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1 Title: Date: Lcatin: Prgram: Spnsr: Duratin: MANAGING LANDOWNER LIABILITY FOR THE ENVIRONMENTAL CONSEQUENCES OF OIL & GAS DEVELOPMENT Octber 24, 2003 Austin, Texas Natinal Assciatin f Ryalty Owners 2003 Natinal Cnventin Natinal Assciatin f Ryalty Owners One Hur

2 MANAGING LANDOWNER LIABILITY FOR THE ENVIRONMENTAL CONSEQUENCES OF OIL & GAS DEVELOPMENT by David E. Pierce Prfessr f Law Washburn University Schl f Law Tpeka, Kansas Natinal Assciatin f Ryalty Owners 2003 Natinal Cnventin Octber Austin, TX

3 MANAGING LANDOWNER LIABILITY FOR THE ENVIRONMENTAL CONSEQUENCES OF OIL & GAS DEVELOPMENT! by Prfessr David E. Pierce Washburn University Schl f Law Tpeka, Kansas I. Liability and the Leasing f Land fr Oil & Gas Develpment Mere wnership r cntrl f prperty can give rise t envirnmental cleanup bligatins under several f the federal envirnmental laws. Liability is premised n a statutrily-defined "status" regarding the envirnmental prblem. Fr example, liability can be based upn a persn's status as the "wner" f land where an envirnmental prblem exists. 2 Therefre, a persn prpsing t acquire an il and gas lease must cnsider hw it may impact their "status" under the envirnmental laws. 3 The lessee may actually cumulate several status psitins as the lease is develped. 4 The landwner/lessr must als be cncerned abut their envirnmental status as il lcpyright 2003by David E. Pierce, All Rights Reserved. This article is adapted frm David E. Pierce, Assessing Thirty Years f Federal Envirnmental Regulatin f Upstream Oil and Gas Activities, 50 INST. ON OIL & GAS L. & TAX'N 5-1 (1999). 2 E.g., Cmprehensive Envirnmental Respnse, Cmpensatin and Liability Act (CERCLA) 107(a)(1), 42 U.S.C. 9607(a)(1) (impsing liability n the "wner r peratr fa vessel r facility" frm which there is a release, r threatened release, f a hazardus substance that results in the incurrence f respnse csts). 3 See generally David E. Pierce, Structuring Rutine Oil and Gas Transactins t Minimize Envirnmental Liability, 33 WASHBURN L. J. 76, (1993), reprinted at 31 PUBLIC LAND & RESOURCES L. DIG. 176 (1994) (analyzing CERCLA wner, peratr, arranger, and transprter liability in the il and gas cntext). 4F r example, under CERCLA acquisitin f the il and gas lease may make the lessee an "wner," develpment f the lease may cnfer "peratr" status n the lessee, and the creatin and dispsal f wastes assciated with develpment may give rise t "arranger" and "transprter" status. CERCLA 107(a)(1), (3), (4), 42 U.S.C. 9607(a)(1), (3), (4). 1

4 and gas develpment prceeds. 5 The gal fr each party is t fully assess their ptential envirnmental status liabilities when cnsidering whether t acquire a lease r mineral interest, r t grant a lease r mineral interest. Once the envirnmental risks are identified, specific strategies can be pursued t address the risks. A. Envirnmental "Status" Liability In the il and gas cntext, status liability under the federal envirnmental laws will mst likely arise under 107(a) f the Cmprehensive Envirnmental Respnse, Cmpensatin and Liability Act ("CERCLA"), and 7003 f the Resurce Cnservatin and Recvery Act ("RCRA")/ 311(f) f the Clean Water Act ("CWA"),8 and 1002(a) the Oil Pllutin Act. 9 When assessing liability, it is best t view each Act individually, withut any attempt t ratinalize r crdinate ne Act with the thers. Althugh Cngress may, fr certain definitins, use references between the Acts,1O Cngress has nt achieved any real crdinatin amng the envirnmental laws. Therefre, an activity that escapes ne Act may nt escape thers and it is ften pssible t have a single situatin cvered by several Acts. 5 See generally David E. Pierce, The Impact f Landwner/Lessr Envirnmental Risk n Oil and Gas Lessee Rights and Obligatins, 31 TULSA L. J. 731, (1996), reprinted at 34 PUBLIC LAND & RESOURCES L. DIG. 127 (1997) (analyzing landwner's CERCLA liability assciated with the activities f their il and gas lessee). 6CERCLA 107(a), 42 U.S.C. 9607(a). 7RCRA 7002 & 7003, 42 U.S.C & 6973 (1994). Technically 7002 and 7003 are part f what is knwn as the "Slid Waste Dispsal Act (SWDA)." Hwever, the Resurce Cnservatin and Recvery Act (RCRA) amended substantial prtins f the SWDA and mst peple simply refer t the SWDA as "RCRA." This article will refer t the cllective prvisins f the SWDA as RCRA. 8CWA 311 (f)(2), 33 U.S.C (f)(2). 90PA 1002(a), 33 U.S.C. 2702(a). IOE.g., CERCLA 101(29) prvides: "The terms "dispsal", "hazardus waste", and "treatment" shall have the meaning prvided in sectin 1004 f the Slid Waste Dispsal Act." CERCLA 101 (29),42 U.S.C. 9601(29); CERCLA 101(32) prvides: "The terms "liable" and "liability" under this subchapter shall be cnstrued t be the standard f liability which btains under sectin 1321 f Title 33." CERCLA 101(32),42 U.S.C. 9601(32). 2

