3. Distinguish -
0. nuisance-interfering w/right to exclusive enjoyment of land v.
1. trespass-interfering w/land owner’s exclusive possession right
4. Trespass resulting in Production
0. All wells in TX are to be straight wells unless prior approval
1. Did the trespasser act in good faith or bad
0. Good faith - when they unknowingly came upon the land- liable for the value of the oil produced, but may charge costs against owner
1. Bad faith-knowingly committed the trespass and liable for total production of the well not allowed to offset cost

0. Larson v. Oil & Gas Conserv. Comm.: Violation of correlative b/c did not make the right findings- WY did not have § to prevent waste
1. State wide spacing patterns-normally 40 acres (§19 of TAC)
0. Field rules - Supersede state wide rules
1. When staff receives application, there is hearing w/public notice (30 days) so that anyone that wants to can be heard
0. Commission conducts the hearing with a hearing examiner
1. Hearing examiner hears evidence and makes finding and determines approval
2. These findings are a recommendation to commissioner
3. Commissioners will most likely put these into law.
2. The losing party can appeal to Travis County District Court for everything except appeal of forced pooling
0. Dist. Ct will review the record made in administrative arena - usually substantially affirming what the hearing court stated
1. Reviewing Admin findings and orders. 2 grounds of contention
0. The order violates a statute or the constitution and
1. The order is not supported by substantial evidence in the record (far more common)
2. This process is a state thing - Congress does not get involved.
2. Well Spacing Exceptions
0. Exceptions justified for two reasons
0. To protect the correlative rights of owners against drainage or
1. To prevent waste of oil and gas
1. Pattie: Correlative Rts. Supercede conservation as long as no waste
0. The courts and conservation agencies have generally allowed a well to be drilled to offset drainage when A will be drained by B b/c the well spacing provision does not allow A to get the oil under her property
1. Implied power to protect correlative rights- reviewed De Novo.
2. Exxon Corporation v. RR Comm’n: to prevent waste of oil, get R. 37 exception when unusual res./other conditions, Must have:
0. Good Faith, not subterfuge to get around § requirements
1. Need to prevent waste or confiscation (econ., phys, or other0
0. Court allows production to prevent physical waste
1. Forms of physical waste
2. Open pit storage
3. Most frequent-if I can’t recover my way it will never get to the public.
2. Unusual Circumstances
1. TXSC- order permitting producer to recomplete producing well to a shallower formation, though drilling a new well in that location would not have been permitted - but b/c the legal location would not have been economically feasible

3. Production Control - production allowable rules
0. Daily, weekly or monthly limits on production of oil
1. Maximum efficient ratio (MER) proration - limits imposed to prevent overly fast production of a reservoir
2. Market Demand Proration - determining market demand in the next month-market can’t set price or over production will result
3. Proration Unit - acreage assigned to well to determine allowable
4. Allowable - Amt. Of O/g allowed to produce over a given period, may be determined by acreage, depth of well, net acre feet of reservoir below proration unit, open flow capacity + other factors
5. Historically, RR Comm’n gives disproportionately larger allowables to small tract owners, changed w/ Normanna & Halbouty
6. Many formations contain the type of production where there are some solutions in the oil and if you produce too fast that causes the gas to come out of the solution "bubble", when that happens the oil is much thicker and cant go through the pours

1. Possible to last forever - F/S determinable

0. Lessor has a Possibility of Reverter

0. Must be reasonable use
1. Servient owner’s burden to prove unreasonable use, under doctrine
0. Pre-existing use by surface owner
1. That is now impaired
2. There is a reasonable alternative avail. on that property
2. For purpose of obtaining minerals under land
3. In accordance with the terms of the lease, and
4. In accordance with applicable statutes, ordinances, rules and regs

0. If facts above exist on lease-mineral owner must use this alternative
1. No jurisdiction has an implied duty of clean-up, except AK

0. Subsidence of the rock and surface - very rare from oil - 1978 houston ship-channel common law landowner could withdraw with no limits - the court put a limitation on this as to wells hereafter drilled is limited by negligence, willful waste and injury

0. "Unless" - widely used, unless delay rental paid or production, K terminates
1. "Or" - either pay delay rental or produce - Must bring Ct. action to terminate lease

0. Problems
0. Untimely Payment - Normal Rule - if payment is not timely, lease is lost, but lessee must give "fair warning" of changes in address, etc... also, if lessor (consciously) accepts late payment the lease continues. Note, most leases include a good faith attempt to pay clause that allows an erroneously addressed or $ amount payment to be corrected w/i 30 days after notice (by lessor) of the problem
1. Third Party as Recipient - usually bank, put clause in to deal w/bank as proper agent. Also, a clause that says if placed in mail by due date, payment is timely is common.

