SURFACE USE NEGOTIATIONS FROM THE LANDOWNER'S PERSPECTIVE

• Jurisdiction: United States

Oil and Gas Agreements: Surface Use in the 21st Century (May 2017)
CHAPTER 11D
SURFACE USE NEGOTIATIONS FROM THE LANDOWNER'S PERSPECTIVE
Joseph B.C. Fitzsimons F. Parks Brown
Uhl, Fitzsimons, Jewett & Burton, PLLC
San Antonio, TX

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JOSEPH B.C. FITZSIMONS is a natural resources, oil and gas, and water law attorney with Uhl, Fitzsimons, Jewett & Burton, PLLC, San Antonio, Texas, and a third-generation South Texas rancher. He has served as Vice-President of the Texas Wildlife Association and is a Director of the Texas and Southwestern Cattle Raisers Association. He is a former Chairman of the Parks and Wildlife Department's Private Lands Advisory Board and, in 1999, was named by then Governor George W. Bush to serve on the Governor's Task Force on Conservation. In May of 2001, Governor Rick Perry appointed Mr. Fitzsimons to the Texas Parks and Wildlife Commission for a six year term, and Mr. Fitzsimons is now a Past Chairman of that agency. In January of 2002, he was named to represent the Texas Parks and Wildlife Commission on the Texas Water Advisory Council, which has the statutory responsibility to advise the Office of the Governor, Speaker of the House, and Lieutenant Governor on issues affecting Texas water policy. In October 2003, Governor Perry appointed him as Chairman. Recently, Governor Perry appointed Mr. Fitzsimons to represent the interest of fish and wildlife on the Environmental Flows Advisory Committee. Chairman Fitzsimons identified environmental flow as a priority for his term on the Committee, and continues to work to ensure water for wildlife. He is a graduate of Lewis and Clark College (B.A., History 1979), and the University of Texas School of Law (J.D. 1985).

This paper addresses the evolving relationship between oil and gas operators and landowners, focusing on topics and provisions at the center of surface use agreement negotiations and legal disputes. It begins with a review of the surface damage protections--or lack thereof--available to landowners under the common law in Texas and other states. A discussion of the implications of split estates and executive rights follows, explaining why fractured ownership of rights in real property tends to further disempower the owner of the surface estate. It then considers the effect of surface damage statutes passed in most oil and gas producing states, although noticeably absent in Texas.

The need for comprehensive surface damage legislation is emphasized by the difficulty of proving damages in court and obtaining a judgment that fully compensates the landowner for damages sustained from oil and gas operations. The paper concludes with a review of the most important negotiation points and evolving operator standards that are included within modern surface use agreements. The goal is to provide practitioners with an up-to-date representation of the current relationship between oil and gas operators and landowners.

1. THE SOCIAL LICENSE TO OPERATE

The past decade has seen the rapid development of the Eagle Ford Shale and a renaissance in the Permian Basin. Indeed, it is rare to find an area in Texas where oil and gas development does not occur. Similar development trends extend across the Rocky Mountain region, various Mid-Continent resource plays and Appalachia. While the Permian Basin of West Texas affords expanses of arid and sparsely populated terrain for development, the recent wave of mineral exploration in the Eagle Ford in South Texas and in the Barnett Shale near Fort Worth brought the oil patch into direct contact with agricultural and urbanized areas. This closer proximity has made the relationship between the oil and gas operator and the landowner increasingly personal in nature. The prospect of increased production of domestic oil and gas resources from areas with rising populations means that landowners and oil and gas operators must continue to refine techniques for balanced use of the surface estate. As well pads and pipelines are wedged into suburban developments, family farms and valuable ranching properties, we have witnessed the corresponding development of comprehensive surface use agreements that seek to balance surface use with mineral development.

