Oil and Gas Law and Taxation

, by Hemingway, Richard; Dzienkowski, John S.; Lowe, John S.; Peroni, Robert J.; Pierce, David E.; Smith, Ernest E.

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ISBN: 9780314147059 | 0314147055
Cover: Hardcover
Copyright: 11/30/2004

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Hemingway?s Oil and Gas Law and Taxation, Fourth Edition is the most comprehensive one-volume work on oil and gas law and taxation available today. For over three decades, Professor Richard Hemingway?s prior three editions of this seminal work have provided guidance to courts, lawyers, commentators, and students. Six distinguished scholars, Professors Anderson, Dzienkowski, Lowe, Peroni, Pierce, and Smith, have joined together to co-author the fourth edition of this classic treatise. As a one-volume treatise, this work covers the substantive law of oil and gas and federal income taxation of oil and gas transactions. The first three chapters examine interests and transactions in the mineral estate. The fourth chapter covers surface and subsurface issues. Chapters five through eight examine in detail the oil and gas lease. Chapter nine addresses the issue of transfers by the lessor and the lessee. Chapters ten through twelve are devoted to oil and gas taxation. Students will see that this work gives them quick access to the law of oil and gas and the law of oil and gas taxation. Collectively, the six new authors of this one-volume treatise bring over 100 years of teaching and writing experience in oil and gas law and taxation to their co-authorship of this work.

Preface

Westlaw Overview

vii

Mineral Estate: Definition

Content of the Mineral Estate: ``Minerals'' as Including Oil, Gas and Petroleum Products

(7)

Content of the Mineral Estate: Inclusion of Substances Other Than Oil and Gas

(21)

``Minerals'' as Including Substances Other than Oil and Gas

(16)

Content and Meaning of Named Substances Such as ``Coal'' and ``Gas''

(4)

Nature of Ownership of the Mineral Estate

(9)

Creation of Interests in the Oil and Gas Mineral Estate by the Landowner

Introduction

(1)

Attributes of the Mineral Estate: The Power to Lease (the Executive Right)

(14)

Alienability of the Executive Right

(3)

Revocability of the Executive Right

(1)

Duration of the Executive Right

(9)

Attributes of the Mineral Estate: The Right to Delay Rentals

(2)

Attributes of the Mineral Estate: The Right to Bonus

(1)

Attributes of the Mineral Estate---The Right to Royalty

(9)

Nature of Royalty Interests Prior to Lease

(1)

Nature of Royalty Interests After Lease

(2)

Separation of Royalty Interests From the Mineral Estate---Nature and Duration of Non-participating Royalty Interests

(4)

Nature of Production Accruing to a Royalty Interest---Separate--Community Property Status

(1)

Minimum Royalty and Shut--In Royalty

(1)

Attributes of the Mineral Estate---The Problem of Whether Payments Out of Production Constitute Bonus or Royalty

(4)

Attributes of the Mineral Estate---Interests Created When Fractional Interests Are Conveyed or Reserved

(30)

Interests Created: Mineral or Royalty?

(1)

Conveyances of ``Oil and Gas in, Under, and That May Be Produced From * * *''

(2)

Conveyances of ``Royalty''

(5)

Conveyances of ``Oil and Gas Produced and Saved''

(3)

Conveyances of ``Royalty'' Coupled With Language Inconsistent With a Royalty Interest

(1)

``Royalty,'' Plus ``Oil and Gas, in, Under, and That May Be Produced''

(4)

``Royalty'' Together With Express Rights of Ingress and Egress

(1)

Conveyances of ``Royalty Rights,'' ``Royalty and the Rights Thereto,'' etc.

