OIL AND GAS LAW

Mineral Interest or Mineral Estate

As in all jurisdictions, Colorado allows the owner of  real property that includes both the surface and mineral estates to “sever”,  or divide out,  the mineral estate and separately grant or reserve all or a portion of said mineral estate.

The mineral estate has sometimes been defined to include 5 constituent elements: a: The Development Right  b: The Executive Power ( the executive power includes matters such as the power to enter into a lease of the minerals); c: The Right to Bonus; d: The Right to Delay Rentals; and, e: The Right to Royalty. Within these elements is an implied easement to come onto the land for exploration and extraction of the minerals. The extent of the easement is subject to reasonable need, necessity and the term.

Rule of Capture

All states follow the rule of capture theory when it comes to defining the nature of the ownership interest in oil and gas.

Clearly a state statute that limits the number and locations of wells impacts the Rule of Capture because no longer does the owner of the oil and gas have the unfettered authority to locate wells bottomed on its land in ways that maximize the capture of hydrocarbons that are located underneath the lands of another. Colorado has such provisions that limit the rule of capture.

Trespass – Liability Where the Trespasser Secures Commercial Production

Because Colorado treats the mineral interest as an interest in real property, the rules relating to trespassory damages applies where there has been a subsurface trespass, such as through a slant or directional well, which is bottomed underneath the land of another owner.

Where a trespasser wrongfully produces minerals from a tract in bad faith, that trespasser is treated as a converter of the minerals produced and is liable to the rightful owner for the full value of those minerals.  In other words, where a bad faith trespass is found, the trespasser must turn over the well to the true owner and pay to him the proceeds received from the sale of any hydrocarbons.

Oil and Gas Leases

These are complicated leases and the guidance of an attorney in reviewing the lease is always a good place to start. Be careful of terms that allow for a lease to run forever as well as provisions that place the cost of production on the Lessor rather than in the exploration company. Leases can be negotiated and all terms including length of years, signing bonuses, royalties and the limitation of production costs are natural areas that should be narrowed to fit your situation.

Oil & Gas – Hydraulic Fracturing

The Western USA is projected to generate 1.3 million barrels of domestic oil and condensate production a day by the year 2020, an amount that exceeds the current daily oil imports from Russia, Iraq and Kuwait combined.  The Western USA has the potential to produce 6.2 trillion cubic feet (Tcf) of natural gas annually by 2020.  Combined, Western USA oil and natural gas is projected to produce more energy on a daily basis than the total United States imports from Russia, Iraq, Kuwait, Saudi Arabia, Venezuela, Algeria, Nigeria and Columbia.  (source Western Energy Alliance)

Fracking involves pumping fluid down a wellbore and into the oil or gas-bearing rock to create fractures in the formation so that the gas or oil can flow from low permeability reservoirs into the well and to the surface.  Sand or ceramic grains are used to prop the fracture open. Hydraulic fracturing is the propagation of fractures in a rock layer caused by the presence of a pressurized fluid. Hydraulic fractures form naturally, as in the case of veins and is one means by which  oil and gas  from source rock may migrate. This process is used to release  natural gase, coal seam gas  and petroleum, or ther substances for extraction, via a technique called induced hydraulic fracturing. Industry is pumping these fluids down steel casings that is cemented in place and carefully designed to protect fresh water aquifers and into formations that contain oil and natural gas.

Hydraulic fracking is a well-tested technology that has enabled the U.S. to develop unconventional natural gas and increase reserves to over a 100 year supply.  States have regulated fracking for over 60 years.  Colorado is a leader in rules and regulations dealing with fracking*.

The use of water in fracking in the year 2010 was less than 0.08% of water use as compared to 85.5% for Agriculture and 7.4% for Municipal and Industrial, 5.64% for Recreation, and 0.83% for large industry.

*Oil and natural gas producers are held to very strict regulatory and scientific standards that carry real legal and financial responsibilities to ensure operations protect air and water quality, and that the risk of accident is minimized and properly controlled.