0. Surface prep (substantial), i.e., building a road
1. Good Faith continuance and due diligence
2. Until well is spudded in

0. Factors
0. Look at well’s history
1. Time of year
2. Expert witnesses
3. Future expectations (in that well)
4. Costs associated (don’t include capital costs, just operating)
1. "Operating Profits" - Pshagoda - disregard capital expenditures when looking at commercially profitable. Factors for Oper. v. Capital
0. Is it predictable
1. Is it recurring
2. Size of the cost - may be important
3. Nearness in time to drilling (closer = more like capital)
4. Is ii an upgrade to increase the length of well’s life or raise production
5. For habendum, profitability = operating revenues - operating costs

0. Habendum -sets period of time for which rights given in the granting clause will extend- contains two parts
0. Primary term - a fixed term of years during which the lessee has the right, w/o any obligation, to operate on the premises
1. Secondary term - extended period of time for which rights are granted to the lessee once production is obtained
1. Delay Rental Payment Clause - obviates any implied covenant to drill test well
0. Lease will terminate sooner if the lessee fails to drill unless you pay
1. Good faith attempt to pay delay rentals holds the lease if as soon as notified you pay (30 days)- no attempt made then no excuse

0. Stanolind Oil & Gas Co. v. Barnhill - Habendum clause
0. If lessee doesn’t produce in commercial quantities w/i 5 yrs then expires
1. Majority - actual production is required to extend into a second term. It implicitly requires marketing also b/c there is no point on production if it cant be marketed - Strict application (4 corners rule)
2. This habendum said it must be producing not just discovered-effectively shortening the lease term lease
0. Finished drilling and be producing on the last day of the lease
3. Suppose they drill in third year of five year primary term-but they don’t produce - they discover. Do they have to pay the delay rental?
0. No, but if last day and you are not producing you lose the lease.
4. Acceptance of delay payment then exception applied
5. Can not be de minimus-would RPO continue production for purposes of making a profit, not speculation.
1. Pack v. Santa Fe Minerals: minority rule (OK and WV)
0. Oil and gas lease will not terminate at the end of the lease as long as oil discovered - actual production not necessary, though discovery requires completion, capability of production and good faith effort to produce
1. MN, WY, KY and TN follow this rule as to gas but not as to oil
2. Temporary cessation due to mechanical errors - the lessee has a reasonable time to restore production- if K silent = QoF

0. Rogers v. Osborn: the clause permits a lessee to complete drilling operations begun before lease ends, but not to commence additional operations
0. Lessee cannot complete a well begun prior to the end of the lease as a dry hole and then spud another well
1. Well Completion Cl - (30/60 cl) Lease will terminate when drilling operations commenced during primary term are completed, unless some lease language extends it.
2. If clearly had production and it ceases how long do you have to restart?
0. Here, sixty days b/c it is within the lease - strict interpretation
1. O&G attorneys went to fix habendums to add operation and production
0. If lease says operations instead of production then no use for 30/60 day clause (may save the lease by giving 30/60 days for operations, etc...) not widely used now if "operation" is in habendum, but still have them
1. What qualifies as "operations"
0. Has to be doing something- just sitting there is not operating
1. Liberal construction in favor of lessee-if term not defined in K
2. If you do define the term - for any of the following . . .
0. Disadvantage-stuck w/definition
1. Definition in example lease calls for physical operation on the lease premises-no language regarding marketing operations-this is not enough
2. Would a market definition fly-yes, like the OK rule
2. Rule- If prod. habendum, must have 30/60; if operation, then not.

