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Helping Surface Owners in Texas and Other Oil and Gas States – Doing Nothing About the Common Law Is a Bad Idea.

On Behalf of | Dec 16, 2022 | Firm News

The following article by James Holmes of Holmes PLLC explores the common scenarios that landowners face either when producers first begin using their land in search of oil and gas production or when producers have been using the land for years to that end.  Often, landowners have not protected their rights to control or, at least, influence producers’ activities on the land by way of surface-use agreements or strong surface language in oil and gas leases.  Thus, often the landowners have limited rights.  This article explores the common law that provides limited rights to landowners and highlights the need for a strong surface-use agreement.

  1. The Surface-Estate Scenarios that Come to the Doors of Holmes PLLC and Other Prominent Oil and Gas Firms.

Holmes PLLC actively manages several large surface estates for Texas families with legacy farm and ranch holdings, mostly in West Texas.  In addition to those long-term clients, Holmes PLLC helps large and small landowners in a variety of scenarios in which oil and gas producers seek access to the land and to features (on/in the land) in furtherance of exploring for and producing oil and gas.  The scenarios for surface-estate disputes are various.

Moreover, “manufacturing” oil and gas production over the past 30 years has increased the importance of a producer’s having access to land and features on/in the land.  Much domestic production no longer flows to the surface naturally; producers, therefore, must manufacture it to the surface with growing technology.  For instance, producers need surface-estate access and usage to a far greater extent nowadays in order to frac and re-frac deep gas wells reaching shale rock.  They need greater surface-estate access in order to water-flood (and/or gas-flood or steam-flood) a sedimentary rock, which has lost its gas pressure or other natural drive mechanism, so that they can force production to the surface and then manage the water-oil-gas amalgamation at the surface.  These activities are equipment-intensive and utilize many surface resources, leaving a large footprint during and after operations.

Some of the more common scenarios for surface-estate disputes include the following:

Traversing your land to develop someone else’s land.

A landman for a well-known oil and gas producer approaches you, in a friendly phone call, asking to use your land for a new roadway to a drilling site.  The site hopefully will bring in a well on your neighbor’s land.  Because your neighbor is your first cousin, you and your family happen to have some royalty interests in this potential well, which isn’t on your land, but is adjacent to it.  Must you allow the new road to this drilling site?  What sort of favorable deal could you obtain by allowing for this road across your land?

Life under old oil and gas leases that push all disputes to the “common law.”

You’ve inherited several hundreds of acres of farmland, from which a few oil and gas producers have been pumping sour oil for decades under 1930s oil and gas leases.  Although you appreciate the continuous royalty income that this activity has brought to your family, you don’t know your rights when one of the producers spills oil on usable farmland, kills a cow with a truck, or angers your long-term farmer tenant by interfering with his crops.  The leases say little, if anything, about the producers’ obligations in these scenarios – indeed, nothing more than “lessee shall pay damages for harms to the lands from operations and shall provide reasonable accommodations.”

Welcome to the 2020s!  Oil and gas leases, with surface-use agreements.

Landmen are trying to get oil and gas leases on your many acres of productive farmland.  You are amazed and delighted that modern exploration techniques have unleashed oil and gas production on your family’s ancestral land – which never got much attention from landmen until just recently.  Your lawyer tells you that the oil and gas lease forms are “favorable” to you as royalty owner.  But these leases say little about the producer’s rights to move about your land or to use it.  You don’t want oil and gas producers to turn your farmland into chaos and to damage it permanently.  Shouldn’t you be asking for a “surface use agreement” or some kind of contract that governs how the producer will use your land while searching for and producing oil and gas?

In this initial installment of “Helping Surface Owners,” Holmes PLLC explores the background facts and the common law (that is, the judge-made law coming from state courts) that are relevant to most surface-estate disputes.

Spade Ranch, West Texas
Spade Ranch, West Texas

  1. What Does a Mineral Estate’s “Dominance” Over the Surface Estate Really Mean?

Most surface owners have heard of these legal concepts: “the surface estate is subservient to the mineral estate,” “the mineral estate is dominant to the surface estate,” or “there is an ‘implied easement’ to use the surface estate in order to develop the mineral estate.”  Indeed, most surface owners understand – from these phrases or from their own life experience – that a producer of oil and gas must have reasonable access to (and usage of) surface land and surface features in order to explore for, drill for, and ultimately produce oil and gas.

