Oil and Gas Law – Komatireddy – Spring 2013
Private Law: Ownership and Leasing
I.
The Ad Coelum Doctrine
a. The ad coelom doctrine is the general property law idea that the
landlord owns everything below and above his land – including the
minerals below his land. This doctrine rings especially true for hard
minerals (such as coal, gold, etc.) but does not exactly ring true for oil
and gas. These volatile hydrocarbons can freely move across one’s
land.
b. This doctrine is modified by the doctrine of extralateral rights. This
doctrine allows an owner to mine the veins of hard minerals that
extend below the surface of another’s land (Del Monte Mining).
c. Essentially opens up the idea that you can access something under
someone else’s land even though you don’t own the surface of the
land. A big step towards the rule of capture.
II.
The Rule of Capture
a. The rule of capture generally exists to show that one may bring the
hydrocarbons below his land to the surface. It establishes, however,
that there is no ownership of individual hydrocarbons until they are
brought to the surface. As long as an extraction of hydrocarbons is
performed on legally owned property, oil can be brought up to the
surface even if it was technically also under the land of a neighbor
(Kelly v. Ohio Oil).
i. You have the legal right to drill on your own land and have the
legal right to draw up all of that oil even if that oil currently
resides under your neighbors land.
b. The rule of capture greatly limits trespass claims in oil & gas law.
Even if a lessee drills next to the land of another, he will still not be in
violation of any law due to the rule of capture. This changes if
someone is using a slant drilling method (where the drill itself would
go under the land of the other party), but this is quite uncommon. An
owner of neighboring land cannot sue for the value of oil or gas
removed (Kelly).
i. There is also no trespass under the ground when hydraulic
fracturing techniques are used (Coastal Oil and Gas Corp. v.
Garza Energy Trust).
1. Trespass will require a showing of actual, permanent
harm to the property. None shown in Coastal. Injury of
simply taking oil and gas below you is not injury
enough to sustain a suit due to the rule of capture.
ii. The rule of capture technically does not apply when there is a
leak of refined or unrefined oil stored on a land where the
owner of that oil does not own the mineral rights. If there is a
diligent and immediate effort made to re-capture the oil, a
Oil and Gas Law – Komatireddy – Spring 2013
person without mineral rights may do so. (Champlin
Exploration v. Western Bridge).
iii. If oil or gas is pumped back into the ground to store for later
use, this oil is treated as if it is personal property. The actual
owners of the oil would be the ones who already brought it up
to the surface before. This generally occurs when a reservoir is
already depleted and the owner of the oil or gas is using the
ground merely as a storage space (Texas American Energy v.
Citizens Fidelity Bank).
c. Non-ownership Theory: Exclusive right to extract hydrocarbons on
your own land. Essentially revolves around surface rights and trespass
d. Ownership in Place Theory: Whoever owns the well owns the gas.
Hydrocarbons become personal property once they are brought to the
surface, because you would now have actual control over the
hydrocarbons.
e. Policy reasons for Rule of Capture: Hard to measure hydrocarbons,
want to encourage production of hydrocarbons, discourages
freeloading, huge risk to driller of trespass if it does not exist where
the damages are speculative, avoids underproduction, readily available
wells, avoidance of litigation
i. Depends on when you have control over the hydrocarbons.
Once they are raised to the surface and captured, it becomes
your property since you have brought them up and rendered
them to be under your control.
III.
Limits and Obligations of Ownership
a. Limits on the Rule of Capture: The rule of capture allows for one to
drill on his own land and draw gas from the land of another. However,
the rule of capture is limited by nuisance, trespass, police power, and
the correlative rights doctrine.
i. You must act properly and safely when drawing gas from a
well. You are allowed to shoot and drill as much as you want,
but you have to safely store something like nitroglycerine. It
cannot be stored closely to a well (would satisfy a nuisance
claim) (People’s Gas v. Tyner).
b. Correlative Rights: Most jurisdictions employ a non-ownership theory
of correlative rights. I.e. the owner has the right to extract the gas, and
it could have been produced if it was not wasted. Damages are
generally awarded for wasted opportunity to remove the hydrocarbons.
i. Similar to an easement. Someone can damage your easement if
you have the right to use a road if said person damages said
road. You are suffering harm and your correlative rights have
been damaged.
ii. Ownership in place – Surface owner technically owns the
hydrocarbons until they are captured
Oil and Gas Law – Komatireddy – Spring 2013
c.
d.
e.
f.
