Oil and Gas Disputes â€“ From a Trial Lawyer's Perspective

Oil and Gas Disputes Oil and Gas Disputes –– From aFrom aTrial Lawyer’s PerspectiveTrial Lawyer’s Perspective

Greg W. CurryGreg W. Curry1722 Routh Street, Suite 15001722 Routh Street, Suite 1500

Dallas, Texas 75201Dallas, Texas 75201214.969.1252214.969.1252

[email protected]@tklaw.com

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General Litigation IssuesGeneral Litigation Issues

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General Litigation IssuesGeneral Litigation Issues●● Hire local counsel and any needed experts early onHire local counsel and any needed experts early on●● Consider self help:Consider self help:

►► LisLis pendenspendens►► TRO / injunctionTRO / injunction►► EstoppelEstoppel letterletter

●● Develop discovery plan earlyDevelop discovery plan early●● Preserve everythingPreserve everything●● Identify witnesses earlyIdentify witnesses early

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Joint Ownership IssuesJoint Ownership Issues

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Joint Ownership IssuesJoint Ownership Issues●● Many Many JOAsJOAs (including 1989 form) have a (including 1989 form) have a

preferential right to purchase provision.preferential right to purchase provision.

●● Strike it.Strike it.

●● Sales are taking placeSales are taking place

●● Most litigated area involving JOA, other than lack of Most litigated area involving JOA, other than lack of performance or poor performanceperformance or poor performance

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Joint Ownership IssuesJoint Ownership Issues●● Preferential Rights DefinedPreferential Rights Defined

►► A right of first refusal, also known as a preemptive or A right of first refusal, also known as a preemptive or preferential right, empowers its holder with a preferential right, empowers its holder with a preferential right to purchase the subject property on preferential right to purchase the subject property on the same terms offered by or to a bona fide the same terms offered by or to a bona fide purchaser. purchaser. Tenneco Inc. v. Enterprise Products Co.Tenneco Inc. v. Enterprise Products Co., , 925 S.W.2d 640, 644 (Tex. 1996).925 S.W.2d 640, 644 (Tex. 1996).

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The Unequivocal Acceptance RuleThe Unequivocal Acceptance Rule●● In In HutchersonHutcherson v. Croninv. Cronin, the court stated:, the court stated:

“The acceptance of an option, to be effectual, must be “The acceptance of an option, to be effectual, must be unqualified, absolute, unconditional, unequivocal, unqualified, absolute, unconditional, unequivocal, unambiguous, positive, without reservation, and according unambiguous, positive, without reservation, and according to the terms or conditions of the option. Substantial to the terms or conditions of the option. Substantial compliance with the terms of the option is held not sufficient compliance with the terms of the option is held not sufficient to constitute an acceptance; to be effectual, the acceptance to constitute an acceptance; to be effectual, the acceptance must be identical with the offer, or, at least, there must be nomust be identical with the offer, or, at least, there must be nosubstantial variation between them. An acceptance of an substantial variation between them. An acceptance of an option must be such a compliance with the conditions as to option must be such a compliance with the conditions as to bind both parties, and if it fails to do so, it binds neither.” bind both parties, and if it fails to do so, it binds neither.”

HutchersonHutcherson v. Croninv. Cronin, 426 S.W.2d 638, 641 (Tex. Civ. App., 426 S.W.2d 638, 641 (Tex. Civ. App.——Tyler Tyler 1968, no writ).1968, no writ).

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Texas Law on Exercise of a Preferential RightTexas Law on Exercise of a Preferential Right

●● The Fifth Circuit Court of Appeals stated in The Fifth Circuit Court of Appeals stated in West West Texas Transmission, L.P. v. Enron Corp.Texas Transmission, L.P. v. Enron Corp., 907 F.2d , 907 F.2d 1554, 1563 (5th Cir. 1990):1554, 1563 (5th Cir. 1990):

“The owner of the property subject to a right of first “The owner of the property subject to a right of first refusal remains the master of the conditions under refusal remains the master of the conditions under which he will relinquish his interest, as long as those which he will relinquish his interest, as long as those conditions are commercially reasonable, imposed in conditions are commercially reasonable, imposed in good faith, and not specifically designed to defeat good faith, and not specifically designed to defeat preemptive right . . . .”preemptive right . . . .”

