CMM Mineral Rights & Land Management 5 — Questions and Answers
Question 1: What is the primary purpose of a 'division order' in the oil and gas industry?
- To authorize the operator to begin drilling operations on a lease
- To instruct the purchaser of production how to distribute proceeds among all interest owners (Correct answer)
- To divide a mineral tract among heirs following the death of the mineral owner
- To establish the working interest ownership percentages before a well is drilled
Correct answer: To instruct the purchaser of production how to distribute proceeds among all interest owners
A division order is a contract between the production purchaser and each interest owner specifying the decimal interest entitling that owner to a share of production proceeds.
Question 2: Under the Mineral Leasing Act, BLM noncompetitive oil and gas leases were historically available for lands not subject to competitive leasing; which 2021 executive action significantly changed this practice?
- Executive Order 13990 paused new oil and gas leasing on federal lands pending a comprehensive review (Correct answer)
- Executive Order 14008 permanently banned all new federal onshore oil and gas leases
- Executive Order 13990 converted all existing noncompetitive leases to competitive leases
- Executive Order 14008 transferred federal mineral leasing authority to individual states
Correct answer: Executive Order 13990 paused new oil and gas leasing on federal lands pending a comprehensive review
Executive Order 13990, signed January 20, 2021, directed a temporary pause on new federal oil and gas lease sales pending a comprehensive review of the federal leasing program.
Question 3: A 'habendum clause' in an oil and gas lease defines:
- The royalty rate payable on all production
- The duration of the lease, typically consisting of a primary term and a secondary term held by production (Correct answer)
- The lessee's obligation to develop the property with due diligence
- The lessor's retained surface rights during mineral extraction
Correct answer: The duration of the lease, typically consisting of a primary term and a secondary term held by production
The habendum clause establishes the lease's two-part term structure: a fixed primary term and a secondary term that continues 'as long as oil and gas are produced in paying quantities.'
Question 4: Which concept describes the minimum level of production that prevents an oil and gas lease from terminating under the habendum clause?
- Proven reserves threshold
- Production in paying quantities (Correct answer)
- Minimum monthly production index
- Sustainable yield benchmark
Correct answer: Production in paying quantities
Production in paying quantities means production sufficient to yield a profit to the lessee over and above the cost of operating the well, even if it never repays the original drilling costs.
Question 5: When evaluating whether a mineral acquisition meets investment criteria, a mineral manager would typically compute a 'net revenue interest' (NRI) as:
- Working interest minus all royalty burdens on the lease (Correct answer)
- Total gross royalty divided by the number of mineral acres owned
- Working interest multiplied by the gross lease bonus per acre
- Royalty rate divided by the total number of producing formations
Correct answer: Working interest minus all royalty burdens on the lease
NRI equals the working interest percentage minus all royalty burdens (lessor royalty plus any ORRIs), representing the fraction of production revenue the working interest owner actually receives.
Question 6: The 'correlative rights' doctrine in oil and gas law holds that each owner of land overlying a common reservoir has the right to:
- Capture all oil and gas migrating beneath their surface regardless of drainage impact
- Produce their fair share of the reservoir without waste and without being drained by neighboring operations (Correct answer)
- Prevent adjacent landowners from drilling within a specified setback distance
- Receive compensation from neighboring operators for any subsidence caused by extraction
Correct answer: Produce their fair share of the reservoir without waste and without being drained by neighboring operations
Correlative rights protect each owner's opportunity to produce their equitable share of a common reservoir, forming the legal foundation for state well-spacing and pooling regulations.
Question 7: Which instrument is used to release a previously recorded oil and gas lease from the public record after it has expired or been surrendered?
- Mineral deed
- Release of oil and gas lease (Correct answer)
- Quitclaim deed
- Affidavit of heirship
Correct answer: Release of oil and gas lease
A release of oil and gas lease (or formal lease release/surrender) is recorded in the county deed records to clear the expired or terminated lease from the chain of title.
CMM Mineral Rights & Land Management 5
What is the primary purpose of a 'division order' in the oil and gas industry?