CHAPTER 10 NEGOTIATING A SURFACE USE AGREEMENT FOR PRIVATE LANDS

• Jurisdiction: United States

Development Issues and Conflicts in Modern Gas and Oil Plays
(Nov 2004)
CHAPTER 10
NEGOTIATING A SURFACE USE AGREEMENT FOR PRIVATE LANDS
David Patton
Locke Liddell & Sapp LLP
Houston, Texas

David Patton is co-chairman of the Locke Liddell & Sapp LLP Energy Practice Group. He has been a partner in the firm since 1981 and has over 27 years experience with virtually every legal aspect of the oil and gas industry. He earned a J.D. from the University of Houston Law Center (1977) and a B.A. from the University of Texas (1973). He is a member of the State Bar of Texas, the Houston Bar Association, and the College of the State Bar of Texas. He is a Director of the Federal Bar Association, South Texas Chapter and Chairman of the Luncheon Committee; Trustee, Rocky Mountain Mineral Law Foundation; Chairman, RMMLF Regional Planning Committee (2002-04); Member, RMMLF Special Institutes Committee; Member, Center for American and International Law. He is listed in the 2003 and 2004 Chambers USA's Leading Lawyers in America in Energy & Natural Resources.

TABLE OF CONTENTS

I. Introduction

II. The Legal Framework

A. Mineral Estates

B. The Mineral Estate is the Dominant Estate

C. Incidents of Mineral Ownership

D. The Accommodation Doctrine

E. Damages for Operations

F. Potential Solutions Available to the Surface Owner

G. Designated Drill Sites Under Chapter 92 of the Texas Natural Resources Code

1. Introduction

2. Overview of the Application Process

3. The Bases of the Commission's Decisions

H. Surface Damage Statutes

1. North Dakota, Montana and South Dakota

2. Oklahoma

3. Tennessee and West Virginia

4. Illinois and Kentucky

5. Pennsylvania, Alaska, and Indiana

6. Local Regulation

III. The Surface Use Agreement

A. Introduction

B. Parties

C. Lands Covered

D. Subsurface Issues

E. Notification, Consultation and Agreement

F. Time Period

G. Non-Exclusivity

H. Payments

I. Locations

J. Operations

1. Roads, Sites and Right-of-Ways

2. Cattle Guards, Gates and Fences

3. Trees

4. Topsoil and Vegetation

5. Wet Conditions

6. Facilities

K. Restoration

L. Reseeding

M. Hunting and Fishing

N. Safety

1. Traffic

2. Fire

3. Drugs and Alcohol

O. Surface Owner's Water

P. Produced Water

Q. Enforcement Costs

R. Indemnification and Release

S. Recording

T. Opportunity to Cure Breach

IV. Facts and Circumstances--Look to the Future

APPENDICIES

APPENDIX I - Surface Damage Statutes Chart

APPENDIX II - Surface Use Agreement (South Texas Landowner Form)

I. Introduction

It has never been more important that mineral owners, mineral lessees, surface owners and other surface users have an understanding as to their respective rights with respect to the use of the surface of lands from which minerals may be exploited. This paper will focus upon surface use issues relevant to private lands insofar as such issues should be considered in drafting surface use agreements.

The origin of the oil and gas industry has its roots during a time our country was not densely populated. In those early days the lands in the West and Southwest were wide open. Land was cheap. We were an agrarian society. Before oil and gas, Texas was a poor state. Black Gold changed that. Politicians in producing states were thrilled with the infusion of promised wealth that mineral development made possible. Jobs were created, schools were built and communities flourished because of oil and gas production and all that came with it. Consequently, from the beginning state legislatures and courts have favored mineral developers in order to promote the further exploitation of resources that not only put money into state treasuries and created opportunities for local voters, but fueled our national economy as well. Texas benefited institutionally more than most states because Texas had few federal lands--public revenues from the oil patch went directly to the capital in Austin.

My early introduction to the inherent conflict between surface owners and mineral exploration was the 1956 movie classic Giant when lowly field hand Jett Rink rebuffed the overtures of all- powerful ranch owner Bick Benedict to keep his vast 600,000 acre Reata intact and safe from unsavory wildcatters. When Jett inherits a small piece of Reata, Bick tries to buy him out and keep wells outside his fences, but Jett turns his small holdings into an oil empire and the old romantic ranching life style is changed forever in Texas.

