I DRINK YOUR MILKSHAKE: THE STATUS OF HYDRAULIC FRACTURE STIMULATION IN THE WAKE OF COASTAL v. GARZA
| Jurisdiction | United States |
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I. INTRODUCTION
The United States consumed 23.44 trillion cubic feet of natural gas in 2008.1 Despite a credit crisis and prices that surged as high as $13.31 MMBtu,2 the American appetite for natural gas proved insatiable; domestic consumption in 2008 was the highest on record.3 While surging prices and an economy in recession were enough to temper American demand for oil,4 the consumption of which dropped nearly 6% in 2008, natural gas consumption remained high, growing by a half a percentage point over the same period.5
What's more, the vast majority (over 80%) of the natural gas consumed in this country is also produced in this country,6 and the single largest source of domestic production is the State of Texas (27.8%).7 Long gone, however, are the days of Spindletop. Sophisticated technology is now used to make previously unrecoverable conventional natural gas reserves obtainable and profitable.8 Unconventional sources of natural gas,
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such as shale and tight sand formations, are becoming the key supply drivers, and Texas is brimming with these plays.9
The importance of hydraulic fracture stimulation, the technological tool that is indispensable to this new production, cannot be overstated. Considered a necessary method of enhanced recovery by many in the industry, the procedure has never been without its detractors who view the unfettered and unrestrained use of this technique as a potential trespass.10 The Texas Supreme Court last year ended years of speculation and brought about a collective sigh of relief from the oil and gas industry with its decision in Coastal Oil & Gas Corp. v. Garza Energy Trust.11 The court analyzed (and artfully sidestepped) the question of whether a hydraulic fracture stimulation that extends across property lines constitutes a subsurface trespass.12
The primary objective of this paper is to explore the importance and implications of hydraulic fracture stimulation, both in the energy industry and in energy law. The paper seeks to identify legal doctrine and cases that provide the existing legal context for this technology; analyze the effects of the Texas Supreme Court's recent decision; and forecast the developments yet to come. Part Two provides a simple overview of hydraulic fracture stimulation. Part III provides a concise introduction to the Garza case, including a summary and a short synopsis of the case's significance. Part IV, the Historical Overview, illustrates the development and interpretation of the legal doctrines implicated by hydraulic fracture stimulation. Part V analyzes the role of state regulation, specifically that of the Texas Railroad Commission, upon oil and gas exploration and its effects upon fracture stimulation. Part VI examines prior Texas case law considering the legal status of fracture stimulation. Part VII examines the Texas Supreme Court's use of the concepts of subsurface trespass, rule of capture, and the implied covenant to protect from drainage; it will raise questions as to the logic of the supporting arguments for the court's decision as well as the foreseeable impact on the conduct of oil and gas operators and royalty and mineral interest owners. Part VIII, Conclusion, provides a brief summation of the writer's recommendations and suggestions.
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II. AN INTRODUCTION TO HYDRAULIC FRACTURE STIMULATION
Hydraulic fracture stimulation or "fracing"13 is a method used to increase the production rate of oil and gas wells.14 Fracing is accomplished by pumping tens of thousands of gallons of fluid into a wellbore at a pressure rated as high as 2700 hydraulic horsepower-- enough energy to power a thousand homes.15 Picture a fire hose shoved down an anthill, except that the procedure is typically performed two miles below the earth's surface.