5 1. CERCLA "Owner" r "Operatr" CERCLA impses cleanup liability n the current 11 "wner" f the "facility" where a hazardus substance prblem exists. 12 "Facility" is defined bradly t include "any site r area where a hazardus substance has... cme t be lcated..." 13 "Owner" is simply defined as "any persn wning... such facility..."14 Anyne familiar with the "bundle-f-sticks" analysis f prperty wnership shuld be able t recgnize several instances in which an il and gas lessee culd be an "wner." If the lessee escapes "wner" status, they may qualify fr "peratr" status under CERCLA. 15 "Operatr" is defined by CERCLA as "any persn... perating such facility..."16 This definitin substitutes use f, r cntrl ver, the facility fr title t an interest in the facility. Even thugh the persn may nt "wn" the facility, if they are using the facility, r have cntrl ver the facility, they can be held liable fr cleanup csts based upn their "peratr" status. If the il and gas lessee undertakes peratins n a lease which includes a facility area, the lessee may becme a CERCLA "peratr" f the facility. 2. RCRA "Cntributr" The Resurce Cnservatin and Recvery Act (RCRA) impses cleanup liability n any persn "wh has cntributed r wh is cntributing" t the: "past r present handling, strage, treatment, transprtatin, r dispsal f any slid r hazardus waste which may present an llalthugh CERCLA als impses liability n "past" wners and peratrs "at the time f dispsal," and n persns that create, manage, transprt, and dispse f hazardus substances, the fcus f this article is n the pre-leasing cncerns f a develper wh has had n prir cntact with the prpsed leased area. CERCLA l07(a)(2)-(4), 42 U.S.C. 9607(a)(2)-(4). 12CERCLA l07(a)(1), 42 U.S.C. 9607(a)(1). 13CERCLA lol(9)(b), 42 U.S.C. 9601(9)(B). In additin t this general catch-all definitin, the fllwing examples are prvided by the definitin: "[A ]ny building, structure, installatin, equipment, pipe r pipeline (including any pipe int a sewer r publicly wned treatment wrks), well, pit, pnd, lagn, impundment, ditch, landfill, strage cntainer, mtr vehicle, rlling stck, r aircraft... " Id. at (A). 14Id. at (20)(A). 15CERCLA l07(a)(1), 42 U.S.C. 9607(a)(1). 3

