Mysteries of the Oil and Gas Lease Student Symposium

Mysteries of the Oil and Gas Lease Student Symposium addresses the document used to develop virtually all the oil and gas in the United States: the oil and gas lease. This foundational document establishes the contours of the relationship between mineral owner and mineral developer that can routinely last for decades. Students presenting this symposium will examine the many "mysteries" associated with the oil and gas lease. After over 150 years of oil and gas development in Kansas, many fundamental oil and gas lease issues remain unresolved by the Kansas Supreme Court.

This symposium addresses the oil and gas lease in a step-by-step, clause-by-clause fashion, exploring each phase of the oil and gas development process. Lawyers new to oil and gas law will find the symposium to be an excellent, comprehensive introduction to the oil and gas lease and the leasing process. Oil and gas lawyers will find the symposium to be an excellent exposition of the unsettled issues and how they are likely to be resolved by courts and how they can be avoided when drafting the next lease.

The symposium will be held Friday, March 27, 2015, in Room 102 at Washburn University School of Law (directions) from 8:50 a.m.-4:15 p.m. Free parking is available north, south, and east of the law school.

Schedule

8:50 a.m. – Welcome: Dean Thomas Romig

9:00 a.m. – Introduction to the Oil & Gas Lease and the Symposium: Professor David E. Pierce

9:15 a.m. – Contract Formation Issues: Bonus and the Agreement to Lease
Photograph: Travis Ternes.Travis J. Ternes
Nowhere in the form lease document will it address the offer and acceptance process that resulted in the mineral owner’s signature on the document. Typically the only reference to the bonus paid to induce the mineral owner to lease is the "one dollar and other consideration" recitation contained in the oil and gas lease. This session addresses the offer and acceptance process and how it can be impacted by use of a sight draft. It also provides guidance on how to better define the point in time when the parties are bound to a lease and no longer free to "shop."

9:30 a.m. – Granting Clause: What Is Really Being Granted?
Photograph: Michael Lygrisse.Michael T. Lygrisse
The precise terms of the granting clause should define the nature of the interest being conveyed by the mineral owner to the developer. Typically the clause grants specific rights to enter and use the leased land to explore for, develop, remove, and take title to oil and gas. This session parses the express terms of the granting clause and begins to link the lease terms with the tortuous body of law that attempts to classify the legal relationship created by the oil and gas lease.

9:45 a.m. – Granting Clause: Blanket Easements and Lessee Surface Use Rights
Photograph: Courtney Kelley.Courtney L. Kelley
Conceptually, the moment an oil and gas lease is signed, the landowner grants the lessee broad easements to use the leased land. This session examines the law governing the resulting blanket easements and the other express and implied rights and limitations on the lessee’s use of the surface to conduct its operations. It also examines statutory law and recent Kansas Corporation Commission rulings addressing the lessee’s use of the surface.

10:00 a.m. – Break

10:15 a.m. – Granting Clause: Reversionary Rights, After-Acquired Title, Accretions, and Covenants Running With the Land
Photograph: Jacob Knight.Jacob T. "Jake" Knight
As already noted, proper classification of the oil and gas lease has been a challenging task. Many statutes that address concepts such as after-acquired title when dealing with a fee interest do not apply to the oil and gas lease. Other title doctrines applicable to fee interests may not apply to oil and gas leases. Therefore, it is incumbent on the parties to the lease to address how granted lease rights will be impacted by subsequent events such as the lessor acquiring a new interest in the leased land by grant or operation of law and the binding effect of lease terms on subsequent transferees.

10:30 a.m. – Granting Clause: Other Rights Granted After Paragraph 1 of the Lease
Professor David E. Pierce
In addition to the rights granted in the "granting" clause of the oil and gas lease, other clauses in the lease contain additional grants of significant value to the lessee. Most leases contain a "free use" clause that allows the lessee to use oil, gas, and other resources from the leased land to support oil and gas development. Most leases grant broad assignment rights together with an "advance novation" clause that releases the lessee from liability for acts taking place after an assignment. Equipment and trade fixture removal clauses are common. Typically the last clause of the oil and gas lease is the "surrender clause" that allows the lessee to release the lease. The release also triggers a broad release of liability in favor of the lessee.

10:45 a.m. – Title Issues: Warranty Clause, Proportionate Reduction Clause, and the Subrogation Clause
Photograph: Blair Loving.Blair W. Loving
The lease warranty clause is frequently the focus of negotiation and removal from the lease, and often offers the lessee little protection, particularly when bonus payments are modest. The most important protection a lessee has regarding defects in the lessor's title is the proportionate reduction clause, also known as the "lesser interest" clause. Interpretations of the proportionate reduction clause by the Kansas Supreme Court and the Court of Appeals have been "mysterious." The primary protection from non-subordinated debts that have priority over the oil and gas lease is the subrogation clause. Subrogation, and the process of subrogation, remain mysteries to many.

