27 February 2014
Practice Groups:
Oil & Gas
Energy
Energy, Infrastructure
and Resources
Environmental, Land
and Natural
Resources
“Houston, We May Have a Problem!” — Surface
Owner Who Put up “Roadblock” to Oil Driller’s Use
of Property to Service Wells in a Pooled Unit Arrives
at Texas Supreme Court
By John F. Sullivan III, George A. Bibikos, Cleve J. Glenn, Bryan D. Rohm
Introduction—A Road Less Traveled
The Texas Supreme Court’s anticipated ruling in the case of Key Operating Equipment Inc.
v. Will Hegar and Loree Hegar could significantly impact the ability of oil and gas producers
to gain access to wells that are part of pooled units.1 The key issue before the Court is
whether a landowner whose minerals had been severed and later leased and pooled 2 with
oil and gas leases on adjacent property can prevent a lessee-operator from using a road
owned by the landowner to service wells on an adjacent property, where those wells are part
of the same pooled unit. A court of appeals in Houston answered “yes,” affirming the trial
court’s injunction that prevented Key Operating Equipment Inc. (“Key Operating”), a lesseeoperator, from using the road owned by Will and Loree Hegar (the “Hegars”) to access its
wells on the adjacent property. 3
The Texas Supreme Court, having recently heard oral argument, is now reviewing the court
of appeals’ decision. Industry experts and stakeholders are concerned that the court of
appeals’ decision, if allowed to stand, would result in extraordinary burden and expense to
lessees whose wells in pooled units would become “trapped” by surrounding properties and
also undermine clear Texas jurisprudence on the rights of dominant mineral estates in
pooled units vis-a-vis the rights of servient surface estate owners. 4
Given the recent boom in domestic oil production, the implications of the Texas Supreme
Court’s forthcoming decision could be far-reaching. The United States is on track to become
one of the largest oil-producing countries in the world by 2015 5, and the State of Texas
accounts for 36% of domestic oil production. 6 An industry expert estimates that as much as
60% of the state’s production is from pooled units.7 Therefore, the legal rights of mineral
lessees to access wells on pooled units are critical to the country’s oil and gas industry as a
whole, not to mention the State of Texas and its economy. 8
Factual Background —The Rocky Road to the Highest Court in Texas
Key Operating produces oil on two adjacent tracts referred to as the “Richardson tract” and
the “Rosenbaum–Curbo tract.” 9 Since 1987, Key Operating has operated wells on the
Richardson tract pursuant to an oil and gas lease. 10
“Houston, We May Have a Problem!” — Surface Owner Who Put up
“Roadblock” to Oil Driller’s Use of Property to Service Wells in a Pooled Unit
Arrives at Texas Supreme Court
The Curbo Tract and the Road
In 1994, Key Operating obtained an oil and gas lease on the Rosenbaum–Curbo tract (the
“Rosenbaum–Curbo Lease”) from Randy Boatright. 11 After acquiring the Rosenbaum–Curbo
Lease, Key Operating built a road across the Curbo tract; 12 the Curbo tract is a subpart of
the Rosenbaum–Curbo tract. 13 Since 1994, Key Operating has used the road to operate
wells located on the Curbo and Richardson tracts. 14
When the well on the Curbo tract ceased production, the Rosenbaum–Curbo Lease
terminated. 15 Key Operating’s owners, brothers Thomas and Kenneth Key, then acquired
Randy Boatright’s one-sixteenth interest in the Curbo tract mineral estate. 16 The Key
brothers then leased their mineral interest in the Curbo tract to Key Operating.17 The lease
authorized pooling. 18
Key Operating Pools its Mineral Interests
In 2000, Key Operating created a 40–acre pooled unit by pooling its mineral leasehold
interests in the Richardson and Curbo tracts.19 The pooled unit is comprised of 30 acres
from the Richardson tract and 10 acres from the Curbo tract. 20 Key Operating produces from
the pooled unit via wells located on the Richardson tract, which it accesses by using the road
across the Curbo tract. 21
The Hegars Purchase the Curbo Tract
In 2002, the Hegars purchased the surface estate and a one-fourth mineral interest in the
Curbo tract. 22 The Hegars built a new house and used part of the road as a driveway to
access their home. 23 The Hegars knew when they bought the property that it was subject to
oil and gas leases and that Key Operating used the road to service its wells on the adjoining
Richardson tract. 24 The Hegars tolerated Key Operating’s use of the road until Key
Operating drilled a new well on the Richardson tract that increased its use of the road.25
What Happened at Trial?
