Week 4 - Oil and Gas

Gas Storage — Slide 3

Gas storage raises a basic ownership question: who owns the pore space, and from whom does the storage company need to obtain the storage right?

• This can become a major dispute because the surface estate and mineral estate may be separately owned.

• Example: one party may obtain storage rights from the mineral owner, while another obtains them from the surface owner, and then the parties discover that it is unclear who actually owns the pore space.

 

• The basic question is: from whom do you have to obtain the storage rights? (X)

(X)

Pore-Space Ownership

 

The first place to look is always the severing instrument.

• Do not immediately jump to the state’s default rule.

• The severing instrument is the conveyance that divided the property into separate surface and mineral estates.

• Example:

  • Owner originally owns the entire tract in fee, meaning both surface and minerals.

  • Owner conveys the minerals to another person and keeps the surface.

  • That transaction is both a conveyance and a severance. (x)

(x)

A conveyance is simply a transfer of ownership, while a severance is the splitting apart of the surface estate and mineral estate. For example, if O owns both the surface and the minerals and then sells the minerals to A while keeping the surface, that transaction is a conveyance because O transferred the mineral estate to A. At the same time, it is a severance because the surface and mineral estates, which were previously owned together, are now owned separately. (X)

(X)

The severing instrument can expressly determine ownership of the pore space.

 

• Example: “I convey the minerals, including the pore space.”

• If the document expressly assigns the pore space, that language controls over the normal default rule.

• Some statutes recognize this by providing a default rule only in the absence of a separate agreement.

• New Mexico, for example, generally places the pore space with the surface owner, but the statute allows a separate agreement to provide otherwise. (X)

(x)

Default Rules

If the severing instrument does not address pore-space ownership, then look to state law.

• The majority rule, whether by statute or common law, generally places pore-space ownership with the surface owner.

• This is not universal.

• Some jurisdictions may recognize rights in both estates.

• In the absence of clear language, many courts have treated the surface and mineral owners as having concurrent rights.

 

Practical consequence:

• If both estates have concurrent rights, obtain the storage rights from both the surface owner and the mineral owner.

• This may be more expensive and less convenient, but it is still preferable to major ownership litigation later. (x)

(X)

Slide 3 — GasX Storage Hypothetical

 

 

The slide shows:

• Sam — surface owner on one side

• Sarah — mineral owner beneath Sam

• Alice — surface owner on the neighboring tract

• Albert — mineral owner beneath Alice

 

GasX Storage Co.

• Underground gas storage reservoir

 

The initial questions are:

• Who has the storage rights?

• From whom should GasX seek permission?

• If a bank lends money to GasX to finance the project, what rights does GasX actually have to offer as security?

 

The analysis begins with the severing instruments.

• If the severing instruments answer who owns the pore space, follow those instruments.

• If they do not, consult state law.

• If the applicable law recognizes concurrent surface and mineral rights, GasX should obtain permission from both.

(X)

(X)

The slide shows:

• Sam — surface owner on one side

• Sarah — mineral owner beneath Sam

• Alice — surface owner on the neighboring tract

• Albert — mineral owner beneath Alice

 

GasX Storage Co.

• Underground gas storage reservoir

 

The initial questions are:

• Who has the storage rights?

• From whom should GasX seek permission?

• If a bank lends money to GasX to finance the project, what rights does GasX actually have to offer as security?

 

The analysis begins with the severing instruments.

• If the severing instruments answer who owns the pore space, follow those instruments.

• If they do not, consult state law.

• If the applicable law recognizes concurrent surface and mineral rights, GasX should obtain permission from both. (x)

(x)

Neighboring Estate and Trespass — Slide 3

 

A different issue arises when stored gas migrates beyond the tract where GasX obtained permission and moves beneath a neighboring tract.

 

• That becomes a trespass question.

 

GasX may choose to access the storage formation from one tract rather than another because of practical considerations such as:

 

• the closest road,

• the best pipeline easement,

• easier surface access,

• or the location of the underground formation.

 

Pipeline easements often appear in groups because once one easement crosses a tract, later pipelines are commonly placed next to the existing one.

 

The underground storage formation may extend beneath both tracts.

 

At common law, migration of stored gas beneath a neighboring tract is generally not automatically an actionable trespass.

 

The key issue is whether the invasion actually interferes with the neighboring owner’s use of the property.

 (x)

(x)

When Stored Gas Becomes Actionable

Test question: when may the migration of stored gas become actionable?

 

Suppose there is native natural gas beneath Alice and Albert’s tract.

 

• If GasX stores gas in the reservoir and that activity interferes with Albert’s ability to produce his native natural gas, the invasion may become actionable.

 

Example:

• Albert owns the mineral estate.

• Native natural gas exists beneath his tract.

• GasX’s stored gas migrates into the same formation.

• The stored gas makes it more difficult or impossible for Albert to produce the native gas.

 

Albert can argue:

• GasX’s activity crossed the property boundary, and

• the activity interfered with his ability to develop his minerals.

This is why a storage company ideally wants a formation that does not contain native natural gas.

• Geologists are used to determine whether the formation is suitable for storage.

• A formation with native gas creates a greater risk of interfering with the neighboring mineral owner’s rights. (X)

(x)

Ohio Case — Note 8, Page 94 / Slide 3

 

Property rights include the right to:

“exclude invasions that actually interfere with the property owner’s reasonable use.”

The key is actual interference with reasonable use.

 

For Albert, reasonable use could include:

• producing native natural gas,

• developing other minerals,

• or otherwise making legitimate use of his mineral estate.

 

If the storage operation interferes with that use, the invasion can become actionable.

Example:

• Albert attempts to develop coal or another mineral.

• GasX’s storage activity makes that development dangerous or impossible.

• Albert may argue that GasX has interfered with his reasonable use of the property. (x)

(x)

Stored Gas and Adverse Possession — Slide 3

Generally, stored gas cannot be acquired through adverse possession.

 

There are two major problems.

First, once gas has:

• been produced,

• passed through the wellhead,

• been transported, and

• then been reinjected for storage,

it is treated as personal property.

 

Traditional adverse possession primarily concerns real property and is generally used to resolve competing claims to land.

 

Second, adverse possession requires possession to be open and notorious.

 

That requirement is difficult to satisfy when gas is moving underground.

• The property owner may have no way of knowing that the stored gas has migrated beneath the tract.

• Because the gas cannot readily be observed, it is difficult to determine when the adverse-possession clock would begin to run.

