New Texas Case Addresses Off-Site Directional Drilling – No Consent Needed from Mineral Lessee
In May, the Texas Supreme Court handed down its decision in Lightning Oil Company v. Anadarko E&P Onshore, LLC, No. 15-0910 (Tex. May 19, 2017), holding that an oil and gas operator did not need a mineral lessee’s consent to utilize an off-site location for directional drilling. The case arose out of a dispute between an oil and gas operator (Anadarko) that wanted to drill off-site from an adjacent tract and the mineral lessee of that adjacent tract (Lightning).
Anadarko entered into a mineral lease with the State of Texas to develop minerals underlying Chaparral Wildlife Management Area. Anadarko’s lease restricted its use of the surface estate and required Anadarko to drill from off-site locations “when prudent and feasible.” Accordingly, Anadarko planned to locate well sites on adjacent tracts and use horizontal drilling to produce minerals from its lease. To this end, Anadarko entered into an agreement with Briscoe Ranch (“the Ranch”), an adjacent surface owner, to drill from the surface of its property. Lightning, lessee of the minerals underlying the Ranch, was not made a party to this agreement, and Anadarko’s development plan called for at least one drilling site with a wellbore that would angle horizontally though mineral-bearing formations leased by Lightning. Lightning objected to Anadarko’s proposed development plan and brought an action against Anadarko for trespass on its mineral estate and tortious interference with contract for interfering with its mineral lease, seeking to enjoin Anadarko from drilling on the Ranch surface.
Shortly after Lightning brought this lawsuit, Anadarko and the Ranch entered into a Surface Use and Subsurface Easement Agreement that specially authorized Anadarko to locate wells on the surface of the Ranch, drill through the subsurface, and use the wells to produce minerals from beneath Chaparral Wildlife Management Area. Both Lightning and Anadarko moved for partial summary judgment. The trial court granted Anadarko’s partial summary judgment motion, and the Court of Appeals affirmed. On appeal to the Texas Supreme Court, Lightning asserted that the Ranch owners could not transfer to Anadarko the right to drill through the subsurface mineral estate because the Ranch owners did not possess that right.
The Court rejected Lightning’s claims, finding first that the claims for both trespass and tortious interference with contract turn upon 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 intended to bore through the formations in which the lessee’s minerals are located. The Court first noted that the surface owner retains ownership and control of the subsurface materials, but the mineral lessee owns the interest in the oil and gas in the subsurface materials. In the case at hand, though the amount of minerals displaced through the drilling would be small, it could not be ignored.
The court reasoned that although a mineral lease does grant the right to explore, obtain, produce, and possess the minerals underlying a given tract, it does not convey the structures where minerals may be 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 right to develop. The Court found that Lightning failed to produce any concrete evidence that Anadarko’s activities would cause Lightning imminent, irreparable harm. Moreover, the court noted that the Lightning’s rights would be protected by the Texas Railroad Commission who would monitor and regulate any off-site wells Anadarko drilled.
Lightning also argued that Anadarko was not just interfering with the place where its minerals were found, but that Anadarko, by drilling under the Ranch, would be extracting some quantum of Lightning’s leased minerals. The Court agreed with Lightning that Anadarko’s development plan would result in some small amount of minerals being lost. To determine whether that amount was sufficient to sustain an action for trespass, the court undertook an interest balancing inquiry, as its precedent required. In balancing the relevant interests of Lightning and Anadarko, the court weighed “the interests of society and the interest of the oil and gas industry as a whole against the interest of the individual operator.” The court’s interest balancing analysis is contained below:
The amount of minerals Lightning will lose is roughly the amount of minerals embedded in fifteen cubic yards of dirt and rock for each thousand linear feet drilled with an eight-inch well-bore . . .[and the minerals themselves] will be a much smaller quantity than the mass of the minerals in which they are lodged. . . and . . . off-lease drilling arrangements often provide the most efficient means of fully exploiting the minerals through horizontal drilling. It can take several thousand feet to kick-out and transition the roughly 90 degrees from vertical to horizontal. Thus, many times when an operator drills a horizontal well from the surface under which its minerals lie, blind spots occur beneath these transition intervals that may never be fully produced unless another well is drilled to reach them. By drilling from adjacent surface locations, this effect is minimized and it is less likely that additional wells will be required because the wellbore is nearly or completely horizontal when it enters the productive lease formation. Such drilling activities allow for recovering the most minerals while drilling the fewest wells. And this Court has always viewed waste-reducing innovations favorably.
On balance, the court found that the small amount of minerals lost during any proposed off-site drilling was not a sufficient injury to support an action for trespass.
The Court also rejected Lightning’s contention that Anadarko tortuously interfered with its mineral lease. The Court opined that exercising one’s own contractual rights was an affirmative defense to tortious interference and that Anadarko was simply exercising the rights it acquired under the Surface Use and Subsurface Easement Agreement.
While this case applies specifically to Texas property rights, participants in the Arkansas oil and gas industry should take note of its potential implications. This ruling does provide some clarity as to whether a surface owner can grant an operator the right to drill for off-tract minerals. It may also provide great boon to operators trying to turn a profit in the current marginal market.
However, it should be noted that the Lightning case may be readily distinguishable from other future cases because the lease with the state of Texas gave Anadarko virtually no other choice but to drill off tract because their lease with the State prohibited them from accessing the minerals under the leased premises from the surface of that premises. At the end of the day, it may still be best-practice for operators to obtain a minerals lease of any tract they plan to drill or enter into an agreement with an off-site mineral lessee before beginning operations.