The Hegars sued Key Operating for trespass and sought a permanent injunction against Key
Operating’s continued use of the road.26 After a bench trial, a judge issued an injunction
against Key Operating using the road.27 Key Operating appealed, and in October 2011, a
Court of Appeals in Houston initially reversed the trial court’s judgment and rendered
judgment for Key Operating. 28 The Hegars filed a motion for rehearing, however, and the
court of appeals withdrew its opinion and issued a new decision affirming the trial court’s
judgment for the Hegars.29
The Houston Court of Appeals’ Decision
The crux of the court of appeals’ opinion lies in its handling of the Hegars’ argument that Key
Operating’s use of the surface estate is limited to those rights that existed when the Boatright
mineral estate was first severed from the surface estate. That event occurred before the
Hegars purchased the Curbo tract and before the Key brothers leased their mineral interests
in the Curbo tract to Key Operating with the pooling clause. 30
2
“Houston, We May Have a Problem!” — Surface Owner Who Put up
“Roadblock” to Oil Driller’s Use of Property to Service Wells in a Pooled Unit
Arrives at Texas Supreme Court
The court reasoned that “[i]f the Key brothers’ lease, which authorizes Key Operating to pool
the Curbo tract, had been executed before or at the time the mineral and surface estates
were severed, this lease would have been part of the Hegars’ chain of title and the Hegars
would have taken their title to the surface estate subject to the lease…” 31 The court opined
further that “in the absence of a pooling or similar agreement to which the Hegars …
consented or to which they or their title are otherwise subject, Key Operating has no right to
use the roadway across the Hegars’ land [i.e., the Curbo tract] to produce oil exclusively from
the Richardson tract.” 32
According to the court of appeals, the central issue was “whether Key Operating can use the
road in a manner that is indivisible and reasonably necessary for both the Curbo and the
Richardson mineral estates.” 33 The court of appeals concluded “… that Key Operating has
the same implied easement for use of the Hegars’ surface estate that existed when it
became a lessee of the Curbo tract’s mineral estate: ‘the Hegars may not interfere with Key
Operating’s right to use the servient estate for the purposes of the easement—i.e., for the
purpose of exploring and producing oil from the Curbo tract.’” 34 The appellate court held that
“… subject to the accommodation doctrine, Key Operating’s common law surface easement
gives it the right to use the road on the Curbo tract to produce oil from the Richardson–Curbo
pool so long as that production includes production from the Curbo tract.” 35
Arguments Presented to the Texas Supreme Court
In the Texas Supreme Court, Key Operating argues that the court of appeals erred in
applying the “accommodation doctrine”36 because it was neither raised nor proved by the
Hegars. 37 Key Operating argues further that the Hegars had notice in their chain of title that
the mineral estate on the Curbo tract had been conveyed to Boatright. Thus, the Hegars
purchased the surface estate subject to all of the rights conveyed to Boatright who, in turn,
could convey all those rights to his successors in interest, namely, the Key brothers and Key
Operating. 38 Finally, Key Operating contends that there are competing rights of use of the
surface estate and that the Hegars bore the burden of establishing a greater right of use but
failed to do so.39 In particular, Key Operating asserts that the Hegars failed to introduce the
necessary evidence (i.e., the severing document to Boatright) to determine whether the
pooling rights of Key Operating had been circumscribed; therefore, the Hegars’ trespass
claim must fail. 40
In response, the Hegars contend that the court of appeals did not base its decision on the
accommodation doctrine but instead relied on certain determinative findings of fact, including
the key finding that no minerals were being extracted from beneath the Curbo tract by wells
located on an adjacent tract. 41
The Hegars argue further that the Key brothers (i.e., the prior owners of the mineral interests
now owned by Key Operating) never acquired, owned or leased any portion of the surface
estate, and therefore, it “cannot burden an estate that they have never owned any part of.” 42
Finally, the Hegars allege that Key Operating cannot rely on its absence of the severing
document argument because Key Operating raised this argument for the first time in its
petition for review with the Texas Supreme Court. 43
The Texas Oil & Gas Association (“TXOGA”) filed an Amicus Brief in the Texas Supreme
Court arguing that the court of appeals’ opinion is fundamentally flawed in its treatment of the
3
“Houston, We May Have a Problem!” — Surface Owner Who Put up
“Roadblock” to Oil Driller’s Use of Property to Service Wells in a Pooled Unit
Arrives at Texas Supreme Court
right of mineral lessees to access wells via surface estates in pooled units. 44 The TXOGA
argues that the court of appeals’ requirement that a lessee must prove with “geologic
certainty” that the well is draining minerals from the beneath the acreage it wishes to use to
access the well in a pooled unit is not only inconsistent with the established body of oil and
gas law in Texas, but would also cause uncertainty in the industry, considerable litigation and
significant expense to mineral lessees producing from pooled units. 45
The Road Ahead
The Texas Supreme Court is expected to issue an opinion in a few months. While it is
difficult to predict how the Court will rule, a favorable ruling for the Hegars could have a
significant impact on lessees across the state. Such a ruling could embolden landowners in
pooled units to more frequently challenge the access rights of lessee-operators and require
them to provide evidence of actual production from beneath the landowners’ properties. This
increased level of risk for lessee-operators may lead to an overall increase in operation
costs, making it economically unfeasible for some lessee-operators to maintain operations in
certain pooled units. Other lessee-operators may try to pass the cost increases along to
lessors in the form of lower royalty payments.
