1. 1 A Short, Short Course on Oil & Gas Law for the Wyoming Practitioner by
David E. Pierce
Washburn University School of Law
2. 2 “Oil & Gas” Law “Oil & Gas Law” is the application of state contract and property law concepts to a resource found within subsurface rock structures the boundaries of which cannot be readily defined at the time the resource is developed.
Most states have also adopted a statutory regime to address many special issues regarding development of the resource.
3. 3 “Oil & Gas” Law “Oil & Gas Law” problems arise when existing contract and property law do not “fit” the matter at issue and a special “oil and gas” rule is created.
“Oil & Gas Law” problems arise when there is a ready answer under existing contract or property law but courts use “oil & gas law” as a license to ignore principles of contract and property.
4. 4 Basic Property Concepts Lord Coke and the “ad coelum” doctrine: “To whomsoever the soil belongs, he owns also the sky and to the depths.”
Absent a prior severance, ownership of the surface includes all that lies beneath surface boundaries extended downward.
5. 5 Basic Property Concepts Freedom of “Conveyance” and American Property Law
General rule: if you can describe it, you can create it.
rule against perpetuities
rule against unreasonable restraints on alienation
6. 6 Basic Property Concepts Some Wyoming statutory limitations:
Wyo. Stat. Ann. § 34-1-152 (transfer of “pore space”).
Wyo. Stat. Ann. § 30-5-405(a)(iii) (cannot sever surface damage payments from land surface).
Wyo. Stat. Ann. § 34-27-103 (cannot sever wind rights from land surface).
7. 7 “Mineral” and “Surface” Estates Ohio Oil Co. v. Wyoming Agency, 179 P.2d 773 (Wyo. 1947).
“[R]eserve . . . all the minerals, mineral deposits, mineral oils and natural gases of every kind and nature contained in or upon said lands, the surface of which is hereby conveyed.”
Creates a “mineral fee” or mineral “estate.”
8. 8 “Mineral” and “Surface” Estates Liens created against the “surface” estate after the minerals had been severed.
Liens attached only to the “surface” estate so a subsequent foreclosure and sale only passed the surface, not the minerals.
Different result if the lien attached prior to the severance.
9. 9 “Mineral” and “Surface” Estates “After severance, the two estates, owned separately, are held by separate and distinct titles.”
“Each estate may be occupied, conveyed, encumbered, sold by the sheriff, or allotted in partition, without any effect upon the other.”
10. 10 “Mineral” and “Surface” Estates Milliron Oil Company v. Connaghan, 302 P.2d 256 (Wyo. 1956).
Owner of severed surface cannot obtain title to severed mineral interest through various “color of title” adverse possession theories.
Actions impacting the surface did not affect the severed mineral interest.
11. 11 “Mineral” and “Surface” Estates Connaghan v. Eighty-Eight Oil Company, 750 P.2d 1321 (Wyo. 1988).
Overriding royalty is a nonpossessory interest in real property and not subject to the doctrine of adverse possession.
Note: an easement is a nonpossessory interest in land but has a relationship to the land sufficient to provide notice to the owner of an adverse claim.
12. 12 “Mineral” and “Surface” Estates Issues in any adverse possession case:
What is the cause of action?
What is the applicable statute of limitations?
When did the cause of action accrue such that the statute commenced running?
Overriding royalty theories? Contract, conversion, property (abandonment)?
13. 13 “Mineral” and “Surface” Estates The new “pore space” estate.
“Pore space” is “subsurface space which can be used as storage space for carbon dioxide or other substances.”
“The ownership of all pore space in all strata below the surface lands and waters of this state is declared to be vested in the several owners of the surface above the strata.”
14. 14 “Mineral” and “Surface” Estates The new “pore space” estate.
“No agreement conveying mineral or other interests underlying the surface shall act to convey ownership of any pore space in the stratum unless the agreement explicitly conveys that ownership interest.” Wyo. Stat. Ann. § 34-1-152(b).
O grants to A the “pore space” in . . . .
15. 15 “Mineral” and “Surface” Estates The new “pore space” estate.
Conveyance of the surface conveys the pore space unless it has been expressly conveyed previously or is expressly excepted, as pore space, from the grant.
16. 16 “Mineral” and “Surface” Estates Ownership of coalbed methane within a coal seam.
O conveys to A all coal.
Who owns the coalbed methane that is found within the pore space of the coal seam? O or A?
17. 17 “Mineral” and “Surface” Estates Caballo Coal Co. v. Fidelity Exploration & Production Co., 84 P.3d 311 (Wyo. 2004).
Seek to ascertain the intent of the parties to the conveyance – at the time they entered into the conveyance.
18. 18 “Mineral” and “Surface” Estates “Surface” owners are almost always residual “mineral” owners.
O conveys to A “all minerals” in § 30.
Following this conveyance there is one uniform truth: A owns “some” minerals and O continues to own “some” minerals.
19. 19 “Mineral” and “Surface” Estates Why? Because the mineral owner will also receive an implied easement to make reasonable use of the surface to develop the granted mineral(s).
Finding that surface owner O has conveyed “all minerals” would also give grantee A the right to make reasonable use of the surface to extract all minerals – including minerals that require destruction of the surface to mine them.
20. 20 “Mineral” and “Surface” Estates The judicial solution: read “all minerals” narrowly so that it does not include “all minerals.”
Miller Land & Mineral Company v. State Highway Commission, 757 P.2d 1001 (Wyo. 1988).
“Reserving . . . all minerals and mineral rights existing under said . . .lands”
21. 21 “Mineral” and “Surface” Estates Who owns the 105,000 tons of gravel sold to the State Highway Commission?
Surface owner or the owner of “all minerals and mineral rights existing under said . . . lands”?
Surface owner; gravel is not a mineral.
Ordinary gravel vs. really neat gravel.
22. 22 “Mineral” and “Surface” Estates “[A]rriving at a clear rule of law is of more importance than the make of the vehicle used in getting to the destination.”
Concurring Justices: No it isn’t.
What was the intent of the parties, at the time of the conveyance, considering that the surrounding soil was much more valuable than the gravel?
23. 23 “Mineral” and “Surface” Estates The Miller court did not want the “mineral” grantee to receive gravel which would consume the surface in its extraction.
So, manipulate title to ensure the mineral stays with the surface owner – unless the mineral is expressly referenced in the grant – or the grant is clear enough to make it too embarrassing for the court to ignore the express language.
24. 24 “Mineral” and “Surface” Estates Mingo Oil Producers v. Kamp Cattle Company, 776 P.2d 736 (Wyo. 1989).
