CHAPTER 1 RESOLVING CONFLICTS BETWEEN OIL & GAS AND OTHER MINERALS

• Jurisdiction: United States

Land and Permitting II
(Jan 1996)
CHAPTER 1
RESOLVING CONFLICTS BETWEEN OIL & GAS AND OTHER MINERALS
Robert A. Bassett
Attorney at Law
Denver, Colorado

I. Introduction

This paper is about agreements. It examines the actual agreements used to resolve conflicts between and among mineral operators and surface owners. The legal issues involved with "dominance" of the mineral estate, "surface rights" of mineral operators, and "multiple mineral development" have been the topics of many recent papers.¹ This paper is not about those legal issues. Rather, it is a review of how people have resolved conflicts by written agreement. It is a study of those agreements.

The law can be oversimplified to a few generalizations. Where there is a split estate (of surface and minerals), the mineral estate was historically the dominant estate.² The mineral operator was entitled access to his estate,³ and even the right to destroy the surface estate,⁴ in order to develop the minerals. In more recent times, mineral operators have been required to adopt alternative methods of production to protect surface values.⁵ Legislation in many states,⁶ and at the Federal level⁷ , has further limited the mineral operator's rights to impinge on the estate of the surface owner. The current law requires both estate owners to proceed with "due regard"⁸ for the other, and to "accommodate" the use of the other.⁹

Where there are two conflicting mineral operators seeking to develop different minerals on the same property, the law is less clear. Most often, this conflict arises when oil and gas drilling and coal mining occur on the same property. Principles such as "first in time, first in right" have been submitted as solutions to the conflict,¹⁰ but by and large, there are few judicial, legislative or regulatory actions which have actually been involved in resolving this type of conflict.¹¹ It seems that the conflicting mineral operators are left to fashion their own solutions, acting upon the evolving law of "due regard" and

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"accommodation," and creating private law through agreements applicable to their own situations.

This paper examines how the issues which typically arise in such situations have been addressed in those private agreements. The paper is intended to serve as a method of organizing the examples which are attached.

Many individuals were contacted in preparing this paper in an attempt to determine if there is a standard of practice for dealing with conflicts between mineral operators. The generosity of many people who supplied their experience in the form of advice, referrals, and citations made this paper possible. Most of all, the people who supplied examples of agreements deserve great thanks: Bob See, Houston, Texas; Bob Outerbridge, Pagosa Springs, Colorado; Steve Youngbauer, Gillette, Wyoming; Lee Gaskins, Englewood, Colorado; Molly Sommerville and Jeff Welborn, Denver, Colorado; Frank Erisman and Jim Cress, Denver, Colorado; David Ebner, Denver, Colorado; John C. Lacy, Tucson, Arizona; Larry Gill, Denver, Colorado; George Reeves, Denver, Colorado; Fred A. Jesser, III, Fayetteville, West Virginia; Jim Bird, Denver, Colorado; Paul Van Booven, Lexington, Kentucky; Rand Sterling, Houston, Texas; and Knute H Lee, Albuquerque, New Mexico.

The remainder of this paper is organized into two general sections. First, agreements resolving conflicts between and among mineral operators are examined, beginning with agreements among multiple hard mineral operators, and then examining the agreements between coal developers and oil and gas developers. Second, three surface use agreements are examined with the focus being on provisions unique to their situations. At the end of the paper, fourteen examples are added, ranging from representative clauses to entire agreements.¹² These were chosen not because they could be used without modification in all (or any) situations, but only because they present a variety of examples for referral in drafting agreements for any specific conflict.

In the end, every conflict is unique and will require careful thought and craftsmanship in writing an agreement. Hopefully, the following will serve as a useful guide.

II. Multiple Mineral Agreements

Many of the individuals contacted for this paper reported that in every mineral conflict in which they had been involved, one of the operators withdrew. In other words, it seems to be the case most often that when a conflict arises, both parties posture themselves in the best light possible, but one or the other makes an economic decision that it is not worth pursuing development of the

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resource in the face of another entity developing a separate resource on the same land.

