OIL, GAS, WIND, AND AGRICULTURE: CAN’T WE ALL JUST GET ALONG?
NATIONAL FARM BUSINESS MANAGEMENT CONFERENCE
JUNE 11, 2013 – OVERLAND PARK, KANSAS
Shannon L. Ferrell, J.D.
shannon.l.ferrell@okstate.edu
Assistant Professor of Agricultural Law,
Oklahoma State University Department of Agricultural Economics
Table of Contents
Introduction ............................................................................................................................... 2
Oil and Gas Issues for Agricultural Landowners ...................................................................... 2
Surface Use Damages............................................................................................................ 2
Calculating Damage Amounts ........................................................................................... 3
Surface Use Agreements ................................................................................................... 3
Seismic Exploration........................................................................................................... 4
Water Use .............................................................................................................................. 5
Fluid (Mud) Application to Agricultural Lands .................................................................... 5
The Importance of Before and After Pictures ....................................................................... 7
Landlord-Tenant Relations and Petroleum Development ..................................................... 7
Wind Energy Issues for Agricultural Landowners ................................................................... 7
Location Considerations for Wind Energy Projects .............................................................. 8
Wind Energy Agreements ................................................................................................... 10
Structure of Wind Energy Agreements ........................................................................... 10
Wind Energy Impacts to Agricultural Uses ..................................................................... 12
Duration of Wind Energy Agreements ............................................................................ 13
Landowner Obligations under Wind Energy Agreements .............................................. 14
Payments for Wind Energy Development ....................................................................... 15
Termination of the Wind Energy Project ........................................................................ 17
Financing Legal Review of Wind Energy Agreements ................................................... 18
Developing Petroleum, Wind, and Agricultural Resources Together .................................... 18
Oklahoma’s Exploration Rights Act of 2011 ...................................................................... 18
The Oklahoma Surface Damage Act’s Role in Wind and Petroleum Development ......... 19
Balancing the Interests: The Osage Nation Case ................................................................ 20
Cooperative Development and the Role of the Surface Owner .......................................... 22
Conclusion .............................................................................................................................. 23
Introduction
The last decade brought tremendous changes in the U.S. energy industry with the explosive
growth of oil, natural gas, and wind development. Much has been written about the economic
and environmental effects of this development. Often overlooked, though, are the impacts of
such growth on our agricultural lands. Farm owners frequently find themselves taking on a
number of roles with the energy industry, including resource owner, contract negotiator, and
mediator between other parties who also hold interests in the property.
While agriculture can draw on lessons learned from previous energy booms, the most recent
round of activity has also created newer issues requiring new solutions. This is particularly true
in the case of new energy technologies such as the combination of horizontal drilling and
hydraulic fracturing, the new era of utility-scale wind energy production, and the concurrent use
of agricultural property for both petroleum and wind energy development.
This paper will present some of the basic issues faced by agricultural landowners in energy
development. The discussion will begin with various issues raised by petroleum development,
followed by those associated with wind development. Finally, the paper will examine the
interaction of wind and petroleum resources and how the two can be developed cooperatively.
Oil and Gas Issues for Agricultural Landowners
Directional drilling (the predecessor to today’s horizontal drilling technology) and hydraulic
fracturing have been used by the petroleum industry for decades. However, recent advances and
refinements to these technologies made a number of geological formations – such as tight sands
and shales – economically viable sources of oil and natural gas. This shift had the effect of
unlocking vast domestic petroleum resources. As a result, U.S. production of oil and natural gas
surged in recent years. Although some of this production has taken place in urban spaces,
bringing about an entirely different set of issues, the vast majority of exploration and production
activities occur in rural areas, affecting both crop and livestock production activities. Since
multivolume treatises could be (and have been) written about the issues surrounding the
negotiation of oil and gas leases themselves, this discussion will instead focus on issues
surrounding the use of the surface for both agricultural and petroleum activities.
Surface Use Damages
Under the common law, a surface owner was owed no damages for the use of the surface by
an oil and gas developer unless the developer caused “unreasonable” damages to the surface. Of
course, this begged the question of what constituted “reasonable” damages to the surface.
Answering that question frequently involved litigation between the landowner and developer,
causing significant expense and delay to both parties. In some cases, this led to hostile and
sometimes violent confrontations between the two when drilling crews would arrive at a
property. To ease these tensions and to harmonize, at least in some measure, the differing uses
of the property, a number of states have enacted “surface damage acts” or similar legislation.
Additionally, many acts also require the developer and landowner to enter into a surface use
agreement or contract specifying the restrictions that will apply to the use of the property and the
compensation that will be paid to the landowner for the use of the property. If such an
agreement is required, landowners should use caution and diligence in negotiating the agreement.
Even if such an agreement is not required, landowners should seek to negotiate terms such as
these with the developer. In some cases, developers may be willing to negotiate such agreements
in the interest of facilitating development and building goodwill with other landowners.
Calculating Damage Amounts
Both developers and landowners frequently focus on the amount of damages to be paid for
petroleum development. Where statutes or case law prescribe a method of defining such
payments, that method should be used. If such a method is not prescribed, though, landowners
and developers are left to develop one on their own.1
One of the first aspects for consideration is the length of the property’s use. In some cases,
the property may be used for a wellpad (an area where drilling equipment and materials are
stored, assembled, and used during the drilling of the well), and once the well is completed, the
pad is no longer necessary. In such cases, some or all of the wellpad area may be reclaimed and
returned to agricultural use. In other cases, the wellpad may be a permanent fixture and used for
petroleum storage, natural gas compressors, or other equipment. In situations where some or all
of the property may be reclaimed and returned to its previous condition, the payment may be
more in the character of a “rent” (and as such, the landowner may have the option of a one-time,
upfront payment or periodic payments) but if the property is to be permanently removed from
agricultural use, the payment should represent an amount for a de facto “purchase” of the
property.
Beyond the length of property use, a host of other factors come into play. The type of land to
be occupied is a significant element for consideration. Use of highly productive cropland may
require more compensation than low-productivity rangeland or barren properties. Similarly, the
location of the drilling operation on the property may prove important since development near
occupied structures, barns, or water resources may pose nuisances or increased risks of injury
and environmental damage that could dictate increased landowner compensation. Development
locations creating an irregular shape of the tract that may reduce or deny access to portions of the
property also impact compensation values.
Finally, if development will destroy native grasses, timber, or other vegetation that will be
highly difficult to re-establish, a “purchase” may be necessary to fairly compensate the
landowner. Alternatively, if such re-establishment is possible, a requirement for the developer to
provide such redevelopment may be an alternative.
As a final note, the form of compensation negotiated by the landowner may have an impact
on the value of such compensation. Though no formal research on the topic has been found,
anecdotal evidence suggests developers may be willing to provide more value in the form of inkind materials or services than if they simply “cut a check.” Examples have included
developers’ construction of roads, terraces, ponds, and other earthwork using on-site equipment,
the provision of gravel for farm roads, and providing oilfield pipe as construction materials for
fences and other structures. Many landowners have reported receiving more value in these
arrangements than if they had requested cash compensation.
Surface Use Agreements
As mentioned above, a surface use agreement between the developer and landowner may be
necessary in addition to the landowner compensation. Different from a simple compensation
agreement, the surface use agreement sets terms and conditions for the use of the property
through both the development (well construction) and operation/maintenance (long-term
extraction, processing, and transport, if on-site) phases of the activity.
Just as case law and/or statutory language can define compensation amounts, such legal
sources can also set restrictions for developers’ use of property. At the same time, it is important
to note such laws may leave significant gaps. Thus, even if such restrictions are part of the law
in a landowner’s state (and especially if they are not), a well-drafted surface use agreement is
crucial to successfully balancing the conflicting uses of the property. Since the “right” terms for
a surface use agreement will need to be a highly individualized determination based on each
property and its uses, the following represents only a sample of terms for consideration:
1)
Require the developer to consult with the landowner prior to locating any structures or
equipment on the property. Developers may be reluctant to give the landowner
complete discretion over the siting of such elements, but explicitly requiring
consultation at least affords the landowner to make his or her siting concerns known.