“Under the rule of reasonable necessity, a mineral lessee is entitled to possess that portion of the surface estate ‘reasonably necessary’ to the production and storage of the mineral . . . .”
25. 25 “Mineral” and “Surface” Estates Oil and Gas Surface Use Act, Wyo. Stat. Ann. §§ 30-5-401 to 30-5-410.
Right to oil and gas includes right to enter surface as “reasonable and necessary” to develop the oil and gas – but, “shall first comply with the provisions of this act and shall reasonably accommodate existing surface uses. . . .”
26. 26 “Mineral” and “Surface” Estates Statutory limitations on “wind” rights and “pore space” rights subject to existing common law regarding “dominance of, the mineral estate.”
Does not appear to alter first-in-time allocation of rights.
27. 27 Oil & Gas Interests Theories describing the nature of ownership in oil and gas: Ownership-in-place and Exclusive-right-to-take.
Newman v. RAG Wyoming Land Co., 53 P.3d 540 (Wyo. 2002): “[N]either rule of ownership has been clearly adopted by this court to date, nor has the distinction been considered of any significant legal consequence.”
28. 28 Oil & Gas Interests Rule of Capture.
Union Pacific Resources Co. v. Texaco, Inc., 882 P.2d 212 (Wyo. 1994): “Under the rule of capture, a land owner acquired title to all the oil and gas which the land owner could produce, even when it was proven that some of the oil and gas migrated from adjoining lands.”
29. 29 Oil & Gas Interests Rule of Capture drives ownership in oil and gas: ownership, regardless of how it is classified, is not complete until the oil and gas are reduced to possession as personal property.
30. 30 Oil & Gas Interests Mineral owners typically “lease” their lands for oil and gas development using an “Oil and Gas Lease.”
The rights granted in the oil and gas lease is, usually, a right “merely to search for oil and gas, and, if either is found, to remove it from the land leased.” Boatman v. Andre, 12 P.2d 370 (Wyo. 1932).
31. 31 Oil & Gas Interests The court in Boatman also observed:
The lease creates as profit a prendre.
An incorporeal hereditament.
A nonpossessory interest in real property.
Why does it matter?
Title to a possessory interest in land cannot be abandoned; a nonpossessory interest can be abandoned.
32. 32 Oil & Gas Interests Interests created out of the mineral interest:
Nonparticipating royalty interest.
Nonparticipating mineral interest.
33. 33 Oil & Gas Interests Nonparticipating Royalty Interest
No right to participate in development.
Passive right to receive production revenue.
Two common forms:
Conveyance of a fraction of production.
Conveyance of a fraction of royalty under an oil and gas lease.
34. 34 Oil & Gas Interests O grants to A the right to receive one-half of the royalty provided for in any oil and gas lease covering the following land . . . .
O grants to A 1/16th of all the oil, gas, and other minerals produced from the following land . . . .
35. 35 Oil & Gas Interests Boley v. Greenough, 22 P.3d 854 (Wyo. 2001).
“Assignment of Royalty”
“SELL, ASSIGN, SET OVER, TRANSFER and CONVEY . . . [1.5%] of all the oil, gas and other hydrocarbon substances produced and saved from the following described lands . . . .”
36. 36 Oil & Gas Interests “TO HAVE AND TO HOLD said royalty interest unto said assignee, [his] heirs and successors and assigns as above set forth; the said oil, gas and other hydrocarbon substances so produced and saved from said land to be delivered free of cost to assignee . . . .”
37. 37 Oil & Gas Interests “This is an OVER-RIDING royalty conveyed by assignors and accepted by assignee subject to the terms of the lease, leases, operating agreement and operating agreements now held by assignors covering said lands.”
At the time, the grantors did not own leasehold interests or overriding royalty interests in any of the lands.
38. 38 Oil & Gas Interests 1998 dispute arose over the interest created by the conveyances.
Drilling Title Opinion
Division Order Title Opinion
Issue: perpetual interests or limited to the duration of oil and gas leases in existence at the time of the grant?
Definition of an “overriding royalty.”
39. 39 Oil & Gas Interests The interests created were perpetual nonparticipating royalties.
Share of production, free of the cost of production, no right to explore, produce, or lease, no right to receive bonuses or delay rentals.
Can be granted before or after the mineral interest owner leases the land.
40. 40 Oil & Gas Interests Use of the term “over-riding royalty” to describe the interest?
During 1967 to 1969, when the interests were created, what was the general understanding regarding use of the term “overriding royalty”?
The term has been used to describe a royalty in addition to the landowner’s royalty under an oil and gas lease.
41. 41 Oil & Gas Interests Historical context.
1989 statute defining overriding royalty of no consequence when trying to ascertain the intent of parties using the term in 1969.
42. 42 Oil & Gas Interests Nonparticipating Mineral Interest
First, must have a “mineral” interest.
Does the owner have the present right to oil and gas prior to being produced from the land? (mineral)
Does the owner have the right to oil and gas only upon its production from the land? (royalty)
43. 43 Oil & Gas Interests Once the mineral/royalty issue is resolved in favor of a “mineral” interest, the common attributes of a mineral interest must be noted:
Right to develop.
Right to authorize others to develop (the “leasing” or “executive right”).
Right to benefits under the lease (bonus, delay rental, shut-in royalty, and royalty).
44. 44 Oil & Gas Interests A nonparticipating mineral interest is one in which one or more of the mineral attributes is held by another owner.
For example, O conveys to A 50% of the oil and gas in and under § 30 but retaining in O the right to develop and lease A’s 50% interest and the right to retain all bonus and delay rental associated with leasing A’s 50% interest.
45. 45 Oil & Gas Interests Note what A is left with: the right to receive royalty associated with A’s 50% mineral interest.
So, if O leases O’s mineral interest in § 30, and A’s mineral interest in § 30, and the lease provides for a 1/8th royalty, A will share in its proportionate share of the 1/8th royalty as a 50% mineral interest owner:
50% x 1/8th = 1/16th royalty.
46. 46 Oil & Gas Interests A owns a 50% nonparticipating mineral interest in § 30 that participates only in royalty attributable to its 50% mineral interest.
This is not a royalty interest; but rather the right to receive royalty under a lease as a mineral interest owner.
47. 47 Oil & Gas Interests Picard v. Richards, 366 P.2d 119 (Wyo. 1961).
“Reserving unto O a non-participating undivided one-fifth of the parties’ mineral interest in and to the above-described lands . . . it being specifically understood that A shall retain all control of said mineral interest subject to full disclosure at any reasonable time to O.”
