COMPLYING WITH AND LITIGATING UNDER THE NEW MEXICO SURFACE OWNERS PROTECTION ACT

• Jurisdiction: United States

53 Rocky Mt. Min. L. Fdn. J. 49 (2016)
Chapter 2
COMPLYING WITH AND LITIGATING UNDER THE NEW MEXICO SURFACE OWNERS PROTECTION ACT
Stephen D. Ingram
Cavin & Ingram, P. A.
Albuquerque, New Mexico

Copyright © 2016 by Rocky Mountain Mineral Law Foundation; Stephen D. Ingram

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I. Introduction

The New Mexico Surface Owners Protection Act (SOPA)¹ was enacted in 2007. It arises from the modern regulatory environment affecting access by the mineral estate to the surface estate. It significantly alters common law concerning the mineral lessee's use of the surface. From the surface owner's perspective, it provides the opportunity to receive notice of impending operations and security for surface damages that did not exist before. From the operator's perspective, it largely reverses the presumption that the mineral lessee can use the surface without liability to the surface owner unless such use is unreasonable, but also provides a more definite means of gaining surface access. Both surface owners and oil and gas operators should know and understand the provisions of SOP A.

II. Background

The general rule is that a mineral lessee's right to use the surface is limited by five principles: the lessee's use must be (1) reasonable; (2) in accordance with the accommodation doctrine; (3) for the benefit of the minerals under the land leased; (4) in accordance with the terms of the lease; and (5) in accordance with applicable statutes and regulations.²

In New Mexico, as in other oil and gas producing states, the common law rule that has been developed is that the mineral estate is considered the "dominant" estate and the surface estate is considered the "servient" estate. Accordingly, the mineral estate can access the surface for the purpose of developing and producing oil and gas without the surface owner's permission and without interference by the surface owner.³

The traditional rule under New Mexico law has been that the mineral lessee is entitled to use as much of the surface area as is reasonably necessary for its drilling and production operations, with due regard for the

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rights of the surface owner, without liability to the surface owner.⁴ Under the traditional rule, the mineral lessee has not been obligated to return the surface to its pre-drilling condition.⁵ Damage to the surface estate by the mineral interest owner has been founded ordinarily only upon unreasonable, excessive or negligent use of the surface.⁶ Reasonable and non-excessive use of the surface by a mineral lessee may include, among other things, constructing roads, laying pipelines, drilling wells, storing supplies and materials, erecting structures and placing tanks on the surface, and using produced salt water for repressuring operations.⁷

The traditional rule is abrogated if there is a contract that provides for payment of damages to the surface owner or surface lessee by the mineral lessee regardless of whether the surface use is negligent or excessive.⁸ In Tidewater Associated Oil Co. v. Shipp,⁹ a state mineral lessee performing a geophysical survey on state leased surface was held liable to a state grazing lessee for damages to livestock, without consideration of whether the damage was caused by negligent or excessive activity, because the state mineral lease required the mineral lessee to compensate the grazing lessee for damage to livestock.¹⁰

The traditional rule governing surface damage liability is also abrogated if there is a statute or regulation altering this rule. SOPA is such a statute.

III. Background of SOPA

SOPA was enacted effective July 1, 2007. Many other states, counties, and municipalities have also enacted limitations on the ability of the mineral estate owner to use the surface estate. Other states with surface owner compensation acts include North Dakota,¹¹ Oklahoma,¹² and

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Wyoming.¹³ New Mexico's SOPA is similar to North Dakota's and Oklahoma's acts in many respects.

IV. Purpose of SOPA

SOPA does not provide a stated purpose within its provisions. Its purpose has been construed to be as follows:

The purpose of SOPA is to balance surface owners' and mineral lessees' interests. SOPA aims to minimize damage and loss of available surface for agriculture caused by oil and gas operations, Section 70-12-4, to promote a fair negotiation process between the surface owner and the mineral lessee, Section 70-12-5, and to not delay exploration and development of minerals, Section 70-12-6. ¹⁴

V. Where SOPA Applies

A. What Surface Is Covered by SOPA

SOPA applies to (1) "private fee surface land," and (2) "leasehold interests in any land on which oil and gas operations are conducted when the tenant incurs damages to leasehold improvements as a result of oil and gas operations."¹⁵ SOPA can therefore be triggered not only when an operator deals with a private landowner, but also when it deals with a surface lessee. Section 70-12-2(B) of SOPA does not specify that "leasehold interests" are limited to privately owned surface, so state and federal grazing leaseholds may be included.