How can a producer bring in a well if that producer cannot traverse land, create a pad site, punch a hole deep into the ground, and manage hydrocarbon production at the surface with equipment and piping?  Clearly, to do its work the producer needs access to the land and the ability to use the land or its features (e.g., rock, dirt, caliche, and natural or manufactured pits).

Although surface owners accept the law for its common sense, they struggle with the realities of how the law is applied.  Why must the producer use this tract of land, and not that one over there?  Must the producer destroy an existing road or fence in order to bring in a well?  Who owns the new roads or other land improvements once the producer either fails to bring in a well or abandons the well after many years of successful production?  How can a producer be forced to remediate and restore the land that it has disrupted?  Can a producer use my land to develop wells on my neighbor’s lands?  Etc.

Getting beyond legalese words like “subservient,” “dominant,” and “implied easement,” surface owners want to know the realities of their situation: what are their rights, and how difficult (and expensive) would it be to enforce those rights?  In close consultation with its clients, Holmes PLLC focuses on these important questions.

In short order, oil and gas law uses the following sets of rules – often called “the accommodation doctrine” because producers must “accommodate” surface owners’ concerns.  (Well, they must make accommodations sometimes, anyway.)  The accommodation doctrine can be broken down into three tests:

(1) First, after reviewing the producer’s plan for traversing and using the land, would the producer “completely preclude or substantially impair” the surface owner’s current use of the land?  For instance, the surface owner uses a certain tract for a cattle pen, and the producer must install a pad for drilling a well on that very same tract, thereby eliminating the cattle pen.

(2) Second, would the surface owner lack any “reasonable alternative method” for continuing his current use elsewhere?  For instance, the surface owner must pen cattle in the very same tract where the producer seeks to install a pad – and he cannot utilize a pen elsewhere, such as on an adjacent tract or nearby tract.

(3) Third, can the surface owner identify “alternative reasonable, customary, and industry-accepted methods” whereby the producer could drill for and produce oil and gas, while allowing the surface owner to continue his current use of the land?  See Texas Outfitters Ltd., LLC v. Nicholson, 572 S.W.3d 647, 656 n.14 (Tex. 2019).  For instance, the surface owner can identify an alternate, perfectly acceptable pad site that will not diminish or inconvenience the producer’s activities.  This alternate site enables the surface owner to keep his cattle pen where he currently has it.

Attention All Surface Owners:  Please note that you “bear the burden of proof” for the foregoing three points: that is, you must do the factual leg work and pay the lawyer and industry expert to demonstrate that (1) your current surface use will be completely frustrated, (2) you have no alternative land for continuing your current use, and (3) the producer does have a reasonable, effective means for drilling/exploring for oil and gas on other land (whether you own such land or not).  This is a tall order: surface owners must conduct much factual research, must pay the professionals to go to court and make the arguments, and then must fight a very fact-intensive legal battle – indeed, an uphill legal battle against the producer’s team of lawyers and experts.  To top it all off, the producer wins merely by preventing the surface owner from proving just one of the three points.

In sum, the producer wins either by scuttling the surface owner’s proof of (1), (2) or (3), or (using the flip-side of the same coin) by proving that the producer “has only one method for developing and producing the minerals” so that “[such] method may be used regardless of whether it precludes or substantially impairs an existing use” by the surface owner.  See Merriman v. XTO Energy, Inc., 407 S.W.3d 244, 249 (Tex. 2013) (emphasis added).

The odds are not in the surface owner’s favor.  This is largely by design.  Over the past many decades, various state courts (in those states that have benefitted from oil and gas production) do not wish to see surface owners routinely or easily disrupting producers’ plans for traversing and using land.  Such routine, easy disruptions could burden the oil and gas industry.

Moreover, courts generally craft laws that disfavor fact-intensive legal fights, so that the plaintiff (i.e., the party starting the lawsuit) generally has an uphill battle regardless of the area of law or the type of industry at stake.  Courts operate best and most efficiently with straightforward “bright line” legal fights – so they go easier on a plaintiff bringing a simple case – for example, “I have a clear contract right in Plain English and the defendant won’t honor that right.”  Fact-intensive fights, on the other hand, delay the courts and threaten to consume tax dollars unnecessarily.  So, courts craft laws that generally disfavor the party that brings a fact-intensive fight into the courtroom.