However, this is not always the case. There are situations where both mineral operators continue to have the desire to operate on the same lands, and therefore enter into an agreement governing their relationship. Several such agreements were furnished by the individuals contacted in preparation of this paper. Of the responses obtained, three dealt directly with conflicts among multiple developers of hard minerals, while the majority dealt with conflicts between oil and gas operators on the one hand, and coal operators on the other.

The agreements which were received and reviewed all contain several common traits. These traits can be grouped into three general categories, Purpose, Operating Issues, and Procedural Issues. The examples selected and annexed hereto are a representative sampling of the agreements gathered for this presentation.

A. PURPOSE

The agreements reviewed share the common trait of expressing the purpose of the agreement. This, of course, would be an aid to understanding the agreement for successors to the agreements, or to arbitrators or courts in the event of a major dispute.

The agreements reviewed often contain an express statement of purpose, an expression of intent that neither mineral operator interfere with the other, an express declaration of which estate is dominant, or a clarification of what rights were granted or reserved.

1. Express statements of purpose

Many of the agreements reviewed contain specific references to the underlying purpose of the agreement. For instance, example 3, states that its purpose is the "expeditious and economical development and utilization" of both deposits, and the "coordination of operations and activities among Operators." Similarly, example 5 states its purpose as being "maximum resource recovery," a theme which is echoed in example 9, "operations ... should be coordinated so that the maximum amount of both resources can be recovered efficiently and economically," and in example 10 "to the end that Lessor will maximize its return on both estates."

A slightly different expression of the purpose of maximizing recovery of both estates, invoking the doctrine of waste, is found in example 6, where one of the

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purposes is to "ensure that neither [mineral operator] damages nor otherwise wastes the resources of the other."

2. Non-interference

The second common thread in the agreements examined, which also expresses the purpose of the document, are statements that the intent of the parties is to avoid interference with the operations of each other. Here again the clauses cover a broad range, beginning with the simplicity of example 2, "XYZ will conduct its activities in such a way that any existing operation of the Placer Owner are not interfered with." Example 1 blends non-interference with maximum recover "lessor and his lessees shall not interfere with Lessee's current or future right to mine and remove the maximum amount of coal," while example 7 adds a limitation to the operations of the coal operator which are to be protected "[the oil and gas] LESSEE agrees to conduct its operations ... not to interfere with the reasonably necessary requirements of any coal operations."

Other agreements recognize the limitations which are inherent in other documents previously executed, such as example 4 where it is required that "any operations to remove oil, gas or other minerals or substances other than coal and substances mixed with coal shall not interfere with the coal mining operations of the Lessee, except at provided in existing [oil and gas] leases."

Finally, some of the agreements attempt to add other standards of conduct such as "best efforts," "accommodation," or "due regard." For instance, example 9 states that "each party shall use its best efforts to conduct operations on and in the vicinity of the oil and gas well locations in such a manner as to minimize potential interference with the operations of the other party." Similarly, example 10, in two separate places, states that "[the coal Lessee shall] jointly use the Said Lands, to accommodate the operations by Operator under an oil and gas lease ... and [the coal operator's] obligations under its permits," and that the coal "Lessee agrees to conduct its operations with due regard to the development of both estates [coal and oil and gas]."

3. Express declaration of dominant estate

Two of the agreements reviewed contain an express declaration of which estate is the dominant estate. However, both are relatively old forms, from the eastern United States, and the effectiveness of such a declaration is suspect. However, if the parties agree to such a declaration, it might be helpful to a court or arbitrator in interpreting an agreement.

Both of the agreements reviewed declare the coal estate to be the dominant estate. Example 7, states that "it is further distinctly understood that the coal

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underlying the above described land is the dominant estate, and that the oil and gas estate shall be servient thereto," while in example 10 "the surface estate and the coal estate of the mineral estate on the property are the dominant estates and the right herein granted to explore for, drill, and produce oil...