0. Perlman v. Pioneer- Whenever, as a result of any cause reasonably beyond lessee’s control and lessee is thereby prevented from compliance, lessee shall not be liable for damages
0. If prevented from complying w/obligation time ceases until 60 days (or whatever is demanded by the K) after the end of the force majuere
1. This does not protect against termination of lease for failure to produce, failure to pay, or any other duty/legal obligation (must be more)
0. Clause doesn’t expressly provide for extension of the lease w/o operations or production
1. Ex- inability to obtain steel to drill b/c of war. Can lessee get out when K for four wells and only enough for two? No, very strict interpretation (#124)
2. Ex- same thing but lost the lease b/c no force majeure lease
0. Must have one & it must also provide for an extension of time
3. Don’t need a broad one if you have a broad shut in clause

0. Freeman v. Magnolia: Magnolia paid at end of term-discovered during the term. Waited four months after discovery to make royalty payment
0. Rule - When shut in royalty clause does not specify the time that the payment is due, payment is due before the well is shut in
1. Shut-in Clause: a well is shut in b/c the lessee is unable to market they can only be made on wells that are capable of producing in paying quantities - can not be made on uneconomic wells or for speculating
0. A grace period of 90 days after shut-in cl. and annually after that = different result- as long as payment is w/i the ninety-days
2. – Shut in date is Important –
0. If producing it’s the day the valves are turned off
1. If not producing = date when testing of well suggested prod. in paying quantities (probably), due before end of primary period
2. Now, most Ks make this payment due w/i 90 days
3. Broad shut in clause-"for any reason and applies to any well"- can hold lease against force majeure and others by paying royalty
4. Shut-in payments belong to royalty owners, not like rent

0. Introduction - Nature and Classification of Covenants: Three types
0. Develop the Premises - seek add’l production, not cvt. to explore
1. Protect the Leasehold - drill offsets to prevent drainage
2. Manage & Administer (& Mktg.) What a RPO would do under circumstances
3. Brewster -if the lessee breaches then he owes damages
0. This is a promise - breach does not cause the lease to expire (ordinarily)
1. Condition on the title -no obligation to pay but causes title to terminate
2. Are the covenants implied in fact or law?
1. Fact (TX) - as though they were written in the lease, suit on covenants is an action in K and sometimes has a different SOL
2. Most cts have held implied in fact and held in K
3. TX you can’t get punis for breach of implied covenant
4. Law - then action in tort and covered by tort SOL, (US S. Ct.)
5. If implied in law - then there would be serious doubt on whether you could expressly negate one of the covenants

0. TXSC- Amoco had obligation to protect against drainage
1. TXSC found three broad implied covenants:
0. Develop the premises (wildcat is a hit expect development of others) a second or subsequent well
1. Protect the lease - having to deal w/drainage
2. Manage the lease - RPO. This is the catch all. Duties of the operator are:
0. Drilling replacement wells
1. Reworking existing wells
2. Additional wells
3. Seeking field wide regulatory action
4. Rule 37 exceptions
5. Seeking voluntary unitization and
6. Seeking other available administrative relief
2. Always consider capital and operating expenses (RPO would)
3. Covenant to explore? Not in TX, Jackson
0. Other states added- purchased the right to an exploratory well- reason for delay clause
1. In TX, usually done w/a continuation clause, (says drill continuously, finish one + start another w/i X days or lease terminated)
4. What are das for failure to drill well?
0. Give lessor royalty she would have received
5. If remedy at law is inadequate ask the court for equity

0. Elements of Proof
0. Productive oil or gas extends under the leased mineral estate
1. Lessee has reasonable expectation of profit for additional wells
2. Lessee is not proceeding at a diligent rate of development
3. Superior Oil v. Devon - only when lessee indicates by words/conduct shows it wont develop will req. of notice to the lessee be waived
0. Rule - Must give notice, then demand further development. If they fail w/i a reasonable time to drill you can terminate - if a RPO would have drilled
1. You must do this before you file the lawsuit
2. Can put a clause in the lease that failure to drill gives the option to terminate, but makes it mostly unmarketable
4. Most suits on breach of implied covenant are for failure to drill the well
0. TX always gives lessee an opportunity to correct
1. Remedy is damages if we can drill as opposed to cancellation