6 imminent and substantial endangerment t health r the envirnment... "17 If the area is already cntaminated at the time the lessee undertakes its develpment peratins, the lessee may be fund t have "cntributed" t the prblem. 18 I7RCRA 7002(a)(B), 42 U.S.C. 6972(a)(B) (citizen suit prvisins giving "any persn" the right t seek a curt rder t "restrain any persn" r t "rder such persn t take such ther actin as may be necessary, r bth... "). RCRA 7003(a), 42 U.S.C. 6973(a) cnfers identical authrity n the Envirnmental Prtectin Agency. I8It is imprtant t nte that 7002 and 7003 are nt subject t any srt f "petrleum exclusin" such as is fund in CERCLA. See CERCLA 101(14),42 U.S.C. 9601(14) ("The term [hazardus substance] des nt include petrleum, including crude il r any fractin theref... "). Als, these sectins apply t prblems created by nn-hazardus "slid waste" and wuld nt be affected by the explratin and prductin waste exemptin frm the definitin f a "hazardus waste" under Subtitle C f RCRA. See Regulatry Determinatin fr Oil and Gas and Gethermal Explratin, Develpment and Prductin Wastes, 53 FED. REG (July 6, 1988). It is als pssible t have a "hazardus" explratin and prductin waste under 7002 and 7003 even thugh the waste is cvered by the explratin and prductin waste exemptin -and is therefre nt "hazardus" fr purpses f RCRA's Subtitle C prgram. "Hazardus," fr purpses f Subtitle C regulatin, is gverned by the Subtitle C regulatry definitin f "hazardus." Therefre, a develper wuld nt have t cncern itself with the Subtitle C generatr, transprter, and treatment, strage, and dispsal requirements impsed n ther Subtitle C hazardus wastes. Hwever, if the lawfully-dispsed waste ever creates a prblem (meeting the "imminent and substantial endangerment" criteria), it may be dealt with as a "slid waste" under 7002 and 7003, and can even be a "hazardus" waste under RCRA's general definitin prvisins which state: The term "hazardus waste" means a slid waste, r cmbinatin f slid wastes, which because f its quantity, cncentratin, r physical, chemical, r infectius characteristics may-- (A) cause r significantly cntribute t an increase in mrtality r an increase in serius irreversible, r incapacitating reversible, illness; r (B) pse a substantial present r ptential hazard t human heath r the envirnment when imprperly treated, stred, transprted, r dispsed f, r therwise managed. RCRA 1004(5),42 U.S.C. 6903(5) See Cnnecticut Castal Fishermen's Ass'n v. Remingtn Arms, 989 F.2d 1305, (2d Cir. 1993) (nting brader "slid waste" definitin in

7 3. CWA "Owner r Operatr" Sectin 311(f) f the Clean Water Act (CWA) impses cleanup liability n the "wner r peratr f an nshre facility" frm which there is a discharge f il r a hazardus substance int "waters f the United States.,,19 In Quaker State Crp. v. us. Cast Guardl the wner f surface estate in the land at the time il seeped frm a waste water cntainment pit was fund t be the party respnsible fr reimbursing the Cast Guard fr $430,000 it spent respnding t the il spil1.21 Oil and gas peratins had been cnducted n the leased land in the past; the pit had been used t manage prduced water at sme unknwn time at least 15 years prir t the spill that triggered the cleanup. Althugh 311(f) expressly applies t "il" as well as "hazardus substances," the discharge must be int "waters f the United States.,,22 There is n similar water nexus requirement in CERCLA r RCRA. 4. OPA "Respnsible Party" Sectin 1002 f the Oil Pllutin Act f 1990 (OP A) impses cleanup liability, and than the definitin used fr Subtitle C prgram). 19CWA 502(7),33 U.S.C. 1362(7) ("navigable waters" defined as "waters f the United States... ") F. Supp. 280 (W.D. Pa. 1988). 211n a subsequent pinin the judge cmmented n the ptential liability f the mineral interest wner, Kendall Refining Cmpany, by making the fllwing cnclusins f law: 20. Kendall Refining Cmpany nt nly was Quaker State's lessr, but was the wner f the il and gas rights t Lt 128, at least frm 1965 thrugh the time f the discharge. Ownership f the il and gas carries with it the right t use the surface f the land fr il and gas purpses. 21. Quaker State as a matter f law culd nt be the sle cause f the discharge, due t Kendall's status and invlvement with the site, including its request fr Quaker State t perfrm abandnment activities theren t Kendall's benefit, and due t thers' prir use f the site and pit. Quaker State Crp. v. U.S. Cast Guard, N. CIV.A.87-55, 1990 WL at *8 (W.D. Pa. 1990). 22CWA 311(b)(3), 33 U.S.C. 1321(b)(3). 5

