Table of contents
Chapter One - RULE OF CAPTURE: ITS EFFECTS AND LIMITS
1.1 - Rule of Capture
1.2 - The Engineering Background of Conservation Regulation
1.3 - Limits on the Rule of Capture
1.3.1 - Stored Gas
1.3.2 - Negligence: Tort Law
1.3.3 - Waste
1.3.4 - Illegal Production that Violates Commission Rules
1.3.5 - Production from Horizontal Drilling
- 1.3.1 - Stored Gas
- 1.1 - Rule of Capture
Chapter Two - STATE REGULATION OF PRODUCTION
2.1 - In General
2.2 - Proration: Regulating Production
2.3 - Drilling Permits
2.4 - Pooling
2.5 - Unitization
2.6 - The Legacy
- 2.1 - In General
Chapter Three - SURFACE V. MINERAL ESTATES
3.1 - Dominant Mineral Estate and Accommodation Doctrine
3.2 - Who Owns Hard Minerals?
- 3.1 - Dominant Mineral Estate and Accommodation Doctrine
Chapter Four - PROPERTY CONCEPTS IN MINERAL ESTATE OWNERSHIP
4.1 - Protection Against Trespassers and Wrongful Claimants
4.1.1 - Seismic Trespass
4.1.2 - Slantwell Trespass; Trespass by Fracturing?
4.1.3 - Trespass Damages
4.1.4 - Slander of Title
4.1.5 - Horizontal Drilling and Impact on the Mineral Estate
- 4.1.1 - Seismic Trespass
4.2 - Cotenants
4.2.1 - Leasing and Production by Cotenants
4.2.2 - Partition
- 4.2.1 - Leasing and Production by Cotenants
4.3 - Prescription and Adverse Possession
4.4 - Life Tenants and Remaindermen
4.5 - Effect of Prior Surface Leases and Mortgages
4.5.1 - Prior Surface Leases
4.5.2 - Prior Mortgage
- 4.5.1 - Prior Surface Leases
4.6 - How to Get Rid of Dormant Mineral Interests
- 4.1 - Protection Against Trespassers and Wrongful Claimants
Chapter Five - THE OIL AND GAS LEASE AS A FEE SIMPLE DETERMINABLE
5.1 - Introduction
5.2 - The Habendum Clause: Production in Paying Quantities
5.2.1 - The Meaning of Production
5.2.2 - The Temporary Cessation of Production Doctrine
5.2.3 - Substitutes for Production—The Shut-In Royalty Clause
5.2.4 - Other Clauses Modifying the Habendum Clause
- 5.2.1 - The Meaning of Production
5.3 - Delay Rentals
5.3.1 - Paying on Time
5.3.2 - What is "Commencement" of a Well?
- 5.3.1 - Paying on Time
5.4 - Pooling – A Powerful Defensive Clause
5.4.1 - The Effect of Pooling
5.4.2 - Is Pooling Effective Under the Terms of the Lease?
5.4.3 - Was Pooling Done in Good Faith?
5.4.4 - Cross-Conveyancing and Joinder
5.4.5 - Lease Terminates; Pooling Effect Remains
- 5.4.1 - The Effect of Pooling
- 5.1 - Introduction
Chapter Six - IMPLIED COVENANTS
6.1 - General Implied Covenants
6.2 - Lessee’s Duty to Drill—The Implied Covenant to Develop
6.3 - The Implied Covenant to Protect Against Drainage
6.4 - Other Implied Covenants: to Administer and Manage the Leasehold
- 6.1 - General Implied Covenants
Chapter Seven - ROYALTY CLAUSES AND DIVISION ORDERS
7.1 - Introduction
7.2 - Market Value versus Proceeds
7.3 - Post-Production Costs and “at the well” Language
7.4 - The Implied Covenant to Market
7.5 - Division Orders: Common Law and Statutes
7.6 - Take-or-Pay and Royalty Owners
- 7.1 - Introduction
Chapter Eight - OBLIGATIONS OF EXECUTIVE RIGHT OWNERS TO NONPARTICIPATING OWNERS
8.1 - Introduction
8.2 - NPRIs and NPMIs: Sharing Lease Benefits
8.3 - Term Royalty Interests
8.4 - Duty of Utmost Good Faith and Fair Dealing
8.5 - NPRIs and Pooling
- 8.1 - Introduction
Chapter Nine - CONVEYANCING ISSUES
9.1 - Description of the Land Conveyed: the Mother Hubbard Clause
9.2 - Was a Mineral Interest or Royalty Interest Conveyed?
9.3 - The Land “Described” versus the Land “Conveyed”
9.4 - Overconveying Mineral Interest Fractions in Deeds: the Duhig Doctrine
9.5 - The Nonapportionment Rule in a Post-lease Conveyance
9.6 - The Community Lease
9.7 - The Two-Grant Theory and the Form Mineral Deed
9.8 - Variant of the Two Grant Theory: Fixed Versus Floating Royalty in the “Double Fraction” Paradigm
9.9 - The Rule Against Perpetuities
9.10 - Relinquishment Act Lands
- 9.1 - Description of the Land Conveyed: the Mother Hubbard Clause
Chapter Ten - APPENDIX
Texas Oil and Gas Law:
Cases and Materials
Jacqueline L. Weaver
A.A. White Professor of Law Emeritus
Associate Professor of Law
University of Houston Law Center
This casebook is dedicated to the State of Alabama
the many students at the University of Houston Law Center
who have helped me learn Oil and Gas Law
My deepest thanks and appreciation go to three research assistants, Kimberly Hicks, Tim Million and Irena Agalliu, all in the class of 2005, who helped me write, edit and format this casebook in a short period of time after I had worked for the State of Alabama on a large case involving underpaid royalties to the state. All three students were in the part-time division at the Law Center, working full-time at challenging jobs during the day, attending law school in the evenings and succeeding very well in their coursework, and then doing extraordinary work as research assistants on this casebook.
My colleague, Bret Wells, joined the faculty at the University of Houston Law Center in 2011. He had a successful career as an executive officer with a global oil service company during the period when the domestic oil and gas industry was substantially transformed by technological advances in the development of shale resources. Since joining the Law Center, he has been teaching Oil and Gas Law, and since 2013, he has worked with me to update this casebook.
