assignment of wellbore interest

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Interpreting assignments of the oil and gas lease.

By Jereme M. Cowan

Under Oklahoma law, an oil and gas lease grants a cluster of rights in land,1 forming an estate in real property with the nature of fee.2 Like many of the sticks in the metaphorical bundle, the estate created under the oil and gas lease is freely assignable and divisible.3 As a result, oil and gas leaseholds can be transferred, in whole or in part, by the holder of the oil and gas lease, such practice being a central element to oil and gas development.4 Furthermore, the transfers of leasehold are usually executed and delivered by legal instruments ubiquitously titled “assignments,” which are filed of record in the same manner as any instrument affecting title to real property.5 Given the history of Oklahoma’s oil booms,6 not to mention Oklahoma’s current role in the U.S. shale boom, assignments inundate many of the county clerk records where oil and gas exploration is prevalent. Therefore, it is likely that an examination of oil and gas land titles in one of these counties will require the interpretation of assignments. BASIC RULES OF CONSTRUCTION Assignments are a contract and a conveyance.7 As such, they are to be read in accordance with the basic rules of contractual interpretation,8 which comprise not only those findings in Oklahoma’s case law but also the statutory provisions of 15 O.S. §§151-178. In a nutshell, Oklahoma’s rules on interpreting assignments begin with prioritizing the true intent of the parties, as gathered from the four corners of the instrument.9 If the assignment is unambiguous, then the written instrument will govern,10 along with all technical terms in the assignment being interpreted as commonly understood among persons in the oil and gas industry.11 However, if there is an ambiguity, then the contractual interpretation can be aided by extrinsic evidence in order to resolve the intrinsic uncertainties of the assignment.12

These rules make it imperative for an attorney conducting a title examination to understand the business and terminology of the oil and gas industry as it pertains to the transfer of leasehold, not to mention understanding general rules of land titles and the law of oil and gas. The purpose of this article is not to give a complete account of the oil and gas industry nor an account of all rules governing the transfer of oil and gas rights in the record title. Rather, the purpose is to give an introductory and cursory overview, presented on a step-by-step basis, for an attorney who may find themselves, either willingly or unwillingly, examining assignments of oil and gas leases filed in Oklahoma. STEP 1: WHAT TYPE OF INTEREST? First and foremost, the title examiner needs to determine the type of interest being assigned (or reserved) in the leasehold. More often than not, if the assignment is transferring an interest in a lease without overriding royalty language or net profits language, then a working interest is being assigned. When there is ambiguity, the title examiner should remember that a working interest is the right to  work  on the leased property — searching, developing and producing oil and gas. On the other hand, an overriding royalty interest is share in production attributable to a particular lease. STEP 2: WHAT AMOUNT OF INTEREST? Working interests tend to be relatively straightforward. Either the assignor is purporting to assign all of its right, title and interest under a lease, all of a lease (read 100 percent) or a fractional interest in a lease. Digressing a bit, now would be a good moment to discuss the difference between all right, title and interest  of the assignor  and 100 percent of a lease. All of the assignor’s right, title and interest could be 100 percent or could be some fractional interest. It depends on what the assignor owns of record. If an assignor assigns a lease without any fractional limitations or without the foregoing language limiting it to the assignor’s right, title and interest, then the assignor is purporting to assign 100 percent of the lease. The prudent examiner notes the distinction.

Overriding royalty interest can sometimes not be as straightforward. Often, the assignor decides to use a formula for the computation of the assigned or reserved overriding royalty interest. For example, a recitation in the assignment reads as follows: an overriding royalty interest equal to the difference between 20 percent and lease burdens. Here, the overriding royalty interest would be calculated by first adding up all the lease burdens, such as a one-eighth landowner’s royalty and a previously conveyed one-thirty-second overriding royalty interest, and then subtracting that number from 20 percent, which is represented mathematically as: 20% - (1/8 + 1/32) = 4.375%.