• Underground movement of stored gas therefore does not fit comfortably within the traditional adverse-possession framework. (x)

(x)

Stored Gas and Adverse Possession — Slide 3

Another problem with trying to acquire stored gas through adverse possession is the open-and-notorious requirement.

 

• Adverse possession normally requires possession to be open and notorious so the record owner has notice that someone is adversely possessing the property.

• Gas moving underground is difficult to detect.

• The record owner may not know that the stored gas has migrated beneath the tract.

• That makes it difficult to determine when the adverse-possession clock would even begin to run.

 

Even if an adverse possessor satisfies all of the required time and activity requirements, ownership does not automatically become clear of record.

 

• The adverse possessor must bring a lawsuit to establish the interest and quiet title.

• So satisfying the adverse-possession requirements does not, by itself, make the public title records change. (X)

(x)

Common Patterns of Oil and Gas Ownership — Slide 4

Mineral ownership does not always involve a simple 100% conveyance from one person to another.

 

A mineral conveyance can be complete or partial.

• Complete conveyance: the owner conveys 100% of the mineral estate.

• Partial conveyance: the owner conveys only part of the mineral estate or reserves part of it.

 

A common conveyancing method is to convey the entire mineral estate and then reserve the portion the grantor wants to keep.

 

Example:

• O owns 100% of the minerals.

• O wants A to receive half.

• O can grant the minerals to A and reserve a 50% undivided mineral interest for O.

 

This produces:

• A — 50% undivided mineral interest

• O — 50% undivided mineral interest

This may look similar to simply conveying 50%, but the grant-and-reserve structure expressly addresses the entire mineral estate and then identifies what the grantor keeps. (x)

(x)

Partial Mineral Ownership

Mineral ownership can also be divided by the type of mineral.

Example:

• One person may own the oil and gas.

• Another may own coal.

• Another may own some other mineral.

So ownership can be divided in different ways:

• a fraction of all minerals, or

• ownership of only certain minerals.

 

This creates separate chains of title for the different mineral interests.

 

Each owner can then potentially lease that particular mineral interest.

Example:

• Oil and gas owner leases to an oil and gas company.

• Coal owner leases to a mining company.

• Those leases can later be assigned to other parties.

• A lessee may assign the entire lease or only part of it.

One tract can therefore develop multiple overlapping chains of title and leasehold interests. (x)

(x)

Prior Government Reservations — Slide 4

Mineral ownership is also subject to prior reservations or holdbacks by the government.

 

The original patent may have reserved certain minerals to the government.

• These reservations can be very old.

• Coal reservations, for example, may date back to the late 1800s.

• Title work must therefore go all the way back to the original patent.

 

Do not assume that the current private parties necessarily own the mineral interest they are disputing.

Example:

• A and B litigate over which of them owns a mineral interest.

• The case progresses through significant discovery and expert work.

• Title research eventually reveals that the mineral interest was reserved by the government in the original patent.

• Neither A nor B actually owned the disputed interest.

The lesson is to check the entire chain of title before spending significant time litigating ownership. (x)

(x)

Meet the Cast of Characters — Slide 5

 

Start with one original owner who owns both the surface and minerals.

Example:

• Jebediah Springfield receives a patent from the Republic of Texas.

• He later sells the minerals and keeps the surface.

That transaction is both a conveyance and a severance.

 

After the severance, there are now:

• an original surface owner at severance, and

• an original mineral owner at severance.

From there, the two chains of title can move separately through time.

 

Example:

• Surface owner A → surface owner B → surface owner C

• Mineral owner A → mineral owner B → mineral owner C

Eventually, there is a current surface owner and a current mineral owner. (x)

(x)

urther Severance of the Mineral Estate — Slide 5

The mineral estate itself can later be divided again.

Example:

• One party owns the oil and gas.

• Another party owns coal and all other minerals.

 

Now there are two different mineral estates.

 

The sequence is:

1. Surface and minerals are severed from each other.

2. The mineral estate is later severed again into separate mineral interests.

 

So a single tract may have:

• current surface owner,

• current oil and gas owner,

• current coal or other mineral owner.

 

It is possible to divide ownership even further, although having many separately owned mineral categories is less common. (X)

(x)

Surface Leases and Mineral Leases — Slide 5

The surface owner can lease the surface estate.

Examples:

• grazing lease,

• hunting lease,

• farming lease.

The surface lessee may also be called a tenant.

 

At the same time, the mineral owners can separately lease their mineral interests.

 

So the same tract may simultaneously have:

• surface owner,

• surface lessee,

• oil and gas owner,

• oil and gas lessee,

• coal or other mineral owner,

• mining lessee. (X)

(x)

Depth Severance — Slide 5

Mineral ownership can also be divided by depth.

 

Example:

• Owner A owns minerals from the surface to 5,000 feet.

• Owner B owns minerals from 5,000 to 10,000 feet.

• Owner C owns minerals below 10,000 feet.

 

This is depth segregation.

 

So mineral ownership does not necessarily extend from the surface all the way to the center of the earth. (X)

(x)

Lessor, Lessee, and Working Interest — Slide 5

When a mineral owner leases the mineral estate:

• the owner becomes the lessor,

• the party receiving the lease becomes the lessee.

 

The lessee receives the right to enter the land and reasonably use the surface to develop the minerals.

 

Example:

• Farmer Brown owns the minerals.

• Farmer Brown executes an oil and gas lease to an oil company.

• Farmer Brown is the lessor.

• The oil company is the lessee.

 

When the lease is signed, the working interest passes to the lessee.

The working interest includes the right to develop the minerals. (X)

(x)

Right of Self-Development

One of the rights included in mineral ownership is the right of self-development.

 

Before leasing:

• Farmer Brown, as mineral owner, has the right to develop the minerals himself.

 

After leasing:

• Farmer Brown gives up that right for the duration of the lease.

• The oil company receives the working interest and the right to develop.

 

The lease may not literally say, “you can no longer develop,” but that is the legal effect of transferring the working interest to the lessee.

 

As long as the lease remains in effect, the lessor generally no longer has the right to independently drill and develop the minerals covered by the lease. (x)

(x)

Operator and Developer — Slide 5

A mineral lessee may also be referred to as:

• operator,

• developer.

So when a case refers to an “operator” on a tract, that usually means the party is the mineral lessee exercising the working interest, unless that party actually owns the mineral estate outright. (x)

(x)

Farmout Agreement — Enron / Not on Final

 

A farmout agreement is a contractual arrangement used when an oil company owns a lease but may not be able to drill before the lease expires.

 

Example:

• Oil Company A owns the lease.

• The lease is about to expire.

• Oil Company A does not have the money to drill.

