1 of 5 6/11/2007 1:08 PM Article from Policy Perspectives

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1 1 of 5 6/11/2007 1:08 PM Article from Policy Perspectives ( August 30, 2006 Why Split-Estate Energy Development Should Concern Utah s Policymakers by Robert E. Forbis Jr., MPA, ABD Traditional multiple-use land management doctrine has, generally speaking, limited the exploration and development of domestic oil and natural gas resources in the United States to federally managed public lands. However, triggered by a combination of political speculation and market forces concerning shrinking global energy reserves, federal management of energy resource development has, since 2000, steadily and increasingly begun to impact privately owned properties known simply as split-estates. As the value of oil and natural gas has risen dramatically since 2000, the level of domestic exploration and development of energy resources in the U.S. has also sharply increased. While public lands have been greatly impacted by this increase in activity, one result of shrinking energy reserves on these lands is that domestic energy development is no longer, generally speaking, limited to publicly owned parcels. Current estimates are that 3-5% of all domestic energy exploration and development is occurring on the privately owned surface estate of split-estate landowners.[1] These estimates are anticipated to continue increasing as long as oil and natural gas prices create an incentive for exploration. This means that more private landowners will be impacted by the problems associated with split-estates. Located throughout the Rocky Mountain region of the United States, a split-estate property is defined as a parcel of property consisting of two separate legal estates: the surface estate and the mineral estate. [2] In the states of New Mexico, Colorado, Wyoming, Montana, and Utah this translates to roughly 51 million acres of surface estate properties being owned and managed by private parties such as ranchers, farmers, homeowners, and retirees and the subsurface mineral estate being owned, leased and managed by the federal government.[3] Due in part to early 20 th century legislation the Stock Raising Homestead Act of 1916 (SRHA)[4] and the Mineral Leasing Act of 1920 (MLA)[5] the Department of Interior, through the Bureau of Land Management (BLM), auctions and administers mineral leases to the underlying mineral estates to private energy development interests for the purpose of exploring, extracting, refining, and marketing domestic energy resources. Thus, one result of severing ownership and management of the two property estates into separate entities has been a significant rise in conflicts between private surface owners, private extractive industries, and federal authorities. In essence, due to SRHA and MLA legislation, access, exploration, and development of the leased mineral estate cannot be denied except under extraordinary and/or narrowly defined circumstances.[6] In turn, this type of relatively unrestricted access and development has greatly disrupted and negatively impacted the ownership and management of privately owned surface estates throughout the West. Of particular concern to surface owners in the West is the leasing of the underlying federal mineral estate to private energy development interests for the purpose of exploring and extracting Coal-Bed Methane Natural Gas (CBM). Due in part to the processes involved in accessing and extracting CBM deposits, the negative impacts to the surface estate can take multiple forms and can be quite significant. For example, the loss, displacement and/or degradation of surface and subsurface water sources, livestock and livestock grazing areas, native flora and fauna, and most significantly, real estate values.[7] Compounding these multiple negative impacts to the surface owner s estate is that federal regulations governing the actions, bonding requirements, and mitigation responsibilities of

2 2 of 5 6/11/2007 1:08 PM energy interests, are woefully inadequate and ill-defined. Of particular concern to surface owners is the legal history regarding conflicts arising from ownership and management of the severed estates that compose a split-estate property. In these cases precedent rulings have favored the mineral estate and its development, mainly because the federal government is the owner of the mineral rights and leases those rights out at its own discretion and for its own monetary benefit. The courts have ruled that rights of the mineral estate retain legal dominance over those of the surface estate.[8] This position is due, in part, to the defining of federal ownership of the mineral estate as outlined in both the SHRA and MLA, but it is also due, in part, to the General Mining Act of 1872.[9] As the dominant estate under the SHRA and MLA, the courts have relied on Texas legal doctrine known as the Accommodations Doctrine to determine the reasonableness of actions taken by owners of either the surface estate or the mineral estate.[10] However, given the divergent interests involved, reasonable to one party is not necessarily reasonable to the other. The legal determination of reasonableness is a matter of considerable subjectivity.[11] Nonetheless, in conflicts arising on split-estates, courts still rely on judgments of reasonable action in determining whether harm could have been avoided and whether damages are owed as a result of that harm[12]. Because of the legal dominance afforded to the mineral estate, this has meant that the burden of proving unreasonable action on the part of the energy development industry is the responsibility of the surface estate property owner.[13] However, a relatively recent Colorado decision reinterpreted the reasonableness test of the Accommodations Doctrine. In ruling for the plaintiff surface estate owners, the court declared, in part, that reasonableness under the Accommodation Doctrine was a two-way street. In essence the court suggested that the responsibility of proving reasonable action had not caused harm should be as equally onerous and burdensome as proving reasonable action had caused harm.[14] Looking specifically at the negative impacts associated with CBM development, coupled with the inadequacy of federal regulations and lower court rulings favoring the right of access and development in the mineral estate, Western state legislatures have responded by enacting state statutes that seek to enhance the property rights of the surface owners estate, as well as the responsibilities of the extractive industries to those property owners.[15] For policymakers and administrators alike, these legislative actions have equated not only to a tricky balancing of rights and responsibilities, but in most instances they have also led to long, contentious, and heated legislative battles as the affected parties seek to influence elected officials and protect their interests[16]. For example, premised on existing state statutes in other energy producing states such as Oklahoma and Texas, Wyoming s newly enacted Surface Owner Protection Act of 2005[17] is a case in point and should serve as an example to other Western states seeking to either enact new legislation as is the case in Colorado and New Mexico or, revisit previously enacted legislation as is the case in Montana.[18] Each of these states has, since 2000, experienced the remarkable rise in federal leasing activity and increased energy production. In turn, each of these states has also experienced a significant increase in conflicts between federal and private energy producing interests and the property rights interests of the states surface estate owning citizens. The experience of these neighboring Western states to mitigate the problems and balance the rights associated with split-estate properties should give Utah s policymakers cause for concern. This concern is not without warrant given: current levels of energy leasing and development activity occurring in the State of Utah