Amanda Parker, the administrative assistant in our faculty suite, made the text “look good” when unfathomable mysteries appeared on the paper. In all ways she helped us make this Casebook serve students as a resource for years to come.
A summer research grant from the University of Houston Law Foundation supported this work, and deep appreciation goes to all those donors who have contributed to the Law Center over the years.
Jacqueline Lang Weaver
Emeritus Professor of Law
© Copyright held by Jacqueline L. Weaver and Bret Wells. No part of this casebook can be reproduced in any manner without the permission of the authors. To request permission, write to email@example.com or Bret Wells at bwells@.central.uh.edu. All rights reserved. 2019.
Welcome to oil and gas law!
This course will cover the basic provisions of an oil and gas lease, the property concepts that apply to the owners of land overlying an oil or gas reservoir (such as trespass, adverse possession, and cotenancy), and the basics of conveying mineral and royalty deeds in Texas. In addition, we will cover Texas’ complex approach to regulation of oil and gas fields. The Railroad Commission of Texas (admittedly, an odd name) is the oil and gas conservation commission for Texas. Historical note: The name derives from the fact that the agency was created in 1899 to regulate the railroads, largely owned by capitalists from eastern states, in an effort to protect farmers and ranchers from the railroads’ monopolistic practices. When oil was first discovered in Texas, very rudimentary, often wooden pipes were used to transport it. So many accidents and fires resulted that the Texas legislature sought to regulate the pipelines. Because the Railroad Commission already regulated one form of transportation, it was given the authority over oil pipeline. When the rule of capture led to enormous overdrilling and waste in the oil fields, the legislature stepped in to regulate this part of the business, and naturally gave the authority to the same agency that was already regulating oil pipelines. The casebook does not cover joint operating agreements or farm-out agreements, as those important topics are seldom able to be covered in a three-credit hour oil and gas course.
This Preface is really a pre-chapter that sets out some basic information to use as a reference throughout the course. It consists of:
I. A bibliography of further reference material, especially useful if you later practice oil and gas law.
II. A short introduction to the nature of an oil and gas lease and the types of owners that have interests in an oil and gas field. This section introduces the definitions of certain key terms used throughout the course.
III. An introduction to petroleum geology: the kinds of underground rock and structures containing the black gold that is the source of so many Texas fortunes and so many great old movies. This section also includes the different characteristics of conventional oil and gas reservoirs compared to shale oil and gas reservoirs that are often called "unconventional" resources despite now being a large and growing part of the U.S. oil and gas supply.
1. Richard Hemingway, Oil and Gas (3d ed. West, 1991). A classic hornbook on the common law of oil and gas as it had developed through 1991. It covers all the major Texas cases, in addition to cases from other states, in clear prose with bolded blackletter rules and nice examples. The book does not cover state conservation regulation of oil and gas.
In 2004, this Hemingway classic was extensively revised and renamed by a group of co-authors. While updated, it is less detailed in its discussions of certain common law issues, but it contains more oil and gas taxation. See Owen L. Anderson, John S. Dzienkowski, John S. Lowe, Robert J. Peroni, David E. Pierce, & Ernest E. Smith, Hemingway Oil and Gas Law and Taxation (2004).
2. Howard Williams and Charles Meyers, Oil and Gas Law, six volumes plus a seventh volume with a Table of Cases and Manual of Terms. You can buy a paperback version of the manual called: Williams & Meyers, Manual of Oil and Gas Terms. A new edition of this manual is printed every year or two. Williams and Meyers write very lucidly; they are often theoretical and conceptual in style, in addition to documenting the many different forms of clauses that may appear in leases. Often Williams and Meyers recommend and analyze policy reasons for the courts to adopt a different viewpoint than that evidenced in the case law. Beginning in 1997, Professors Patrick Martin (from Louisiana State University and Bruce Kramer at Texas Tech University became the update editors of the treatise. This treatise covers the case law from all oil and gas producing states in the U.S.
3. Eugene Kuntz wrote a multi-volume set on Oil and Gas Law. Kuntz has somewhat more information on state regulation of production than Hemingway or Williams and Meyers. Many of the volumes consist of state oil and gas statutes, arranged state-by-state. The volumes also include a variety of commonly used forms such as oil and gas lease forms, unitization agreements, etc. This treatise is currently updated and edited by Professor Owen Anderson and others.
4. Ernest E. Smith and Jacqueline Lang Weaver, Texas Law of Oil and Gas. These three volumes contain everything you ever wanted to know about Texas oil and gas law, including Railroad Commission regulation. Updated assiduously and annually by Professor Smith at the University of Texas and Professor Weaver at the University of Houston Law Center.
5. If you go into an oil and gas practice, you may find the following volumes useful, especially in keeping you up-to-date:
- Rocky Mountain Mineral Law Institute, annual volumes on Oil & Gas and Mining Law. See KF 1819.A2R6. Note: these volumes are not kept with the law reviews in the library.
- Institute on Oil & Gas Law and Taxation, annual volumes by the Southwestern Legal Foundation, which is now called the Center of American and International Law/Energy Law Institute. See KF 1849. A2 S6.
- State Bar of Texas, Institutes on Oil, Gas and Energy Law. Some of the annual institute binders of proceedings are kept on reserve. If you are a member of the State Bar of Texas, you can access recent institutes at the Bar’s website and pay a fee to download specific articles.
6. For a good technical and engineering background of conventional oil and gas, see A Primer of Oil & Gas Production; A Primer of Oil Well Drilling; A Primer of Oil Well Service and Workover, available from the Petroleum Extension Service of the University of Texas. Its website is www.utexas.edu/cee/petex and the catalog of offerings is listed there. The primers have lots of photos of actual drilling and production operations.
7. A very good technical volume for lay persons is Petroleum Conservation edited by Stuart Buckley (1951).
Museums to Visit
Seeing is believing. Experiencing is understanding. If you want to relive history or see some of the whiz-bang new technologies used in the modern petroleum industry, visit some museums:
The Houston Museum of Natural History in Hermann Park (near Rice University and the Medical Center) has a first-rate Wiess Energy Hall, with a Geovater ride that takes you 8,000 feet down a wellbore and then fractures the well with you inside it.
Galveston has the Ocean Star museum, an actual offshore drilling rig platform transformed into a museum. It is located at Pier 19 (Harborside at 20th St).
