Oil and gas law in the United States
Encyclopedia
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.
, extraction of oil and gas is generally regulated by the individual states through statute
s and common law
. Federal and constitutional law
apply as well.
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.
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.
, rather than as an interest in real estate. Texas American Energy Corporation v. Citizens Fidelity Bank & Trust Company.
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 lease
d land to explore, develop, and transport minerals (Hunt Oil Co. v. Kerbaugh), unless the lease specifies otherwise (a "no-surface access" lease).
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. This bill failed to pass in the House of Representatives.
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)
s 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 roustabout
s.
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.
Property law
Property law is the area of law that governs the various forms of ownership in real property and in personal property, within the common law legal system. In the civil law system, there is a division between movable and immovable property...
in oil
Oil
An oil is any substance that is liquid at ambient temperatures and does not mix with water but may mix with other oils and organic solvents. This general definition includes vegetable oils, volatile essential oils, petrochemical oils, and synthetic oils....
and gas
Natural gas
Natural gas is a naturally occurring gas mixture consisting primarily of methane, typically with 0–20% higher hydrocarbons . It is found associated with other hydrocarbon fuel, in coal beds, as methane clathrates, and is an important fuel source and a major feedstock for fertilizers.Most natural...
both under the soil before discovery and after its capture
Rule of capture
The rule of capture or law of capture is common law from England, adopted by a number of U.S. jurisdictions, that establishes a rule of non-liability and ownership of captured natural resources including groundwater, oil, gas, and game animals. The general rule is that the first person to...
, and adjudication
Adjudication
Adjudication is the legal process by which an arbiter or judge reviews evidence and argumentation including legal reasoning set forth by opposing parties or litigants to come to a decision which determines rights and obligations between the parties involved....
regarding those rights.
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.United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, extraction of oil and gas is generally regulated by the individual states through statute
Statute
A statute is a formal written enactment of a legislative authority that governs a state, city, or county. Typically, statutes command or prohibit something, or declare policy. The word is often used to distinguish law made by legislative bodies from case law, decided by courts, and regulations...
s and common law
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
. Federal and constitutional law
United States constitutional law
United States constitutional law is the body of law governing the interpretation and implementation of the United States Constitution.- Introduction :United States constitutional law defines the scope and application of the terms of the Constitution...
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
Offshore drilling
Offshore drilling refers to a mechanical process where a wellbore is drilled through the seabed. It is typically carried out in order to explore for and subsequently produce hydrocarbons which lie in rock formations beneath the seabed...
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 feeFee simple
In English law, a fee simple is an estate in land, a form of freehold ownership. It is the most common way that real estate is owned in common law countries, and is ordinarily the most complete ownership interest that can be had in real property short of allodial title, which is often reserved...
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
Rule of capture
The rule of capture or law of capture is common law from England, adopted by a number of U.S. jurisdictions, that establishes a rule of non-liability and ownership of captured natural resources including groundwater, oil, gas, and game animals. The general rule is that the first person to...
, and the correlative rights doctrine
Correlative rights doctrine
The correlative rights doctrine is a legal doctrine limiting the rights of landowners to a common source of groundwater to a reasonable share, typically based on the amount of land owned by each on the surface above. This doctrine is also applied to oil and gas in some U.S...
. 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 propertyPersonal property
Personal property, roughly speaking, is private property that is moveable, as opposed to real property or real estate. In the common law systems personal property may also be called chattels or personalty. In the civil law systems personal property is often called movable property or movables - any...
, 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 rightsMineral rights
- Mineral estate :Ownership of mineral rights is an estate in real property. Technically it is known as a mineral estate and often referred to as 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 lease
Lease
A lease is a contractual arrangement calling for the lessee to pay the lessor for use of an asset. A rental agreement is a lease in which the asset is tangible property...
d 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
Habendum clause
A habendum clause is a clause in a deed or lease which defines the type of interest and rights to be enjoyed by the grantee or lessee.In a deed, a habendum clause usually begins with the words "to have and to hold." Its provisions must agree with those stated in the granting clause...
means that substantial preparations for such drilling has to be undertaken, as long as such measures have been commenced in good faith
Good faith
In philosophy, the concept of Good faith—Latin bona fides “good faith”, bona fide “in good faith”—denotes sincere, honest intention or belief, regardless of the outcome of an action; the opposed concepts are bad faith, mala fides and perfidy...
and with due diligence
Due diligence
"Due diligence" is a term used for a number of concepts involving either an investigation of a business or person prior to signing a contract, or an act with a certain standard of care. It can be a legal obligation, but the term will more commonly apply to voluntary investigations...
