The rule of capture - an oil and gas perspective.

AuthorKramer, Bruce M.
PositionThe Rule of Capture and Its Consequences
  1. INTRODUCTION II. THE LEADING CASES A. The "Pure" Form of the Rule of Capture B. The Indiana/Kentucky, Approach: Correlative Rights. C. The Choice Between Correlative Rights and the Pure Rule of Capture III. THE MODERN APPLICATION, MISAPPLICATION, AND NON-APPLICATION OF THE RULE OF CAPTURE IN OIL AND GAS CASES A. Proper Application of the Rule: Edwards v. Lachman B. Proper Rejection of the Rule: Wronski v. Sun Oil Co C. Improper Application of the Rule: Caflisch v. Crotty D. Improper Reasoning Regarding the Rule: Hammonds v. Central Kentucky Natural Gas Co IV. SOME DIFFICULT CASES IMPLICATING THE RULE OF CAPTURE A. Geo Viking, Inc. v. Tex-Lee Operating Co B. Kennedy v. General Geophysical Co C. Anderson v. Amoco Canada Oil and Gas and NCNB Texas National Bank v. West V. CONCLUSION I. INTRODUCTION

    The rule of capture and its evil twin the "offset drilling" rule have informed oil and gas extraction since Colonel E.L. Drake drilled the first commercial well in Pennsylvania in 1859. (1) The rule's definition is deceptively simple. Robert E. Hardwicke, a noted oil and gas attorney, gave one of the most straightforward formulations of the rule when he stated, "The owner of a tract of land acquires title to the oil and gas which he produces from wells drilled thereon, though it may be proved that part of such oil or gas migrated from adjoining lands." (2) While there has been much debate over the rule of capture and its "social costs,"(3) this article will explore the common law development of the rule as it has been applied in oil and gas cases. The first part of this article will explore the early case law developments adopting the rule of capture. The second part will explore the rule's application in a more "modern" context to resolve issues that arise in the development of oil and gas.

    Early development of case law on the rule of capture does not universally adhere to the "pure" form as reflected in Robert E. Hardwicke's definition given above. Some of the older cases are more nuanced than given credit for and reflect a concern about the ramifications of applying the "pure" form of the rule of capture to issues other than ownership of the resource. As modern cases indicate, the rule of capture is more expansive than just controlling the description of who owns oil and gas produced from a well. Although the rule of capture is constrained by conservation legislation aimed at minimizing, if not eliminating, many of the "social costs" of the rule, the rule is actually at the heart of much conservation legislation--making it possible to further the goals of preventing waste, protecting correlative rights, and conserving oil and gas. Early cases reflect such concerns, but the jurisprudence never fully developed, which encouraged enactment of conservation legislation to accomplish the objectives that courts could not, or would not, achieve.

    While the rule of capture doctrine has its origins in the latter part of the 19th century, criticisms of the doctrine became widespread in the early part of the 20th century. One man in particular, Henry L. Doherty, a petroleum engineer by trade, was instrumental in raising concerns about the social costs created by continued adherence to the rule of capture. (4) A number of lawyers also brought attention to the two major problems associated with a rule of capture ownership regime--overdrilling and the dissipation of the reservoir's natural energy. (5) Doherty was a leading proponent of a federal compulsory unitization statute, (6) That initial effort undertaken in the late 1920s and early 1930s did not lead to any federal legislation; it was not until 1945 that Oklahoma enacted the first comprehensive compulsory unitization statute. (7)

    The rule of capture doctrine, while somewhat easy to define, is not so easily applied to a variety of factual situations. As the cases show, when the sole issue is the right of the mineral owner to produce or capture hydrocarbons from a well bottomed on the owner's lands, the courts have no problem applying the rule of capture in what the authors call its "pure" form. (8) When the issues relate, however, to such matters as the method or technology used to remove the hydrocarbons, the use of the hydrocarbons once produced, or the damage to the common source of supply through intentional or negligent behavior, the rule of capture's common law application becomes less clear. This article will refer to the extent to which courts modify the "pure" rule of capture as "correlative rights" although the specific holding may not entail what would pass for correlative rights in the context of water law. (9)

    Legislative modifications to the Hardwicke definition that tended to place constraints on the owner's ability to capture dearly influenced the common law development of the rule. (10) The obvious types of conservation regulation so imposed include well spacing, proration or allowable regulation, and pooling and unitization. (11) But this article focuses largely on the common law developments of the rule of capture and leaves to others the study of how and why legislatures modified the rule.