0. Elements of Proof -Exploratory well should be drilled b/c probability of profit
1. Jackson - wants them to drill exploratory well held this is no different then covenant for reasonable development
0. Ct held that there is no covenant to explore and this is the only way to get Sun to drill a well
1. They had info regarding land but no wells on the 9000 acres
0. TX/OK, no cvt to explore distinct from cvt to develop

0. OK held a delay of eight years before marketing was reasonable b/c was impure and there were no pipelines
1. Even if there was a pipeline, purchaser may be reasonable to wait for better deal
2. Reasonable price actually means best price available
3. Remember in OK rule is if you discovered w/i primary term then will allow marketing in second term
0. In TX, if no shut in clause and only habendum then the lease would have terminated

0. 1/8 of the market value, provided that if the gas is sold the royalty shall be 1/8 of the proceeds received
0. Some say at time of the K (lease) & some say at the field (wellhead) TX
1. Adding Value to the Production - If you process the gas anything at all that raises the value gets rid of the proceeds clause (5^th cir.) - key - put in a cl stating "whether or not the gas has been processed or treated" = make it as broad as possible
2. Absent something in the lease changing it, this term means market value at the mouth of the well -
3. if there is no market value at the mouth of the well (oil) then you truck and it is recognized that the cost of transporting the oil - is charged against the lessor’s royalty as are any costs of marketing, treating, etc...
4. Gas may be different if long term K, note the difference b/t amount received v. Mkt price (look at K & circumstances)
5. Proceeds clause - royalty based on whatever you get when you sell gas - even though in a long term contract and price is higher or lower
0. When you sign, it’s not limited to sale in the field and if the sale is at the tailgate (plant) then proceeds clause may not apply
1. Class form-sold and in revision for a future form
1. Sold means sold w/o processing
2. Should state whether before or after any processing
1. Mkt. Value = value at mouth of the well
2. Pre-Production costs = payed by lessee
3. Post production costs = attributable to lessor in proportion to ownership, unless K language to the contrary, a minority CO, KS, OK say treating is part of making marketable & not chargeable to lessor
4. Products clause - used to keep costs from going against lessor/royalty owners, i.e., extraction costs of removing gas from oil. Rarely in lease (must add-in)
0. Common carrier has to serve all customers and publish rates according to volume and distance
1. The deeper the well the greater the likelihood to find very rich gas-distillate and condensate-these are specific liquids that are in solution w/gas - can siphon them out as liquids and sell (propane and butane)-what kind of royalty for these liquids?
2. If extraction occurs at or near the lease, cts find someone to give royalty owner money-but if nothing is in the lease about it (products clause stating she gets free of costs of extraction) she will have to pay her share of the extraction costs.
3. Gas buyer will pay price based on having to take the liquids out
4. TXSC refused to publish - case stated that get mkt price even if higher or lower
0. Handle this by putting language into the proceeds clause

0. This is a quantity clause
1. Lessee sells gas getting certain price-provision tells the buyer how much cubic feet to take a day insuring a revenue stream and calculate revenue as a lessee
0. Inserted clause stating the buyer will take or pay for it if it does not take
1. It made this K bankable so the lessee could show a stream of revenue
2. Common law- unless a specific clause covering the situation "economic out clause," the lessee says you are breaching and owe me 100K an hour so to keep the SOL from running against the lessee they must file suit - but if it goes to judgment then the gas co. will file chapter 11 and they won’t get anything.

0. Language reserves to heirs a ½ non-participating royalty-ct says this off the top
1. attorney reserved 1/16 of the royalty - the division order did not work here
2. Bottom line: "of" was used & lessee isn’t protected when writing erroneous division order in its favor