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●● The terms and conditions of the exercise of a preferential The terms and conditions of the exercise of a preferential right were at issue in right were at issue in Texas State Optical, Inc. v. WigginsTexas State Optical, Inc. v. Wiggins, 882 , 882 S.W.2d 8 (Tex. App.S.W.2d 8 (Tex. App.——Houston [1st Dist.] 1994, no writ), where Houston [1st Dist.] 1994, no writ), where the court of appeals acknowledged that the relevant “PRP” the court of appeals acknowledged that the relevant “PRP” had matured into an option and that the exercise of an option, had matured into an option and that the exercise of an option, like acceptance of any other offer, must be positive, like acceptance of any other offer, must be positive, unequivocal, and not change or qualify the terms of the offer. unequivocal, and not change or qualify the terms of the offer. However, the court cited However, the court cited West Texas TransmissionWest Texas Transmission in noting in noting that there is an exception where a seller imposes a term in that there is an exception where a seller imposes a term in bad faith to defeat an option, in which case the option holder bad faith to defeat an option, in which case the option holder may validly exercise the option while at the same time may validly exercise the option while at the same time rejecting the bad faith term.rejecting the bad faith term.

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●● Probably covers both operating and nonProbably covers both operating and non--operating operating interestsinterests

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Other Areas of DisputeOther Areas of Dispute●● Payment of joint interest billingsPayment of joint interest billings

►► AuditAudit►► Suspend rightsSuspend rights►► ForeclosureForeclosure►► Drill a partner outDrill a partner out

●● Performance by operatorPerformance by operator►► Gross negligence standardGross negligence standard►► Does not protect from contractual issuesDoes not protect from contractual issues

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Liability for Hydraulic Liability for Hydraulic FracturingFracturing

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Coastal Oil & Gas Corp. v. Garza Energy TrustCoastal Oil & Gas Corp. v. Garza Energy Trust

●● One year ago, the Texas Supreme Court decided One year ago, the Texas Supreme Court decided the case of the case of Coastal Oil & Gas Corp. v. Garza Energy Coastal Oil & Gas Corp. v. Garza Energy Trust. Trust. 51 Tex. Sup. Ct. J. 1258, 2008 WL 3991029 51 Tex. Sup. Ct. J. 1258, 2008 WL 3991029 (Tex. Aug. 29, 2008).(Tex. Aug. 29, 2008).

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Primary Issue:Primary Issue:

Whether subsurface hydraulic fracturing of a Whether subsurface hydraulic fracturing of a natural gas well that extends into another’s natural gas well that extends into another’s property is a trespass for which the value of gas property is a trespass for which the value of gas drained as a result may be recovered as damages?drained as a result may be recovered as damages?

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No,No,

But does that solve all of the But does that solve all of the operator’s problems?operator’s problems?

No.No.

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●● Coastal was the lessee of a 748Coastal was the lessee of a 748--acre tract owned by the Garza acre tract owned by the Garza Energy Trust. Energy Trust.

●● They are also the owner/operators of an adjacent 163They are also the owner/operators of an adjacent 163--acre acre tract.tract.

●● Coastal drilled a well as close to the Garza tract as allowed byCoastal drilled a well as close to the Garza tract as allowed bythe RRC and used hydraulic fracturing to enable production the RRC and used hydraulic fracturing to enable production on their well.on their well.

●● Fracturing is used in the majority of new wells drilled in Fracturing is used in the majority of new wells drilled in Texas.Texas.

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●● Garza sued Coastal for:Garza sued Coastal for:

►► Breach of the implied covenant to develop Garza’s Breach of the implied covenant to develop Garza’s tract;tract;

►► Trespass, alleging that the Trespass, alleging that the fracingfracing invaded beneath invaded beneath their tract causing substantial drainage; their tract causing substantial drainage;

►► Breach of the implied covenant to protect against Breach of the implied covenant to protect against drainage; anddrainage; and

►► BadBad--faith pooling.faith pooling.

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●● At trial, Garza won on all counts and the jury At trial, Garza won on all counts and the jury awarded over $15 M in total damages. The trial awarded over $15 M in total damages. The trial court reduced some of the damages. court reduced some of the damages.

