Balancing Property Rights, Energy Production And The Environment by Joseph Fitzsimons, Esq. Uhl, Fitzsimons, Jewett & Burton, PLLC San Antonio, Texas jfitzsimons@ufjblaw.com University of Texas at Austin Kay Bailey Hutchinson Center for Energy, Law & Business Austin, Texas April 7, 2015 1
Joseph Fitzsimons is a natural resources, oil and gas and water law attorney and 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 Texas Parks & Wildlife Commission and in 2009 he placed a conservation easement on his ranch. 2
Part I: Conflicting Property Rights The Surface Estate vs. The Mineral Estate 3
Split Estates Texas law allows the mineral estate underneath real property to be severed from the surface estate and conveyed in whole or in part to third parties. Because the mineral estate cannot be developed without usage of the surface, the mineral estate is considered the dominant estate, resulting in the surface estate s subservience to mineral development. 4
Reasonable Use of the Surface Because of its dominance, the mineral estate holds an implied easement to use as much of the surface as reasonably necessary for the development of the mineral estate. Reasonable Use extends to a wide variety of oil and gas related activities, including drilling of wells and the building of roads, pipelines, electric lines, as well as storage and processing facilities and the usage of large amounts of water. However, new landowners often buy property for recreation and wildlife purposes, which are directly in conflict with oil and gas development. 5
Surface Damage Statutes Almost all states with extensive oil and gas development have adopted some form of legislation to protect and compensate surface owners faced with development on their property. These statutes typically prescribe a procedure for contacting and negotiating with surface owners prior to the beginning of operations. 6
Typical Elements of a Surface Damage Statute: Required Notice to Surface Owner Good Faith Attempt to Negotiate Damages Bonding Requirements Payment for Damages to Land and Crops Prescribed Method for Determining Damages Penalties for Non-compliance with Statute Statute of Limitations for Claims 7
Major Shale Major Plays Shale Plays Coexisting with with Surface Damage Statutes Surface Damage Statutes Bakken Shale (North Dakota & Montana) Niobrara Shale (Colorado & Wyoming) Permian Basin (New Mexico) Woodford Shale, Granite Wash (Oklahoma) Marcellus Shale (West Virginia, Pennsylvania) Statutes protecting surface owners have no demonstrable impact upon mineral development. 8
Texas has no Surface Damage Statute! 9
The Accommodation Doctrine To balance the total dominance of the mineral estate, the Texas Supreme Court adopted the accommodation doctrine in 1971. The doctrine has been applied by courts in several states and adopted by state legislatures in the statutory form of Surface Damage Acts. 10
Getty Oil Co. v. Jones 470 S.W.2d 618 (Tex. 1971) Getty installed oil wells with pump jacks that interfered with a pivot irrigation system, preventing Jones from irrigating his crops with his existing equipment. Because Getty s drilling of the wells completely precluded use of the irrigation system and there were reasonable alternatives available on the property, the court required Getty to lower the wells into cellars to prevent interference. The court requires application of the accommodation doctrine when the surface owner proves: there is an existing use by the surface owner which would otherwise be 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. 11
Texas Genco, LP v. Valence Operating Co. 187 S.W.3d 118 (Tex. App. Waco 2006, pet. denied) Valence held an oil and gas lease pertaining to the mineral estate underneath Genco s surface landfill. Valence sought to drill an oil and gas well on the location of a landfill cell that was planned and permitted, but was not yet constructed. Genco argued that directional drilling represented a reasonable alternative for Valence s development of the minerals The court ruled that: (1) sufficiently planned use qualifies as an existing use by the landowner for the purposes of the accommodation doctrine, and (2) directional drilling of horizontal wells from elsewhere on the lease was a reasonable alternative for development of the minerals. 12
Merriman v. XTO Energy, Inc. 407 S.W.3d 244 (Tex. 2013) Merriman sought an injunction when XTO began construction of a gas well location on property where Merriman engaged in periodic cattle ranching activities. Merriman argued the well would interfere with existing locations used for temporary corrals and livestock pens on the property. The court ruled that Merriman failed to prove he had no reasonable alternative for location of cattle pens on the property. The court added an additional evidentiary burden for the surface owner, who must now prove: there is no reasonable alternative method available to the surface owner by which the existing use can be continued. 13
The Bottom Line: Application of the accommodation doctrine by Texas courts is exceptionally rare. There is no Surface Damage Statute in Texas to protect surface owners. The only practical method for the landowner to protect the surface from oil and gas development is through negotiation of a Surface Use Agreement with the operator. 14