0. Division order is addressed to the buyer authorizing to run the oil or the gas and give the credit as follows - wildco 7/8 of 8/8, molly brown 1/8 of 8/8
1. Ex: molly sold some of her royalty (1/4) so now molly has 3/4 of 1/8 of 8/8 and royalty buyer 1/4 of 1/8 of 8/8
0. Assume ambiguity-then wildco will pay on original basis and division order can be cancelled
2. Royalty clause is a covenant, Not a condition on a title
0. If it were a condition - failure to pay properly would terminate the lease
1. If underpaid, remedy is to sue for amount should have been paid (K law)
3. Lessor remedies
0. UCC gives royalty owner a lien §9.319
1. TX- awards interest for late payment of royalty
2. In common law - no right to attorney’s fees unless in K or in statutes so when suing under royalty could probably get attorney’s fees
3. Remedy - money, interest, attorney’s fees and a lien

0. Drilling/production of minerals invades mineral estate and begins AP.
1. No AP against a mineral interest that was severed before adversely possessed, until actual drilling (as against mineral holder)
2. Depends on time of AP & whether severed 1st, if not severed 1st AP runs against both (even if min. later severed)

0. Difference is abandonment-a fee title it is not subject to abandonment
1. Oil and gas lease is not intended to last forever w/o production
2. Deed in minerals last forever-minerals can be severed from the surface
3. LA- no min. estate can exist apart from surface for > 10 yrs w/o prodt’n

1. If no lease on the land she has ability to execute a lease or drill
2. If lease came first then it’s superior to royalty buyer, vice versa

1. Even if it land never produces, the mineral interest has a substantial value b/c owner has right to lease and receive bonus and delay rentals
2. If there is production, a royalty interest is preferable b/c it is cost free

0. Deed - Name and Identity of the grantor
1. Words of grant - Grant, sell and convey to ABC (or undersigned) (triggers implied warranties)
2. Grantee - to ABC, the name of the grantor can be the name of the signor
3. Description of the land - must be specific location
4. Signature - of parties
5. Delivery of Deed - delivery is presumed if recorded
6. Acknowledged - often used

0. If drainage, one small owner can stop a cotenant from entering and drilling
1. (WV, LA, IL, MI)-non-participating co-tenants have right to enjoin the interest when drills w/o permission - (with the exception of drainage)
0. If time isn’t ripe for injunction then won’t settle and will compensate

0. Must compensate w/net profits - revenue rec’d less amount spent in obtaining.
0. Non-participating co-tenant will not receive any revenues until all costs are recouped - Capital & Operating Costs
1. Entering co-tenant takes the entire dry-hole risk.
0. Exception: when dry hole gives info for a second producing well
2. The non-participating co-tenant has no right to object to the development however the developing co-tenant must be careful not to deny the non-participating cotenant the right to independently develop - to do so would be an ouster and subject the co-tenant to trespasser liability
3. Co-tenant can ratify the lease and start obtaining royalties - directly or by just accepting a royalty payment

0. "Open" means when an oil and gas lease exist at the creation of the life tenant; the grant of the lease opens the mine
1. TX limits the doctrine to the term of the lease in existence when the life tenancy is created - the life tenant may not extend existing leases
2. If the oil and gas lease expire and wells are drilled as a result of a subsequent lease, life tenant does not get the open mine
3. If production on lease executed by dad - then the life tenant is entitled to the corpus for life and the remainder people have to wait until they die
4. Same thing is accomplished by the homestead exemption and the Uniform Principal Income Act.

0. Delay rentals belong to the life tenant -
1. Right to make investment decisions
0. Unclear: one case says pay life tenant-let them fight it out!
1. Risky to pay the life tenant unless the remainder-person agrees
2. Only own % of title, Bank owns & you find an agricultural tenant in possession of the land (most of these are oral), law makes o/g lease superior to these at renewal
0. Usually use subordination release, lessee pays the tenant a modest sum of money to subordinate his lease to the o/g lease
1. If tenant has a five year lease - you have to get a subordination
0. Don’t do this and bank will enjoin drilling
3. Doctrine of Marshaling of Assets - If subordination from bank did not happen and Wildco is about to drill and hears about a foreclosure-if you get to court fast enough, before foreclosure, can have doctrine of marshaling assets applied
0. Iin foreclosure, The lessee has the right to have land sold subject to the lease and then if land does not make enough money to pay loan, sell lease separately to raise the money
1. Be wise, get subordinations before drilling