●● The court of appeals reversed and remanded the The court of appeals reversed and remanded the attorney’s fee award, but affirmed in all other attorney’s fee award, but affirmed in all other respects.respects.

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●● The Texas Supreme Court, Justice Hecht delivering The Texas Supreme Court, Justice Hecht delivering the opinion:the opinion:

►► Reversed the award of damages for drainage Reversed the award of damages for drainage resulting from the trespass (resulting from the trespass (fracingfracing))

►► Remanded the issues of breach of the implied Remanded the issues of breach of the implied covenant to develop and badcovenant to develop and bad--faith poolingfaith pooling

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●● While not deciding the broader issue of whether While not deciding the broader issue of whether fracingfracing in and of itself is a trespass, the Court held in and of itself is a trespass, the Court held that the rule of capture disallowed any damages that the rule of capture disallowed any damages where the only claim of injury was that the where the only claim of injury was that the fracingfracingallowed gas to flow from one tract to another.allowed gas to flow from one tract to another.

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●● The rule of capture gives a mineral rights owner The rule of capture gives a mineral rights owner title to the oil and gas produced from a well, even if title to the oil and gas produced from a well, even if the oil and gas flowed to the well from another the oil and gas flowed to the well from another owner’s tract. owner’s tract.

●● Given this rule, the Court said that “the gas [Garza] Given this rule, the Court said that “the gas [Garza] claims to have lost simply does not belong to claims to have lost simply does not belong to [Garza].” [Garza].” Id.Id. at *5. at *5.

●● Accordingly, because there were no other claims of Accordingly, because there were no other claims of injury, Garza had no recoverable damages. injury, Garza had no recoverable damages.

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●● Garza argued that the rule of capture should not Garza argued that the rule of capture should not apply to apply to fracingfracing, comparing the practice to slant, comparing the practice to slant--well drilling.well drilling.

●● The Court rejected this argument, contrasting the The Court rejected this argument, contrasting the fact that slantfact that slant--well drilling took minerals in place well drilling took minerals in place while while fracingfracing only allowed minerals to drain. only allowed minerals to drain.

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●● The Court gave four reasons for not changing the The Court gave four reasons for not changing the rule of capture:rule of capture:

1.1. The law already gives a drained owner full recourse;The law already gives a drained owner full recourse;

2.2. Doing so would usurp the power of the RRC;Doing so would usurp the power of the RRC;

3.3. Determining the value of the drained minerals is not a Determining the value of the drained minerals is not a decision best left to litigation; anddecision best left to litigation; and

4.4. Nobody in the industry wants it to change.Nobody in the industry wants it to change.

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●● The law already gives a drained owner full recourseThe law already gives a drained owner full recourse

►► An owner who claims that her minerals are being An owner who claims that her minerals are being drained can:drained can:

■■ Drill an offset well;Drill an offset well;

■■ Sue the lessee for violation of the implied covenant to Sue the lessee for violation of the implied covenant to protect against drainage;protect against drainage;

■■ Offer to pool; orOffer to pool; or

■■ Apply for forced pooling if the offer to pool is denied.Apply for forced pooling if the offer to pool is denied.

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●● Changing the rule would usurp the power of the Changing the rule would usurp the power of the RRCRRC

►► The rule of capture allows the commission to protect The rule of capture allows the commission to protect correlative rights correlative rights –– by governing spacing, density by governing spacing, density and and allowablesallowables of well of well –– while also preventing waste while also preventing waste and conserving natural resources.and conserving natural resources.

►► Changing the rule would give a right to specific Changing the rule would give a right to specific minerals and would limit the Commission’s power to minerals and would limit the Commission’s power to regulate production.regulate production.

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●● Determining the value of the drained minerals is not Determining the value of the drained minerals is not a decision best left to litigationa decision best left to litigation

►► Given the subsurface nature of the litigation, the Given the subsurface nature of the litigation, the facts are almost impossible to determine.facts are almost impossible to determine.

►► Courts would also have to take into account the Courts would also have to take into account the social policies, industry operation, and greater good social policies, industry operation, and greater good of permitting of permitting fracingfracing. .