2)
Specify setbacks from sensitive areas such as homes, barns, water sources, and other
areas of priority. Some states specify such setbacks in statutes or regulations, but
many states do not. Further, private parties can always negotiate larger setbacks than
required by statute. By the same token, landowners should use caution not to waive
any setback requirements established by state or local law. Attach a map of the
property with the setbacks highlighted as an exhibit or appendix to the agreement to
make compliance with setbacks as easy as possible for the developer. Also include
other helpful elements on the map such as agreed points of access.
3)
Establish the type of fencing to be used on the property including specifications for
cattle guards and/or gates, and damages for any fence cuts not immediately repaired.
4)
Include a requirement for all subsurface structures and equipment (such as pipelines) to
be buried at a defined depth (clearly define such a depth in inches or feet, and make
sure it is sufficient to be below any depth of agricultural activity such as cultivation or
drainage systems). Further, include a requirement to maintain such depths; erosion has
a way of making such buried systems come to the surface.
5)
Require “double-ditching” wherein topsoil is separated from subsoils as trenches are
constructed; subsoils are then replaced first and topsoils second, thus largely
preserving the soil profile.
6)
Define in advance the damages to be paid for damage or loss of crops and the injury or
death of livestock. For crops, this might be defined in terms of a set price per acre of
cropland damaged; for livestock it may be a defined price per type of animal
(commercial animal, breeding stock, purebred stock, etc.). The damage term might
take into account historic average yields for a crop or set an assumed yield, and may
use historic price data or objectively-determinable market data (such as the nearby
futures price for the commodity). In the case of injured livestock, actual costs of
veterinary care coupled with an adjustment for productivity (i.e. weight gain foregone)
is a frequent measure. For death losses, a pre-determined price or local auction price
(though prices for purebred animals may require a different methodology) is often
used, combined with the costs of disposal and necropsy, if needed.
Seismic Exploration
In many cases, oil and gas developers explore for their resources using seismic methods.
This involves the production of vibrations and the recording of those vibrations’ interaction with
the various geological formations underground to locate areas likely to contain petroleum
deposits. These vibrations are produced either by truck-mounted hydraulic rams (“thumper
trucks”) or by the detonation of explosives in bored holes.
As with production operations, a number of states regulate seismic exploration activities
while others do not. Also, as previously discussed, in both types of regulatory environments it is
important for the landowner to negotiate an exploration agreement to protect his or her interests.
Many of the elements of a seismic exploration agreement (sometimes called a “seismic permit”)
are similar to surface use agreements. Provisions for crop or pasture damages take on an
increased importance, though, as seismic exploration frequently involves a number of vehicles
traversing the property potentially causing tracking, soil compaction, and vegetation damage.
The landowner may also want to define specific setbacks from sensitive areas for vibrationgenerating activities, especially for the use of explosives. Special care should be taken to protect
groundwater wells, as effects on the quality and/or quantity of flow from such wells are
frequently the subject of disputes arising out of seismic exploration activities.
Water Use
The amount of water used in petroleum extraction operations has received a great deal of
attention, particularly in the context of hydraulic fracturing operations. The amount of water
used to hydraulically fracture a well varies greatly from formation to formation, and there is
significant debate in scientific literature even as to the typical amount used within a formation.
Nevertheless, even the most conservative estimates indicate a hydraulically fractured well will
use millions of gallons of water.2 This can have significant impacts on agricultural water use,
particularly in drought-stricken portions of the United States.
Again, states vary widely in the legal systems used to allocate water, and even more widely
in the way those systems allocate water to agricultural and petroleum development uses. In some
jurisdictions, landowners may be compelled to yield water resources to petroleum development
use, while in others, the parties are free to negotiate such use with the landowner hold in the
ability to sell surface or groundwater to the developer.
Where the landowner has the freedom to negotiate his or her provision of water to the
developer, the landowner must be cautious to address several issues. He or she may wish to
restrict the uses to which the water may be applied, such as drilling fluids (also called “drilling
mud”), hydraulic fracturing, or “water flooding” (using water to force petroleum resources
toward the wellbore). The landowner may also wish to restrict the use of the water to wells
located on the property. Depending on the water source (groundwater or stream water),
restricting the timing of withdrawals so as not to interfere with agricultural or recreational uses
may also be important.
Fluid (Mud) Application to Agricultural Lands
Petroleum production yields a number of waste materials. Among these may be spent
drilling fluids, sometimes called drilling “mud.” Far from being simple water and soil, drilling
mud is a complex blend of materials used to flush drill cuttings from the well, cool the drill bit,
and to maintain pressure in the wellbore. Drilling mud may use water or a petroleum-based
substance (frequently diesel) as the solvent. Although mud is commonly recycled, it will
eventually reach the end of its useful life and must be discarded. Petroleum production may also
produce salt water drawn from the formations where it is found mixed with the oil and/or natural
gas.
Developers may turn to agricultural landowners as one disposal option for these materials,
applying the materials to agricultural lands so natural processes will break down the materials.
Landowners may focus on the amounts offered to accept these fluids without regard for other
potential impacts. Currently, little information regarding the long-term agronomic and
environmental effects of drilling fluid application exists, although such research is now
underway. In the absence of more information on these impacts, and since many states are
currently developing legal rules to govern such disposal, it is incumbent upon landowners to
protect themselves with strong written application agreements. Following are several items
landowners should consider in such agreements:
1)
When negotiating with an application company, landowners should ask for the
company’s full, legal name. This is important because if something goes wrong, the
proper party must be held accountable, which can be difficult when several contractors
are involved. If the name on the application truck does not match the name on the
agreement, the landowner should not allow application without documentation.
2)
State regulations may require fluids to be tested for only a limited number of
parameters. Landowners should specify what waste analyses they want to receive, and
should not accept fluid application without those analyses in advance. If landowners
have concerns about other substances, such as heavy metals or naturally occurring
radioactive materials (NORM), testing for such materials must be specified in the
agreement.
3)
Include a map of the application area, including “no fluid zones.” As discussed above
with development and exploration, landowners might have points they want off-limits
for application, such as a setback distance from occupied buildings, barns, wildlife
habitat areas, etc. The agreement should include a map that, again, makes it as easy as
possible for the applicator to stay away from these areas.
4)
Landowners may be able to minimize conflicts if things go wrong by agreeing in
advance as to what will be paid if something happens. See the discussion above for
how to craft agreed provisions for crop and livestock damages.
5)
Parties should define what will constitute a “material breach” of the agreement.
“Material breach” is defined as “a substantial breach of contract, usually excusing the
aggrieved party from further performance and affording the right to sue for damages.”3
As with all agreements, but especially with fluid application agreements, it may be
important to define those events that will justify the immediate termination of the
agreement.
6)
The agreement should include an indemnification clause protecting the landowner in
the event of litigation brought by another party. What if, for some reason, a
neighboring landowner’s property is damaged as a result of the application of mud to
the property? Such a clause should not only require the payment of any damages
charged to the landowner, but also the payment of any legal defense costs incurred by
the landowner as a result of the litigation.
7)
The agreement should determine how payment will be made and its accuracy verified.
First, landowners should focus on all the potential impacts, and then talk about
compensation. Agreements should specify how much the landowner will be paid,
when they will be paid, and their options if they are not paid. Landowners should also
avoid language that could mean they are waiving their rights to any other damages or
amounts by accepting the payment.
Beyond the application agreement, landowners should also be aware of fluid application
effects on their insured crops. In almost all circumstances, the application of drilling fluid to an
insured crop will void that crop’s coverage. Landowners should consult their crop insurance
provider before entering into a fluid agreement. They should also be aware application of fluids
to CRP lands will likely constitute a violation of their CRP agreement.
The Importance of Before and After Pictures
Even with carefully drafted agreements and statutory protections, conflicts frequently arise
when development does not go as planned or when accidents cause damage to property. The
ability of the landowner to prove the cause, nature and extent of the damages is crucial to his or
her success in recovering compensation for such damages. In turn, that ability is linked directly
to the ability of the landowner to document the condition of the property both before and after
the development activity in an objectively verifiable way.
