November 17, 2017 Articles

Texas Supreme Court Examines Pass-Through Drilling and Ownership Rights

The court set forth the mineral lessee’s bundle of rights and how those rights relate to those of the surface owner.

By Joshua Fuchs, Laurens Wilkes, Will Taylor, and Viddy Harris – November 17, 2017

In Lightning Oil Co. v. Anadarko E&P Onshore, LLC, 520 S.W.3d 39 (Tex. 2017), the Texas Supreme Court determined that Anadarko did not trespass or tortiously interfere with a mineral lease by drilling through a mineral estate it did not own to reach its adjacent lease. Such “pass-through” drilling frequently raises the question of whose permission is needed to drill these types of off-lease wells. In Lightning, the court held that the owner of the surface rights where Anadarko’s well was located - not the mineral lessee—could authorize the drilling activities.

In reaching its holding, the court set forth the mineral lessee’s bundle of rights and how those rights relate to those of the surface owner. The opinion provides some guidance both to upstream companies engaging in off-lease or pass-through drilling and mineral lessees seeking to protect their rights, in terms of when such drilling activities are permissible and under what circumstances. Parties wishing to reserve the right to exclude pass-through drilling may also consider using Lightning to evaluate what language in a deed would allow for control over not only the minerals, but also the non-mineral subsurface materials.

Pass-Through Drilling: Common Issues in Texas and Other Jurisdictions
In development plays throughout the country, operators are sometimes faced with the need to drill wells off-lease or off-premises. This may be necessitated by reserves that are in close proximity to a residential area, difficulty in leasing contiguous tracts, or limitations on surface use set forth in the lease. In these situations, an operator may need to reach its reserves by drilling horizontally through subsurface strata it does not own. Such pass-through or off-lease drilling often leads to the question of whose permission is needed to drill. Is the permission of the owner of the surface on which the off-premises well is located enough or does the operator need to obtain the permission of the owner of the minerals that are traversed en route to the leased area?

Many oil and gas-producing jurisdictions have not addressed these questions head-on. Instead, operators and their counsel must rely on the particular jurisdiction’s interpretation of mineral and surface ownership rights in different contexts. See, e.g. Chance v. BP Chemicals, Inc., 670 N.E.2d 985 (Ohio 1996) (because subsurface ownership rights are not absolute and an owner can only exclude those subsurface invasions that actually interfere with reasonable and foreseeable use of the subsurface, lateral migration of injectate by chemical refiner did not constitute trespass); Stone v. Chesapeake Appalachia, LLC, No. 5:12-cv-102, 2013 WL 2097397 (N.D.W. Va. Apr. 10, 2103) (“[T]his Court finds, and believes that the West Virginia Supreme Court of Appeals would find, that hydraulic fracturing under the land of a neighboring property without that party’s consent is not protected by the ‘rule of capture,’ but rather constitutes an actionable trespass.”). The Texas Supreme Court’s opinion in Lightning represents one of the first opinions to tackle clearly the question of whether a mineral owner can prevent pass-through drilling that is authorized by an adjacent surface owner.

Case Background and the Parties’ Arguments on Appeal
Lightning Oil is the lessee of the mineral estate underlying 3,251.53 acres of land in Dimmit County, Texas. Anadarko leases the adjacent mineral estate. The State of Texas leased those minerals to Anadarko and maintains ownership of the surface as a wildlife conservation area. Anadarko agreed with the state to drill wells off-lease away from the conservation area “when prudent and feasible.” Lightning, 520 S.W.3d at 43. Accordingly, Anadarko negotiated with the adjacent surface estate owner, Briscoe Ranch, to establish well sites and drill through Lightning’s lease to produce from Anadarko’s lease beneath the conservation area. Upon learning of Anadarko’s plans, Lightning sought an injunction and asserted claims of trespass and tortious interference with contract.

Both parties filed motions for summary judgment, and the trial court granted Anadarko’s motion on the basis of its justification defense. The court of appeals affirmed the trial court’s ruling and, thereafter, the Texas Supreme Court agreed to hear the case.

On appeal, Lightning set forth various arguments regarding why the lower courts’ rulings were erroneous, including that, under long-standing Texas law, the mineral estate is dominant and has the right to exclude those seeking to pass through it. Lightning also asserted that the court of appeals’ decision improperly expanded the accommodation doctrine by requiring a mineral lessee to accommodate surface uses that benefit an adjacent mineral estate and that the lower-court rulings ignored the original conveyance language severing the mineral estate. Lightning, 520 S.W.3d at 44.

Anadarko, conversely, pointed to authority indicating that the surface estate owner controls the matrix of earth underlying the surface. Anadarko argued that this authority and the rule of capture mean that Lightning does not own specific oil and gas molecules and, therefore, does not have the right to exclude pass-through drilling. The Texas Oil and Gas Association submitted an amicus brief in support of Anadarko.

The Court’s Opinion
The legally relevant question in this case was a novel one: Does a lessee’s rights in the mineral estate include the right to preclude a surface owner’s, or an adjacent lessee’s, activities that are not intended to capture the separately leased minerals, but rather are intended only to traverse the formations in which the lessee’s minerals may be located?