• Oil Company A can farm the lease out to Oil Company B.

• The agreement essentially says: “If you drill this lease, we will assign the lease to you.”

 

So the basic idea is:

• one company has the lease,

• another company performs the drilling,

• and the drilling company receives the lease if it satisfies the agreement.

This comes up frequently in the industry, but it is covered more fully later and is not something to worry about for the final at this point. (x)

(x)

Kinds of Royalty Interests — Slide 6

There are three types of royalty interests:

 

1. Non-participating royalty interest

2. Lessor’s royalty

3. Overriding royalty interest

 

Royalty generally gives the holder the right to receive value from production. The royalty holder is not participating in the actual development of the minerals. (x)

(x)

Non-Participating Royalty Interest — Slide 6

A non-participating royalty interest, or NPRI, is typically created by the mineral owner and burdens the mineral estate.

 

Example:

• Mineral owner sells the minerals but reserves a 1/16 royalty.

• If oil or gas is later produced from the tract, the NPRI owner receives 1/16 of the production or its value.

If there is no production, the NPRI owner receives nothing.

 

Test point:

• No production = no royalty payment.

• An NPRI does not guarantee income merely because the interest exists. (x)

(x)

Royalty In Kind vs. Royalty in Value

A royalty can be received in kind or in value.

Royalty in kind means the royalty owner actually receives the physical oil or gas.

 

Example:

• Holder owns a 1/16 royalty.

• 160 barrels are produced.

• A 1/16 royalty equals 10 barrels.

• If taken in kind, the royalty owner actually receives those 10 barrels.

 

More commonly, the royalty is taken in value.

• The royalty owner does not receive the physical barrels.

• Instead, the owner receives money equal to the value of the royalty share.

 

So:

• in kind = physical oil or gas

• in value = money representing the value of that oil or gas (x)

(x)

Duration of an NPRI — Slide 6

An NPRI may be terminable or perpetual.

 

Example of a term NPRI:

• “I reserve a 1/16 NPRI for 10 years.”

• At the end of 10 years, the NPRI expires.

 

If a title document from 1890 created an NPRI for only 10 years, there is generally nothing left to worry about today because the term has ended.

 

A perpetual NPRI is different.

Example:

• “I reserve a 1/16 royalty.”

• No ending date is included.

• The interest may continue indefinitely.

 

So when reviewing title, the language governing duration matters. (x)

(X)

Term NPRI With a Secondary Term

A more complicated NPRI may provide:

 

“1/16 royalty for 10 years and so long thereafter as oil and gas is produced.”

This creates a structure similar to an oil and gas lease.

 

Primary term:

• The NPRI lasts for the stated period, such as 10 years.

 

Secondary term:

• At the end of the 10 years, check whether oil or gas is being produced.

• If there is production at that moment, the NPRI continues for so long as production continues.

 

Example:

• NPRI begins in 1890.

• Primary term runs from 1890 to 1900.

• Production begins one day before the 10-year term ends.

• The NPRI can then continue into the secondary term.

• It remains in existence so long as the required production continues.

 

If production later stops, the determinable interest terminates.

 

This creates a title problem because an old NPRI may still exist today if production began at the required time and has continued.

If there was no production by the end of the stated 10-year primary term, the NPRI simply ends. (x)

(X)

Lessor’s Royalty — Slide 6

When Farmer Brown leases his minerals to an oil company, he gives up the right of self-development and transfers the working interest to the lessee.

 

In return, he can receive several types of payments under the lease:

• bonus

• delay rental

• royalty

 

The most important payment is generally the royalty.

 

Historically, the typical lessor’s royalty was 1/8.

• For many decades, 1/8 was the common royalty fraction.

• Modern leases can provide whatever royalty percentage or fraction the parties negotiate.

The lessor’s royalty is the royalty retained by the mineral owner when the mineral estate is leased. (x)

(X)

Overriding Royalty Interest — Slide 6

An overriding royalty interest, or ORRI, is carved out of the oil and gas lease.

 

It comes from the working-interest side of the lease and is paid by the oil company, which is the lessee/operator.

 

It is commonly given to a third party.

Example:

• A small oil company needs geologists or engineers to help develop a well.

• The company may not have enough money to pay them significant cash compensation.

• Instead, the company may give them an overriding royalty interest.

• If the tract later produces, those third parties receive the stated share of production.

An ORRI depends on the oil and gas lease from which it was created.

 

As a general rule:

• if the underlying lease ends, the ORRI ends with it.

 

If a new company later obtains a new lease on the same land, the old ORRI generally does not automatically attach to that new lease. (X)

(x)

Farmer Brown owns the minerals and enters into an oil and gas lease with an oil company.

The lease provides for a historic 1/8 lessor’s royalty.

 

Suppose the well produces $8 million worth of oil and gas.

• Farmer Brown’s 1/8 royalty = $1 million.

• Oil company’s 7/8 working-interest share = $7 million.

 

The oil company bears the costs of production.

 

Examples:

• drilling costs

• exploration costs

 

Royalty owners generally do not pay the costs of production.

So the drilling and production costs come out of the oil company’s 7/8 working-interest share.

Adding the 1/16 NPRI — Board Drawing

Now assume the tract is also burdened by a 1/16 NPRI.

The NPRI is paid out of the lessor’s royalty side first.

 

So the structure is:

• Farmer Brown has a 1/8 lessor’s royalty.

• The 1/16 NPRI burdens that royalty interest.

• The NPRI is taken from Farmer Brown’s 1/8 before cutting into the oil company’s 7/8.

If the total NPRI burden becomes large enough, it can consume Farmer Brown’s entire royalty and then begin cutting into the oil company’s share.

 

Farmer Brown does not have to personally pay additional money if the royalty burden exceeds his royalty share.

 

Example:

• If several NPRIs collectively exceed Farmer Brown’s 1/8 royalty, his royalty may be reduced to zero.

• The remaining burden begins cutting into the oil company’s working-interest share.

This is the point shown on the board drawing where the 1/16 NPRI comes out of Farmer Brown’s 1/8, while the oil company begins with the remaining 7/8. (x)

(x)

 

Overriding Royalty Interest — Slide 6 + Board Drawing

 

An overriding royalty interest, or ORRI, is carved from the oil and gas lease and paid out of the oil company’s side of production.

 

Example:

• Farmer Brown leases to the oil company for a 1/8 lessor’s royalty.

• The oil company therefore begins with the remaining 7/8 working-interest share.

• Suppose the oil company grants a 1% ORRI to a third party.

• 1% = 1/100.

• That 1% is paid out of the oil company’s side.

