Face Challenges Confidently

518 Key Operating & Equip., Inc. v. Hegar

Tuesday, December 8th, 2015

Richard F. Brown

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

Key Operating & Equip., Inc. v. Hegar held that a mineral lessee’s implied surface easement extends to the surface of the entire pooled unit regardless of which tract within the pooled unit is actually producing. The Richardson Tract and the Curbo Tract are adjoining tracts. Beginning in 1987, Key Operating leased and produced oil from the Richardson Tract. In 1994, Key Operating acquired a lease on the Curbo Tract and built a road across the surface of the Curbo Tract to access oil wells on both tracts. In 2000, the last well on the Curbo Tract stopped producing, and Key Operating lost its lease on the Curbo Tract. Key Operating’s owners immediately purchased an undivided 12.5% mineral interest in the Curbo Tract, which they then leased to Key Operating. Both the Richardson Lease and the new Curbo Lease contained pooling clauses. Key Operating pooled ten acres from the Curbo Tract with thirty acres from the Richardson Tract into the forty-acre Richardson–Curbo Unit. All production was from wells located on the Richardson Tract, which Key Operating accessed using the road across the Curbo Tract. The evidence showed that no oil was being produced or drained from the Curbo Tract. In 2002, the Hegars purchased 1/4 of the minerals and eighty-five acres of the surface of the Curbo Tract, including the road. The Hegars sued Key Operating for trespass and sought a permanent injunction against Key Operating’s continued use of the road. The Hegars’ principal arguments were: (1) a pooling clause in a lease executed after the original severance of the surface estate is not in the surface owner’s chain of title and could not be binding on the surface owner, and (2) the lessee’s implied surface easement did not permit the lessee to use the surface of one pooled tract to benefit a second pooled tract in the pooled unit, if there was no production from the first pooled tract.

The Court began by reviewing the basic principles of the law of pooling. The mineral estate is the dominant estate and the mineral owner has the incidental right (implied surface easement) to use so much of the surface as is reasonably necessary to produce the minerals. The right to lease—the executive right—is a right of the mineral estate and is an interest in property, not a product of contract. “The primary legal consequence of pooling is that ‘production and operations anywhere on the pooled unit are treated as if they have taken place on each tract within the unit.’” Public policy encourages pooling to prevent waste.

The Court expressly declined to consider whether the lease must be in the Hegar’s chain of title to bind the Hegars, because the mineral owner (and thus the mineral owner’s lessee) held the implied property right to use the Hegar’s surface. The Court reasoned that because production and operations anywhere on a pooled unit are treated as if they have taken place on every tract in a unit, the “legal consequence” of production from the Richardson Tract is that it is also production from the Curbo Tract. Because production from the pooled part of the Richardson Tract was legally also production from the pooled part of the Hegar Tract, Key had the right to use the road to access the pooled part of the Richardson Tract.”

The court never explains why the production was “legally” production from all of the pooled unit. There is no mention of cross-conveyance theory attributable to pooling. The only authority cited is Tichacek, which simply holds that the power to pool is granted by the lessor in the pooling clause of the lease. It appears that the court is reasoning that the mineral owner has the right to (1) develop the minerals, (2) reasonable use of the surface to develop the minerals, (3) pool to develop the minerals, and (4) lease those rights to another, all as an interest in property. The right to pool is not unconstrained, but is limited by the accommodation doctrine and that a pooling may not be done in bad faith, but neither of those issues were in this case.

The Court distinguished its more general holding in Robinson v. Robbins Petroleum Corp. —that a mineral lessee may not use the surface of one leased tract to aid operations on another tract—by explaining that the surface owner’s tract in Robinson had not been pooled with the producing tract, nor did the mineral lease allow for pooling. In this case, Key Operating pooled the Curbo Tract with the Richardson Tract, as expressly permitted in the leases.

This case strongly supports pooling by refusing to require that: (1) the lease pooling clause be in the surface owner’s chain of title and (2) the lessee must prove that there is production from a particular tract in the pooled unit. The case did not directly address the legal consequences of pooling, but apparently holds that the right to pool is a property right included in the mineral estate. If so, then the cases holding that there is no power to pool nonparticipating and overriding royalty interests may be subject to question.