Beaumont features the Texas Energy Museum which opened on the 89th anniversary of the first Spindletop gusher. It contains life-size reproductions of old rigs and animated robots which escort visitors through the oil industry’s history, with a focus on the Spindletop gusher ([at 600 Main St.). The Spindletop Gladys City Boomtown Museum on the campus of Lamar University nearby recreates the boom town that sprang up after the 1901 gusher. (3 miles south on US 69 to Highland Ave. following signs, 409-835-0823).
In Austin, the Bob Bullock Texas State History Museum has substantial floor space devoted to the oil and gas industry and a movie about Texas which recreates the Galveston hurricane, an oil gusher and a rocket launch; the movie has a special “bite” to it. (The museum is at 1800 Congress, downtown near the capitol.)
If you happen to be in the northern Pennsylvania area, a visit to Oil Creek State Park will take you back to the early days of oil discovery in that state. Here is some information and a link to the Oil Creek State Park, provided courtesy of Christine Polansky, a former student, whose family grew up in the area:
Oil Creek State Park. http://www.dcnr.state.pa.us/stateparks/parks/oilcreek.aspx
The Oil Creek Valley is the site of the world’s first commercial oil well. Oil Creek State Park tells the story of the early petroleum industry by interpreting oil boomtowns, oil wells and early transportation. Scenic Oil Creek carves a valley of deep hollows, steep hillsides and wetlands.
The primary purpose of Oil Creek State Park is to tell the story of the changing landscape. The early petroleum industry’s oil boom towns and important oil well sites are in contrast with clean trout streams and forested hillsides seen today throughout the park. The events of the exciting 1860s, the time of the original oil boom, receive special emphasis.
- Train Station Visitor Center
Displays and programs are at Petroleum Centre, the focal point of the early oil boom. “A Contrast in Time” slideshow takes you on a six-minute journey through time. The din of pumping wells and shouting men in the 1860s contrasts with the rustling leaves in a gentle breeze in present day Oil Creek. The train station is open noon to 4 p.m. Saturdays and Sundays. Visit the Train Station Visitor Center for historical displays, an exciting diorama and an interactive computer information center. A train still chugs through the valley and stops at the Train Station in Petroleum Centre, just as it did over 100 years ago.
- Historical Tableaus
These full-scale, three-dimensional landscapes contain buildings, machinery, equipment and materials that replicate the historic landscape. Similar to a movie set, the buildings are empty and the machinery does not work, but the tableaus give an idea of historic periods at Oil Creek.
If you want to “experience” some oil industry lore from the comfort of your sofa, rent some videos such as:
- There Will Be Blood. An Academy Award winning film, it gives a very accurate picture of early drilling techniques—and of the ruthlessness, greed, and competition for oil and gas that has marked episodes in the industry’s history. It is a bleak character study of an oilman in the earliest days of the industry.
- Giant. The classic about Texas oil, with James Dean and Elizabeth Taylor.
- The Deepwater Horizon. This movie depicts the 2010 blowout in the Gulf of Mexico caused when BP, the operator of a federal oil and gas lease, failed to use good practices in drilling a deep, high-pressure well on the U.S. outer continental shelf. Eleven workers died. The movie is quite realistic in showing what a modern offshore drillship looks like and in explaining how the blowout happened. (It depicts some of the oil men from BP as caricatures, though.) The drillship was called the Deepwater Horizon and was owned by Transocean, a big drilling contractor. Offshore wells are given names and this fateful well was called the Macondo. Macondo is a fictional town described in Gabriel García Márquez's novel, One Hundred Years of Solitude. It did not fare well either.
- Haynesville. This movie depicts members of a rural community struggling to understand and negotiate an oil and gas lease in one of the first shale plays in the U.S. A single mom organizes the community as best she can because there is strength in numbers. The film is a documentary and shows how some landowners made good deals and spent their money.
A. Basic provisions of a typical oil and gas lease:
Lessor hereby in consideration of $_________ grants exclusively unto Lessee for the purpose of exploring and producing oil and gas the following described land: [description inserted]
- This lease shall be for a term of _____ years from this date (the primary term) and as long thereafter as oil or gas is produced from said land.
- Royalties to be paid are 1/8 on oil and gas produced.
- If drilling operations are not begun on said land on or before one year from the date of this lease, the lease will terminate unless on or before such anniversary date Lessee shall pay to Lessor $_____ (herein called delay rentals), which shall cover the privilege of deferring commencement of drilling operations for 12 months.
A typical Texas oil and gas lease appears in full in the Appendix to this book (along with other forms). We will cover all parts of the oil and gas lease closely later in the class. The objective of this Preface is to assure that you know the basic structure of the lease because we discuss property rules before we analyze the lease in depth in chapters 5 and 6.
From your first-year Property course and study of future interests, what is the nature of this oil and gas lease? Remember when Grandpa gave Grandson Willie the right to receive $2000 per year “as long as” Willie did not smoke or drink? Or when Grandpa gave land to the Baptist church “so long as the land is used for church purposes”? What is the formal term for the interest granted to Willie and the church? What will happen if Willie smokes or if the Church sells the property so that a Starbucks can be constructed on the tract?
The money payments. Able owns Blackacre, a 40-acre tract of land in Texas. Able leases Blackacre to Bigg Oil. What does Able typically get in return for the lease?
- a 1/8 royalty if oil and gas is discovered on Blackacre. This 1/8 royalty is cost free; one out of every eight barrels of oil produced is due Able (in kind or by value). The remaining 7/8 of the oil and gas produced belongs to lessee and is termed the working interest. Note: today royalties are often greater than 1/8, especially in shale boom areas.
- bonus money. This is the "consideration" or "front end" money paid to Able in exchange for executing the lease. In unexplored territory it may be as low as $1 per acre. In "hot" territory, it may be $1,000 or $10,000 per acre.
- delay rentals. This is money paid by Bigg Oil to Able in order to delay drilling a well. Delay rentals are usually based on acreage (say, $50/acre) and are usually paid annually, to defer drilling one more year. Delay rentals can only be paid to delay drilling during the primary term of a lease.
The lessor’s interest after leasing. Now that Blackacre is under an oil and gas lease, what is the nature of Able's remaining interest in Blackacre? Able owns:
- the surface (subject to the lessee's right to use the surface as is reasonably necessary to extract oil and gas).
- a 1/8 royalty (and any delay rentals).
