Legal Definitions - capture-and-hold rule

The capture-and-hold rule is a principle in oil and gas law that defines the specific point at which "production" of oil or gas is considered to have occurred for the purpose of calculating royalties owed to landowners or mineral rights holders.

Under this rule, production is deemed to happen as soon as the oil or gas is brought to the surface and contained, whether in tanks at the wellhead or in other storage facilities located on the leased property. This means that the royalty obligation typically begins when the resource is physically extracted and held, even if it has not yet been processed, transported off-site, or sold to a buyer.

Here are some examples to illustrate the capture-and-hold rule:

• Scenario: Crude Oil Storage at the Wellhead

  An energy company operates an oil well on leased land. After drilling, crude oil is pumped to the surface and immediately transferred into large storage tanks located right next to the well. Due to market conditions, the company decides to hold the oil in these tanks for several weeks before arranging for its transport to a refinery.

  How it illustrates the rule: According to the capture-and-hold rule, "production" for royalty calculation purposes occurs as soon as the crude oil is pumped into those storage tanks at the wellhead. The landowner's royalty share would be calculated based on the volume of oil captured and held at that point, not when it is eventually sold or leaves the property.

• Scenario: Natural Gas in On-Site Holding Facilities

  A natural gas producer extracts gas from a well. The gas is immediately directed into a large on-site holding facility on the leased property, designed to store significant volumes before it can be processed to remove impurities and then sent to a pipeline. This storage might be necessary due to pipeline capacity issues or to accumulate enough volume for efficient processing.

  How it illustrates the rule: The capture-and-hold rule dictates that the natural gas is considered "produced" once it enters the on-site holding facility. The royalties owed to the mineral rights owner would be based on the volume of gas captured and stored there, even though it hasn't yet been processed into a marketable product or transported off the leased premises.

• Scenario: Temporary Remote Storage

  In a remote oil field, a company extracts oil from a new well. Because the nearest pipeline connection is several miles away and transportation logistics are complex, the company uses a series of temporary storage tanks situated on the leased property, but a short distance from the wellhead, to accumulate the oil. The oil remains in these tanks for a period while transportation arrangements are finalized.

  How it illustrates the rule: The capture-and-hold rule applies because the oil has been brought to the surface and stored on the leased property. The royalty obligation begins when the oil is placed into these temporary storage tanks, regardless of its specific location on the leased land or the subsequent steps required to make it ready for sale or transport off the property.