3 3 of 5 6/11/2007 1:08 PM have set records for the BLM,[19] the absence of state legislation addressing the rights and interests of the state s surface owners,[20] the reliance of Utah courts on the reasonableness test of the Accommodations Doctrine and,[21] according to the latest BLM audit, there are roughly 9.7 million acres of split-estate property holdings in the State of Utah that hold the potential of energy development activity.[22] Compared to its Western neighbors Utah is not unique in its experience with the dynamics of energy development and its attendant environmental and private property rights problems. Indeed, the State of Utah compares equally in every energy-related policy domain being impacted by the rise in energy resource development[23]. In some ways, it could be argued that Utah faces even more challenges than its neighbors in protecting the economic interests of the state s private surface owning citizenry. Because of the speculated potential for Utah s supplying domestic energy resources both traditional methods of extraction and non-traditional methods (such as tar sand and oil shale) [24] the conflicts between surface and mineral rights holders will only increase. Additionally, while traditional methods impact the surface estate to a moderate degree, the proposed non-traditional methods in the extraction of energy from tar sands and oil shale suggest even greater levels of impact to the economic and property rights interests of the state s split-estate property owners. Later this year, as required under Section 1835 of the Energy Policy Act of 2005,[25] the Department of Interior (DOI) will issue a report reviewing current policies and practices in the management of Federal subsurface energy resource development and its effects on the privately owned surface estate. In this report, comparisons of the rights and responsibilities under the SRHA and MLA for owners of the mineral and surface estates will be revisited and assessed. Finally, the report will make recommendations for legislative and administrative action to balance the reasonable access and extraction of energy resources with the surface owner concerns for minimizing impacts to the private surface estate.[26] In conclusion, should policymakers in the State of Utah wish to avoid a divisive battle that pits the energy industry against Utah s agricultural and livestock industry, legislation that incorporates the legislative balancing of its neighboring states, as well as the findings contained within the mandated DOI report to Congress, should be crafted and implemented. Notes [1] See Environmental Working Group Report (2004), Who Owns the West: Oil and Gas Leases, available at [2] Bureau of Land Management definition, available at [3] Bureau of Land Management estimates 58 million western split-estate acreage (Non-Federal Surface/Federal Minerals) and 7 million acres of non-western split-estate acreage, available at [4]Stock-Raising Homestead Act, Dec. 29, 1916, ch. 9, 39 Stat. 862 (43 U.S.C. 291 et seq.). [5]Mineral Leasing Act, Feb. 25, 1920, ch. 85, 41 Stat. 437 (30 U.S.C. 181 et seq.).