- a possibility of reverter in the mineral estate. If the oil and gas lease terminates, the mineral estate that passed to Bigg Oil under the lease will revert to Able. Typically, the oil and gas lease terminates when (1) delay rentals are not properly paid during the primary term; or (2) the primary term ends and there is no oil and gas production in paying quantities.
Suppose Able, after leasing the 40 acres to Bigg, then sells 10 acres of Blackacre to Baker. What has Baker bought?
- the surface of 10 acres (subject to Bigg's reasonable use).
- the right to royalty from any well on the 10 acres.
- the right to delay rentals due on the 10 acres.
- a possibility of reverter in the mineral estate on 10 acres.
If Baker bought the 10 acres fully warranted by Able that Able owned it free and clear of any encumbrances, Baker, of course, has a cause of action against Able for breach of warranty since the 10 acres is subject to Bigg's prior lease. Baker has no right to lease his 10 acres to someone else.
The paragraphs above describe the basic relationship between a lessor (the landowner who owns the minerals) and the lessee (the oil company that leases the oil and gas from the landowner). The royalty created in this situation is called the landowner’s royalty, the lessor’s royalty, or the lease royalty.
B. Non-Participating Royalty Interest Owners (NPRIs)
The royalty in Section A supra was created when a mineral interest owner leased his oil and gas to an oil company. However, royalties can arise from other transactions. Many millions of people own nonparticipating royalty interests. Such persons do not own the minerals underlying land; they simply own the right to receive a share of royalty when someone else leases the land and oil or gas is produced.
Suppose Able owns 40 acres of Blackacre, a potential oil and gas bearing tract. Able has four daughters to put through college and needs to raise some money quickly. Able doesn't want to lease the land yet, since he thinks he can get a much larger bonus if he waits a while longer and oil and gas is discovered on adjoining tracts. Able sells a 1/16 non-participating royalty interest in the 40 acres to Baker in return for $10,000.
What has Baker bought?
- the right to 1/16 of all the oil and gas cost-free from a well anywhere on the 40 acres. Thus, if Able's hunch proves correct and Able later leases to Bigg Oil for a hefty bonus and a 1/8 royalty, Able will get 1/2 of the 1/8 royalty (which equals 1/16) and Baker will get the other 1/16.
- Baker does not have the right to lease the land nor the right to bonus or delay rentals.
The essential nature of an NPRI interest is that it is “carved out” of the lessor’s royalty interest. That is, the NPRI owner’s fractional share of royalty is subtracted from the share of royalty that would otherwise go to the lessor under any oil and gas lease negotiated by the lessor. The NPRI interest is created either by grant in a simple deed, usually not more than three sentences long, or it is created by a phrase reserving an NPRI interest to the grantor when the grantor sells the minerals under Blackacre.
Non-participating royalties can also arise after leases have been executed. Suppose that Able sells the 1/16 royalty to Baker as above, then leases to Bigg Oil and Bigg drills a producing well on the 40 acres. Able is getting a 1/16 royalty paid out of actual production (and Baker receives the other 1/16). But Able needs more money right now since all four daughters have been admitted to expensive colleges. Able offers to sell an additional 1/32 royalty to Charlie in exchange for $81,000. (The purchase price would be determined by the present value of the future flow of income expected from the 1/32 of the oil and gas). Now Bigg owes Able a 1/32 royalty and Baker a 1/16, and Charlie a 1/32. Bigg Oil is paying a total royalty of 1/8 due under the terms of the lease, and this 1/8 is being divided among the lessor (Able) and the two NPRIs (Baker and Charlie).
C. Selling mineral interests rather than royalty interests.
Instead of selling non-participating royalties to raise money, Able could sell a mineral interest to Baker (or indeed, Able could sell an interest in both the surface and minerals to Baker, but suppose Able wants to retain complete ownership of the 40-acre surface in order to continue his farming operations). Able could sell all the mineral interest in the South 20 acres to Baker. If this was done before leasing, Baker now has fee simple title to the mineral interest in the South 20. Able cannot lease the South 20; this right to lease now belongs to Baker.
Another example: Able could sell an undivided ½ interest in the mineral estate underlying the entire 40 acres to Baker. Able and Baker are now cotenants in this mineral estate. Each has the right to lease, but must account to the other for the proceeds as you will learn in the Chapter on co-tenancy.
Able could also sell mineral interests after the land has been leased as well as before. Able should make sure that the conveyance is subject to the lease to avoid breach of warranty problems, as noted above.
D. Overriding royalty interest owners.
Often, one oil company acquires a lease and then assigns an interest in the lease to a second oil company. Suppose Able leases to Bigg Oil and then Bigg assigns 10 acres of the lease to Littel Oil Company. Littel has little money to pay for the interest, so the deal is structured as follows: Littel will drill a well on the 10 acres, and if successful, Bigg will receive a 1/16 overriding royalty interest on this production and Littel will earn the right to retain this acreage as an assignee under Bigg’s lease. This overriding royalty is carved out of the lessee’s interest. Thus, Littel will owe the lessor the 1/8 royalty from a well drilled on the 10 acres (under the already negotiated lease), and an additional 1/16 royalty to Bigg Oil. Littel’s working interest is less than the normal 7/8 interest; it totals only 13/16 of the oil and gas produced (Littel produces 100%, or 16/16 of the oil and must pay 1/8, or 2/16, to the lessor, and an additional 1/16 as an overriding royalty to the assignor, Bigg.) If you have a small producer as a client, you may be offered an override in a well (rather than hourly billing) in exchange for legal services to that client.
“Looking for rocks in all the right places”
Early History of Conventional Reservoirs
In the beginning, operators found crude oil where it had seeped up to the surface of creeks and swamps in the coal country of Pennsylvania and nearby eastern states. In 1859, near Oil Creek, Pennsylvania, Colonel Edward Drake drilled the first oil well in the United States—to a depth of 70 feet. This well fueled a speculative boom that fed the demand for an illuminant, kerosene, that could replace gas made from coal. But, no Pennsylvania oil boom could match the splendorous fields found in Texas, beginning with the great gusher of Spindletop, discovered in 1901.
