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.
The law regulating oil and gas ownership in the US generally differs significantly from laws in Europe; oil and gas are often owned privately in the US as opposed to being owned by the national government as they are in many other countries.
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.
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.
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.
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. [1] An operator may not 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 U.S. federal law.
The rule of capture provides that an oil producer with a wellbore on his property is allowed to drain oil out from underneath his land—even if some of that oil originated from a neighbor's land, migrating to the oil producer's land through geologic forces or drainage. The rule of capture gives landowners an incentive to pump out oil as quickly as possible by accelerating operations or drilling multiple wells to capture the oil of their neighbors. Such practice may deplete the gas pressure needed to force oil from the ground, which will reduce the amount of oil available for recovery from that reservoir. State law often limits the rule of capture to protect correlative rights of neighboring owners. [2] Government agencies and state oil and gas conservation commissions, such as the Texas Railroad Commission, have developed conservation laws which regulate extraction by individual owners to protect the rights of the mineral owners and to prevent economic and physical waste.
Mineral rights may be severed by a deed from the surface rights. Such a condition is called a split estate. Once severed from surface ownership, oil and gas rights may be bought, sold, or transferred, like other real estate property. Ownership in the oil and gas rights for different horizontal layers, or strata, may be further divided and sold to different parties. In some states, severed mineral rights revert to the landowner if the mineral right not exercised for a certain time period. [3]
In most states, unless otherwise specified by a deed, the owner of the oil and gas interest is presumed to have the right to occupy as much of the surface property as is reasonably needed to extract the oil and gas, subject to regulations for minimum distances from homes or buildings. Courts have generally held that, without this implied right of access and surface occupancy, ownership of the oil and gas rights would be meaningless. This is called subsurface supremacy.
Refined hydrocarbons that escape into the ground are not subject to the law of capture, unless evidence shows that the refiner abandoned them. [4] Extracted oil and gas which are subsequently stored in underground reservoirs are considered as personal property, rather than as an interest in real estate. [5]
The foundational legal document of the U.S. oil and gas industry is the oil and gas lease. [6] Oil and gas producing companies do not always own the land they drill on. 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. [6]
Lessees of mineral rights have a right of reasonable access to leased land to explore, develop, and transport minerals, [7] unless the lease specifies otherwise (a "no-surface access" 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. 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.
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. [8] 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. [9] This bill failed to pass in the House of Representatives.
Unless specified otherwise, establishing commercial production from a single well within the lease will hold the entire lease as long as production continues. Language to the contrary is called a Pugh clause. The Pugh Clause is named after a Louisiana lawyer, Lawrence G. Pugh, who first used this kind of language in an oil and gas lease in 1947. [10] In Texas the clause is sometimes referred to as a "Freestone Riders" clause. [11]
A Pugh Clause is meant to prevent a lessee from declaring all lands under an oil and gas lease as being held by production, even if production only occurs on a fraction of the property. [12] A Pugh clause may specify that a producing well may hold only a specified area around that well; after the primary term, the mineral owner is free to lease the rest of the land to others. Pugh clause can be either "vertical", "horizontal", or both. A vertical Pugh clause limits the lease to certain depths or certain geological formations. [13] A horizontal Pugh clause severs a leasehold on the basis of horizontal planes, while a vertical Pugh clause severs based on vertical planes only.
Payments to the lessor typically take three forms: bonus, rental, and royalties, as negotiated between the parties. 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 gross value of any oil or gas produced from the lease that is paid to the mineral owner. It is not a portion of profits, for it is paid without deducting costs of drilling, completing, or operating the well. Whether or not the operator can deduct costs of treating, transporting, or marketing the oil and gas, if not specified in the lease, has been a matter of legal dispute. The traditional royalty rate for oil and gas in the United States was one-eighth (12.5 percent), although today it is often higher. Some states, such as Pennsylvania and West Virginia, have set the legal minimum royalty for private oil and gas leases to one-eighth. [14] [15]
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. [16]
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. [17]
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. [18] These suits for negligence are typically brought by drilling site workers known as roustabouts.
