Face Challenges Confidently

674 Lightning Oil Co. v. Anadarko E&P Onshore, LLC, 520 S.W.3d 39 (Tex. 2017)

Wednesday, February 14th, 2018

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.

Lightning Oil Co. v. Anadarko E&P Onshore, LLC, 520 S.W.3d 39 (Tex. 2017) (Surface estate and subsurface trespass by drilling) held that the surface owner has the right to locate a well on the surface and to drill through the earth beneath the surface to an adjacent tract, when the mineral estate and surface estate have been severed. The fee owner severed the surface and mineral estate in the Briscoe Ranch. Lightning Oil Co. (“Lightning”), as lessee, acquired from the mineral owner a lease for oil and gas under the Briscoe Ranch. Anadarko E & P Onshore, LLC (“Anadarko”) entered into a Surface Use and Subsurface Easement Agreement with Briscoe Ranch to site wells on the Briscoe Ranch and to drill through the earth under the Briscoe Ranch to open wells that bottomed on Anadarko’s adjacent leasehold acreage. Lightning sued Anadarko for trespass and for tortious interference with Lightning’s lease.

“. . . Lightning’s claims for both trespass and tortious interference with contract turn on whether a lessee’s rights in the mineral estate include the right to preclude a surface owner or an adjacent lessee’s activities that are not intended to capture the lessee’s minerals, but rather are intended only to traverse, or bore through, the formations in which the lessee’s minerals are located.” The Supreme Court recognized that every unauthorized entry upon land of another is a trespass, but noted that ownership of property does not necessarily include the right to exclude every invasion or interference. “[P]roperty does not refer to a thing but rather to the rights between a person and a thing.” “Consequently, a trespass is not just an unauthorized interference with physical property, but also is an unauthorized interference with one of the rights the property owner holds.”

The Court then analyzed the relationship between the surface estate and the mineral estate. The surface overlying a leased mineral estate is the surface owner’s property, and those ownership rights include the geological structures beneath the surface. “Although the surface owner retains ownership and control of the subsurface materials, a mineral lessee owns a property interest – a determinable fee – in the oil and gas in place in the subsurface materials.” Lightning pointed out that in this case Anadarko would clearly extract some of Lightning’s minerals (from the wellbore) and put permanent structures in place (surface locations and casing) that could interfere with Lightning’s dominant mineral estate and its exclusive right to produce the minerals.

The materials extracted from the wellbore would include about a dump truck load of material (and inevitably some oil and gas) out of the producing Escondido formation, which is about 200-875 feet thick. The Court applied a balancing test and held, on the basis of public policy, that the loss Lightning would face is not a sufficient injury to support a claim for trespass. The Court relied upon “the longstanding policy of this state to encourage maximum recovery of minerals and to minimize waste.” It is unclear from the opinion whether there was some evidence in the case of the efficacy of horizontal drilling originating on off-site surface locations, or the Court simply relied upon secondary sources to reach that conclusion.

To resolve Lightning’s claim of interference, the Court first reviewed the nature of the mineral estate. There are five “rights,” and the one at issue here is the right to develop.

[T]he rights conveyed by a mineral lease generally encompass the rights to explore, obtain, produce, and possess the minerals subject to the lease; they do not include the right to possess the specific place or space where the minerals are located. Thus, an unauthorized interference with the place where the minerals are located constitutes a trespass as to the mineral estate only if the interference infringes on the mineral lessee’s ability to exercise its rights.

The Court held that Lightning’s claims of interference were mere speculation. Whatever future development might occur would be governed by the rules and regulations of the Railroad Commission and would be further limited by Anadarko’s rights being no greater than those of the surface owner. The Court specifically pointed to the accommodation doctrine and its belief that the doctrine has a broad application.

The Court expanded on the accommodation doctrine after first noting that “because Anadarko is the surface owner’s assignee, its activities are a surface use for accommodation doctrine purposes.” “Lightning’s argument is essentially that it should have the right to prevent any surface or subsurface use that might later interfere with its plans. Such a decision would render the mineral estate absolutely dominant and significantly alter the balance achieved through the flexible nature of the accommodation doctrine.” This obviously extends the accommodation doctrine beneath the surface and reaches uses other than use of the surface.

The Court expressly bases its opinion on the respective rights of the surface estate and the mineral estate. It should be noted that this case involves the rights that follow a severed surface estate, which does not address the additional complexity of a lessor/lessee relationship. That is, many lease forms grant the “exclusive” right to drill, and that provision, or other express or implied covenants in the lease, may further restrict the rights of the surface owner who is also a lessor.

The significance of the case is the holding that the surface owner has the right to locate a well on the surface and to drill through the earth beneath the surface to an adjacent tract, when the mineral estate and surface estate have been severed.