4 4 of 5 6/11/2007 1:08 PM [6] See Christopher M. Alspach, Surface Use By the Mineral Owner: How Much Accommodation Is Required Under Current Oil and Gas Law, 55 Okla L. Rev. 89, 91 (2002) at 91 (citing Bergen Ditch & Reservoir Co. v. Barnes, 683 P.2d 365 (Colo. Ct. App. 1984), King at s 9-2). [7] See Blaine Hardin & Douglas Jehl, Ranchers Bristle as Gas Wells Loom on the Range, N.Y. Times, Dec. 29, 2002, available at See also Alan C. Miller, Tom Hamburger & Julie Cart, White House Puts the West on Fast Track for Oil, Gas Drilling, L.A. Times, August 25, 2004, available at [8]See generally Christopher M. Alspach, Surface Use By the Mineral Owner: How Much Accommodation Is Required Under Current Oil and Gas Law, 55 Okla L. Rev. 89, 91 (2002) (citing Charles G. King et al., Surface Rights Issues, State Bar of Tex., Annual Oil, Gas & Min. L. Inst. 9-2 (1992); Ronald W. Polston, Surface Rights of Mineral Owners What Happens When Judges Make Law and Nobody Listens?, 63 N.D. L. Rev. 41, 42 (1987). [9]General Mining Act of 1872, May 10, 1872, ch. 152, 17 Stat. 91; R.S , 2331, , [10] See Getty Oil Co. v. Jones 470 S.W.2d 618 (Tex. 1971). [11] Interview conducted in chambers on June 23, 2004 with U.S. District Court Judge Clarence A. Brimmer, District of Wyoming. [12] See generally Supporting Declarations of first person accounts to the Western Organization of Resource Council s Oil and Gas Industry Responsibility Petition to the Dept. of Interior and BLM available at, [13] Alspach at 105 (summarizing existing Accommodation Doctrine case law). [14] See Gerrity Oil & Gas v. Magness, 946 P.2d 913 (Colo.1997). [15]SeeN.D. Cent. Code to (1987), 52 Okla. Stat, to (Supp. 2000), Mont. Code Ann to (1999), S. D. Codified Laws 45-5A-1 to 45-5A-11 (Michie 1997), W. Va. Code to (1998), Tenn. Code Ann to (1989), 765 Ill. Comp. Stat. 530/1 to 530/7 (2001), Ind. Code (c) (1995), Ky. Rev. Stat. Ann , (Michie 2000). [16] See Juliet Eilperin, Growing Coalition Opposes Drilling: In N.M. Battle, Hunters Team with Environmentalists, The Washington Post, July 25, 2006, available at. [17] Wyoming Surface Owner Accommodation Act, Wyoming Statutes through [18] See Denver Post Editorial, Setback for Drilling Agreement, The Denver Post, April 15, 2006, available at www. denverpost.com/search/ci_ See also Nancy Lofholm & Kim McGuire, Boom Life: As Energy Drilling Explodes Across the West, Those in Its Path Try to Keep, or Adjust, Their Ways Amid the Upheaval, July 2, 2006, available atwww.denverpost.com/search/ci_ [19] See Robert Gehrke, Oil, Gas: Critics Say Community Concerns in Mineral Areas Are Being Ignored by the Agency, The Salt Lake Tribune, June, 28, 2006, available at (article ID ). See also, Tribune Staff & Wire Services, Congress Wants Quick Approval of Power Corridors, The Salt Lake Tribune, May 24, 2006, available at (article ID ), Joe Baird, BLM s Oil, Gas Lease Sale Rakes in $54M, The Salt Lake Tribune, May 16, 2006, available at (article ID ).

5 5 of 5 6/11/2007 1:08 PM [20] See generally Surface Owner Protection Legislation for a summary description concerning previously implemented surface owner protection or damage compensation laws in western states excluding Utah, available at [21]See Flying Diamond Corporation v. Rust, 551 P.2d 509 (Utah 1976). [22] Data collected per in person & follow-up telephone conversation with Utah BLM Field Office representative August 17, BLM s 2005 audit approximates split-estate acreage within Utah as 9,631,220 total acres. [23] See Patty Henetz, Utah Oil & Gas Exploration Energy Boom, The Salt Lake Tribune, July 31, 2005, available at (article ID 10BE6CEA576618D8). See also, Joe Baird, Environmentalists Question BLM s Role as Land Steward, The Salt Lake Tribune, July 31, 2005, available at (article ID 10BE6CEA5E867BD0), Robert Gehrke & Patty Henetz, Oil Boom Stampedes BLM, The Salt Lake Tribune, July 22, 2005, available at (article ID 10B96AB1EDCE3DF8), Robert Gehrke, Oil Industry Providing Workers for BLM Office, The Salt Lake Tribune, July 9, 2005, available at (article ID 10B42BBC38286F30). [24] See also, Joe Baird, Oil Shale Optimism Met with Warnings, The Salt Lake Tribune, June 1, 2006, available at (article ID ). See also Joe Baird, Six Businesses Get Oil-Shale Go-Ahead, The Salt Lake Tribune, January 16, 2006, available at (article ID ), Robert Gehrke, Bill to Speed Mining of Utah s Oil Shale Advances in House, The Salt Lake Tribune, October 27, 2005, available at (article ID 10D8DD92B18C5F38), Robert Gehrke, Oil Shale Deposits Generate New Buzz as Energy Source, The Salt Lake Tribune, May 31, 2005, available at (article ID 10A7757BB848E6FB). [25] Energy Policy Act of 2005, August 8, 2005 (Public Law ), SEC Split-Estate Federal Oil and Gas Leasing and Development Practices: [26] For further information regarding Congress s directive to BLM, as well as other information concerning federal action and split-estates, best management practices, rights and responsibilities: See BLM s split-estates website at Published by Center for Public Policy & Administration Copyright 2007 The University of Utah. All rights reserved. The Center for Public Policy & Administration offers research, education and services to public and nonprofit organizations that will strengthen administration, leadership and public policy making. Powered by IMN