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Aspects of Leasing

CHAPTER 3. Aspects of Leasing. International Ventures. Legal Rights to reservoirs are typically held by the country (the State or National Government) Most cases the host country retains controlling interest throughout exploration and production.

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Aspects of Leasing

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  1. CHAPTER 3 Aspects of Leasing

  2. International Ventures • Legal Rights to reservoirs are typically held by the country (the State or National Government) • Most cases the host country retains controlling interest throughout exploration and production. • Complex arrangements are made between the host country and petroleum companies.

  3. National Ventures • Four Sources for securing the rights to explore, drill and produce come from: 1. Private Property Owner 2. State Government 3. Federal Government 4. Native American Tribes

  4. National Venture • All of the sources may hold title or established ownership to a given piece of land. • Only the title holder may grant rights to develop the resources on the land. • Instrument used to grant these rights: • Oil, Gas, and Mineral Lease (Traditionally) • Oil and Gas Lease (Typically) • Ownership of the minerals must be established

  5. Ownership • Absolute Ownership: • Oil and Gas are owned in place, underground. • If a reservoir lies under adjacent property, the first to produce retains the ownership of the reservoir. • Example: Texas • Nonownership-in-place: • No one owns the petroleum until it is captured. • Title can be assumed upon production, and the oil and gas become personal property. • Example: Louisiana and Pennsylvania

  6. Ownership • Fee Simple: • Preserved from the middle ages where as: • The property owner has full ownership of the land and everything above or below it. • Landowners can sell off just the land or just the mineral estate by what is called a Mineral Deed. • Mineral Estate and Surface Owners • When a mineral estate of oil and gas is sold it is typically regarded as a Possessory Estate. • Other mineral types can be regarded as a Servitude Estate.

  7. Possessory vs. Servitude Mineral Rights • Possessory Estate: • Can not be lost by not using/exploring it • Can obtain access to it even if the surface is not owned by means necessary with due regard to the surface owner. • Oil and Gas constitute a dominant/possessory estate • Servitude Estate: • Minerals are owned after reducing them to a possession • Can be lost by failure to explore diligently.

  8. Royalty Interest Holder • Royalty Interest: • Is a share or percentage of the total or gross oil and gas production • Two types: • Participating Royalty Owner • One who owns all or part of the mineral estate and has the executive rights of the mineral estate • Nonparticipating Royalty Owner • One who owns no part of the mineral estate and therefore has no right to execute leases, enter the property, nor explore or produce any minerals in the property. (Only receives a share of the profits from production)

  9. Royalty Interest • Land owners can transfer royalty interest by sale or reserve it totally or in part. • An owner can sell both the surface and mineral estates but keep the royalty interest for themselves. • But they can also keep the property and sell a fraction of the royalty interest in a Royalty Deed.

  10. Lease Language • Lessor: Mineral Estate or Fee owner • Lessee: Petroleum Company or other party • Consideration: Money/Payment ie. Bonus • Royalty: Share of what is produced • Delay Rental: Payment made to keep the lease from automatically expiring • Primary Term: The agreed period of time drilling should be commenced • Implied Covenants: Obligations on the lessee imposed by law • Expressed Covenants: Obligations for development imposed by the lease that replace Implied • Working Interest: The controlling interest / or the lessee’s portion. • Operator: The party who has the controlling interest and develops the resource. • Operating Agreement: Company, Individual, partnerships all parties in agreement of the contract.

  11. Oil Migration Cases • Before 1875: • Implied Covenant: required the lessee to develop or forfeit the lease agreement. • After 1875: • Implied Covenant was not upheld giving the Oil Operators the right not to develop during the lease period • Also found that Oil and Gas Migration was a natural occurrence and because of this, belonged to the one who was the first to capture it • The person who drilled a well and found oil was the legal owner. • This produced consequences….

  12. Rule of Capture • Gives Landowners freedom from liability of depleting a common reservoir shared by an adjoining property. • In states that have Nonownership doctrine, owners can drill as many wells as they can given they don’t drill diagonally across adjoining property lines. • Government regulations now prorate the amount of hydrocarbon that can be produced to keep individuals from disproportionate production.

  13. Offset Drilling Rule • Sates that a landowner whose hydrocarbon reserves are being depleted by a neighbor's wells can not recover damages in court or stop the offending operator. • Landowner’s recourse: • Drill their own well and produce as fast as possible • If they lease the mineral interest, lessee assumes the burden of the offset drilling rule. • Drilling taking place on an adjacent property obligated the owner/lessee to drill nearby to “Offset” the potential loss of hydrocarbon.

  14. Court Decisions on Mineral Leases • Oil and Gas were always implied minerals, but when iron ore, lignite and other minerals were mined under the same leases it created a severe detriment to the surface owners. • As a result the courts reasoned that the Mineral Estate owner did not have the right to “Appropriate the Soil”. • Meaning: minerals substantially affecting the surface belong to the surface owner.

  15. Government/State Regulations • Excessive drilling ensued because of the Rule of Capture and the Offset Drilling Rule. This led to several things: • Waste from drilling of unneeded wells • Rapid reduction in reservoir pressures • Altered natural drive mechanisms • Total production was less than ideal • States formed regulatory agencies • Enforced sound conservation rules to include: • Well Spacing • Prorated Production Rates • Correlative Rights: rights given to property owners in a pool to produce, without waste, their just and equitable share of the hydrocarbon in such a pool. • Pooling: he act of combining small tracts of land into a large enough pool to satisfy state spacing regulations for drilling.

  16. Federal Regulations • Environmental Protection Agency (EPA) • Bureau of Land Management (BLM) • Minerals Management Service of the Department of the Interior (DOI) • Railroad Commission • All well permits on land are approved through this office

  17. Questions • What is the typical instrument used to grant rights for mineral exploration/production. • Describe absolute ownership. • What is a fee simple owner? • What is a Mineral Deed? • Explain the difference between a servitude estate and a possessory estate. • What is a royalty? • Implied Covenant is a what_____? • The operator on a lease agreement is defined as what? • True or False: the Offset Drilling Rule states that you can not drill in an offset direction towards an adjacent property. • List two federal agencies that regulate the oil and gas industry.

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