8 damages,23 n the "respnsible party" fr a facility "frm which il is discharged, r which pses the substantial threat f a discharge f il,,,24 int "waters f the United States.,,25 "Respnsible party" is defined t include the fllwing: (B) Onshre facilities In the case f an nshre facility (ther than a pipeline), any persn wning r perating the facility, except a Federal agency, State, municipality, cmmissin, r plitical subdivisin f a State, r any interstate bdy, that as the wner transfers pssessin and right t use the prperty t anther persn by lease, assignment, r permit. 26 (E) Pipelines In the case f a pipeline, any persn wning r perating the pipeline. (F) Abandnment In the case f an abandned... nshre facility... pipeline, r ffshre facility, the persns wh wuld have been respnsible parties immediately prir t the abandnment f the... facility.27 Althugh the OP A prvides fr a brader range f cmpensatin and damages than permitted under CERCLA, RCRA, and the CW A, the OPA is limited t "il" cntaminatin, requires a nexus with "waters f the United States," and applies nly t "an incident ccurring" n r after August 18, 230PA 1002(b), 33 U.S.C. 2702(b). 24Id. at (a), 250PA 1001(21),33 U.S.C. 2701(21) (defining "navigable waters" as "waters f the United States... "). 26This definitin suggests that nn-gvernmental landwners wh lease t a third party will remain a "respnsible party" as an "wner." It als suggests that a lessee f a gvernmental bdy will be regarded as an wner r peratr. 270PA 1001(32),33 U.S.C. 2701(32). 6

9 A. Lessee Strategies T avid assuming an unwanted status with a cntaminated area, the develper needs t be aware f envirnmental prblems assciated with the area they prpse t lease. At a minimum this will require an nsite inspectin f the area t be leased. If there appears t be prblem areas, the develper has tw basic ptins: (1) avid the prblem altgether by nt leasing the prperty, r by excluding the prblem areas frm the lease;29 r (2) attempt t define and leverage the risk by btaining reliable infrmatin cncerning the prblem and then btaining indemnity agreements frm the landwner, mineral wner, r ther parties having an existing status with the prperty.30 B. Landwner Strategies. The landwner's basic cncern is that a mineral develper will create envirnmental prblems n the land fr which the landwner will ultimately be liable because f its status as the "wner" f the prperty. This prblem arises whenever the landwner cnveys a mineral interest r grants an il and gas lease; in each situatin the grantee will typically btain an express r implied right t make reasnable use f the surface t develp the granted minerals. 31 The 280PA, Pub. L. N ,104 Stat. 484, 506 (1990) (OPA 1020); OPA 1017(e), 33 U.S.C. 2718( e) ("Nthing in this title shall apply t any cause f actin r right f recvery arising frm any incident which ccurred prir t August 18, "). 29 Anther ptin wuld be t try and tailr the lease rights s they exclude any right t use r cntrl the prblem area ther than the exclusive right t any il r gas that might be prduced frm beneath the area. This wuld prtect the lessee's right t remve il and gas lcated within the prblem area frm adjacent prperty, withut giving the lessee any srt f easement r develpment rights physically within the prblem area. The gal is t avid any kind f interest that culd be cnstrued as cnferring n the lessee "cntrl" ver the prblem area. See David E. Pierce, Incrprating a Century f Oil and Gas Jurisprudence int the "Mdern" Oil and Gas Lease, 33 WASHBURN L , (1994). 30lf it is nt pssible t negtiate an indemnity agreement, r the party ffering t indemnify has inadequate assets, the nly ptin may be t invest additinal effrt in fully defining the prblem, and the assciated risk as an il and gas lessee, and then trying t draft the lease t place the lessee in the best psitin pssible shuld the prblem result in a future cleanup actin. 31See David E. Pierce, The Impact f Landwner/Lessr Envirnmental Risk n Oil and Gas Lessee Rights and Obligatins, 31 TULSA L. J. 731 (1996). 7

