Chapter 8 Surface Use for Oil & Gas in the Permian Basin - Access, Use, and Damages

• Jurisdiction: United States

Chapter 8 Surface Use for Oil & Gas in the Permian Basin - Access, Use, and Damages

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Garrett S. Melchiorre Cotton, Bledsoe, Tighe & Dawson, PC Midland, TX

GARRETT S. MELCHIORRE is a Shareholder in the Oil and Gas Title Examination and Transactional Section of Cotton, Bledsoe, Tighe & Dawson, PC. He earned a Bachelor of Arts in Policy Studies from Syracuse University in 2005, Master of Science in Elementary Education from Brooklyn College of the City University of New York in 2007, and Juris Doctor from Chicago-Kent College of Law in 2010. Licensed in Texas and New Mexico, he has practiced law in Midland, Texas since graduating from law school and is Board Certified in Oil, Gas and Mineral Law by the Texas Board of Legal Specialization. He primarily renders drilling, division order and acquisition title opinions covering state, federal and privately owned lands in Texas and New Mexico and advises clients on all aspects of exploration and production activities, including complex leasehold and title issues and selling and acquiring assets. He is a fellow of the Texas Bar Foundation and a member of the Oil, Gas and Energy Resources Law Section of the State Bar of Texas, American Association of Professional Landmen and Permian Basin Landmen's Association.

I. Introduction^*

For more than three hundred years after the first Spanish explorers set foot on the perimeter of the region of West Texas and Southeastern New Mexico known today as the Permian Basin, it was generally regarded as a desert wasteland unsuitable for human occupation and having little value.¹ In 1850, an early American explorer described the supposedly useless terrain, as "wholly unfit for agriculture" and a "desolate, barren waste, which can never be rendered useful by man or beast, save for a public highway."² Maps published in the late 1850s designated the wide expanse of desert as terra incognita, Latin for unknown or unexplored land.³

By the 1880s ranchers searching for quite literally, greener pastures, had moved their large herds of cattle into the open range of West Texas and Southeastern New Mexico drawn by the excellent quality of grass, ample water resources, relatively easy travel over the flat plains, and minimal danger of Indian attacks.⁴ Any notion these ranchers had found an idyllic location to live off the land, however, was short-lived. They soon discovered the semi-arid climate of West Texas and Southeastern New Mexico made the land suitable for grazing fewer than a dozen cows to a section.⁵ Prolonged droughts were common to the region and would have devastating effects for years on end.⁶ Despite these hardships, ranching was the basic enterprise of the Permian Basin for the next half-century.⁷

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It was not until the 1920s, when wildcatters made the first commercial oil discoveries in the Westbrook Field in Mitchell County, Texas, Big Lake Field in Reagan County, Texas, most famous for the Santa Rita No. 1 well, and Artesia Field in Eddy County, New Mexico, that the oil business came to dominate the regional economy.⁸ The rich returns of these early commercial wells confirmed the presence of oil over a wide expanse of territory and sparked a rush of exploration and leasing activity throughout the Permian Basin.⁹ Almost overnight, oil scouts, geologists and landmen flooded the Permian Basin to locate open acreage and secure oil and gas leases from landowners which in turn brought prosperity and growth to the region.¹⁰ The oil boom of the 1920s changed the financial outlook for many ranchers struggling to make ends meet through the payment of lease bonus, rentals and royalty, so long as they still owned their minerals. The oil boom also improved the quality of life for the workers and residents who called the growing communities near the oil fields of the Permian Basin home.¹¹

The destiny of the Permian Basin has been quite different from the bleak one predicted by its early explorers. Today, the once sparsely populated Permian Basin has become one of the most active energy producing areas in the world due to recent advances in horizontal drilling and hydraulic fracturing technology that can unlock the vast reserves of oil and gas beneath the surface.¹² The Permian Basin's evolution from an economy rooted in ranching and agriculture to an economy largely dependent upon oil and gas development has resulted in tension between surface owners and mineral owners¹³ as to what constitutes reasonable use of the surface. The rapid expansion of oil and gas development throughout a more densely populated Permian Basin coupled with the increasingly common practice of companies paying surface damages for conducting oil and gas operations has resulted in huge financial windfalls for many surface owners even when they do not own the minerals underneath their land.