(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
Force majeure
Force majeure or vis major "superior force", also known as cas fortuit or casus fortuitus "chance occurrence, unavoidable accident", is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of...
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
Act of God
Act of God is a legal term for events outside of human control, such as sudden floods or other natural disasters, for which no one can be held responsible.- Contract law :...
must completely prevent performance and must be unanticipated. Courts often construe this clause very strictly and rarely enforce it. For example, a tornado
Tornado
A tornado is a violent, dangerous, rotating column of air that is in contact with both the surface of the earth and a cumulonimbus cloud or, in rare cases, the base of a cumulus cloud. They are often referred to as a twister or a cyclone, although the word cyclone is used in meteorology in a wider...
preventing performance in Oklahoma
Oklahoma
Oklahoma is a state located in the South Central region of the United States of America. With an estimated 3,751,351 residents as of the 2010 census and a land area of 68,667 square miles , Oklahoma is the 28th most populous and 20th-largest state...
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
United States House of Representatives
The United States House of Representatives is one of the two Houses of the United States Congress, the bicameral legislature which also includes the Senate.The composition and powers of the House are established in Article One of the Constitution...
6251 IH), proposed prohibiting the Secretary of the Interior
United States Secretary of the Interior
The United States Secretary of the Interior is the head of the United States Department of the Interior.The US Department of the Interior should not be confused with the concept of Ministries of the Interior as used in other countries...
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. 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 contractContract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...
s have nuances which differ from standard contracts. For example, when an assignment
Assignment (law)
An assignment is a term used with similar meanings in the law of contracts and in the law of real estate. In both instances, it encompasses the transfer of rights held by one party—the assignor—to another party—the assignee...
of an oil and gas lease expressly provides that any extension or renewal of the lease is subject to an overriding royalty
Royalties
Royalties are usage-based payments made by one party to another for the right to ongoing use of an asset, sometimes an intellectual property...
, 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
Statute
A statute is a formal written enactment of a legislative authority that governs a state, city, or county. Typically, statutes command or prohibit something, or declare policy. The word is often used to distinguish law made by legislative bodies from case law, decided by courts, and regulations...
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
Negligence
Negligence is a failure to exercise the care that a reasonably prudent person would exercise in like circumstances. The area of tort law known as negligence involves harm caused by carelessness, not intentional harm.According to Jay M...
, 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 roustabout
Roustabout
A roustabout is a labourer typically performing temporary, unskilled work. The term has traditionally been used to refer to traveling-circus workers, natural gas, or oil rig workers....
s.
In education and practice
Law school classesLaw school
A law school is an institution specializing in legal education.- Law degrees :- Canada :...
teaching oil and gas law generally require that students first take a class in property and contract law. In Texas
Texas
Texas is the second largest U.S. state by both area and population, and the largest state by area in the contiguous United States.The name, based on the Caddo word "Tejas" meaning "friends" or "allies", was applied by the Spanish to the Caddo themselves and to the region of their settlement in...
and Wyoming
Wyoming
Wyoming is a state in the mountain region of the Western United States. The western two thirds of the state is covered mostly with the mountain ranges and rangelands in the foothills of the Eastern Rocky Mountains, while the eastern third of the state is high elevation prairie known as the High...
, oil and gas law is tested on the bar exam
Bar examination
A bar examination is an examination conducted at regular intervals to determine whether a candidate is qualified to practice law in a given jurisdiction.-Brazil:...
.
Oil and gas law practitioners
Lawyer
A lawyer, according to Black's Law Dictionary, is "a person learned in the law; as an attorney, counsel or solicitor; a person who is practicing law." Law is the system of rules of conduct established by the sovereign government of a society to correct wrongs, maintain the stability of political...
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
Landman (oil worker)
In the United States and Canada, a Landman or "Petroleum Landman" is an individual who performs various services for oil and gas exploration companies...
, 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 law#United States
- Renewable energy in the United StatesRenewable energy in the United StatesRenewable energy accounted for 14.3 percent of the domestically produced electricity in the United States in the first six months of 2011. Hydroelectricity is the largest producer of renewable power in the United States. In 2009, the U.S...
- New York energy lawNew York energy lawNew York energy law is the statutory and common law of the state of New York concerning the policy, conservation, and utilities involved in energy, along with its regulation and taxation.-Energy Law :...
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.