For practitioners representing landowners, the negotiation process with oil companies need not be a zero-sum game. Collaborative benefits can be achieved by the parties and surface

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use agreement negotiations are seldom acrimonious. Most rural landowners in Texas own at least a portion of the mineral interest beneath their property and therefore have a vested interest in allowing reasonable use of the surface estate by the operator. Even landowners without an interest in minerals tend to recognize the importance of the industry to our economy and way of life. Landowners are generally willing to work with the operator on a plan for mineral extraction, so long as it preserves the integrity of the surface estate and reimburses the landowner for any resulting loss. Under a basic surface use agreement or similar statutory scheme, the surface owner receives compensation for damages to the property that result from typical oil and gas development activities, plus fringe benefits like gate and cattle guard upgrades, road improvements and other incidental services provided by the operator.

Likewise, most oil and gas operators realize that a failure to abide by regulations and jurisdictional norms will materially affect their reputation and corresponding social license to operate. It has been our experience that the reputation earned by each oil and gas operator in a particular region is no secret to landowners and local government officials. In some regions, large landowners hold a degree of political influence and financial resources that rival those held by the mineral developer. Each landowner that owns an interest in the mineral estate is free to grant an oil and gas lease to the lessee it desires, although they are not always able to influence the identity of the eventual operator. However, landowners that possess a sufficient amount of leverage may insist upon greater power to determine which companies may receive an assignment of an oil and gas lease. Some expressly prohibit the assignment of the lease to particular operators, listing them by name in the agreement.

When certain operators fail to cooperate with landowners on issues where not required by law, the same operators may invite litigation and increased costs when the shoe is on the other foot. Even when the surface owner holds no corresponding interest in the mineral estate, their consent may become necessary in the future if the operator wishes to use the surface estate for operations that benefit lands outside of the unit. The aggrieved landowner is more likely to use these situations--such as the negotiation of a pipeline easement or road access agreement--to return any perceived slight upon the offending party. A poisoned relationship between the surface owner and the operator seldom improves over time. Moreover, the resulting discord has a negative effect upon the perception of the industry as a whole.

2. LEGAL STANDARDS

A. REASONABLE USE AND THE ACCOMMODATION DOCTRINE

Let us turn to the subject of "reasonable" use of the surface estate by the oil and gas operator. Necessarily, this paper entails a brief discussion of the property law concepts and common law precedents involved. Most oil and gas attorneys are no doubt familiar with the concept of the dominant mineral estate, the implied right to reasonable use of the surface, and the scant protections afforded by the accommodation doctrine. Mineral rights are a severable

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interest in real property that can be reserved or conveyed to third parties,¹ and ownership of the mineral estate is accompanied by an implied easement to enter and use as much of the surface estate as is reasonably necessary for the extraction of minerals.² Professor Ernest Smith describes this right as including "the legal privilege to use the surface in a way that interferes with the surface owner's use of the land and that significantly damages the surface, without the legal obligation to make any compensation whatsoever."³ In practice, this legal privilege can include the construction of a wide variety of infrastructure so long as it relates to production of oil and gas from the leased premises or lands pooled therewith. The scope of permitted use under the implied easement extends even to temporary employee housing, equipment storage yards, refineries and processing facilities.

When rights to use the surface for oil and gas exploration are granted under the terms of an oil and gas lease, these contractual rights will define the scope of the operator's permitted use of the surface, but only to the extent they differ from the scope of the implied easement under common law.⁴ In Texas, the implied easement held by the mineral lessee to reasonable use of the surface is limited by the "accommodation doctrine," first established in the Texas Supreme Court's 1971 decision in Getty Oil Co. v. Jones.⁵ The doctrine created by this case has been applied and to some extent codified in several other oil and gas producing states.⁶ In its ruling, the Texas Supreme Court required application of the accommodation doctrine "where there is an existing use by the surface owner which would be otherwise precluded or impaired, and where under the established practices in the industry there are alternatives available to the lessee whereby the minerals can be recovered."⁷ In an indication of its limited scope, only a handful of

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Texas cases have applied the accommodation doctrine when presented with the opportunity.⁸ The surface owner bears the burden of proving the lessee's actions preclude or substantially impair existing surface use,⁹ and the surface owner must also demonstrate that reasonable alternatives are available...