(1)

Miscellaneous Words and Phrases

(1)

Profits

(1)

``Landowner's Interest'' and ``Landowner's Rights''

(1)

The Effect of the Size of the Fractional Interest Conveyed or Reserved on the Mineral--Royalty Distinction and the Amount of Production to Which the Owner is Entitled

(1)

Royalty Conveyances

(4)

Mineral Conveyances

(2)

Effect of a Conveyance or Reservation of a Mineral Interest, Less the Right to Bonus, Delay Rentals and the Power to Lease

(3)

Effect of a Conveyance or Reservation of a Mineral Interest, Less the Right to Bonus and Delay Rentals

(2)

Effect of Recitals to Other Instruments

(1)

Attributes of the Mineral Estate---Conveyances of Terminable Royalty and Mineral Interests

(4)

Maintaining Terminable Interests Beyond the Initial Term

100

(1)

Application of the Rule Against Perpetuities to Terminable Interests

101

(2)

Statutory Termination of Dormant Mineral Interests

103

(3)

Conveyances, Partition, and Adverse Possession of the Mineral Estate

Conveyances of the Mineral Estate---Description of Fractional Interests

106

(4)

General

106

(1)

Description of Quantum of Interest---Undivided Interests

106

(1)

Description of Size of Interest---Percentage Interests and Mineral or Royalty Acre Interests

107

(3)

Problems Commonly Encountered in Conveyances or Reservations of Fractional Interests in the Mineral Estate

110

(10)

General---Use of Parol Evidence

110

(1)

Reservations and Exceptions---Effect of False Recitals of Fact, and Effect of Those Made in Favor of Third Parties

110

(2)

Reservations and Exceptions of Fractional Mineral or Royalty Interests From Conveyances of Undivided Mineral or Royalty Interests

112

(2)

The Effect of an Exception or Reservation in an Instrument in Which Grantor Has Breached His Covenant of Warranty by Overconveyance---After Acquired Title and the Doctrine of Duhig v. Peavy--Moore Lumber Co.

114

(6)

Partition of the Mineral Estate

120

(13)

Basis for Judicial Partition of Concurrently Owned Interests in the Minerals

120

(3)

Elements Necessary for Partition of the Mineral Estate

123

(1)

Necessity of a Possessory Interest

123

(1)

The Concept of Estates of Equal Dignity or of Right to Possession

124

(6)

Necessity of Ownership Throughout the Entire Tract to Be Partitioned

130

(1)

Method of Partition

131

(1)

Equitable Partition

132

(1)

Adverse Possessors---Effect of Surface Possession

133

(6)

Loss of Ownership by Nonuse of Mineral Estate

133

(1)

No Severance of Surface and Minerals

134

(1)

Prior Severance of Surface and Minerals

135

(3)

Tacking of Possession Between Successive Possessors

138

(1)

Merger of Severed Estate

139

(1)

Adverse Possession---Actual Possession of the Minerals

139

(4)

Acts of Actual Possession

140

(1)

Rights Acquired---Claiming Under Color of Title

140

(2)

Rights Acquired---Not Claiming Under Color of Title

142

(1)

Trespass: Surface and Sub--Surface, and Third Party Claims

The Geophysical Surface Trespasser

143

(7)

The Right to Explore

143

(3)

Surface Geophysical Exploration Where a Trespass Is Involved

146

(2)

Surface Geophysical Exploration With No Physical Entry

148

(1)

Surface Geophysical Exploration That Causes Physical Damage

149

(1)

The Geophysical Sub--surface Trespasser

150

(11)

Sub--Surface Trespass That Results in No Production

151

(1)

Sub--Surface Trespass That Results in Production or Drainage

152

(1)

Recovery and Remedy

152

(4)

The Good--Faith Trespasser

156

(3)

Discovery and Limitations

159

(1)

Trespass Caused by Underground Intrusion of Injected Substances

160

(1)

Conversion Caused by Negligent or Wrongful Sub--Surface Operations

161

(1)

Slander of Title Affecting Oil and Gas Interests

161

(5)

The Oil and Gas Lease---Leases from Owners of Concurrent, Successive, or Restricted Interests

Co--Tenants

166

(11)

Right of a Co-tenant to Develop and Produce

166

(3)

Accounting to a Non-joined Co-tenant by a Producing Co-tenant

169

(4)

Co-tenant Leasing

173

(3)

Ratification by a Non-joined Co-tenant

176

(1)

Life Tenant and Remainderman

177

(11)