In the early years of the 1900s, seismic exploration was in its infancy, and the search for oil often resembled the use of “divining sticks” to find ground water. Before Spindletop, the city fathers of Corsicana had accidentally found oil while drilling a water well in an effort to bring industry and commerce to this town. The area around Beaumont, Texas, on the Gulf Coast contained salt domes. As early as 1892, promoters had advertised the possibility that oil was to be found trapped by these domes. A mining engineer named Lucas bought a lease in this area and teamed up with the Hamill brothers, drillers from Corsicana. On January 10, 1901, the Hamills were changing a drill bit when the well began to regurgitate mud. Then, the drill pipe shot out of the well (which had been drilled to a depth of about 1,020 feet), breaking into joints as it rocketed through the air. All became quiet, until, with an explosive roar, a black fountain of oil erupted from the well, double the height of the derrick, making one of the most photographed moments in the history of the industry. In nine days, the well rained 800,000 barrels of oil on the rice fields and farms in the area. The Texas boom had begun. Land in the area sold for $900,000 an acre, and shady land deals earned the moniker “Swindletop.” Walter Rundell, Jr., Early Texas Oil: A Photographic History, 1866-1936, at 35-38. (Texas A&M Press 1976).
Why would anyone look for oil around salt domes? Petroleum geology has become much more sophisticated since these early days, and geologists look for several kinds of underground formations based on their examination of the surface contours of land, the kind of rock strata outcroppings on the land, and the geological history of the area. Land which was once covered with seas hold the most interest to geologists, because such lands are likely to overlie strata of sandstone or limestone.
Both of these types of rock are porous and permeable, the two key characteristics of petroleum-bearing rock. Porosity measures the ability of the rock to hold oil, gas or water. The pore spaces are the tiny spaces between mineral grains, often grains of sand compressed over millions of years. Rock porosities are typically in the range of 15 to 20 percent of the total rock volume, although some good rocks may be twice this porous. Permeability measures the ability of oil, gas or water to flow through the rock. Without permeability, the oil sits trapped with no “tunnel” or route to reach the well bore drilled into the rock.
Conventional oil from conventional reservoir rocks (limestones and sandstones) flows up the well bore with little need for additional stimulation after the well is drilled. Much of the case law in this Casebook was decided when oil and gas were produced from vertical wells drilled into conventional reservoirs. The shale oil boom in the U.S. occurred in the first decade of the 21st century. Courts have had to bend and amend the common law in light of the new technology of horizontal drilling and hydraulic fracturing. Legislators and regulators have also had to adjust the legal framework to this new technology.
Notes and Comments
1. A PowerPoint slide show on petroleum geology and reservoir engineering will be presented in class. The author is indebted to Greg Hazlett at PetroSkills L.L.C. for supplying a superb set of slides for this course. Two slides are reproduced in the next page of this Preface for your continued reference:
- The first shows how gas, oil, and water form stratum in many reservoirs. In Figure 1, the oil and gas are trapped in an anticline structure. Why are the fluids layered in this order?
- The second shows the many different types of traps that geologists hope to find. The East Texas field, the largest in the continental United States, is a stratigraphic trap, almost 40 miles long on its east-west border. Prudhoe Bay in Alaska is a larger field. It is an enormous gas-cap field. The Trans-Alaskan Pipeline sends the oil down from the northern Arctic part of Alaska, across 800 miles of astounding landscape, to the port of Valdez. There, the oil is loaded onto tankers to be shipped to Japan and the lower 48. The Alaskan government is pushing for the development of a gas pipeline that would carry the 30 trillion cubic feet of gas stored in the gas cap to the United States through Canada. Many of the enormous buildings on the surface of the Prudhoe Bay are dedicated to processing gas, to recover liquids from it that can be shipped along with the crude oil, and then reinjecting the gas back into the ground.
2. Review: Which is more porous—the concrete pavement or a marble floor? Explain.
Common Types of Structural Traps
B. The Geology of Conventional versus Unconventional Oil and Gas
Note: This text is adapted from Chapter 1 of International Petroleum Transactions (4th edition, forthcoming 2019, Rocky Mtn. Min. L. Foundation), Section B, written by Professor Weaver.
Over eons of time, the earth’s continents and vast oceans and seas have moved around the mantle of the earth due to the geological forces of plate tectonics. Mountains eroded over millions of years, washing huge amounts of rubble and animal and plant matter down into oceans or lakes. The organic material became buried so deep under layers of rubble that it was transformed by heat (from below) and pressure (from the weight of the earth above). Geologists look for these thick layers of buried sedimentary rock that were once muds or silts holding deposits of organic matter, mainly single-celled marine organisms. Sedimentation means the process of settling mineral or organic particles in place. The oil and gas mature or “cook” under heat and pressure inside the microscopic pore spaces of the sedimentary rock, called source rock. Source rock consists of fine-grained shales or limestones that contain organic matter now compacted into hard rock by the weight of the earth. Typically, source rock contains about 1% organic matter, but very rich source rock can have as much as 10%.
A geological “province” is a large area (often thousands of square kilometers) with a common geological history. Petroleum geologists look for provinces (sometimes called basins) that have a thick layer, uplift or fold of sedimentary rock. Here is where petroleum might reside. Of the 937 geological provinces around the world, only 406 were identified as petroleum provinces in 2000. Of these, a mere 20 provinces held almost 80 percent of the petroleum found outside the U.S.
The U.S. Geologic Survey (USGS) has extensive maps of petroleum provinces around the world, with much accompanying data and analysis. For example, visit the USGS at
https://pubs.usgs.gov/of/1997/ofr-97-470/OF97-470L/gulfofmexico.pdf for a map outlining the large provinces in the Gulf of Mexico area. You will find dots of what looks like red and blue confetti off the coasts of Texas and Louisiana, and some coastal areas of Mexico. These dots are oil (red) and gas (blue) fields. The graphic shows how small the fields are in the great expanse of territory in the Gulf’s provinces. Geologists search for fields the size of these “dots.”
Conventional oil and gas: “Hard to find but easy to produce.”
After the organic matter inside source rock matures to form oil and gas, the geology of “conventional” oil and gas follows a different path from “unconventional” oil and gas. Most of the history of petroleum since the 1890s has been the search for conventional petroleum that has migrated upward out of the source rock into reservoirs of sandstone or limestone that are capped or sealed by a hard layer of rock or by salt (the remains of the vast oceans that evaporated), trapping the oil and gas inside the reservoir. Large amounts of oil, gas and briny water can reside in the tiny pore spaces (about one-tenth of a millimeter in size) between tightly packed sand grains in sandstone. Limestone is another type of sedimentary rock composed of tiny grains of skeletal remains of marine organisms, such as coral, that secreted shells made of calcite or aragonite and left the shells behind when they died. The coral reefs of ancient seas can become limestone reservoirs rich with oil and gas.