A sound farm record-keeping system is the first step toward that ability. Records of crop and
pasture productivity on a parcel-by-parcel basis can provide historic yield information and a
basis for projecting losses based on forgone future production. Livestock production records can
provide analogous support for livestock impacts. A routine of soil sampling, particularly in areas
around the wellpad can provide important baseline data for environmental conditions, as can
something as simple as time-stamped photographs and NRCS aerial photos. By the same token,
periodic flow tests and water quality sampling of wells and streams can provide critical data for
water impacts. Consistency in farm records and use of state-licensed laboratories accompanied
by proper chain-of-custody procedures for soil and water samples will be crucial in the
admissibility of such evidence should the matter proceed to litigation.
Landlord-Tenant Relations and Petroleum Development
The importance of addressing prospective oil and gas development and all associated
activities in an agricultural lease cannot be overstated. Stories abound in which a landowner is
offered substantial compensation for petroleum exploration, production, or fluid disposal and
accepts without consulting the tenant. In some states, this could be a material breach of the lease
agreement or even trespass, entitling the tenant to void the lease and/or seek damages from the
landlord. Beyond this, though, failing to include the tenant in decisions regarding petroleum
activities is not the way to build goodwill and attract quality tenants to the property.
Agricultural land leases should include provisions for how the landowner will work
cooperatively with the tenant to mitigate the impacts of petroleum development on the property.
This can include how to apportion surface damage payments, how to include the tenant in
consultation arrangements with the developer, and whether fluid application will be allowed on
the property.
Wind Energy Issues for Agricultural Landowners
As with the petroleum industry, the U.S. wind energy industry has seen explosive growth
over the past decade, with national installed capacity growing from 2,377 megawatts in 2001 to
43,461 megawatts at the end of 2011.4 In 2009 the greatest year for growth occurred, with 9,645
megawatts of capacity installed in that year alone.5 There are 8,400 megawatts of capacity under
construction at the time of this writing.6 With this immense industry growth, it becomes
increasingly important for agricultural landowner to understand the potential impacts of wind
energy development and to evaluate potential wind energy development agreements.
Location Considerations for Wind Energy Projects
Wind speeds have a tremendous impact on how much energy a wind turbine can produce.
This means one of the most, if not the most important factor developers consider in determining
where to place a wind project is where wind speeds will be highest.
The first thing a developer examines is a wind resource map for the area to see areas where a
good wind resource can be expected. Next, the developer will see if any large utility
transmission lines are available. Transmission lines large enough to carry the power generated
by a utility-scale wind project are very expensive. Even if an area has a tremendous wind
resource and can produce vast amounts of electrical energy, the project may not be profitable if it
is too far from utility lines – the added capital cost in building the lines will erase the added
profits. Thus, developers are always trying to balance a location’s wind resource with its access
to transmission.
Consider the following scenario: Assume a developer has determined an area has a good
wind resource, and this area is close enough to transmission to be profitable. What now? The
next step will be for the developer to create a project layout. Here, the developer faces a
dilemma. He wants to place as many turbines as possible in a given area to maximize the power
(and thus revenues) generated. However, the developer also knows if he places turbines too
close together, the turbulence generated will cause neighboring turbines to interfere with each
other and actually reduce the amount of power generated. For example, research has shown to
reduce turbulence losses to 10 percent, turbines must be placed no closer than five rotor
diameters apart in the crosswind direction, and no closer than eight to ten rotor diameters apart in
the prevailing wind direction.7 The diagrams below illustrate this spacing. For example, if a
turbine’s blades are 115 feet long, then the “rotor diameter” is 115 x 2, or 230 feet. Thus, if the
prevailing winds were north and south, the turbines would be spaced no closer than 1,150 feet
going east and west, and no closer than 1,840 feet going north and south.
Figure 1 – Diagram of turbine spacing in crosswind wind direction
Figure 2 – Diagram of wind turbine spacing in direction of prevailing wind (i.e. downwind).
What does this mean for landowners? There are two implications. First, there is a limit to
how many turbines can be placed on a parcel of land. The American Wind Energy Association
estimates the total “land use” per megawatt of wind turbine capacity is 60 acres, with three acres
physically occupied by the project (this is land taken up by the turbine base and pad, roads, and
other systems), and the remaining 57 acres used only as an unobstructed clear area to preserve
wind flow to the turbine array.8
Fig. 3 – Aerial photo of a quarter-section of property in Woodward County, Oklahoma, with
four turbines (note shadows). Photo taken from Google Earth.
However, turbulence does not only come from other turbines. This interference can come
from any object near the turbine, which is why developers do not like to place turbines next to
tall objects that can generate turbulence and interfere with the turbine’s optimal performance.
The principals of aerodynamics tell us an object will cause turbulence upward in the air for a
height twice that of the object. For example, if we have an oil derrick that is 140 feet tall, the
upward turbulence caused by the derrick can be 280 feet into the air. Aerodynamics also tells us
an object can cause turbulence downwind for a distance up to twenty times its height. Therefore,
the same oil derrick could cause turbulence for 2,800 feet downwind – over half a mile. Note,
the further away from the turbulence-causing object, the closer the turbulence is to the ground
and the less significant the interference becomes. The figure below shows these patterns:
Figure 4 – Example of turbulence effect distances
Minimizing turbulence is the reason many agreements contain language requiring the
landowner to get permission either from the developer before he or she constructs any new
structures on the property, or restricting any new structures above a certain height. Similarly, the
lease might require the landowner to restrict oil and gas development on the property, as
discussed in the last section of this paper. For now, though, it is important to note oil derricks
are not permanent; they are only in place to drill a well, and then are removed. Property can be
developed for both wind and petroleum with little interference between the two, so long as both
developers work cooperatively.
Wind Energy Agreements
For the purposes of this section, “wind energy agreement” will refer to the document or
documents working together to govern the relationship between the landowner and the party
constructing and operating the wind power project. Before beginning this discussion, it is
important to note a wind energy agreement is an important, complex, and long-lived legal
agreement that can have significant economic impacts. Landowners should strongly consider
contacting an attorney with experience in negotiating wind energy agreements for assistance
before executing such a document.
Structure of Wind Energy Agreements
While an oil and gas lease may often be a two-page, “fill-in-the-blank” document, a wind
energy agreement frequently exceeds thirty pages. Landowners are often unaware of the drastic
difference between the two agreements. First, the oil and gas lease comes with a century of case
law, statutes, regulations, and industry custom “built” into it, while the wind energy agreement is
often an entirely new creation of the wind energy developer. Second, while the primary duty for
a mineral interest owner is often “just stay out of the way,” the relationship between wind power
developer and landowner is much more complex and must be (or at least, should be) spelled out
in detail within the agreement. The typical financing arrangements for an oil and gas well differ
starkly from those for a wind power project, and a great deal of the language and terms contained
in the wind energy agreement may be dictated by lenders or investors rather than the developer
itself, complicating the negotiation process.
As they look at their wind energy agreement, landowners must understand this one document
may function like an option, easement, and lease simultaneously. As each of these tools can
have very different impacts on the their property interests, they must take careful note of the
potential interactions among them all.
Many wind energy agreements commence with an option contract between the developer and
the landowner in which the landowner grants an exclusive right to the developer to investigate
the suitability of the project for development, and if the developer should so choose, to enter into
a full development contract and commence project construction and operation. During this
option period, the developer will likely deploy meteorological data towers to verify the wind
resource, conduct environmental and wildlife impact studies, and analyze construction
suitability. Option periods often vary widely, in some cases are as short as one or two years, and
extending to ten years in other cases. Some states have limited option periods by statute.9
Another feature often included in wind energy agreements is a confidentiality agreement
covering the site data developed during the option period and, in many cases, most of the terms
of the overall agreement. Many landowners are unfamiliar with confidentiality agreements.
Landowners must understand by signing an agreement with a confidentiality clause (or a
separate confidentiality agreement), they will be bound by its terms and may not be able to
discuss the wind energy agreement with others whose advice they may need. Confidentiality
agreements can also restrict landowners’ ability to negotiate together.
