Litigation claims between private parties arising in the context of exploration and production activities encompass a wide range of contract and tort issues. In Texas and other states, the fee simple ownership of land comprises both a surface and mineral estate. As a result, opportunities for disputes and litigation abound both between the two estates and within the “bundle of sticks” comprising the numerous interests in the mineral estate.1 Not surprisingly, litigation asserting traditional tort and contract claims has arisen in Texas and elsewhere concerning hydraulic fracturing.
Subsurface Trespass. In 2008, in Coastal Oil & Gas Corp. v. Garza Energy Trust, the Supreme Court of Texas held that the traditional rule of capture precluded a recovery for the plaintiff’s only claim of injury for subsurface trespass, that because of a hydraulic fracturing operation on neighboring property drainage had occurred with respect to the plaintiff’s minerals.2 The Court’s limited holding was that “damages for drainage by hydraulic fracturing are precluded by the rule of capture.”3 This ruling, the Court held, made it unnecessary to decide the “broader issue” of whether subsurface fracing can give rise to an action for trespass.4 The Coastal v. Garza decision has been criticized for applying the rule of capture without deciding the trespass issue, because the traditional rule of capture only bars liability if the drainage is legitimate in the first instance.5 However, given the majority opinion’s implicit holding that subsurface fracing beneath another’s property is not an illegitimate activity, it would appear to be up to the Texas Railroad Commission to regulate fracing to change that outcome and provide a basis for liability, should it choose to do so.
Garza’s discussion of the potential impact of agency permitting on trespass liability was recently cited by the Supreme Court of Texas in FPL Farming Ltd. v. Environmental Processing Systems, L.C.6 In FPL, the Supreme Court held that a Texas Commission on Environmental Quality (“TCEQ”) injection well permit did not grant immunity from trespass for the permittee.7 The Supreme Court distinguished Garza and its decision in Railroad Commission of Texas v. Manziel on the basis that the rule of capture, while implicated in the extraction of minerals, has no bearing on injection-related issues.8 Perhaps the highlight of the FPL decision is its blanket statement that, “the mere fact that an administrative agency issues a permit to undertake an activity does not shield the permittee from third party tort liability stemming from consequences of the permitted activity.”9 The ultimate impact of this decision on other areas of oil and gas law remains to be seen.
Landowner Suits and Regulatory Confusion – The Range Resources Saga. As fracing activity has occurred closer and closer to urban areas, landowner suits have become more and more frequent. The Range Resources saga from alleged contamination in Parker County highlights the general nature of these disputes, as well as the regulatory back-and-forth between the RRC and the EPA.
Two families in Parker County, the Lipskys and the Haleys, allege that their wells have been contaminated by fracing activity conducted in their area by Range Resources.10 On August 6, 2010, the landowners filed complaints with the RRC district office.11 During the next few months the RRC collected and tested gas samples from the subject wells and also performed structural integrity tests on the wells.12 It is pertinent to note that the wells, which the landowners maintain are contaminated, terminate about two hundred feet below the ground.13 It is generally agreed that methane gas is present in the wells. However, it is not known how it got there or where it is from.
Range maintains that their activities did not cause the contamination in the affected wells because they are drilling to depths of five thousand feet to the Barnett shale formation.14 Range asserts that the contamination in the wells is from the Strawn formation, whose methane has a different molecular fingerprint from the methane in the Barnett shale, and is located layers above the Barnett formation.15 The families assert the contamination has made the well water no longer potable.16
The EPA issued an emergency order concerning the wells and alleged contamination to Range under the authority of the SDWA on December 7, 2010.17 The EPA maintained that the order was issued in response to a need to protect the well users from “imminent and substantial endangerment.”18 The EPA said that samples taken from the water wells showed unsafe levels of methane, benzene, and toluene and other contaminants.19 Samples from one of the domestic water wells were then compared with gas from one of Range’s nearby wells in compositional and isotopic fingerprinting analyses.20 The EPA then determined that “the presence of gas in Domestic Well 1 is likely to be due to impacts from gas development and production activities in the area.”21 During the time the sampling and other activities were occurring in the fall of 2010, the EPA was reportedly consulting with the RRC and determined “that appropriate State and local authorities had not ‘taken sufficient action to address the endangerment described herein and do not intend to take such action at this time.’”22 Clearly a dispute was brewing between the EPA and Texas regulatory authorities.