►► While these factors could be considered, changing While these factors could be considered, changing the rule would disrupt one of the foundational the rule would disrupt one of the foundational principles of the industry.principles of the industry.

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●● Nobody in the industry wants it to changeNobody in the industry wants it to change

►► The Court received amicus curiae briefs from The Court received amicus curiae briefs from regulators, landowners, royalty owners, operators, regulators, landowners, royalty owners, operators, and hydraulic fracturing service providers all and hydraulic fracturing service providers all opposing liability for hydraulic fracturing.opposing liability for hydraulic fracturing.

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●● What does this all mean?What does this all mean?

►► The Court left unanswered the larger question of The Court left unanswered the larger question of whether whether fracingfracing in and of itself is a trespass.in and of itself is a trespass.

►► Still liable for negligence even if it was during Still liable for negligence even if it was during fracingfracing..

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Liability for Horizontal Liability for Horizontal DrillingDrilling

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Liability for Horizontal DrillingLiability for Horizontal Drilling●● Need permission to use the surface of adjoining Need permission to use the surface of adjoining

tract for horizontal drillingtract for horizontal drilling

●● Do you need permission of mineral Do you need permission of mineral lessorlessor on lands on lands which you will pass through?which you will pass through?

►► Unanswered questionUnanswered question

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Liability for Horizontal DrillingLiability for Horizontal Drilling●● Currently cases go both waysCurrently cases go both ways

●● GarzaGarza has language that supports both positionshas language that supports both positions

●● But what is the harm?But what is the harm?

●● But will a court stop a knowing and intentional tort But will a court stop a knowing and intentional tort if asked to do so?if asked to do so?

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Lease Termination IssuesLease Termination Issues

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Lease Termination IssuesLease Termination Issues““In areas like Panola and Harrison, I don’t see how In areas like Panola and Harrison, I don’t see how

there is anything left to lease. Those counties have there is anything left to lease. Those counties have been leased up for years because of the Cotton been leased up for years because of the Cotton Valley and Travis Peak formations.”Valley and Travis Peak formations.”

Walter Walter PriddyPriddy, Geologist , Geologist –– Henderson, TX. Henderson, TX. Haynesville Haynesville Shale Generates Attention, Shale Generates Attention, Marshall News Messenger, Marshall News Messenger, August 19, 2008.August 19, 2008.

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Lease Termination IssuesLease Termination Issues●● The typical The typical habendumhabendum clause extends an oil and clause extends an oil and

gas lease, after it begins producing, so long as gas lease, after it begins producing, so long as there is continued production.there is continued production.

●● Courts have interpreted “production” in these Courts have interpreted “production” in these provisions to mean “production in paying provisions to mean “production in paying quantities.” quantities.”

●● So what do courts consider PPQ?So what do courts consider PPQ?

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Lease Termination and PPQLease Termination and PPQ●● The Texas standard for PPQ was established in The Texas standard for PPQ was established in

Clifton v. KoontzClifton v. Koontz. 325 S.W.2d 684 (Tex. 1959). . 325 S.W.2d 684 (Tex. 1959).

●● This test also serves as the basis for the Louisiana This test also serves as the basis for the Louisiana Mineral Code’s definition of PPQ, so there is Mineral Code’s definition of PPQ, so there is overlap between the states. La. Rev. Stat. Ann. overlap between the states. La. Rev. Stat. Ann. § 31:124.§ 31:124.

●● Under the test in both states, the Under the test in both states, the lessorlessor carries the carries the burden to show that there has been no PPQ.burden to show that there has been no PPQ.

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PPQ in Texas PPQ in Texas –– Part 1Part 1

ProductionProductionLess:Less: Operating ExpensesOperating ExpensesLess:Less: Marketing ExpensesMarketing Expenses

Profit to Lessee?Profit to Lessee?