11:00 a.m. – Duration of the Grant: Habendum Clause Primary Term Limits On the Primary Term Created By the Drilling/Delay Rental Clause; the "Paid-Up" Lease
Photograph: Nicholas Caldwell.Nicholas M. "Max" Caldwell
Under oil and gas leases with a drilling/delay rental clause, the primary term is an annual affair. This clause provides the first opportunity to begin the critical work of distinguishing covenants from conditions and forfeitures from special limitations on the grant. It is also an introduction to the "first" implied covenant and the industry's initial response (the drilling/delay rental clause) and its most recent response (the paid-up lease). The rare cases in which the Kansas Supreme Court has granted equitable relief for a failed payment provide insight into how the court might address commencement issues.

11:15 a.m. – Break

11:30 a.m. – Duration of the Grant: Maintaining the Lease By Commencing Operations
Photograph: Nathan Jiwanlal.Nathan A. "Nate" Jiwanlal
One of the greatest mysteries of the oil and gas lease is how for 150 years the "commencement" issue has evaded the Kansas Supreme Court. Two major clauses in the oil and gas lease create commencement issues. The drilling/delay rental clause during the primary term and the "commencement" clause moving from the primary into the secondary lease term. Court of appeals decisions on the issue take varying and, many would say, conflicting approaches. The issue, however, is fundamental: what must a lessee be doing on the critical date to “commence” drilling operations and maintain the lease in effect?

11:45 a.m. – Duration of the Grant: the Production Requirement and the Paying Quantities Requirement
Photograph: Katie Gerth.Katie L. Gerth
A fundamental issue that seems to breed more questions than answers each time it goes to the Kansas Supreme Court is determining when an oil and gas lease is producing in "paying quantities." Although the presence of paying quantities throughout the life of the lease determines its very existence, the jurisprudence for distinguishing the paying from the non-paying lease remains dim for drawing such bright-line conclusions. It remains a mystery why courts would interpret leases to require production "in paying quantities" and thereby create a compelling incentive for lessees to operate on the cheap. It is equally mysterious why courts would gratuitously interpret the lease in a way that prevents lessees from continuing to produce oil and gas that most likely will otherwise never be recovered.

Noon – Duration of the Grant: Shut-In Royalty Clause
Photograph: Aaron Othmer.Aaron M. Othmer
Although shut-in royalty jurisprudence is still largely a mystery, it has migrated to the absurd and back to the rational. The shut-in royalty clause provides another object lesson on the importance of distinguishing a covenant from a condition. It also demonstrates the propensity of courts, from time-to-time, to adopt hypercritical interpretations of otherwise broad grants of authority. The shut-in clause also offers important lessons on how to draft to avoid self-inflicted problems that can result in lease termination.

12:15 p.m. – Duration of the Grant: Temporary Cessation Doctrine and the Cessation of Production Clause
Photograph: Stephen Stocks.Stephen J. Stocks
The temporary cessation doctrine created a flexible approach to dealing with the many events that disrupt the continuous production from a well. Lessees, in an effort to address "permanent" cessations, and to avoid some of the nebulous aspects of the cessation doctrine, adopted a cessation of production clause. One of the more mysterious elements of any "cessation" clause or doctrine is the realization there can be a "cessation" of production while there is continuous, uninterrupted production. Interpretive issues also arise when it would be more advantageous to deal with a temporary cessation applying the doctrine instead of a clause.

12:30 p.m. – Lunch (provided)

1:00 p.m. – Duration of the Grant: Operations Clause and the Dry Hole Clause
Photograph: Adeel Syed.Adeel A. Syed
One of the potentially broadest clauses that can perpetuate an oil and gas lease is the "operations" clause. Operations can encompass a range of activities but often the lease narrows its scope with terms like "drilling" and "reworking." Much of the mystery then becomes defining the scope of activities encompassed by "drilling" and "reworking." Another mystery is the definition of "dry hole." Precise definitions of these terms are important because completing a "dry hole" or commencing "drilling or reworking operations" trigger specific time frames in which things must occur to perpetuate the lease.

1:15 p.m. – Royalty: What Precisely Does the Mineral Owner Receive and What Must They Do To Receive It?
Photograph: Sean McElwain.Sean McElwain
The royalty clause typically provides for a fraction of the "oil" produced and a sum of money on "gas" produced. Although "casinghead gas" is expressly addressed, liquids that drop out from a gas well at the wellhead (condensate, distillate, natural gasoline) may or may not be addressed. When not addressed, will the "gas" clause or the "oil" clause apply to liquid hydrocarbons from a gas well? Determining the precise entitlement to product or cash can impact a number of basic legal issues. For example, the rights under a division order are impacted by whether the lessor owns production that can be sold to a purchaser. Lessor remedies against its lessee can depend upon the lessor's ownership of the extracted substance at issue. Lessor environmental liabilities may be impacted by its ownership of production.