Some developers take an approach of negotiating the agreement in its entirety before
execution of the option, while other developers provide only the option agreement with a term
sheet for the subsequent, full agreement with the details to be negotiated if and when the option
is triggered. The trend appears to be moving toward negotiating the agreement in its entirety
before the option period begins.
If the developer’s investigations indicate the project will indeed work, the developer will then
trigger the option and enact the full agreement. In many wind energy agreements, the assurances
needed by the developer to enable project construction and operation may take the form of a
collection of easements and/or a general lease of the affected property. 10 A brief summary of
some of the typical terms (be they presented as easements, covenants, or contractual lease terms)
follows:
Table 1 – Common Landowner Terms
Term
Description
Access
Developer has right to access the property and construct roads for evaluation of site
and construction, operation, and maintenance of equipment.
Construction
Developer may use portion of surface for access to construction equipment and
“lay-down” areas.
Transmission
Allows for construction of underground and above-ground transmission lines,
construction and operation of substations.
Non-obstruction
Landowner will not construct any improvements that could interfere with airflow
patterns on property, nor permit obstructions to occur.
Overhang
Landowner acknowledges that turbine rotor discs may overhand property lines or
improvements on the property.
Noise
Landowner acknowledges that certain noise levels may be caused by the project
(may sometimes provide for a decibel limit and a specified radius from turbines).
Most of the wind energy agreement will likely revolve around securing these terms,
establishing the compensation package for the landowner, and defining the other parameters of
the parties’ legal relationship. While hundreds of pages could be written about the issues to be
considered in evaluating a wind energy agreement, this paper will focus on what are arguably the
five most important questions for the landowner to analyze as he or she evaluates the proposed
agreement. These questions are:
1. How will current uses of the property be affected by the project?
2. How long will the agreement last?
3. What are the landowner’s obligations under the agreement?
4. How will the landowner be compensated?
5. What happens when the project ends?
Wind Energy Impacts to Agricultural Uses
Assuming the developer builds and operates the project, the landowner will be “sharing” the
surface of the property with the project. While this should result in a new revenue stream, in all
likelihood the landowner will also want to continue his or her existing uses of the property to the
maximum extent possible, thereby making the wind power project revenues “supplemental”
rather than “replacement” funds.
Generally, a wind power project will only physically occupy three acres of land per
megawatt of turbine capacity.11 While this often leaves much of the property available for crop,
livestock, or recreational uses, inconveniences can be caused by changes to fencing
configurations, fragmentation of crop areas, blockages of irrigation systems, and changes to
drainage patterns. These concerns should be raised during initial contract negotiations to
determine if reasonable accommodations can be reached either to minimize these disruptions or
for additional compensation to mitigate them. This may be in the form of “liquidated damages”
language. This is language providing agreed-to compensation for each event (for example, a
specified dollar amount for each fence breach, each linear foot of terrace repair needed, etc.).
Some states have also proposed guidelines for maintaining the agricultural viability of property
under wind power development, addressing issues such as drainage pattern preservation, soil
disturbance minimization, vegetative cover preservation, and the like.12
Another frequent use of land potentially impacted by wind power development is recreational
leasing, frequently in the form of hunting agreements. In many wind energy agreements, hunting
may be completely prohibited on the affected property during the construction phase to minimize
risk to construction crews. However, wind energy agreements may also contain broad
indemnification language holding the landowner responsible for injuries of project personnel or
damage to project equipment caused by hunting lessees or other assignees of the landowner (for
a discussion of these indemnity issues, see the section below titled “Landowner Obligations under
Wind Energy Agreements”). Landowners should discuss compensation for loss of lease revenues
to the extent such losses are caused by the project.
Aesthetic uses of the property (sometimes called “beauty” or “scenic” uses) and surrounding
property may also be a concern. These may include noises from the turbines, as well as visual
impacts. Noise impacts may be easier to handle in the terms of the agreement, and often come in
the form of a noise easement whereby the landowner stipulates the turbines may cause certain
noise levels (often defined in decibels or “dB”) within a certain range of the turbines. Visual
impacts are far more difficult to address. In the case of Rankin v. FPL Energy, LLC, Texas’s
Eleventh Court of Appeals refused to stop the operation of a wind power project as aesthetics
were not found to be a sufficient basis to award damages based on negligence.13 Several other
cases have also cited the subjectivity of aesthetics claims in suits involving wind power projects
– in other words, “beauty is in the eye of the beholder.”14 Nevertheless, both developers and
landowners should consider possible opposition to projects by neighbors.
The landowner’s participation in governmental programs can also have an impact on the use
of the property for wind energy development. Several USDA programs such as the Conservation
Reserve Program (“CRP”), Environmental Quality Incentives Program (“EQIP”), the Grassland
Reserve Program (“GRP”) and other common programs for landowners require participants to
have multi-year contracts and plans for the use and maintenance of the land under contract.
Constructing wind power equipment on such lands in violation of those contracts or plans could
cause landowners to forfeit future payments, to return of past payments, or even to pay
penalties.15 If the project lands are under any USDA program contracts, the appropriate agencies
should be contacted to discuss integration under the contract plans prior to execution of the wind
energy agreement.16 Landowners should consider negotiating agreement language providing any
loss of revenues from such programs caused by the wind power project should be compensated
by the developer.
Finally, landowners should explicitly reserve the right to use the property for agricultural,
recreational, and other uses. From the landowner’s perspective, such a reservation should be as
broad as possible while still allowing the developer the rights necessary to construct, operate, and
maintain the project. Similarly, landowners should also be careful not to grant away access to
other resources on the property without fair compensation, as many wind energy agreements
offered by developers may contain provisions granting the developer free access to water, rock,
and other materials without any additional payment to the landowner.17
Duration of Wind Energy Agreements
Long lease terms reflect the classic struggle, seen for many years in the oil and gas industry
as well: a resource developer wants to secure access to the resource at a fixed price for as long as
possible, while the landowner would like to continually offer access to the resource back to the
market if a better price may be secured. While leases with 150-year terms may still be offered,
contracts such as these are becoming rare. The general trend seems to be toward shorter periods,
often ranging between 20 and 40 years.18 From the developer’s perspective, a lease period must
be of sufficient length to recapture the project’s costs and return an acceptable profit to investors.
Many wind turbines today have an expected lifespan of approximately 20 years, thus , developers
may be reluctant to agree to a term less than that period.
The effect of these circumstances may lead to long-term leases with renewals solely at the
discretion of the project developer. However, while it may be difficult to get initial terms in
smaller increments, there may be opportunity for negotiating the terms of lease renewals.
Therefore, the first step for the landowner can be to carefully analyze the duration of the
agreement. Some agreements are quite forthright in defining a duration, but others may be
unclear.
If the project developer is unwilling to negotiate the overall length of the agreement, it may
be possible to negotiate a “reopener” term allowing for negotiation of some commercial terms at
renewal periods. It is important such reopeners be tied to the compensation terms of the
agreement to minimize downside risk with a price floor for the landowner if electrical markets
should trend downward at the time of lease renewal. The landowner may also wish to reopen the
entire agreement if the project is to be “repowered” (existing project turbines are removed and
replaced with new larger or more efficient turbines).19
Finally, many landowners may overlook how entering into a wind energy agreement may
impact their estate plans. The length of these agreements makes it quite possible that successors
to the land in question will take the property subject to the agreement. For this reason,
landowners may need to involve those successors in discussions about the agreement as part of
their succession planning efforts.
Landowner Obligations under Wind Energy Agreements
As mentioned above, wind energy agreements differ from oil and gas agreements because
there may be many more on-going duties faced by the landowner under a wind energy
agreement. First among these obligations is likely the non-obstruction term of the agreement
requiring the landowner to avoid (and in some agreements, actively defend against) the creation
of any condition that could interfere with the flow of wind over the surface of the property.