48. 48 Oil & Gas Interests A leased the lands and received $15,000 in bonus money.
O wants her 1/5th share of the bonus.
Best argument: O received a 1/5th mineral interest which was nonparticipating as to the right to lease and develop, but participating as to all economic benefits (bonus, delay rental, shut-in royalty, and royalty).
49. 49 Oil & Gas Interests Court holds O received a nonparticipating royalty interest and therefore was not entitled to any of the bonus money.
Court also holds O is not entitled to a 1/5th royalty but rather 1/5th of the royalty.
Note, 1/5th of the royalty is what O would receive as a mineral interest owner.
50. 50 Oil & Gas Interests So far we have focused on transfers of interests out of the mineral interest.
The most common transfer out of the mineral interest is the grant of a profit a prendre to a developer under an “Oil and Gas Lease.”
Leasehold interest; working interest.
51. 51 Oil & Gas Interests Transfers by the lessee out of the leasehold interest.
Net profits interest.
52. 52 Oil and Gas Interests Overriding Royalty
53. 53 Oil and Gas Interests Production Payment
54. 54 Oil and Gas Interests Net Profits Interest
55. 55 Oil and Gas Interests
56. 56 Oil and Gas Interests Carried Interest
Owner of development rights agrees to “carry” the owner of the carried interest to a specified point in the development process.
“Carry” means the carrying party will advance the costs, and assume the risk, of the carried operations.
Carrying party recovers costs from the carried interest owner’s share of production, if any.
57. 57 Oil and Gas Interests A.A.P.L. Form 610—Model Form Operating Agreement
Allows party to go “non-consent.”
Consenting parties “carry” the non-consenting party’s share of the operation.
If the operation is successful, the carrying (consenting) parties recover their investment, plus a risk charge (“penalty”) from the carried (non-consenting) party’s share of production.
58. 58 Oil and Gas Interests Convertible Interest
Most commonly used in conjunction with a Farmout Agreement.
59. 59 Oil & Gas Interests Up to this point we have examined interests that are unique to the oil and gas industry.
Now lets see how traditional interests are treated in the oil and gas context.
Concurrent (undivided) interests.
60. 60 Oil & Gas Interests Concurrent (undivided) Interests
Two major issues in the oil and gas context:
Who can develop or authorize development?
How will development proceeds be shared?
61. 61 Oil & Gas Interests Torgeson v. Connelly, 348 P.2d 63 (Wyo. 1959).
Authorize Development: “The owners of undivided portions of oil and gas rights in and under real estate are tenants in common and each of them may enter upon the premises to explore for and develop gas and oil. One of them cannot exercise the right to the exclusion of the other,”
62. 62 Oil & Gas Interests Sharing of Development Proceeds: “and the one who does proceed must account to a nonconsenting cotenant for the pro rata share of the net profits to be determined by deducting from the amount received the necessary expense of exploring, developing, extracting, and marketing.”
63. 63 Oil and Gas Interests Divided Interests
Surface Boundary Divisions
“the Northeast Quarter of § 30”
“an undivided 10% interest in the NE1/4 of § 30”
Subsurface Boundary Divisions
“from the surface to 10,000 feet below sea level”
“the Dakota formation”
“oil, gas, and other minerals”
64. 64 Oil & Gas Interests Successive Interests
Life Estate and Remainder
O to A for life, remainder to B.
Who can develop or authorize development?
How will development proceeds be shared?
65. 65 Oil and Gas Interests Successive Interests
Neither the life tenant nor the remainderman can independently develop or authorize development.
Unless the grantor of the life estate grants a party the power in the conveyance creating the life estate.
66. 66 Oil and Gas Interests State v. Snyder, 212 P. 758 (Wyo. 1923).
“[U]nder the common law, life estates, whether conventional or arising by operation of law, were impeachable for waste, unless the instrument creating a conventional life estate expressed a contrary intention.”
67. 67 Oil and Gas Interests “[C]ourts have been unanimous in holding . . . that a life tenant has no right whatever, as against a remainderman, to open up new mines or quarries or oil or gas wells, or lease the land for that purpose to others.”
68. 68 Oil & Gas Interests Successive Interests
Once development takes place, a series of rules will determine who will share in production proceeds.
Unless the grantor of the life estate addresses the matter.
69. 69 Oil & Gas Interests Successive Interests
Open Mine Doctrine
Lease in effect at time life tenancy created by grantor; life tenant receives all lease benefits.
70. 70 Oil and Gas Interests First Wyoming Bank, N.A.—Cheyenne v. First National Bank and Trust Co., 628 P.2d 1355 (Wyo. 1981).
“The purpose of the so-called ‘open mine’ rule is to try and match testator’s intent. Presumably where she/he has been receiving oil royalty payments she/he considers them to be income.”
71. 71 Oil & Gas Interests “Thus, absent some words of limitation in instrument creating a trust, it is assumed that testator intended the life tenant to enjoy the property in the same fashion and to the same extent it had been enjoyed by the testator.”
72. 72 Oil & Gas Interests Successive Interests
Absent Open Mine Doctrine
Delay rental: pay to life tenant.
Royalty: invested for remainder, interest to life tenant.
Bonus: some states it is income; others treat it as principal.
73. 73 Oil & Gas Interests Interests Held in Trust
Trust agreement controls development.
Absent direction in trust agreement, look to Trustee Powers Act.
Division of revenue: Uniform Principal and Income Act
74. 74 Oil & Gas Interests Wyoming Uniform Principal and Income Act
Wyo. Stat. Ann. § 2-3-834: “This act applies to every trust or decedent’s estate existing on the effective date of this act except as otherwise expressly provided in the will or terms of the trust or in this act.”
Does not apply to typical life estate.
75. 75 Oil & Gas Interests Wyo. Stat. Ann. § 2-3-821. Allocation of principal and income for “minerals or other natural resources.”
Eliminates the open mine doctrine: “(c) This act applies whether or not a decedent or donor was extracting minerals, water or other natural resources before the interest became subject to the trust.”
76. 76 Oil & Gas Interests Allocation of principal and income under the Wyoming UP&IA:
“Nominal” in amount, treat it as income.
More than nominal:
27.5% allocated to principal.
72.5% allocated to income.
77. 77 Oil & Gas Interests
The Kansas experience with the UPIA:
1931 100 Principal
1962 27.5 Principal / 72.5 Income
1997 90 Principal / 10 Income
2003 15 Principal / 85 Income
78. 78 Oil and Gas Interests Term Interests
Definite term; reversion.