B. What Minerals Are Covered by SOPA

SOPA does not specify whether it applies to an operator exploring for fee, state, or federal minerals underlying the surface. It clearly applies to privately owned minerals.

In practice, SOPA is treated as applying to state minerals. For access to fee surface overlying state minerals, there are no separate New Mexico state agency regulations, so the operator should follow SOP A. For access to the surface of state trust lands under a state mineral lease, State Land Office regulations require a $10,000 surety bond to be posted in favor of the State of New Mexico for the benefit of surface lessees "to secure payment to the extent allowed by law for such damage to their interests and tangible improvements upon such lands as may be suffered by reason of development, use and occupation of the lands by the oil and gas lessee."¹⁶

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Alternatively, a $20,000 blanket bond or surety is acceptable, unless a surface lessee shows the State Land Commissioner that such an amount is inadequate in a given case.¹⁷

Lessees of federally owned minerals are of course already subject to existing federal regulatory regimes for surface access. For access to the surface by a lessee of federal minerals, the Bureau of Land Management's (BLM) Onshore Oil and Gas Order No. 1 requires that the operator make good faith efforts to notify the private surface owner before entry in connection with well staking, applications for permission to drill and conducting of cultural or biological surveys.¹⁸ Federal regulations require an operator to exercise "due care and diligence" to ensure that leasehold operations do not result in "undue damage" to the surface or surface improvements.¹⁹ The operator's liability for damages to third parties "shall be governed by applicable law."²⁰ Prior to BLM approval of an application for permission to drill or sundry notice for new surface disturbing activities, the operator must certify a good-faith effort to reach a surface use agreement with a private surface owner, and if no agreement is reached, the operator must post a bond with the BLM, which may be a separate bond to protect the surface owner where there is a split estate.²¹ If such minerals were originally reserved by the United States under the Stock-Raising Homestead Act,²² then the mineral owner is to provide prior notice to the surface owner before entry for operations and post a bond to secure payment of damages to crops, tangible improvements, and value of the land for grazing.²³

Despite federal regulation of access to surface overlying federal minerals, there is authority for the proposition that SOPA applies to fee surface overlying federal minerals as well. Section 70-12-2(B) states that SOPA applies to "leasehold interests in any land on which oil and gas operations are conducted" as concerns damage to leasehold

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improvements.²⁴ More stringent state or local regulations may be accepted or ratified as part of federal regulation.²⁵ Wyoming, for example, has administered its Surface Owner Accommodation Act as applying to all surface lands, including those overlying federal minerals.²⁶ However, there appears to be no uniform practice thus far in New Mexico as to SOPA compliance concerning fee surface access over federal minerals.

C. To Whom SOPA Applies

SOPA applies to operators, surface owners and surface tenants.

An "operator" under SOPA is a person with a legal right to conduct oil and gas operations, and includes the agents, employees and contractors of that person.²⁷ Thus, operators should ensure all of their contractors follow SOPA, and should be involved as to when and how their contractors access the surface to conduct operations.

A "surface owner" under SOPA is "a person who holds legal or equitable title, as shown in the records of the county clerk, to the surface of the real property on which the operator has a legal right to conduct oil and gas operations."²⁸ Thus, the operator should rely on county clerk records, not tax assessor's records, as to surface ownership. This raises the question of fractional undivided surface interests. SOPA does not specify whether the operator has to give notice to all fractional undivided surface interest owners, or if notice to one will suffice. Another question concerns how to determine who holds "equitable title." An example of this would be land occupied under a real estate contract, or contract for deed, in which the seller retains legal title, but the buyer occupying the land has equitable title.

Section 70-12-3(D) requires that the person accessing the surface have the "legal right to conduct operations." Such rights would be conferred by a lease from the mineral owner, a permit from the mineral owner, a farmout agreement, a term assignment, or possibly by other means. Related to this issue is the general rule that a...