While this may not seem like a significant constraint, studies have shown even relatively low
structures such as houses and barns can cause turbulence downwind of the structure for distances
up to 20 times the structure’s height.20 Depending on the size of the parcel in question, this
principle, or an express set-back provision in the agreement, may effectively block the
construction of any new improvements on the land unless an agreement is in place allowing for
discussion of potential improvements with project engineers. If landowners have any plans for
improvements, such plans should be raised to the attention of the developer as the agreement is
considered. Agreements should also be examined to see if landowners are required to affirmatively
eliminate other obstructions, such as trees, and if the agreement prohibits the leasing of the land
for any other uses, such as cellular towers.
Another significant issue may be the indemnification provisions of the wind energy
agreement. The concept of indemnification itself may be new to many landowners. Adding to
this, indemnification provisions are often the provisions wind energy developers are least willing
to negotiate.21 Indeed, some agreements will effectively hold the landowner liable for any
damages or injuries not the result of negligence or willful misconduct by the developer.
Landowners may also be required to take on greatly increased insurance limits to satisfy these
indemnification obligations.
Landowners should seek a balanced and fair indemnity relationship. For example, if the
project site is under a hunting lease, the landowner and developer may consider a standard
indemnification agreement to be executed by the hunting lessee that provides the lessee will be
responsible for any damages or injuries caused by his or her presence on the property.
Landowners should also consider negotiating indemnity language that explicitly exonerates the
landowner from liability for the actions of trespassers and any other parties not under the direct
control of the landowner. Finally, increases in insurance requirements for the landowner should
be a consideration in compensation negotiations.22
Another potential hazard for landowners may come from legal interests created in the
property by the wind energy agreement. If the land is subject to an agreement with a secured
creditor, such as a mortgage, it is quite likely creation of an interest in the property without the
consent of the secured party could constitute an event of default in the separate agreement. In the
case of some mortgages, this default may make the entire amount owed due and payable
immediately. As a result, creditors’ consent may be needed prior to execution of a wind energy
agreement.23 Conversely, many wind energy agreements often require the landowner to secure
“subordination” agreements from creditors (meaning the other creditors must agree they will not
foreclose on the property if the foreclosure would constructively evict the developer) and may
restrict or prohibit the creation of any new encumbrances on the property. Landowners’ equity
in real property may be a significant source of capital, especially in agriculture, and such
provisions could pose challenges for accessing that equity. At a minimum, landowners should
involve their lenders in the wind energy agreement discussion and work out an arrangement
allowing the landowner to meet lending and liquidity needs, prior to executing the wind energy
agreement.24
Payments for Wind Energy Development
At the core of every wind energy agreement is the issue of compensation, and there are
almost as many different ways to calculate landowner payments as there are landowners.
However, there are a number of measures commonly used across agreements.
When evaluating the payment terms of a lease, one should consider whether the payments
vary by the “phase” of the project. Generally, wind power projects are divided into an “option”
or “pre-construction” phase (during which the project’s viability is evaluated), a “construction
phase” (occurring after the option has been exercised but before commercial production of
energy has commenced), an “operation phase” (during which the project is generating and selling
power), and possibly a “decommissioning” phase (when the project has wound up and is
dismantled). The landowner should be aware of how the project’s phases will affect payments,
and what milestones trigger each phase.
One common factor used as a compensation basis is the acreage involved. While this is often
the denominator for rural land leases, it is helpful to understand acreage held by a landowner
may hold little proportion to the other important metrics of the wind power project, such as the
number of turbines in place on the property or the turbines’ generating capacity. Terrain and
project geometry may mean a smaller landowner may have more turbines than his or her larger
counterparts.
Another frequent factor in calculating landowner payments is the number of turbines in place
on the property. In the past, landowners often received a flat amount per turbine, but the recent
trend seems to be toward a per-turbine payment based on the nameplate capacity of the turbine.25
Shifts in the dynamics of the turbine market and in turbine technology itself have sometimes led
to projects involving multiple turbine designs, capacities, and even manufacturers represented,
and this can lead to differing generating capacities. A capacity-based turbine payment enables
the landowner to capture the “upside” potential of new equipment installations.
Lastly, many agreements now provide for a “royalty”26 payment to the landowner based on
the production of the turbines on his or her property. This element of the landowner payment is
often the most complex to understand, calculate, and verify. While the concept of a payment
based on the electrical production of the project seems fairly simple, there are a number of
variables in play. First, the landowner must understand the basis of the payment, which may be
the megawatt- or kilowatt-hours of power produced, “gross proceeds” from sales of electricity,
“net revenues” from the power sold, etc. It is critical the definition of these terms within the
agreement be analyzed thoroughly. If a royalty is based on “gross proceeds,” do those proceeds
include revenues from the sale of transferable tax credits or renewable energy credits (“RECs”)?
If the payment is based on “net revenues,” what costs are deductible by the developer – and if the
project sells its power on the spot market rather than under a long-term power purchase
agreement (“PPA”), will the landowner be at the mercy of market fluctuations? Market-based
measures may give landowners the opportunity to participate in favorable price swings, but
should be tempered with minimum-payment provisions to secure against downside risk.27
Given a wind power project incurs the vast majority of its costs in its first few years of
development and operation, many leases are now including a royalty “escalator” clause that
increases the royalty percentage at specified intervals. The escalator clause can prove to be a
mutually-beneficial provision for both developer and landowner, allowing for more rapid costrecovery by the developer while allowing the landowner to increase his or her participation in
project profits during later years. Such escalators need to include either an explicit function for
increases (specifying the intervals at which royalties will increase and in what proportion) or be
indexed to an objectively-determinable, publicly available number (ex. the U.S. Bureau of Labor
Statistics Consumer Price Index, U.S. Energy Information Agency wholesale electrical price,
etc.).
While royalty payments often represent the best returns for landowners, they are
accompanied by the need for landowners to audit payments. As many practitioners in Oklahoma
and other oil and gas producing states are well aware, numerous class action suits have been
waged by royalty owners alleging mis-measurement of resources, miscalculation of royalties
due, skewed “market” prices by affiliate transactions, and the like.
In evaluating the wind energy agreement, the landowner must also consider the situation in
which he or she may execute the agreement and the project is built, but the project configuration
does not allow for placement of a turbine on the landowner’s property. In such a situation, some
form of minimum payment to the landowner burdened by the agreement but has not received
turbines should be considered. One means of achieving this is a “pooled,” “community,” or
“project” payment. These payments are made to landowners, based not on the performance of
turbines located on their property, but rather the production of the project as a whole. These
payments may serve a number of functions including compensating landowners whose property
is part of the project but did not receive a turbine, as well as “leveling” the performance among
turbines (where geographic conditions may make some turbines markedly more or less efficient
than neighboring turbines).
Lastly, negotiating a “most favored nation” clause may be possible in some projects. As the
name implies, such a clause enables the landowner to capture the most favorable easement or
lease terms granted to any other landowner within the same project. This can help the landowner
overcome potential oversights in the negotiating process or a lack of information regarding
comparable terms. The problem with such a clause, of course, lies in its verifiability, which is
complicated by the confidentially agreements typically tied to the project. It should also be
noted these clauses can be used against landowners to avoid mass requests for the clause: “I
can’t give you what you are asking for, because if I did, I would have to give it to everyone else
in the project.”
An alternative for landowners is collective negotiation of a lease with their neighbors. This
can increase the landowners’ bargaining power and allows them to spread legal costs amongst
themselves. Some developers even favor these arrangements, as they allow the developer to
secure large areas of land through the negotiation of one agreement, rather than “piecing” a
project together through individual negotiations and risking a checkerboard pattern in the land
under lease.
Termination of the Wind Energy Project
When asked by the author about project termination clauses, one developer stated “Hey, if
we develop your project, we have likely sunk hundreds of millions of dollars into it, so we’re not
going to terminate your agreement on a whim.” While this is a valid argument, landowners must
understand the conditions providing either party the ability to terminate the agreement. Often,
agreements will provide a host of potential causes that can enable the developer to terminate the
agreement. In such case, landowners should require, at a minimum, the immediate payment of
all sums then due to the landowner. Some practitioners have also suggested requiring a
“termination fee” as a function of a historic course-of-payments for the landowner (ex. a
termination fee equal to the past three years of payments to the landowner).28
In virtually every case, the ability of the landowner to terminate the agreement will be
extremely limited, and will likely be based on the non-payment of amounts due the landowner
within a certain timeframe. Further, the landowner will likely be required to provide written
notice of a potential termination event to the developer and provide a specified cure period.