There are various business reasons for computing an assigned or reserved overriding royalty interest with the subtraction of lease burdens from a certain percentage, the most prominent being that assignments of leases typically cover a block of leases, which contain various lease net revenue interests. Showing the overriding royalty interest as a formula rather than a specific number allows the assignor to either retain or convey the leases at certain net revenue interest. In the prior example, assuming the assignor was assigning the overriding royalty interest, it was retaining an 80 percent net revenue interest in all the leases covered by the assignment except, of course, those leases which were already burdened greater than 20 percent. STEP 3: WHAT LEASE IS COVERED? All leasehold interests derive from a lease. Therefore, it is imperative that the examining attorney determine what lease is covered by an assignment. If the assignment covers one or just a few leases, then the lease(s) will probably be described somewhere in the body of the instrument. If the assignment covers multiple leases, then typically they will be described in an exhibit “A” attached thereto. However, it should be noted that in some cases an assignment may not describe a particular lease or leases but instead will include language that it is the intent to assign all leasehold rights in a particular tract of land, usually the unitized area. For example, an assignment may read that all of the assignor’s rights in the leasehold covering the SW/4 are transferred to the assignee without giving further explanation as to the underlying leases.  In this particular example, the assignor is conveying whatever leasehold rights it may own from whatever source such rights might derive as to the SW/4.

STEP 4: WHAT ARE THE LIMITATIONS TO THE ASSIGNED INTEREST? By far the most challenging (and often most ambiguous) aspect of an assignment is the limitations to the assigned interest. Like land itself, a lease is a bundle of sticks. A lease can be cut and carved any which way, limited only by the imagination of the oil and gas industry. If an assignor wants to assign a lease insofar as that lease covers a particular formation in the strata, then the assignor can do so. The following are standard limitations that the examining attorney should recognize.

An assignment can be limited to the wellbore of a well. A wellbore limitation means that the assignor is assigning only those rights to production from the wellbore of a certain well, arguably at the total depth it existed at the time of the assignment. All interest outside the wellbore are excluded from the assignment, entailing that a wellbore assignee can produce from shallower formations in the wellbore but cannot produce from deeper formations or lands outside the wellbore.

The central problem with wellbore only assignments is determining when in fact there is a wellbore only assignment. The title examiner should be aware that a wellbore assignment is the narrowest of assignments. Very limited rights to the lease are being assigned. It can be argued that the lease or unit and the lands covered by the lease or unit need only be described for informational purposes, as it is rights to the wellbore being assigned. Furthermore, the fact that a well or unit is mentioned in the description of the lease does not entail that the assignor intended to convey wellbore rights only. More often than not, a reference to a well or unit in Oklahoma is for informational purposes.

Some assignments are limited to certain depths or to a particular formation. For instances, an assignment may limit the assigned leases “insofar as said leases cover the Woodford Formation” or “insofar as from the surface to a depth of 8,100 feet.” Depth limitations are usually more prominent than wellbore limitations and are considerably less ambiguous. Furthermore, title examiners should always read an assignment thoroughly to determine whether a depth limitation is pertinent. Many times, such a limitation is buried in one of the numerous special provisions of the assignment or placed in one of the exhibits attached thereto.

In order to accommodate the formation of units, leases will often be assigned only as to a portion of the lands covered thereby. For example, a participant enters into a joint operating agreement with the operator that has proposed the drilling of a 40-acre unit well located in the NW/4 NW/4. If the participant owns all of a certain lease covering the N/2 NW/4, the participant may decide to assign only that portion of the lease covering the NW/4 NW/4, thereby retaining all rights in the NE/4 NW/4. Therefore, assignments may contain limitations as to the area acreage being conveyed.

CONCLUSION The foregoing steps serve as an introduction to interpreting assignments of oil and gas leases. Most certainly, each step of analysis could be accompanied by a more detailed explanation. That said, the key point to be made here is that the interpretation of assignments in oil and gas land titles requires a familiarization of the business practices of the oil and gas industry, not just an understanding of the governing law.

ABOUT THE AUTHOR Jereme M. Cowan is a managing partner at Cowan & Fleischer PLLC. Mr. Cowan’s practice fo-cuses on oil and gas land titles. He has planned, moderated and spoken at a number of oil and gas seminars sponsored by the Oklahoma Bar Association.