 

For purposes of Oil and Gas I, if the ORRI is stated simply as 1%, treat it as 1% of total production.

 

Example:

• Total production = $8 million.

• 1% ORRI = $80,000.

The actual instrument can change that result.

• An agreement could instead provide for 1% of the 7/8 working-interest share.

• If so, the math would be different.

• The exact language of the ORRI ultimately controls. (x)

(x)

Duration of ORRI vs. NPRI — Slide 6

The basic distinction is:

• ORRI → tied to the oil and gas lease from which it was carved.

• NPRI → duration depends on the terms that created the NPRI.

 

Therefore:

• When the underlying oil and gas lease ends, the ORRI generally ends.

• A new lease does not automatically carry the old ORRI with it.

• An NPRI may terminate under its own stated terms.

• If an NPRI contains no termination provision, it may be perpetual.

 

This is what the board drawing is showing:

• Farmer Brown — 1/8 lessor’s royalty.

• 1/16 NPRI — burdens Farmer Brown’s side and may continue if perpetual.

• Oil Company — 7/8 working-interest side.

• 1% ORRI — comes from the oil company’s leasehold side and generally disappears when that lease disappears. (x)

(x)

Washout — Not Important for This Course

Because an ORRI disappears when the underlying lease ends, the lessee may have an incentive to let the lease expire and obtain a new lease without the override.

 

That is called a washout.

 

Example:

• Oil company’s lease is burdened by an ORRI.

• Oil company allows the lease to expire.

• Oil company then obtains a new lease from Farmer Brown.

• The old ORRI would ordinarily no longer burden the new lease.

 

There is case law addressing bad-faith washouts, and an override may sometimes be restored where the washout was accomplished in bad faith.

 

For this class, however, use the basic rule:

• Lease ends → ORRI ends. (x)

(x)

What Does “Carved From the Lease” Mean? — Slide 6

An ORRI is not literally a percentage ownership of the working interest.

 

“Carved from the lease” means the ORRI is paid from the proceeds generated by the lease.

This is different from assigning part of the working interest.

 

Example:

• Lessee owns 100% of the working interest.

• Lessee could assign 50% of that working interest to another company.

• That would actually transfer part of the leasehold interest.

 

An ORRI does not do that.

 

Instead:

• the lessee keeps the working interest,

• but agrees to pay a stated royalty from the production attributable to that lease. (x)

(X)

Surface Use and the Right to Explore — Slide 7

Increasing oil and gas development creates greater conflict between mineral development and surface ownership.

 

Questions to consider:

• Is the right to explore a valuable property right?

• Who owns that right?

• What is the scope of that right?

• What causes of action are available to protect it?

Development may become especially contentious where surface tracts are small and heavily occupied.

 

Example:

• Mineral development expands into areas with many 10-acre surface tracts.

• Surface owners may receive no mineral revenue but still experience surface activity.

• This can lead to statutory pressure to require compensation for use of the surface. (x)

(x)

Geophysical Testing Problem — Slides 8–9 / Page 100

 

Title history:

• 2015: O conveys to A all oil, gas, and other minerals.

• O retains the surface.

• 2016: A conveys a 1/2 undivided mineral interest to B.

• Mineral ownership is now:

  • A — 1/2 undivided mineral interest

  • B — 1/2 undivided mineral interest

• 2017: B leases B’s mineral interest to X Company.

• B’s working interest passes to X Company.

 

Now a geophysical company wants to conduct seismic testing on the tract.

Question: who must give permission? (x)

(x)

Surface Owner O — Slides 8–9

Generally, permission from O is not required merely because O owns the surface.

 

The reason is that geophysical exploration is part of the process of developing the mineral estate.

The right to explore therefore belongs with the mineral estate rather than merely with the surface estate.

 

Important practical caution:

• Make sure O truly owns only the surface.

• Do not assume from appearances that O has no mineral interest.

• Title must be checked before deciding whose permission is necessary. (x)

(x)

Mineral Co-Tenant A — Slide 9

A still owns a 1/2 undivided mineral interest and has not leased it.

 

Therefore, A still possesses the right of self-development.

 

Because A’s ownership is undivided:

• A does not own a particular physical half of the tract.

• A owns a 1/2 interest throughout the entire mineral estate.

• A can therefore use the entire surface as reasonably necessary to develop the minerals.

The right of self-development includes the ability to:

• personally explore and develop, or

• hire another company to perform exploration and development.

 

Thus, A may authorize a geophysical company to conduct seismic testing.

At common law, in a jurisdiction allowing any mineral co-tenant to develop, permission from one mineral co-tenant can be sufficient. (X)

(x)

99% / 1% Co-Tenant Example — Slide 9

Suppose:

• Owner 1 owns 99% of the minerals.

• Owner 2 owns 1%.

• A geophysical company wants permission to conduct seismic testing.

At common law, the company may be able to obtain permission from the 1% owner alone.

 

That creates an obvious practical problem.

 

Example:

• The 1% owner may not even realize that she owns the interest.

• The geophysical company offers her $5,000 for permission.

• She agrees because the payment is significant compared with her small mineral interest.

• The seismic work reveals that there is no oil or gas.

• That information becomes known.

• The 99% owner’s speculative leasing value may collapse even though the 99% owner never consented.

 

Some states respond by requiring a minimum percentage of mineral ownership before development may proceed.

 

Examples might require:

• 70%,

• 80%, or

• 90%

of the mineral estate to consent.

 

The percentage depends on the jurisdiction.

 

Texas, under the common-law approach being discussed, may allow development based on the consent of a much smaller co-tenant interest. (x)

(x)

Mineral Owner B — Slide 9

B is different from A because B leased its mineral interest to X Company.

 

Once B leased:

• B transferred the working interest to X.

• B generally no longer controls geophysical exploration.

 

Therefore, B is usually unnecessary for permission unless:

• the jurisdiction requires participation by all co-tenants, or

• B’s oil and gas lease expressly reserved geophysical exploration rights to B.

 

A lease could theoretically reserve that right to the lessor, but that would be unusual. (x)

(x)

Company X — Slide 9

X Company stepped into B’s shoes by receiving B’s working interest.

 

Therefore:

• X generally has the development rights formerly held by B.

• X can usually authorize geophysical exploration.

• X could potentially serve as the consenting mineral co-tenant in a jurisdiction following the common-law co-tenant rule.

 

If the jurisdiction requires a certain percentage of ownership to consent, however, X alone may not be enough.

 

Example:

• A owns 50%.

• X controls B’s 50% working interest.

• State requires 75% or 80% consent.