Thus, landowners should be advised to keep sound records of payments and project milestones,
and to provide prompt notice of any potential defaults so as to preserve their rights if termination
is warranted.29
All parties to a wind power agreement must contemplate the project may eventually end,
whether by completion of the operational life of all the equipment, introduction of some new
energy technology, or the dissolution of the developer. A frequent fear of landowners is the
developer will default or dissolve, and the landowner will be left with huge inoperable machines
on his or her property. To that end, many landowners have requested wind energy agreements
contain some form of “decommissioning” language that, at the end of the project, requires the
developer to remove all equipment, restore the land to its original grade, vegetation, and soil
condition, and to remove sub-surface materials to a specified depth. Further, landowners are also
seeking a “performance bond” from the developer, from which funds are to be used to ensure
performance of the decommissioning obligations.
Decommissioning language is not found in all agreements, and frequently must be requested
by the landowner. Further, the posting of a bond or other security in an amount sufficient to
cover the complete costs of a decommissioning project could become cost-prohibitive for some
developers. A compromise offered by some companies is a “salvage value” decommissioning
clause whereby the salvage value of the equipment in a project is evaluated at a specified period
(for example, every five years) relative to the estimated cost of decommissioning activities. If
the salvage value of the equipment falls below the estimated decommissioning costs, bonds are
posted in an amount sufficient to cover the difference.
Minimum requirements for decommissioning for Oklahoma, including requirements to
remove equipment and restore soils and vegetation, are included in the Oklahoma Wind Energy
Development Act at 17 OKLA. STAT. § 160.14. Further, developers are also required by the
Wind Energy Development Act to file a bond to ensure decommissioning is accomplished.30
The Act specifically provides landowners and developers may negotiate decommissioning terms
more stringent than the act.
Financing Legal Review of Wind Energy Agreements
At the risk of stating the obvious, reviewing a highly technical 40-page lease presenting a
host of novel issues will take more of a lawyer’s time than reviewing a two-page oil and gas
lease with familiar provisions. Landowners who realize this may be reluctant to engage an
attorney for fear of the cost; attorneys may be hesitant to take clients due to the time-intensive
nature of the enterprise. Collective action may serve both groups well. Many wind power
projects will involve tens of thousands of acres, which, in turn, will mean the involvement of
numerous landowners. Such landowners may enhance their bargaining power by forming a
negotiation group that enables them to share in the expense of legal services while providing the
developer the ability to negotiate one agreement binding the entire group, rather than numerous
individual agreements. Also, landowners should ask developers if they will provide for
reimbursement of legal fees incurred in reviewing the agreement; many developers will provide
such fees up to a capped amount.
Developing Petroleum, Wind, and Agricultural Resources Together
Members of both the wind and petroleum industries have expressed great concern about their
ability to effectively develop their interests on the same property. To be sure, wind and oil and
gas resources can be found on the same property, and in several areas these resources have
already been developed together without problems. Nevertheless, both industries continue to
invest significant efforts in seeking to preserve their respective development rights. To some
extent, surface owners find themselves caught in the middle of this controversy, particularly if
they are severed surface owners who do not own the mineral interests underlying their property.
In some regards, this is a question only answered by state law on the respective rights of the
surface, mineral, and “wind” estates. In some ways, though, landowners can still take measures
to harmonize the development of these very disparate yet connected resources. This discussion
will look at the example of Oklahoma law and its handling of these issues.
Oklahoma’s Exploration Rights Act of 2011
Concerned about potential interference of wind energy projects with the development of
petroleum resources, industry groups lobbied for passage of the Exploration Rights Act of 201131
(Exploration Rights Act). This act codified the long-held common law principle stating the
mineral estate generally confers a right to the mineral interest owner “the right to make
reasonable use of the surface estate, including the right of ingress and egress therefor [sic], for
the purpose of exploring, severing, capturing and producing the minerals underlying the tract of
real property or lands spaced or pooled therewith.” 32 However, the Exploration Rights Act took
specific aim at the wind energy industry, stating a wind energy developer “shall not
unreasonably interfere with the mineral owner’s right to make reasonable use of the surface
estate”33
The Exploration Rights Act requires wind energy developers to provide advance notice (at
least 30 days prior to entry of the property) of construction operations to the following parties
whose interests lie within the geographic area of the proposed wind energy facility: (1) operators
actively conducting oil and gas operations, (2) operators of unspaced units or units created by
orders of the Corporation Commission, and, (3) all oil and gas lessees.34 The notice is to be
transmitted by certified mail and must include a map or plat of the proposed wind energy facility
including turbine sites and all supporting systems.35 Notice of the construction activities must
also be published 30 days in advance of construction operations in a county newspaper of
record.36
For its assertion of mineral owners’ (or perhaps more precisely, operators’) rights and the
strictures imposed on wind energy developers, the Exploration Rights Act additionally states it is
not really changing anything:37
It is the intent of this act to confirm the mineral owner’s historical right to make
reasonable use of the surface estate, including the right of ingress and egress
therefor, for the purpose of exploring, severing, capturing and producing the
minerals, and nothing in this act is intended to expand or diminish those historical
rights. Further, nothing in this act shall amend or modify the surface damages
statutes or be interpreted to grant, expand or diminish any person's rights therein.
(Emphasis added). Thus, the question then becomes: how would the Oklahoma Surface
Damage Act handle conflicts between wind and petroleum development?
The Oklahoma Surface Damage Act’s Role in Wind
and Petroleum Development
While it is clearly settled in Oklahoma law a mineral estate owner or lessee has the right to
use “so much of the surface as is reasonably necessary for the exploration and development of
the mineral estate,”38 that right is not without bound. First, it carries its inherent limitation that
such use be “reasonable,” and use of the surface estate beyond what is deemed reasonable makes
the mineral estate owner or lessee liable to the surface owner for the damages caused by such
use.39 Second, the Oklahoma Surface Damage Act40 requires payment to the owner of the
surface estate for the payment of any damages “which may be caused by the drilling
operation.”41 While surface damages are most commonly paid in advance of the drilling
operations, the Surface Damage Act also allows for the recovery of damages occurring later in
the life of the oil and gas operations: “Damages collected pursuant to this act shall not preclude
the surface owner from collecting any additional damages caused by the operator at a subsequent
date.”42
It seems clear from the statutes and case law that the development of a wind energy project
cannot, as a legal matter, preclude the development of the oil and gas resources underlying it.
