The property law principle “cuius est solum, eius est usque ad coelom et at infernos”— meaning “whoever owns the soil, it is theirs up to Heaven and down to Hell”—does not necessarily ring true in contemporary times and  especially not in North Dakota. The ownership of mineral rights can be severed from the ownership of the surface estate, which is frequently the case in North Dakota. Therein lies the potential for surface owners, who generally receive little benefit from the production of oil and gas, to perceive their situation as unfair, and an increasing number of them are demanding more from oil and gas companies for using the surface.

Even though mineral estates are dominant over surface estates, some surface owners are finding favorable redress under North Dakota’s unique laws.  Indeed, in  late 2013 a jury in North Dakota’s federal district court awarded $1 million to surface owners for “lost use and access” stemming from the drilling and production of two wells in the Bakken, plus more than $500,000 in attorneys’ fees. Deadwood Canyon Ranch, LLP v. Fidelity  Exploration & Production Co., Case No. 4:10-CV-081. Understanding the production companies’ obligations and surface owners’ rights under the Surface Damage Compensation Act has never been more important given the increase in drilling and other oil field operations in North Dakota. Here are four things mineral developers should know about the Act:

  1. Proper Notices Required

First Notice. Before a production company—or “developer” per the language of the statute—initially enters the land “for activities that do not disturb the surface”—which includes inspections, staking, surveys, measurements, and general evaluation of proposed routes and sites for oil and gas drilling operations—the mineral developer must give the surface owner at least seven days’ notice. The notice may be by registered mail or hand delivery. N.D.C.C. § 38-11.1-04.1(1). The mineral developer must give this required notice to the surface owner at the address shown by the records of the county treasurer’s office. The surface owner is deemed to have received the notice seven days after mailing by registered mail or immediately upon hand delivery. N.D.C.C. § 38-11.1-04.1(3).

The notice must include:

  • The name, address, telephone number, and, if available, the e-mail address of the mineral developer or someone designated by the mineral developer;
  • An offer by the mineral developer to discuss and agree to consider accommodating the surface owner’s proposed changes to the proposed plan of work and oil and gas operations before commencing the oil and gas operations; and
  • A sketch of the approximate location of the proposed drilling site.

N.D.C.C. § 38-11.1-04.1(1).

Second Notice. At least twenty days before commencing drilling operations, the production company must again give the surface owner written notice in the same  manner. However, if the mineral developer plans to commence drilling operations within twenty days of the lease’s termination, the developer may give the required written notice at any time prior to commencing drilling operations. In either case, the notice must sufficiently disclose the plan of work and operations to enable the surface owner to evaluate the possible effects of drilling operations on the surface owner’s use of the property. N.D.C.C. § 38-11.1-04.1(2).

The notice must include:

Sufficient disclosure of the mineral developer’s plan of work and operations to enable the surface owner to evaluate the effect of the proposed drilling operations on the surface owner’s use of the property;

  • A plat map showing the location of the proposed well; and
  • A form prepared by the state’s oil and gas government agency that advises the surface owner of their rights and options, which include the right to request that the state inspect and monitor the well site for the presence of hydrogen sulfide. This form is available at https://www.dmr.nd.gov/oilgas/surfaceowner.pdf.

N.D.C.C. § 38-11.1-04.1(2).

If a production company fails to give either of these required notices, the surface owner may petition the court for “appropriate relief” and may be entitled to punitive damages as well as actual damages. N.D.C.C. § 38-11.1-04.1(4).

  1. A Written Offer of Settlement

At the time the oil and gas company is required  to give the second notice concerning commencement of drilling operations, the production company must make a written offer of settlement to the surface owner (or whoever is seeking compensation for damages, such as a tenant of the surface owner). N.D.C.C. § 38-11.1-08. This offer should be the production company’s good faith estimate of the damages that could accrue over time. (See “Calculation of Damages” under Part 4 below discussing the two types of “damage and disruption” payments and lost agricultural production payments.) The surface owner is free to reject any such offer and sue the production company for compensation. Then, if the court awards the surface owner compensation greater than what the production company offered, the surface owner will also be awarded attorney's fees and court costs as well  as interest on the compensation from the day drilling was commenced. N.D.C.C. § 38-11.1-09.

Typically, a production company will contact a surface owner long before the statutorily required twenty days to discuss (and negotiate) the developer’s plan of work and operations. The bottom line is the statute affords the surface owner significant protections, resulting in leverage particularly against the unwary developer.

  1. A Mediation Process

  • Within one year of a surface owner’s rejection of a production company’s offer of compensation, either party may seek the aid of the North Dakota mediation service or another civil mediator to attempt to resolve how the surface owner should be compensated. The cost of the mediator will be split evenly, unless the parties agree otherwise. N.D.C.C. § 38- 11.1-9.1.