• Permission from both A and X would be necessary.

 

As a general rule, however, permission from surface owner O is still unnecessary for the mineral-development right itself. (x)

(x)

Liability for Unauthorized Geophysical Testing — Slide 10

If a geophysical company enters land without sufficient authority, possible claims include trespass.

Trespass does not always result from intentional wrongdoing.

 

Example:

• Survey crew believes it is operating on one tract.

• It accidentally crosses onto the neighboring tract.

• The entry can still create a trespass issue.

 

Other theories have also been considered, including unlawful appropriation of a trade secret.

That theory is unusual because the subsurface information may be something the landowner did not even know before the geophysical company discovered it. (x)

(x)

Damages for Unauthorized Exploration — Slide 10

Two possible measures of damages are:

• reasonable value of the exploration right, or

• loss of speculative value.

 

Reasonable value of the right:

• The law can measure damages by asking what the geophysical company reasonably would have paid for permission.

• This can be associated with assumpsit.

 

Damage to speculative value:

• Before seismic testing, the tract may have speculative oil-and-gas value.

• After seismic testing reveals no hydrocarbons, potential lessees may lose interest.

• The tract’s speculative leasing value can therefore fall dramatically.

 

So even if the land itself is physically unharmed, disclosure of unfavorable subsurface information may cause economic loss.(x)

(x)

Inferring Data From Neighboring Tracts — Slide 10

A geophysical company may be unable to obtain permission for one tract but still conduct seismic testing around it.

 

Example:

• Company obtains permission from all surrounding 40-acre tracts except Gray Acre.

• It does not enter Gray Acre.

• It collects seismic information from the surrounding properties.

• Geologists use the surrounding information to infer what probably lies beneath Gray Acre.

 

If the surrounding acreage shows no promising formations, that may suggest Gray Acre also lacks valuable hydrocarbons.

 

If the surrounding acreage is promising, geologists may infer that Gray Acre may be promising as well.

This sets up the dispute in Enron. (x)

(x)

Enron Oil & Gas Co. v. Worth — Slides 11–12

Issue: Can a mineral owner authorize a third party to conduct geophysical surveys without interference from the surface owner?

 

The general answer is yes.

 

Enron offered the surface owners $5 per acre for entry.

Example:

• 100 acres × $5 per acre = $500.

 

Enron did not necessarily have a legal obligation to pay the surface owner at common law.

 

The payment had practical value.

• A hostile surface owner can obstruct access.

• Police or sheriffs may become involved.

• The geophysical crew may sit idle while continuing to charge a day rate.

• Paying a relatively small amount can avoid unnecessary confrontation. (x)

(x)

Enron — Preexisting Surface Use

A surface owner may also have a legitimate existing use of the land.

Example:

• Farmer has crops growing on the property.

• Geophysical company wants to enter immediately.

• Farmer agrees to entry after the crops are harvested.

 

In the real world, these disputes are often resolved through negotiation rather than litigation.

 

The company may simply:

• pay for access,

• adjust the timing,

• and avoid interfering with existing surface uses. (x)

(x)

Enron — Lower Court

The lower court distinguished between the mineral owner and Enron.

The theory was:

• Mineral owner has the right to self-develop and explore.

• Mineral owner’s lessee also has development rights.

• Enron itself was neither the mineral owner nor the lessee.

• Enron was merely a third-party geophysical company.

 

The lower court therefore concluded that the mineral owners could conduct the survey, but Enron could not.

Another argument was that Enron did not have to share the resulting seismic information with the mineral owners.

The appellate court rejected this narrow distinction. (x)

(x)

Enron — Court of Civil Appeals — Slide 12

Unless the oil and gas lease provides otherwise, the mineral owner or the mineral owner’s lessee may enter the land to conduct geology and geophysics, or G&G.

 

The right extends beyond the individual mineral owner or lessee.

 

There is a chain of authorized parties:

• mineral owner,

• mineral owner’s lessee,

• lessee’s contractor,

• contractor’s subcontractors,

• other persons reasonably necessary to carry out mineral development.

 

The key is that the activity must be connected to the reasonable development of the mineral estate.

 

Thus, a third-party geophysical contractor can exercise the development right on behalf of the mineral owner or lessee. (x)

(x)

Hinds v. Phillips — Slide 12

The same principle applies to other contractors needed for mineral development.

 

Example:

• Lessee achieves production.

• Lessee needs a pipeline.

• Lessee can bring a pipeline crew onto the surface as part of reasonably developing and producing the minerals.

 

The mineral-development right therefore extends to persons reasonably necessary to accomplish the authorized mineral activity. (x)

(x)

Relief for Interference With Exploration Rights — Note 2 / Slide 12

The available cause of action may depend on how the jurisdiction characterizes the mineral interest.

 

If the jurisdiction treats the interest as real property:

• trespass may be available.

 

If the interest is treated more like an exclusive license:

• injunctive relief may be the better remedy.

 

The exact name of the cause of action can therefore vary by state.

  (x)

(x)

Why Pay the Surface Owner? — Note 4 / Slide 12

Even if the mineral owner or lessee has the legal right to use the surface without paying for entry, payment may still be practical.

 

Advantages:

• avoids conflict,

• reduces delays,

• makes access easier.

 

But voluntary payment creates risks.

 

If companies repeatedly pay surface owners for access, the practice may develop into an industry custom.

 

Over time, courts may consider established industry custom when determining what the common law requires.

 

There is also a practical expectation problem.

• Pay Farmer Brown $5 per acre.

• Neighboring landowners hear about it.

• Soon everyone expects the same payment.

 

So being a “nice guy lessee” can create broader economic consequences. (x)

(x)

Surface Damage — Slide 12

At common law, reasonable surface damage caused by mineral development may not require compensation.

 

The important question is whether the use was reasonable.

 

Industry practice helps determine reasonableness.

• If an operator acts consistently with how other operators in the area conduct similar activities, that is evidence that the use is reasonable.

 

A Surface Damage Act, or SDA, can alter the common-law result.

• An SDA is a statute requiring compensation to the surface owner in specified circumstances.

• Many states have some form of Surface Damage Act.

• Central states often have oil-and-gas-focused statutes.

• Eastern states may have versions associated more closely with coal mining.

 

Texas is notable because it does not have a general Surface Damage Act of the type being discussed. (x)

(x)

Kennedy v. General Geophysical Co. — Slides 13–14

Texas Civil Appeals, Galveston, 1948.

 

The appellant owned 339 acres near a geophysical survey and sought:

• trespass damages, and

• exemplary damages.