1.  See Hinds v. Phillips Petroleum Company , 1979 OK 22, 591 P.2d 697, 698 (1979) (stating that “[t]he cluster of rights comprised within an instrument we refer to ‘in deference to custom’ as an ‘oil and gas lease’ includes a great variety of common-law interests in land”). 2.  See Shields v. Moffitt , 1984 OK 42, 683 P.2d 530, 532-33 (1984) (finding that “the holder of an oil and gas lease during the primary term or as extended by production has a base or qualified fee,  i.e. , an estate in real property have the nature of a fee, but not a fee simple absolute”). 3.  See Hinds  at 699 (concluding that leasehold interests are freely alienable “in whole or in part”); Eugene Kuntz,  Kuntz, a Treatise on the Law of Oil and Gas , Volume Five, §64.1, 259 (1987) (asserting that the oil and gas lease is freely assignable “in the absence of a provision to the contrary”);  see also Shields  at 533 (holding that a lease clause restricting alienation was void). 4. John S. Lowe,  Oil and Gas Law in a Nutshell , Sixth Edition (2014). 5. Joyce Palomar,  Patton and Palomar on Land Titles , 3rd Edition, Volume One, 3 (2003). 6. Kenny A. Franks,  The Oklahoma Petroleum Industry  (Norman: University of Oklahoma Press, 1980). 7.  See Plano Petroleum, LLC v. GHK Exploration, L.P. , 2011 OK 18 (2011). 8.  K & K Food Servs. v. S & H, Inc. , 2000 OK 31, 3 P.3d 705, 708. 9.  See Messner v. Moorehead , 1990 OK 17, ¶8, 787 P.2d 1270, 1272. 10.  Messner  at 1273. 11. 15 O.S. §161. 12.  Crockett v. McKenzie , 1994 OK 3, ¶5, 867 P.2d 463, 465.

Originally published in the  Oklahoma Bar Journal --  OBJ 88 pg. 285 (Feb. 11, 2017)

Texas Supreme Court Holds that Assignment Conveyed Entire Lease Interest, Not Merely A Wellbore Interest

Posted by: Jordan Mullins and Michael Szymanski in Case Law Update

Piranha Partners v. Neuhoff , No. 18-0581, 63 Tex. Sup. Ct. J. 474, 2020 Tex. LEXIS 136 (Tex. Feb. 21, 2020)

Where parties assign an interest in a lease with a single existing well, disputes can sometimes arise when the leasehold is further developed. Was the parties’ intent for the assignment to be limited to that single wellbore or did it also include production from later-drilled wells? The Texas Supreme Court reviewed a dispute as to whether an assignment of an overriding royalty interest conveyed an interest limited to an entire lease, a single well, or to the lands identified in the assignment.

In 1975, Neuhoff Oil & Gas (“Neuhoff”) purchased a two-thirds interest in the Puryear Lease, an existing lease covering all the minerals under a tract of land. Neuhoff later sold its two-thirds interest in the Puryear Lease but reserved a 3.75% overriding royalty interest on all production under the Puryear Lease. For twenty-four years, only one well was completed on the lands covered by the lease, the Puryear B #1-28. Then, in 1999, Neuhoff sold its overriding royalty interest at auction to Piranha Partners (“Piranha”). Neuhoff then went out of business, assigning its remaining assets to individual family members (the “Neuhoff Heirs”).

The operator under the Puryear Lease paid Piranha an overriding royalty on the Puryear B #1-28, but on additional wells it drilled on the lease, it paid an overriding royalty to the Nuehoff Heirs, believing Piranha had only been conveyed the overriding royalty interest in the specific well and not on all production under the Puryear Lease. The Piranha Assignment’s granting clause conveyed all of Neuhoff’s interest in properties described in an attached “Exhibit A” which described Neuhoff’s overriding royalty interest by reference to the Puryear #1-28, the land, and the Puryear Lease.

The Texas Supreme Court indicated Piranha erroneously relied upon numerous rules of construction that were not applicable. For instance, Piranha argued that the “greatest estate” canon applied since the assignment used the word “all.” The Court dismissed the canon’s applicability because the Assignment was unambiguous and the remainder of the sentence Piranha focused on included “all…right, title, and interest in and to the properties described in Exhibit ‘A’,” which, nevertheless, required analysis of Exhibit A.

Piranha also erroneously relied on construction rules regarding the clarity by which an instrument must describe a reservation or exception. The Court found those rules inapplicable because the issue was the scope of the grant to Piranha, not a reservation or exception. The Court also dismissed Piranha’s “construe against the grantor” argument, because the assignment was unambiguous.