The two most common contractual agreements entered into by oil and gas companies are the Farmout Agreement and the Joint Operating Agreement. A farmout agreement, generally, is between one company that owns a lease, and another company that wishes to drill the property. The company wishing to drill, called the farmee, provides drilling services in exchange for a majority interest in the lease owned by the farmor. [19]
In some cases, oil and gas rights or leases in a drilling unit are held by more than one company or person who wish to participate in drilling and production. In such cases, the various interests sign a Joint Operating Agreement, a contract entered into by two or more ownership or leasehold co-tenants to jointly explore and develop the oil and gas property, including operations, voting mechanisms, subsequent operations, risk-sharing, indemnities and exculpatory provisions, revenue allocation, title examination and title issues, and future acquisitions and divestitures in the contract area. One company is designated as the operator, and operates the property on a day-to-day basis. [20]
There are various terms describing ownership interests in an oil or gas well. An interest signifying a duty to pay expenses is called:
Interests in receiving income include:
For any oil and gas property, the total working interests must add up to 100%. The sum of the net revenue interests, royalty interests, and overriding royalty interests, must also add up to 100%.
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.
There are several not-for-profit foundations that exist to further the practical and scholarly study of oil and gas law, for example the Energy and Mineral Law Foundation and the Rocky Mountain Mineral Law Foundation.
Regulation of oil and gas drilling and production are largely left to the states, except for federal offshore waters, where operations are regulated by the Bureau of Ocean Energy Management. The names and organizational structures of the state agencies overseeing oil and gas extraction vary. In Texas, oil and gas are regulated by the Texas Railroad Commission, in Oklahoma by the Oklahoma Corporation Commission, and in North Dakota by the Industrial Commission. In Colorado and Wyoming, the agencies are the state Oil and Gas Conservation Commissions.
Local control of oil and gas operations is contentious. The key legal issue is generally whether, or to what extent, state regulations preempt local controls. The result varies state-to-state. In 2023, a recent law in California banning new drilling in certain places including homes, schools, and healthcare facilities gathered enough signatures to put a referendum, filed on behalf of a board member of the California Independent Petroleum Association, on the 2024 general election ballot. There is controversy over how some of the signatures were collected. [21] [22]
States require a drilling permit before a well begins drilling. Requirements to receive drilling permits generally include minimum setbacks from lease or unit boundaries, and adequate casing and cementing programs.
States generally require permits for or notices of major work done on a well, and periodic reports of oil and gas produced.
When a well reaches the end of economic production, it must be plugged according to the terms of a plugging permit.
Where the onshore oil and gas rights are owned by the federal government, as is the case for much land in the western United States, the various permits must also be obtained from the Bureau of Land Management as well as the state, which may have different requirements than the equivalent state permits.
A royalty payment is a payment made by one party to another that owns a particular asset, for the right to ongoing use of that asset. Royalties are typically agreed upon as a percentage of gross or net revenues derived from the use of an asset or a fixed price per unit sold of an item of such, but there are also other modes and metrics of compensation. A royalty interest is the right to collect a stream of future royalty payments.
A lease is a contractual arrangement calling for the user to pay the owner for the use of an asset. Property, buildings and vehicles are common assets that are leased. Industrial or business equipment are also leased. In essence, a lease agreement is a contract between two parties: the lessor and the lessee. The lessor is the legal owner of the asset, while the lessee obtains the right to use the asset in return for regular rental payments. The lessee also agrees to abide by various conditions regarding their use of the property or equipment. For example, a person leasing a car may agree to the condition that the car will only be used for personal use.
A waiver is the voluntary relinquishment or surrender of some known right or privilege.
Assignment is a legal term used in the context of the laws of contract and of property. In both instances, assignment is the process whereby a person, the assignor, transfers rights or benefits to another, the assignee. An assignment may not transfer a duty, burden or detriment without the express agreement of the assignee. The right or benefit being assigned may be a gift or it may be paid for with a contractual consideration such as money.
A rental agreement is a contract of rental, usually written, between the owner of a property and a renter who desires to have temporary possession of the property; it is distinguished from a lease, which is more typically for a fixed term. As a minimum, the agreement identifies the parties, the property, the term of the rental, and the amount of rent for the term. The owner of the property may be referred to as the lessor and the renter as the lessee.