Since those fictional scenes from the 1920's, surface owners and mineral owners have co-existed in a natural state of tension. In the early days of the oil industry most farmers were happy to exchange a few acres of pastureland for an oil well. But as we have become more urbanized and development has absorbed more and more rural countryside, conflicts are inevitable. The very way we Americans use our lands has changed dramatically in the last half of the 20%gth%g century. In fact, we even think differently about our lands than we did a century ago.

First, the growth of our population and the spread of cities into suburbs and beyond have caused an unavoidable competition for space. Second, the concept of public use of lands has never been more in conflict with private use of lands than it is today. Third, in certain circumstances the value of land for non-oil and gas purposes is far greater than the economic value of potential oil and gas production. Next, there has been an exponential increase in the use of lands for recreation without regard to the commercial value of what may be produced on or from beneath the land. As we have grown wealthier as a nation, some of the wealthiest among us can afford to own large expanses of land and choose to curtail or prohibit oil and gas exploration because the economic benefits of such activities to them are outweighed by aesthetics or other personal preferences. Finally, many state and local governments are backing away from an historical pro-industry stance in favor of more restrictive regulations that protect urban development and recreational users.

When I was ten years old living in a small town in deep South Texas, an oil well was drilled a block from my house, literally in the middle of our neighborhood. Huge trucks and pieces of equipment rolled up and down my street night and day. The well required an enormous amount of gas to be flared which lit up the sky with such a roar that one could not carry on a conversation blocks away. Disposal tanks were literally in the backyard of my best friend. On some days the fumes would make one's eyes water. But life went on without much protest. We played baseball in the field near the well and grew accustomed to the inconvenience. Today, there would be individual and public outcry over such disregard for surface users, and rightfully so.

My experience is that most modern operators recognize that it is highly desirable to have a good working relationship with surface owners. A fair arrangement that allows all owners of the various rights to the surface to pursue their respective ends saves time and money for all concerned. Regardless of the legal advantage that one party may have over the other concerning surface rights, the abuse of that advantage may ultimately reap unwanted consequences.

This paper will discuss the basics of mineral ownership in relation to surface ownership and will suggest a few solutions to mineral owners and surface owners so that both may enjoy the benefits of their estates. The primary focus will be upon what should be considered when negotiating and drafting surface use agreements.

In the context of this paper, a surface use agreement is a legal document drawn between a surface owner and one who has the right to use the surface for oil and gas exploration and development. Its purpose is to set forth rights, conditions and limitations on both the surface owner and the operator and to specify in writing how surface use is to be shared between the two estates. At first blush the term surface use agreement conjures up a formal written agreement between the surface owner and the mineral owner that deals exclusively with surface use issues. While such agreements are not uncommon, far more common are agreements relating to the surface that are buried in the body of leases, deeds, wills and other instruments that have a broader purpose. All of the various forms of agreement have legal significance; some are simply more detailed than others. Regardless of what form is to be used, simple or complex, one must first understand the underlying legal framework of mineral ownership and the relationship of such ownership to surface ownership.

II. The Legal Framework

A. Mineral Estates

In most producing states mineral interests, including oil and gas interests, are interests in real property governed by state law relating to real property. Unlike some jurisdictions, in Texas the owners of oil and gas in a tract of land own the oil and gas in place. ¹ The ownership of minerals and the incidents of such ownership are initially part of the fee simple ownership of a tract of land. The owner of the entire fee simple estate may sever the surface estate from the mineral estate. ² However, the conveyance of the fee simple title to a tract of land prior to severance of the minerals from the surface estate also transfers all of the minerals therein. Prior to severance, the fee simple owner of a tract of land owns all of the incidents of ownership of the minerals.

The incidents of ownership of minerals may be separated from the remainder of the incidents of ownership of the fee simple title to a tract of land. Severance may occur by:

&TLRbull2; Conveyance

&TLRbull2; Reservation or exception

&TLRbull2; Devise

Examples of mineral estates carved out of fee simple estate:

&TLRbull2; Fee mineral estate

&TLRbull2; Mineral leasehold estate

&TLRbull2; Partial mineral estates

&TLRbull2; Non-participating mineral interests

&TLRbull2...