Copious amounts of fluid are injected into a wellbore at such enormous pressure that the reservoir rock -- the formation in which the oil and gas molecules are encased -- splits apart (or fractures).16 These fractures, 1/10th of an inch in diameter at the well and eventually diminishing to zero, spread out horizontally away from the wellbore as far as the fluid pressure and forces of nature will allow.17 If the process is stopped at this point and the liquid removed, the weight of the earth and the subsurface pressure existing two miles deep are so powerful as to slam these fractures shut, often as though they had never been split open in the first place.18
In order to sustain the fractures, the next step is to inject a propping agent, called "proppant."19 The proppant can be anything from naturally occurring sand grains to specially engineered products like sintered bauxite.20 These tiny granules, when pumped into the well bore, wedge themselves into the fractures created by the fluid.21 The fluid is then withdrawn, leaving the fractures and the proppant in place; these propped-open fractures are now pathways of increased conductivity between the reservoir and the wellbore.22 If everything goes right, the rate of production will have increased substantially; oil and gas can flow to the
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wellbore with greater ease and thus at a much greater rate.23 Indeed, production can increase by as much as one and one-half to thirty times over the rate of initial production.24
The concept of fracturing a well to increase production has been with us since at least the 19th century.25 Explosive fracturing was used as far back as the 1860's; it involved the use of a "torpedo," basically a tin can filled with nitroglycerin.26 The explosion would crack the formation, thereby creating flow channels to the wellbore.27 The method was crude but very successful, even inspiring the experimental use of nuclear devices to fracture wells in the late 1950's and early 1960's.28 Explosive fracturing declined in use in the 1930's and 1940's after the introduction and acceptance of a technique called acidizing, whereby acid is pumped down the well in order to dissolve the reservoir rock.29 The very first hydraulic frac job was performed by Amoco Production Company in 1947 on the Klepper Gas Unit No. 1 well, in the Hugoton Gas Field in western Kansas.30
Today, tens of thousands of fracing operations are conducted every year, at costs ranging from $20,000 to $1 million.31 While both oil and gas wells can be fraced, most frac jobs are performed on gas wells.32 Indeed, as recently as 2006, gas well stimulation accounted for 70% of fracture treatments.33 The increased productivity generated by fracing is most pronounced in gas wells, especially tight sand or shale formations like the Barnett Shale.34 Many if not most of these formations would be uneconomic without fracing.35 In point of fact, "the majority of gas reserves in North America are only produced as a result of hydraulic fracturing."36
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III. COASTAL V. GARZA: A BRIEF INTRODUCTION
A. Summary of Facts
The Coastal v. Garza case revolves around a 748 acre parcel of land called Share 13, located in Hidalgo County, Texas, and the various parties to the oil and gas leases covering the land.37 The lessors of Share 13, some forty-four individuals in all, are members of the extended Garza and Salinas families, two branches of the same family tree that have occupied Share 13 for over a century (sometimes referred to below as "respondents").38 The lessee of Share 13 "at all times material" was Coastal Oil and Gas Corporation.39
The catalyst for the litigation at hand -- as for so much oil and gas litigation -- was the drilling of a very productive well.40 The well, called the M. Salinas No. 3 (sometimes "Salinas #3"), was drilled by Coastal on Share 13 in 199341 and was by all accounts an exceptional producer.42 The well was drilled 1,700 feet north of the property line separating Share 13 and an adjacent tract, Share 12.43
As it happened, Coastal was also the lessee for Share 12 at this time.44 The record does not state the motive, but within a year of the completion of the Salinas #3 well, Coastal purchased the mineral estate of Share 12 outright.45 The following year, Coastal drilled the "Coastal Fee No. 1" well on Share 12, at a distance of 467 feet away from the Share 13 boundary line -- the minimum distance allowed under the Texas Railroad Commission rules.46 Coastal's profit margin for a well drilled on Share 12 was much higher, of course, than the wells drilled on Share 13 which were burdened by the respondents' royalty interest.47
So eager was Coastal to place a Share 12 well as close as possible to the Salinas #3 that it shut in a producing well in order to make room for the Coastal Fee No. 1.48 In November of 1996, in the course of bringing production online, Coastal fraced the Coastal Fee No. 1, as it did all the
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wells on Share 12 and Share 13.49 The respondents believed that this frac was so close to the property line and so massive in scale as to effect subsurface fractures extending across the property line, thereby draining gas from Share 13 and the Salinas #3.50 Respondents sued Coastal for, among other things, trespass and a breach of the implied covenant to protect from drainage, seeking to recover the value of their drained gas as damages.51
The jury found, among other things, that "Coastal's fracing of the Coastal Fee No. 1 well trespassed on Share 13, causing substantial drainage, which a reasonably prudent operator would have prevented ..."52 The Court of Appeals for the Thirteenth District of Texas affirmed and allowed recovery of damages, based on the value of drained gas.53 Relying heavily on the 1961 Texas Supreme Court case Gregg v. Delhi-Taylor Oil Corp.,54 the Garza appellate court noted "fracing can create a subsurface trespass...
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