0. A, executive, holds acts for B, non-executive -A owes B full fiduciary duty
0. Duty of care -degree of care a person of ord. prudence would exercise in conduct of their own affairs - no speculating
1. Duty of loyalty -No self dealing
2. NO Duty to subordinate personal interest to the estate’s interest
1. Utmost good faith only requires appropriate sharing plus no self dealing and any time this is labeled as a fiduciary duty add-it doesn’t require subordination

0. Navy Bean gave Home Bean power of atty to sell and convey land
0. Do you sell all of the land if you execute an oil and gas lease - No
1. Does the power to sell all give the power to sale part - No
1. Powers of Atty are strictly construed
0. If want power to convey oil and gas lease must be expressly set forth -
2. If you want the power to pass to attorney - you have to expressly state
0. TX Trust act gave trustees power to execute
1. Must find complying statute and strictly adhere to it

0. Act gives power of soil owner to be agent of state to lease oil and gas
1. Compensation for services is half of the bonus, delay rental and royalty
2. 1869-95, State ceded all minerals to surface owners, but only applied to private owners. So, any land state sold from 1895-1931 state held min. interest.
3. Owes the state a fiduciary duty, must act in the best interest of the state. Owner has duty of appropriate sharing, self dealing can subject the owner to punitive das also the duty to subordinate personal interest to state’s interest

0. After June 8, 1983- use NATURAL & ORDINARY MEANING OF THE WORD TEST
0. "Mineral" is determined by the ordinary/natural meaning of the word, regardless of whether parties knew at time of K
1. Mineral owner has right to take minerals even if removal causes destruction to the surface, but requires compensation to the surface owner for destruction, UNLESS the substance was specifically defined as a mineral (belonging to min. estate) in the grant or reservation
2. List of NON-Minerals adopted from CL (S.D. test)
0. Building stone
1. Limestone
2. Caliche
3. Surface shale
4. Water
5. Sand
6. Gravel
7. Near-surface lignite/coal (near-surface = 2-300 ft.)
8. Near-surface iron ore
1. Prior to June 8, 1983 - use SURFACE DESTRUCTION TEST- if mineral is so close to the surface that reasonable method of extraction would damage the surface it belongs to the surface owner. -TEST - unless contrary intent in grant/conveyance, the resource is part of estate IF:
0. The resource is at/near the surface (for hard min = 2-300ft), AND
1. Any reasonable method to extract the resource exists at the time of grant/conveyance (or thereafter), that would destroy all/part of the surface estate

0. Distinction made b/t land described and land conveyed
1. Deed that reserves a fraction of minerals Conveyed - it reserves a fraction of the mineral interest owned by the grantor at the time of conveyance
2. Deed that reserves a fraction of minerals Described - reserves that fraction of the minerals under the entire estate

0. Rule - where full effect can not be given both to the granted interest and to the reserved interest, the courts will give priority to the granted interest until the granted interest is fully satisfied - Look at what is conveyed, not what’s owned
1. NOTE: in the Duhig deed there was no mention of any other deed - if there was the result might change- for Duhig to apply there must be no reference to another deed (doesn’t apply to leases)

0. Bundle of sticks theory - Look at granting cl to see what is conveyed, then look at what is negated (If negation cl describes mineral that would be in the conveyance)
1. Granting Clause: not only defines the property to be leased but also sets forth the rights given to the lessee in order to develop the mineral estate
2. Land described above - a reference to the metes and bounds in fee simple
3. Prefacing undivided interests are disregarded in construing a reservation
4. Duhig principle - (applies where no reference to other deeds-look at what is conveyed not what is reserved) A conveys to B reserving ½ of minerals and B conveys to C reserving ½ minerals - look at deed from B to C, what’s conveyed
5. Scarborough - "Subject to" clause - informing that the deed is subject to existing oil and gas lease. Often acts as Second Granting Cl
0. Protects the grantor against claims for breach of warranty b/c of outstanding lease, avoids the Duhig problem, and
1. Clarifies that grantee receives an interest in unaccrued rents and royalties under the lease
2. Court construes the "subject to" cl to prevail for revenues under existing lease and future leases