Range filed suit in federal district court against the EPA under the Administrative Procedures Act in the Western District of Texas seeking to compel the EPA to produce documentation about their investigation of the wells and EPA employees for deposition.23 Meanwhile, “back at the ranch”, on January 18, 2011, the federal government “commenced a civil enforcement action in the Northern District of Texas seeking injunctive relief and civil penalties arising out of Range’s non-compliance with three of six provisions in the Emergency Order.”24 On January 20, 2011, Range filed a petition for review of the Northern District’s action with the Fifth Circuit.25
The RRC issued a proposal for decision on March 7, 2011 in which it held that Range’s activities did not contaminate the landowners’ wells.26 This action by the RRC was the product of a hearing before the RRC in which the EPA declined to participate. Hearing testimony came from multiple witnesses, including expert testimony on geochemical gas fingerprinting and EPA’s Compliance and Enforcement Director for EPA Region 6. In summary, the “fingerprint” expert opined that the gas from the shallow water-bearing zone was different than that of the Barnett Shale and the EPA Director testified that EPA never conducted “fingerprint” tests of the gas and that its environmental chemist had told him that “we don’t have enough experience at this site or data to do this [fingerprinting] at this time.”27 Separately, a representative of the Upper Trinity Groundwater Conservation District (where the water wells are located) observed that natural gas has been in the water “at least since the late ‘60s or early ‘70s.”28 Undaunted, the EPA has proceeded to seek enforcement of its order against Range Resources. The fate of this matter, of course, will involve the confluence of the state and federal decisions and likely will involve litigation that goes much deeper than two contaminated water wells.29
Other landowners have filed suits against oil and gas operators in Texas courts involving fracing, generally alleging causes of action such as nuisance, trespass, and negligence, and, at least in one case, fraud relating to the alleged concealment of material facts. 30 These cases are generally in their early stages and are still progressing, and the extent of operator liability, if any, for these cases remains to be seen.
Condemnation. Residents (sometimes even royalty owners) frequently complain that drilling activity is disruptive of their domestic tranquility and health.31 The populist fervor opposing urban drilling activity has produced a welter of local ordinances regulating such activities, not uncommonly in the form of outright drilling bans or moratoriums.32 It should then come as no surprise that the affected operators have sued complaining of inverse condemnation by a regulatory taking.33
Mineral Owners vs. Surface Owners. 34 The legal competition between the owners of the dominant estate (minerals) and the servient estate (surface) certainly has a lengthy lineage.35 Complaints of a mineral owner’s excessive use of the surface commonly give right to causes of action in trespass or nuisance.36 Texas courts have been historically unsympathetic to surface owners’ complaints, absent proof of negligence, breach of contract or breach of a statutory duty.37 However, jurisprudence abounds in many states embracing the accommodation doctrine which requires the mineral owner to accommodate an existing use of the surface estate.38 Mere inconvenience to the surface owner will not suffice, as there must be a substantial impairment of the existing use.39 The “superiority” or “dominance” of the mineral estate owner ends when the interests of neighboring landowners, government entities or other third parties are adversely affected by the operator’s actions.40
Preferential Rights Provisions. Preferential rights provisions (also known as preemptive rights, first options, and various other labels) allow the holder of the right to step in front of a prospective sale of an interest to a third party by matching the third party’s offer.41 Such rights (1) permit the joint operators of oil and gas ventures to control who they do business with and (2) permit the joint operators to increase their holdings should the property be offered for an attractive price.42 Preferential rights provisions often arise in the litigation context in bankruptcy proceedings. Issues that may arise in the bankruptcy context concerning preferential rights provisions include whether a debtor-in-possession takes property subject to the restriction and whether the bankruptcy court may ignore the right as an impermissible restraint on alienation under 11 U.S.C. § 365 dealing with executory contracts of the debtor.43