Leases From a Life Tenant or a Remainderman

177

(3)

Joint Leases by Life Tenant and Remainderman

180

(2)

Leases Preceding the Life Estate---The Open Mine Doctrine

182

(5)

Application of the Uniform Principal and Income Act

187

(1)

The Determinable Fee Estate, Estates Subject to a Power of Termination, and Fee Estates Subject to Executory Interests

188

(2)

Lands Subject to Servitudes and Restrictions

190

(2)

Landlord and Tenant

192

(3)

Lands Subject to Security Interests

195

(5)

Leases From Persons Acting in a Representative Capacity

200

(11)

Attorneys--in--Fact

201

(1)

Trustees

201

(3)

Administrators, Executors, and Guardians

204

(3)

Business Entities

207

(1)

Governmental Entities

208

(2)

Unascertainable or Unknown Owners

210

(1)

The Oil and Gas Lease---Duration

The Nature of an Oil and Gas Lease

211

(6)

Classification of Oil and Gas Leases by Duration

217

(4)

Keeping the Lease Alive During the Primary Term---the Delay Rental

221

(26)

The Delay Rental---Payment Date

224

(2)

The Delay Rental---Tender

226

(5)

The Delay Rental---Notice of Assignment by the Mineral Owner

231

(2)

The Delay Rental---Effect of Operations During the Primary Term Resulting in a Dry Hole

233

(4)

The Delay Rental---Effect of Improper Payment

237

(5)

The Delay Rental---Estoppel, Waiver, and Ratification of an Improper Payment by the Mineral Owner

242

(5)

Propelling the Lease Past the Primary Term and Keeping It Alive During the Secondary Term by Production of Oil or Gas---Definition of ``Production''

247

(26)

Production---Quantum of Production, i.e., Paying Quantities

251

(10)

Production---Sporadic Production and Temporary Cessation of Production---Cessation-of-Production Clause

261

(12)

Propelling the Lease Past the Primary Term and Keeping it Alive During the Secondary Term---Contractual Substitutes for Production---The Nature of Shut--in Royalties

273

(11)

Shut--In Royalties---Time of Payment

276

(8)

Propelling the Lease Past the Primary Term by Operations---Completing the Well Drilling at the End of the Primary Term---the Well--Completion Clause

284

(5)

Propelling the Lease Past the Primary Term by Operations---Completing the Well Drilling at the End of the Primary Term---Commencement of Drilling Operations

289

(4)

Keeping the Lease Alive by Operations During the Secondary Term---the Dry--Hole Clause

293

(3)

Keeping the Lease Alive by Operations During the Secondary Term---The Cessation-of-Production Clause

296

(8)

The Oil and Gas Lease---Royalty and Other Clauses---and Division Orders

Royalty Clause---Products Covered and Remedies for Breach

304

(10)

Products Covered

304

(7)

Remedies for Breach of the Royalty Clause

311

(3)

Royalty Clause---Royalty on Casinghead Gas

314

(6)

Royalty on Casinghead Gas and Extracted NGLs

314

(3)

Royalty on Casinghead Gas: Is it Oil or Gas?

317

(3)

Royalty Clause---Royalty on Condensate

320

(3)

Royalty Clause---Royalty Accounting Issues

323

(29)

Introduction

323

(4)

Market Price or Market Value Royalty and Long-Term Gas Sales Contracts

327

(9)

Expenses of Transportation and Preparation for Market

336

(12)

Royalty on ``Take-or-Pay'' Proceeds and Settlements

348

(4)

Division and Transfer Orders

352

(8)

Nature of the Division Order

352

(2)

Effect of the Division Order

354

(5)

Termination of Division Orders

359

(1)

Minimum Royalty Clause

360

(1)

Mother Hubbard Clause

361

(6)

Proportionate Reduction and Warranty Clauses

367

(6)

Surrender Clause

373

(2)

Removal of Equipment Clause

375

(2)

Force Majeure Clause

377

(4)

Free Gas Clause

381

(5)

Pooling Clause

386

(13)

Formation of Units

387

(1)