10 techniques the lessr can use include: (1) select nly well-knwn, well-financed il and gas grantees and lessees with a reputatin fr ding things right; (2) prvide fr cntinuing liability f the riginal grantee/lessee in the event a subsequent transferee fails t cmply with the cvenants f the agreement; (3) clearly define surface use rights and bligatins t minimize the creatin f envirnmental prblems; (4) prvide fr a brad indemnity agreement regarding envirnmental matters; (5) prvide fr attrney fees and litigatin csts in the event the cvenants are breached r it is necessary t sue t establish indemnity rights; and (6) plice the agreement t ensure it is being hnred. 32 EXAMPLES OF ENVIRONMENTAL PROTECTION CLAUSES When leasing: A. Land Use Restrictins. 1. Drilling Operatins. T the maximum extent feasible, LESSEE will minimize the use f surface pits and hazardus materials in drilling peratins n the Leased Land. Any pit r ther surface disruptin assciated with drilling peratins n the Leased Land will be fully reclaimed and restred t its natural cnditin immediately fllwing the cmpletin f drilling peratins. All substances brught nt the Leased Land, and wastes generated as part f the drilling prcess, will be remved frm the Leased Land immediately fllwing the cmpletin f drilling peratins. 2. Prductin Operatins. All equipment designed t separate, dehydrate, treat, cmpress, prcess, r therwise cnditin Leased Substances will be lcated ff f the Leased Land. Any tanks used t cllect and stre a Leased Substance prir t marketing will be lcated ff f the Leased Land. B. Indemnity by LESSEE. LESSEE will indemnify, hld harmless, and defend LESSOR against any claim, demand, cst, liability, lss, r damage suffered by LESSOR, including reasnable attrney fees and litigatin csts, arising ut f the fllwing activities cnducted by LESSEE, r thse having a cntractual relatinship with LESSEE, n r impacting the Leased Land: 1. Any activity expressly r impliedly authrized r required by this Lease. 32See David E. Pierce, Incrprating a Century f Oil and Gas Jurisprudence int the "Mdern" Oil and Gas Lease, 33 WASHBURN L , (1994) (discussing language the landwner r lessr can use t apply the listed techniques in either a mineral deed r il and gas lease).

11 2. Plugging and abandnment f prducing wells, nnprducing wells, existing wellbres, r previusly plugged wellbres. 3. Management, use, and dispsal f prduced water and wastes r substances assciated with Lease activities. 4. The generatin, prcessing, handling, transprtatin, strage, treatment, recycling, marketing, use, dispsal, release, r threatened release, f il, natural gas, natural gas liquids, all ther petrleum substances, any waste material, r any "Hazardus Substance" r "Pllutant r Cntaminant" as thse terms are defined by the Cmprehensive Envirnmental Respnse Cmpensatin and Liability Act (CERCLA) at CERCLA 101 (14) and (33),42 U.S.C (14) and (33). LESSEE's indemnity als includes any envirnmental prblem assciated with il and gas explratin, drilling, develpment, prductin, treating, strage, transprtatin, marketing, prcessing, abandnment, and related activities at any site existing n the Leased Land as f the Effective Date f this Lease. LESSEE's bligatins created by this SECTION are cntinuing bligatins which will cntinue in effect, and be enfrceable by LESSOR, even after the Lease terminates r therwise ceases t burden the Leased Land. Anther leasing clause: ENVIRONMENTAL ISSUES AND INDEMNITY. a. Land Use Restrictins. T the maximum extent feasible, LESSEE will minimize the use f surface pits and hazardus materials in drilling peratins n the Leased Land. Any pits, pnds, r ther surface impundments used in cnnectin with the develpment r peratin f the Leased Land shall cmply with all applicable lcal, state, and federal standards and in any case shall meet r exceed the standards fr such structures lcated within a wellhead prtectin r critical aquifer prtectin area as defined by the federal Safe Drinking Water Act r any state law cunterpart. Any pit r ther surface disruptin assciated with drilling peratins n the Leased Land will be fully reclaimed and restred t its natural cnditin immediately fllwing the cmpletin f drilling peratins. All substances brught nt the Leased Land, and wastes generated as part f the explratin, develpment, r prductin prcess, will be remved frm the Leased Land immediately fllwing the cmpletin f drilling peratins. All equipment designed t separate, dehydrate, treat, cmpress, prcess, r therwise cnditin Leased Substances will be lcated ff f the Leased Land. Any tanks used t cllect and stre a Leased Substance prir t marketing will be lcated ff f the Leased Land. N injectin r dispsal well will be placed n the area encmpassed by the Leased Land. N pipe, chemicals, r ther material r equipment will be placed n the Leased Land except items that are n-site fr immediate use in peratins. Equipment r material placed 9