Title Disputes. The resolution of disputes related to title to real property is obviously of particular importance to oil and gas law. In Texas, there is a critical distinction between trespass to try title claims (“TTT” claims) and actions to quiet title. Trespass to try title is a statutory action under the Texas Property Code.44 Prior to 2004, parties eschewed the special TTT provisions found in Rules 783-809 and Chapter 22 of the Texas Property Code, preferring instead to frame the dispute as a declaratory judgment claim. However, the Texas Supreme Court has made it plain that the sole method of determining title to real property in Texas.45 Trespass to try title suits in Texas state court are controlled by a specialized section of the Texas Rules of Civil Procedure (Rules 783-809) that mandate certain requirements for pleading. In order to prevail in a trespass to try title suit, a plaintiff must show: “(1) a regular chain of conveyances from the sovereignty of the soil; (2) a superior title out of a common source; (3) title by limitation; or (4) title by prior possession coupled with proof that the possession has not been abandoned.”46 Alternatively, an action to quiet title is equitable in nature, and has the goal of removing a “cloud” on title.47 Notably, an action to quiet title would not directly affirm the plaintiff’s title, but rather only eliminates the defendant’s cloud on the title. No money damages are recoverable on an action to quiet title.48 Judging by the number of lawsuits regularly filed involving title disputes, the practitioner is well-advised to inform himself/herself of the appropriate claim for relief, rather than blithely proceed on common intuition.49
Marcellus Shale Natural Gas = “Mineral”? A recent decision from the Superior Court of Pennsylvania (the second-highest court in the state) has the potential to greatly impact operations in the Marcellus Shale in that state.50 In Butler v. Charles Powers Estate, the primary issue in the lawsuit is whether a deed reserving “half the minerals and Petroleum Oils” entitles the successors to that interest to half of the Marcellus shale gas.51 The lower court held that it did not, relying in part on a Pennsylvania Supreme Court case from 1882 that held the word “minerals” in a reservation, without reference to natural gas or oil, created a rebuttable presumption that “minerals” does not include either one.52 But the appellate court reversed, holding that expert testimony would be needed to determine whether Marcellus shale gas falls within the deed’s reservation. 53 Industry groups are watching the litigation closely, as it has the potential to create a great deal of uncertainty in the booming Marcellus shale.54
Executive Right Holder vs. Non-Executive Right Mineral Owners. The “executive right” to minerals is, in general, “the exclusive right to execute oil and gas leases.”55 Abuses of the executive right, which carries with it a fiduciary duty to the non-executive interest holders, have been the subject of litigation in Texas over the past several decades, perhaps most notably in the Manges v. Guerra litigation.56 The Texas Supreme Court recently revisited this issue in Lesley v. Veterans Land Board.57 In Lesley, which dealt with land on or near the Barnett Shale, the non-executive mineral rights owners complained that the executive rights-holding property developer breached its duty to them by imposing restrictive covenants on a subdivision to limit oil and gas production in favor of protecting lot owners.58 The Court of Appeals held that the developer did not owe any duty to the other interest owners because it had taken no direct action to exercise the executive right.59 The Supreme Court disagreed, holding that the developer breached its duty by filing restrictive covenants.60 It is interesting to note that the developer in fact acquired the executive right for the very purpose of protecting the subdivision lot owners from oil and gas operations, but the Court held that because of the developer’s breach of duty, the restrictive covenants should be cancelled and the surface owners would be protected through the accommodation doctrine.61 Lesley thus affirms stringent nature of the duty owed by an executive rights holder, and could potentially generate renewed interest in executive rights-related litigation.