Defeasible Term Interests
Definite primary term with indefinite secondary term; possibility of reverter.
Oil and Gas Leases, Mineral Interests, Royalty Interests
79. 79 Oil and Gas Interests Defeasible Term Mineral Interest
80. 80 Oil and Gas Interests Basic Problem:
The “production” requirement.
Defeasible term conveyances seldom contain the savings clauses found in oil and gas leases, such as a dry hole, cessation, completion, or shut-in royalty clause.
81. 81 Oil and Gas Interests Creditors
Mortgages and liens.
Subordination (by agreement with the creditor).
Subrogation (pursuant to lease clause).
82. 82 Oil and Gas Interests Easements, Covenants, Servitudes
All create burdens and rights in property that may impact ability to develop the minerals.
Do the rights conflict? Or, can they coexist?
83. 83 The Oil & Gas Lease No standard form.
Origin of the “Form 88”
All leases address three general subjects:
The Duration of the Grant.
84. 84 The Oil & Gas Lease The Grant: “Lessor . . . hereby grants, leases and lets exclusively unto lessee for the purpose of investigating, exploring, prospecting, drilling, mining and operating for and producing oil, liquid hydrocarbons, all gases, and their respective constituent products, injecting gas, water, other fluids, and air into subsurface strata, laying pipe lines, storing oil, building tanks, power stations,
85. 85 The Oil & Gas Lease telephone lines, and other structures and things thereon to produce, save, take care of, treat, manufacture, process, store and transport said oil, liquid hydrocarbons, gases and their respective constituent products and other products manufactured therefrom, and housing and otherwise caring for its employees, the following described land . . . .”
86. 86 The Oil & Gas Lease “Lessee shall have free use of oil, gas, and water from said land, except water from lessor’s wells and tanks, for all operations hereunder, including repressuring, pressure maintenance, cycling, and secondary recovery operations . . . .” [Free Use Clause]
87. 87 The Oil & Gas Lease “Lessee shall have the right . . . to remove all property and fixtures placed by lessee on said land, including the right to draw and remove all casing.”
88. 88 The Oil & Gas Lease “There shall be no obligation on the part of the lessee to offset wells on separate tracts into which the land covered by this lease may be hereafter divided by sale, devise, or otherwise, or to furnish separate measuring or receiving tanks.”
89. 89 The Oil & Gas Lease “When required by lessor, lessee will bury all pipe lines below ordinary plow depth.”
“Lessee shall pay for damages caused by its operations to growing crops on said lands.” [Crop Damage Clause]
“No well shall be drilled within two hundred feet (200 ft.) of any residence or barn now on said land without lessor’s consent.”
90. 90 The Oil & Gas Lease
“Lessor shall have the privilege, at his risk and expense, of using gas from any gas well on said land for stoves and inside lights in the principal dwelling thereon, out of any surplus gas not needed for operations hereunder.” [Free Gas Clause]
91. 91 The Oil & Gas Lease “together with any reversionary rights and after-acquired interest, therein . . . .”
“containing ___ acres, more or less, and all accretions thereto.”
92. 92 The Oil & Gas Lease “The rights of either party hereunder may be assigned in whole or in part and the provisions hereof shall extend to the heirs, executors, administrators, successors, and assigns . . . .” [Assignment Clause]
93. 93 The Oil & Gas Lease “An assignment of this lease, in whole or in part, shall, to the extent of such assignment, relieve and discharge lessee of any obligations hereunder.” [Advance Novation Clause]
94. 94 The Oil & Gas Lease “Lessee and lessee’s successors and assigns shall have the right at any time to surrender this lease, in whole or in part, to lessor . . . ; thereupon lessee shall be relieved from all obligations, expressed or implied, of this agreement as to the acreage so surrendered . . . .” [Surrender Clause]
95. 95 The Oil & Gas Lease “Lessor hereby warrants and agrees to defend the title to said land, and agrees that lessee, at its option, may discharge any tax, mortgage, or other lien upon said land, and in the event lessee does so, it shall be subrogated to such lien with the right to enforce same and apply rentals and royalties accruing hereunder toward satisfying same.” [Warranty Clause; Subrogation Clause]
96. 96 The Oil & Gas Lease “In case said lessor owns a less interest in the above described land than the entire and undivided fee simple estate therein, then the royalties, including substitute gas royalty, and rentals herein provided for shall be paid the said lessor only in the proportion that his interest bears to the whole and undivided fee . . . .” [Proportionate Reduction Clause a/k/a Lesser Interest Clause]
97. 97 The Oil & Gas Lease “If the leased premises shall hereafter be owned in severalty or in separate tracts, the premises, nevertheless, shall be developed and operated as one lease, and all royalties accruing hereunder shall be treated as an entirety and shall be divided among and paid to such separate owners in the proportion that the acreage owned by each such separate power bears to the entire leased acreage.” [Entireties Clause]
98. 98 Nonapportionment The nonapportionment problem arises as follows:
O leases § 30 to X on May 1, 2010.
O conveys SWĽ of § 30 to A on May 2.
X drills well on SWĽ of § 30 on May 3.
Assuming the lease provides for a 1/8th royalty, how should it be divided between O and A?
99. 99 Nonapportionment Under the nonapportionment doctrine A gets all the royalty; O gets nothing.
The well on A’s land will continue the lease in effect as to O’s land – without development on O’s land.
100. 100 Nonapportionment Ways to achieve apportionment of the royalty:
Entireties clause in the O/X lease.
Provide for apportionment in the O/A conveyance.
Use force pooling statute to pool all the separate interests to achieve the same result as an entireties clause.
101. 101 The Oil & Gas Lease Duration of the Grant: “Subject to the provisions herein contained, this lease shall remain in force for a term of ten (10) years from this date (called ‘primary term’), and as long thereafter as oil, liquid hydrocarbons, gas or other respective constituent products, or any of them, is produced from said land or land with which said land is pooled.” [Habendum Clause]
102. 102 The Oil & Gas Lease “[I]f there is a gas well or wells on the above land (and for the purposes of this clause the term ‘gas well’ shall include wells capable of producing natural gas, condensate, distillate or any gaseous substance and wells classified as gas wells by any governmental authority)
103. 103 The Oil & Gas Lease and such well or wells are shut in before or after production therefrom, lessee or any assignee hereunder may pay or tender annually at the end of each yearly period during which such gas well or gas wells are shut in, as substitute gas royalty, a sum equal to the amount of delay rentals provided for in this lease . . .