Mining law is the branch of law relating to the legal requirements affecting minerals and mining. Mining law covers several basic topics, including the ownership of the mineral resource and who can work them. Mining is also affected by various regulations regarding the health and safety of miners, as well as the environmental impact of mining.
The Mineral Leasing Act of 1920 30 U.S.C. § 181 et seq. is a United States federal law that authorizes and governs leasing of public lands for developing deposits of coal, petroleum, natural gas and other hydrocarbons, in addition to phosphates, sodium, sulfur, and potassium in the United States. Previous to the act, these materials were subject to mining claims under the General Mining Act of 1872.
A finance lease is a type of lease in which a finance company is typically the legal owner of the asset for the duration of the lease, while the lessee not only has operating control over the asset but also some share of the economic risks and returns from the change in the valuation of the underlying asset.
Mineral rights are property rights to exploit an area for the minerals it harbors. Mineral rights can be separate from property ownership. Mineral rights can refer to sedentary minerals that do not move below the Earth's surface or fluid minerals such as oil or natural gas. There are three major types of mineral property: unified estate, severed or split estate, and fractional ownership of minerals.
The Dabney Oil Syndicate refers to a number of petroleum-drilling enterprises in California involving Joseph B. Dabney and his associates.
For the oil and gas terminology of overriding royalty interest, pleasesee Overriding Royalty Interest.
Offshore oil and gas in the United States provides a large portion of the nation’s oil and gas supply. Large oil and gas reservoirs are found under the sea offshore from Louisiana, Texas, California, and Alaska. Environmental concerns have prevented or restricted offshore drilling in some areas, and the issue has been hotly debated at the local and national levels.
Offshore drilling for oil and gas on the Atlantic coast of the United States took place from 1947 to the early 1980s. Oil companies drilled five wells in Atlantic Florida state waters and 51 exploratory wells on federal leases on the outer continental shelf of the Atlantic coast. None of the wells were completed as producing wells. All the leases have now reverted to the government.
A habendum clause is a clause in a deed or lease that defines the type of interest and rights to be enjoyed by the grantee or lessee.
South African property law regulates the "rights of people in or over certain objects or things." It is concerned, in other words, with a person's ability to undertake certain actions with certain kinds of objects in accordance with South African law. Among the formal functions of South African property law is the harmonisation of individual interests in property, the guarantee and protection of individual rights with respect to property, and the control of proprietary management relationships between persons, as well as their rights and obligations. The protective clause for property rights in the Constitution of South Africa stipulates those proprietary relationships which qualify for constitutional protection. The most important social function of property law in South Africa is to manage the competing interests of those who acquire property rights and interests. In recent times, restrictions on the use of and trade in private property have been on the rise.
The South African law of lease is an area of the legal system in South Africa which describes the rules applicable to a contract of lease. This is broadly defined as a synallagmatic contract between two parties, the lessor and the lessee, in terms of which one, the lessor, binds himself to give the other, the lessee, the temporary use and enjoyment of a thing, in whole or in part, or of his services or those of another person; the lessee, meanwhile, binds himself to pay a sum of money as compensation, or rent, for that use and enjoyment. The law of lease is often discussed as a counterpart to the law of sale.
The petroleum fiscal regime of a country is a set of laws, regulations and agreements which governs the economical benefits derived from petroleum exploration and production. The regime regulates transactions between the political entity and the legal entities involved. A commercial or legal entity in this context is commonly an oil company, and two or more companies may establish partnerships to share economic risks and investment capital.
In the oil and gas industry, a farmout agreement is an agreement entered into by the owner of one or more mineral leases, called the "farmor", and another company who wishes to obtain a percentage of ownership of that lease or leases in exchange for providing services, called the "farmee." The typical service described in farmout agreements is the drilling of one or more oil and/or gas wells. A farmout agreement differs from a conventional transaction between two oil and gas lessees, because the primary consideration is the rendering of services, rather than the simple exchange of money.
As a legal document, the broad form deed severs a property into surface and mineral rights. This allows other individuals or organizations other than the land owners to purchase rights to resources below the surface. These parties also receive use of surface resources — such as wood or water — to facilitate gathering the resources below ground. Based on English legal theory but an American creation from the early 1900s, the broad form deed was used by land and coal companies in many states within the Appalachian Region.
For the English land law concept of overriding interest, please see Overriding Interest.
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