The question appears to be whether the mineral owners or lessees could be held liable for any
damages to the wind energy project or lost revenues, and the answer appears to be the classic
legal refrain: “it depends.” Oklahoma courts have allowed consideration of numerous factors in
determining the value of surface damages payable under the Surface Damage Act, effectively
setting forth a non-exhaustive list in Davis Oil Co. v. Cloud, several of which were discussed
above.43
Further, the surface owner would have colorable grounds to claim interference with a wind
energy project constituted interference with the surface estate by virtue of Oklahoma’s statute
tying the rights to develop wind energy resources to the surface estate.44
Balancing the Interests: The Osage Nation Case
To date, the only U.S. case that appears to have addressed the balance between wind and
petroleum development is the 2011 case of Osage Nation v. Wind Capital Group, LLC.45
In 1906, the federal government severed the mineral estate underlying the entirety of Osage
County and put that mineral interest into tribal trust, which is managed by the Bureau of Indian
Affairs.46 Portions of that mineral interest were leased to a number of operators with plans to
develop the Mississippi shale using horizontal drilling and hydraulic fracturing technologies.47
However, Wind Capital Group (WCG) leased approximately 8,500 acres of property from seven
surface owners in an area that intersected at least part of the oil and gas leases.48
WCG estimated the surface footprint of the entire facility (including the surface footprint of
the ground above where the collection lines would be installed) would be less than 1.5 percent of
the total acreage, or approximately 127 acres.49 Based on the turbines WCG planned to use, the
turbine towers would be 265 feet tall at hub height, and would use 165 foot long blades – which
would mean the blade tips would be 100 feet above the ground at their lowest point.50 The
turbine foundations would be approximately 10 feet deep and the shape of an inverted cone,
starting at 16 feet in diameter at the ground surface and continuing to 50 feet at their base.51
WCG estimated a construction time of nine to twelve months for the project.52
The principal claim of the Osage Nation was the planned wind energy project “would
unlawfully interfere with its rights to develop the Osage Mineral Estate.”53 The Northern
District roundly rejected the Osage Nation’s claim, though, finding the Nation failed to prove the
wind project would cause such interference under either federal or state law.54
The court first found no prospective interference with the leases held by three of the four oil
and gas companies.55 The remaining oil company, Orion Exploration, had plans for one well that
appeared to lie within the same section as one of WCG’s planned turbines, though the evidence
provided by the Tribe failed to show the well or turbine would be close enough to cause any
interference.56
Central to the court’s holding was its determination the Tribe’s claims of interference were
speculative at best, and there were numerous ways the development of both the wind and
petroleum resources could be harmonized.57 As the court’s discussion of these factors was most
thorough, it is reproduced here:
The primary conflict predicted by the Tribe, through Mr. Root, is the potential for
conflicts during Wind Farm construction. According to [plaintiff’s expert witness]
Mr. Root, a conflict would arise if a lessee attempts to drill a well at the same
time and in the same area as turbine construction. Mr. Root's testimony with
respect to alleged interference was speculative as to whether the lessee and the
Defendants will be in the same place at the same time during construction. He
admitted that, even then, they might be able to stagger and co-ordinate their work.
He stated that, following construction and during operation and maintenance of
the Wind Farm, there “would be an impact,” but “it would not be as great as
during construction.” When asked whether maintenance and operation of the
Wind Farm would unreasonably interfere with the development of the Mineral
Estate, he stated “it might, possibly.” The court finds Mr. Root's testimony
speculative and insufficient to establish that the Wind Farm will interfere with
development of the Osage Mineral Estate.
Each permanent turbine site will be 70 feet by 70 feet. During construction, there
will also be a 40 foot by 80 foot temporary pad from which the turbine will be
erected. Access to the turbine construction site can be staged from any direction –
including the direction opposite the well site. A drilling rig would need roughly
100 feet from the edge of a drilling site to the wellhead, and from there drilling
activities can typically be staged from any direction. In the event the location of a
particular drill site is closer than these distances allow, a modest adjustment to the
drilling schedule or location may solve the conflict.
The Court also finds that if a well location is selected within close proximity to a
turbine center, or directly on a Wind Farm road or transmission line, Orion or
other mineral lessees will likely be able to make modest adjustments to the well
location. With the types of wells to be drilled, the currently available drilling
technology, and the nature of the geological formations being targeted, a modest
adjustment to provide the necessary setback from a turbine, or to move off a road
or underground transmission line, could likely be reasonably accomplished by the
mineral lessees. The Court finds that such adjustments are well within the
capabilities of the mineral lessees and that such adjustments are routinely made in
the oil and gas industry. In the event an actual, non-speculative, conflict develops
that prevents a lessee from obtaining reasonable access to the surface estate, the
law provides recourse.
The Court further finds that the economics of the planned drilling program
indicate that Orion will likely make necessary adjustments rather than forego
development. Using information from Orion, the testimony of both expert
witnesses support a finding that the wells are sufficiently promising that the
additional expense associated with adjusting the location will not be prohibitive.
As to the oil and gas infrastructure such as flow lines, water lines, and tank
batteries, the Court finds that any impact from the Wind Farm will be minimal. To
the extent such infrastructure is buried, it will be at different depths than the
underground collection lines. Orion can readily bore under Wind Farm roads if
needed. And if a desired flow line or water line happens to intersect a turbine
location, only a minor adjustment is necessary to circumnavigate the 16 foot
diameter of the foundation at the four foot subsurface level. Further, [defendant’s
expert witness] Mr. McBeath testified, and this court finds, that the surface
impediments in the area, even with the additional Wind Farm facilities, are fewer
than what oil and gas companies normally encounter in their operations. Mr.
McBeath stated, and this court finds, that laying subsurface lines in and around
the Wind Farm's collector lines will not present a significant obstacle to the
lessees. Mr. McBeath also presented maps showing that wind farms and oil and
gas operations can and do co-exist in close proximity to each other, including in
Oklahoma. The Court finds this testimony to be credible.58
Interestingly, the court also found the Tribe’s assertion of the damages it would sustain
would be “speculative” while WGC could sustain $220 million in losses if a permanent
injunction against the wind project was allowed.59 Further, at several points, the opinion points
out actions the oil and gas operators could do to accommodate the development of the properties
for wind energy development, not the other way around.
A number of factors make the Osage Nation case unique, including that the case was brought
before any actual oil and gas operations were initiated within any proximity to any existing wind
energy facilities. The court would be confronted much more directly with analysis of the
“reasonable use” doctrine and the provisions of the Surface Damage Act if existing facilities of
one resource developer were placed closely to one another.
Cooperative Development and the Role of the Surface Owner
As the court points out in several ways through the Osage Nation opinion, there appears to be
a relatively simple solution for both parties: move a little. Both wind developers and petroleum
operators will argue their facilities are the most location sensitive, but in truth, the answer
depends on the geography and geology of the area in question. Placement of wind energy
turbines is based on extensive computer modeling of both the local geographic and
meteorological conditions, as is the placement of petroleum wells. However, movement of either
facility a few hundred feet in one direction or another is unlikely to be fatal to either enterprise,
particularly if a large plateau or plain is available to the wind energy developer, or if directional
drilling is contemplated by the petroleum developer. Further, wind energy developers’ concerns
about the interference caused by the presence of a derrick should be tempered by the fact the
derrick is only temporary in nature. If its presence materially impacts the function of a nearby
turbine, such impact would be limited to the period in which the well is drilled, and most
permanent structures such as pump jacks or tank batteries would not be of sufficient height to
cause significant impacts to turbine functions. Prudence, of course, dictates both wind and
petroleum developers locate their facilities outside the “hazard radius” of each other’s facilities.
In the case of a derrick, this radius would be, at a minimum, the “fall-down radius” of the derrick
(a circular area with a radius slightly greater than the height of the derrick), and for a turbine, the
“fall-down radius” (an area with a radius slightly larger than the height of the turbine at the
highest point of its rotor disk), accounting for any areas that could be subject to ice throws from
the turbine blades. Intersections of roads, underground cables or pipelines can be accommodated
by clear marking of such systems and care in crossing each.
The greatest peril in the co-extensive development of the wind and petroleum resources of a
parcel may rest not with the wind or petroleum operator but with the surface owner. While the
owner of a unified surface and mineral estate holds some bargaining power in negotiations he or
she may enter with either a mineral or wind lessee, the surface owner holds virtually no ability to
either block the development of the mineral resources or to direct the operations of mineral
lessees. Nevertheless, almost all wind energy leases include “quiet enjoyment” language stating
the surface owner will not permit the holder of any other interest in the property to interfere with
the use of the property by the wind energy facilities. Other clauses frequently found in wind
energy leases may require the landowner to acquire subordination agreements from the holders
of other interests in the affected lands. All too often, surface owners sign wind energy
agreements with this language, when they have no power to carry out the obligations they
impose. Nevertheless, these surface owners could be held liable for the breach of such
requirements if subsequent oil and gas development did, in some way, materially interfere with
the development or operation of the wind energy project.60
What is a surface owner to do? If the surface owner holds a unified estate, the solution lies in
negotiating either mineral or wind energy leases that functionally require the cooperative
development of both resources. Severed surface owners do not have this option, though, and at a
minimum should avoid agreeing to any quiet enjoyment clauses or other language that, explicitly
or implicitly requires them to exert control over the actions of the mineral owner or lessees. A
more aggressive approach would be the negotiation of language in the wind energy lease
whereby the wind developer acknowledges the mineral estate is owned by someone other than
the surface owner and indemnifies the surface owner against any damages caused by the
development of the mineral estate. In any case, severed surface owners and their attorneys
should studiously avoid placing the surface owner in the position of mediator or arbitrator
between the mineral estate and petroleum developers.