Nuisance. In Baker v. Energy Transfer Co.,62 a case in which the plaintiff landowners asserted claims for trespass, nuisance and nuisance per se pertaining to the venting of hydrogen sulfide from Energy Transfer Company’s natural gas treating plant located near the landowners’ residences, the court in affirming summary judgment for the defendant noted longstanding Texas law that “a lawfully run oil and gas plant or drilling operations cannot be a nuisance per se.” 2011 WL 4978287 at *6. Other jurisdictions apply the same rule of law, while holding that a lawful operation that is not a nuisance per se may nonetheless become a nuisance depending on the particular facts and circumstances. See, e.g., Lone Star Producing Co. v. Jury, 445 P.2d 284, 288 (Okla. 1968); Phillips Petroleum Co. v. Vandergriff, 122 P.2d 1020, 1023 (Okla. 1942) (affirming nuisance and negligence judgment in favor of landowner for property damage resulting from the operation of a casinghead gas booster station in the vicinity of her property); Natale v. Everflow Eastern, Inc., 195 Ohio App.3d 270, 279-81 (Ohio App. Aug. 26, 2011).
Negligence. Upstream operations may give rise to negligence claims. Such claims are analyzed under a traditional negligence analysis, typically focusing on duty, standard of care and causation principles. Pioneer Nat. Res. USA, Inc. v. W.L. Ranch, Inc., 127 S.W.3d 900, 907 (Tex. App.-Corpus Christi 2004, pet. denied) (reversing on causation grounds judgment in favor of landowner for negligence, trespass and fraud for alleged improper drilling of horizontal well; “Problems with drilling equipment in drilling an oil well is to be expected but cannot be the basis of a negligence cause of action. An oil well driller does not ordinarily guarantee that he will have no problems with the drilling equipment when drilling a well.”); Wirth v. Reynolds Metals Co., 947 S.W.2d 401, 404 (Ark. App. 1997) (affirming summary judgment based on lack of causation against landowners in negligence action complaining that defendant’s drilling of gas well negligently caused the failure of their water well); Butler v. Baber, 529 So.2d 374, 381 (La. 1988) (rendering judgment for landowners complaining of damage to oyster beds from certain defendants’ dredging operations; “The facts of this case clearly establish that the defendants’ dredging operation caused damage to the plaintiffs’ oyster beds and the oyster production from those beds. Despite the care and prudence exercised by defendants, plaintiffs are entitled to damages for their oyster leases.”); McCoy v. Cohen, 140 S.E.2d 427, 437-38 (W. Va. 1965) (affirming on lack of causation grounds judgment against landowners complaining of damage to water wells from defendants’ alleged negligent fracturing operations in drilling of gas well); Sun Oil Co. v. Nunnery, 170 So.2d 24, 31-32 (Miss. 1964) (affirming negligence liability judgment in favor of lessor of oil and gas lease for damages to surface from oil and gas lessee’s negligence in clearing site for well which was never drilled); Killam v. Moerbe, 131 S.W.2d 143, 144 (Tex. Civ. App.-San Antonio 1939, writ dism’d) (reversing for lack of causation a judgment in favor of landowner for damages to livestock and real estate resulting from the pollution of a stream caused by the operator’s negligence in permitting an oil and gas well to blow out; the court noted that it was not a “matter of common knowledge that the character of oil which escaped from the pipes of appellant would, if drank [sic] by an animal, have the effect to injure or kill it”).
Fraud. Fraud claims may arise in circumstances in which the landowner claims that he was fraudulently induced by the operator to sign a lease amendment or similar document. The courts treat such claims in the same manner as garden variety fraud claims, which are typically fact-driven and decided on a case by case basis. For example, in Pioneer Nat. Res. USA, a fraud judgment for the landowner was reversed because statements by the operator that (1) the operator “planned to drill a horizontal well with three 4500 foot laterals (horizontal well bores)” and (2) “based on Texas Railroad Commission rules” the operator “needed 380 acres in order to drill the 4500 foot laterals” were not “promises to induce the execution of the amendment” or “false misrepresentations of past or existing material facts.” 127 S.W.3d at 909. See also Trimble v. Hope Nat. Gas Co., 169 S.E. 529, 531- 32 (W. Va. 1933) (reinstating landowner’s suit against operator for fraudulent drainage where the operator was “willfully taking gas” from the landowner’s lease “through wells on its adjoining and neighboring leases” while refusing the landowner’s demands and requests that a well be drilled on the landowner’s lease).