Texas Supreme Court Considering Important Oil and Gas Case

*This article is not a substitute for the advice of an attorney.*

The Texas Supreme Court is currently considering Key Operating & Equipment Co. v. Hegar, a case that will have important implications for both the oil and gas industry and surface owners across Texas.  Oral argument was held in February and the case is now pending decision by the Court.

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Background

This dispute involves two adjacent tracts of land in Washington County known as the Rosenbaum-Curbo tract and the Richardson tract.  Key operating began production on the Richardson tract in 1987.  From 1994-2000, Key Operating had a lease on the Rosenbaum-Curbo tract as well and during that time, Key built a road across the Rosenbaum-Curbo property, which was used for oil production on both tracts.  When the Rosenbaum-Curbo lease ended in 2000, Key executed another lease, which allowed for pooling, in 2000 and pooled its 30 acre interest in the Richardson tract and 10 acre interest in the Rosenbaum-Curbo tract.  The only producing wells on this 40 acre pooled unit are located on the Richardson tract.

In 2002, the Hegars purchased the surface estate and 1/4 of the mineral estate to the Rosenbaum-Curbo property.  The Hegars knew of the mineral lease in place and that Key Operating used the road running across the Hegar’s property.  When a new well was drilled on the Richardson tract, thereby increasing traffic on the road, the Hegars filed suit claiming trespass and seeking an injunction to prevent Key Operating from using their road.  The Hegars argued that Key had no right to use their property for two reasons (1) they are not party to the pooling agreement and (2) the implied right to use the surface estate applies only when the use is necessary to produce minerals beneath that same land.  Here, the Hegars contend, Key is using the road to produce mineral beneath the Richardson tract, not under their tract.

Importantly, the trial court found that “credible evidence shows that no minerals are being extracted beneath the Curbo tract by the wells located on the Richardson tract.”  As you will see below, the Court of Appeals’ opinion turns on this factual finding.

Main Issue in the Case

The main issue in this case is whether a mineral lessee (Key Operating) has the right to use the surface estate of one tract (Curbo tract) in a pooled unit in order to achieve production on another tract within that pooled unit (Richardson tract).  The Court of Appeals explained the rule as follows:  “If Key Operating is not producing oil from the Curbo tract, it has no right to use the surface of the tract.  If Key Operating is producing oil from the Curbo tract, it has a right to use the surface of the tract subject to the accommodation doctrine.”

General Law Regarding Surface Owner Rights in Texas

In order to understand this case, it is important to understand surface owner rights in Texas.  Under Texas law, property may be severed into two estates:  mineral and surface.  When this is done, the mineral estate is dominant over the surface estate.  That means that a mineral owner or lessee (such as an oil and gas company) has the implied right to use as much of the surface as is reasonably necessary to produce the underlying minerals.  Absent a contractual agreement to the contrary, Texas courts have held this gives oil and gas companies the right to build drill pads, construct roads, build gathering lines, use groundwater, and drill injection wells.

This implied right, however, is not unlimited.  The surface owner is protected by the accommodation doctrine.  Under this legal doctrine, the mineral owner or lessee must accommodate the surface owner’s existing uses if possible.  In applying the doctrine, the court will consider whether the mineral owner or lessee has an alternative method of producing the minerals, and whether the surface owner has an alternative method of exercising his existing surface use.

Lower Court Decisions

Both the trial court and the First District Court of Appeals (Houston) found in favor of the landowner.  The Court of Appeals made two key findings.  First, the Hegars were not bound by the provisions on the pooling agreement because the agreement was entered into after the mineral and surface estates were severed and because the Hegars were not a party to the underlying lease, nor did they ratify the lease.  Second, the court explained that even if there were no rights pursuant to the pooling agreement, the implied right to use the surface estate as is reasonably necessary to produce oil and gas still exists.  The court found that if Key Operating was using the well to produce any oil from the Rosenbaum-Curbo tract, then it had the implied right to use the land, even if it was also producing from the Richardson tract.  If, on the other hand, the production from the wells located on the Richardson tract was only production from oil and gas underlying that property, Key had no such right to use the surface of the Hegar’s land.  As noted above, the trial court found that the evidence proved that no minerals were being produced from under the Hegar’s property.  In light of this, the Court of Appeals Key is not permitted to use the Hegar’s surface estate and a permanent injunction preventing such use is proper.

Supreme Court Appeal

Key Operating has appealed the lower court decisions to the Texas Supreme Court.  Oral argument was on February 7, 2014.  No decision has been issued to date.

Why Does This Case Matter?

This case could have important impacts on the rights of surface owners across Texas.  The Supreme Court decision will likely set clarify Texas law regarding how the implied right to use the surface estate in order to produce the mineral estate is applied to pooled units and whether an oil company may use the surface of one tract to produce oil and gas on a separate tract.

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