Oil and Gas Law and Taxation

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

• ISBN13: 9780314147059
• ISBN10: 0314147055
• Edition: 4th
• Format: Hardcover
• Copyright: 2004-11-30
• Publisher: West Academic

Summary

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.

Table of Contents

Preface	v
Westlaw Overview	vii
Mineral Estate: Definition
Content of the Mineral Estate: ``Minerals'' as Including Oil, Gas and Petroleum Products	1	(7)
Content of the Mineral Estate: Inclusion of Substances Other Than Oil and Gas	8	(21)
``Minerals'' as Including Substances Other than Oil and Gas	9	(16)
Content and Meaning of Named Substances Such as ``Coal'' and ``Gas''	25	(4)
Nature of Ownership of the Mineral Estate	29	(9)
Creation of Interests in the Oil and Gas Mineral Estate by the Landowner
Introduction	38	(1)
Attributes of the Mineral Estate: The Power to Lease (the Executive Right)	39	(14)
Alienability of the Executive Right	41	(3)
Revocability of the Executive Right	44	(1)
Duration of the Executive Right	44	(9)
Attributes of the Mineral Estate: The Right to Delay Rentals	53	(2)
Attributes of the Mineral Estate: The Right to Bonus	55	(1)
Attributes of the Mineral Estate---The Right to Royalty	56	(9)
Nature of Royalty Interests Prior to Lease	57	(1)
Nature of Royalty Interests After Lease	58	(2)
Separation of Royalty Interests From the Mineral Estate---Nature and Duration of Non-participating Royalty Interests	60	(4)
Nature of Production Accruing to a Royalty Interest---Separate--Community Property Status	64	(1)
Minimum Royalty and Shut--In Royalty	64	(1)
Attributes of the Mineral Estate---The Problem of Whether Payments Out of Production Constitute Bonus or Royalty	65	(4)
Attributes of the Mineral Estate---Interests Created When Fractional Interests Are Conveyed or Reserved	69	(30)
Interests Created: Mineral or Royalty?	69	(1)
Conveyances of ``Oil and Gas in, Under, and That May Be Produced From * * *''	70	(2)
Conveyances of ``Royalty''	72	(5)
Conveyances of ``Oil and Gas Produced and Saved''	77	(3)
Conveyances of ``Royalty'' Coupled With Language Inconsistent With a Royalty Interest	80	(1)
``Royalty,'' Plus ``Oil and Gas, in, Under, and That May Be Produced''	80	(4)
``Royalty'' Together With Express Rights of Ingress and Egress	84	(1)
Conveyances of ``Royalty Rights,'' ``Royalty and the Rights Thereto,'' etc.	85	(1)
Miscellaneous Words and Phrases	85	(1)
Profits	85	(1)
``Landowner's Interest'' and ``Landowner's Rights''	86	(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	87	(1)
Royalty Conveyances	87	(4)
Mineral Conveyances	91	(2)
Effect of a Conveyance or Reservation of a Mineral Interest, Less the Right to Bonus, Delay Rentals and the Power to Lease	93	(3)
Effect of a Conveyance or Reservation of a Mineral Interest, Less the Right to Bonus and Delay Rentals	96	(2)
Effect of Recitals to Other Instruments	98	(1)
Attributes of the Mineral Estate---Conveyances of Terminable Royalty and Mineral Interests	99	(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