Employing a Reservoir Community Analysis to Define and Marshal Correlative Rights in the Oil and Gas Reservoir

• Author: David E. Pierce
• Position: Director, Washburn Oil and Gas Law Center. Norman R. Pozez Chair in Business and Transactional Law at Washburn University School of Law, Topeka, Kansas.
• Pages: 787-807

Employing a Reservoir Community Analysis to Define and Marshal Correlative Rights in the Oil and Gas Reservoir David E. Pierce * TABLE OF CONTENTS Introduction .................................................................................. 787 I. The Ad Coelum Doctrine .............................................................. 789 II. The Rule of Capture ..................................................................... 790 III. Conservation Regulation and Correlative Rights ......................... 792 IV. Intra-Reservoir Conflicts and the “Property Line” Analysis ........ 795 A. Garza : A Weak and Incorrect Analysis ................................. 796 B. Stone : A Strong but Equally Incorrect Analysis .................... 797 V. The Reservoir “Neighborhood” Analysis ..................................... 799 A. Correlative Rights .................................................................. 800 1. Negative Rights and Fear of “Fair Share” Allocation ..... 800 2. The First Gas Balancing Case: Hague v. Wheeler ........... 801 B. Professor Kuntz’s “Special Community” ............................... 803 C. A “Reservoir Community” Analysis ...................................... 804 1. Define Community Membership ..................................... 804 2. Define the Physical Attributes of the Reservoir Community ...................................................................... 804 3. Evaluate the Activity Impacting the Reservoir Community ...................................................................... 805 Conclusion .................................................................................... 806 INTRODUCTION The Louisiana Mineral Code has much to offer common law jurisdictions that seek to more completely define the oil and gas property interest. As Copyright 2016, by DAVID E. PIERCE. * Director, Washburn Oil and Gas Law Center. Norman R. Pozez Chair in Business and Transactional Law at Washburn University School of Law, Topeka, Kansas. 788 LOUISIANA LAW REVIEW [Vol. 76 common law courts grapple with cross-boundary intra-reservoir conflicts, such as hydraulic fracturing (“frac”) fissures that cross subterranean property lines, the Louisiana Civil Code provides useful guidance on how to be “neighborly” 1 while the Mineral Code reminds us that reservoir rights are “correlative.” 2 These Code provisions provide accurate and useful reminders about the scope of “ownership” within an oil and gas reservoir. 3 As is often the case, the Code provisions also provide guidance for how common law jurisdictions might better address oil and gas issues. 4 In typical elegant fashion, the Mineral Code states: “Landowners and others with rights in a common reservoir or deposit of minerals have correlative rights and duties with respect to one another in the development and production of the common source of minerals.” 5 In the past, most of the focus has been on “rights and duties” that place limitations on what an owner can do within the reservoir: negative rights. 6 This Article explores the 1. LA. CIV. CODE art. 667 (2015) (“Although a proprietor may do with his estate whatever he pleases, still he cannot make any work on it, which may deprive his neighbor of the liberty of enjoying his own, or which may be the cause of any damage to him.”); see also LA. REV. STAT. ANN. § 31:10 & cmt (2000) (describing Article 10 as “a limited restatement of the obligation of good neighborhood contained in Article 667 of Louisiana Civil Code”). Article 2 of the Mineral Code explains the relationship between the Mineral Code and the Civil Code by providing that in the event of a conflict regarding a mineral law issue the Mineral Code “shall prevail.” LA. REV. STAT. ANN. § 31:2. Otherwise, the Mineral Code is “supplementary” to the Civil Code. Id. 2. LA. REV. STAT. ANN. § 31:9. 3. As used in this Article, the term “reservoir” has the same meaning as the term “pool” that Louisiana law defines as “an underground reservoir containing a common accumulation of crude petroleum oil or natural gas or both.” LA. REV. STAT. ANN. § 30:3(6) (2007); see also LA. REV. STAT. ANN. § 31:213(3) (2000) (adopting same definition). 4. The best examples of common law states seeking to mimic Louisiana law to address nagging oil and gas problems are the “Dormant Mineral” and “Mineral Lapse” acts designed to impose a “use” requirement to perpetuate a severed mineral interest beyond a stated statutory period. See generally Texaco, Inc. v. Short, 454 U.S. 516 (1982) (upholding the Indiana dormant mineral act designed to terminate a “mineral interest” if not “used” for 20 years and the owner fails to file a statement of claim); Scully v. Overall, 840 P.2d 1211, 1214 (Kan. Ct. App. 1992) (distinguishing terms of the Kansas mineral lapse act from the Indiana act). Title examiners across the nation are envious of Louisiana’s mineral servitude doctrine that avoids the myriad perpetual estates in minerals that exist under the common law system. 