CHAPTER 8 ADDRESSING KEY ITEMS IN SURFACE USE AGREEMENTS

• Jurisdiction: United States

Oil and Gas Agreements: Surface Use in the 21st Century (May 2017)
CHAPTER 8
ADDRESSING KEY ITEMS IN SURFACE USE AGREEMENTS
Randall B. Reed
Dray, Dyekman, Reed & Healey, P.C.
Cheyenne, WY
Lindsay A. Woznick
Hirst Applegate, LLP
Cheyenne, WY ¹

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RANDALL B. REED is a partner at the Cheyenne law firm of Dray, Dyekman, Reed & Healey. He has practiced at the same firm for 26 years, focusing on the areas of real property, oil and gas, mineral tax, regulated utility and business law. Randy has been recognized for his professional achievements by being selected as a top tier attorney in Mountain States Super Lawyers, Best Lawyers/US News and World Report and Chambers and Partners USA. Randy graduated from the University of Wyoming College of Law in 1991. Randy grew up on a ranch just outside the small town of Lusk, Wyoming, and appreciates the value of personal property rights, while at the same time understands the value that multiple uses of real property can provide.

LINDSAY A. WOZNICK is an AV rated partner at Hirst Applegate, LLP where she has practiced law since 2005. Prior to joining Hirst Applegate, Lindsay attended the University of Wyoming College of Law where she graduated with honors, Order of the Coif, and Order of the Barristers. She obtained her bachelor's degree in Education from the University of Wyoming, graduating with honors, Summa Cum Laude. Her practice is focused primarily in the areas of commercial litigation, oil, gas and energy law, real estate law, creditors' rights and banking law, and estate planning and estate administration. She is a member of the Rocky Mountain Mineral Law Foundation, Wyoming Bar Association, Laramie County Bar Association, Southeast Wyoming Estate Planning Council and WealthCounsel. Ms. Woznick was named as one of the Wyoming Business Report's 2015 Top 40 under 40, and she has been recognized by Chambers and Partners for her real estate practice. She has extensive experience handling complex real estate transactions and in drafting and negotiating surface use agreements, easements, oil and gas leases, and land use agreements on behalf of oil and gas operators, pipeline companies, utilities, and surface owners.

I. Introduction²

The changing landscape throughout the West, and particularly in more densely populated areas, is causing a shift in how parties negotiate surface use agreements. What were once fields or pastures have now become residential developments with occupants that very likely have no economic interest in the potential oil and gas reserves beneath their property. Oil and gas development in more populated areas has created a vast array of concerns and implications for all parties involved. With the increase in horizontal drilling and centralized well pads comes an increased importance for both oil and gas operators and landowners to make sure the surface use agreement is thoroughly and thoughtfully drafted.

This paper will discuss the backdrop against which the parties enter negotiations for oil and gas surface use agreements and will provide a discussion of customary provisions of a typical surface use agreement.³ While there is no such thing as a "standard form of surface use agreement", this paper is intended to introduce the key items to address in a surface use agreement with the landowner.

II. Background

A surface use agreement is a voluntary agreement between the surface owner and the mineral owner or lessee that will govern the relations between the two parties with regard to the lessee's use of the surface for oil and gas development. Its primary purpose is to resolve as many of the conflicts that exist between the mineral and surface owners as possible so that the parties

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avoid future disputes and potential litigation. While not every issue can be anticipated and covered in a surface use agreement, the process of negotiating such an agreement allows the parties to develop trust and rapport, and make positive progress towards avoiding future conflict and maintaining workable relationships.