The Neuhoff Heirs, on the other hand, primarily relied upon so-called “surrounding circumstances evidence,” including descriptions that appeared in the auction documentation and argued this information showed the interest offered was limited to the well. Arguing the flip side, Piranha contended those same documents did not describe the interest as “WBO,” an acronym sometimes used in auction materials to show an offered interest pertained to “wellbore only.” Piranha also pointed to the agreement Neuhoff signed with the auction house, indicating it was not selling a “fractionalized interest.” The Neuhoff Heirs, however, argued that the agreement applied to Neuhoff selling 100% of its interest in the Puryear B #1-28. The Court concluded the auction documents failed to support either side as the documents disclaimed the reliance placed on them by the parties, requiring that the parties instead look to the actual Assignment to Piranha.

The Court ultimately held that Piranha Assignment included all overriding royalty in the Puryear Lease, not just in the land or the wellbore. Rather than apply rules of construction or surrounding circumstances, the Court used a “holistic and harmonizing approach” in construing the language within the Assignment and its Exhibit A. Specifically, the Court focused on several provisions in the Assignment referencing the interest in the lease (as opposed to in a well or lands), and language describing the interest being conveyed as “all oil and gas leases…which shall include any… overriding royalty interests…held by [Neuhoff], as of the Effective Date,” to mean the Assignment to Piranha included all interest then owned by Neuhoff.

In addition, the Court noted the language “All presently existing contracts…to the extent they affect the Leases,” indicated “Neuhoff Oil conveyed its entire interest under the Puryear Lease,” further discrediting the assignment to Piranha was limited to the wellbore or land itself. Other provisions also referenced the lease, including a provision which indicated that the overriding royalty was payable out of oil produced under the lease and pursuant to the terms of the lease. The proportionate reduction clause also referenced the assignor’s interest in the lease.

As a result, the Court concluded that the Assignment to Piranha conveyed the overriding royalty interest as to all production under the Puryear Lease, not just in the Puryear #1-28.

Taken as a whole, the conclusion in this case is largely consistent with the body of case law emphasizing a holistic and harmonizing approach to deed interpretation. This case underscores the importance of ensuring that not only the body of an assignment, but also the exhibits, both carefully describe the intended scope of the conveyance. It also underscores that boilerplate “all right, title, and interest” language is not always merely expansive quitclaim language, but sometimes can have material meaning. It is important to evaluate the rights of either party in the event circumstances change in the future (i.e. drilling and production of an additional well).

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• CHAPTER 6 WELLBORE ASSIGNMENTS OF OIL AND GAS LEASES

TIMOTHY C. DOWD is an attorney with Elias, Books, Brown & Nelson, P.C., in Oklahoma City, Oklahoma. Mr. Dowd is a past President of the Oklahoma City Mineral Lawyers Society (1996-97); and is past Chairperson of the Oklahoma Bar Association Mineral Law Section (2005-06). Mr. Dowd is the author of the Oklahoma chapter of AAPL's Nationwide Comparison of Laws on Leasing, Exploration and Production (2011) and the chapter on Oil and Gas Titles in West Publishing Company's Oklahoma Real Estate Forms and Practice. Mr. Dowd has written numerous articles for publication including:

Trespass in the Age of Horizontal Drilling Under State Conservation Statutes , 63 Rocky Mt. Min. L. Inst. 6A-1 (2017);

Current and Emerging Issues in Oil and Gas, Title Examination , Oil & Gas 2 Nat. Resources & Energy J. 505 (2017);

Clearing Title of Long-Lost Mineral Owners , 54 Rocky Mt. Min. L. Inst. 30-1 (2008); and Preferential Rights to Purchase in Oil and Gas Transactions , 49 Rocky Mt. Min. L. Inst. 5-1 (2003).

Mr. Dowd's primary area of practice is oil and gas law, including the rendering of title opinions and the drafting and negotiation of industry contracts.

I. Introduction

Wellbore assignments present a unique challenge to the title examiner. As has been frequently noted, there is a dearth of case law interpreting wellbore assignments, 1 although that is beginning to change as the cases presented in this paper demonstrate. Wellbore assignments are frequently ambiguous. Drafters are often not relying on a form, not relying on a good form, or not thinking long term and anticipating future operations. The third situation is frequently the case with older assignments drafted prior to the frequency of horizontal drilling. This paper will discuss in turn the principals of contract interpretation necessary to interpret an assignment that is limited to less than the entire leasehold estate. Then the paper takes a look at the current state of case law regarding wellbore assignments. Finally, the paper offers tips for drafting an unambiguous assignment.

