Chapter 3 DOMESTIC GAS TAPS REVISITED: THE EVOLUTION OF CONCERN AND COMPLEXITY
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DOMESTIC GAS TAPS REVISITED: THE EVOLUTION OF CONCERN AND COMPLEXITY
I. Introduction
II. Gas Taps 101
III. Determining Who Owns the Tap Right
IV. Erosion of the Liability "Line in the Sand"
V. Warnings
VI. Conversions
VII. Terminating Free Gas Taps
VIII. Unit Theory
IX. Waiver Versus Accommodation
X. Gas Tap Accounting
XI. Regulatory Developments in Colorado
XII. Conclusion
This is an update to an article about free gas clauses that was presented in 2005 at the Rocky Mountain Mineral Law Institute held in Portland, Oregon.1 At that time, the judicial decisions concerning domestic gas taps were not very controversial and there was little governmental regulation of domestic gas taps. Fast-forward some 15 years and there are signs of change to this area of oil and gas law.
This paper is designed to highlight some of these changes and trends. More importantly, the paper will present several practical approaches that may be utilized in dealing with domestic gas taps. Across the United States, there are thousands of gas tap provisions contained in oil and gas leases that are being produced. It is virtually impossible for a company's management to ever reach a point where it believes that its gas taps are "handled." One reason is that new gas tap entitlements emerge or ripen on an ongoing basis as additional wells are drilled and dwellings are built.
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This paper2 focuses on more or less standard gas tap provisions contained in oil and gas leases. Most gas tap rights are created by oil and gas leases. There are, however, situations in which a gas tap right has been created in connection with other circumstances, such as entering a surface use agreement or obtaining a road or pipeline easement. In those non-lease situations, the document giving rise to the tap right should be analyzed as with any other written contract. It is not possible to generalize about tap rights created in non-routine situations or in documents other than oil and gas leases.
Before venturing into recent trends and various approaches to dealing with free gas provisions, it is productive to review the basic rules and holdings concerning domestic gas taps. As with all lease issues, the precise terms of the lease in question should be reviewed to determine if there are any special or unusual terms added because the specific terms agreed upon by the lessor and lessee will control over the general observations set forth below. A sample of a free gas provision is: "Lessor shall have the privilege at its risk and expense of using gas from any gas well on said land for stoves and inside lights in the principal dwelling thereon out of any surplus gas not needed for operations hereunder."3
The following are 10 fundamental concepts related to a typical free gas provision contained in an oil and gas lease:
1. There are three prerequisites to free gas entitlement: (A) a free gas provision in the lease; (B) a supplying well under the terms of the lease; and (C) a principal dwelling. The legal right to the tap is dormant until all three criteria exist.
2. Once removed from the ground, gas is personal property and there can be no adverse possession supporting entitlement to a gas tap right.4 Taking gas, even for a long time, does not necessarily mean that there is a right to do so.
3. Commercial use of the gas generally is not allowed.
4. The phrase "stove and inside lights" means normal domestic use; the words should not be taken literally.5
5. The principal dwelling is usually the first one built on the leased lands (check assessor or building department records to determine
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this), but the holder of the tap right can designate which dwelling is the principal one for purposes of the free gas provision.6
6. The domestic gas tap right is a covenant that runs with the surface estate of the leased lands. This is perhaps the most misunderstood concept in gas tap law.
7. Unauthorized use by the tap owner generates a claim for damages but does not cancel the right as to authorized uses.7
8. The tap right has elements of both a contract and a real estate conveyance or reservation.8
9. If there are a number of eligible supplying wells, the tap owner may choose the well and usually does so based on proximity, but sometimes gas type or quality is a factor.
10. Multiple wells do not mean multiple taps; unless there is lease language to the contrary, there should be only one tap tied to one dwelling on the leased lands.9
While it is well settled that the right to a free gas tap created by an oil and gas lease is a covenant that runs with the surface estate,10 there are questions that arise as a result of this judicially created rule.
The first noteworthy aspect is the fact that free gas clauses remained in oil and gas lease forms beyond the period of their initial utility or desirability. Free gas clauses have appeared in oil and gas leases even where the mineral owner/lessor does not own any part of the surface estate. This result likely means that a form was used without the free gas part being analyzed or without running title. One must ask why a lessor who owns only minerals would include a provision that would not benefit the lessor, but rather a surface owner who may have no relation to the lessor or
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may even be unknown to the lessor? Further, leases that have free gas clauses usually state that the lessor shall have use of gas. This would be nonsensical in the context of a severed mineral estate where the lessor does not simultaneously own an interest in the surface estate.
The rule that the free gas right is a surface covenant also means that mineral ownership becomes irrelevant. One land professional approached the author indicating that she owned a home on a surface tract and that she recently had gone to considerable effort to purchase a small mineral interest in the pertinent drilling and spacing unit. She did so in order to be able to obtain a gas tap for her residence and wanted to know what subsequent steps she needed to take. She was informed that the current ownership of minerals was not relevant to the analysis. Her potential entitlement to a tap would be based on the history of title to the surface estate of the leased premises, the related facts regarding dwellings, and the terms of the oil and gas lease. Her efforts to obtain a mineral interest were to no avail in regard to her acquiring a gas tap right.
The second noteworthy and potentially challenging aspect is tracing title to the tap right as the surface estate is subdivided. This becomes more complicated as time passes and surface ownership becomes more fragmented. As surface tracts are created and sold, one must analyze whether the free gas right stays where it initially was or whether it is transferred. Suppose that there is a farm with a house and the house has been receiving free gas from a well on the leased lands pursuant to the terms of the applicable lease. The farm owner decides to split the parcel in half. He sells the half without the dwelling to the buyer. Under this scenario, the tap right can be the subject of three approaches. The owner can reserve or "less and except" the tap right. It then would stay with the parcel on which the original dwelling was located. Alternatively, the owner could assign the tap right to the buyer (probably via a "together with" provision in the deed). The physical tap then would have to be disconnected in the original dwelling. The third and most difficult scenario is when the deed is silent as to the tap right. Without more, it should then stay with, and remain appurtenant to, the lands on which the principal dwelling is situated.11
Suppose, however, that the owner sells the half with the principal dwelling and keeps the other half intending to build a new home on it using the free gas right. If the deed is silent, it could lead to a dispute. The seller may think he owns the tap and it goes wherever he lives. The buyer may think he is purchasing a house that comes with free gas, because it is set up
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for wellhead gas and has been using such gas.12 Although these examples are rather simple, the fact patterns can become very complex if there are multiple lots created over time and if the various transfer instruments do not address the free gas right.
Traditionally, the approach to gas taps employed by most operators was to simply avoid any involvement with domestic gas taps beyond a gas tap's "stub in" or "tie in" point on the well pad. Operators generally avoided assistance with, inspection of, and any knowledge concerning the status of the gas tap on the landowner's side of the tap's connection point. After all, the typical free gas provision stated that the gas would be provided at the lessor's risk and expense. Operators reasonably assumed that if they did not cross that "line," they would be able to avoid liability while still complying with the terms of the lease.
Cracks in this conceptual line of defense started to appear with the decision in the Ohio case of Weiss v. Thomas & Thomas Development Co.13 That lawsuit involved the owner of a free gas tap, who died as a result of an explosion in the dwelling that was receiving the free gas. The trial court granted summary judgment in favor of the well operator. The Ohio Supreme Court, however, reversed and remanded noting that gas is a dangerous commodity and gas companies owe a high duty of care to users. The court ignored the contractual "risk and expense" wording and applied tort concepts. Would a well-written indemnity and "hold harmless" provision have altered the judicial result? One can only speculate...
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