June 01, 2016 Feature

Hydraulic Fracturing: Contracts, Courts, and Compromise

Hannah J. Wiseman

The United States is currently a global leader in the production of oil and natural gas owing to the rapid emergence of horizontal drilling and hydraulic fracturing in shales and other “tight” formations. This development has substantially benefited the country but also has generated costs that are borne by a variety of individuals and organizations. Many of those who bear the brunt of the costs have sought legal advice.

 

The Parties Seeking Solutions

Some of the primary beneficiaries of the oil and gas boom are the millions of individuals who own minerals and have leased these minerals to oil and gas companies. But some of these mineral owners later find that oil and gas production causes impacts in the form of noise, spills, and air pollution. They also experience financial disappointment, such as learning that their neighbors received more generous bonus payments from oil and gas companies or that royalty payments are lower than expected.

Other individuals with concerns about the boom include surface owners who own land overlying minerals but do not own the minerals and thus are not parties to the lease controlling mineral development. Further, owners of lands that border oil and gas development (“neighboring landowners”) have sometimes experienced spills that run off well sites, as well as air pollution and other impacts. Local government officials, too, often hear these concerns from their constituents and struggle to find solutions. These governments also must directly address the impacts of increased road use by heavy trucks; demands for increased sewage connections, building permits, schools, court services, and other locally provided services; and loss of city employees to higher-paying oil and gas jobs.

Means of Addressing Client Concerns

When any of these individuals or groups approaches an attorney for advice, there are several possible courses of action. For mineral owners, the best way to avoid and mitigate potential environmental effects is through careful preparation of the lease and associated contracts. Similarly, local government officials can enter into contracts such as road use agreements with oil and gas companies, in which the companies promise to cover the costs of road widening, repairs, and maintenance. Further, some local governments bargain with oil and gas companies for actions and donations that address certain environmental and social effects. Surface owners who lack mineral rights also should attempt to negotiate with the oil and gas company before site development begins. Indeed, in some states with “surface damage acts”—which give surface owners more say in the development process—this negotiation is required.

To the extent that leases and other contracts and agreements fail to prevent certain undesirable impacts of oil and gas development, court action may be necessary. A growing number of lawsuits by mineral owners, surface owners, and neighboring landowners allege private nuisance and other common law claims associated with oil and gas development, as well as statutory violations. Further, some local governments have attempted to ban or extensively regulate oil and gas development in order to reduce its impacts on local residents and the environment, although this often leads to preemption challenges in court or preemption by state legislatures.

Finally, in some cases compromise, rather than a formal contract or lawsuit, may be the best solution. Some local governments have welcomed oil and gas development but have formed committees composed of local government officials, industry representatives, and citizens to address development concerns.

Contracts

Mineral owners who also own the surface of the land and are concerned about environmental impacts on their property have a very direct solution available to them: They can engage an attorney to help them draft a lease and lease addendum with measures that will address these environmental concerns. (A lease is actually more sophisticated than a contract—in many states it grants fee simple determinable ownership in minerals—but I use “contract” as shorthand here.) Attorneys should advise these landowners to consider including requirements such as baseline testing of all water wells and surface water on the property; lining of the entire well site with impermeable plastic; using covered tanks to contain all oil and gas wastes; locating the well and surface pits and tanks a specified distance from certain surface locations; and removing equipment from the site and fully restoring the site within a certain period of time after the completion of drilling and fracturing. Although oil and gas companies will not always agree to all these terms, negotiating for certain protections within the lease can help to avoid many of the impacts that could lead to litigation.

Attorneys should remember that even where states have public law requirements such as baseline water testing, mineral owners who also own the surface of the property might want more stringent requirements. For example, in Colorado oil and gas companies must test a maximum of four water wells prior to drilling, but a landowner might want more wells tested. Owing to concerns about property values, some landowners will oppose baseline testing, however, even if the lack of testing makes post-drilling and fracturing contamination more difficult to prove. Attorneys should be sensitive to this concern and should advise clients on the benefits and drawbacks of requiring or refusing baseline testing.

For clients who do not own minerals but will be impacted by oil and gas development, several contractual remedies may be available. These are important, as surface owners overlying “severed” minerals owned by someone else are at the mercy of the dominant mineral estate. Those developing the mineral estate may use the surface as is “reasonably necessary” to produce minerals and need not pay the surface owner any damages associated with this reasonably necessary use. Numerous activities have been found to be reasonable, such as operating a waste pit very close to a house or using up most of the water on the property—again, while paying no damages. Further, neighboring surface owners might also experience impacts, and local governments are likely to hear complaints from these owners and other concerned citizens.

