Key Operating & Equipment, Inc. v. Hegar, No. 13-0156 (June 20, 2014)

Key Operating and Equipment operates two neighboring tracts of land—a producing tract and a nonproducing tract. In 1994, Key built a road across a portion of the nonproducing tract to access and service wells on both tracts. In 2000, Key’s lease on the nonproducing tract expired when the wells stopped producing, but that same year Key’s owners obtained a 12.5% mineral interest in the nonproducing tract and leased that interest to Key. With that lease came the right to pool the minerals with other property in the vicinity, so Key then pooled its leased minerals with its leased minerals under thirty acres from the adjoining producing tract.

In 2002, the Hegars bought eighty-five acres of the nonproducing tract, and the acreage they acquired included the road Key used to access one of its wells on the producing tract. The Hegars proceeded to build a house on their property and used the road to access it. For several years they left Key’s use of the road unrestricted. However, when Key drilled an additional well on the producing tract, traffic on the road increased, which prompted the Hegars to seek a declaratory judgment that Key had no legal right to “access or use the surface of the [nonproducing tract] in order to produce minerals from the [producing tract].”

At trial, it was determined that the Richardson No. 4—the well that Key had just drilled that caused this dispute to arise—was the only well on the pooled acreage with significant current production. The well’s drainage area did not reach the Hegars’ property, and the well was not draining from the Hegars’ property. The trial court enjoined Key from using the part of the road that was on the Hegars’ property for the purpose of mineral production from the producing tract, and the Court of Appeals affirmed after rehearing.

In a unanimous opinion, the Texas Supreme Court reversed the lower courts and held that a mineral lessee has the right to use the entire surface of a pooled unit to produce minerals from anywhere on the unit. The owner of a dominant mineral estate has the right to use the surface of that land to produce and remove minerals as well as the incidental rights necessary for production and removal. The Court stated that “once pooling occurred, the pooled parts of the [two tracts] no longer maintained separate identities insofar as where production from the pooled interests was located. So the legal consequence of production from the pooled part of the [producing tract] is that it is also production from the pooled part of the [nonproducing tract].” As a result, Key had the right to use the road to access the well(s) on the producing tract.

The Court further concluded that as owners of 12.5% of the minerals beneath the nonproducing tract, Key’s owners had the right to use the surface to develop and remove those minerals—including the right of ingress and egress to do so—as well as the right to pool those minerals. As mineral interest owners, Key’s owners had the inherent right to ingress and egress over the surface of any pooled acreage for the purpose of any production and development of minerals from any part of the pooled acreage, and Key leased these rights from its owners.

The Texas Supreme Court’s decision is a victory for oil and gas lessees because the Court of Appeals’ opinion, left undisturbed by the Texas Supreme Court, would have meant that many mineral lessees would not be able to reach what would effectively be “landlocked” wells in pooled units. The case highlights the continual nature of the dispute between landowners and oil and gas lessees.