Sandstone and limestone are good reservoir rocks because they have two characteristics: porosity and permeability. Porosity measures the percentage of void space in a rock between grains or within cracks and cavities in the rock. Permeability measures the ease of flow of a gas or liquid through a porous rock. Rocks with good porosity may have pore spaces that exceed 30 percent of the rock’s volume, while poor rock has less than 10 percent porosity. Rocks that lack good pore space tend to have low permeability, meaning it is far less likely that fluid will flow through the rock to a well bore. The ability of oil to flow through reservoir rock also depends on the viscosity of the oil, i.e., how “thick” it is. (Honey is more viscous than water.) Many websites have good graphics of reservoir geology that show the difference between good and bad rocks, such as:
Jamie Toro, “Geology 493,” University of West Virginia (Mar. 4, 2016) available at
http://pages.geo.wvu.edu/~jtoro/Petroleum/13_Reservoirs1.pdf (last visited Nov. 25, 2017).
Reservoirs holding conventional oil and gas are hard to find because they are relatively small in area compared to the petroleum province in which they are located. Aerial surveys can show certain land features of interest, such as thrusts and faults. Salt domes that trap oil have often pushed up the land surface of flat coastal plains (that were once seafloors), making a dome-like hill on the surface that looks like a spindletop (hence the name of that famous field). But, more detailed data is needed to justify drilling a well that will cost several million dollars today. Within an identified “petroleum system” consisting of source rock, reservoir rock and a trap, geoscientists identify a “play” that contains one or more geologically related “prospects” where commercial quantities of hydrocarbons are most likely to be found. Only drilling will confirm whether a prospect is a win or a loss.
The explorer uses seismic data, often bought from third-party providers, to peer under the earth to find and evaluate these prospects, much like doctors use X-rays, sonograms and MRI imaging to peer inside the human body to spot a possible tumor before cutting the body open. On land, seismic data is collected using trucks that send low-frequency vibrations into the earth. Visit MaurinMedia, “Vibroseis Trucks for Geophysical Prospecting,” (Sept. 2, 2012) for the sight and sound of these trucks.
Small explosions of dynamite in shallow holes drilled in the earth can also send sound waves through the ground. The waves reflect signals back (like echoes reflect your voice back after bouncing off a canyon wall) to geophones located on the surface that record the data. Sound waves travelling through layers of petroleum-bearing sands travel at different velocity and density than those passing through other layers of rock. Offshore, special vessels tow several miles of streamers containing thousands of hydrophones that record reflections back from sound waves made by air guns shooting loud bursts of compressed air into the water.
This seismic data is then processed through high-powered computers, displayed, and interpreted. One processing technique, called Direct Hydrocarbon Indicators (DHI), amplifies changes in the data to produce “bright spots,” where the seismic reflections match the pattern of known oil and gas accumulations, thus predicting a new find. The data display may be a series of black and white lines on a two-dimensional map or a company may decide to invest in 3-D seismic that can be displayed as a colorful, multi-layered cube. 3-D seismic requires far more data points than 2-D and costs significantly more (imagine the vibrator trucks moving across a land surface in a close plaid pattern, rather than in parallel stripes), but it reduces the risk of drilling a dry hole. Some larger oil companies and big service providers have “visualization rooms” where the data is displayed in brilliant color on walls that put the viewer “inside” the reservoir and allow the data to be manipulated and discussed with a team. It is easy to find graphics of the structural faults and traps that geologists search for by inserting “graphics of oil and gas traps” into your browser.
Interpretation of the seismic data is the final step to identifying a prospect to drill. Data from other sources, such as gravitometric surveys and electromagnetic surveys, may be added to develop the geologic story of each prospect. If a good prospect is identified, the geoscientists will work with reservoir engineers to develop a subsurface model of the reservoir that is used to estimate the volume of hydrocarbons in place and how much may be recovered.
Once found, the petroleum trapped in a conventional reservoir is “easy to produce” because it is under so much pressure that it travels up the newly drilled well bore to the surface under its own force. The natural drive within the reservoir pushes the liquid and gas to the surface. Today, blowout preventers and many other safety features are used to assure that the oil and gas do not rush up the well bore in an uncontrolled manner, but in the early days of the industry, gushers of black crude spouting like geysers from just-drilled wells were a sign of great success and fortune. Today, such a gusher is considered an environmental disaster. For photos of the early drilling and pollution in Texas oil fields, search “Spindletop photos” in an image browser.
The Macondo well that blew out in the Gulf of Mexico in April 2010 had clearly tapped a conventional oil reservoir. Its high-pressure flow could not be stemmed for almost three months and it poured about 5 million barrels of oil into the Gulf. Many deepwater offshore reservoirs were formed by fast-moving, turbid currents that carried water mixed with much sediment downslope, like an avalanche. The forceful currents washed away finer grain sands, leaving more porous and permeable sandstone deposits. Wells drilled in these turbidite reservoirs can drain from large areas at high rates of production and are key targets for explorationists.
Unconventional shale oil and gas: “Easy to find but hard to produce.”
Unconventional oil and gas is found in the source rock itself, not in reservoirs. The organic matter in the shale rock has matured into oil or gas, but it has not migrated to a sandstone or limestone. It is still trapped in the pore spaces of the very low-permeability shale that served as a source rock to conventional oil and gas. Until the technology of hydraulic fracturing was developed, shale rock was considered to be a good cap rock or seal that kept oil and gas trapped in reservoirs, awaiting discovery. In contrast to conventional reservoirs, shale is relatively easy to find in large basins where thick sediments were deposited, but it is hard to produce.