For surface owners overlying severed minerals, some states, such as Oklahoma, have surface damage acts that require the oil and gas company to enter good-faith negotiations with the surface owner before entering the site and attempt to agree on damages that the company will pay to the surface owner. If the company and the surface owner cannot agree on an amount, a court appoints a third-party appraiser to set damages, and, if the parties still cannot agree, a jury trial is available. In the many states where this important remedy is unavailable to surface owners, an attorney for a surface owner should still attempt to set up a meeting between the company and the surface owner before any site development begins and attempt to enter into an agreement as to the acceptable location for the well, the timing of oil and gas operations (such as avoiding around-the-clock drilling or fracturing where possible), fencing around the well site to deter livestock, and other protections. In some cases, surface owners might be willing to negotiate to pay the oil and gas company to avoid impacting certain parts of the surface, such as areas with valuable crops.

Neighboring landowners and their attorneys should participate in any available public hearings when an agency proposes to issue a permit to drill a well. Further, in states that require oil and gas companies to conduct baseline testing of water wells within a certain distance of the well site, this testing often occurs on neighboring properties. A company’s decision to approach neighboring property owners and their attorneys regarding the water testing process could open up room for negotiation about other concerns—beyond potential water contamination—and how they could be avoided.

Local governments have several opportunities for securing agreements with oil and gas companies that will protect public infrastructure and constituents, including surface owners, neighboring property owners, and other concerned citizens. For example, some states require that oil and gas companies attempt to enter into road use agreements with local governments. In Ohio, applicants to drill a horizontal well must submit with the application a copy of a road use agreement or an affidavit that the company made a good-faith effort to enter into a road use agreement with the affected local government. Even in states where road use agreements are not required, local governments, which control weight limits and exercise other authority over certain local roads, often secure these agreements. Further, where local governments retain zoning authority over oil and gas development—for example, where oil and gas development is a conditional use within certain zones and thus requires case-by-case approval—local governments can place certain conditions on development and restrict its location.

And finally, local governments bargain with developers of all sorts—residential, commercial, and industrial—to cover some of the costs of the impacts of development by contributing money to local schools or parks or building new wastewater hook-ups, and local governments can ask the same of oil and gas companies. Although several states have preempted local governments’ ability to require a special local permit before oil and gas development begins or to apply zoning regulations to oil and gas development, it does not appear that this preemption prevents local governments from using their land use authority to enter into agreements with oil and gas companies in which companies mitigate the impacts of development (e.g., to limit drilling around local resources like lakes or to regulate the technical aspects of oil and gas development).

Courts

Where up-front negotiation and contracting fail to prevent environmental impacts of oil and gas development, parties often must return to their attorney and discuss potential litigation options. So far, few cases requesting damages or injunctions relating to oil and gas activity have resulted in successful judgments, although some have succeeded, and several have generated settlements. Further, recent cases show that surface owners, neighboring landowners, and even individuals more distant from oil and gas development can sometimes obtain remedies from claims relating to oil and gas activity.

One initial snag to anticipate in many of these claims is whether the individuals raising claims must first address these claims through an administrative agency. The courts have reached different conclusions in this area. In Oklahoma, where landowners alleged personal injury from oil and gas wastewater wells that appeared to have caused a 5.0-magnitude earthquake, the Oklahoma Supreme Court held that the personal injury claim was properly addressed by the courts, not by the Oklahoma Corporation Commission that permitted the wastewater wells. Ladra v. New Dominion, LLC, 353 P.3d 529 (Okla. 2015). But in North Dakota, where mineral owners claimed that flaring of natural gas by oil companies violated a state statute and resulted in underpayment of royalties, a federal district court found that these claims first had to be filed with the administrative agency. See, e.g., Wisdahl v. XTO Energy, 2014 WL 10537960 (D.N.D., May 14, 2014).

Compromise

Even where formal contracts seem unlikely to result in prevention or mitigation of environmental effects and litigation is too expensive, a third possible approach is to encourage public dialogue and consensus regarding the drilling and fracturing process. Garfield County, Colorado, takes this approach through its Energy Advisory Board, which includes members such as local government officials, representatives of environmental groups and home owners associations, individual citizen representatives, and oil and gas company representatives. The board meets regularly to hear complaints and concerns about oil and gas development and general presentations about state and local initiatives designed to improve oil and gas development and reduce its impacts. The stated mission of the board is to “prevent or minimize conflict associated with oil and gas development through positive and proactive communication and actions. . .” (tinyurl.com/huczwxw).

Conclusion

The project of balancing the benefits and negative impacts of oil and gas development is not always easy, but attorneys have an important role to play in advising clients of their many options—particularly the possibility of avoiding litigation through up-front agreements and constructive dialogue. And where contracts and compromise don’t work, litigation can sometimes generate important remedies for clients.

Hannah J. Wiseman

Hannah J. Wiseman is the Attorneys’ Title Professor at the Florida State University College of Law.