Lawyers and landmen working in the Permian Basin will often represent clients who own property rights or conduct oil and gas operations on both sides of the Texas/New Mexico border. As a result, practitioners must be familiar with the oil and gas law concepts and practices of both states. The objective of this paper is to provide Permian-focused lawyers and landmen a general overview of the similarities and differences between the approaches of Texas and New Mexico with respect to surface use for oil and gas development. Section II provides a brief overview of the common law principles that have emerged in Texas and New Mexico regarding the creation of split estates and the dominant mineral estate. Section III explores the development of Texas case law regarding reasonably necessary surface use and the limitations placed on the dominant mineral estate theory in Texas, including the accommodation doctrine. Section IV briefly covers the future of the accommodation doctrine in Texas through the lens of Lyle v. Midway Solar, LLC. Section V discusses New Mexico case law regarding reasonably necessary surface use. Finally, Section

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VI discusses the comprehensive surface use legislation enacted by the New Mexico legislature in 2007. This paper generally focuses on private lands rather than State or Federal Lands.

II. Overview of the Common Law Governing Split Estates

A. Creation of the Split Estate

It is helpful to begin with a review of the common law doctrine related to the creation of split estates to understand why an increasingly large number of surface owners only own a portion of the minerals underneath their land or none at all. Texas and New Mexico are ownership-in-place jurisdictions that recognize a landowner owns the oil and gas under the land "in place" as real property.¹⁴ Ownership-in-place jurisdictions refer to "split estates" and "severance" in connection with surface and mineral estates that have separate ownership.¹⁵

It is generally understood that a deed conveying fee simple title to land without reservation or exception conveys the surface and all minerals therein, including oil and gas, even though the deed does not mention the minerals.¹⁶ On the other hand, a deed conveying fee simple title to land may sever the surface estate from the mineral estate resulting in the creation of two separate and distinct estates of fee ownership.¹⁷ When a grant or reservation causes a severance of the land into separate and distinct surface and mineral estates, a split estate is created.¹⁸ Texas and New Mexico recognize that an oil and gas lease is a conveyance of a fee simple determinable interest in the oil and gas in place.¹⁹ Thus, an oil and gas lease causes a mineral severance when the lessor also is the surface owner.²⁰

The owner of a severed mineral interest, whether created by deed or lease, has "the exclusive right to possess" the oil and gas underlying the land.²¹ Often analogizing property rights as a bundle of sticks,²² Texas and New Mexico courts have identified the five essential attributes, or sticks, of a severed mineral interest as: (1) the right to develop (the right of ingress and egress

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to explore for and produce oil and gas); (2) the right to execute oil, gas and mineral leases (the executive right); (3) the right to receive bonuses; (4) the right to receive delay rentals; and (5) the right to receive royalties.²³ Both states recognize that a mineral interest may be stripped of one or more of its attributes by grant or reservation.²⁴

Anyone who has examined title to private lands in Texas and New Mexico understands that undivided fractional ownership of severed mineral interests, usually among a great number of owners, is common in areas such as the Permian Basin that have a long history of production.²⁵ Since the time of the first oil boom, and many boom and bust cycles thereafter, some landowners have profited handsomely from the bonuses paid to lease their land and royalty payments on production. Some landowners, however, realized the value of their minerals by selling all or a portion of their mineral interests outright to mineral buyers.²⁶ It is quite common to see the initial severance of the surface and mineral estates occurring many decades ago by outright sale of the minerals. As a result of these long-standing mineral severances, a large number of surface owners have never owned title to the mineral estate underlying their lands or might only own a small undivided interest in the mineral estate.²⁷ A surface owner who also owns a portion of the mineral estate can attempt to negotiate oil and gas lease terms aimed at protecting surface rights by expressly defining the mineral owner's liability for damage to the surface.²⁸ However, a surface owner who has no interest in the severed mineral estate will not negotiate oil and gas lease terms and therefore has less leverage to protect surface rights by written agreement.²⁹

Surface-only landowners face the predicament of having oil and gas exploration and production activities occur on their land without the benefit of realizing direct financial gain from such activities.³⁰...