Basis and Authority of the Lessee to Pool

388

(6)

Designation of Pooling

394

(1)

Effect of Pooling on Acreage Included and Not Included in the Unit

395

(4)

Allocation of Production

399

(1)

Entirety and Assignment Clauses

399

(1)

Lessor's Special Inspection Clause

400

(1)

The Oil and Gas Lease---Implied and Expressed Covenants

Basis and Nature of Covenants Implied in Oil and Gas Leases

401

(3)

Implied Covenant to Drill an Initial Well

404

(1)

Implied Covenant to Further Develop or Explore

405

(18)

Profitability to the Lessee

407

(4)

Reasonable Diligence of the Lessee

411

(1)

Exploration and Development Where Profitability Cannot Be Shown

412

(7)

Effect of Express Development Provisions

419

(4)

Implied Covenant to Protect Against Drainage

423

(9)

The Basic Protection Obligation

423

(1)

Effect of an Express Offset Clause

424

(2)

Where the Lessee Owns an Interest in the Draining Well

426

(5)

Effect of Conservation Regulations and Development Statutes

431

(1)

Implied Covenants---Other Covenants

432

(7)

The Covenant to Use Reasonable Care in Operations

432

(2)

The Covenant Not to Prematurely Plug or Abandon a Well

434

(1)

The Covenant to Market

435

(2)

The Covenant to Seek Favorable Administrative Action

437

(2)

Effect of Delay Rental Payments on Implied Covenants

439

(1)

Remedies for Breach of Implied Covenants

440

(6)

Damages

440

(3)

Cancellation of the Lease

443

(3)

Effect of Surrender of the Lease

446

(1)

Breach of an Express Obligation to Drill

446

(3)

Transfers by the Lessor and by the Lessee

Conveyances by the Lessor Expressly ``Subject to'' an Existing Lease---Effect Upon the Quantum of Interests Conveyed

449

(7)

Conveyances by the Lessor Expressly ``Subject to'' an Existing Lease---Effect Regarding the Land Covered by the Conveyance

456

(2)

Conveyances by the Lessor Expressly ``Subject to'' an Existing Lease---Effect Upon the Referenced Lease and the Duration of the Conveyance Referencing the Existing Lease

458

(3)

Conveyances by the Lessor---Apportionment or Nonapportionment of Rentals and Royalties

461

(4)

The Entirety Clause

465

(7)

Transfers by the Lessee

472

(1)

Contracts to Assign Oil and Gas Leases

473

(2)

Assignment of Oil and Gas Leases

475

(4)

Income Interests Created From the Lessee's Interest

479

(10)

Defining the Fraction of Production

481

(2)

Defining When the Income Interest Terminates

483

(6)

Divisibility of Covenants

489

(5)

Relationship of Lessor, Lessee, and Assignee

494

(6)

Ability of Income Interest Owners to Assert Implied Obligations

494

(1)

Assignment of Leases as Affecting Liability Upon Express and Implied Covenants

495

(5)

Federal Taxation of Oil and Gas Interests and Transactions---Acquisition of Properties, Geological, Geophysical, and Development Costs

Introduction to the Taxation Materials

500

(2)

Major Differences Between General Principles of Taxation and the Oil and Gas Tax Rules

501

(1)

Fundamental Questions in Analyzing the Taxation of an Oil and Gas Transaction

502

(1)

The Economic Interest Concept

502

(16)

Production Payment Cases

505

(2)

Net Profits Interest Cases

507

(3)

Processing and Development Cases

510

(8)

The Property Unit

518

(14)

Introduction

518

(1)

Definition of Property

518

(1)

Each Interest Owned

519

(2)

Each Mineral Deposit

521

(1)

Each Tract or Parcel of Land

521

(6)

Unitization of Separate Properties

527

(1)

Aggregation of Mineral Interests

528

(1)

Aggregation of Operating Mineral Interests

529

(2)

Aggregation of Nonoperating Mineral Interests

531

(1)

Geological, Geophysical, and Drilling and Development Costs

532

(48)

