CHAPTER 4 ACQUIRING SEISMIC DATA - AGREEMENTS WITH LAND OR LEASE OWNERS, CONTRACTING FOR SEISMIC DATA OR SERVICES

• Jurisdiction: United States

Oil and Gas Agreements: The Exploration Phase
(Mar 2010)
CHAPTER 4
ACQUIRING SEISMIC DATA - AGREEMENTS WITH LAND OR LEASE OWNERS, CONTRACTING FOR SEISMIC DATA OR SERVICES
Warren J. Ludlow ¹
XTO Energy, Inc.
Fort Worth, Texas

Warren J. Ludlow is Vice President & Associate General Counsel for XTO Energy Inc., one of the nation's largest independent oil and gas producers, where he is responsible for the legal work associated with the company's acquisitions and other oil and gas transactions. Prior to joining XTO in April 2007, Mr. Ludlow was General Counsel for Brigham Exploration Company, an active explorer in South Texas, West Texas, Oklahoma, and the Rockies. Prior to joining Brigham in June 2001, Mr. Ludlow was Associate General Counsel for Frontera Resources Corporation, a small international exploration company with assets primarily in the Republic of Georgia. Prior to Frontera, Mr. Ludlow worked at Hunt Oil Company as Senior Counsel, where he managed the company's litigation and performed the legal work for producing property acquisitions and divestitures and the company's south Louisiana exploration activities. Prior to Hunt, he worked at Pacific Enterprises Oil Company (USA) as Assistant General Counsel, where he was responsible for the day-to-day operations of the Law Department. Prior to Pacific, he worked for British Petroleum, and before that, at the Denver office of the law firm, Kutak Rock. He has a B.S. degree in Political Science and a J.D. degree from the University of Utah. He is admitted to practice law in both Colorado and Texas. Mr. Ludlow has been a speaker at legal seminars sponsored by the Rocky Mountain Mineral Law Foundation, the AAPL, the Texas Bar Association, the Louisiana Mineral Law Institute and other organizations.

Introduction

Thirty years ago, oil and gas explorers were happy if a third of their exploratory wells turned out to be producers. But with the development of seismic techniques, especially three-dimensional or 3D seismic, today's explorers are not satisfied unless the success rate of their exploratory wells is at least two-thirds. Because of these dramatic increases in drilling success rates, most wells drilled today utilize the aid of seismic data.

This paper will focus on the legal aspects of seismic data, particularly the acquisition of seismic data and geophysical trespass, and the various types of contracts relating to the acquisition, use and licensing of seismic data, with special emphasis on clauses dealing with exceptions to confidentiality obligations, risk allocation in connection with seismic operations, and the right to sublicense and transfer seismic data. It will also examine whether seismic data qualify as trade secrets. In addition, the paper will include checklists of the provisions contracts dealing with seismic data typically contain.

Although this paper cites cases and legal treatises where appropriate, the focus is on the practical aspects of dealing with seismic data rather than an in depth legal analysis. Where there is some legal analysis, this paper tends to focus on Texas law.²

The Legal Aspects of Acquiring Seismic

The Nature of Seismic Data. Seismic data are acquired through a geophysical survey. Williams & Meyers defines geophysical survey as "the accurate measurement and recording of certain physical qualities in the outer rock shell of the earth, the object being to learn the nature and contour of underground geological structures."³ Williams & Meyers list the principal geophysical survey methods as seismic, gravity, magnetic, electrical and geochemical. A seismic survey has been defined as "recorded information about the response of the earth to the input of mechanical energy from a controlled

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source."⁴ The purpose of collecting seismic data in the oil and gas industry is to help the explorer to: (i) understand the structural detail and stratigraphy of the earth beneath the surface; (ii) identify potential traps where hydrocarbons may have accumulated; and (iii) find direct indicators of hydrocarbons.⁵

The Exploration Right. To conduct geophysical operations without fear of liability for geophysical trespass or related torts, the explorer must obtain permission from the owner of the exploration right. The right to conduct geophysical operations is a valuable property right that the law will protect, regardless of the oil and gas ownership theory of the applicable state.⁶

Ownership of the Exploration Right. So who owns the right to explore? Said another way, whose permission must an explorer obtain before conducting geophysical operations? The answer depends on how the applicable property is owned. Clearly, the fee simple owner of real property is the owner of the right to explore.⁷

Minerals Severed From the Surface. Where ownership of the minerals has been severed from the surface, only the mineral owner has the right to explore.⁸ Consent from the surface owner is not necessary because the mineral owner holds the inherent right to use as much of the surface as is reasonably necessary to explore for oil and gas.⁹ Practically speaking, though, most explorers will seek permission from the surface owner to avoid potential surface access issues, to pay for damages to the surface (although often not legally required), or to at least put the surface owner on notice of the intended operations.