II. Principles of Contract Interpretation

Conveyances of interests in oil and gas leases are subject to the same general rules of interpretation as contracts. 2 The primary goal in construing an assignment or any conveyance is to determine the intent of the parties as expressed in the conveyance. 3 Often referred to as the "four corners" doctrine, a court will look at the conveyance in its entirety, 4 with effect given to every part of the conveyance. 5 Generally, if an instrument is clear and unambiguous on its face, then extrinsic evidence will not be admitted to

determine the intent of the parties. 6 Whether a contract or a conveyance is ambiguous is a question of law, and thus for the court to decide. 7

There are two basic approaches to contract interpretation that have been called the traditional view and the modern view. In jurisdictions that follow the traditional rule, contract interpretation is treated as a question of law for the court to decide based on the four corners of the instrument by applying rules of construction. Only after a court determines that the intent of the parties cannot be determined from the document itself (i.e. that it is ambiguous) will a court allow extrinsic evidence to determine the intent of the parties. 8

According to the modern view, as contract interpretation seeks to determine what the parties actually intended, the fact that the parties dispute intent makes the conveyance ambiguous. 9 A conveyance is ambiguous if it is "reasonably and fairly susceptible of different constructions" 10 or contains "an intrinsic uncertainty." 11

In specifically eschewing the four corners rule, New Mexico allows extrinsic evidence in order to determine whether a conveyance is ambiguous, even though it treats the question of whether a contract is ambiguous as a question of law. 12 It is also a rule of construction that a conveyance will be construed most strongly against the grantor. 13

In theory, a title examiner would apply the same rules of contract interpretation that a court would, especially in a situation where there is no extrinsic evidence of intent of the parties. In practice, a title attorney would consider outside factors in construing an instrument regardless of whether the instrument seems unambiguous. Frequently, two parties will argue that an instrument unambiguously supports each party's claim, only to have a court decide that the instrument is ambiguous. 14 Thus, it is difficult for a title examiner to determine what a court would decide is ambiguous. Further, a title examiner may be advised that a client claims a certain interest as a result of a conveyance. Whether or not the conveyance is ambiguous, the title examiner will likely credit his or her client with the interest claimed, subject to a title requirement to obtain some sort of stipulation or other curative. Thus, the cautious approach for a title examiner is to err on the side of

finding ambiguity, consider all available evidence as to the intent of the parties, and draft an appropriate requirement.

Given that construing wellbore assignments is so heavily fact-based, and that courts have interpreted cases in some surprising ways, it is instructive to look at some cases in further detail.

III. Case Law

A. Petro Pro, Ltd. v. Upland Resources, Inc . 15

Petro Pro, Ltd. v. Upland Resources, Inc . is probably the seminal case construing a wellbore-only assignment. The King "F" No. 2 Well was completed on a tract that was later pooled to create a 704-acre gas unit, producing from the Cleveland Formation between 6,500 and 6,600 feet, but also including the Brown Dolomite Formation between 3,400 and 3,600 feet. KCS Medallion Resources ("KCS") and MB Operating Co., Inc. ("MB") were the owners of this unit. In November 1998, KCS and MB conveyed to L & R Energy ("L & R"):

All of Seller's right, title and interest in and to the oil and gas leases described in Exhibit "A" attached hereto and made a part hereof ("Subject Leases") insofar and only insofar as said leases cover rights in the wellbore of the King "F" No. 2 Well. 16

Beginning in May 2003, Upland Resources ("Upland"), pursuant to a farmout agreement with KCS, drilled three wells in the Brown Dolomite Formation: the Skeeterbee No. 1 and Skeeterbee No. 2 Wells, both horizontal wells, and the Skeeterbee No. 3, a vertical well.

In April 2004, L & R assigned its interest in the King "F" No. 2 Well to Petro Pro, Ltd. ("Petro Pro"). Upon inquiry, Petro Pro determined that KCS and Upland were treating the interest of Petro Pro as a wellbore-only interest in the King "F" No. 2 Well.