Leverage to Negotiate a Surface Use Agreement Surface Use Agreements are usually negotiated along with the Oil and Gas Lease. Unless the landowner owns at least a portion of the mineral estate, there will be insufficient leverage to negotiate a viable SUA. When creating a split estate, be sure to make a preemptive SUA that is binding upon the severed mineral owner. 16
Why a Surface Use Agreement is Necessary Oil and gas exploration and production are surface intensive operations including seismic surveys, surface locations, pads, pits, frac tanks, pipelines, roads and related infrastructure. Without a Surface Use Agreement recovery for damages is limited to the market value of the affected acreage, even if the costs of restoration exceed the market value of the property 17
Why a Surface Use Agreement Introduction is Necessary Without a Surface Use Agreement: the surface owner has no input on the location of infrastructure operator is under no obligation to remove infrastructure operator has free use of both surface and groundwater operator is under no obligation to restore the surface after completion of operations 18
SUA Provisions: Surface Use Coordination Surface Use Agreement should: coordinate the activities of the operator minimize traffic and interference prevent surface fractionalization This goal is accomplished by extensive planning: Designation of oil field corridors Developing a plan of operations 19
Surface Use Agreements 21
SUA Provisions: Drilling Pads Multiple Well Drill Pads for optimum recovery with minimum surface impact Could exceed 6 acres in size Construct berms for visual screening Pad size should be reduced after drilling operations are complete Topsoil segregation and reclamation Caliche base vs. temporary geotextile mats Per acre damage payment 22
Drilling Pad 5 acres 23
Drilling Pad Reclamation: July 7, 2013 24
Drilling Pad Reclamation: July 7, 2014 25
Wooden Mats Geotextile Materials Stockpiling of Topsoil 26
Reclaimed Drilling Pad Using Wooden Drilling Mats 27
SUA Provisions: Frac Ponds Fresh water only: no drilling mud or any other fluid in the frac ponds Design for use as livestock/wildlife impoundments when operations are completed Fence to protect wildlife and livestock Per acre damage payment 28
Eagle Ford Frac Pond 29
SUA Provisions: SUA Provisions: Surface Sites Surface Sites Tank Batteries/Separators/etc. Where necessary, locate along oil field corridor Berms for spill prevention and visual screening Require operator to keep equipment painted and free of corrosion If trucking oil, consider time limitations on pick-up during hunting season 30
Tank Battery: Unpainted 31
Tank Battery: Painted 32
SUA Provisions: SUA Provisions: Roads Roads Give surface owner control of operator s method of ingress and egress Exclude operator from operating near homes, structures or other sensitive areas Surface owner and operator should coordinate on road locations and construction methods Operator should be solely responsible for maintenance, repair and erosion control 33
Road Material 34
Roads: Drainage and Run-off 35
SUA Provisions: SUA Provisions: Pipelines Pipelines Operator has right to install certain pipelines under its implied easement SUA should require consultation and agreement with surface owner for pipeline locations SUA should provide for payment for all pipelines on an inch per foot basis Double-ditch pipelines to preserve topsoil and provide for removal and reclamation after lease expires 36
Pipeline Trenching 37
Pipeline Reclamation: Before 38
Pipeline Reclamation: After 39
SUA Provisions: SUA Provisions: Water Water Hydraulic fracturing operations use large quantities of water Reserve all surface and groundwater to Surface Owner Drilling of Water Well Potential problems with regulatory agencies Should be paid on water produced not water used Limit use of surface water, charge for off-lease water State water law varies considerably 40
SUA Provisions: Waste Management Pits, mud, closed systems, spills, NORM Salt water injection SUA Provisions: Waste Management Porous space belongs to surface owner, subject to terms of the oil and gas lease Should prohibit salt water disposal unless surface owner agrees in writing If allowed, be sure to include royalty for skim oil 41
Reserve Pit Remediation 42
SUA Provisions: SUA Best Provisions: Management Best Practices Practices Erosion Control Terraces/Culverts/Gravel/Caliche Soil Protection Double-ditching/Stockpiling soil/prevention of invasive or harmful seeds/brush control Livestock protection Fencing/Cattleguards/Proper gate procedure Maintenance Rust control/painting/sound abatement/lighting 43
SUA Provisions: SUA Provisions: Damage to Property Damages to Property Complete cost of repair or replacement Regardless of whether such costs exceed the fair market value of the property. Environmental Issues Environmental indemnity CERCLA/SARA and state statutes 44
Tank Battery in Poor Condition 45
Poorly Maintained Well 46
Blown-out Well 47
SUA Monitoring Surface use agreement must be continually enforced Monitoring Expert engineer should be engaged to periodically check property. Expert environmental consultant should be engaged to ensure operator compliance. Ranch manager or other consultant should be continually monitoring contractors and subcontractors. 48