1940s mural by Frank Mechau, Terry County, Texas

1940s mural by Frank Mechau, Terry County, Texas.

  1. Where Does the Surface Owner Stand Under the Common Law?

“Not in the best of places” is the short answer to this question.  The producer has broad rights to enter and leave the land, to designate drill-site locations and well-production locations, and to place roadways and pipelines where most convenient (for the producer).

When a surface owner objects to a producer’s development plan for a drill site, roadway, or pipeline, or when he seeks damages for crops, timber or livestock lost to the producer’s activities, the surface owner faces the following decision-tree test: first, is there a strong surface-use agreement (“SUA”) in place?  Second, if there is no SUA between surface owner and producer, then does the oil and gas lease address surface usage?  Finally, if there is no SUA and there is no surface language in the lease, then what does the common law say?

The foregoing decision-tree test signals a spoiler alert for the “Helping Surface Owners” installments.  Let’s just reveal the secret: Holmes PLLC highly encourages surface owners to obtain SUAs (i) at the time of oil and gas leasing or (ii) at any other opportune juncture in their relationship with the producer.  And, here is some good news: if a surface owner misses the chance for an SUA when an oil and gas lease is negotiated and entered – or, if his grandparents missed that chance decades ago – then most likely an “opportune juncture” will arise that enables the surface owner to obtain an SUA from the producer.

The common law – with or without scant surface language in an oil and gas lease – is simply a hard, cold place to be for surface owners.  In most oil and gas producing states, and certainly in Texas, the producer may install a drill site, roadway, or pipeline wherever it pleases – even when disrupting the owner’s existing surface usage.  In fact, the producer may do this while not paying damages to the owner.  Again, the producer merely needs to demonstrate that its selection of the place for the drill site, roadway, or pipeline will promote the development of oil and gas and is reasonable and logical for that end.  (Note, some states (but not Texas) will have statutes that protect surface owners from uses of their land to which they object (for whatever reason), entitling those owners to sue for money damages even when the applicable oil and gas lease contains no surface language.  These statutes improve the surface owner’s bleak existence under the common law, but only slightly.)

Likewise, in most oil and gas producing states, and certainly in Texas, the producer has no obligation to “restore” or “remediate” the surface to its original condition after the producer ceases producing oil and gas.  See, e.g., Warren Petroleum v. Monzingo, 304 S.W.2d 362, 363 (Tex. 1957) (“The action [i.e., the producer’s duty to restore the land] would be one on contract and not in tort.  Admittedly the lease contained no such provision and one is not to be read into the contract by implication.”).  Provided the producer plugs and abandons the wells pursuant to state regulatory requirements and performs other clean-up requirements (which tend to be easily met), the producer does not owe obligations to the surface owner to restore the land to its original, pristine condition.  (Again, in some states (not Texas) surface owners may have statutory rights to sue producers in order to compel some restoration and remediation to the land.)

Scant surface language such as “Lessee [i.e., producer] shall pay for damages caused by its operations to growing crops and timber on said land,” or “Lessee shall be liable and agrees to pay for all damages to the land, livestock, growing crops or improvements caused by the lessee’s operations on said lands,” offer minimal protection to surface owners.  First, if and when a surface owner claims “damages” under such clauses, the producer initially argues that nothing was harmed by its operations, but rather the land merely gave way to necessary oil and gas activities – which the lease itself and the common law allow.

Getting past this initial position, when a producer does acknowledge the surface language’s applicability to the surface owner’s claim for damages, then the parties have a dispute over the value of the crop damaged by an errant backhoe driver, the cow killed by drinking saltwater (from a nearly producing well), or the contamination from spills of various kinds.  Of course, the producer tends to value such damages lower than what is satisfactory to the surface owner.  The surface owner must weigh the tradeoff of (i) accepting the producer’s low offer or (ii) paying a lawyer to go to court with a contract claim (which has a limited range of recoveries).

The “limited rights existence” for surface owners under the common law – or under the common law supplemented with a little surface language in the oil and gas lease – cries out for help.  That help comes through the surface-use agreement, SUA, the focus of the next “Helping Surface Owners” installment.