In September 2004, Petro Pro filed suit seeking to quiet title to the entire 704-acre pooled unit, from the surface to a depth of 6,800 feet. Several royalty owners intervened, seeking damages for alleged breach of implied covenants and for tortious interference with existing contracts. The royalty owners argued that Petro Pro's lawsuit and claims of ownership prevented Upland from fully developing the lease from drainage from adjacent wells.

In cross motions for summary judgment, Upland contended that Petro Pro's interest was limited to production and enhancement of production from the Cleveland Formation from the confines of the King "F" No. 2 Well. The royalty owners contended that Petro Pro had the right to produce from any formation, subject to governmental regulations limiting Petro Pro's horizontal rights to forty acres surrounding the King "F" No. 2 wellbore. Petro Pro contended they were the exclusive owners of any portion of the leasehold estate that could reasonably be reached and produced through the King "F" No. 2 wellbore. At trial, the court found the assignment unambiguous and granted Upland's motion for summary judgment.

The court of appeals found that the judgment entered by the trial court failed to resolve the rights conveyed by the assignment. The court of appeals construed the limitation to "rights in the wellbore" as limiting the assignment to production from the wellbore of the King "F" No. 2 Well at the depth it existed at the time of the conveyance. This meant that Petro Pro's rights included the right to produce from shallower formations, including the Brown Dolomite, but not the right to extend the wellbore vertically or horizontally, and not the right to share in production from any other well that may be drilled on the lease.

Important points in this case are that the court relies on Texas' ownership-in-place theory to support its finding that the assignment was unambiguously limited to the gas that may be produced from the wellbore of the King "F" No. 2 Well. Thus, the court effectively gave some guidance on how to interpret an assignment limited to a wellbore absent greater definition. The only geographical area conveyed and owned by Petro Pro was that required to operate and produce the King "F" No. 2 Well, and the depths conveyed to Petro Pro are the depths (both horizontally and vertically) penetrated by the existing wellbore. Further, Petro Pro had the right to use the wellbore to produce from any uphole formations.

B. Key Production Company, Inc. v. Quality Operating, Inc . 17

Key Production Company, Inc. v. Quality Operating, Inc . follows Petro Pro in finding that the language "insofar and only insofar as" described is a limitation on the grant but neither reserves nor conveys any interest.

In Key Production Company, Inc. v. Quality Operating, Inc . the Texas Court of Appeals construed a purchase and sale agreement, an assignment, and an amendment of the assignment, a joint operating agreement, and a declaration of unit in order to determine the intent of the parties. Exxon was an owner of an interest in the Pearline...

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• Table of Contents
• CHAPTER 1 OPERATING AGREEMENTS, FARMOUTS, TERM ASSIGNMENTS, AREAS OF MUTUAL INTEREST, REASSIGNMENT OBLIGATIONS, AND RIGHTS OF FIRST REFUSAL
• CHAPTER 2 CUSTOMIZING THE OIL AND GAS LEASE FROM THE LESSEE'S PERSPECTIVE
• CHAPTER 3 NEGOTIATING THE OIL AND GAS LEASE FROM THE LANDOWNER'S PERSPECTIVE
• CHAPTER 4 DIVIDING, SURRENDERING, AND ASSIGNING THE LEASE: HOW PUGH CLAUSES AND OTHER PROVISIONS CAN ALTER THE INTEREST COVERED BY A LEASE
• CHAPTER 5 NON-TRADITIONAL LEASE TERMS AND HOW AND WHEN TO USE LEASE RATIFICATIONS - UPDATED
• CHAPTER 7 EXTRA PROVISIONS - THE FINAL WORD IN THE AAPL MODEL FORM OPERATING AGREEMENT
• THE BLM'S MANAGEMENT OF FLUID MINERAL DEVELOPMENT ON SPLIT ESTATE: ACCESS ISSUES AND FEE-FEE-FED WELLS
• CHAPTER 10 APPLYING TITLE DEFECTS UNDER A TYPICAL PURCHASE AGREEMENT
• STATE LAW REGIMES GOVERNING SURFACE USE - WYOMING AND COLORADO
• STATE LAW REGIMES GOVERNING SURFACE USE - TEXAS AND NEW MEXICO
• CHAPTER 12 SINGLE WELL SPACING AND POOLING: STATE SPACING AND JURISDICTION OVER CONSERVATION
• CHAPTER 13 ETHICAL OBLIGATIONS OF LAWYERS AND LANDMEN IN NEGOTIATING LEASES

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• Commodities

Wellbore: What it is, How it Works, Examples

James Chen, CMT is an expert trader, investment adviser, and global market strategist.

