§ 7.8 - Oil and Gas

• Jurisdiction: Washington

§7.8 OIL AND GAS

The deskbook third edition chapter on oil and gas noted that there had been no significant oil or gas production in Washington. Although that still remains true, increasing fossil fuel prices could make exploration and development of oil, gas, and coalbed methane viable in this state. The Washington Department of Natural Resources (DNR) notes that much of the Puget Lowland and Columbia River basin have some potential for natural gas production, while coastal areas north of Grayland are the only parts of the state with reasonable potential for oil discoveries. See Wash. Dep't of Nat. Res., Oil and Gas Resources, http://www.dnr.wa.gov/ResearchScience/Topics/EarthResources/Pages/oil_gas_resources.aspx. According to DNR, about 600 oil and gas wells have been drilled in the state, but large-scale commercial production has never occurred. Id. Companies also are exploring coalbed methane production in western Washington. Id.

This section provides a summary of some of the key legal issues relating to ownership and leasing of oil and gas development rights. This portion of the chapter will discuss who owns and has the right to develop and lease oil and gas, the various provisions of a typical oil and gas lease, implied covenants in such leases, and the state conservation statute. Also covered by this chapter are use of the surface of land for development of oil and gas and leasing on state, federal, and Indian lands. This section does not discuss lessees' conveying interest in oil and gas, the relationship among the various owners of interests in a lease, or agreements for drilling, development, and production.

(1) Private ownership

This section discusses oil and gas production when the mineral interest is owned rather than leased.

(a) Severance from surface estate

Washington recognizes that oil and gas rights and other subsurface minerals can be severed from the surface estate by grant or reservation in a deed, and that following such a severance, the mineral owner has separate rights that are protected under property law. Saddle Mtn. Minerals, L.L.C. v. Joshi, 152 Wn.2d 242, 253-55, 95 P.2d 1236 (2004); McCoy v. Lowrie, 42 Wn.2d 24, 26-27, 253 P.3d 415 (1953); Harrison v. County of Stevens, 115 Wn.App. 126, 134, 61 P.3d 1202, review denied, 149 Wn.2d 1031 (2003). An instrument creating a mineral interest must satisfy the requirements for a conveyance of real property: that is, it must be in writing, signed and acknowledged by the parties, and contain an adequate description of the property being conveyed. RCW 64.04.020. Washington recognizes rights associated with ownership of severed mineral interests, but extinguishes mineral rights if unused for 20 years. RCW 78.22.010. See §7.8(1)(e), below.

(b) Definition of "minerals"

The Washington Supreme Court has held that the term "minerals" does not unambiguously include oil and gas as a matter of law. Kunkel v. Meridian Oil, Inc., 114 Wn.2d 896, 903, 792 P.2d 1254 (1990). The court in Kunkel stated that "each case must be decided on the language of the grant or reservation, the surrounding circumstances, and the intention of the grantor if it can be ascertained." Id at 902. In Kunkel, the deed reserved to the Northern Pacific Railway Company "all minerals of any nature whatsoever upon or in said land, including coal and iron." Id. at 899. This was inconsistent with a contract for deed that the parties had entered into reserving "coal and iron lands." Id. at 898; see also Puget Mill Co. v. Duecy, 1 Wn.2d 421, 429, 96 P.2d 571 (1939) (meaning of "minerals" must be decided on facts of case).

(c) Mineral interests and royalty interests

The property interests conveyed or reserved by a landowner consist of mineral interests and royalty interests. Unless otherwise modified or limited by the deed, and subject to obligations contained in the deed, the owner of a mineral interest has all the powers and rights with respect to the minerals as did the fee simple owner of the property before severance. The mineral interest owner has the right to develop the oil, gas, and other minerals or to lease the land for mineral development purposes. The owner of a royalty interest is entitled to a share of the production, if and when there is production, but has no right to develop or lease the land. Determining the type and amount of interest created by a particular grant or reservation often is difficult and has been the subject of considerable litigation in other states. See 2 Howard R. Williams & Charles J. Meyers, OIL AND GAS LAW §§302-320.3 (1994).