●● Measured over a reasonable period of time.Measured over a reasonable period of time.●● If there is a profit, then the well is PPQ and there is no need If there is a profit, then the well is PPQ and there is no need to to

go to part 2.go to part 2.●● Expert intensiveExpert intensive

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PPQ in Texas PPQ in Texas –– Part 1Part 1●● Note that this calculation does not include drilling and equipmeNote that this calculation does not include drilling and equipment nt

costs.costs.●● It does include:It does include:

►► TaxesTaxes►► Overhead chargesOverhead charges►► LaborLabor►► RepairsRepairs►► Depreciation on salvable equipmentDepreciation on salvable equipment►► Other outOther out--ofof--pocket lifting expensespocket lifting expenses

Evans v. Gulf Oil Corp.Evans v. Gulf Oil Corp., 840 S.W.2d 500 (Tex. App., 840 S.W.2d 500 (Tex. App.––Corpus Christi 1992, writ Corpus Christi 1992, writ denied) (considering production over two separate periods, one 1denied) (considering production over two separate periods, one 15 months 5 months and the other 18 months).and the other 18 months).

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PPQ in Texas PPQ in Texas –– Part 2Part 2●● If there is no profit, then the court asks whether a If there is no profit, then the court asks whether a

reasonably prudent operator would continue to reasonably prudent operator would continue to operate with an expectation of profit, and not just operate with an expectation of profit, and not just for speculation.for speculation.

►► If so, the lease continues.If so, the lease continues.

►► If not, the lease terminates.If not, the lease terminates.

●● Again, this is measured over a reasonable period of Again, this is measured over a reasonable period of time.time.

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PPQ in Texas PPQ in Texas –– Part 2Part 2●● In determining whether a reasonably prudent In determining whether a reasonably prudent

operator would continue with the well, a court will operator would continue with the well, a court will consider all relevant circumstances, including:consider all relevant circumstances, including:►► Ability to market the minerals (including pipeline Ability to market the minerals (including pipeline

availability and general market conditions)availability and general market conditions)►► Relative profitability of other wells in the areaRelative profitability of other wells in the area►► Operating and marketing costs of the leaseOperating and marketing costs of the lease►► Net profitNet profit►► Lease provisionsLease provisions►► Period of time that the well has been marginally Period of time that the well has been marginally

producingproducing

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Lease Termination and PPQLease Termination and PPQ●● CessationCessation--ofof--Production ClausesProduction Clauses

►► Difference between total physical cessation of Difference between total physical cessation of production and cessation of production in paying production and cessation of production in paying quantitiesquantities

►► If there is total physical cessation of production, If there is total physical cessation of production, then the cessationthen the cessation--ofof--production clause controls.production clause controls.

►► If there is only a cessation of production in paying If there is only a cessation of production in paying quantities, then the quantities, then the Clifton v. KoontzClifton v. Koontz standard standard controls.controls.

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The Economy Strikes the PatchThe Economy Strikes the Patch●● One Haynesville operator has at least 30 cases where it pulled One Haynesville operator has at least 30 cases where it pulled

out of contracts because of changed market conditions.out of contracts because of changed market conditions.

●● Generally, bad economics are not a defense. Generally, bad economics are not a defense.

●● Creative Creative lawyeringlawyering is being utilized:is being utilized:

►► Statute of FraudsStatute of Frauds►► No titleNo title►► EstoppelEstoppel►► Etc., etc., etc.Etc., etc., etc.

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Surface Owner IssuesSurface Owner Issues

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Surface Owner IssuesSurface Owner Issues●● ““Clean, freshwater, is the lifeblood of rural Texas.” Clean, freshwater, is the lifeblood of rural Texas.”

Douglas Douglas BeveridgeBeveridge, Vice President, King Ranch Minerals, Vice President, King Ranch Minerals

●● Water will be a concern in the HaynesvilleWater will be a concern in the Haynesville

●● Water will be needed for fracturing processWater will be needed for fracturing process

●● Texas (and Louisiana) are already concerned about Texas (and Louisiana) are already concerned about water shortageswater shortages

●● Controlling the fracturing process to keep water table Controlling the fracturing process to keep water table safesafe

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Mineral Owner’s Right to Use the SurfaceMineral Owner’s Right to Use the Surface●● Primarily an issue when the mineral rights are severed Primarily an issue when the mineral rights are severed

from the surface . . . but has become more of an issue in from the surface . . . but has become more of an issue in historical areas and where the oil fields are meeting the historical areas and where the oil fields are meeting the citycity..

