LEASE MAINTENANCE AND TITLE ISSUES ACROSS THE SHALE BASINS: NIOBRARA SHALE CHRONICLES OF COLORADO

• Jurisdiction: United States

Development Issues in Major Shale Plays
(May 2014)
CHAPTER 3D
LEASE MAINTENANCE AND TITLE ISSUES ACROSS THE SHALE BASINS: NIOBRARA SHALE CHRONICLES OF COLORADO
C. Elaine Carleton
Partner
Carleton Gotlin Law PC
Denver, Colorado

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C. ELAINE CARLETON's practice primarily focuses on the upstream side of oil and gas development. Elaine has extensive business and legal experience in numerous aspects of the oil and gas industry based on her diverse experience as an attorney, landman, crude oil marketer, and division order analyst. Elaine has over 30 years of experience in the industry, half of which was working within several major oil and gas companies. With this practical experience, she has developed a practice that emphasizes her background in title examination, acquisition and divestment, exploration and development, and drafting and negotiation of industry contracts. Originally from the Permian Basin of Texas, in 1980 Elaine received a BBA from the University of Texas in Petroleum Land Management. In 1995, she graduated from the University of Denver College Of Law. Elaine was admitted to practice law in Colorado in 1995 and in Texas in 1996.

I. INTRODUCTION

A. Horizontal wells

1. Definitions

2. Footprint/Economics

B. First well in Colorado

II. OWNERSHIP THEORIES AND LIMITATIONS

A. Ad Coleum

B. Rule of Capture

C. Correlative Rights

D. Limits on rule of Capture

E. Prevention of Waste

F. Spindletop

G. Conservation Statutes

III. COLORADO OIL AND GAS CONSERVATION COMMISSION ("COCGG")

A. Creation

B. Protections of Correlative Rights

C. Field Wide Orders

1. J-Sand Formation

2. Codell Formation

3. Niobrara Formation

4. Commingling

D. Rule 318A

1. 1998 - Creation of Greater Wattenberg Area ("GWA")

2. 2005 -Amendment - Increased density and roving units

3. 2011 - Amendment - Horizontal Wells

IV. NIOBRARA SHALE FORMATION- COLORADO

A. Niobrara Shale Fields

B. Colorado Niobrara Fields

C. Denver Julesburg ("D-J") Fields

D. COGCC by the numbers

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V. OLD HBP LEASES IN ERA OF NEW TECHNOLOGY

A. Litigation on Lease Definitions

1. Bledsoe v. Forest

B. Habendum Clause

1. Davis v. Cramer

C. Pooling Provisions

D. Pugh Clause

VI. OTHER LEASEHOLD ISSUES

A. Wellbore assignments and Reservations

B. Leasehold Risk on New Leases

VII. PROBATE CURATIVE

A. C.R.S. § 15-12-101 et. seq.

B. Ancillary Probate - C.R.S. § 15-13-101 et. seq.

C. Decree of Heirship - C.R.S. § 15-12-1302

VIII. TRESPASS CLAIMS - RULE OF CAPTURE CASES

A. Coastal Oil & Gas Corp v. Garza Energy Trust,

B. INB Land & Cattle LLC v. Kerr-McGee Rocky Mt. Corp

C. Continental Resources Inc. v. Farrar Oil Co

D. Union Pacific Resources Co. v. Texaco Inc.

IX. MORATORIA ON FRACING OPERATIONS IN COLORADO

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I. INTRODUCTION

With the advent of horizontal drilling and multiple fracturing, there is potential for developing oil and natural gas in areas that were previously deemed uneconomic. Williams and Meyers define horizontal drilling as a technique whereby the well is initially drilled vertically and then turned and drilled horizontally at an angle to the vertical hole. It encompasses high angle directional drilling of boreholes with lateral penetration throughout the productive reservoirs.¹ Horizontal drilling allows the wellbore to follow the desired formation.² Describing the physical characteristics that distinguish horizontal wells from vertical wells, the Texas Court of Appeals noted that "Horizontal wells traverse several tracts owned by different individuals, not all of which are contiguous; they include multiple points along the drain hole rather than a single drill site; and they penetrate highly fractured formations that do not facilitate the natural migration of oil and gas".³

A horizontal well, as opposed to a vertical or even directional well, allows for the recovery zone to be the length of the lateral along the producing horizontal zone (pay zone) to increase the points of production with one well. Instead of a small number of fractures in a vertical well that are limited to the thickness of the pay zone, there can be numerous fracture points in a horizontal well that can run along the pay zone. This can reduce the number of surface locations that are needed with vertical wells to achieve the same fracture points. Therefore, although the costs of a horizontal well are higher per well, if one horizontal well can adequately drain the area of numerous vertical wells, the total drilling and completion costs are lower for the same or better drainage.