(d) Coalbed methane

Coalbed methane is found in and around coal veins as a byproduct of coal formation. U.S. Steel Corp. v. Hoge, 503 Pa. 140, 142, 468 A.2d 1380 (1983). It once was considered a hazard of coal mining and was vented into the atmosphere to prevent explosion or inhalation. Id. Beginning in the late 1970s, however, coalbed methane became commercially exploited as an energy source and continued expansion of such developments is anticipated in the coming decades. William B. Prince, Joint Development of Coal and Coalbed Methane, 48 ROCKY MTN. MIN. L. INST. 19-1, 19-6 (2002); Patrick R. Day & Charles P. Henderson, Getting Along or Going to Court: Ownership and Development Conflicts Between Coalbed Methane and Coal, 46 ROCKY MTN. MIN. L. INST. 7-1 (2000); Kurt M. Peterson, Coalbed Gas Development in the Western United States: Legal Issues and Operational Concerns, 37 ROCKY MTN. MIN. L. INST. 13-1 (1991). When minerals have not been severed from the surface estate, or when all minerals including coal, oil, and gas are owned by the same person, coalbed methane development can proceed pursuant to an oil and gas lease modified to provide for developing the coalbed methane.

When the mineral and surface estates are severed, the issue is whether coalbed methane is an incident of the mineral lease. In the western states coalbed methane has been developed primarily by oil and gas owners or their lessees. Peterson, 37 ROCKY MTN. MIN. L. INST. §13.03[4]. The Wyoming Supreme Court has held that the right to coalbed methane is separate from the right to mine coal. Newman v. RAG Wyo. Land Co., 53 P.3d 540, 545-50 (Wyo. 2002) (right to ventilate coalbed methane gas, an essential element of right to mine, is not equivalent to ownership). Montana has legislated that coalbed methane is gas and is not within the scope of the definition of "coal." MONT. CODE ANN . §82-1-111(1)(a)& (2). Eastern states, such as Pennsylvania, have held that the coal owner owns the coalbed gas that is present in the coal, but the landowner owns as much of the coalbed gas as migrates onto the surrounding property outside of the mineral lease. U.S. Steel Corp., 503 Pa. at 147.

In Amoco Production Co. v. Southern Ute Indian Tribe, 526 U.S. 865, 119 S.Ct. 1719, 144 L.Ed.2d 22 (1999), the United States Supreme Court held that lands patented into private ownership under the Coal Lands Act of 1909, 35 Stat. 844, codified at 30 U.S.C. §81, and the Coal Lands Act of 1910, 36 Stat. 583, codified at 30 U.S.C. §§ 83-85, did not include coalbed methane. Thus, under federal law, the private oil and gas owner, rather than the federal coal lessee, has the right to develop coalbed methane on those lands. The Southern Ute decision, however, did not resolve the issue of coalbed methane ownership on lands patented under other statutes.

(e) Dormant mineral interest statute

Under Washington law the owner of the surface estate may acquire ownership of an inactive severed mineral interest held by another person by following the requirements of RCW 78.22.050. This statute applies only to mineral interests that are "unused" for a period of 20 years. "Use" includes production, leasing, receipt of rentals or royalties, payment of taxes, or filing a statutory statement of claim. RCW 78.22.030. This applies to all minerals, not just oil and gas.

The procedure for acquiring ownership requires personal service of the current mineral interest owner with a notice of intent to file a claim of abandonment and extinguishment. RCW 78.22.050(1). The notice of intent must contain the name and address, if known, of the holder of the mineral interest as shown of record; a reference to the instrument originally creating the mineral interest, including where it is recorded; a description of the lands affected by the mineral interest; the name and address of the person giving notice; the date of first publication of the notice if notice is by publication; and a statement that a claim of abandonment and extinguishment will be filed after 60 days following the last publication or date of personal service, unless the current mineral interest owner files a statement of claim of mineral interest in a form required by RCW 78.22.040.

The mineral interest is conclusively presumed extinguished once the required fees are paid and the surface owner files the claim of abandonment and extinguishment and an affidavit of service or publication. RCW 78.22.060. If, however, the current mineral interest owner files a statement of claim within the 60-day period and pays the required fees, the statement is recorded, indexed, and a special notation of the filing is made in the index. Id.

Mineral interests retained or owned by any public entity or resulting from land exchanges between public and private owners are not subject to abandonment and extinguishment. RCW 78.22.080.

Caveat : Where the mineral estate has been severed from the surface estate, the surface possessor may only adversely possess the mineral estate by establishing each of the elements of adverse possession separately with respect to those rights. See Gilbreath v. P. Coast Coal & Oil Co., 75 Wn.2d 255, 450 P.2d 173 (1969); McCoy v. Lowrie, 42 Wn.2d 24, 26-27, 253 P.2d 415 (1953); Bryant v. Palmer Coking Coal Co., 86 Wn.App. 204, 219, 936 P.2d 1163, review denied, 133 Wn.2d

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