►► Hostile surface ownersHostile surface owners——“get off my land . . . what part of my “get off my land . . . what part of my double barrel shotgun do you not understand?”double barrel shotgun do you not understand?”

■■ Play nice, negotiate compromise, surface damage agreement . . .Play nice, negotiate compromise, surface damage agreement . . .

■■ Never take matters into your own handsNever take matters into your own hands

■■ Injunctive relief and possibly damages related to Injunctive relief and possibly damages related to delay/interference . . .delay/interference . . .

►► Same rights to access surface exist even if minerals and Same rights to access surface exist even if minerals and surface are not severed, subject to terms of the leasesurface are not severed, subject to terms of the lease

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Mineral Owner’s Right to Use the SurfaceMineral Owner’s Right to Use the Surface●● Scope of mineral owner’s right to use surfaceScope of mineral owner’s right to use surface

►► Where mineral estate is severed from surface, mineral Where mineral estate is severed from surface, mineral estate dominant estate dominant

►► Legal privilege and enforceable right to use and have Legal privilege and enforceable right to use and have priority over servient estate to extent priority over servient estate to extent reasonably necessaryreasonably necessaryto explore, develop, and transport mineralsto explore, develop, and transport minerals

■■ When conflict of use arises, and no reasonable alternative, When conflict of use arises, and no reasonable alternative, mineral estate’s right to use surface trumpsmineral estate’s right to use surface trumps

■■ In Texas, mineral owner not required to pay surface damages In Texas, mineral owner not required to pay surface damages provided use is not excessive, negligent, or in violation of provided use is not excessive, negligent, or in violation of leaselease-- -- --but as a practical matter most oil companies do so.but as a practical matter most oil companies do so.

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Mineral Owner’s Right to Use the SurfaceMineral Owner’s Right to Use the Surface●● Scope of mineral owner’s right cont’d . . . Scope of mineral owner’s right cont’d . . .

►► Many surface owners may not know that mineral owner Many surface owners may not know that mineral owner may be entitled to damages and injunctive relief for may be entitled to damages and injunctive relief for improper interference improper interference

►► Right to use surface includes right to construct roads, Right to use surface includes right to construct roads, tanks, pits, flow lines, utilize surface water, conduct tanks, pits, flow lines, utilize surface water, conduct seismic, etc., as seismic, etc., as reasonably necessaryreasonably necessary to explore, to explore, develop, and transport minerals and giving develop, and transport minerals and giving due regarddue regard to to rights of surface ownerrights of surface owner

►► Rights may also be expressly defined by lease language Rights may also be expressly defined by lease language (often overlooked or forgotten until too late)(often overlooked or forgotten until too late)

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Mineral Owner’s Right to Use the SurfaceMineral Owner’s Right to Use the Surface●● Limitations to right to use surfaceLimitations to right to use surface

►► May use only amount of surface as “reasonably May use only amount of surface as “reasonably necessary” to explore, develop, and transport minerals necessary” to explore, develop, and transport minerals giving “due regard” for the rights of the surface ownergiving “due regard” for the rights of the surface owner

►► “Accommodation Doctrine”: Are there reasonable “Accommodation Doctrine”: Are there reasonable alternative means to producing minerals which will permit alternative means to producing minerals which will permit surface owner to continue existing use of surface?surface owner to continue existing use of surface?

■■ must substantially impair existing surface usemust substantially impair existing surface use

■■ and reasonable alternative must be availableand reasonable alternative must be available

►► Despite implied doctrine, express terms of lease or Despite implied doctrine, express terms of lease or mineral reservation may trumpmineral reservation may trump

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Mineral Owner’s Right to Use the SurfaceMineral Owner’s Right to Use the Surface●● Limitations to use surface cont’dLimitations to use surface cont’d

►► Whether “reasonably necessary” is fact question; surface owner Whether “reasonably necessary” is fact question; surface owner has burden of proof to show surface use not reasonably has burden of proof to show surface use not reasonably necessarynecessary■■ e.g., mineral owner may be required to directionally drill, evene.g., mineral owner may be required to directionally drill, even if if

increased costs, if directional drilling is viable economic alteincreased costs, if directional drilling is viable economic alternative rnative