 

Exemplary or punitive damages are significant in oil-and-gas disputes because they are less predictable than ordinary contractual damages.

 

Facts:

• The geophysical company did not physically enter Kennedy’s land.

• No seismic charges were placed on the property.

• No geophones, trucks, or equipment were placed on the property.

• There was no evidence of physical damage.

• No interpretable seismic information attributable to Kennedy’s tract was obtained. (x)

(x)

Seismic Data Around an Unpermitted Tract — Slide 13

A seismic company may collect data around a tract for which it lacks permission.

 

Some information from the unpermitted tract may inevitably appear in the surrounding seismic data.

 

That information can be muted so that it is not used.

 

The result is essentially a blank area in the seismic dataset corresponding to the unpermitted tract.

 

Even so, geologists may sometimes infer what lies beneath the tract based on surrounding data. (x)

(x)

 

Kennedy — Vibrations and Trespass — Slide 14

Kennedy sought damages based partly on seismic vibrations crossing onto the property.

 

Rule:

• Vibrations alone are not an actionable trespass when there is no actual damage.

There must be some actual injury.

 

Example:

• Seismic activity physically damages a chimney.

• That is actual property damage and may support a cause of action.

 

Without actual damage, merely having vibrations pass through the property is insufficient.(x)

(x)

Actual Damage and Causation

Some subsurface activities can produce actual damage.

 

Example: saltwater disposal wells.

• Hydraulic fracturing produces large amounts of wastewater.

• The wastewater may be injected deep underground into saltwater disposal wells.

• Disposal can affect fault planes and may contribute to earthquakes.

• Earthquakes can potentially cause actionable damage.

The difficult issue is causation.

• There may be dozens or hundreds of disposal wells in the region.

• A plaintiff must establish which activity caused the particular earthquake or damage.

• That can be difficult to prove.

Another possible causation argument:

• Surface owner has a flowing artesian well.

• Geophysical activity occurs nearby.

• The well stops flowing afterward.

• A jury may be asked to infer causation from the timing and circumstances. (x)

(x)

Kennedy — Holding and Dicta — Slide 14

 

Holding:

• Vibrations alone were not an actionable trespass because there was no actual damage.

• There was no evidence of wrongful acquisition of subsurface information from Kennedy’s property.

• The company did not obtain interpretable seismic data directly from Kennedy’s tract.

 

Dicta:

• If the company had directly obtained and interpreted subsurface information from Kennedy’s property, a cause of action might have existed. (x)

(x)

Slide 1 — Geophysical Trespass

Why geophysical trespass matters

• Geophysical trespass is an example of a situation litigators may face where there is not a traditional cause of action that fits perfectly.

• When drafting a petition, the lawyer has to decide what causes of action to allege even though historically none fit geophysical trespass exactly.

(x)

Who owns the seismic data?

• Seismic is an exploration tool used to obtain information about what is beneath the property.

• The right to conduct seismic exploration is included among the rights of the mineral developer, whether the developer is:

  • the mineral owner; or

  • the lessee.

 

• Oil and gas leases typically do not say that the lessor has access to the seismic data.

• Usually, the lessee/operator is the party that conducts the seismic survey.

• Industry custom and practice generally provides that the lessor does not receive the seismic data.

• If the lessor wants access to the seismic data, the lease may need an express provision giving the lessor that right.

• This reflects the fact that the lessee usually drafts the oil and gas lease. (x)

(x)

Why would the lessor want the seismic data?

• If the lessee cannot finish the project or dissolves, the lessor would still have information about what may exist beneath the property.

• The lessor could use that information to market the property to another operator.

• A large, sophisticated landowner is more likely to negotiate for seismic information.

  • Professor’s example: the Four Sixes Ranch rather than an owner with only a few acres.

  • Large landowners may also negotiate or draft their own leases.(x)

(x)

Spec-shot” survey

• A spec-shot survey occurs when a seismic company comes in independently of an oil and gas lease and conducts the seismic operation on a speculative basis. (x)

(x)

Louisiana percentage requirement

• Professor referenced Louisiana requiring approximately 80% before seismic information can be gathered, although he noted the exact percentage may have changed.

• Purpose: prevents a company from obtaining essential subsurface information merely by getting permission from a very small fractional owner of an undivided mineral interest. (x)

(x)

Slide 2 — Geophysical Trespass Actions

Possible causes of action

• Traditional trespass

• Assumpsit

• Loss of speculative value

• Interference with the right to contract

• Invasion of privacy

• Unlawful acquisition of trade secret

• Misappropriation

  • Dishonest application of another’s property for one’s own use.

• Professor’s point: historically, none of these common-law causes of action fit geophysical trespass perfectly. (x)

(x)

Blue Acre hypothetical

• Assume several neighboring owners each own approximately 1,000 acres.

• Blue Acre is located in the middle.

• Blue Acre’s owner says:

  • no one may enter the tract;

  • it is a bird sanctuary; and

  • no seismic activity is permitted.

• A company can obtain permission from the surrounding owners and use seismic technology to image beneath Blue Acre without physically entering it.

• Assume the seismic shows that there is nothing beneath Blue Acre and the company tells everyone.

• Result: nobody wants to lease Blue Acre anymore.

 (x)

(x)

Texas rule / practice

• Professor described imaging Blue Acre without permission as geophysical trespass under Texas law.

• As a result, seismic operators may “mute the traces” and not take or process seismic data coming from a tract for which they lack permission.(x)

(x)

Professor Anderson’s “seismic law of capture”

• Professor Anderson argued that companies should be permitted to gather and disclose the information even without Blue Acre’s permission.

• His argument was based largely on economic efficiency.

• If seismic establishes that nothing valuable exists beneath the tract:

  • an operator can avoid drilling an approximately $8 million dry well;

  • economic waste is reduced;

  • unnecessary surface use is avoided; and

  • environmental waste is avoided.

• He referred to this idea as the “seismic law of capture.”

• Professor said he originally strongly disagreed with the idea and is still uncertain whether he likes it. (x)

(x)

Student question — Are leases contingent on seismic testing?

• Usually not.

• Under a simple oil and gas lease, the lessee generally does not have to do anything during the primary term.

• Many leases, however, contain a continuous development clause.

  • This usually does not require seismic testing.

  • Instead, it may require the lessee to continue drilling wells according to a drilling program.

• Professor said this will be addressed further in Chapter Two. (x)

(x)

Traditional trespass / damages

• If the defendant has the surface owner’s permission, the defendant may not be a traditional common-law trespasser.

• One possible measure of damages is essentially the amount the defendant would have paid to obtain the right to use the property.