Acquisition Costs

532

(3)

Allocation of Costs to Mineral Interests

535

(3)

Revenue Ruling 83--105---Examples of Tax Treatment of Geological and Geophysical Expenditures

538

(5)

Applying the Service's Position on G & G Costs and Public Policy

543

(1)

Drilling and Development Costs

544

(2)

The Nature of Intangible Drilling and Development Costs

546

(2)

Injection Wells

548

(2)

Offshore Wells and Development

550

(7)

Underground Storage

557

(1)

The Election to Deduct Intangible Drilling and Development Costs

557

(1)

Nature of the Option

558

(1)

Intent to Deduct IDC

559

(2)

Nonproductive Wells---An Option Within an Option

561

(1)

Timely Exercise of Option

561

(1)

The ``Operator'' Requirement

562

(2)

Year in Which IDC Are Paid or Incurred

564

(2)

Prepaid Drilling Expenses and Turnkey Drilling Contracts

566

(9)

Recapture of IDC as Ordinary Income Upon Disposition

575

(5)

Federal Taxation of Oil and Gas Interests and Transactions---the Oil and Gas Lease

Sale or Lease

580

(7)

Payments for the Use of the Surface Estate

587

(1)

Royalty

588

(3)

Delay Rentals

591

(4)

Bonus

595

(27)

The Nature of a Bonus

595

(8)

Bonus---Depletion

603

(1)

Percentage Depletion of Bonus

603

(8)

Cost Depletion of Bonus

611

(4)

Bonus Paid in Installments

615

(4)

No Production---Restoration of Depletion Deduction to Income

619

(3)

Advanced and Minimum Royalties

622

(8)

Treatment by Lessor

623

(2)

Treatment by Lessee

625

(5)

Shut--In Royalties and Substitute Royalties

630

(2)

First-Year Payments Under Federal Leases

632

(3)

Cost and Percentage Depletion

635

(45)

General Overview

635

(2)

Calculation of Cost Depletion

637

(2)

Calculation of Percentage Depletion

639

(1)

The Basic Concept of Percentage Depletion

639

(1)

Applicable Percentage

639

(1)

Gross Income From the Property

640

(10)

Taxable--Income--From-the-Property Limitation

650

(3)

Section 613A Limitations on Percentage Depletion

653

(1)

Scope of § 613A

654

(1)

Exempted Domestic Gas Wells

655

(2)

Limiting Percentage Depletion to Certain Tax-payers and to a Limited Quantity of Production

657

(1)

Average Daily Production and Depletable Oil Quantity

657

(7)

Certain Refiners Excluded

664

(2)

Certain Retailers Excluded

666

(7)

The Proven Property Exception (Pre--October 12, 1990 Transfers)

673

(4)

65%-of-Taxable--Income Limitation

677

(1)

Recapture of Depletion Deductions as Ordinary Income Upon Disposition

678

(2)

Proposed Tax Credit for Producing Oil and Gas From Marginal Wells

680

(2)

Federal Taxation of Oil and Gas Interests and Transactions---The Pool of Capital Doctrine---Sharing Arrangements

The Pool of Capital Doctrine---Investment of Services

682

(18)

Background

682

(1)

G.C.M. 22730

683

(5)

The 1964 Cases: James A. Lewis Engineering and Frazell

688

(2)

The Tax Reform Act of 1969

690

(1)

Revenue Rulings 77--176 and 83--46

691

(5)

Effect of the Seventh Circuit's Decision in Zuhone

696

(4)

Treatment of Production Payments Under § 636

700

(6)

Carried Interests

706

(17)

The Abercrombie Carried Interest Transaction

707

(7)

The Manahan Carried Interest Transaction

714

(2)

Deduction of IDC in Carried Interest Transactions Involving Assignments of Fractional Interests

716

(4)

Revenue Ruling 77--176

720

(1)

The Herndon Carried Interest Transaction

721

(2)

Appendix

723

(16)

Table of Cases

739

(54)

Index

793

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Oil and Gas Law and Taxation

Summary

Table of Contents

Supplemental Materials