Two technologies allowed the commercialization of shale rock at the end of the 20th century: hydraulic fracturing (or “fracking”)1 and horizontal well drilling. Fracking is required to wrest the oil or gas from the shale source rock. This process forces large amounts of water (mixed with a small percentage (typically under 5%) of additives down a well bore under very high pressure to crack the shale rock and make it permeable. Early private efforts to fracture oil- and gas-bearing rock in the US used nitroglycerine (1865) and napalm (1947). The federal government used underground atomic explosions in its 1967 Gas Buggy project in New Mexico. The oil and gas shortages of the 1970s spurred Congress to provide sustained federal funding for R&D into fracturing, often working with industry-funded research institutes. Starting in 1978, George Mitchell of Mitchell Energy, an independent E&P company, experimented with fracking in the Barnett Shale in Texas, often using the expertise of research scientists from federally funded national labs. In 2002, Devon Energy acquired Mitchell Energy and successfully combined its horizontal drilling techniques with Mitchell’s microseismic mapping and hydraulic fracturing in the Barnett Shale.
for the Breakthough Institute’s “Shale Fracking Innovation Timeline.”
Most shale wells today are horizontal wells. The drill bit starts at the surface and drills down vertically, but then it is steered to curve through the rock and enter the shale layer horizontally. Some horizontal wells extend more than two miles laterally, remaining in contact with the shale layer for most of their length. After drilling, if the well appears commercial, steel pipe called casing is cemented along the length of the well bore (as is done for vertical wells). The casing and cement seal off the well bore from the surrounding rock. A perforating gun is then inserted in the casing to shoot holes through the steel and cement into the rock formation.
At this point, oil and gas in a conventional reservoir will start flowing towards and into the perforations and up the casing to the surface. In a shale well, no oil and gas will flow. These wells must undergo an additional “well completion” phase, called fracking. Water with a small percentage of additives (less than 5%) is forced down the well bore under very high pressure and out the perforations. The pressure of the water literally cracks the rock. Proppants, like sand or tiny ceramic beads, are mixed in the water to keep open the microscopic cracks in the shale formation, allowing liquids and gas to flow into the well bore to the surface. Each fracking operation requires several million gallons of water. In the Permian Basin, an arid desert in West Texas, more than 20 million gallons may be required. Both sourcing water for use in hydraulic fracturing and disposing of the huge amounts of water that flow back to the surface make shale development controversial, especially in areas that never experienced conventional oil and gas development. Many state laws apply to regulate the environmental aspects of shale development.
One consequence of the fracking boom has been “induced seismicity,” or earthquakes in Oklahoma and Texas, caused largely by high-volume injection of waste water for permanent storage in deep underground formations, and, more rarely, by the fracking operation itself, A full discussion of the externalities of fracking, and their regulation and management, is beyond the scope of this book, but visit http://www.rff.org/research/subtopics/natural-gas for excellent, unbiased sources on the environmental and economic effects of shale development in the US.
Video animations of a fracking operation are easy to find on YouTube. Here is a good one from Marathon Oil: “Animation of Hydraulic Fracturing (Fracturing),” (Apr. 26, 2012),
Chesapeake Energy has a series of YouTube videos (ranging from 3 to 10 minutes each) that explain the different stages of an operation in the Marcellus Shale, the largest gas producing field in the U.S. (located in the Appalachian area of Pennsylvania and West Virginia). The videos include:
- Well Pad Preparation and Drilling (also showing pollution prevention practices) (May 22, 2012),
- Horizontal Drilling (Mar. 24, 2012);
- Hydraulic Fracturing
- Well Completion (actually fracking a well) (Mar. 24, 2012)
- Natural Gas Production and Marketing (May 22, 2012)
(showing central processing facilities, compressors and pipeline construction).
(Or, use your browser to search for “Chesapeake Energy video” and then name the topic.)
In short, brute force wrests oil and gas out of shale rock. Without fracking, a horizontal well is just a long hollow tube running underground. The drilling rig and crew have done their job, but obtaining production awaits the arrival of the frack crew.
It is obvious that shale rock is far inferior in quality to a nice piece of sandstone reservoir, but conventional reservoirs are increasingly difficult to find. When found, often offshore, they require huge capital investments in the billions of dollars to develop. Generally, only 3% to 5 % of the oil and gas locked in shale rock or in very “tight” (i.e., compacted, dense) sandstones is recovered, compared to the 30 to 90 percent recovery rates for conventional reservoirs (see Section B(2) infra). Operators today are re-fracking wells, spacing the perforations more closely, and using greater amounts of water and proppant to improve shale recovery rates. Applying more brute force can increase recovery rates, but costs increase too. See EIA, Trends in U.S. Oil and Natural Gas Upstream Costs (Mar. 2016) at
https://www.eia.gov/analysis/studies/drilling/pdf/upstream.pdf, showing the variation in costs in five key shale plays.
C. Terminology of Different Types of Oil and Gas Resources
Note: This text is adapted from a Memo on Conventional versus Unconventional Oil and Gas Sources by Krys Willman, Research Assistant for Prof. Weaver 2010-11.
Conventional sources of oil extracted from porous and permeable reservoir rocks can be produced at economic flow rates without special stimulation. Development of conventional reserves often occurs in three distinct phases: primary recovery, secondary recovery and enhanced oil recovery (EOR). In primary recovery, the natural pressure of the reservoir drives the oil into the wellbore and up to the surface. In secondary recovery, the life of the field is extended by repressuring techniques, such as injecting water or gas to drive the oil into the wellbore. Once the easy-to-produce oil from conventional reserves is recovered, EOR techniques may be used to extract even more of the reserve’s original oil in place. The primary methods of EOR are thermal recovery, gas (for example, CO2) injection, microbial injection and chemical injection. EOR techniques are relatively high cost and vary in effectiveness.
Types of Unconventional Oil
1. Shale oil
Shale oil is classified as unconventional because the oil housed in this rock can only flow if the rock is fractured after the well is drilled. Early drillers considered shale formations to be worthless and would routinely drill through the shale formation to get to the conventional reservoirs lying underneath.
Horizontal drilling and hydraulic fracturing were first used to produce gas from the shale source rock and many in the industry were surprised to learn that these techniques could also be used to produce a very light oil. The primary shale oil plays in the United States are the Bakken formation in Montana, North Dakota and Canada, the Eagle Ford shale located south of San Antonio, and the multiple shale formations that underlie the Permian basin in west Texas. Shale oil is sometimes called "light, tight oil," or LTO because the oil is very light and comes from "tight" formations that are impermeable. This light oil is quite volatile and combusts easily. In the past few years, several rail cars of this light shale oil have derailed and then quickly burst into flames, causing massive fireballs, some of which have killed citizens nearby. One such train exploded in Lac Megantic, Canada and killed 47 people who were dining and shopping in the downtown area of this small town.