►► Surface use generally limited to exploration, development, and Surface use generally limited to exploration, development, and transport of minerals underlying lease/mineral estatetransport of minerals underlying lease/mineral estate■■ must secure easement or right of way to transport offmust secure easement or right of way to transport off--lease or offlease or off--

premise production or to access lease or premise to explore premise production or to access lease or premise to explore adjacent acreage (unless pooled)adjacent acreage (unless pooled)

►► Surface use must comply with terms of lease and with applicable Surface use must comply with terms of lease and with applicable statutes, rules, and regulationsstatutes, rules, and regulations■■ e.g., drilling permits, statutory notice requirements, etc.e.g., drilling permits, statutory notice requirements, etc.

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Mineral Owner’s Right to Use the SurfaceMineral Owner’s Right to Use the Surface●● Surface damagesSurface damages

►► Custom becomes the perceived law of the land. Many surface Custom becomes the perceived law of the land. Many surface owners believe they are entitled to surface damages as a owners believe they are entitled to surface damages as a matter of law. matter of law. ■■ However, absent express lease language to the contrary or However, absent express lease language to the contrary or

statute, mineral owner/lessee generally statute, mineral owner/lessee generally onlyonly exposed to exposed to damages to the surface that are considered not reasonably damages to the surface that are considered not reasonably necessary to explore and develop minerals necessary to explore and develop minerals

■■ Existence of drill site, roads, pits, even noise, etc… that are Existence of drill site, roads, pits, even noise, etc… that are reasonably necessary, for example, and with due regard to the reasonably necessary, for example, and with due regard to the rights of the surface owner do not give rise to surface damages rights of the surface owner do not give rise to surface damages per seper se

■■ Injury to livestock within reasonably necessary area to conduct Injury to livestock within reasonably necessary area to conduct operations does not give rise to surface damages, unless injury operations does not give rise to surface damages, unless injury the result of intentional acts or gross negligencethe result of intentional acts or gross negligence

■■ However, what is reasonably necessary is often debatedHowever, what is reasonably necessary is often debated

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Mineral Owner’s Right to Use the SurfaceMineral Owner’s Right to Use the Surface●● Surface damages cont’dSurface damages cont’d

►► Exposure to damages for operations outside the Exposure to damages for operations outside the reasonably necessary area used to explore and reasonably necessary area used to explore and develop mineralsdevelop minerals

■■ pollution is not “reasonably necessary.” Lessee pollution is not “reasonably necessary.” Lessee cannot negligently damage surfacecannot negligently damage surface

■■ violations of RRC rules may result in negligence violations of RRC rules may result in negligence per seper sefindingfinding

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►► Don’t forget the lease! Lease language may contain Don’t forget the lease! Lease language may contain express provisions concerning surface damages: express provisions concerning surface damages:

■■ liable for damages, for example, to agricultural crops liable for damages, for example, to agricultural crops or structures regardless if operator is acting or structures regardless if operator is acting reasonably or within a justified area necessary for reasonably or within a justified area necessary for exploration and productionexploration and production

■■ lease may also cap or waive surface damageslease may also cap or waive surface damages

■■ express provisions concerning fencing operations or express provisions concerning fencing operations or restoration of the surfacerestoration of the surface

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►► Surface owner may seek breach of contract damages Surface owner may seek breach of contract damages (e.g., breach of lease provisions), decreased market (e.g., breach of lease provisions), decreased market value, interference with peace and enjoyment of value, interference with peace and enjoyment of surface (“nuisance” damages), physical damage to surface (“nuisance” damages), physical damage to land, loss of crops or livestock, etc… predicated on land, loss of crops or livestock, etc… predicated on excessive or unreasonable use of surfaceexcessive or unreasonable use of surface

►► If not covered by the lease (and not required by state If not covered by the lease (and not required by state statute), most operators will attempt to negotiate a statute), most operators will attempt to negotiate a surface damage agreement upfrontsurface damage agreement upfront

►► In Texas, notice to landowner from tax roll is necessary In Texas, notice to landowner from tax roll is necessary for registry of existing wellsfor registry of existing wells

Documents

Oil and Gas Disputes â€“ From a Trial Lawyer's Perspective