The court first addressed the scope and extent of surface ownership. The surface owner retains ownership and control of the subsurface materials, but the mineral lessee owns a property interest in the oil and gas in place in those subsurface materials. Lightning, 520 S.W.3d at 47. Lightning argued that Anadarko’s drilling program extracts a portion of the subsurface to accommodate the wellbore, a process that will indisputably extract or displace some minerals. The court apparently gave some credit to this argument, noting that while the surface owner owns and controls the mass of earth undergirding the surface, “those rights do not necessarily mean it is entitled to make physical intrusions into formations where minerals are located and remove some of the minerals.” Lightning, 520 S.W.3d at 47. This is particularly important when considering trespass, because “every unauthorized entry upon land of another is a trespass even if no damage is done or the injury is slight.” Coastal Oil & Gas Corp. v. Garza Energy Tr., 268 S.W.3d 1, 12, n. 36 (Tex. 2008).

The court looked to existing case law and concluded that prior cases, while providing some clues, did not solve the question of whether the mineral lessee has the right to exclusive control and use of subsurface materials if they contain recoverable minerals. To determine whether mineral lessees have the right to prevent surface owners from drilling through subsurface areas containing minerals and extracting some of those minerals, the court analyzed the attributes of severed mineral estates.

A mineral lease generally can give the lessee the right to possess, use, and appropriate oil and gas. This typically includes the “right to develop”—that is, the “right to go onto the surface of the land to extract the minerals, as well as those incidental rights reasonably necessary for extraction.” Lightning, 520 S.W.3d at 49 (quotations omitted). But, it does not convey a right to possess the specific place or space where the minerals are located. An unauthorized interference with the place where the minerals are located, therefore, would not constitute a trespass unless it interferes with a mineral lessee’s right to develop.

Lightning argued that Anadarko’s proposed drilling program interferes with its right to develop. But the court disagreed, stating that Lightning’s arguments were speculative. The court also noted that the Texas Railroad Commission, the regulatory body charged in part with oversight of certain drilling activities, maintains rules regarding the efficient development of minerals and protecting the interests of the parties involved, including Lightning’s interests. Moreover, while Lightning’s mineral estate remains the dominant estate that is aided by the accommodation doctrine–i.e., the mineral owner’s right to use as much of the surface “as is reasonably necessary to produce and remove the minerals”—this dominance is not unbounded and “the rights of a surface owner are in many ways more extensive than those of the mineral lessee.” Lightning, 520 S.W.3d at 48.

Lightning also argued that Anadarko interfered with the minerals themselves by extracting a small amount of minerals as part of the pass-through drilling process. Lightning objected to the court of appeals’ reliance on the rule of capture to dismiss its argument. The rule of capture vests title in whoever brings the minerals to the wellhead, even if the minerals flowed from outside the lease or property boundaries. The Texas Supreme Court agreed, but for a different reason: Lightning’s claim centers on Anadarko’s extraction of minerals embedded in the physical matter and not specific minerals themselves.

Nevertheless, given that any extraction would occur, the court employed a balancing test to determine if Anadarko’s actions constituted actionable trespass. The court balanced the interest of the oil and gas industry against the interest of the individual operator. Acknowledging that Anadarko’s drilling plan will result in the destruction of a small amount of Lightning’s minerals, the court emphasized that Lightning owns only the minerals, not the materials surrounding any minerals that are extracted. Accordingly, Lighting’s interest in preventing the proposed drilling by Anadarko was small. On the other hand, off-lease drilling arrangements like Anadarko’s often provide the most efficient means of fully exploiting minerals through horizontal drilling. This is an important interest and outweighed Lighting’s interest. Lightning, 520 S.W.3d at 51.

The Lightning opinion provides some clarity for operators planning to engage in pass-through drilling and owners seeking to prevent such drilling. The case establishes that, in many instances, an operator may need only the consent of the surface owner to drill through the subsurface to an adjacent mineral lease.

Notably, however, Lightning claimed only that its future right to develop minerals would be disrupted by Anadarko’s drilling program. Indeed, the Texas Supreme Court suggested that Lightning offered only speculation as to Anadarko’s alleged interference with its development rights. Lightning, 520 S.W.3d at 49. It is unclear if this would make a material difference in the outcome, but mineral owners seeking to prevent pass-through drilling may consider setting forth specific evidence–such as an established drilling plan–to support any claims for injunctive relief or trespass.

Finally, Lightning leaves open the possibility that a deed transferring surface rights could effectively reserve certain subsurface rights, such as the “earth surrounding any hydrocarbon molecules,” by using express language, thus giving the mineral owner the right to prevent pass-through drilling. A party, therefore, may be able to contractually modify the court’s holding in Lightning and a close look at any existing deeds may be in order.

Joshua Fuchs and Laurens Wilkes are partners and Will Taylor and Viddy Harris are associates at Jones Day in Houston, Texas. The views and opinions set forth herein are the personal views or opinions of the authors; they do not necessarily reflect views or opinions of the law firm with which they are associated.

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