12 n site and nt actively used fr ten cnsecutive days will be deemed nt t be fr immediate use in peratins. Within five days after a develpment r prductin peratin is cmpleted, all the assciated develpment structures, equipment, and any ther material brught t r generated at the site will be remved frm the site. If any tpsil has been disturbed by the peratin, the area will be graded t its riginal cntur, and the tpsil replaced, prperly seeded, fertilized, and maintained until the riginal cver in the affected area is reestablished. b. Assumptin f Liability. LESSEE assumes the fllwing liabilities assciated with the Leased Land: LESSEE acknwledges that it is entering int this Lease withut relying n any representatins by LESSOR cncerning the cnditin, envirnmental r therwise, f the Leased Land. Instead, LESSEE is relying slely upn its independent investigatin t determine the status f the Leased Land. As partial cnsideratin fr this Lease, LESSEE agrees t assume all liabilities it may incur as an wner r peratr f the Leased Land, including any envirnmental cleanup bligatins that may be impsed under any lcal, state, r federal law, including the cmmn law. LESSEE further agrees t hld LESSOR harmless frm any claim LESSEE may have r acquire, in cntributin r therwise, assciated with the cnditin f the prperty r LESSEE's liability as an wner r peratr. This includes, withut limitatin, any claim r cause f actin LESSEE may have at cmmn law r under any lcal, state, r federal statute such as the Cmprehensive Envirnmental Respnse, Cmpensatin and Liability Act (CERCLA) r a state r lcal cunterpart. LESSEE agrees t assume all liabilities assciated with any activity cnducted n the Leased Land, by LESSEE, its cntractrs, and any ther persn r entity exercising r purprting t exercise rights thrugh LESSEE r n LESSEE's behalf. c. Agreement t Remedy Envirnmental Prblems. LESSEE agrees t remedy any Envirnmental Prblem resulting frm, arising ut f, r in any manner assciated with any activity by LESSEE, its cntractrs, and any ther persn r entity exercising r purprting t exercise rights thrugh LESSEE r n LESSEE's behalf, that presently impacts, r is likely t impact, the Leased Land. In the event an Envirnmental Prblem is identified, LESSOR will give LESSEE ntice f the Envirnmental Prblem and LESSEE will, at its sle risk and expense, take the necessary actin t define and remedy the Envirnmental Prblem. Fr purpses f this sectin, "Envirnmental Prblem" means any situatin which: vilates any lcal, state, r federal requirement, is reprtable under any envirnmental law, gives rise t a cleanup, sampling, testing, mnitring, assessment, r similar bligatin under any cmmn law, statutry, r regulatry thery, cncerns cnditins, structures, r substances that require special envirnmental handling fr their prper renvatin, demlitin, r dispsal, r expses LESSOR t a substantial threat f liability assciated with the health, safety, and welfare f the public, wrkers, r the envirnment. d. Agreement t Indemnify. LESSEE will prtect, indemnify, hld harmless, and defend LESSOR against any claim, demand, cst, liability, lss, r damage suffered by LESSOR (including LESSOR's reasnable attrney fees and litigatin csts) resulting frm, arising ut f, r assciated with ne r mre f the fllwing events: LESSEE's breach f any cvenant, bligatin, r duty created by the terms f this Lease. LESSEE's failure t cmply with the LESSOR's retained rights under this Lease. Any matter encmpassed by LESSEE's assumptin f liabilities, including 10