In Colorado, Niobrara oil was first discovered around 1862 in the Florence (Canyon City) Field in Fremont County, Colorado when oil seeped to the surface. Much of the initial production was from hand dug "wells", until the first well was drilled to a depth of about 1600 feet in 1876. This was the second discovery of oil in the United States, the first being in Titusville, Pennsylvania in 1859.

II. OIL AND GAS OWNERSHIP THEORIES

Ad Coelum Doctrine

In 1859, when the first well was drilled in Titusville, Pennsylvania, mineral ownership was governed by the common law principle that the owner of property owned everything under the surface of his lands and up to the heavens. This doctrine worked well for hard rock minerals. However, disputes arose about landowners' rights to oil and gas beneath their land because landowners, drilling on their own property, could extract oil and gas from beneath adjacent lands due to the fugacious and fungible nature of petroleum. Courts soon realized that, because of these characteristics, strict application of the hard rock mineral doctrine to oil and' gas would discourage mineral owners from drilling for fear of liability in the event that their drilling activities drained oil and gas from their neighbors' properties. As a result, this doctrine was soon modified by the rule of capture, which many describe as a "rule of convenience."

Rule Of Capture Doctrine

The rule of capture provides that the owner of a tract of land acquires title to the oil and gas that he or she produces from wells drilled on that land without liability, even if part of such oil and gas may have migrated from adjoining lands.⁴ This encouraged development of oil and gas

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resources by recognizing the migratory character of oil and gas and the impossibility of determining liability for drainage where a landowner lawfully produces from wells located on his land.⁵ Courts reasoned that oil and gas were like wild animals, in that both were able to "wander" from one owner's tract to adjacent tracts, and held that once oil or gas was "captured" through production, absolute title vested in the landowner.⁶ The neighboring landowner whose property was being drained could protect himself only by producing from wells drilled on his own land.⁷

Because the rule of capture required each landowner to drill his own well to protect from adjacent drainage, the rule often resulted in wasteful and unnecessary drilling. Although the rule of capture is a rule of non-liability, a landowner could be liable for negligence of waste of oil and gas. In Elliff v. Texon Drilling Co.,⁸ a well blew out and burned on property adjacent to Elliff due to Texon's negligence. The well lost large quantities of oil and gas that Elliff claimed were drained from under his property. The Texas Supreme Court rejected Texon's defense of nonliability under the rule of capture, stating that each owner had a right to a fair and equitable share of the oil and gas under his land and to be protected against negligent drainage and damage to the formation. Eventually, the rule of capture began to be limited by this concept of each owner's right to a fair and equitable share, which in essence is the correlative rights doctrine.

Correlative Rights Doctrine

Correlative rights are the rights and duties that exist between owners of land over a common supply source and include the right: (1) against waste of extracted substances; (2) against spoilage of the source of supply; (3) against malicious depletion of the source of supply; and (4) of a fair opportunity to extract oil or gas.⁹ A single reservoir often underlies the land of many different landowners. Therefore, whereas the rule of capture entitled each owner of land above a common source to extract oil and gas without accounting to others for a share of the production, the correlative rights doctrine emphasizes that this right must be exercised with due regard for other owners who have the same rights to extract oil and gas from the same source.¹⁰ The doctrine of correlative rights provides a legal framework in which each owner of oil and gas in a reservoir can produce his or her fair share of the total oil and gas in the reservoir, measured with reference to its proportionate ownership of the reservoir.¹¹

Prevention Of Economic And Physical Waste

The rule of capture, in combination with private and fragmented mineral rights, resulted in both physical and economic waste. Excessive drilling occurred as each owner attempted to capture the oil and gas underneath his land and prevent it from migrating to an adjoining landowner. An owner had no incentive to conserve oil and gas for future production because any unit he conserved could be produced and sold by one of his neighbors.¹² The disastrous consequences of unrestrained application of the rule of capture are exemplified by the development of the Spindletop oil field in eastern Texas around Beaumont. In 1901, the discovery well at Spindletop struck oil and produced more than 800,000 barrels of oil in its first nine days, setting a world record. Oil prospectors rushed to East Texas to make their fortune. By the end of 1901, 440 wells had been drilled on the 125-acre hill where Spindletop was located.¹³

The overabundance of wells resulted in a rapid decrease in reservoir pressure, water seeped into the reservoir...