Is the mineral estate losing the upper hand in Texas?

One of the most frequently recited “rules” in oil and gas law is that the mineral estate is dominant to the surface estate. Although courts still give lip service to the rule, the conflicts caused by drilling in urbanized areas appear to be eroding that dominance.

The basic premise of the dominant estate rule is that the mineral owner (or the operator as a lessee of the minerals) is permitted to use as much of the surface as is reasonably necessary to explore for and produce the minerals. That means that unless lease provisions, statutes or local ordinances intervene and impose more stringent requirements, the operator has the right of ingress and egress over the surface, need not pay for using the surface to install tanks or machinery, may use the tract’s water whether above or below ground, and need not even restore the surface after completion and abandonment of drilling activities. As anyone who has seen such activities can attest, the surface owner can be left with quite a mess on that surface.

The dominant estate rule is not unlimited; there are limitations that provide surface owners some protection. For example, the “reasonable use” rule allows the operator to use only so much of the surface as is reasonably necessary to produce the minerals.

In the urban drilling environment – or anywhere horizontal or directional drilling is used to access multiple tracts – the reasonable use rule can provide some surprisingly strong negotiating leverage for a surface owner. This leverage arises because courts have held that the surface of one tract is not servient to the minerals of another tract.  As a result, minerals dominate only their own surfaces unless the surface owner agrees otherwise.

Thus, for example, one court found that although an operator would generally be permitted to use for free a tract’s water sources in its drilling operations, that tract’s water could not be used to develop minerals from other tracts without permission from the surface owner.  And of course, surface owners are unlikely to grant that type of permission without some form of compensation.

Another limitation on the dominant estate rule arose in the 1970s, when the Texas Supreme Court determined that operators must exercise their right to develop minerals in such a way as to accommodate the surface owner’s reasonable uses.  The courts have used the “accommodation doctrine,” as it is now called, to require operators to place their drilling machinery in a different location on the surface, or to use different technology that would minimize disruptions to uses of the surface already in progress.

The accommodation doctrine standards imposed in the past have focused on whether there is an existing use of the surface; whether that use would be precluded or impaired by the drilling; whether the existing use is the most practical and reasonable use under the circumstances; and whether other alternative established drilling practices would accommodate the existing surface use.

Applying the “reasonable use” and “accommodation doctrine” limitations is, by necessity, a balancing test that is very case-specific and fact-intensive, leading legal commentators and the courts to often opine that no hard-and-fast rule is possible.

Some recent cases, however, are making it appear that courts are more and more frequently applying these balancing tests in ways that favor the surface owners.  For example, the accommodation doctrine was applied in a recent case resulting in a finding that a planned expansion of the current surface use (an ash disposal landfill) was sufficient to force the operator to drill horizontally instead of vertically. Significantly, the court made its ruling without even acknowledging the significant additional costs incurred by the operator in drilling horizontally.

Perhaps an even more landscape-changing case was just tried in Tarrant County. In that case, the surface owner was able to completely avoid the balancing discussed above and obtain a judgment for millions against the operator. The dispute arose after the surface owner of a very large tract, Northside Land and Development LLC, spent years and untold dollars working with the Sansom Park officials planning a mixed-use development. During this time, the operator, Western Production Co., apparently kept quiet about its plans to use the same surface for drilling.

Just before Northside obtained its development agreement, Western applied for a drilling permit that would have precluded the use of approximately twenty percent of the planned residences. That loss of 20 percent of the residences in turn kept Northside’s development agreement from being signed and kept the development from going forward.

Northside sued. Court observers would have expected a claim based on allegations that Western failed to make reasonable use of the surface, or that it failed to accommodate the surface use. Instead, Northside alleged that Western had tortiously interfered with Northside’s plans. Surprisingly, Northside succeeded on that claim, despite Western’s defenses that it should only be held to the reasonable use or accommodation doctrines.

Are these cases evidence that operators are being held to higher and higher standards when their mineral development interferes with the surface? If so, the mineral estate’s “dominance” may end up being in name only.

Lisa Vaughn is an attorney at Shannon Gracey Ratliff & Miller LLP.