13 envirnmental liabilities, under the terms f this Lease. Any activity expressly r impliedly authrized r required by this Lease. Any matter assciated with prducing wells, nnprducing wells, existing wellbres, unplugged wells, r previusly plugged wellbres. Any matter assciated with the management, use, and dispsal f prduced water and wastes r substances assciated with the develpment r peratin f the Leased Land. Any matter assciated with this Lease relating t the generatin, prcessing, handling, transprtatin, strage, treatment, recycling, marketing, use, dispsal, release r discharge, r threatened release r discharge, f il, natural gas, natural gas liquids, all ther petrleum substances, any waste material, r any "hazardus substance" r "pllutant r cntaminant" as thse terms are defined (nw r in the future) under CERCLA and its state cunterpart. Any matter relating t LESSEE's wnership, use, r ccupancy f the Leased Land r any area impacting the Leased Land. LESSEE's bligatins created by this Sectin are cntinuing bligatins which will remain in effect, and be enfrceable by LESSOR, even after the Lease terminates r therwise ceases t burden the Leased Land. In the event LESSOR cnveys r assigns all r any part f its interest in the Leased Land, LESSOR will nevertheless cntinue t be cvered by LESSEE's indemnity. Hwever, LESSOR's grantees r assignees will als be cvered by LESSEE's indemnity t the extent f the interest they receive in the Leased Land. LESSEE's indemnity bligatin will apply even thugh the basis fr LESSOR's liability arises ut f LESSOR's statutry r cmmn law strict liability, sle r cncurrent negligence, r any ther statutry, trt, r cntract thery. When cnveying a mineral interest: 3. RESTRICTIVE COVENANTS. Grantee prmises t cmply with the fllwing restrictins cncerning the rights it is receiving in the Land by this Cnveyance (the "Cnveyed Prperty"), which shall be deemed cvenants that run with the Cnveyed Prperty: a. Pits. N pits, pnds, r ther surface impundments will be used in develping r perating the Cnveyed Prperty. b. Prductin-Related Equipment and Strage Tanks. N abve grund r undergrund strage tanks will be placed n the area encmpassed by the Cnveyed Prperty. N equipment designed t separate, treat, dehydrate, cmpress, r prcess the Cnveyed Prperty will be placed n the area encmpassed by the Cnveyed Prperty. c. Injectin and Waste Dispsal. N injectin r dispsal well will be placed n the area encmpassed by the Cnveyed Prperty. N slid, liquid, r gaseus waste will be stred r dispsed f n the area encmpassed by the Cnveyed Prperty. d. Hazardus Substances. N substance, defined as a "hazardus substance" (nw r in the future) under the federal Cmprehensive Envirnmental Respnse, Cmpensatin and Liability Act ("CERCLA"), the Kansas statutry cunterpart t CERCLA, and any amendments r 11

14 substitutins fr CERCLA and its Kansas cunterpart, will be brught nt the area encmpassed by the Cnveyed Prperty. e. Strage f Equipment r Material. N pipe, chemicals, r ther material r equipment will be placed n the area encmpassed by the Cnveyed Prperty except items that are n-site fr immediate use in peratins. Equipment r material placed n site fr lnger than five cnsecutive days will be deemed nt t be fr immediate use in peratins. f. Restre Develpment and Prductin Areas. Within five days after a develpment r prductin peratin is cmpleted, all the assciated develpment structures, equipment, and any ther material brught t r generated at the site will be remved frm the site. If any tpsil has been disturbed by the peratin, the area will be graded t its riginal cntur, and the tpsil replaced, prperly seeded, fertilized, and maintained until the riginal cver in the affected area is reestablished. g. Set-Back Requirements. N equipment, material, r peratin site will be lcated within 300 feet f any huse, garage, barn, stream, creek, pnd, lake, r ther structure, imprvement, r water surce lcated n the area encmpassed by the Cnveyed Prperty. Grantee acknwledges that Grantr may, in additin t damages and any ther remedy at law r equity, btain injunctive relief t enfrce the cvenants specified in this cnveyance. 4. GRANTEE'S ASSUMPTION OF LIABILITY. Grantee assumes the fllwing liabilities assciated with the Cnveyed Prperty: a. Cnditin f the Area Encmpassed by the Cnveyed Prperty. Grantee acknwledges that it is purchasing the Cnveyed Prperty withut relying n any representatins by Grantr cncerning the cnditin, envirnmental r therwise, f the Cnveyed Prperty r the area encmpassed by the Cnveyed Prperty. Instead, Grantee is relying slely upn its independent investigatin t determine the status f the Cnveyed Prperty and the area encmpassed by the Cnveyed Prperty. As partial cnsideratin fr this cnveyance, Grantee agrees t assume all liabilities it may incur as an wner r peratr f the Cnveyed Prperty and the area encmpassed by the Cnveyed Prperty, including any envirnmental cleanup bligatins that may be impsed under any lcal, state, r federal law, including the cmmn law. Grantee further agrees t hld Grantr harmless frm any claim Grantee may have r acquire, in cntributin r therwise, assciated with the cnditin f the prperty r Acme's liability as an wner r peratr. This includes, withut limitatin, any claim r cause f actin Grantee may have at cmmn law r under any lcal, state, r federal statute such as CERCLA r a state r lcal cunterpart. b. Activities n the Area Encmpassed by the Cnveyed Prperty. Grantee agrees t assume all liabilities assciated with any activity cnducted n the Cnveyed Prperty r the area encmpassed by the Cnveyed Prperty, by Grantee, its lessees, cntractrs, and any ther persn r entity exercising r purprting t exercise rights thrugh Grantee r n Grantee's behalf. In 12