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Leased Interests. The mineral owner may assign the right to explore to its lessee. Even in the absence of an express grant to the lessee of the right to explore by geophysical methods, that right is implied.¹⁰ If the lease grants the exclusive right to explore, then only the mineral lessee can grant the consent to a third party seeking to conduct seismic operations on the leased tract. If the lease grants the non-exclusive right to explore, then either the lessee or the lessor may lawfully grant consent.¹¹

In Louisiana, however, whether a mineral lease granting an exclusive right to explore also grants the lessee the exclusive authority to permit third parties to conduct geophysical operations is unclear. By statute, Louisiana prohibits seismic exploration unless the explorer "has obtained the consent of either the owner or the party or parties authorized to execute geological surveys, leases or permits as provided in the Louisiana Mineral Code."¹² In Tinsley v. Seismic Explorations, Inc.,¹³ the Louisiana appellate court affirmed a judgment against a geophysical company for an unauthorized seismic survey who had obtained consent from the mineral owner/lessor, but not the lessee. The lessee, the court held, owned the exclusive right to explore the property. On appeal,¹⁴ the Louisiana Supreme Court reversed, declining to award the mineral lessee damages because it failed to prove any actual damages had occurred. It also refused to affirm the appellate court's holding that the mineral lessee acquired the exclusive right to conduct geophysical operations, "conceding without deciding" that issue.¹⁵

Subsequently, in Musser Davis Land Co. v. Union Pacific Resources,¹⁶ the Fifth Circuit, construing Louisiana law, had to determine whether UPR had the right to conduct seismic operations pursuant to its lease without the consent of the lessor. Acknowledging that the Louisiana Supreme Court had diminished the precedential value of the appellate court's decision in Tinsley, the Fifth Circuit held that UPR's operations did not constitute a trespass under Louisiana Revised Statutes §30:127 "because the lease constitutes authorization and consent to such operations by the

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landowner."¹⁷ While allowing the mineral lessee to conduct geophysical operations pursuant to its lease, the Musser case, however, did not go so far as to hold that a mineral lessee had the right to permit third parties to conduct such operations without the consent of the lessor.¹⁸

Fractional Mineral Interests. All co-owners of minerals own the right to explore, and any cotenant may explore and develop the minerals without the consent of the other cotenants, subject to an obligation to account to the other cotenants for net profits.¹⁹ Presumably, then, a single cotenant can grant the necessary consent to conduct geophysical operations, regardless of how small the cotenant's fractional interest might be.²⁰ But cases dealing with the rights of cotenants generally are in the context of drilling and production activities. With only two exceptions, the issue has not been directly addressed in the context of geophysical operations.

The first exception is Louisiana.²¹ Louisiana's Civil Code states that the use of land held in cotenancy is to be determined by the agreement of all the co-owners.²² The Mineral Code, however, modifies the Civil Code, requiring an explorer to obtain consent from cotenants owning at least 80 percent of the mineral interest for both exploration and development,²³ unless necessary to prevent waste, destruction or extinction of the mineral servitude.²⁴ But the explorer cannot stop when it reaches the 80 percent plateau.

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It must use "every effort" to contact the remaining owners and offer them substantially the same terms as the consenting owners.²⁵

The other exception is Oklahoma.²⁶ In Enron v. Worth,²⁷ Enron obtained leases or farmouts covering half of the acreage over which it intended to conduct geophysical operations. As to the other half, Enron obtained seismic permits from some, but not all, of the mineral owners. The surface owner refused to grant Enron access to the property and Enron filed suit seeking an injunction against the surface owner. The trial court granted the injunction as to that half of the lands covered by the leases and farmouts, but denied it as to the other half on the basis that the permits did not grant Enron the right to drill and produce the minerals. The court of appeals reversed, specifically rejecting the argument that geophysical exploration requires the consent of...