What Is a Wellbore?

A wellbore is a hole that is drilled to aid in the exploration and recovery of natural resources, including oil, gas, or water. A wellbore is the actual hole that forms the well. A wellbore can be encased by materials such as steel and cement, or it may be uncased. The motivation for drilling a wellbore is usually to extract oil or gas for a protracted period of time.

Key Takeaways

• A wellbore is a type of borehole that is used to extract oil or gas.
• A borehole can also be used for mineral extraction, environmental assessment, and temperature measurement.
• Wellbores are typically vertical shafts that might be uncased or encased with cement and steel.
• The purpose of the wellbore is to extract oil and gas for a protracted period of time.

Understanding a Wellbore

A wellbore is a type of borehole, which is a narrow shaft that is drilled into the ground — either horizontally or vertically — to extract water, petroleum, or gases. Other reasons for drilling boreholes include mineral exploration, environmental site assessment, and temperature measurement.

Resource extraction companies dig wellbores to gain access to the natural resources they are seeking, such as oil and gas. A wellbore is usually a straight vertical shaft that "bores" into the ground to allow the recovery of natural resources. It also includes the open hole and uncased portions of the well.

Examples of a Wellbore

The following is a diagram of an oil wellbore encased in steel and cement. The wellbore is the actual drilled hole. The drilled hole may refer to the inside diameter of the wellbore wall or the rock face that bounds the drilled hole. The wellbore can then be cased with materials to improve its stability while improving operation and resource recovery.

Borehole is often used as a synonym for wellbores, though sometimes the borehole refers to the open diameter of the hole itself, whereas the wellbore is the hole including the casing between the opening and the rock or earth walls on the outside.

Wellbores must be cleaned before and after production because if mud or debris is not removed, it can increase operating costs while increasing safety and environmental risks. Furthermore, drilling wellbores is complex and requires specialized training, tools, and equipment. When successful, the wellbore creates a well that can extract oil and gas for a protracted period of time.

Though wellbores are commonly thought to belong to oil drillers, a wellbore can be used for any type of well. For thousands of years, drillers have used drilling rigs or a hand-operated rigs to dig wells. The machinery and techniques used to create wellbores differ based on geological conditions and the intended purpose of the well. For offshore drilling, floating units or platforms supported by the seafloor are used for the drilling rig.

Chinese miners have been creating wellbores since at least the Qin Dynasty (221–206 BC). Initially, these wells could reach depths of 30 meters. By the 1800s, depths of 1,000 meters were being achieved.  

K.S. Tom describes the drilling process: "The Chinese method of deep drilling was accomplished by a team of men jumping on and off a beam to impact the drilling bit while the boring tool was rotated by buffalo and oxen." Early oil extraction in California in the 1860s and beyond used this method, which they called "kicking her down."  

John K. Warren. " Evaporites: A Geological Compendium ." Spring, 2016.

K. S. Tom. " Echoes from Old China: Life, Legends, and Lore of the Middle Kingdom ." University of Hawaii Press, 1989.

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Assignment of Oil and Gas Lease

An oil or gas lease provides the lessee with many rights regarding the use of the land and the minerals buried underneath it. When that lease is signed, it creates a real estate, which can be further divided or assigned to other parties. That’s where the term assignment comes from in the oil and gas industry. 

But the assignment of oil and gas lease can include the transfer or conveyance of various things. So for anyone involved in an oil or gas lease in any capacity, it’s beneficial to understand the meaning of assignment and its implications for the lease itself. 

Assignment of Oil and Gas Lease Meaning

The definition of assignment in real estate is the sale, transfer, or conveyance of a whole property ownership/rights or part of it to another party. 

The term in the oil and gas industry is used for sale, transfer, or conveyance of working interest, lease, royalty, overriding royalty interest, or net profit interest. 

Since real estate property rights or mineral rights in the case of oil and gas are divisible, mineral rights owners or lessees often sell or convey parts of the mineral rights to other companies. The legal instrument used for this purpose is called an assignment. 

