CHAPTER 8 ACCESS TO PRIVATE SURFACE AND STATE SURFACE USE LAWS

• Jurisdiction: United States

Surface Use for Mineral Development in the New West
(Feb 2008)
CHAPTER 8
ACCESS TO PRIVATE SURFACE AND STATE SURFACE USE LAWS
Norman D. Ewart
Rosetta Resources, Inc.
Houston, Texas

I. Introduction

Several factors have played a role in the enactment of surface access and compensation legislation. The increasing expansion of residential development into areas of oil and gas development has resulted in state governments enacting legislation on surface use. Other contributing factors include agricultural interest groups advancing their interests in state legislatures. Industry practices of paying for surface damage perhaps has itself contributed to an expectancy of payment for surface use, and consequently contributed to surface use legislation.

The tensions between oil and gas development, other surface uses and residential development continues to be an issue. In 2007, three state legislatures, New Mexico, Colorado and Texas took different statutory approaches to the relationship between oil and gas operators and surface owners. As described in this paper, the legislative approach adopted in each of these three states differs significantly. New Mexico adopted a "Surface Owners Protection Act" similar to surface access and compensation statutes existing in other states which limit the "dominant" rights of the mineral estate to access the surface to explore and develop the minerals.¹ Colorado took an entirely different approach by codifying the common law dominance of the mineral estate and the accommodation doctrine.² Texas enacted legislation affirming the dominance of the mineral estate and requiring the oil and gas lessee to notify the surface owner, without codifying the accommodation doctrine.³ In addition to the various state statutes, the Bureau of Land Management ("BLM") also is regulating surface access through requiring notice, surface use agreements, or in the alternative, bonding for surface damage.

In addition to surface access legislation, Colorado and Texas have enacted legislation addressing residential subdivision development and protecting oil and gas exploration and development. This paper will briefly discuss the common law dominant mineral estate and the accommodation doctrine before analyzing the state surface access statutes. A table summary of the state statutes and BLM regulations is attached hereto as an appendix.

II. The Dominant Mineral Estate and the Accommodation Doctrine

Minerals and the surface to land may be separated or severed by several means, including by mineral deed, by reservation of minerals from a grant of surface, or by other means. When the minerals in land are severed from the surface, the mineral estate becomes a separate property interest in the land. The severance of the mineral estate and surface estate requires that an easement in favor of the mineral estate be implied to assure

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access to the surface. Consequently, the mineral estate includes an implied easement to the surface, limited by the reasonable necessity.⁴ In general, reasonableness of use has been determined by industry practices.⁵

The accommodation doctrine was developed by the courts to temper the dominant rights of the mineral estate to reasonably accommodate the surface owner's existing use of the surface. Without the accommodation doctrine, where there was a conflict between the rights of the mineral owner and the rights of the surface owner, the mineral owner's rights prevailed over the interests of the surface owner. Under the accommodation doctrine, limits are placed on the mineral owner's right to use the surface by requiring the mineral owner, in exercising its rights to use the surface, to act with due regard for the interests of the surface owner.⁶ The accommodation doctrine requires the mineral owner to consider the rights of the surface owner and to accommodate the existing uses of the surface if those uses do not unreasonably interfere with the mineral owner's operations.

The common law generally provides that the mineral owner is only liable for damage to the surface if the surface owner can show negligence, unless there is a contractual arrangement providing for damages.⁷ Under the common law, the surface owner can generally recover the diminution in value to the surface for permanent damage and restoration costs for temporary damage, not to exceed the value of the land.⁸

III. Surface Use Statutes

A. New Mexico and Similar Surface Owner Protection Legislation

New Mexico's "Surface Owner's Protection Act"⁹ is similar to the existing surface compensation statutes in states such as Illinois,¹⁰ Kentucky,¹¹ Montana,¹² North Dakota,¹³ Oklahoma,¹⁴ South Dakota,¹⁵ Tennessee,¹⁶ West Virginia,¹⁷ and Wyoming.¹⁸

