Oil and Gas Implied Covenants for the 21st Century: The Next Steps in Evolution
John Burritt McArthur
Juris Publishing, Inc., 2014
John Burritt McArthur
Juris Publishing, Inc., 2014
Oil and gas development through leasing is prevalent in the United States, due in part to the nature of mineral reserve ownership. According to McArthur, “[i]n almost all other countries, the government owns all mineral reserves, [whereas i]n the United States, in contrast, landowners own a very large share (though by no means all) of the country’ mineral rights.” In addition, the author notes, “even public minerals have been developed under leases that are very similar to private mineral leases.” He explains,
The lease has proven a durable, reliable tool for private and public landowners to sell their rights in one or more minerals while still retaining surface occupancy, the right to other uses of their land, and a share of the value of anything produced from the property.
Another factor in the United States, given such extensive private land ownership, is the rule of capture. “Because oil and gas are (like wild animals) ‘fugitive’ products,” McArthur explains, “they only become legal property when reduced to possession. . . . The rule of capture provided the stimulus for very rapid drilling, but it was controversial from the early days of the industry because its incentives ensured widespread duplication and waste.” Against this backdrop, McArthur notes, “American courts developed oil-and-gas implied covenants, drawn mostly from the law of mining, to protect the parties to the lease.”
Most of the implied covenants protect the lessor, but some have been developed to protect the lessee. The former, extensively addressed in chapters 2 through 7, include the duty to (a) fully develop the lease, (b) develop hard minerals, (c) explore, (d) protect against drainage, (e) market, and (f) cooperate with the lessor’s land uses. Implied covenants protecting the lessee are covered in chapter 8.
In chapter 9, McArthur “urges courts to consider adding three new covenants:”
an implied duty of disclosure; an implied duty to restore the surface to a condition reasonably like the starting condition, minus ordinary wear and tear; and a duty to limit costs deducted against the royalty share to actual cost and a reasonable rate of return.
“[P]ossible uses of the covenants as evidentiary standards of prudence for disputes about equity investments and in international litigation and arbitration” are explored in chapter 10, the author notes. In the final chapter, McArthur argues for the continuing need for implied covenants, noting that “Courts need to keep using implied covenants to police [oil and gas leases] with particular care to make sure that lessees are fair to the lessor as well as to themselves.” He concludes that “[i]n this way, the lease will continue to be the anchoring legal document for the next century of American oil, gas, and mineral development.”
Ginger Strand, Carbon Cache, Nature Conservancy Magazine (Oct.–Nov. 2016), www.nature.org/magazine/archives/carbon-cache.xml, describes how “California’s groundbreaking carbon market is helping one American Indian community protect its forests—and its way of life—while fighting climate change.” As a result of the carbon market, Strand observes, “[t]he Yurok are making money by preserving large swaths of northern California’s forest, and reinvesting that income to conserve salmon habitat, reassemble their ancestral lands and preserve their culture.”
The tribe is accomplishing its objective through a provision of California’s Global Warming Solutions Act, enacted in 2006, which permits the sale of forest carbon offsets. Strand explains:
The concept of cap-and-trade is fairly simple: Limit the supply of emissions permits in a market-based system, then slowly decrease that supply to drive up the price of the remaining permits and encourage emissions reductions. California’s bill, the product of years of research and negotiation, mandates that polluters buy a permit for each metric ton of carbon they emit. Those permits will become costlier as the total emissions allowed statewide decrease by approximately 3 percent annually, part of the state’s ambitious goal of dialing back total greenhouse gas emissions to 1990 levels by 2020. Carbon emission permits can be bought and sold on an open market, so if one company is able to cut emissions, it can sell its leftover permits to another company that emits too much.
The key component for the Yuroks arose, according to Strand, because “California’s law also created a new way for companies to meet a portion of their emission standards: by purchasing carbon offsets from sustainably managed forest projects.” Strand quotes Louis Blumberg, the Nature Conservancy’s California climate change program director, as stating, “California’s carbon market became the first in the world with a comprehensive role for forests.”
“In practical terms,” Strand explains, “a factory based in Los Angeles can help plant trees and fund conservation easements in forests as far away as Maine or Alaska.” Strand continues, “[t]oday, dozens of forestry projects nationwide are selling offsets on the California market, [and t]he Yuroks were among the first to get involved.” Strand describes their project:
With the assistance of Western Rivers Conservancy, an Oregon-based nonprofit, the tribe acquired some 22,000 acres from the Green Diamond Resource Company in 2011. . . . Working with an investment group called Forest Carbon Partners, the tribe then applied for offset credits on 7,660 acres of these lands, committing to sustainable forest management for the next century. They were issued more than 800,000 offsets—worth an estimated $6 million to $8 million—by the California Air Resource Board.
“Tribal leaders are planning more carbon offset projects,” the author notes, and “hope to use the revenue to acquire even more of their ancestral lands.” Strand explains that the Yuroks “are exploring not only forest restoration but also re-introduction of Roosevelt Elk—a species important to the tribe for subsistence and cultural uses that has suffered from habitat loss—and the California condor.” According to Strand, efforts toward habitat restoration are proving successful. Strand concludes with the following quote from Bob McConnell, an archeological field coordinator for the tribe, “It’s amazing how resilient this land is. It’s been mistreated and mistreated and it’s still producing and trying to heal itself. We’ve got to step up our part of the equation.”
