September 19, 2018
Author: Richard M. Butler
Organization: Langley, Banack & Butler
The Eagle Ford Shale development is taking place on some of the most treasured ranch land in the State of Texas. The productive area of this formation overlays “the Golden Triangle” of South Texas deer hunting long known for vast undeveloped, undisturbed land teaming with a myriad of wildlife species, including trophy whitetail deer and some of the country’s last remaining concentrations of wild quail, both of which have significant monetary value to South Texas landowners. While oil and gas exploration has been present in portions of South Texas for a long time, it has never occurred on anything like the scale now being seen in the region. Many South Texas ranchers are now faced with the difficult task of protecting their abundant wildlife resources, cattle operations and natural environments from the potential ravages of all three that can be wrought by intensive oil and gas exploration and production efforts.
These ranchers come face-to-face with an inherently hostile legal environment and long standing Texas public policy of encouraging mineral development. The conflict between surface interests and mineral interests naturally and normally occurs when there has been a severance of those respective interests in land. A landowner has a hard time accepting damages being caused to his property in order for someone other than himself to make money on mineral development under “his ranch.” Conversely, a mineral interest owner has little reason to be concerned with the damage done to the surface of property under which his mineral interests lie if protecting that surface in any way interferes with the realization of profit from his mineral interest.
These conflicts have come up many times in the storied history of Texas oil and gas exploration and our courts have developed doctrine to deal with them. What follows is a brief explanation of the legal boundaries for the inevitable conflicts that come to the fore when wildlife and cattle country become an oil field.
THE DOMINANT ESTATE- WHAT IT MEANS AND HOW IT WORKS
Since the days of Spindletop and the vast mineral wealth of our state was realized, Texas lawmakers and courts have set about the task of making law that will encourage rapid, aggressive exploration and production of mineral resources in Texas. Mineral wealth was, after all, one of the primary money making enterprises in the state and was and is a principal means of filling the state government’s coffers. The Dominant Estate Rule is a product of that prioritization of mineral development.
The mineral estate owner, or its lessee, is entitled to go onto the surface of the land on or under which the minerals lie and use as much of the surface as is reasonably necessary in order to explore for and produce those minerals. Merriman v. XTO Energy, Inc., 407 S.W.3d 244 (Tex. 2013). Courts have rationalized that to hold otherwise would render the mineral estate “worthless.” Tarrant County Water Control & Improvement Dist. No. One v. Haupt, Inc., 854 S.W.2d 151 (Tex. 1993); Sun Oil Co. v. Whitaker, 483 S.W.2d 808 (Tex. 1972); Brown v. Lundel, 344 S.W.2d 863 (Tex. 1961). Horizontal drilling technology has removed some of the imperative behind this rule, but for the most part realization of mineral wealth requires unfettered access to and use of the surface overlying the minerals to be extracted.
Here’s the part that makes ranchers’ blood boil. Unless required to do so by a lease provision, surface use agreement, or statute, the mineral owner (or lessee) does not have to repair or restore damage to the surface, nor does the mineral owner have to pay the surface owner anything for damaging the surface so long as no more of the surface was used than was reasonably necessary to explore for and produce the minerals and the mineral owner was not negligent in conducting its activities. Warren Petrol. Corp V. Monzingo, 304 S.W.2d 362 (Tex. 1957); Humble Oil & Ref. Co. v. Williams, 420 S.W.2d 133 (Tex. 1967). There are many property owners in South Texas who have surface only ownership subject to leases executed by mineral owners who have not required lease terms providing any protection of the surface or any compensation to the surface owner for damages to the surface. I’ve seen many ranch owners get very red in the face when told that they won’t get paid a dime for the 20 acre site on their property that has been covered with base material and is now the home of drilling rigs, fracing equipment arrays, slush pits, frac ponds, crew quarters, tank batteries, compressors, and the like, never to be restored or usable as ranchland again. I’ve seen many of these rock-ribbed conservative Republican ranchers become born-again environmentalists when confronted with this disturbing reality.
Surface owners who have executive rights and the good sense to hire a knowledgeable oil and gas attorney to negotiate and document their oil and gas leases will execute leases which contain surface protection and damage compensation clauses in them, or will have such protections contained in a separate surface use agreement that governs the use of the surface by the lessee. Texas courts have traditionally recognized the surface owners right to obtain reasonable surface protection and surface damage clauses. Hawkins v. Twin Montana, Inc., 810 S.W.2d 441 (Tex. App. - Fort Worth 1991, no writ). In Lesley v. Veterans Land Board of State, 352 S.W.2d 479 (Tex. 2011), the Texas Supreme Court struck down a restrictive covenant that prohibited exploration and production activities on a residential subdivision as being an exercise of the executive right in violation of the fiduciary duty of utmost fair dealing owed by the executive rights holder to the non-executive rights holder. In speaking to the surface owners’ understandable desire to protect the surface use, the Court said that “the common law provides appropriate protection to the surface owner through the accommodation doctrine.” Since the accommodation doctrine is also available to the rancher whose land is being developed for minerals, is insisting on something more, like surface damage payments, payments for use of water or outright prohibitions of such use, limitations on drilling sites and the like also a violation of this duty?
THE ACCOMMODATION DOCTRINE- HOW MUCH RELIEF DOES IT PROVIDE SURFACE OWNERS
Many oil and gas practitioners refer to this doctrine as the “No Accommodation Doctrine,” as they view it as highly skewed in favor of the mineral owner and a very difficult path to navigate for the landowner attempting to get relief from mineral development activities on the land.