0. Authorizes lessee to proportionately reduce future lease benefits to the extent that title has failed.
1. Texas Co. v. Parks- failure to literally apply cut down cl caused lease terminat’n
1. Only triggered when lessor doesn’t have full f/s in land conveyed
2. Law is not logic, it is experience (Holmes)

0. Intended to pick up narrow strips-not whole and distinct tracks
1. Jones v. Cally: parties left out part of land in conveyance, tried to rely on cl to p/u other tract. S. Ct. said NO, even if contrary to intent, cl. doesn’t apply to separate/distinct tracts
2. Smith: TXSC refused to give literal effect to clause, limiting application to a small (non distinct) unleased tract that exists w/o knowledge of parties

0. A royalty deed covering property subject to a lease granted 1/32 royalty interest and a future lease clause stated that the grantee would be entitled to 1/4 of any and all royalties reserved under future leases
1. TXSC said the 1/4 prevails b/c w/i four corners and subject to clause
2. Rule "subject to" goes to royalty under present and future leases

0. Granting clause-1/96 in minerals-this is a mineral interest so 1/96 of 1/8 of 8/8
1. Subject to clause-1/12 of all rentals and royalties of every kind and character
2. Deed conveyed an interest in minerals and since it’s a single estate then it covered 1/12 of all leases - the subject to clause was a present not a future lease
3. Here there is no intention to convey two separate leases

0. Bundle of sticks cases were absent other language- procedure
0. Take the granting clause and apply the negation
1. If other or subsequent language (subject to clause) the result will differ

0. Japhet: Maj. Rule: owners of subdivided tracts of land are presumed to know the rule of capture and intend its application - TX does not have apportionment

0. Thomas Gilcrease v. Gas Co.: entirety clause gave a pool
0. If entirety cl, non-participating owners may ratify & get the benefit of pooling. This stems from a lessor’s over conveyancing.

0. CA case - checkerboarded a bunch of lots and reserved the power to lease only
1. CA held this right is the power to change ownership in oil and is not certain to vest in 21 years the reservation is void
2. Right to leasing stick is property right in TX, so not a problem

1. Do not use "this lease shall be effective from and after the termination of the bottom lease"- this top lease will be void b/c may violate RaP

2. Humble v.Clark leased to Humble but delay rental was paid-she didn’t know and deeded a top lease, the Humble lease expired-ct said the subject to cl. reinstated the expired lease

0. Exception - payment of royalty. That is in proportion to acreage of all tracts
1. Cross conveyancing - (‘40's) in sep. K, parties conveyed % of interest to each other to prevent RaP, Now handled by production agreement.
0. Allocation pooling provision that doesn’t expressly contain any cross conveyances (production is personal property) Not subject to RAP
2. Some pooling clauses- attorneys put in provision that power to pool may be exercised no more than 20 years from the lease

1. Dynamite charges or heavy equip. used w/seismographic equip to determine contour of subsurface

1. Execute 3 yr. lease w/humble 12/23/19-signed/acknowledged 1/29/20
2. Rule - Date executed was the date of lease- so lease expired before they commenced drilling operations and got a dry hole
3. Now no one will pay Kishi for the lease- wants money he could have gotten had Humble not wrongfully drilled (trespassed)
4. When Humble entered in denial of Kishi’s title they were a trespasser

1. Now, TX adopted KS rule, trespass can be waived & creates an implied K to pay shooting fee to mineral owner, sue in assumpsit - Cowden
2. Permission from the surface owner is not enough

1. A trespasser may be held liable for damages to the perceived value of the estate caused by the trespass and drilling a dry hole.
2. Damages = amount of lost bonus payments

1. Good Faith type - where trespasser illegally drills a well on a mineral estate - usually with the thought that there lease is still valid
1. Liable for value of oil produced but credited with the costs incurred (Cap & Oper) if conferred a benefit on mineral estate holder
2. Bad Faith type - by drilling a directional or slant well - has the well on one lease but illegally bottoms out and produces from an adjacent well-
1. Liable for the total value of production and not allowed to offset any costs, even if reasonable
2. Per Se Bad Faith - if lessee enters in the face of pending litigation, contradicts the CL, but still law in TX (Hous. Prod. v. Mecom)