    It is interesting to note that the nature of ownership of oil and gas in the ground, perceived today as the more nettlesome issue, at the outset largely subsumed the rule of capture. The key issue was what is now widely viewed as the ownership/non-ownership dichotomy. (12) Did one have a possessory or corporeal interest in the oil and gas in the ground, or did one only have a non-possessory or incorporeal interest? That question had substantial ramifications on how courts treated the principal document used to exploit the oil and gas resources, namely the oil and gas lease. Nonetheless, the conceptualization of the ownership of oil and gas in the ground is inextricably bound up with the rule of capture.

    State courts knew well the rule of capture as an ownership concept at the time of the nascent development of oil and gas. (13) The English groundwater case, Aeton v. Blundell, (14) that applied the rule of capture doctrine to percolating groundwater, had been widely cited in various state court decisions dealing with ownership of groundwater. (15) These state court decisions all agreed that the rule of capture insulated from liability an owner of groundwater who drilled a well on her side of the property line even where it damaged an adjacent landowner. One of the earliest oil and gas cases, Dark v. Johnston, (16) while not citing Acton, clearly relied on Acton's basic premise when holding that one does not own the oil and gas beneath the ground. Referring to Coke on Littleton, (17) the court says:

     Oil is a fluid, like water, it is not the subject of property except

    while in actual occupancy. A grant of water has long been considered

    not to be a grant of anything for which an ejectment will lie. It is not a grant of the soil upon which the water rests: Coke Lit. 4 ... The nature of the subject has much to do with the rights that are given over it, and to us it appears that a right to take all the oil that may be found in a tract of land, cannot be a corporeal

    right. (18)

    While labeling the agreement between the parties a mere license, the court's analysis is a precursor to the later cases that struggled with ownership of oil and gas. (19)

    The fugacious nature of oil and gas, as well as the applicability of the rule of capture doctrine, was apparently well known to the parties engaging in off and gas development. In Allison and Evans' Appeal, (20) the issue involved the interpretation of an oil and gas lease that provided for a "protection zone" abutting the north and east boundaries of the area leased. (21) As described, there was a small portion of land abutting the leased tract that did not lie within the protection zone. The same lessor who leased the first tract then leased again to a third party who drilled a well on that omitted portion. The appointed master found that: "The chief object of this protection appeared to be to secure to the lessees the exclusive chance for oil under their lease, or at least in so far as 8 rods additional north and 10 rods on the east would do that." (22) The court then interpreted the first lease as not omitting that portion of the tract because it would defeat the purpose of the provision--the protection of the first lessee from the effects of the rule of capture. The court not only upheld the lower court's injunction preventing continued production from the offending well but also awarded damages based on one haft of the value of the production from the offending well. (23)

    In Wood County Petroleum Co. v. West Virginia Transportation Co., (24) the court not only used the percolating waters analogy, but also the ferae naturae analogy to resolve what in modern jargon would be called a phased severance problem. An assignee of a lease covering only "rock or carbon oil" drilled a well whereupon large amounts of natural gas were found. The lessor asserted that the lessee was not entitled to "capture" the natural gas and sell it. The court disagreed, however, and concluded that not only could the lessee capture the natural gas, but also would not have to compensate the lessor under the terms of the lease. After referring to the "eternal fires" of Baku and a nearby Ohio natural gas well that appeared to be inexhaustible, the court concluded that natural gas is more like air or water than commodities such as oil or coal. (25) The court analogized the assignee's use of the natural gas to a trespasser's use of the air and water. Both would be damnum absque injuria. (26) Kier v. Peterson, (27) a Pennsylvania decision, reached a similar result, even though the opinion adopts an absolute ownership theory for oil and gas in place. (28) The West Virginia Supreme Court of Appeals, however, in Williamson v. Jones, (29) rejected a broad reading of the holding in Kier to suggest that gas could not be the subject of property ownership.

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