Term
| What are the two most common types of oil and gas royalty interests? |
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Definition
Standard Royalty - Fractional share of any oil and gas produced at the well that is free of the costs of production.
Nonparticipating Royalty Interest ("NPRI") - Right to receive royalty payments held by someone other than the mineral interest owner. Entitles its holder to a share of production, but they do not have the right to lease or participate in bonus and rentals. |
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Term
| What is a mineral interest? |
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Definition
Fee simple ownership of oil in gas in place under the property and the exclusive right to search for, develop, and produce oil and gas from the property.
The mineral owner has the right to grant leases (executive right) and receive royalty, bonus, and delay rentals. |
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Term
| What is a surface interest? |
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Definition
| The rights of land ownership that remain after the mineral estate is severed. Surface interest is subject to an implied easement of surgace use by the dominant mineral interest owner. |
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Term
| Can a co-tenant lease without the consent of the other co-tenants? |
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Definition
| Yes, but he must account to nonconsenting co-tenants for their share of the profits. |
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Term
| Can a life tenant get an oil and gas lease without the consent of the remaindermen? |
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Definition
| No. Neither a life tenant nor the remainderman can grant a valid oil and gas lease without the joinder of the other. |
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Term
| If a life tenant and a remainderman consent to a valid OG lease, how are the lease benefits distributed? |
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Definition
(1) According to the terms of the grant.
(2) If the grant is silent -
(a) life tenant - current income and interest, including delay rentals
(b) remainderman - principal of the bonus and the royalty |
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Term
| Is the OG lease subject to a morgage? |
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Definition
If the mortgage was executed before the OG lease - lease is subject to the mortgage lien
If the OG lease was executed before the mortgage - OG/lessee rights superior to the mortgage |
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Term
| When a property is foreclosed, what protection is available for the OG rights (if they are subject to the foreclosure)? |
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Definition
| The surface assets must be sold first in an effort to satisfy the loan before the mineral rights are sold. This is called "marshalling" the assets. |
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Term
| What are the two essential clauses of an oil and gas lease? |
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Definition
Granting clause - defines the rights given by the lessor to the lessee and describes the property covered by the lease.
Habendum clause - contains (1) primary term - fixed period of time during which the lessee has no obligation to drill, and (2) secondary term - indefinite, but normally linked to "production in paying quantities" |
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Term
| What is a delay rental clause? |
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Definition
| Clause in an OG lease that negates any implied duty or convenant to drill during the primary term. The lessee may delay drilling by paying the lessor a stipulated sum. |
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Term
| What is a dry hole clause? |
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Definition
| Defensive clause in an OG lease that defines what the lessee must do to maintain the lease after drilling a dry hole. |
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Term
| What is a force majeure clause? |
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Definition
| Defensive clause in an OG lease that lists acts of God and other catastrophes beyond the reasonable control of the lessee that excuse the lessee from performance. |
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Term
| What is a shut-in royalty clause? |
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Definition
| Defensive clause in an OG lease that permits the lessee to maintain a lease if wells are shut in (not actually producing) though capable of producing, by payment of a shut-in royalty. |
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Term
| What is a pooling clause? |
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Definition
| Defensive clause in an OG lease that allows the lessee to place the leased tract into a larger unit by combining acerage from adjacent tracts. Production from any well on the pooled unit will satisfy this production requirement. |
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Term
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Definition
| Provide that if only part of the acerage under the lease is pooled, the lease on unpooled acreage may not be maintained by production from the pooled unit. |
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Term
| What is a division order? |
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Definition
| an order that is usually prepared by the lessee or purchaser of oil or gas and specifies how payments are to be divided among the royalty and mineral interest owners who are due a share of production. |
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Term
| What is the (implied) standard of performance of the lessee in an oil and gas lease? |
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Definition
Reasonably prudent operator - the lessee must act if the lessor proves it profitable to do so. |
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Term
| What is the covenant to protect against drainage? |
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Definition
Exception to the rule that the lessee has no duty to drill in the primary term.
The lessor must show: (i) substantial drainage, (ii) that a reasonably prudent operator woul drill to protect against drainage, (that drilling would be profitable), and (iii) damages (measured by the royalty the lessor would have obtained had the well been drilled). |
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Term
| When does a lessor or surface owner have the right to recover for damages to the surface estate against the mineral estate owner? |
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Definition
| (i) use of the servient estate by the lessee is excessive or not reasonably necessary to oil and gas operations; (ii) the use does not benefit the development of oil and gas from under the leased tract; (iii) the use is contrary to lease provisions, statutes, ordinances, or other regulations. |
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Term
| What is the accomodation doctrine? |
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Definition
| If the use of the surface (i) substantially interferes with a preexisting surface use of the lessor; (ii) alternative methods are practicable; and (iii) the alternative is available on the leased premises, the mineral owner must accomodate existing surface uses. |
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Term
| What is the nonapportionment rule? |
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Definition
| When property is subdivided after an oil and gas lease has been entered into, the owners of the subdivided interest are not entitled to apportioned royalty payments. They are entitled, however, to an apportioned delay rental. |
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Term
| What is a community lease? |
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Definition
| Where two or more contiguous property owners enter into a single lease covering all of their propery. In TX, a community lease has the effect of an implied pooling agreement. |
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Term
| What is the Duhig doctrine? |
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Definition
| In a three-or-more party chain of conveyance in which the Grantor seemingly conveys more than 100% of the mineral or royalty interest, the Grantor will bear the loss. |
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Term
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Definition
Revenues minus costs
Costs include all reasonable drilling and operating costs on productive wells. |
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Term
| What is a Mother Hubbard clause? |
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Definition
| In an oil and gas lease, the first paragraph ususally contains a clause to pick up small strips of land not specifically included in the granting clause because of mistakes in surveys or descriptions. |
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Term
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Definition
Production in paying quantities (PPQ)
Formula for PPQ is - revenues minus Lessor's royalty minus operating costs. |
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