Conclusion
The continued energy thirst of the world, the growing competitiveness of wind energy with
other technologies, and the significant amount of energy resources now being economically
produced in the U.S. indicate the nation’s agricultural and energy industries will be working
together for quite some time. With a sound understanding of the issues involved and a proactive
approach to balancing the needs of farming and energy development, landowners can take
important steps to preserve their farm value and environment, both now and in the future.
1
The factors discussed in this section were collected in the opinion of Davis Oil Co. v. Cloud, 766 P.2d 1347 (Okla.
1986).
2
EPA OFFICE OF RESEARCH AND DEVELOPMENT, PLAN TO STUDY THE POTENTIAL IMPACTS OF HYDRAULIC
FRACTURING ON DRINKING WATER RESOURCES, 22 (2011).
3
BLACK’S LEGAL DICTIONARY, 7th ed. (1999).
4
U.S. ENERGY INFORMATION ADMINISTRATION, WIND, available at
http://www.eia.gov/cneaf/solar.renewables/page/wind/wind.html (last visited January 5, 2012); AMERICAN WIND
ENERGY ASSOCIATION (hereinafter AWEA), U.S. WIND INDUSTRY THIRD QUARTER MARKET REPORT, OCTOBER
2011, 1, available at http://www.awea.org/learnabout/publications/reports/upload/3Q-2011-AWEA-Market-Reportfor-Public-2.pdf (last visited January 5, 2012).
5
Id.
6
AWEA, U.S. WIND INDUSTRY THIRD QUARTER MARKET REPORT, OCTOBER 2011, 1, available at
http://www.awea.org/learnabout/publications/reports/upload/3Q-2011-AWEA-Market-Report-for-Public-2.pdf (last
visited January 5, 2012).
7
J.F. MANWELL, ET AL, WIND ENERGY EXPLAINED: THEORY, DESIGN AND APPLICATION 385 (2d ed. 2009).
8
See AWEA, WIND ENERGY AND THE ENVIRONMENT, http://www.awea.org/faq/wwt_environment.html .
9
See, e.g. SOUTH DAKOTA CODE §43-13-19 (limiting option periods to five years).
10
See generally Windustry, Wind Energy Easement and Lease Agreements, available at
http://www.windustry.org/sites/windustry.org/files/LandEMain.pdf.
11
See American Wind Energy Association, Wind Energy and the Environment, available at
http://www.awea.org/faq/wwt_environment.html. The American Wind Energy Association estimates the total “land
use” per megawatt of capacity is 60 acres, with three acres physically occupied by the project, and the remaining 57
acres used only as an unobstructed clear area to preserve wind flow to the turbine array.
12
See, e.g. New York State Department of Agriculture and Markets, Guidelines for Agricultural Mitigation for Wind
Power Projects, available at http://www.farmlandinfo.org/documents/30658/NYS-DAM-Wind-PowerGuidelines.pdf.
13
See Rankin v. FPL Energy, LLC, -- S.W.3d --, 2008 WL 3864829 (Tex. App. 2008).
14
For a compilation of such cases, see generally Stephen Baron, New Meets Old: Wind Turbines and the Common
Law of Nuisance, University of Texas Wind Energy Institute (February 19-20, 2008, Austin, Texas), available at
http://www.utcle.org/eLibrary/preview.php?asset_file_id=15069.
15
See, e.g., 7 C.F.R. § 1410.32(h), providing that termination of a CRP contract will trigger repayment of all
amounts received by the landowner under the contract, plus interest.
16
For an excellent discussion of these programs, see generally Farmers Legal Action Group, Inc., Farmers’ Guide
to Wind Energy: Legal Issues in Farming the Wind and its discussion of “Impact[s] on Farm Program Eligibility” at
pp. 4-8 et seq., available at http://www.flaginc.org/topics/pubs/index.php#FGWE.
17
Agreements that seek water rights from the landowner are of particular concern. Wind energy facilities do not
require water for their operation, and thus landowners confronted with such a provision must undertake special care
to determine the proposed use of, and compensation for, their water by a project developer.
18
See Windustry, supra note 27.
19
See Windustry, Wind Energy Easements and Leases: Best Practices and Policy Recommendations, available at
http://www.windustry.org/sites/windustry.org/files/LandEBestPractices.pdf.
20
See MANWELL, supra.
21
See Neil Hamilton, Roping the Wind: Legal Issues in Wind Energy Development in Iowa,” American Agricultural
Law Association Symposium, (October 25, 2008, Minneapolis, Minnesota).
22
For a thorough discussion of liability issues for landowners, see generally Farmers Legal Action Group, Inc.
supra note 34, Ch. 5, available at http://www.flaginc.org/topics/pubs/index.php#FGWE
23
See Farmers Legal Action Group, “Negotiating Wind Energy Property Agreements,” available at
http://www.flaginc.org/topics/pubs/arts/WindPropertyAgrmnts2007.pdf.
24
See id.
25
See generally Windustry, “Wind Energy Leases and Compensation Packages,” available at
http://www.windustry.org/sites/windustry.org/files/LandECompPackages.pdf.
26
Real property and oil & gas scholars may contest the use of the term “royalty” to describe these payments. For
the purposes of this discussion, the term will be used to describe a payment that is correlated to the production of
electrical power from the project (rather than correlated to acres or turbines).
27
See generally Windustry, “Wind Energy Leases and Compensation Packages,” available at
http://www.windustry.org/sites/windustry.org/files/LandECompPackages.pdf.
28
University of Texas Wind Energy Institute CLE, The Ultimate Guide to Wind Leases, June 2, 2006 (available
from Texas Bar Association).
29
See Farmers Legal Action Group, supra note 42.
30
17 OKLA. STAT. § 160.15
31
52 Okla. Stat. §§ 801 – 805.
32
52 Okla. Stat. § 803(A).
33
52 Okla. Stat. § 803(B).
34
52 OKLA. STAT. § 803(C).
35
Id.
36
52 OKLA. STAT. § 803(D).
37
52 OKLA. STAT. § 803(F).
38
Roye Realty & Developing, Inc. v. Watson, 791 P. 2d 821, 824 (Okla. Civ. App. 1990).
39
Id., citing Thompson v. Andover Oil, 691 P.2d 77 (Okla. Civ. App. 1984); Tenneco Oil Co. v. Allen, 515 P.2d
1391; and Lone Star Producing Co. V. Jury, 445 P.2d 284 (Okla. 1968).
40
52 OKLA. STAT. §§ 318.2 - 318.9.
41
52 OKLA. STAT. §§ 318.5(A).
42
52 OKLA. STAT. §§ 318.9.
43
766 P.2d 1347, 1352 (Okla. 1986).
44
See Oklahoma Airspace Severance Restriction Act, 60 OKLA. STAT. § 820.1(B).
45
2011 U.S. Dist. LEXIS 146407 (N.D. Okla.) *1.
46
Id.
Id. at *5.
48
Id., *3.
49
Id.
50
Id. at *3 -*4.
51
Id. at *4.
52
Id. at *4.
53
Id. at *5. It is worth noting that none of the operators joined or intervened in the case.
54
Id. at *6.
55
Id. at *6.
56
Id. at *7 - *8. Orion also testified that it would take “about two weeks to prepare the site for drilling, then 26 days
from spudding the well to its completion, followed by about two weeks of dismantling.”
57
Id. at *9
58
Id. at *11 - *14.
59
Id. at *15 - *16.
60
Ernest E. Smith, The Growing Demand for Oil and Gas and the Potential Impact Upon Rural Land, 4 Tex. J. of
Oil, Gas and Energy L. 1, 14 (2008).
47