Part III: Enforcing State and Federal Regulations 49
The Texas Railroad Commission Despite its name, the RRC has regulated the oil and gas industry in Texas since 1891 The Commission sets statewide rules and imposes fines for violations RRC Rule 8 give the Commission the duty to prevent the pollution of surface water and groundwater Special rules govern usage of pits and the drilling, completion and plugging of wells 50
Texas Commission on Texas Commission on Environmental Quality (TCEQ) Environmental Quality (TCEQ) TCEQ regulates environmental pollution in Texas, including soil, air and water However, the Railroad Commission has jurisdiction over pollution connected with oil and gas exploration, production and transportation TCEQ jurisdiction is preferable, but difficult to obtain because of Memorandum of Understanding with the Railroad Commission 51
Environmental Protection Agency (EPA) The EPA s jurisdiction can be invoked when operations pollute state waters or result in the unlawful disposal of hazardous materials Normal oil and gas waste is exempt from federal hazardous materials laws Permits are required for discharges of contact stormwater into waterways Landowners are hesitant to invite federal government investigation of their property 52
Army Corps of Engineers The Army Corps issues Section 404 dredge and fill permits under the Clean Water Act Corps jurisdiction is not implicated unless the construction activities or runoff pollution have a demonstrable effect upon state waters Can make determinations on whether creeks and bodies of water have a significant nexus with state waters 53
The Bottom Line: Almost all oil and gas activities and resulting pollution are governed by the Texas Railroad Commission. TCEQ or federal agency jurisdiction is difficult to invoke and may invite unwanted attention. Regulatory relief will not fully compensate for damages to property and cost of remediation. The best way to prevent pollution is a strong Surface Use Agreement that is monitored and strictly enforced. 54
Endangered Species Act 1973 legislation creates listing of threatened and endangered species subject to federal protection Notable endangered and threatened Texas bird species include: Whooping Crane Black Capped Vireo Golden Cheeked Warbler Lesser Prairie Chicken 55
Lesser Prairie Chicken Listed as a threatened species by USFWS on March 27, 2014. Core population of birds exist in Texas, Oklahoma and Kansas within developing oil and gas fields, creating a clear conflict with industry. Range-wide conservation plan being developed to protect habitat and reestablish population. Operators must pay for taking of habitat and birds in violation of conservation plan, and may participate in mitigation banking programs. 56
Part IV: Conservation Easements 57
Conservation Easement Basics Conservation Easements are agreements between the landowner and a qualified organization, usually a land trust. The landowner conveys and restricts its use and development rights in order to protect the defined conservation values in perpetuity. The terms of the written agreement will govern the future actions of the parties. 58
IRS Code Section 170(h) Landowners receive property tax benefits from the IRS if the conservation easement meets certain qualifications under IRS rules. The Code requires a qualified real property interest conveyed to a qualified organization exclusively for conservation purposes. 59
IRS Code Section 170(h) and Oil and Gas Development Surface mining is prohibited by the Code. Oil and gas exploration is allowed so long as the impact is restricted to limited, temporary and localized impacts that are not irremediably destructive of significant conservation interests. 60
But What If I Don t Own The Entire Mineral Estate? Minerals severed from the surface estate before the date of the conservation easement are not subject to the conservation easement s terms. The implied easement of the mineral owner is unaffected and exploration activities will not result in liability for breach of the conservation easement as to parties that did not sign it. The landowner may lose IRS tax benefits if conservation values are damaged by oil and gas exploration. 61
Balancing Mineral Development with a Conservation Easement If the landowner owns a portion of the mineral estate, use this leverage to negotiate a Surface Use Agreement that complements the terms of the Conservation Easement. Encourage directional drilling, multi-well pads and consolidation of roads and facilities. Draft a conservation easement with detailed provisions anticipating future oil and gas development scenarios. 62
The Bottom Line: Balancing conservation purposes with potential oil and gas development requires careful drafting of the conservation easement. Parties must agree to become subject to a conservation easement s terms. Keep in mind, sometimes you can make it work, and sometimes you cannot. 63
Questions? 64
Thank You Texas Agricultural Land Trust, The Nature Conservancy, Land Trust Alliance, Melinda Taylor and Stephen J. Small For use of prior material 65 65