Helpful Oil & Gas Definitions, A-D

Acreage-Contribution Agreement. A support agreement by which the contributing party agrees to contribute leases or interests in leases in the area of a test well to a drilling party in exchange for information, if the drilling party drills to an agreed depth and develops the information. See also Support Agreements.

Ad Coelum Doctrine.The common-law doctrine that the owner of land owns everything above and below the property’s boundaries from the heavens to the core of the earth, including all elements therein. This has generally been replaced by the rule of capture for fugacious minerals such as oil and gas.

After-Acquired Title Clause. An oil and gas lease clause that extends the coverage of the lease to any interest in the described property acquired after the lease. A common formulation is “This lease covers all the interest now owned by or hereafter vested in the lessor . . . .”

Apportionment Rule. The rule followed in a minority of states that royalties accruing under a lease on property that is subdivided after the lease grant are shared by the owners of the property proportionately to their interest in the property. See alsoNon-Apportionment Rule.

Area-Rate Clause. An indefinite price escalation clause found in some long-term gas contracts that provides for an increase of the contract price if any regulatory agency permits or prescribes a higher price for gas sold in the same area. Area-rate clauses permit sellers to collect the highest price permitted by the regulatory authority in the relevant area.

Assignment Clause. See also Change-of-Ownership Clause.

1. Bonus. A payment to induce a lessor to execute a lease.

Bottom-Hole Agreement. A contract in which the contributing party agrees to make a cash contribution to the drilling party in exchange for geological or drilling information, if the receiving party drills to an agreed depth and conducts agreed tests. See also Support Agreements.

Capture-and-Hold Rule. The conventional analysis that production occurs for royalty-calculation purposes when oil or gas is captured and held at the wellhead or on the lease. The cost of transporting, compressing, and processing and severance and gross-production taxes are charged proportionately against the royalty interest where royalty is determined by working back from a downstream price or value. See also Marketable-Product Rule.

Carried Interest. A fractional interest, usually in an oil and gas lease, free of some or all costs, which are borne by the remainder of the working interest owners. A common arrangement in drilling ventures is that the promoter will be carried to the casing point for 1/4 of the working interest and charged with bearing its share of completion and operating costs.

1. Casing. An industry term for pipe placed in a wellboreSurface Casing protects potable water against pollution. Intermediate casing protects deeper formations. Production casing is the pipe through which oil and gas is produced.

Casinghead Gas. Gas produced from the casinghead (top) of an oil well. Casinghead gas is natural gas held in solution with oil in the production formation. At production or shortly after, the gas separates from the oil.

Casing Point. The point at which a well has been drilled to the desired depth and the owners must decide whether or not to place production pipe, or casing, in the hole and proceed to complete and equip the well for production.

Cessation-of-Production Clause. An oil and gas lease savings clause that specifies what the lessee must do to maintain the lease in the event that production ceases. The purpose of the cessation-of-production clause is to make more certain the temporary-cessation-of-production doctrine. See also Temporary-Cessation-of-Production Doctrine.

Change-of-Ownership Clause. An oil and gas lease clause specifying what notice must be given by the lessor or its assignee to the lessee of changes in ownership to bind the lessee to recognize them. The purpose of the clause is to protect a lease holder against the consequences of making an improper payment under the lease. See also Assignment Clause.

Continuous-Operations Clause. See Operations Clause.

Contribution Agreement. See Support Agreement.

Correlative-Rights Doctrine. A corollary to the rule of capture that the right to capture oil and gas from potentially producing formations under one’s property is subject to the concomitant duty to exercise the right without negligence or waste. See also Rule of Capture.

Cost Depletion. Recovery of one’s tax basis in a producing oil or gas well by deducting basis proportionately over the producing life of the well. See also Percentage Depletion.

Damages Clause. A lease clause that imposes a duty on the lease holder to pay the lessor or the surface owner for damage, usually of a specified type, to the surface. Often damages clauses are limited to “growing crops.” In the absence of a damages clause, the lease holder has no legal obligation to pay for reasonable damage to the surface necessary to obtain oil and gas. The lessee has an implied right to use the surface for oil and gas operations.

Daywork Drilling Contract. A drilling contract under which the lease operator compensates the drilling contractor on the basis of the amount of time the contractor spends conducting drilling operations. Essentially, the lease operator hires the contractor’s drilling rig and staff to work under the lease operator’s direction. This contract form gives broad discretion to the lease operator to give instructions to the drilling contractor how to conduct drilling operations. Courts impose broad liability upon the lease operator as a result of its broad discretion. See also Drilling Contracts.

Delay Rental. A payment from the lease holder to lessor to maintain the lease from period to period during the primary term without drilling. See also Drilling-Delay Rental Clause, “Unless” Lease, “Or” Lease, and Paid-Up Lease.

Deregulation Clause. A gas contract provision spelling out how price is to be determined and what obligations the buyer and seller will owe one another if regulated natural gas is freed from regulation.

1. Distillate.wet element of natural gas that may be removed as a liquid. May also be called condensate and natural gasoline. Also, any product of the process of distillation.

Division Order. An authorization to one who has a fund for distribution from persons entitled to the fund directing how the fund is to be distributed. Division orders are entered into by both working interest owners and royalty owners to sell oil and to give instructions for payments under a lease.

Double-Fraction Problem. A common interpretative problem in conveyances that arises when one who owns a fractional interest conveys or reserves a fraction because it is unclear whether they are conveying a fraction of their fractional interest or all of their fractional interest.

Drilling Contracts. Agreements for the drilling of a well or wells entered into between drilling contractors, who own drilling rigs and associated equipment, and persons or entities owning or operating mineral rights or leasehold rights. Drilling contracts are generally structured to provide compensation on a daywork, footage, or turnkey basis. The compensation provision typically controls the scope of discretion given to the operator to direct the contractor and the amount of potential liability imposed on the operator, as well as method of payment. See also Daywork Drilling Contract, Footage Drilling Contract, and Turnkey Drilling Contract.

Drilling-Delay Rental Clause. An oil an gas lease clause giving the lessee the right to maintain the lease from period to period during the primary term either by commencing drilling operations or by paying delay rentals. Leases contain drilling-delay rental clauses because courts have held that they obviate any implied covenant to drill a test well on the premises. They are accepted by lessors because they provide for periodic rental payments. See also “Unless” Lease and ”Or” Lease.

Dry-Hole Agreement. A contract in which the contributing party agrees to make a cash contribution to the drilling party in exchange for geological or drilling information, if the well drilled is a dry hole. See also Support Agreements.

Duhig Rule. A rule of title interpretation developed in Duhig v Peavy-Moore Lumber Co Inc, 135 Tex 503, 144 SW2d 878 (1940) to deal twith the frequent problem of overconveyances of fractional interests. Where a grantor does not own enough interest to give full effect both to the granted interest and to a reserved interest, courts will give priority to the granted interest rather than to the reserved interest until the granted interest is fully satisfied. No case in Michigan has mentioned the Duhig rule, but in states that have accepted the Duhig Rule it is generally limited to conveyances by warranty deed.