104. 104 The Oil & Gas Lease and if such payments or tenders are made it shall be considered under all provisions of this lease that gas is being produced from the leased premises in paying quantities.” [Shut-In Royalty Clause]
105. 105 The Oil & Gas Lease “If operations for drilling are not commenced on said land or on land pooled therewith on or before one (1) year from this date, this lease shall terminate as to both parties, unless on or before one (1) year from this date lessee
106. 106 The Oil & Gas Lease shall pay or tender to the lessor a rental of ____ Dollars which shall cover the privilege of deferring commencement of such operations for a period of twelve (12) months. . . .” [Drilling, Delay Rental Clause]
107. 107 The Oil & Gas Lease “If prior to the discovery of oil, liquid hydrocarbons, gas or their respective constituent products, or any of them, on said land or land pooled therewith lessee should drill and abandon a dry hole or holes thereon, or if, after discovery of oil, liquid hydrocarbons, gas or their respective constituent products, or any of them, the production thereof should cease from any cause,
108. 108 The Oil & Gas Lease this lease shall not terminate if lessee commences reworking or additional drilling operations within sixty (60) days thereafter, or (if it be within the primary term), (i) in the case of a dry hole, commences or resumes the payment or tender of rentals or commences operations for drilling or reworking on or before the rental paying date occurring twelve (12) months after the expiration of the rental period during which such dry hole was drilled,
109. 109 The Oil & Gas Lease or (ii) in the case of cessation of production, commences or resumes the payment or tender of rentals or commences operations for drilling or reworking on or before the rental paying date next ensuing after the expiration of three (3) months from the cessation of production. [Dry Hole Clause; Cessation of Production Clause]
110. 110 The Oil & Gas Lease “If, at the expiration of the primary term, oil, liquid hydrocarbons, gas or their constituent products, or any of them, is not being produced on said land or land pooled therewith but lessee is then engaged in operations for the drilling or reworking or any well thereon,
111. 111 The Oil & Gas Lease this lease shall remain in force so long as drilling or reworking operations are prosecuted (whether on the same or different wells) with no cessation of more than sixty (60) consecutive days, and if they result in production, so long thereafter as oil, liquid hydrocarbons, gas or their respective constituent products, or any of them, is produced from land or land pooled therewith.” [Operations / Completion Clause]
112. 112 The Oil & Gas Lease “Lessee shall not be liable for delays or defaults in its performance of any agreement or covenant hereunder due to force majeure. . . .” [Force Majeure Clause]
113. 113 The Oil & Gas Lease Landowner Compensation:
Bonus, Delay Rental, Shut-In Royalty
114. 114 The Oil & Gas Lease “The royalties to be paid by lessee are: (a) on oil, and other liquid hydrocarbons saved at the well, one-eighth of that produced and saved from said land, same to be delivered free of cost at the wells or to the credit of lessor in the pipe line to which the wells may be connected; [Oil Royalty Clause]
115. 115 The Oil & Gas Lease “(b) on gas, including casinghead gas and all gaseous substances, produced from said land and sold or used off the leased premises or in the manufacture of gasoline or other products therefrom, the market value at the mouth of the well of one-eighth of the gas so sold or used, provided that on gas sold at the wells the royalty shall be one-eighth of the amount realized from such sale . . . .” [Gas Royalty Clause]
116. 116 Royalty Issues Once the lease has been signed, and production has been obtained, how can the lessor maximize their royalty?
Increase the volume of oil and gas produced.
Increase the value of that which is produced.
117. 117 Royalty Issues The Royalty Value Theorum:
“When compensation under a contract is based upon a set percentage of the value of something, there will be a tendency by each party to either minimize or maximize the value.”
118. 118 Royalty Issues Lessors will readily pursue theories that will net them a fraction of X+ instead of X.
Lessees will avoid paying royalty on X+ if their leases can support a royalty on X.
Value disputes boil down to taking the + from one party and giving it to the other.
119. 119 Royalty Issues Linear Enhancement of Royalty Value
As oil or gas moves downstream from the wellhead it increases in value.
Value increases from:
Investments made in the production;
Increased value at downstream location.
120. 120 Example Wellhead value of gas: $1.00/Mcf
Cost to move gas from wellhead to interstate pipeline (gathering & compression): 50˘/Mcf
Value of gas at interstate pipeline: $1.55/Mcf
121. 121 Royalty Issues Wellhead value of gas: $1.00/Mcf
Cost to move gas from wellhead to interstate pipeline (gathering & compression): 50˘/Mcf
Value of gas at interstate pipeline: $1.55/Mcf
122. 122 Royalty Issues Royalty Value Theorem considered in conjunction with Linear Enhancement
Recipe for dispute: lessees will seek to value production for royalty purposes as close to the point of extraction as possible ($1.00/Mcf) while lessors will seek to value production as far downstream from the point of extraction as possible ($1.55/Mcf).
123. 123 Royalty Issues
“Change” contributes to royalty disputes.
Government regulation has been the source of major changes impacting royalty calculation.
Regulation has changed gas marketing patterns.
124. 124 Royalty Issues Marketing Patterns Pre-1992
Dedicate leased land to a gas purchaser.
Contract prices stray from market value.
Delivery point at or near where produced.
Contract volume defined by output of well.
125. 125 Royalty Issues Marketing Patterns Post-1992
Leased land rarely dedicated.
Short-term contracts on a 30-day cycle.
Contract price reflects market value.
Delivery points far removed from wellhead.
Contract volume defined by buyer’s needs.
126. 126 Royalty Issues Wyo. Stat. Ann. §§ 30-5-304 & 30-5-305 addresses the “deductible costs” issue for the calculation of royalty
127. 127 Royalty Issues “‘Costs of production’ means all costs incurred for exploration, development, primary or enhanced recovery and abandonment operations including, but not limited to lease acquisition, drilling and completion, pumping and lifting, recycling, gathering, compressing, pressurizing, heater treating, dehydrating, separating, storing
128. 128 Royalty Issues or transporting the oil to the storage tanks or the gas into the market pipeline. ‘Cost of production’ does not include the reasonable and actual direct costs associated with transporting the oil from the storage tanks to market or the gas from the point of entry into the market pipeline or the processing of gas in a processing plant; . . . . Wyo. Stat. Ann. § 30-5-304(vi)
129. 129 Royalty Issues What is a “market pipeline”? Cabot Oil & Gas Corp. v. Followill, 93 P.3d 238 (Wyo. 2004), defines “gathering” but does not define “market pipeline.”
“We hold that ‘gathering’ means to collect gas and move it to a point where it can be processed or transported to the user.”
