Where an oil and gas production company seeks to drill a  horizontal well through the mineral interest of another, in order to produce oil and gas from a lease held by the driller, does trespass occur?  Since 2014, we have been following the Lightning Oil Company v. Anadarko case through various levels of the Texas court system, which involves this very question.  Last week, the Texas Supreme Court issued a decision upholding the lower court opinions in the case and making clear that in this situation, trespass does not occur.

 

Background

The Briscoe Ranch sits just north of the Chaparral Wildlife Management Area (CWMA) in Dimmit County, Texas.  Lightning holds the mineral lease for the 3,250 acres just north of the CWMA.  The surface of the ranch is owned by Briscoe Ranch (“Ranch”).  Anadarko holds a lease for the mineral estate underlying the CWMA.  The surface of the CWMA is owned by the Texas Parks and Wildlife Department.

The lease between Anadarko and Texas Parks and Wildlife Department prohibits Anadarko from using the surface of the CWMA for oil and gas wells without consent, requiring Anadarko to user off-site drilling locations when “prudent and feasible.”  In order to access the minerals beneath the CWMA, Anadarko entered into a Surface Use and Subsurface Easement Agreement with Briscoe Ranch.  This agreement gave permission for Anadarko to build several well pads and drill numerous wells on the Briscoe ranch, that would then horizontally cross property lines and actually produce oil from beneath the CWMA.  Importantly, there were to be no “take points” along the horizontal well on Lightning’s lease.

Lightning filed suit against Anadarko alleging trespass and tortious interference with contractual relations.  Lightning sought a temporary injunction preventing Anadarko from entering the Briscoe Ranch surface estate to drill any oil or gas well through the mineral estate, attempting to drill any well through the Briscoe Ranch mineral estate, interfering with Lightening’s use and enjoyment of the Briscoe Ranch mineral estate, and trespassing upon the Briscoe Ranch mineral estate.

Lightning sued Anadarko seeking to prevent them from drilling a well through Lightning’s mineral estate in order to reach Anadarko’s mineral estate.  They argued that as mineral estate holder, Lightning had the right to exclude others from drilling and to determine who could drill through the earth within the boundaries of their lease.  Specifically, Lightning claimed trespass of the mineral estate and tortious interference with business relations.

In response, Andadarko argued that it was not trespassing at all as it had obtained permission from the surface owner to drill through to reach its own mineral lease.  It was the surface owner, reasoned Anadarko, who holds rights to the surface underground, not the mineral owner.

Prior Court Decisions

In 2014, the trial court sided with Anadarko, denying the temporary injunction and dismissing the case.  The court held that although Anadarko’s conduct may constitute a trespass on Lightning’s mineral estate, but there is no interference with Lightning’s mineral interests in the estate.  Lightning appealed to the San Antonio Court of Appeals.

In 2015, the Court of Appeals affirmed the trial court.  “Because the surface owner controls the matrix of the underlying earth, and the summary judgment evidence conclusively proves the surface owner gave Anadarko permission to site and drill, we affirm the trial court’s order.”  It is the surface owner, not the mineral owner, who has the right to control the earth beneath the surface estate.  Here, because the Ranch held the surface rights, and Anadarko obtained permission from the Ranch to drill through their subsurface, they did not trespass or tortiously interfere with contracts.  Again, Lightning appealed this decision.  [Read full opinion here.]

Supreme Court Decision

In May 2017, the Texas Supreme Court upheld the lower courts’ decisions.  [Read full opinion here.]

With regard to the trespass claim, Lightning argued that because it owns the interest in the oil and gas beneath the surface, some of which would necessarily be displaced when the well is drilled through the property, Anadarko’s drilling constitutes trespass.  The Court made clear that it is the mineral estate owner who holds the “exclusive right to possess, use, and appropriate gas and oil” when a lease is in place.  The Court reasoned that while holding a mineral estate provides the mineral owner with various rights, the right to “possess the specific place or space where the minerals are located” is not one of those rights.  Lightning offered no solid evidence that Anadarko drilling through the Ranch property would cause them imminent, irreparable harm.  Further, the Court reasoned, Lightning’s rights as the mineral owner are still in place–it holds the dominant estate and the implied right to use the as much of the surface as is reasonably necessary to produce oil and gas.  Thus, Lightning is not left without right or remedy in the event a problem arises.

Additionally, the Court addressed the argument that when the hole is drilled through the Ranch property, there will be a small amount of minerals pushed from the Lightning mineral estate property over onto the Anadarko mineral estate property.  The Court looked to a number of scholarly articles identifying horizontal drilling as being the more efficient, less wasteful approach.  “Balanced against the small loss of minerals a lessee such as Lightning will suffer, if drilling through the minerals is determined to be a non-actionable interference with property rights, it is the longstanding policy of this state to encourage maximum recovery of minerals and to minimize waste….In that context, we have no doubt that the individual interests in the oil and gas lost through being brought to the surface as part of drilling a well are outweighed by the interests of the industry as a whole and society in maximizing oil and gas recovery.”  Thus, the injury claimed by Lightning was insufficient to support a claim of trespass.

Finally, the Court made short work of the Tortious Interference with Contract claim, finding that there was no evidence that any action by Anadarko interfered with Lightning’s contractual lease rights.

Key Take-Away Points

This case makes clear that if an oil or gas operator seeks to drill through the property of another to reach his or her lease and produce minerals, it is the power of the surface owner–not the mineral owner–to negotiate such a lease.

NO COMMENTS