15 additin t such liabilities, Grantee will be strictly liable fr any damage t: cultivated land, grwing crps, pasture land, unimprved land, livestck, fences, rads, ditches, culverts, trees, turf, terraces, springs, water wells, grundwater, persnal prperty, fixtures, and imprvements lcated nw r in the future n the area encmpassed by the Cnveyed Prperty. 5. GRANTEE'S INDEMNITY OF GRANTOR. Grantee will prtect, indemnify, hld harmless, and defend Grantr against any claim, demand, cst, liability, lss, r damage suffered by Grantr, including Grantr's reasnable attrney fees and litigatin csts, assciated with r arising ut f ne r mre f the fllwing events: a. Breach f Cvenant. A breach f any restrictive cvenant cntained in paragraph numbered 3 f this cnveyance. b. Assumptin f Liability. Any matter encmpassed by Acme's assumptin f liabilities, including envirnmental liabilities, under paragraph numbered 4 f this cnveyance. c. Specific Operatins. (1) Any activity expressly r impliedly authrized r required by this Cnveyance. (2) Plugging and abandnment f prducing wells, nnprducing wells, existing wellbres, r previusly plugged well bres. (3) Management, use, and dispsal f prduced water and wastes r substances assciated with the develpment r peratin f the Cnveyed Prperty. (4) Grantee's generatin, prcessing, handling, transprtatin, strage, treatment, recycling, marketing, use, dispsal, release r discharge, r threatened release r discharge, f il, natural gas, natural gas liquids, all ther petrleum substances, any waste material, r any "hazardus substance" r "pllutant r cntaminant" as thse terms are defined (nw r in the future) under the federal Cmprehensive Envirnmental Respnse, Cmpensatin and Liability Act ("CERCLA"), the Kansas statutry cunterpart t CERCLA, and any amendments r substitutins fr CERCLA and its Kansas cunterpart. d. Other Matters. Any matter relating t Grantee's wnership, use, r ccupancy f the Cnveyed Prperty r the area encmpassed by the Cnveyed Prperty. 13

16 A CHECKLIST FOR THE NARO LANDOWNER CONSIDERING TO LEASE THEIR LAND Have yur surface rights already been determined by a prir severance f a mineral interest? If s, yur bargaining psitin is reduced because the prspective lessee may already pssess the rights they need t develp the minerals. The fllwing items assume the surface wner presently wns all the mineral rights. If less than all the mineral rights are wned, in mst states any mineral wner has the right t make reasnable use f the surface fr mineral develpment. Even thugh there has been a prir mineral severance, the surface wner still has the ability t enfrce cncepts f "reasnable use," "accmmdatin dctrine" rights, rights under the deed r lease (r ther dcuments) in which the surface wner is a third party beneficiary, and statutry rights. Is it time t lease? T btain the terms necessary t prtect the landwner's interests the lessr must have the necessary bargaining pwer. Often this means refusing the lease unless, and until, the speculative value f the leased land justifies the investment necessary t negtiate and prepare an acceptable lease-and hire an il & gas attrney t represent yu. Wuld I lan mney t the persn r entity seeking t lease my land? Prmises are cheap. T ensure a prmise is kept, r damages are cllectible if breached, the lessee must be reputable. Ensure the party yu deal with initially remains "n the hk" nce they transfer the lease. It des little gd t btain a prmise frm a reputable develper if they can abslve themselves f cntinuing liability by assigning the lease t smene else. Define the lessee's surface use rights with precisin. Ensure the minimal use necessary is made f the surface and that nthing remains n the land as develpment prgresses. Define yur surface rights with precisin. Ensure yu can d the things yu need r want t d n the surface thrughut the duratin f the lease. Prvide fr a brad indemnity agreement regarding envirnmental matters-including well plugging and abandnment. Remember, hwever, this is merely aprmise. Prvide fr attrney fees and litigatin csts in the event it is necessary t enfrce the lease terms. In mst states yu will nt get these unless yu prvide fr them in yur lease. Make sure any fights are cnducted where it will be cnvenient fr yu-and hpefully incnvenient fr them. Avid any srt f arbitratin r mediatin requirements that wuld make it mre difficult t ecnmically pursue a remedy. Select yur lcal district curt as the place t reslve lease disputes; decide if yu want t avid federal curt using an exclusive chice-f-frum clause. Be vigilant; actively plice the agreement t ensure it is being hnred.