130. 130 Royalty Issues “Cabot’s contention that the statute limits gathering to those transportation costs that occur on the geographic region of the lease is not supported either by the statutory language or any authority.”
131. 131 Royalty Issues Wold v. Hunt Oil Co., 52 F. Supp.2d 1330 (D. Wyo. 1999) (holding that expenses associated with moving gas from the wellhead to the inlet of a FERC-regulated pipeline were “gathering” costs that could not be deducted under § 30-5-305(a)).
132. 132 Royalty Issues “At the well” language?
Lessee marketing options?
Can a lessee sell its gas at the wellhead?
Does it matter if the lessee has the option to seek a market downstream from the wellhead?
What if the wellhead price is based upon a downstream proceeds or index work-back?
133. 133 Royalty Issues Must the wellhead sale be at a fixed per MMBtu wellhead price or can it be a percentage-of-proceeds formula for calculating royalty?
State v. Davis Oil Co., 728 P.2d 1107 (Wyo. 1986), may be relevant in addressing this issue. The court, with two justices dissenting, ignored a wellhead sale where the wellhead purchase price was based, in part, on subsequently determined downstream values.
134. 134 Royalty Issues Mandatory information provided to police royalty and other production payments. Wyo. Stat. Ann. § 30-5-305(b)
Timely payment of royalty and other production payments. Wyo. Stat. Ann. § 30-5-301
Administration of suspense accounts. Wyo. Stat. Ann. § 30-5-302
135. 135 Royalty Issues Remedies for failing to make timely and proper payments as required under the article 5 provisions, including an 18% interest penalty, prevailing party attorney fees, and a $100/month statutory penalty for failing to provide the information required by W.S. 30-5-305(b). Wyo. Stat. Ann. § 30-5-303
136. 136 Royalty Issues Cabot Oil & Gas Corp. v. Followill, 93 P.3d 238 ( Wyo.2004), addressed statute of limitations issues regarding the § 30-5-303 remedies:
“The remedial purpose of the Act would be nullified if the discovery rule did not apply. The one year statute of limitations related to the penalty for failure to properly report under the Royalty Payment Act begins to run if, and when, the producer issues a proper report.”
137. 137 The Oil and Gas Lease Division Orders
Document used by a production purchaser to entitle it to take possession of the owner’s production and to specify the precise proportionate share the owner claims in the production stream.
138. 138 The Oil and Gas Lease When the party seeking a division order has no existing relationship with the interest owner (no lease relationship), it functions as a sales contract with the interest owner as seller.
Lessor’s sale of oil (condensate?) is a sale of goods governed by Article 2 of the Uniform Commercial Code.
139. 139 The Oil and Gas Lease Division orders have sometimes been used by lessees to further define, or to change, the basis for calculating royalty with their lessor.
140. 140 The Oil and Gas Lease Wyo. Stat. Ann. § 30-5-305(a). “A division order may not alter or amend the terms of an oil or gas lease or other contractual agreement. A division order that alters or amends the terms of an oil and gas lease or other contractual agreement is invalid to the extent of the alteration or amendment and the terms of the oil and gas lease or other contractual agreement shall take precedence.”
141. 141 The Oil and Gas Lease This makes sense if the oil and gas lessee is seeking the division order – or a party that already has a contractual relationship with the party.
It does not make sense if the party seeking the division order has no existing legal relationship with the lessor or other party seeking to sell their production.
142. 142 The Oil and Gas Lease Pooling
“Lessee is hereby granted the right to pool or consolidate the leased premises, or any portion or portions thereof, as to all strata, or any stratum or strata, with other lands as to all strata, or any stratum or strata, but only as to the gas right hereunder (excluding casinghead gas produced from oil wells)
143. 143 The Oil and Gas Lease to form one or more gas operating units of not more than 640 acres, plus a tolerance of ten per cent (10%) to conform to Governmental Survey quarter sections. Lessee shall file written unit designations in the county in which the premises are located.
144. 144 The Oil and Gas Lease Such units may be designated either before or after the completion of wells. Drilling operations and production on any part of the pooled acreage shall be treated as if such drilling operations were upon or such production was from the land described in this lease whether the well or wells be located on the land covered by this lease or not.
145. 145 The Oil and Gas Lease “The entire acreage pooled into a gas unit shall be treated for all purposes, except the payment of royalties on production from the pooled unit, as if it were included in this lease.”
146. 146 The Oil and Gas Lease In lieu of the royalties herein provided, lessor shall receive on production from the unit so pooled only such portion of the royalty stipulated herein as the amount of his acreage placed in the unit or his royalty interest therein on an acreage basis bears to the total acreage so pooled in the particular unit involved.” [Pooling Clause]
147. 147 The Oil and Gas Lease Effect of compulsory pooling. Wyo. Stat. Ann. § 30-5-109(f) provides, in part:
“Operations incident to the drilling of a well upon any portion of a unit covered by a pooling order shall be deemed for all purposes to be the conduct of such operations upon each separately owned tract in the unit by the several owners thereof.
148. 148 The Oil and Gas Lease That portion of the production allocated or applicable to each tract included in a unit covered by a pooling order shall, when produced, be deemed for all purposes to have been produced from such tract by a well drilled thereon.”
149. 149 The Oil and Gas Lease Contrast the additional language in the compulsory unitization statute.
Wyo. Stat. Ann. § 30-5-110(k). “Whenever the commission enters an order providing for a unit operation, any lease, other than a state or federal lease, which covers lands that are in part within the unit area embraced in any such plan of unitization and that are in part outside of such unit area shall be vertically segregated into separate leases,
150. 150 The Oil and Gas Lease “one (1) covering all formations underlying the lands within such unit area and the other covering all formations underlying the lands outside each unit area, . . . .”
See S. Thomas Throne, An Examination of the Segregation Clause in Wyoming’s Unitization Statute and the Implied Covenant of Further Exploration, 31 Land & Water L. Rev. 839 (1996).
151. 151 The Oil and Gas Lease Pugh Clause. Wolff v. Belco Development Co., 736 P.2d 730 (Wyo. 1987). Absent express language to limit the effect of a pooling clause, or the “standard” terms of a pooling (or communitization) agreement, production from anywhere within a pooled area will be deemed production from each lease that comprises the pooled area.
152. 152 The Oil and Gas Lease This means the lease habendum clause will be interpreted as though the producing well within the pooled unit is physically located on the leased land.
This will maintain all the lease acreage (as to all depths) beyond the primary term so long as there is production from the well on the pooled unit.
