The following article by James Holmes of Holmes PLLC continues an analysis of landowners’ rights to regulate various activities on their land that are incidental to oil and gas exploration and production. Given that the common law, traditional lease language, and statutes will not entitle landowners in most producing states to damages for surface uses or for post-production remediation, such landowners have very limited rights. Thus, landowners often become very frustrated with producers, which can utilize their land with near impunity and can interrupt their own surface uses. However, surface-use agreements entered before exploration and production begin, or even at later times (when producers must have concessions from landowners), greatly protect landowners’ rights.
- The Value of Having Clear Contractual Language.
As noted in the earlier installment, courts tend to treat favorably a plaintiff bringing a simple case – for example, a plaintiff claiming, “I have a clear contract right in Plain English and the defendant won’t honor that right.” Accordingly, a landowner equipped with a strong surface-use agreement (“SUA”), with straightforward and specific language addressing a variety of surface activities, likely will have strong rights in a lawsuit against a producer that is recklessly using the surface estate. Moreover, in Texas, the highest civil court is returning to prominence in oil and gas jurisprudence by enforcing contractual language as written, thereby giving contractual parties the specific bargain over which they negotiated when entering a contract. In three cases in the past decade, the Texas Supreme Court has upheld lessor rights under royalty-valuation provisions in oil and gas leases: Chesapeake Exploration, L.L.C. v. Hyder, 483 S.W.3d 870 (Tex. 2016); BlueStone Nat. Res. II, LLC v. Randle, 620 S.W.3d 380 (Tex. 2021); and Devon Energy Prod. Co., L.P. v. Sheppard, 66 Tex. Sup. J. 421 (Mar. 10, 2023).
As Holmes has explored in his installments on “Royalty-Valuation Disputes in Texas Oil and Gas Leases” and in “Royalty-Valuation Disputes Under the Marketable Product Rule” royalty-valuation provisions are exceedingly complex and laden with “words of art” carrying highly specialized meanings in the oil and gas industry. Therefore, if Texas’s high court has resumed enforcing (for the lessor’s benefit) that sort of complex contractual language, then the court is highly likely to enforce (for the landowner’s benefit) the less-complex and more-straightforward language appearing in SUAs. The destructive class-action attorneys, who for the most part wrecked Texas’s oil and gas jurisprudence in the 1990s and early 2000s, have waned in activity and importance over the past 20 years. This is a very good development for Texas law and for lessors: it is enabling the Texas Supreme Court to return to issuing balanced opinions – awarding victories to lessees and to lessors (when warranted) – without fears of spawning class action lawsuits against producers.
Abandoned cattle pens made from Amoco’s tubing string, Mallet Ranch Headquarters, north Terry County, Texas.
- How a Surface-Use Agreement Works.
An SUA is a multi-page contract covering a variety of expected surface activities. It regulates the rights of the producer and the landowner over those activities. If thorough and well-planned, an SUA addresses not only surface activities that will happen with certainty, as the producer explores for and produces oil and gas, but also potential surface activities, many of which may never happen. Rather than entrusting future disputes to the common law, the parties (especially the landowner) will fare much better by anticipating potential surface activities and related disputes in a contract.
SUAs identify when and where a producer may install roads, fences, pipelines, drillsites, pads (for production equipment), tankage sites, pits (for frac water and for produced water), and other surface features. Commonly, SUAs provide maps, diagrams, and plats in order to specify many of these features. Also, SUAs can provide for defined, oftentimes large “corridors”: areas within which the producer will contain its exploration and production activities, so the producer and landowner can each plan for their own future surface activities without disruption or surprises. Both producer and landowner benefit from an SUA that anticipates, identifies, and generally plans out surface features.
SUAs often manage the producer’s consumption of certain commodities necessary for exploration and production: dirt, rock, caliche, and fresh water. SUAs often allow producers to use these items in furtherance of developing oil and gas leases. Also, as for water, SUAs often regulate the parties’ relationship over fresh water from new or reactivated water wells, and they occasionally regulate the parties’ relationship over produced water, including how it is handled at the surface and how it is disposed via a salt-water disposal well.
SUAs typically address remediation and restoration of land – including the moving of dirt, the grading of surfaces, and the seeding of surfaces. SUAs can and should spell out the specific work that producers must undertake in order to restore land to its original (or to its nearly original) condition following drilling activities or a cessation of production. SUAs can and should provide that landowners expect the producer or its successors to undertake remediation/restoration work or to pay a competitive rate per-acre so that the landowner can compensate a service provider for such work. SUAs must clarify that landowners exclusively own the roads, fences, water wells and other surface features that remain after cessation of production, when the producers no longer need the same.
SUAs set the prices for the producers’ installation of surface features, consumption of production-related commodities, and management of fresh or produced water. The prices are specific: for instance, a pad of a certain square footage will cost the producer certain dollars, and a larger pad not surprisingly will cost more. Also, pipeline, fence and road installations will cost a certain dollar amount “per rod” (i.e., a unit of measurement equaling 16.5 feet). Injury or death to livestock, including specific types thereof (such as bull, cow or calf), will cost a certain dollar amount. Again, both producer and landowner benefit from an SUA that anticipates and prices out the foregoing; they both avoid the costs and hassles of looking to the vague common law for such prices.
The Rate and Damage Schedule of the University of Texas System contains helpful market prices for the producers’ installation of surface features, consumption of production-related commodities, and management of fresh or produced water. This Schedule is an industry standard in Texas. In their SUAs, easements, and saltwater-disposal agreements, landowners should strive for prices and other terms that are comparable, if not identical, to those appearing in the Schedule. The State of Texas updates the prices and rates in the Schedule every few years. Landowners, accordingly, should include “escalation” provisions for prices and rates appearing in an SUA in order to match those appearing in the Schedule.
Finally, SUAs must provide thorough indemnification provisions (so that the producer indemnifies the landowner) and insurance provisions (so that the producer obtains threshold insurance-policy coverage). These indemnification-insurance provisions supplement – or possibly even supplant – the common law or minimal language in the underlying leases, which can be inadequate for ensuring that solely the producer bears responsibilities to third parties for injuries, deaths, and damages caused by exploration and production activities.
Olivia Holmes on Lazy S Ranch, Hockley County, Texas.
- Holmes PLLC Provides Surface-Use Agreements for Landowners: “Get the Memo!”
Holmes PLLC is happy to help landowners negotiate towards obtaining SUAs and, whenever possible, actually enter SUAs with pro-landowner language. SUAs are becoming commonplace in Texas and other producing states whenever sophisticated producers and well-informed landowners come together. Both sides see advantages to having clarity and certainty in a contractual relationship – rather than testing the common law or scant lease language when disputes arise. And disputes inevitably arise.
Holmes PLLC has prepared its SUA form by carefully selecting provisions from 10 leading surface-use forms. Further, Holmes PLLC enhances its form with the many excellent insights coming from the Rate and Damage Schedule of the University of Texas System.
Holmes PLLC’s SUA form is confidential and available only to existing landowner clients. To maintain confidentiality, the firm’s clients and the counter-party producers file a “Memorandum of Surface-Use Agreement” in county land records, in lieu of the full SUA. The Memorandum identifies the specific acreage governed by the SUA and satisfies legal requirements of filing in public records those contracts that burden the land, run with the land, and/or create easements.
Holmes PLLC’s clients who – so to speak – “get the Memo” are in good shape as they move forward with producers on their lands.