The purposes of the surface owner protection statutes in this these states are: to minimize damage suffered by surface owners; to prevent harm to the general public by potential loss of available surface for agricultural or other beneficial purposes; to promote settlement of disputes between surface owners and mineral owners; and not to prevent or delay exploration and development of minerals. A few of the surface owner compensation statutes recite that the goal underlying the statute is an exercise of the state's police power to protect the public welfare.¹⁹

North Dakota was the first state to enact a surface owner compensation statute. Montana, Tennessee, and West Virginia have statutes modeled on the North Dakota statute, but with differences in timing of notice to the surface owner and arbitration provisions. Illinois and Kentucky have similar statutes which apply only when the surface owner has not consented to the mineral owner's operations. The Indiana statute is similar to the other statutes in that it imposes liability for surface damages, regardless of fault, but differs from the other statutes in that it does not require notice or bonding.²⁰ As more specifically described below, the New Mexico statute enacted in 2007 places

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additional obligations on operators, as compared with the obligations imposed by the surface owner protection statutes in the other states.

As discussed below, these surface owner compensation statutes generally may include the following provisions: (i) a requirement that the mineral owner provide notice to the surface owner prior to commencement of operations; (ii) either an offer to meet with the landowner to discuss proposed operations or an offer of settlement/surface use agreement prior to commencement of operations; (iii) bonding requirements or other financial security, if the operator does not reach an agreement with the surface owner; (iv) specific categories of damage liability; and (v) various dispute resolution avenues.

1. Notice

Although most of the surface owner compensation statutes require an operator to provide written notice to the surface owner prior to commencement of operations within specified periods of time, the statutes of Indiana, Tennessee and West Virginia, do not require such prior notice. The required content of the notice is specified in the statutes, and in some jurisdictions may include facility locations, roads, wells, pits, pines, pads, and tanks. In New Mexico and Montana, the notice must contain a copy of the pertinent statute, and a sufficient disclosure of the plan of operations to enable the surface owner to evaluate the effect of operations on the property. In New Mexico, a proposed surface use agreement must accompany the notice.

2. Access and Compensation Agreement or "Bonding On"

The New Mexico, Oklahoma and Wyoming surface owner compensation statutes require that the owners of the mineral rights and the surface rights enter into a surface use agreement prior to commencement of operations or, if an agreement cannot be reached, the operator can "bond on" by posting of a bond or other financial security to cover potential surface damages. Excluding the New Mexico statute, the statutes do not specify in detail what the surface use agreements should contain. New Mexico's statute contains a list of required contents for a proposed surface use agreement.²¹

The amount of the bond requirements vary from state to state, ranging from Two Thousand Dollars per well to a Twenty Five Thousand Dollar blanket bond. New Mexico's statute requires bonding (or CD or letter of credit) with a New Mexico surety company or financial institution of Ten Thousand Dollars per well or a Twenty Five Thousand Dollar blanket bond. However, no New Mexico surety company or financial institution issues bonds for surface access and compensation. While it may not be possible to technically comply with the requirement to obtain a bond from a New Mexico surety company or financial institution, obtaining a bond from a non-New Mexico financial institution should satisfy the purposes of the statute so long as the financial institution has the ability to financially support the monetary amount of the bond obligation. Using a non-New Mexico institution would only be a problem if the institution could not support the financial obligations of the bond. Further, the New

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Mexico legislature intended that operators be able to use bonds to financially support potential surface damage compensation.

The New Mexico statute prescribes that a single well bond may not be released unless: the surface owner provides notice of compensation for damages; a surface use agreement between the mineral owner and the surface owner has been executed; the surface owner agrees that the bond should be released; there has been a final resolution of any action for damages, and such damages have been paid; or all wells have been plugged and abandoned and the operator has not conducted activities on the property for six years. A blanket bond may not be released until six years after the operator has filed a certified statement from New Mexico's Oil Conservation Division that the operator is no longer the...