• Professor’s defense-side approach:

  • First argument: there is no liability for trespass.

  • Second argument: even if there is liability, damages should be limited to the market value of the right the defendant would have had to purchase.

• This provides an alternative to the plaintiff’s potentially much larger damages calculation. (x)

(x)

Loss of speculative value

• Another possible theory is loss of speculative value.

• The difficulty is that the claimed value is inherently speculative. (x)

(x)

Slide 2 — Geophysical Trespass Actions

Interference with the right to contract:

• If seismic information reveals that Blue Acre has no valuable minerals, nobody may want to lease from the owner afterward.

• The owner could argue that the seismic company interfered with the owner’s right to contract because its conduct effectively destroyed the market for a future lease.

• Professor’s point: this theory still does not fit geophysical trespass perfectly. (x)

(x)

Other possible theories:

• Invasion of privacy

  • Awkward fit because the information is so private that the owner may not even have known it existed.

• Unlawful acquisition of a trade secret

  • Comes from intellectual property law.

• Misappropriation

  • Dishonest application of another’s property for one’s own use.

• Overall point: until there is a specific geophysical-trespass cause of action, the existing common-law theories do not fit especially well.(x)

(x)

Seismic information and efficiency:

• Student asked whether a single public database containing all seismic information would make U.S. drilling much more efficient.

• Professor said it probably would have made a much larger difference decades ago.

• Today, the industry already knows much more about subsurface formations because:

  • operators have drilled through shale formations for more than a century to reach conventional reservoirs; and

  • shale itself is now being targeted for production.

 

• Shale development is somewhat more like mining because operators generally have a better idea of what exists underground. (x)

(x)

• Historically, conventional oil and gas drilling involved much more uncertainty:

  • only around 20–30% of wells might be successful;

  • those successful wells had to pay for the unsuccessful wells.

 

• That uncertainty helps explain why oil and gas developed around a leasing system rather than operators simply purchasing the minerals outright.

 

• Professor suggested that, as shale development becomes more predictable, future development could potentially look more like coal mining, where a developer simply pays for the mineral rights rather than maintaining a continuing royalty relationship.(x)

(x)

Slide 3 — Lightning Oil Co. v. Anadarko

Case basics:

• Texas.

• Texas Supreme Court.

 

Background — ownership:

• Briscoe Ranch is a large ranch in South Texas.

• Professor described the surface and mineral estates as severed.

• Briscoe Ranch owned the surface.

• In the class discussion, the Hurd family was described as owning minerals beneath the Ranch.

• Lightning was the lessee associated with the Ranch mineral estate.

• Adjacent to the Ranch was the Chaparral Wildlife Management Area.

• The State owned the Chaparral tract, and Anadarko held the lease there. (x)

(x)

Chaparral lease restriction:

• Anadarko was allowed to develop the Chaparral minerals, but its lease contained restrictions on surface drilling.

• Drilling locations had to be placed off-site when doing so was prudent and feasible.

• Professor emphasized that this was not an absolute prohibition on using the Chaparral surface.

• Instead, if there was a prudent and reasonable way to develop the minerals from somewhere else, Anadarko was expected to use that method.

• The alternative was directional drilling from adjacent property.

 

Directional / horizontal drilling:

• Anadarko could begin the well on neighboring property and then direct the wellbore underground toward the Chaparral minerals.

• Professor noted that modern laterals can extend for several miles.

• He compared the technology to a drone moving slowly through the rock underground.

• This produces the central question:

  • Can Lightning stop Anadarko from drilling through the subsurface of Lightning’s mineral estate merely to reach Anadarko’s minerals on the neighboring tract? (x)

(x)

Minerals displaced by the wellbore:

• Anadarko was not trying to produce Lightning’s minerals.

• It was only drilling through Lightning’s subsurface estate to reach another tract.

• Some minerals located directly where the wellbore passed would necessarily be removed or destroyed.

• Professor emphasized that the quantity was very small.

• The Supreme Court spent significant time analyzing the amount, but his practical summary was simply: not a lot. (x)

(x)

How production actually occurs:

• A well does not produce from every formation through which the wellbore passes.

• In a vertical well, production casing is placed only in the portion from which production will occur.

• In a horizontal well:

  • the well begins vertically;

  • reaches a “kickoff point”;

  • turns horizontal or sub-horizontal; and

  • production casing and hydraulic fracturing occur only in the targeted productive formation.

 

• Thus, Anadarko could physically pass through Lightning’s formation without actually producing Lightning’s minerals. (x)

(x)

Drill-through agreements:

• Professor characterized the deeper practical issue as whether drill-through agreements are legally permissible.

• The issue attracted attention because the industry had been drafting these agreements for decades.

• Cases like this can prompt industry groups to file amicus briefs because a ruling could affect longstanding industry practices. (x)

(x)

Slide 4 — Lightning: Background Continued

Anadarko’s plan:

• Anadarko informed Lightning that it intended to stake wells on the Ranch.

• Lightning opposed the proposal.

• The parties discussed the issue but did not reach an agreement.

• Lightning then sued Anadarko seeking:

  • declaratory relief; and

  • injunctive relief. (x)

(x)

Injunction requirements:

• Professor used the case as a review of injunctions.

• He emphasized two important ideas:

  • the threatened harm must be sufficiently imminent / irreparable; and

  • monetary damages must be inadequate to make the plaintiff whole.

• The second requirement is the one he said people sometimes forget.

• If money can adequately compensate the plaintiff, an injunction generally becomes much harder to obtain. (x)

(x)

Court of Appeals — San Antonio:

• Lightning failed to prove that its potential injuries could not be quantified and compensated with money.

• Lightning therefore also failed to show the absence of an adequate remedy at law.

• This undermined its request for injunctive relief.(x)

(x)

Slide 5 — Lightning’s Claimed Injuries

Lightning argued that Anadarko’s drilling operations could harm Lightning’s mineral interest.

Potential blowout / reservoir damage:

• Lightning argued that Anadarko’s wells could experience a blowout or some other drilling problem that could harm the reservoir beneath the Ranch.

• That could affect Lightning’s ability to recover its own minerals and therefore impair Lightning’s correlative rights.

• Professor viewed this as a weak basis for an injunction because Lightning was relying on the possibility that something might go wrong during an otherwise common industry practice. (x)

(x)

• Example:

  • A one-in-a-thousand possibility that something could go wrong is very different from showing that the harm is likely.

  • Courts generally will not stop an ordinary activity merely because an accident is possible.(x)

(x)

• Professor described Lightning’s argument as essentially a “parade of horribles.”