153. 153 The Oil and Gas Lease In the Wolff case the lessor, in 1967, entered into an oil and gas lease covering 803 acres – after striking out the pooling clause from the form lease. In 1971 the lessor entered into a communitization agreement creating an 80-acre pooled unit which consisted of 40 acres from the lessor’s tract and 40 acres of federal lands. The well was completed on the portion of the pooled area consisting of the federal lands.
154. 154 The Oil and Gas Lease In 1987 the lessor asserted the balance of the leased acreage outside the 80-acre communitized area had terminated because there had been no wells drilled on this part of the leased land.
155. 155 The Oil and Gas Lease Express terms of the communitization agreement control – and they state that production anywhere within the pooled area is deemed to be production from the leased land – which maintained all the lease acreage, both inside, and outside, of the pooled area.
156. 156 The Oil and Gas Lease Absent a Pugh clause, the lessor is left with implied covenant arguments to prompt development of land outside the pooled area (and for formations that are not part of the pooled area).
157. 157 Conservation Regulation Limiting the Rule of Capture, by statute.
Wyoming Oil and Gas Conservation Act
Wyo. Stat. Ann. §§ 30-5-101 to 30-5-128
“The Act . . . represents a legislative modification of the rule of capture.” Union Pacific Resources Co. v. Texaco, Inc., 882 P.2d 212, 223 (1994).
158. 158 Conservation Regulation “[T]he [Act’s] purpose is to provide a comprehensive regulatory program which prevents the waste of Wyoming’s oil and gas resources and protects the correlative rights of property owners.”
Protect “correlative rights.”
159. 159 Conservation Regulation Wyo. Stat. Ann. § 30-4-101(a)(ix). “‘Correlative rights’ shall mean the opportunity afforded the owner of each property in a pool to produce, so far as is reasonably practicable to do so without waste, his just and equitable share of the oil or gas, or both, in the pool; . . . .”
160. 160 Conservation Regulation Administered by the Wyoming Oil and Gas Conservation Commission which exercises broad powers over “all persons and property” that is “necessary to effectuate the purposes and intent of this act . . . .” Wyo. Stat. Ann. § 30-4-104(a).
161. 161 Conservation Regulation Two major techniques are used to accomplish the Act’s goals:
(1) the creation of drilling units and
(2) pooling separate properties within a drilling unit.
162. 162 Conservation Regulation Wyo. Stat. Ann. § 30-5-109(b). “In establishing a drilling unit, the acreage to be embraced within each unit and the shape thereof shall be determined by the commission from the evidence introduced at the hearing but shall not be smaller than the maximum area that can be efficiently drained by one (1) well.”
163. 163 Conservation Regulation Pooling: The process by which separately owned tracts or interests within a drilling unit are combined to share in the development and production from any well completed on the drilling unit.
164. 164 Conservation Regulation Communitization: When the act of pooling encompasses federal or Indian lands, it is called “communitization.”
Communitization and pooling mean the same thing; when properly used the term communitization indicates the presence of federal or Indian lands within the drilling unit.
165. 165 Conservation Regulation Pooling can be by agreement among all the owners, called “voluntary pooling,” or it can be imposed on the parties by the commission, called “compulsory” or “forced” pooling.
166. 166 Conservation Regulation Wyo. Stat. Ann. § 30-5-109(f). “When two (2) or more separately owned tracts are embraced within a drilling unit, or when there are separately owned interests in all or part of the drilling unit, then persons owning such interests may pool their interests for the development and operation of the drilling unit. In the absence of voluntary pooling, the commission, upon the application of any interested person, may enter an order pooling all interests in the drilling unit for the development and operation thereof. . . .”
167. 167 Conservation Regulation Wyo. Stat. Ann. § 30-5-109(g). “Each pooling order shall provide for the drilling and operation of a well on the drilling unit, and for the payment of the cost thereof, as provided in this subsection. . . .”
168. 168 Conservation Regulation Union Pacific Resources Co. v. Texaco, Inc., 882 P.2d 212 (Wyo. 1994).
Commenting on the drilling unit/pooling process, the court noted:
“[T]he Commission exercises its authority in distinct stages. First, the drilling unit is established. Second, the compulsory pooling order is issued, if necessary.”
169. 169 Conservation Regulation Prorating Production
Prorating production, or “prorationing,” is a limit on what producers in a field can produce from their wells.
For example, if a well is capable of producing, without waste, 100 barrels of oil each day, a prorationing order might limit the well to 50% of that amount, or 50 barrels per day.
170. 170 Conservation Regulation Prorating production to affect the “market demand” (i.e. price) for oil or gas is expressly prohibited. Wyo. Stat. Ann. § 30-5-117 (“It is not the intent or purpose of this law to require, permit, or authorize the commission or supervisor to prorate or distribute production of oil and gas among the fields of Wyoming on the basis of market demand. . . .”).
171. 171 Conservation Regulation Fieldwide Unitization
Of all the conservation techniques (drilling units, pooling, prorationing), fieldwide unitization is the only technique that eliminates underlying problems regarding the rule of capture.
172. 172 Conservation Regulation Unlike “pooling” which merely seeks to combine acreage encompassed by a single drilling unit, “unitization” seeks to combine all drilling units, and all owners, within a pool, for development as a pool – as distinguished from the development of individual drilling units.
173. 173 Conservation Regulation Wyo. Stat. Ann. § 30-5-110. Comprehensive statute that authorizes “compulsory” or “forced” unitization when the procedures are followed and at least 80% (subject to adjustment to 75% under certain circumstances) of the owners consent to the plan of unitization.
174. 174 Conservation Regulation Gilmore v. Oil and Gas Conservation Commission, 642 P.2d 773 (Wyo. 1982) demonstrates some of the hurdles faced by unitization proponents under the Wyoming statute (which is, on balance, as “good” or “bad” as unitization statutes found in other states).
175. 175 Conservation Regulation Owners voted on 67 different formulas for determining participation in costs and revenue associated with the proposed unit operations..
5,753.5 barrels of oil were being lost, each day, that unitization (so that secondary recovery operations could be conducted) was delayed.
176. 176 Conservation Regulation The parties had been trying to unitize the pool for years.
“The Commission found that waste was occurring . . . by delaying secondary recovery, and as a result, after a . . . hearing, ordered a curtailment of production pending unitization.”
In Texas this is known as “arm-twisting.”
177. 177 Conservation Regulation Correlative Rights The term is used in two distinct contexts:
Statutory Context. Once an owner’s self-help rights under the rule of capture are limited by conservation regulations, the state must ensure it treats all parties fairly.