5. LA. REV. STAT. ANN. § 31:9 (emphasis added). 6. See, e.g. , Elliff v. Texon Drilling Co., 210 S.W.2d 558, 559 (Tex. 1948) (negligent operations resulting in blowout and damage to the reservoir). This concept is articulated in Article 10 of the Mineral Code: “A person with rights in a common reservoir or deposit of minerals may not make works, operate, or otherwise use his rights so as to deprive another intentionally or negligently of the liberty of enjoying his rights, or that may intentionally or negligently cause 2016] EMPLOYING A RESERVOIR COMMUNITY ANALYSIS 789 positive rights aspects of correlative rights and how such an analysis can assist in resolving intra-reservoir conflicts. Development of a coherent analysis of correlative “rights and duties” in the oil and gas reservoir has been stunted by the ad coelum doctrine and the rule of capture. The quest for a more complete definition of property in oil and gas begins with the foundational concepts created by the ad coelum doctrine and the rule of capture, followed by qualifying principles created by correlative rights and conservation regulation. The contours of correlative rights are explored in the context of subsurface boundary disputes that require a precise delineation of rights in oil and gas reservoirs lacking physical boundaries. The study is completed with the author’s “reservoir community” analysis that defines and marshals each owner’s positive and negative correlative rights in a reservoir. I. THE A D C OELUM DOCTRINE Much of the law of real property depends upon boundary lines drawn upon the surface of land. Boundaries define “ownership” and the unlawful invasion of ownership: “trespass.” 7 The “ ad coelum doctrine” is the abbreviated term used to describe the extent of ownership in land within surface boundaries. 8 Ownership extends above and below the land surface. 9 The ad coelum doctrine is a foundation of land law everywhere in the United States. 10 For example, the civil law statement of the doctrine is contained in Louisiana Civil Code article 490: damage to him.” LA. REV. STAT. ANN. § 31:10; see also Mobil Exploration & Producing U.S. Inc. v. Certain Underwriters Subscribing to Cover Note 95-3317(A), 837 So. 2d 11, 36 (La. Ct. App. 2002) (applying Article 10 and the comments to negligent drilling operations that resulted in a blowout and loss of “an ownership interest in hydrocarbons to be produced from the property at issue”). 7. Boundaries also play a similar role in defining the unlawful interference with ownership: “nuisance.” 8. The complete maxim is: cujus est solum, ejus est usque ad coelum et ad inferos , which is translated: “To whomsoever the soil belongs, he owns also to the sky and to the depths.” BLACK’S LAW DICTIONARY 341 (5th ed. 1979). 9. See supra note 8. 10. The ad coelum doctrine has been adopted, either by common law or by statute, to draw the necessary subsurface boundary lines. For example, the Supreme Court of Arkansas adopted it by decision in Osborn v. Arkansas Territorial Oil & Gas Co. , 146 S.W. 122, 124 (Ark. 1912). North Dakota, in 1877, adopted the following statute: “The owner of land in fee has the right to the surface and to everything permanently situated beneath or above it.” N.D. CENT. CODE § 47-01-12 (West, Westlaw through 2015 legislation). Professor Kuntz has observed in his treatise: “Ownership of land carries with it ownership of or the exclusive right to enjoy substances under the surface.” 1 EUGENE KUNTZ, A TREATISE ON THE LAW OF OIL AND GAS 59 (1987). 790 LOUISIANA LAW REVIEW [Vol. 76 Unless otherwise provided by law, the ownership of a tract of land carries with it the ownership of everything that is directly above or under it. The owner may make works on, above, or below the land as he pleases, and draw all the advantages that accrue from them, unless he is restrained by law or by rights of others. 11 The Louisiana Mineral Code applies this doctrine to “minerals occurring naturally in a solid state .” 12 This extension of surface boundaries to define subsurface rights operates on the same fence-line mentality used to define surface rights. 13 The problem, however, is that oil and gas can move within the reservoir rock structure and thereby migrate across the downward projection of surface boundary lines. 14 This aspect of oil and gas prompted courts to develop the rule of capture. II. THE RULE OF CAPTURE In Louisiana, the rule of capture is found in article 8 of the Mineral Code that authorizes a landowner to “reduce to possession and ownership all of the minerals occurring naturally in a liquid or gaseous state that can be obtained by operations on or beneath his land even though his operations may cause their migration from beneath the land of another.” 15 That is the affirmative statement of the rule. Article 14 states the negative corollary of the rule: “A landowner has no right against another who causes drainage of liquid or gaseous minerals from beneath his property if...