In the absence of a surface use agreement, the actions of the mineral estate and surface estate owners are controlled by the law of the jurisdiction where the property is located. When the mineral and surface estates are severed, the mineral estate benefits from being the "dominant estate," while the surface is the "subservient estate."⁴ The owner of the mineral estate has the right to use so much of the surface as is reasonably necessary to access and develop the minerals.⁵ The rights enjoyed by the mineral estate owner have been described as implied easements.⁶ Without these implied rights a mineral owner's estate "would be worthless."⁷

The concept of what is a "reasonable use" or "reasonably necessary" is augmented by the accommodation doctrine, adopted by the Texas Supreme Court in Getty Oil Co. v. Jones and followed in many of the oil and gas producing states.⁸ This doctrine seeks to balance the competing interests of the surface owner's continued use of the surface with the necessity of ingress and egress for the mineral owner. It requires the mineral owner to "reasonably accommodate" or give "due regard" for the surface estate's rights.⁹ Therefore, when a reasonable alternative is available to the mineral owner, this doctrine requires the mineral owner to exercise that alternative.¹⁰ The doctrine also establishes that the mineral owner cannot use more of the surface than is reasonably necessary.¹¹ States vary in how they word and apply this doctrine, with some benefitting surface owners more than others.¹²

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A leading case from Colorado on the subject of reasonable accommodation is helpful in understanding the burden the doctrine places on the landowner when it comes time to prove an excessive use by the operator.¹³ The shifting burden demonstrates how difficult it can be for surface owners to meet their burden:

[I]n order to establish a prima facie case of trespass, the surface owner's initial burden is to present evidence that the operator's conduct materially interfered with surface uses. Evidence that the operator's conduct was merely inconvenient to the surface owner is insufficient. A material interference with surface use, for the purpose of establishing a prima facie case, is an interference which is not reasonable from the perspective of the surface owner and considering only the impact on the surface use.

To rebut the surface owner's prima facie case, the operator must present evidence, by means of expert testimony or otherwise, that explains why its surface conduct was reasonable and necessary from the perspective of the operator. Assuming the operator presents such evidence, the surface owner would then be permitted to present its own rebuttal evidence that reasonable alternatives were available to the operator at the time of the alleged trespass. Ultimately, it is the province of the trier of fact to balance the competing interests of the operator and surface owner and objectively determine whether, under the circumstances, the operator's surface use was both reasonable and necessary. ¹⁴

So long as the mineral owner's use of the surface is reasonably necessary, there is no obligation to pay surface damage.¹⁵ Therefore, in the absence of a specific statute or regulation giving the surface owner the right to recover damages, his or her causes of action are limited a claim that the mineral owner's actions were excessive, negligently caused damage to the surface, or constitute a trespass.¹⁶

Several western states have adopted statutes to protect the surface estate in recognition of the difficulties suffered by surface owners with respect to mineral exploration and development on their lands, especially in the split estate situation where the surface owner receives no benefit

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from the mineral extraction.¹⁷ These laws set forth procedures an operator must go through prior to drilling, including attempting to negotiate a surface use and damage agreement. While these statutes may require that oil companies pay damages incurred by a landowner, in the absence of an agreement between the parties, the amount of any damages are not likely recoverable without litigation or arbitration, emphasizing the landowner's need for a surface use agreement.

Almost all split estate statutes provide that any contrary terms in a surface use agreement control, allowing the parties a freedom to contract. One recent Wyoming case in particular bears out the significance of the parties' agreement. In Denbury Onshore, LLC v. Robert F. Christensen and Janet K. Christensen, a dispute arose between the Christensens and Denbury over Denbury's use of the Christensens' surface estate to extract federally reserved minerals.¹⁸ The case involved complex and novel issues--issues arising from the uncertainty of how the Wyoming Split Estate Act, the Stock-Raising Homestead Act, and the surface use agreement govern conduct on surface lands overlying reserved mineral interests when the surface owner and the operator cannot agree to the terms of expanded surface use by the operator.

Denbury informed the Christensens that it planned to construct roughly 1,500 feet of new road in order to connect two existing roads. Denbury offered to amend the surface use agreement and pay Christensen the amount of $1,691.26 for this additional use (alleging that it was four times the value of the land disturbed).¹⁹ Christensen rejected Danbury's offer and asked for a larger initial payment and annual payments. Denbury in turn rejected the landowner's counteroffer and began constructing its new road without a signed amendment to the agreement or an agreed upon damage payment. Bonding and litigation then ensued.²⁰

Following a trial in May of 2015, the jury found Denbury breached the implied covenant of good faith and fair dealing in its negotiations with the Christensens under the surface use agreement and awarded...