Oil and gas law in the United States

Oil and gas law in the United States is the branch of law that pertains to the acquisition and ownership rights in oil and gas both under the soil before discovery and after its capture, and adjudication regarding those rights.

Drilling companies most often lease the rights to drill for and produce oil.

Overview

The law regulating oil and gas ownership in the U.S. generally differs significantly from laws in Europe because oil and gas are often owned privately in the U.S. as opposed to being owned by the national government in many other countries.

Jurisdiction

In the U.S., extraction of oil and gas is generally regulated by the individual states through statutes and common law. Federal and constitutional law apply as well.

Ownership

In the United States, oil and gas rights to a particular parcel may be owned by private individuals, corporations, Indian tribes, or by local, state, or federal governments. Oil and gas rights extend vertically downward from the property line. Unless explicitly separated by a deed, oil and gas rights are owned by the surface landowner. Once severed from surface ownership, oil and gas rights may be bought, sold, or transferred, like other real estate property.

Oil and gas rights offshore are owned by either the state or federal government and leased to oil companies for development. The tidelands controversy involve the limits of state ownership.

Although oil and gas laws vary by state, the laws regarding ownership prior to, at, and after extraction are nearly universal. An owner of real estate also owns the minerals underneath the surface, unless the minerals are severed under a previous deed or an agreement.

Prior to and at extraction

Unless mineral rights are severed, whoever owns the fee of the soil owns everything below the surface, limited by the extent of the surface rights (Del Monte Mining & Milling Co. v. Last Chance Mining & Milling Co.). Because oil and gas are fluids, they may flow in the subsurface across property boundaries. In this way, an operator may permissibly extract oil and gas from beneath the land of another, if the extraction is lawfully conducted on his own property (Kelly v. Ohio Oil Co.). An operator may not, however, angle a well to penetrate beneath property not owned by or leased to him.

The two conflicting legal doctrines covering oil and gas extraction are the rule of capture, and the correlative rights doctrine. Which of the doctrines applies in a particular case depends on state law, which varies considerably from state to state, or in the case of the federal offshore zone, on US federal law.

The rule of capture gives land owners an incentive to pump out oil as quickly as possible to capture the oil of their neighbors. Such practice may deplete the gas pressure needed to force oil out of the ground. Government agencies such as the Texas Railroad Commission therefore regulate extraction by individual owners.

Ownership of extracted oil and gas

Refined hydrocarbons that escape into the ground are not subject to the law of capture, unless evidence shows that the refiner abandoned them. Champlin Exploration, Inc. v. Western Bridge & Steel Col, Inc. Extracted oil and gas which are subsequently stored in underground reservoirs are considered as personal property, rather than as an interest in real estate. Texas American Energy Corporation v. Citizens Fidelity Bank & Trust Company.

Lease

Oil and gas producing companies do not always own the land they drill on. Most often the company (the lessee) leases the mineral rights from the owner (the lessor). Major points in a lease include the description of the property, the term (duration), and the payments to the lessor.

Lessees of mineral rights have a right of reasonable access to leased land to explore, develop, and transport minerals (Hunt Oil Co. v. Kerbaugh), unless the lease specifies otherwise (a "no-surface access" lease).

Term of the lease

A lease remains in effect for a certain period of time, called the primary term, as long as the lessee pays the annual rental. The lease expires after the primary term, unless drilling or oil and gas production has started on the lease. If production is established, the lease will remain in effect past the primary term, as long as the lease continuously produces oil or gas. The lease can however, be revived by virtue of delay rentals. (see, below). Delay rentals are fees paid to the lessor, to delay production or commencement of drilling, without terminating the lease. There are other clauses that also, revive the lease. (Mentioned below).

To commence drilling a well under the habendum clause means that substantial preparations for such drilling has to be undertaken, as long as such measures have been commenced in good faith and with due diligence (Breaux v. Apache Oil Corp.). The habendum clause sets out these terms, as well as most significantly, identifying the parties to the transaction and their interests in the conveyed real property.

An oil and gas lease generally includes a force majeure clause. Such agreement relieves the lessee from liability for breach, if the party's performance is impeded as the result of a natural cause that could not have been anticipated or prevented. This Act of God must completely prevent performance and must be unanticipated. Courts often construe this clause very strictly and rarely enforce it. For example, a tornado preventing performance in Oklahoma would not trigger the force majeure clause, since tornadoes are a common occurrence in Oklahoma.

The Responsible Federal Oil and Gas Lease Act (2008), also called the "Use It or Lose It" bill (HR 6251 IH), proposed prohibiting the Secretary of the Interior from issuing new federal oil and gas leases to holders of existing leases who do not either diligently develop the lands subject to such existing leases or relinquish such leases.^[1] This bill failed to pass in the House of Representatives.

Payments

Payments to the lessor typically take three forms: bonus, rental, and royalty. The bonus is an up-front payment made at the time the lease takes effect. The rental is an annual payment, usually made until such time as the property begins producing oil or gas in commercial quantities. The royalty is a portion of the value of any oil or gas produced from the lease.

In an "unless-delay rental" lease, a lessee agrees to pay delay rentals so long as the lessee is not drilling on the property. An "unless" oil and gas lease terminates automatically, if the lessee fails to drill within the specified time or pay the delay rentals as called for in the lease (Schwartemnerger v. Hunt Trust Estate)

Contract

Oil and gas contracts have nuances which differ from standard contracts. For example, when an assignment of an oil and gas lease expressly provides that any extension or renewal of the lease is subject to an overriding royalty, a new lease that is substantially similar to the first lease and procured by the assignee during the term of the first lease, is regarded, as a matter of law, as an extension of renewal of the first lease. Reynolds-Rexwinkle Oil, Inc. v. Petex, Inc.

Statutes can override agreements made by parties. For instance, a statute may void an agreement to indemnify a construction worker as to liability for death or bodily injury incurred on an oil well, regardless of the indemnitee's negligence, without affecting the validity of an insurance contract. It affirms the right of an individual party to obtain insurance, not to protect the interests of the indemnitee. Amoco Production Co. v. Action Well Service, Inc. These suits for negligence are typically brought by drilling site workers known as roustabouts.

In education and practice

Law school classes teaching oil and gas law generally require that students first take a class in property and contract law. In Texas and Wyoming, oil and gas law is tested on the bar exam.

Oil and gas law practitioners usually fall into three broad categories. First, oil and gas companies usually have in-house attorneys that advise the company of its rights and the legal issues. These attorneys are usually assisted by landmen, who examine property titles land oil and gas rights and acquire property for the company. Landmen may be lawyers themselves. Second, practitioners may represent private parties. When an oil company attempts to obtain land from a private party, a party may retain counsel to be better informed of his or her rights and to negotiate a favorable bargain with the oil company. Last, oil and gas attorneys work for federal and state governments that oversee energy and environmental policy and land acquisitions.

See also

	Energy portal
	Law portal
	United States portal

• Energy law#United States
• Renewable energy in the United States
• New York energy law

References

1. ^ [1]

External links

• Center for Biological Diversity v Dept of the Interior 17Apr2009 DC Appellate Decision regarding MMS 5-Year Plan as pertains to Alaska OCS leases.