Mixing Surface Development With Oil and Gas Operations - Part I
| Jurisdiction | Colorado,United States |
| Citation | Vol. 34 No. 5 Pg. 11 |
| Pages | 11 |
| Publication year | 2005 |
2005, May, Pg. 11. Mixing Surface Development with Oil and Gas Operations - Part I
May 2005
Vol. 34, No. 5 [Page 11]
Mixing Surface Development with Oil and Gas Operations - Part I
by Polly Jessen, Carleton Ekberg
Part I of this article outlines an oil and gas operator's rights to use the surface estate, associated environmental and operational effects on surface development, and the potential liabilities of the surface owner or developer related to those impacts. Part II, to be published in the June 2005 issue, will discuss the obligations of the oil and gas operator related to those impacts and steps a surface owner or developer may take to limit potential liability.
As commercial and residential development fans out along the Front Range, developers increasingly encounter prospective sites where mineral interests have been severed from the surface estate or where mineral interests have been leased.1 At these sites, abandoned or active oil and gas wells and other infrastructure may be present or future oil and gas development is a possibility. Once a well has been located, ongoing oil and gas development and production may have operational and environmental impacts that adversely affect planned development and could result in liability to a surface developer. Historical oil and gas operations also may have resulted in environmental contamination.
A recent news story highlights the significance of failing to account for severed or leased mineral interests in development planning. In this story, the mineral interest lessee objected to the compensation for surface use and environmental protections requested by the surface owner as a condition of access.2 Therefore, within its legal rights under Colorado law, the lessee simply posted a nominal surface damage bond with the Colorado Oil and Gas Conservation Commission ("Commission" or "COGCC")3 and began drilling within several hundred feet of a residence without a surface access agreement.4
In evaluating the viability of developing a parcel with leased or severed mineral interests for commercial and residential uses, the developer and its legal counsel need to understand and weigh the answers to the following five questions, all of which are addressed in this article:
1. What are the rights of a mineral interest owner to use the surface estate?
2. What are the potential environmental and operational impacts of oil and gas extraction activities on surrounding surface development?
3. What are the legal obligations and potential liabilities of a surface owner locating residential and commercial development near an oil and gas well site?
4. What are the legal obligations of the mineral interest lessee and/or well operator to address environmental contamination and accommodate surface development?
5. What steps can a surface owner or developer take to limit potential liability associated with the environmental and operational impacts of oil and gas operations?
The regulatory requirements and common-law legal obligations imposed on the oil and gas lessee and its operator in Colorado may provide some protection to a surface owner or developer from the adverse environmental and operational impacts of oil and gas development. In addition, a surface developer may be able to take a number of steps as it plans and implements development to limit its liability related to ongoing oil and gas operations on the site.
Part I of this article discusses the rights of the mineral interest owner or lessee to the surface estate in developing its interests, possible environmental and operational impacts of oil and gas operations, and the potential liabilities of the surface owner. Part II, which will be published in the June 2005 issue of The Colorado Lawyer, discusses the obligations of the mineral lessee or operator related to those impacts. Also addressed in Part II are the steps a surface owner or developer may take to limit potential liability. This article will be of interest to natural resources, real estate, environmental, and business attorneys representing mineral and surface estate owners and developers, lenders, insurers, and other parties who are involved in real property development projects where surface and mineral estates are severed.
As a general matter, Colorado law provides that mineral interest owners have a right to "reasonable use" of the surface estate to access and develop the mineral interests without compensation to the surface owner.5 This right includes the rights of ingress, egress, exploration, and surface usage as reasonably necessary to the successful exploitation of the mineral interests.6
In the development of the mineral estate, the Colorado Oil and Gas Conservation Act ("Conservation Act" or "Act")7 is the primary source of regulation. The Conservation Act creates the COGCC8 and grants the Commission "jurisdiction over all persons and property, public and private, necessary to enforce" the provisions of the Act, and the "power to make and enforce rules, regulations, and orders pursuant to this [Act], and do whatever may be reasonably necessary to carry out the provisions of this [Act]."9 The COGCC has adopted rules and regulations to implement the provisions of the Conservation Act.
The Conservation Act's legislative declaration states that it is in the public interest to:
promote the development, production, and utilization of natural resources of oil and gas in the state of Colorado in a manner consistent with protection of public health, safety, and welfare; to protect the public and private interests against the evils of waste in the production and utilization of oil and gas by prohibiting waste;[10] to safeguard, protect and enforce the coequal and correlative rights of owners and producers in a common source or pool[11] of oil and gas to the end that each such owner and producer in a common pool or source of supply of oil and gas may obtain a just and equitable share of production therefrom.[12]
In the exercise of its powers to maximize the ultimate recovery from a pool and to avoid the drilling of unnecessary wells, the COGCC has established rules and can issue orders that establish the location of wells in a pool.
Before a well can be drilled in Colorado, an application for permit to drill ("APD") must be approved by the COGCC.13 For an APD to be approved, the bottom of the well must be at a location that is permitted by rule or order of the COGCC. Permitted locations may be identified by: (1) a field order established by COGCC order;14 (2) statewide well location rules; (3) special well location rules; and (4) exceptions to permitted well location rules that are granted either administratively or by COGCC order. Wells may be drilled vertically or directionally, and the surface location is not necessarily above the bottom hole location. In selecting a surface location, the lessee/operator15 takes into account topography, surface use, and other similar matters, and must comply with the provision of COGCC Rule 603.16
COGCC rules ("Rules") and orders thus determine a permitted location for a well. In the absence of any contractual provisions governing drilling locations, or restrictions under the COGCC's health and safety regulations that are discussed in more detail below, a mineral interest lessee/operator could claim a legal right to drill at any permitted location. Identifying possible permitted locations for oil and gas development in relation to planned surface development is an important step in a surface developer's due diligence and development planning process.
Field Orders
The COGCC has the power to issue orders that establish drilling units of specified and approximately uniform size and shape covering any pool.17 The initial order establishing drilling units permits only one well to be drilled and produced from the pool in that drilling unit, and identifies the permitted location for the well in that drilling unit.18 The size and shape of the drilling unit is determined based on evidence presented at the hearing and is required to be no smaller than can be efficiently and economically drained by one well.19
After wells in a field subject to a field order have produced for a period of time, the behavior of the wells may suggest that the original estimate of the area that can be efficiently and economically drained by one well is not correct and that additional wells may be required to produce the oil and gas in the drilling unit efficiently and economically. In that case, the Conservation Act permits the COGCC, on application, notice, and hearing, to decrease or increase the size of the drilling units or to increase the number of wells that can be drilled in an existing spacing unit.20
Statewide Well Location Rules
Until such time as a field order is issued, wells may be located in accordance with COGCC Rule 318. Part (a) of Rule 318 states that a well proposed to a depth in excess of 2,500 feet below the surface will be located not less than 600 feet from any lease line and no closer than 1,200 feet from any other well producing from the same formation. Part (b) of Rule 318 states that a well proposed to a depth less than 2,500 feet below the surface will be located not less than 200 feet from any lease line and no closer than 300 feet from any other well producing from the same formation, except that only one producible well may be allowed in each governmental quarter-quarter section.21
Well locations under Rule 318 also are subject to the limitations of the safety requirements of Rule 603(a), which require wells to be set back at least 150 feet from any surface property line, occupied building, public road, major above-ground utility line or railroad.22 As will be discussed in more detail in Part II of...
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