The party assigning the rights is called the assignor, and the party receiving the rights is called the assignee. 

Assignments are filed in the same way as an oil and gas lease or a title deed to a property. These legal documents need to be drafted in accordance with the state requirements and filled with the relevant county or municipality authorities. 

Of the different assignment transactions in the oil and gas industry, the assignment of rights in the oil and gas lease is the most common. While the lease itself is the negotiable instrument in the scenario, the assignment establishes the successful transfer of the rights. 

It may look like a simple document, but the rights and duties of the different parties can make it complex. As a result of the assignment, the property interests, rights, and obligations of the lessor, lessee, and assignee may alter. 

On top of this, any local laws governing such a transfer also need to be accommodated. Now, federal regulations also impact the transfer of oil and gas interests. 

What Can Be Assigned?

The lessee of an oil or gas lease can assign the entire lease or part of it. In other words, the lessee can sell or transfer part of the estate or the entire estate to which they have the working rights. 

The assignee is assigned the working interest and lease obligations, including override royalty. The assignment document will state the percentage of override royalty, which is the percentage of the mineral removed from the land under lease and the net profits received by the assignee by the sale of the minerals. 

An overriding royalty interest is an undivided interest that gives the holder the right to receive a certain percentage of the revenue from the sale of the mineral. This differs from royalty interest in that the overriding interest cannot be divided and doesn’t grant ownership of the mineral rights once the assignment expires. 

In other words, the original mineral owner (the lessor) retains a royalty interest, whereas the lessee assigning the lease to an assignee gets the overriding royalty interest. 

Multiple Lease Assignments

Normally, the assignment mentions and describes the lease assigned to an assignee. 

However, an oil or gas company often may have multiple lease agreements with different mineral owners from the same field or formation. On the other hand, the leases involving different lessees may have undergone unitization to increase production and reduce competition. 

In such cases, the assignment may include multiple leases. If multiple leases are in an assignment, they are typically described in an exhibit with the document. However, in cases of unitization, the assignment may not necessarily list or describe the leases. Instead, it will just mention all the lease agreements in a particular unit or tract of land. 

It all comes down to the document’s language, as sometimes the focus is on the rights and obligations rather than the actual lease or property. 

Assignment Limitations

Oil and gas leases are pretty flexible regarding how they can be further leased or assigned. An assignor may choose to assign the lease as is or set limitations that may not exist in the original lease. An assignor may set the following limitations for the assignee:

• Wellbore Limits: The assignment may set the production to the wellbore only. In other words, the assignee can only produce the mineral from the wellbore of a particular well, and all the interests outside of this wellbore are not assigned. In such a case, the assignee cannot produce from deeper formations. 
• Depth Limits: The assignment may set the interest to a certain depth or a particular formation by mentioning the formation’s depth or name. For instance, the assignee may only have a working interest up to a depth of 8,000 ft. from the surface. These are more common in assignments than wellbore limitations. Such limitation may also automatically apply if the oil or gas lease also had depth limitations. 
• Horizontal Limits: The assignment may set horizontal limitations or, in other words, include only a part of the land. The assignee would not be able to produce from outside these parts of the land as described in the assignment, even if they are part of the actual lease. 

Assignment of oil and gas lease is a common instrument in the oil and gas industry in the US, used to assign lease rights and obligations to other companies. The companies with the lease can assign multiple leases to the same party. Similarly, they can divide a lease and assign it to different parties. 

The assignment procedure and documentation may vary based on state laws and the individual case. However, it’s a detailed document that specifies what is covered under the assignment, what duties befall the assignee, and what they need to pay the assignor. 

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Oklahoma HB3972

State government; defining terms; authorizing certain assignment of claims to the attorney general; scope of authority; limitations; public interest standard; emergency., +   −   bill search, table of contents.

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• 2 CCR submitted
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• CCR rejected, further conference requested, same conferees
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• CCR submitted
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Quantum Physics

Title: utilising a quantum hybrid solver for bi-objective quadratic assignment problems.

Abstract: The intersection between quantum computing and optimisation has been an area of interest in recent years. There have been numerous studies exploring the application of quantum and quantum-hybrid solvers to various optimisation problems. This work explores scalarisation methods within the context of solving the bi-objective quadratic assignment problem using a quantum-hybrid solver. We show results that are consistent with previous research on a different Ising machine.

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