1:30 p.m. – Royalty: Calculation Issues
Photograph: Daniel Obermeier.Daniel G. Obermeier
One of the most profound mysteries of the oil and gas lease is how the phrase "at the well" can be interpreted to mean some point, perhaps hundreds of miles from "the well." Royalty calculation issues have ebbed and flowed through the years with the perennial dispute being the calculation of royalty on gas. Because gas is transported in a continuous process in pipelines from wellhead to the place it is ultimately consumed, the basic dispute has been whether the gas should be valued for royalty purposes at or near the leased premises or at some point downstream from the leased premises. The value of the gas increases as it moves downstream because midstream companies and other investors spend money to enhance the value of the gas product. Kansas has also drawn important distinctions between "market value" and "proceeds" gas royalty measures.

1:45 p.m. – Royalty: Statutory Considerations
Photograph: Daniel Wernert.Daniel Wernert
Kansas has adopted several statutes that impact the administration and calculation of royalty. Severance tax and other taxation statutes impact royalty calculation. Statutes address the disclosure of how royalty payments are calculated; other statutes address interest assessed for delays in making royalty payments.

2:00 p.m. – Break

2:15 p.m. – Pooling Clause: Impacts the Grant, the Duration of the Grant, and the Royalty
Photograph: Ronald Manyiri.Ronald R. Manyiri
Without a statutory pooling alternative, the pooling clause is of major importance. The pooling clause expands the area where rights under the granting clause can be exercised. It also expands the area where actions can be taken to extend the duration of the lease. The pooling clause also alters the royalty clause by proportionately reducing the royalty to reflect the royalty owner’s acreage contribution to the pooled area. Many variations of the clause exist, including "Pugh" clauses and similar arrangements to limit the scope and effect of pooling.

2:30 p.m. – The Nonapportionment Problem and the Entireties Clause
Photograph: Aaron C. Boswell.Aaron C. Boswell
Mineral owner conveyances of land subject to an oil and gas lease will trigger the nonapportionment doctrine. The entireties clause is designed to change the effect of the doctrine by providing for apportionment. The two basic types of entireties clause are examined along with some of the surprising results that can occur under the "now or hereafter" form of clause. Complexities caused by pooling are also considered.

2:45 p.m. – Force Majeure Clause
Photograph: Seth Jones.Seth K. Jones
Force majeure clauses are always read carefully – but usually not at the time they are included in the oil and gas lease. They typically receive their first reading when searching for an excuse for the lessee’s inability to perform under the lease. With the recent listing of the lesser prairie chicken as a threatened species, lawyers and landmen are busy scouring force majeure clauses, looking for a way to extend the lease while sorting through obligations under the Endangered Species Act.

3:00 p.m. – Break

3:15 p.m. – Implied Covenants and Lease Operation: Drainage, Development, and Exploration
Photograph: Jessica Gallagher.Jessica N. Gallagher
The oil and gas lease contains a number of covenants not found within the four corners of the lease document. They exist to the same extent as though written in the lease because they are derived from the express lease terms. To obtain the entire lease obligation, the implied as well as the expressed must be identified and interpreted. The implied covenants will be examined along with the statutory provisions in the “Deep Horizons Act.” Many mysteries, and myths, exist in this area.

3:30 p.m. – Federal Income Tax Ramifications of the Oil and Gas Leasing Process
Photograph: Sara Maupin.Sara K. Maupin
The oil and gas leasing process triggers important tax consequences for both lessor and lessee. Tax issues begin with the way the bonus compensation is paid and continues through the production phase with the tax treatment of royalty. Tax law, the ultimate mystery.

3:45 p.m. – Open Discussion of Lease Issues

4:00 p.m. – Closing Comments

4:15 p.m. – Reception outside room 102

General Information

Date:
Friday, March 27, 2015
8:50 a.m.-4:15 p.m.

Location:
Washburn University
School of Law, Room 102

Parking:
North, south and east of the law school.
Get Directions and Maps

Registration Fee

$59 - Attorneys
No Charge - Students
See registration form.

Program fee includes reporting hours of attendance to the Kansas CLE Commission and written materials. Please pre-register at least 48 hours in advance. Seating is limited.

CLE Credit

Approved by the Kansas Continuing Legal Education Commission for 6.0 CLE hours (no ethics).

Cancellations

If you cannot attend the symposium, you may send a substitute. If you cancel your registration at least two (2) business days prior to the event, your registration fee will be refunded. After that date, non-attending registrants will receive the course materials. Please allow two weeks for delivery. The sponsors reserve the right to cancel this event and return all fees.

Special Needs Assistance

If you require special services or auxiliary aids to assist you while attending the event, please call Donna Vilander at (785) 670-1105.

General Inquiries

David E. Pierce
Norman R. Pozez Chair in Business and Transactional Law and Professor of Law
david.pierce@washburn.edu

Media Contact

Shelia Summers
Assistant Director of Marketing Communications
shelia.summers@washburn.edu
(785) 670-1784

Washburn Law thanks the following for their support of this symposium:

In 2014 the Oil and Gas Law Center at Washburn Law sponsored the first of its kind Student Symposium where the lawyer audience was instructed by Washburn Law students who have focused much of their law school study on oil and gas law. "Vexatious Title Issues" addressed conveyancing and other issues that impact the determination of ownership to the oil and gas resource. The successful 2014 Symposium was supported by a grant from the Rocky Mountain Mineral Law Foundation.