The Texas Supreme Court’s most recent ruling on the Accommodation Doctrine came in Merriman v. XTO Energy, Inc., 407 S.W.3d 244 (Tex. 2013). In that case, a rancher/surface owner sought to enjoin the mineral lessee from drilling a well which the rancher contended would interfere with the use of his cattle pens which were an essential element of his cattle raising operation on the property. In ruling that the landowner had not met his burden of establishing entitlement to relief under the Accommodation Doctrine, the Court spelled out what is required to obtain that relief. “To obtain relief on a claim that the mineral lessee has failed to accommodate an existing use of the surface, the surface owner has the burden to prove that (1) the lessee’s use completely precludes or substantially impairs the existing use, and (2) there is no reasonable alternative method available to the surface owner by which the existing use can be continued… If the surface owner carries that burden, he must further prove that given the particular circumstances, there are alternative reasonable, customary and industry-accepted methods available to the lessee which will allow recovery of the minerals and also allow the surface owner to continue the existing use.” The Court ruled that Merriman had not provided sufficient proof that there was no alternative method for him to conduct the activities he had conducted in the existing pens somewhere else on his property, such as by relocating the pens. That not being established, he had not proved that his existing use was precluded or substantially interfered with. The fact that a landowner would incur substantial expense, time delays, and other “inconveniences” did not deter the Court from ruling that no accommodation was required in this case. This decision makes it clear that getting relief under the Accommodation Doctrine is going to be an increasingly elusive goal.
OIL AND GAS LEASE TERMS AND SURFACE USE AGREEMENTS- HOW FAR CAN THEY GO IN VIEW OF LESLEY
Owners of substantial surface estates that have mineral executive rights normally call on the services of an oil and gas attorney to negotiate and document mineral lease terms. The terms being negotiated by such attorneys will either contain provisions protecting the surface estate and requiring restoration and reasonable surface damage payments. Leases may also prohibit use of water from the property, or require payment for such water usage. Some attorneys utilize separate documents, frequently referred to as surface use agreements, to spell out these surface provisions. In any event, the intent is generally to limit the use of the property by the mineral lessee, set tougher standards for payment of damages than Texas common law does, require payment for use of the surface, and require prompt restoration of the property. Has the Texas Supreme Court fired a shot across the bow of attorneys and landowners seeking such protections in its Lesley decision, or will Texas courts continue to allow surface owners with executive rights leeway in making requirements of mineral lessees that are far in excess of what is required of the dominant estate absent such contractual terms?
As reviewed previously in this article, the mineral estate owner is entitled to use as much of the surface estate, including water, as is reasonably necessary to explore for and produce minerals from the property, without compensation to the surface owner. If the oil and gas lease requires payment to the surface owner for uses that the mineral interest owner is entitled to free of charge, why would the mineral interest owner not be entitled to a portion of those proceeds as a Portwood v. Buckalew disguised bonus or disguised royalty? Under the rational of Lesley, why is a surface owner entitled to obtain protections of his surface and payment for damages thereto when common law provides appropriate protection to the surface owner through the accommodation doctrine? Most oil and gas attorneys have practiced under the belief that obtaining these tough surface requirements had long been accepted by the courts of Texas, but many of us also accepted that In re Bass had settled the question of whether or not the executive rights owner had a duty to lease. If it could be shown that obtaining these surface protection and payment provisions decreased the amount of bonus or royalty the lessee was willing to provide to lease the property, the surface owner executive obtaining those provisions might be in jeopardy.
REALITY SEMINAR EXAMPLES
1. Walt and his wife bought surface only of a 100 acre tract that was under an oil and gas lease but not yet drilled. The terms of the lease, negotiated by the sellers, provided no surface protection or surface damage payments and placed no limits on surface use by the lessee. Lessee announces plans to drill a horizontal well on a site the minimum distance allowed by RRC regulations from Walt’s house, directly downwind of the prevailing southeast wind. The Eagle Ford wells in the vicinity have higher hydrogen sulfide levels than most Eagle Ford wells. The noise, dust, and potential hydrogen sulfide releases in close proximity to his house have Walt and his family worried. He proposes to Lessee a drilling location on the property that would provide more “buffer” and that would not be so directly downwind of his house. The Lessee responds that drilling from the alternative location would result in an additional $150,000 in drilling cost, although it would provide access to the objective section of the Eagle Ford Shale. Lessee refuses to move the location. Does Walt have any chance under the accommodation doctrine?
2. Gus and Fred each own 50% of the minerals under the Rancho Grande, with Gus having exclusive executive rights to 100% of the minerals and owning 100% of the surface estate. Gus uses a very tough oil and gas attorney to negotiate a lease with Big Oil. The lease has very stringent provisions protecting the surface estate. In order to obtain the lease, Big Oil was also required to execute a separate Water Purchase Agreement, under which Big Oil was to pay Gus $55 per barrel for water derived from subsurface water well under Rancho Grande. The water was needed for drilling and fracing Big Oil’s wells to extract the minerals from Rancho Grande. Big Oil was also required to pay Gus surface damages of $4,000 per acre for all drill sites and roads constructed on Rancho Grande, which was a property use necessary in order to explore for and produce the minerals. Is Fred entitled to any of the money paid to Gus for the water or surface damages? What if Fred entered into this lease with when he could have entered into a lease with another oil company for $1,000 per acre more bonus, provided that the alternative lease would not provide for payment for water or surfaces damages?