John Lowe - Oil and Gas Law in a Nutshell

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JESSE H. CHOPER

Professor of Law and Dean Emeritus,
University of California, Berkeley

JOSHUA DRESSLER

Professor of Law, Michael E. Moritz College of Law,
The Ohio State University

YALE KAMISAR

Professor of Law Emeritus, University of San Diego
Professor of Law Emeritus, University of Michigan

MARY KAY KANE

Professor of Law, Chancellor and Dean Emeritus,
University of California,
Hastings College of the Law

LARRY D. KRAMER

President, William and Flora Hewlett Foundation

JONATHAN R. MACEY

Professor of Law, Yale Law School

ARTHUR R. MILLER

University Professor, New York University
Formerly Bruce Bromley Professor of Law, Harvard University

GRANT S. NELSON

Professor of Law, Pepperdine University
Professor of Law Emeritus, University of California, Los Angeles

A. BENJAMIN SPENCER

Professor of Law,
University of Virginia School of Law

JAMES J. WHITE

Professor of Law, University of Michigan

SIXTH EDITION

by

JOHN S. LOWE

George W. Hutchison Chair of Energy Law
Senior Associate Dean for Academic Affairs
SMU Dedman School of Law

Mat #41503320

The publisher is not engaged in rendering legal or other professional advice, and this publication is not a substitute for the advice of an attorney. If you require legal or other expert advice, you should seek the services of a competent attorney or other professional.

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COPYRIGHT 1983, 1988, 1995 JAQUELYN TAFT LOWE, custodian
West, a Thomson business, 2003
2009 Thomson Reuters
2014 LEG, Inc. d/b/a West Academic

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West, West Academic Publishing, and West Academic are trademarks of West Publishing Corporation, used under license.

Printed in the United States of America

ISBN: 978-0-314-28958-2

To my best friend (and wife),
Jacquelyn Taft Lowe

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The first oil well in the United States was drilled in 1859 to a depth of 69 feet. In the century and a half since then, the United States and the rest of the world have developed economies that are based on oil and gas as their major fuel sources. Approximately 35 percent of the energy used in the United States comes from oil and another 25 percent from natural gas. Worldwide, the percentages are substantially the same.

All things change over time, and environmental and climate concerns and growing demand will eventually cause a shift to other forms of energy. But for now, and for the foreseeable future, we live in a petroleum world in which oil and gas resources are likely to become more and more valuable. For this reason, commercial and property lawyers, as well as people who work in the oil and gas industry, need to understand the legal principles that control oil and gas exploration and development.

This book focuses upon the legal rules that govern development of privately owned mineral rights in the United States. I have chosen that focus because most mineral rights in the United States are owned privately, though the federal and state governments own hundreds of millions of acresapproximately 30 percent of all mineral rights. Also, the rules for VI governmentally owned resources in the United States tend to be based on those for private lands.

Because of the value of oil and gas resources, there are numerous secondary sources and research materials available. Those that I have used in preparing this book include Eugene Kuntz, THE LAW OF OIL AND GAS (Lexis/Nexis); Howard R. Williams and Charles J. Meyers, OIL AND GAS LAW (Lexis/Nexis); Ernest Brown, THE LAW OF OIL AND GAS LEASES (Lexis/Nexis); Richard W. Hemingways OIL AND GAS LAW AND TAXATION (West); W. R. Summers, THE LAW OF OIL AND GAS (West); and Maurice Merrill, COVENANTS IMPLIED IN OIL AND GAS LEASES (Thomas Law Book). In addition, I have used many of the cases included in John S. Lowe, Owen L. Anderson, Ernest E. Smith, David E. Pierce, and Christopher S. Kulander, CASES AND MATERIALS ON OIL AND GAS LAW (West), and Richard Maxwell, Patrick H. Martin and Bruce M. Kramer, CASES ON OIL AND GAS (Foundation), as illustrations.

I acknowledge the support of the many research assistants at SMUs Dedman School of Law and The University of Tulsa who have helped me research and prepare various editions of this booksome now nearly as gray-haired as I am. These include David W. Cias, Brynna Krough, Nugent DJ Beaty, Eric Camp, Ashley Songer, Monika Ehrman, A. Z. Scott Goldberg, Ann Lane, Laura A. Hudock, Matthew T. McLain, Jamey Seely, Richard K. Vangelisti, Dona K. Broyles, Gregory N. Fiske, Laurie A. Patterson, David Keehn, James Arlington, VII Kenneth L. Wire, David P. Page, Jeffrey R. Fiske, Arthur H. Adams, Tommy H. Butler, Michael F. Miller, Joseph G. Staskal, Curtis L. Craig, Michael D. Cooke, Steve E. McCain, Harley W. Thomas, Laura E. Frossard, Mark S. Rains, Thomas J. Wagner, Charles E. Molloy, and Robert W. Kennard. Special thanks are due to Larry D. Vredenburgh, Ph.D., Norman J. Hyne, Ph.D., and Christopher S. Kulander, Ph.D for help with Chapter 1, to John Taft Lowe, Kathryn June, and the St. Michael School, Dallas, for their help with graphics, to Professor John Dzienkowski, Judge James A. Hogue, Sr., and Professor Peter D. Maxfield for their comments on tax matters, to Bryan A. Garner and Jeffrey Newman for their help with my Glossary, and to Professor Owen L. Anderson, his wife, Kathie [PhD], and Maria M. Seidler, Esq., for their general review. I alone am responsible for any defects in analysis or errors in statements.

The Hutchison Endowment and the Michael C. and Jacqueline M. Barrett Endowed Faculty Research Fund at SMUs Dedman School of Law financially supported my work on this 6th edition, for which I am grateful. Accolades are also due to my deans, John B. Attanasio and Julia P. Forrester, for their continuing encouragement. Finally, I thank my wife, Jacquelyn Taft Lowe, for tolerating the domestic disruption caused by this project.

JOHN S. LOWE

Dallas, Texas
February, 2014

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SIXTH EDITION

Oil and gas are the liquid and gaseous forms of petroleum, a chemically complex substance composed of hydrogen and carbon with trace amounts of oxygen, nitrogen, and sulphur. Petroleum occurs in gaseous, liquid, and solid states, depending upon its physical composition, temperature and pressure.

Petroleum is found in sedimentary rocks formed by ancient seas. The generally accepted theory for petroleums origin is that sediment from rivers and remains of marine plants and animals simultaneously accumulated on sea floors, forming layer upon layer of sediment and organic residue. As layers were buried deeper and deeper, they were compressed and subjected to increasing pressure from the overlaying sediment. Increased pressure generated heat, which acted upon the sediment for tens to hundreds of millions of years and transformed the organic material into crude oil and natural gas.