178. 178 Conservation Regulation Private Context. Each owner within a pool has reciprocal rights and duties as to all other owners within the pool -- because each pool owner has the capacity to impact the rights of the other pool owners.
Their property is interconnected.
179. 179 Conservation Regulation “Correlative rights recognize that each owner overlying an oil and gas reservoir has rights and duties with regard to other owners above the reservoir.
The connected nature of the reservoir rock structure makes it possible for any owner conducting operations within the reservoir to impact other owners. . . .
180. 180 Conservation Regulation Correlative rights are part of the bundle of sticks comprising ownership of the oil and gas, much like the rights to lateral and subjacent support are part of the bundle of sticks comprising land ownership.”
181. 181 Implied Covenants Obligations not expressed in the oil and gas lease, but found to exist because of the express terms of the lease.
Because the parties agreed to terms A, B, and C, it is reasonable to imply that they intended term D as well.
Lessee has exclusive control over development.
Lessor royalty depends on development.
182. 182 Implied Covenants Ready v. Texaco, Inc., 410 P.2d 983 (Wyo. 1966) (court recognized that lessee had an implied right to conduct seismographic operations on the leased land even though the lease did not expressly address such operations – but nothing suggested the lessee’s rights were exclusive).
183. 183 Implied Covenants “[I]t is settled that implied covenants are not favored by the law and will not be interpreted to exist unless from the language employed in the instrument such implication is indispensable in the effectuation of the intention of the parties.”
184. 184 Implied Covenants “[T]he leases in question do not explicitly grant to lessee the right to explore. However, by clear implication they permit exploration by any reasonable and prudent means, but, conversely, there is no exclusive right to explore. The governments in each instance could have made such grant but they did not do so.”
185. 185 Implied Covenants Kuehne v. Samedan Oil Corp., 626 P.2d 1035 (Wyo. 1981).
“An implied covenant is one which may reasonably be inferred from the whole agreement and the circumstances attending its execution. Implication when used in that sense is synonymous with intention. An express covenant upon a given subject, deliberately entered into without fraud or mutual mistake, excludes the possibility of an implied covenant of a different or contradictory nature.”
186. 186 Implied Covenants Sonat Exploration Co. v. Superior Oil Co., 710 P.2d 221 (Wyo. 1985) (court upholds trial court’s finding that lessee did not breach an implied covenant to further develop lessor’s leased lands).
187. 187 Implied Covenants “We hold that, even after a substantial delay between the last drilling and the commencement of the action to cancel the lease, a lessor – in order to establish the breach in question – must carry the burden of proving lack of reasonable diligence on the part of the lessee, which burden includes the showing of a reasonable expectation of profit for both the lessor and lessee from further drilling.”
188. 188 Implied Covenants “Superior’s lease from the bank included six separate tracts of land located from two to nine miles away from each other . . . .”
Lease given in 1957; production obtained from one tract in 1960 and the tract was subsequently unitized. No further drilling by Superior. Demand for further development made by lessor in 1977 followed by law suit.
189. 189 Implied Covenants Although Superior did not drill any additional wells, it was active in contributing toward other drilling in the area, entering into farmouts of the leased land, and generally staying active and interested in development of the area – short of spending money to drill on the leased land.
190. 190 Implied Covenants “It is well established that oil and gas leases . . . contain an implied covenant of development.”
Follow the rule developed in Brewster v. Lanyon Zinc Co., 140 Fed. 801 (8th Cir. 1905), “to the effect that the lessee must act with reasonable diligence in developing the minerals under the lease.”
191. 191 Implied Covenants “[L]essee’s diligence must be measured by the ‘prudent operator’ test.” “[B]reaches of implied covenants to develop are questions of fact which must be resolved in each case according to its particular circumstances.”
192. 192 Implied Covenants Reject Oklahoma rule that after an unreasonable period of time passes from drilling the initial well, the burden of proof shifts to the lessee.
“Instead, we will continue to follow the rule that the lessor must prove that the lessee has breached the implied covenant of development under the prudent operator test.”
193. 193 Implied Covenants Court evaluates lessor’s evidence regarding profitability and affirms the trial court’s finding that the lessor failed to carry its burden of proof.
Who gets to enjoy, under these facts, the speculative value associated with the lease? For now, the lessee.
194. 194 Implied Covenants “In any event, we believe that a lessee who is acting prudently by not developing under present circumstances indeed would lose a great deal if the lease were to be cancelled and shortly thereafter market conditions change or technological advancements are made so that further development becomes prudent.”
195. 195 Implied Covenants Court also affirms trial court’s refusal to specify any sort of time table for lessee’s development – because there was no breach of the implied covenant to develop.
196. 196 The Prudent Operator Standard Objective, Not Subjective:
Good faith, subjective honesty of the lessee is not the test.
What a reasonable business person would do is not the test.
The test is what a reasonable lessee would do considering the interest of both the lessor and the lessee.
197. 197 Implied Covenants First, the court defines the need for an implied covenant.
Second, the court must identify what a prudent operator would have done to comply with the covenant considering all the relevant facts confronting the lessee.
198. 198 Implied Covenants Facts external to the operator: the circumstances that confront them such as geological and market conditions. These will obviously vary from case-to-case.
Facts internal to the operator: the hypothetical prudent operator is a standard based upon a set of unchanging facts.
199. 199 Implied Covenants The standard will not change based upon who happens to be the lessee.
Same standard whether lessee is a major oil company or an individual.
Ownership, or non-ownership, of other facilities (such as pipelines) does not matter.
200. 200 Implied Covenants The standard does not change based upon the number of leases and lessors the lessee may have.
The standard does not change based upon the economic condition of the lessee; only concerned with the economic condition of a hypothetical prudent operator.
201. 201 Implied Covenants A prudent operator has only one lease.
“Amoco’s responsibilities to other lessors in the same field do not control in this suit. This lawsuit is between the Alexanders and Amoco on the lease agreement between them and the implied covenants attaching to that lease agreement. The reasonable prudent operator standard is not to be reduced [nor enlarged?] to the Alexanders because Amoco has other lessors in the same field.”
202. 202 Implied Covenants Terming it the “independent duty principle,” the Kansas Supreme Court recognizes the single lease analysis in Smith v. Amoco Production Co.:
“Amoco admits that its obligations as lessee apply independently to each lease. The independent duty principle is applied to prevent Amoco from making the management of a given lease dependent upon the management of another lease.”
203. 203 Thank You Thank-you for allowing me to spend time with you discussing my favorite subject.