P.C.D. Milly, Julio Betancourt, Malin Falkenmark, Robert M. Hirsch, Zbigniew W. Kundzewicz, Dennis P. Lettenmaier, and Ronald J. Stouffer, Stationarity Is Dead: Whither Water Management?, Science 319:5863, Feb. 1, 2008, at 573, available from www.sciencemag.org, “analyzes water management and the concept of “stationarity.” The authors define “stationarity” as “the idea that natural systems fluctuate within an unchanging envelope of variability [, which] is a foundational concept that permeates training and practice in water-resource engineering.”
The authors admit that “[t]he stationarity assumption has long been compromised by human disturbances in river basins. Flood risk, water supply and water quality are affected by water infrastructure, channel modifications, drainage works, and land-cover and land-use change.” However, they note,
[i]n view of the magnitude and ubiquity of the hydroclimatic change apparently now under way . . . we assert that stationarity is dead and should no longer serve as a central default assumption in water-resource risk assessment and planning. Finding a suitable successor is crucial for human adaptation to changing climate.
The authors observe that “[s]tationarity is dead because substantial anthropogenic change of Earth’s climate is altering the means and extremes of precipitation, evapotranspiration, and rates of discharge of rivers” and conclude that “[s]tationarity cannot be revived. Even with aggressive mitigation, continued warming is very likely, given the residence time of atmospheric CO2 and the thermal inertia of the Earth system.”
Nicholas C. Matalas, Comment on the Announced Death of Stationarity, Journal of Water Resources Planning and Management, July–Aug. 2012, at 311, available from ascelibrary.org, questions “whether stationarity is indeed dead or now has only secondary status.” Matalas notes, “[t]he assertion that the past was stationary, that the present is not stationary, and that the future will never be stationary needs to be qualified.” He continues,
[p]erhaps the stationarity of the past will never recur, but that does not rule out a future state of stationarity relative to an average different from that before. Fortunately, water-resource systems have inherent degrees of robustness, redundancy, and resilience that allow them to be operated quite reliably under extreme stresses, at least over relatively short periods of time [citations omitted].
[b]efore passing judgment on whether stationarity is indeed dead or whether it has secondary status, the degree to which real or perceived nonstationarities affect the uncertainties underlying the processes of making water planning and management decisions needs to be assessed. The assumption of stationarity has not yet been pushed to the limit of its operational usefulness in the face of a changing climate.
“To paraphrase Mark Twain,” concludes Matalas, “the announced death of stationarity is premature.”
P.C.D. Milly, Julio Betancourt, Malin Falkenmark, Robert M. Hirsch, Zbigniew W. Kundzewicz, Dennis P. Lettenmaier, and Ronald J. Stouffer, On Critiques of “Stationarity Is Dead: Whither Water Management?”, Water Resources Research (Sept. 12, 2015), available from AGU.Publications, “review and comment upon some themes in the recent stream of critical commentary on the assertion that ‘stationarity is dead,’ attempting to clear up some misunderstandings; to note points of agreement; to elaborate on matters in dispute; and to share further relevant thoughts.”
The authors acknowledge that their assertion that stationarity is dead “has been echoed widely in the water community, and beyond: in ecology, in conservation and natural resource management, and in environmental and natural resource law [citations omitted].” The authors also note that “the proposition has been prominently questioned in a series of thoughtful papers presenting an opposing viewpoint [citations omitted].”
Following their introduction, the authors address the opposition in three parts, the first of which is titled “Exposition of Our Terminology.” As part of their exposition, the authors describe “a process to be stationary if and only if the joint probability distribution function (pdf) of its state is invariant over time.” They conclude that “as a result of [anthropogenic climate change (ACC)], representations of hydrologic processes in the 21st century generally need to consider nonstationarity. In fewer and simpler words . . . ‘Stationarity is dead.’”
In the second portion of their commentary, titled “ACC in the Historic Hydrologic Context,” the authors note the following observation and draw the following conclusion:
In their visionary work, Revelle and Suess  made the following observation about the release of CO2 by burning of fossil fuels: “Human beings are now carrying out a large scale geophysical experiment of a kind that could not have happened in the past.” It is a one-of-a-kind event, which simply does not fit the template of our historical encounters with hydrologic nonstationarity, nor has such rapid change in greenhouse-gas forcing been found in the paleo-record.
This uniqueness and immensity of ACC as a driver of hydrologic change—led us to state that “stationarity is dead” due to ACC. It is expected to influence processes even in the most remote corners of the earth, where humans may be exerting virtually no local effect in the local hydrology.
In the third portion of their commentary, “Discussion of Critiques,” the authors comment on certain commentators, concluding that the authors:
agree with our critics on the importance of data. We have very little knowledge about what the outcome of ACC will be. Precisely for this reason we stated the following: “In a nonstationarity world, continuity of observations is critical [citation omitted].”
In their “Concluding Remarks,” the authors observe that “we need an approach that is informed by advances in understanding and computation regarding the coupled global land-ocean-atmosphere system . . .” and clarify that “[w]e do not suggest that the ‘suitable successor’ to stationarity has been found. Rather we continue to regard finding such a suitable successor as a major challenge . . . [citation omitted].”
Ms. Dunec is vice president, underwriting counsel with Old Republic Title Company in San Francisco, California, and a member of the Natural Resources & Environment editorial board. She can be reached at firstname.lastname@example.org.