

40 acres

Tract A 535 acres

Tract B 140 acres

Unit Well 30 acres 10 acres

38

* * * “Notwithstanding anything to the contrary herein contained, the commencement of operations for drilling, the drilling or reworking of a well, or the production of oil gas or other mineral from any well situated on lands included within a unit embracing a portion of the leased premises and other lands not covered hereby shall only serve to maintain this lease in force as to that portion of the leased premises embraced in such unit; but during the primary term delay rentals payable hereunder shall be proportionately reduced and be payable on that portion of the leased premises not included in such unit.” * * *

Pugh Clause: Example of Clause

39

Pooling Clauses Problem Set on p. 5-64

30 acres 70 acres

160 acre unit

A B

40

Pugh Clause: Community Bank of Raymore v. Chesapeake

Community Bank of Raymore v. Chesapeake, 416 S.W.3d 750: 1.  Facts

Chesapeake developed Block Two at depth of 5,672 by end of primary term. Lease had a continuous operations clause, horizontal Pugh clause, and a retained acreage clause. Drilling was being done at end of primary term but not at depths below 5,672. How are these clauses to interact in the lease?


“[T]he lease’s horizontal Pugh clause never sprang into life. By its terms, the Pugh clause operates “[a]t the expiration of the Primary Term or the conclusion of the continuous development program[.]” “By its plain, grammatical terms, the severance clause is triggered “after expiration of the Primary Term ...and any extension of the Primary Term . . . Accordingly, the plain language of the severance clause provides that the lease’s primary term is extended by continuous development and that severance will not occur until after the expiration of the extended primary term.

What About Deeper Zones?

41

Pooling Clauses: Jones v. Killingsworth

Jones v. Killingsworth, 403 S.W.2d 325: 1.  Facts

“Units pooled for oil hereunder shall not substantially exceed 40 acres each in area, and units pooled for gas hereunder shall not substantially exceed in area 640 acres each plus a tolerance of 10% thereof, provided that should governmental authority having jurisdiction prescribe or permit the creation of units larger than those specified, units thereafter created may conform substantially in size with those prescribed [or permitted]* by governmental regulations.”

* Not in case but in Sample Lease §4 2.  Court reasoning

“The parties obviously knew when the lease contract was executed that a permitted oil proration unit could conceivably be much larger in area than one prescribed by governmental authority. To say that a lessee can pool lessors’ land with units of any size permitted by the Railroad Commission would defeat the intention of the parties to restrict the size of the units to the size prescribed by governmental authority. Absent express authority, a lessee has no power to pool interests in the estate retained by the lessor with those of other lessors.”

42

Allocation Wells: The “No Authority to Pooling” Solution?


Kick-Off Point

> <

> <

>

<

> <


Terminus


Penetration Point

A B C



Mineral: Bigg Oil (no pooling clause)



> <

> <

>

<

> <

> <

>

<


43

Pooling Clauses: Good Faith Pooling Amoco Production Co. v. Underwood

Amoco Production Co v. Underwood, 558 SW.2d 509: 1.  Facts Total Acres Pooled Acres Excluded Acres

Walser (Circle Dot) Sec. 3 643.23 553.02 90.21 Walser (Circle Dot) Sec. 81 647.90 45.00 602.90 Underwood Sec. 2* 320.90 10.00 310.90 Underwood Sec.1* 320.00 20.00 300.00 Wright Sec. 1 160.00 10.00 150.00 Hefley Sec.4 40.00 40.00 0 Johnson Sec.4 120.00 10.00 110.00

Totals 2,252.03 688.02 1,564.01

2.  Court reasoning “Lessee must exercise “good faith” toward the lessor and royalty owners in making a pooling designation.”

§1 §2 §4

§81

§3

44

Pooling Clauses: Good Faith Pooling Coastal Oil & Gas Corp

Coastal Oil & Gas Corp, 268 SW.3d 1: 1.  Facts


“Salinas points to Coastal's decision not to include the Coastal Fee No. 1 well in the Unit, which would have given Salinas a royalty on part of its production; the inclusion of the M. Salinas No. 4 well in the Unit, which was unnecessary to obtain favorable spacing for the M. Salinas No. 8 and freed Coastal from part of its royalty obligation; and the location of the M. Salinas No. 4 and No. 6 wells in less favorable locations to prevent drainage to the Coastal Fee No. 1 well. We agree with Salinas that this evidence supports the jury's finding [of bad faith pooling].”

BS1 3 6

7 8 5 10 11

9

1 28 14 15 20

16

18

2 3

P1

C1 C2

Share 15 2V

4

Share 12

Share 13

Excluded Included

45

Good Faith Pooling of Horizontal Wells


Kick-Off Point

> <

> <

>

<

> <


Terminus


Penetration Point

A B C



Mineral: Bigg Oil Mineral: Bigg Oil Mineral: Bigg Oil

> <

> <

>

<

> <

> <

>

<


46

Cross-Conveyance and Joinder Veal v. Thomason

Veal v. Thomason, 159 SW.2d 472: 1.  Facts


“The royalty owners under the other lease contracts in this unitized block are necessary parties to this suit. There is no escape from this conclusion, because Thomason seeks in his action to obtain a judgment freeing this land from the Texas Company lease, and if this is done by judgment which names such company only the royalty owners under the other leases in this unitized block will have had such royalty interest in this land, and for all practical purposes, cut off and destroyed without having their day in court.”

6,000 acre unit

Veal 197.4

21+ other lessors

47

Pooling Clauses: Good Faith Pooling Wagner & Brown, Ltd. v. Sheppard

Wagner & Brown, Ltd. v. Sheppard, 282 SW.3d 419: 1.  Facts

Choices: è  1/8th co-tenant of 100% of net profits from production (Sheppard’s View) è  1/8th co-tenant * 51% (62.72/122) of net profits from production of pooled unit (Wagner & Brown’s View)

è Court Choice: Sheppard became an unleased 1/8th co-tenant when the lease expired, but the tract remained part of the pooled unit since it was validly pooled and the pooled unit still existed. So, Sheppard is entitled to her 1/8 co-tenant share of net profits of the pooled unit.


“The lease here allowed the Sheppard tract (rather than just the lease) to be pooled for purposes of production, and that is what the unit designation did. As termination of the lease changed none of the lands committed to the unit, we hold that it did not terminate the unit. Thus, while Sheppard is entitled as a co-tenant to 1/8th of the proceeds due to the mineral owners of her tract, that does not entitle her to 1/8th of the proceeds that must be shared with the mineral owners of other tracts by the terms of the unit agreement.”

122 acres

Sheppard 62.72

Documents

Presentation: Oil & Gas Chapter 5: Oil and Gas Lease as an FSD 5.pdfProfessors Wells Presentation: October 4, 2017. 2 Oil & Gas Leasehold: Preliminary Comments 1. Statute of Frauds