The North Dakota mediation services website (http://www.nd.gov/ndda/program/mediation- services) is a good resource that explains the mediation process, which includes:

  • The party wishing to initiate mediation must first submit a written request to the administrator of the mediation service.
  • Upon receipt of the mediation request, the mediation service will send a letter to the other party stating that mediation has been requested along with a "Request for Mediation" form for the other party to complete. The form requires that the other party specify whether it agrees to participate in the mediation or rejects the request.
  • If the other party rejects the mediation, the requesting party will be notified of the decision. If the other party agrees to mediate, the mediation service will assign a mediator and notify all parties.
  • The assigned mediators will complete the mediation process and is in charge of managing the mediation process.
  • If the parties reach an agreement through mediation, the mediator will write the agreement for the parties to sign.

Any information that the North Dakota mediation service creates, collects, or maintains in the course of any formal or informal mediation is confidential unless all parties have given written consent to the release of that information or unless the court so orders. N.D.C.C. § 6-09.10-10.

  1. The Basics of Surface Damage Litigation

Although in many states surface owners may want minerals to be produced so they can receive royalties, such is often not the case in North Dakota because typically someone else owns the mineral estate. The huge increase in activity in the Bakken combined with the frequent severance of the dominant mineral estate from the surface estate has resulted in surface estate owners seeking increasing compensation for surface damages—a trend sometimes referred to as “surface owners’ revenge.”

A growing proportion of surface damage issues fail to get resolved through either the parties’ negotiations or mediation and result in lawsuits.

Here are some of the basic parameters generally applicable to these cases:

Statute of Limitations. If a surface owner rejects the offer of settlement, he or she must notify the mineral developer of the damages sustained “within two years after the injury occurs or would become apparent to a reasonable person.”

N.D.C.C. § 38-11.1-07. Then, the surface owner must bring any claim for relief within six years “after the claim for relief has accrued.”  N.D.C.C. §§ 38-11.1-07, 28-01-16.

Calculation of Damages. There has been relatively little judicial interpretation of how damages are to be calculated under the Act. Moreover, on August 1, 2011, the North Dakota legislature amended the statutes governing surface damage payments. Specifically, it amended Section 38-11.1-04, which covers damage and disruption payments to surface owners, and it enacted section 38-11.1-08.1, which covers loss of production payments. Both these sections apply to wells drilled on or after August 1, 2011.

Damage and disruption payments. Section 38- 11.1-04 instructs the production company to pay the surface owner or the tenant of a surface owner for any "lost land value, lost use of and access to the surface owner's land, and lost value of improvements caused by drilling operations." In both the pre-2011 and post-2011 versions of Section 38-11.1-04, the legislature distinguished between compensation for damages caused by “drilling operations” and compensation for damages caused by “exploration.” For the purposes of the damages statute, it is helpful to think of payment for damages as being divided into damages for exploration and damages for drilling operations occurring after exploration.

There is some dispute over whether surface  owners may elect to receive annual payments, as opposed to a lump sum payment. The original wording of Section 38-11.1-04 explicitly permitted surface owners to elect annual payments. However, the statute now expressly requires only a single-sum payment for "harm caused by exploration" but is silent as to the appropriate   form of payment for damages caused by drilling operations. In practice, parties generally interpret Section 38-11.1-04 as requiring a single-sum payment for all lost land value, lost use and  access to the surface owner’s land, and lost value of improvements caused by exploration, but requiring either a single-sum payment or annual payments for such damages caused by drilling operations. Ultimately, however, this is a question still open for judicial interpretation.

The statute does not provide any specific formula for reaching a compensation agreement, recognizing that land values and income- producing potential vary throughout the state. Instead, it provides that the amount of damages will be determined by "any formula mutually agreeable between the surface owner and the mineral developer." Two commonly referenced reports—the “North Dakota Farm Business Management Report” and the “USDA North Dakota Annual Report”—provide property valuation data, and may assist the parties in reaching agreement or in establishing the appropriate damages in mediation or litigation. In determining the amount of these damage and disruption payments, the surface owner and mineral developer must consider the period of time over which the loss to the surface owner occurred.

Lost agricultural and production income. In  August 2011, the North Dakota legislature  enacted Section 38-11.1-08.1 to specifically cover the loss of agricultural income and production caused by post-exploration activity. The statute requires that the mineral developer pay the surface owner “a sum of money equal to the amount of damages sustained by the surface owner . . . for loss of agricultural production and income caused by oil and gas production and completion operations.” The statue mandates  that such payments be made annually unless the surface owner elects to receive a one-time payment. As is the case for damage and disruption payments, the amount of damages  due to the surface owner “may be determined by any formula mutually agreeable between” the parties, and, in determining these damages, “consideration must be given to the period of  time during which the loss occurs.” Again, the above referenced reports may assist the parties in reaching agreement or in establishing the appropriate damages in mediation or litigation.

Conclusion

Ownership of a mineral interest is useless without access to the surface estate; nevertheless, the North Dakota Surface Damage Act recognizes the need to compensate surface owners for loss of production and harm caused to their land by mineral exploration and drilling operations. The Act’s stated purpose is “to provide the maximum amount of constitutionally permissible protection to surface owners and other persons from the undesirable effects of development of minerals.”

N.D.C.C. 38-11.1-02. Production companies should be aware of the statutory protections afforded surface owners when conducting their operations and be aware that the penalties for non-compliance can be severe.