2. Oil Shale or Kerogen
The terms “shale oil” and “oil shale” have prompted confusion in the industry. The inverted terms represent two distinctive sources of oil.
Oil shale is a porous sedimentary rock that contains kerogen, an organic bituminous material that was not buried deep enough at high temperatures to convert into oil and natural gas. The term is a misnomer because kerogen is not crude oil and the rock in which kerogen is often found is not shale. Found at shallow depths, kerogen releases a substance similar to oil when heated. However, obtaining usable oil from oil shale is not simple. Once mined, using traditional surface mining methods, oil shale undergoes surface retorting during which it is crushed and heated in order to release an unstable oil-like liquid that requires an upgrading process before it is transported to a refinery. If the deposits of oil shale are deeper, then an in-situ conversion process can be employed to heat the kerogen in place in the reservoir over the course of a few years. The largest oil shale deposit in the world is the Green River Formation in Colorado, Utah and Wyoming. Oil shale is not yet produced commercially in the United States.
3. Heavy Oils and Oil Sands (aka Tar Sands)
High viscosity oils have high densities when compared to conventional oil and are, thus, more resistant to flow. Most of the heavy oil, extra heavy oil and bitumen resources (commonly referred to as oil sands or tar sands) are found in shallow deposits and originated as conventional oil that migrated to the surface where they were degraded. As these oils do not readily flow in most reservoirs, they require specialized production methods. Furthermore, due to their high carbon, sulfur and heavy metal content, high viscosity oils require upgrading before they are transported to refineries. The viscosity, density and impurity of these oils make their production much more expensive than conventional oil sources.
The terms heavy oil, extra heavy oil and bituminous sands are often used interchangeably. The terminology can vary based on the location of the oil, the production method used to extract the oil and whether the oil flows at ambient conditions. The American Petroleum Institute (API) has classified the grades of oil based on the API gravity scale and their viscosity. Heavy crude oil has an upper limit set at 22° API gravity and viscosity between 100-10,000 cP; extra heavy oil has an API gravity below 10° and viscosity between 100-10,000 cP; and bitumen has viscosity about 10,000 cP.
In order to produce heavy oils, viscosity must be reduced to allow the oil to flow. Therefore, most deposits require heat or dilution for the heavy oil to flow into wells. However, some heavy oil reserves are capable of being produced via “cold production” because the oil flows at reservoir conditions, i.e., without heating. This method is proving to be viable only for a small fraction of the reservoirs, though, so thermal recovery is likely to follow if the economics are right. In order to transport heavy oil, it must be diluted with crude oil, upgraded to synthetic crude oil or continually heated within the pipeline. Venezuela’s Orinoco heavy oil belt is the most notable heavy oil project worldwide.
Natural bitumen is also referred to as oil sands and tar sands, though bitumen actually is the heavy oil extracted from the sands. The sands contain about 83% sand, 10% bitumen, 3% clay and 4% water. Bitumen shares the same attributes as heavy oil, but it is even more viscous. Although, oil sands are classified distinctly from heavy oil, they pose similar extracting and refining concerns. They can be produced through either surface mining or in-situ methods for shallow deposits and deeper deposits, respectively. During surface mining, the sands are extracted and transported to a location where the bitumen is separated using a hot water process. The extracted bitumen must be upgraded to a synthetic crude oil in order to create a product that refineries can utilize. When surface mining is not an option due to the deep location of the reserves, the bitumen has to be extracted from the sands in place, using various techniques that involve heating the bitumen so that it will flow when pumped to the surface. Canada’s Athabasca oil sands in Alberta is the most notable oil sands project worldwide.
Conventional gas resources are found in porous rock formations, usually sandstone, and are often found together with conventional oil deposits. Conventional deposits are easy to extract and generally do not require advanced technologies as they will naturally flow out of the reservoir when a well is drilled.
Unconventional gas is natural gas that is found in a low permeability reservoir that requires advanced completion methods to develop. The three most common types of unconventional natural gas are shale gas, tight sands gas, and coalbed methane.2 The resource potential of unconventional natural gas is huge, and these reserves are estimated to constitute a majority of the natural gas that remains for extraction in North America. The Energy Information Administration (EIA) estimates that by 2030, half of the natural gas produced in North America will be from unconventional resources.
1. Shale Gas
Shale is a fine-grained sedimentary rock that often breaks easily into thin layers. The shale rock acts as both the reservoir and the source for the natural gas. Successful shale gas resource plays in North America include the Barnett, Marcellus, Fayetteville, Haynesville and Woodford shales.
2. Tight Gas
Tight gas refers to natural gas that is trapped in a very tight formation underground. The rock is very hard and extremely impermeable, making the underground formation “tight.” Additionally, tight gas can be trapped in sandstone or limestone formations that are atypically nonporous and impermeable, creating what is known as tight gas sands (or tight sand). Extracting gas from tight formations requires much effort using fracturing and acidizing techniques.
In North America, the Piceance and Uinta basins are tight sand gas resource plays and the Midcontinent Granite Wash is a series of tight gas resource plays. The Midcontinent Granite Wash is a series of tight gas plays. The Piceance and Uinta are tight sandstone gas resources plays. While both sources are found in low permeability rock formations, the key difference between shale gas and tight gas is that shale gas is trapped in shale, an easily breakable rock, while tight gas is locked in very impermeable, hard rock, requiring more effort to extract.
3. Coalbed Methane
Coal is another fossil fuel, formed underground in seams that are removed by mining. The coal seams or surrounding rock can contain trapped natural gas that is released when mining activities unleash it. Historically, coalbed methane was seen as a bothersome by-product of coal production. Now, the trapped gas is purposefully extracted by pumping water out of the coal seam to reduce the water pressure holding the gas in the seam so that it may be piped out of the well. The Powder River Basin and the San Juan Basin are significant coalbed methane plays in North America.
The word “fracturing” is sometimes abbreviated as “fracing” or “frac’ing” in industry literature. This casebook will use “fracking,” the most common spelling because it accords with how the term is pronounced.
- 2 Unconventional gas reserves also include (a) methane hydrates, which are frozen lattices of water that form a cage around methane molecules found in polar permafrost and underneath the ocean; (b) deep gas found in deposits beyond conventional drilling depths; and (c) geopressurized zones of natural gas found at unusually high pressures for their depth.
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