Bottom line, the Texas Supreme Court’s ruling could have broad implications for lessees and
lessors of mineral interests, surface owners and the oil and gas industry as a whole. Oil and
gas industry participants should therefore closely monitor this case.46
Authors:
John F. Sullivan III
john.sullivan@klgates.com
713.815.7330
George A. Bibikos
george.bibikos@klgates.com
717.231.4577
Cleve J. Glenn
cleve.glenn@klgates.com
713.815.7327
Bryan D. Rohm
bryan.rohm@klgates.com
412.355.8682
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4
“Houston, We May Have a Problem!” — Surface Owner Who Put up
“Roadblock” to Oil Driller’s Use of Property to Service Wells in a Pooled Unit
Arrives at Texas Supreme Court
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1
See http://www.search.txcourts.gov/Case.aspx?cn=13-0156
Pooling involves the bringing together of small tracts sufficient for the granting of a well permit under applicable spacing
rules and is important in the prevention of drilling unnecessary and uneconomic wells which result in physical and
economic waste. See Patrick H. Martin & Bruce M. Kramer, Williams & Meyers, Oil and Gas Law, 780 (15th ed. 2012).
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. See Southeastern Pipe Line Co., Inc. v. Tichacek, 997 S.W.2d 166,
170 (Tex. 1999). A well located in a pooled unit is deemed to be a well on each pooled tract, and production from the unit
well is deemed to have taken place on all pooled leases.2 See id.
3
Key Operating & Equipment, Inc. v. Hegar, 403 S.W. 3d 318 (Tex. App.—Houston [1st Dist.] 2013).
4
See Brief of Amicus Curiae of Texas Oil & Gas Association, Key Operating Equipment, Inc. v. Will Hegar and
Loree Hegar, Case No. 13-0156, at p. 2-5 (November 20, 2013).
5
See http://www.chron.com/jobs/article/Oil-and-gas-industry-looks-bright-for-Lone-Star-5235724.php
6
Id. “In fact, several publications have dubbed the state ‘Saudi Texas,’ referring to Saudi Arabia, which has always been
the oil and gas world giant, but that title is moving closer and closer to Texas.” Id.
7
See Brief of Amicus Curiae of Texas Oil & Gas Association at p.5, fn. 8.
8
See Brief of Amicus Curiae of Texas Oil & Gas Association, at p. 2-5.
9
Key Operating & Equipment, Inc., 403 S.W. 3d at 322–323.
10
Id. at 323.
11
Id.
12
Id.
13
Id.
14
Id.
15
Id.
16
Id.
17
Id.
18
Id.
19
Id.
20
Id.
21
Id.
22
Id.
23
Id.
24
Id.
25
Id.
26
Id. Will Hegar testified, “We’re trying to raise a family and we can’t do it with a highway going through our property.” Id.
at 323.
27
Key Operating & Equipment, Inc., 403 S.W. 3d at 324.
28
Id. at 322.
29
Id.
30
Id. at 325.
31
Id. at 326.
32
Id. at 336.
33
Id. at 331–332.
34
Id. at 332 (emphasis added).
35
Id. at 327 (emphasis added).
36
Under the accommodation doctrine, when a mineral estate lessee’s intended use of the surface estate would preclude
or impair an existing use of the surface by the surface owner, the rules of reasonable usage require the mineral estate
owner to adopt an alternative means of exploration or production if such an alternative is available under established
industry practices. See Lesley v. Veterans Land Bd. of State, 352 S.W. 3d 479, 492 & n. 79 (Tex. 2011); Tarrant Cnty.
Water Control, 854 S.W. 2d at 911; Getty Oil Co. v. Jones, 470 S.W. 2d 618, 621 (Tex. 1971).
37
Petition for Review, Key Operating & Equipment, Inc., v. Will Hegar and Loree Hegar, Case No. 13-0156, at p. 5-7
(Tex. March 25, 2013).
38
Id., at p. 8-12.
39
Id., at p. 16.
2
5
“Houston, We May Have a Problem!” — Surface Owner Who Put up
“Roadblock” to Oil Driller’s Use of Property to Service Wells in a Pooled Unit
Arrives at Texas Supreme Court
40
Id., at p. 16.
Response to Petition for Review, Key Operating & Equipment, Inc., v. Will Hegar and Loree Hegar, Case No. 13-0156,
at p. 8 (Tex. May 13, 2013) (emphasis added).
42
Id., at p. 11.
43
Id., at p. 5.
44
Brief of Amicus Curiae Texas Oil & Gas Association, at p. 1-6
45
Id. “This court has never adopted the novel rule announced in the court’s Opinion, and, as the preeminent authority in
oil and gas law, both in Texas and beyond our borders, this Court should not permit to stand uncorrected any opinion that
so egregiously misstates and misconstrues basic oil and gas principles, including the rule of capture and the laws of
pooling, particularly a holding so incompatible with established Texas commercial oil and gas practices.” Id. at 5 (citing,
Ernest E. Smith, Implications of a Fiduciary Standard of Conduct for the Holder of Executive Right, 64 Tex. L. Rev. 371,
375 (1985)).
46
In light of the court of appeals’ opinion and the uncertainty of how the Texas Supreme Court will rule, it might even be
prudent for some lessees to review their leases and well locations in pooled units and take appropriate steps to ensure
that they will still have access to wells if the Texas Supreme Court affirms the court of appeals’ decision.
41
6