1. FACTS:
1. P had 11/24 as lessee cotenant, was drilling & fighting suit at same time
2. D had 12/24 as lessee cotenant, but lease description was invalid
3. B/c D’s lease was invalid, lessor leased to P
4. P was not a BFP b/c he knew of D’s prior interest, Ct found this irrelevant b/c P was a cotenant & had rt to use land
5. D claimed that Kishi applied, but ct. limited Kishi to its facts saying that it only applies when lessee of an expired lease enters, and acts to deny the rts of a cotenant (trespass)
6. Holding - P must treat D like any other cotenant, P may deduct expenses, but must share profits w/D

1. Publication by D
2. Falsity
3. Malice OR Deliberate act w/o reas. cause
4. Das.
5. P owns the estate
6. Must prove a specific loss of sale. -Ellis v. Waldrup

0. Overriding Royalty: often a lessee will convey a fraction of its working interest to a 3d party in return for that 3d party’s contribution toward development.
0. Operator grants interest to another for lease term by a sale/ reservation
1. Functionally, works like reg. royalty, but absent special provision, it will not survive the lease.
2. Any interest given comes from Operator’s share, but may be expressed in terms of all of production - watch K language

b. Brannan: Rule - one who assigns operating rights but reserves an overriding royalty interest is not protected by implied covenants, and is not entitled to be party to subsequent leases, UNLESS (1) in the K, or (2) Fiduciary relationship

3. To overcome problem many leases state an overriding royalty will survive and attach to a renewal, replacement or extension lease if it is taken within ____ days (6 months)- such a provision controls
4. The overriding royalty will not attach unless there is some type of fraud
5. Overriding royalty owner can sue on implied covenants-like 3d p. bene.

0. Difference-if covenants are indivisible lessee can say I drilled over here - if divisible then cannot look to others to show development
1. TX- Implied Covenants are divisible- more favorable to lessor (Ap Cts)

0. Dry Hole Letter - contributing party agrees to make a cash contribution only if drilling party hits a dry hole (time/place/depth specific) & party provides info
0. Signature not needed-accepted by performance
1. Multiple parties may give this letter to driller
1. Bottom Hole Letter: contributing party agrees to give cash in exchange for drilling info. if they drill to certain depth. Pays whether well is dry or not
2. Farmout Agreement: Lessee assigns lease to driller in return for something
0. Lessee may keep royalty, portion of lease, or other (shares may be sold)
1. Must have liquidated das provision b/c das are uncertain avoid litigation
2. Remember, no das. for not drilling, include a Liquid. Das. Cl.
3. Assignment may be held til drilling is complete to compel drilling. Note, this may raise liability issues, b/c once driller gets assignment he is drilling on his own land (limits assignor’s tort liab)
4. Most important substantive issues regarding a farmout;
1. Duty imposed-whether drilling well is a covenant or condition
2. What must be done in order to earn the right to the assignment
3. What is earned

0. Person with the largest interest is usually the operator (A)
0. A charges joint account cost of renting, drilling, the rig, drilling mud, bits, etc. These are entered into cost column and billed proportionally
1. Rev Ruling - if each party has rt. to dispose of their production in kind, then not taxed as a corp. - each party has its own separate book
2. A’s separate books will enter proceeds from sale of oil or gas . All three may not get the exact same price (selling equipment is in different log)
3. Not a partnership b/c it’s not a business for a common profit.
0. Three businesses for 3 diff. profit objectives - akin to agency
1. Stine v. Marathon Oil Co.: Indemnity Agreement says if Oper is negl not liable
0. 5th Cir gives a broad reading, Oper. only responsible for acts outside scope of its power (per the agreement)
1. Unless gross negligence Marathon is not liable
2. Damages are borne in proportion by the owners

0. M&T : Rule -AFE’s are estimates, you are bound to your ownership fraction
0. Provisions are in the operating agreement
0. If costs get high and a party wants out (non-consenter) - other parties are left holding the bag
1. To compensate other parties for dry hole risk they get costs back and some multiple of expenses (customary to entitle them to 500% reimbursement) before non-consenter gets anything from production (subject to royalty)
2. Can only non-consent to drilling already in progress if there is a provision in the AFE to limit the costs a party will bear (must be signed by parties)