  • If Anadarko failed to properly case its wells, something could go wrong and damage Lightning’s ability to produce.

  • But people conduct these drilling operations regularly, so the mere possibility of failure did not provide a strong basis for an injunction.(x)

(x)

Additional offset wells:

• Lightning also argued that Anadarko’s production could force Lightning to drill additional offset wells to prevent drainage.

• This connects to an implied covenant in oil and gas leases.

• If a neighboring operator begins producing in a way that may drain the leased tract, the lessee may have an implied obligation to protect the tract by drilling.

• The lease may not expressly say this; the obligation can arise as an implied covenant.

• Professor said this is technically a Chapter Two concept but is important to understanding why Lightning cared about Anadarko’s drilling.(x)

(x)

Why this matters to Lightning:

• Ordinarily, Lightning can treat its leases somewhat like an option:

  • if it wants to develop, it can drill;

  • if it does not develop, the lease may eventually expire.

• Anadarko’s nearby production changes that situation.

• If Anadarko begins draining minerals from the area, Lightning’s mineral lessors could potentially demand that Lightning drill protective wells.

• Thus, Anadarko’s drilling could create additional development obligations for Lightning that Lightning otherwise would not have faced.(x)

(x)

Possible responses by Lightning:

• Lightning could surrender the leases.

  • Professor noted that this is not very attractive because Lightning does not want to give up valuable leases.

• Lightning could assign the leases to another company willing to drill.

• The practical problem is Lightning’s drilling budget.

  • Lightning may have budgeted for only a certain number of wells.

  • Implied obligations triggered by Anadarko’s nearby development might require Lightning to drill more wells than it wants or can afford.

• Professor’s point: this creates a real business problem for Lightning, but the court was not particularly sympathetic to it.(x)

(x)

Interference with Lightning’s drilling plans:

• Lightning also argued that Anadarko’s wellbores would interfere with Lightning’s own drilling plans.

• The court did not accept this argument.

• Professor emphasized that this area of South Texas consists of wide-open spaces.

• There were not a limited number of places from which Lightning could drill.

• His analogy:

  • it is like entering an almost empty restaurant;

  • if only one other couple is sitting there, you have plenty of room to sit somewhere else.

• Similarly, Anadarko’s wellbore did not meaningfully prevent Lightning from locating its own wells elsewhere.(x)

(x)

Slide 6 — Texas Supreme Court: Lightning

The Texas Supreme Court generally agreed with the Court of Appeals but issued its own opinion.

Important fact:

• Anadarko’s wellbore would physically displace some of Lightning’s minerals.

• But the amount was extremely small.

• Professor repeatedly emphasized that the practical conclusion was simply: “not a lot.”

• The small amount of minerals displaced became important to the Court’s analysis. (x)

(x)

The Court divided Lightning’s claim into two inquiries:

1. Would Anadarko’s drilling impermissibly interfere with Lightning’s use of the surface and subsurface terrain?

2. Would Anadarko’s drilling impermissibly interfere with Lightning’s minerals themselves?(x)

(x)

Professor’s overall point:

• Neither inquiry ultimately favored Lightning.

• Anadarko’s drilling would not materially interfere with Lightning’s ability to use the Ranch for its own mineral development.

• Nor would Anadarko’s drilling materially interfere with Lightning’s mineral interest merely because the wellbore displaced a very small amount of rock and minerals.(x)

(x)

Practical background — drill-through agreement:

• Professor noted that Briscoe Ranch likely did not grant Anadarko the drill-through right for free.

• The Ranch likely received compensation for allowing Anadarko to drill through the property.

• Meanwhile, the mineral-owning family was also benefiting from its lease with Lightning.

• Professor described the related landowners as effectively making money from both sides while Lightning and Anadarko fought over the legal consequences.

• His broader point was that the drill-through agreement created complications for Lightning even though entities associated with the Ranch had agreed to it.(x)

(x)

Slide 7 — Lightning: Interference With Surface and Subsurface

First inquiry:

• Would Anadarko’s drilling impermissibly interfere with Lightning’s use of the surface and subsurface terrain?

 

Texas Supreme Court rule:

• “An unauthorized interference with the place where minerals are located constitutes an actionable trespass” only when the interference infringes on the mineral lessee’s ability to exercise its rights.

• Therefore, merely passing through the subsurface is not enough.

• Lightning had to show that Anadarko’s conduct actually interfered with Lightning’s ability to exercise its mineral rights.(x)

(x)

Application:

• Lightning did not make that showing.

• Lightning remained able to drill and develop its own minerals.

• Anadarko’s wellbore did not prevent Lightning from exercising its rights.

 

Railroad Commission regulations:

• Lightning also had not shown that existing Railroad Commission regulations were inadequate to protect its interests.

• For example, if concerns involved a blowout or improper well operations, regulatory protections already existed.

• The possibility that something might go wrong did not establish that Lightning’s rights were presently being infringed.(x)

(x)

Accommodation doctrine:

• The accommodation doctrine continued to protect Lightning’s dominant mineral estate.

• Professor explained that a mineral owner or mineral lessee has the right to reasonably use the surface when necessary to develop the minerals beneath the tract.

• If Anadarko’s operations actually prevented Lightning from reasonably using the surface to develop its minerals, Lightning could have a stronger argument.

• But that was not the situation here.(x)

(x)

Why accommodation was not a major problem here:

• The Ranch involved wide-open spaces.

• Lightning had many places from which it could drill.

• Anadarko was not occupying the only available drilling location or otherwise blocking Lightning’s access.(x)

(x)

Professor’s counterexample — limited surface-use locations:

• Professor then gave an example of when this type of interference argument could become much stronger.

• Some properties contain designated surface-use locations restricting mineral development to only certain drilling sites.

• These restrictions may run with the land and remain effective for a very long time.

• In that situation, available drill sites can become genuinely scarce.

• If another operator used all of the permitted drilling locations, the mineral owner or lessee could plausibly argue that its ability to develop the minerals had actually been impaired.(x)

(x)

Houston / Grand Parkway example:

• Professor connected this to his practice experience around the Houston area.

• As development expanded outward around Houston, commercial developers purchased rural tracts near future highway intersections.

• Some of those tracts were already burdened by older oil-and-gas provisions establishing specific surface-use or drilling locations.

• Those restrictions mattered because a commercial developer would not want to build a major facility and later discover that someone retained the right to drill a well in the middle of the property.

• This illustrates the type of situation where limited drilling locations could create real interference, unlike the wide-open Ranch in Lightning. (x)

(x)