IV.
iii. Non-ownership states – Have a right to take them, but do not
own the molecules
iv. Essentially, each owner has a right to a fair and equitable share
of the oil and gas under his land as well as the right to
protection from negligent damage to the producing formation
(Eliff v. Texon). In Eliff, Texon’s negligence permitted one of
its wells to blow out and drain large quantities from Eliff’s
land. This was a violation of conservation, as capture should be
in a non-negligent manner only.
Waste: Mineral rights extractors have a duty to the mineral owner to
not capture oil and gas in a negligent or wasteful way.
Adverse Possession: When someone who doesn’t own the oil and gas
interest on property is making a claim to that mineral interest. Requires
an objective notice where the claim must be open, notorious, for as
long as the SOL require, and exclusive (Deiderich v. Ware). Basically
need to make a claim so the owner has objective notice and the owner
has failed to respond in a timely manner to the claimants adverse
possession.
i. Where the surface and mineral interests are not severed, the
person would be adversely possessing the entire thing. Not just
the mineral rights. The owner could see the person on the land
if he just came by to look at it and he would have sufficient
notice.
ii. If they are severed, then the claimant trying to get the mineral
interest must actually drill or produce the mineral on the land.
Abandonment: Not available to everyone. Only available to people in
non-ownership jurisdictions. Requires lack of use of the interest and
intent to abandon (Gerhardt v. Stevens). In Gerhardt, the heirs of the
estate thought the land was worthless with no value. This constituted
an intent to abandon on part of the heirs.
Types of Interests:
i. Royalty Interest: Share of production or a share of the revenues
free of production costs
ii. Fee Interest: Own rights free and clear; both surface and
minerals
iii. Mineral Interest: Ownership of oil & gas or right to use the
property to search/develop/produce
iv. Leashold Interest: Interest in minerals transferred via lease
v. Surface Interest: Interest after mineral interest has been
severed. This interest will be subservient to the mineral interest
and must allow the holder of the mineral interest to access his
interest (by using the land).
Common Law Claims
a. Geophysical and Exploration Trespass: Seismographic technology is
generally considered to be a trade secret. It is done normally via a boat
Oil and Gas Law – Komatireddy – Spring 2013
b.
c.
d.
e.
or truck with a recorder that picks up sound waves from the ground.
All rights comprising the mineral estate are vested in the mineral
owner and the mineral owner can authorize a third party to conduct the
operations (Enron Oil v. Worth). This is true even when you lease the
oil and gas exploration rights as the 3rd party to another party. You still
maintain the corollary right for geophysical exploration. An owner
cannot claim trespass if someone is shooting seismic around his land if
the shooter has the rights to shoot these other tracts. (Kennedy v.
General Geophysical). While this may show the potential presence of
hydrocarbons, the owner of the land has no right to object. Basically,
what is the point of having a mineral interest if you cannot explore the
surface?
i. Multiple Owners: The permission of all fractional owners of a
mineral estate is not needed. Each owner has an undivided
mineral interest and each has a separate and distinct right to
enter and develop his portion (Enron Oil). Similar to tenantsin-common.
1. Minority: Need 80% or more ownership stake in
mineral rights to explore.
2. Majority: Any owner (no matter percentage) can
explore on the land.
ii. Land Damage: In order to maintain damage for geophysical
exploration, there needs to be a physical damage to the land.
Mere vibrations will not result in physical injury (Kennedy).
Emphasis on the fact that the company wasn’t trying to
sneakily obtain information about the land but trying to get info
about adjacent land that caused vibrations on his land.
1. Unclear if that played a factor.
Dry Hole Trespass: In dry hole trespass, the person performing
geophysical exploration has uncovered the fact that there are no
hydrocarbons on the land. The owner would receive the loss of
speculative value – the difference between how much the lease could
have been for before the trespass and how much it is worth after the
trespass (Humble Oil v. Kisi).
Wet Hole: Wet hole trespass results when there is actual drilling. A
driller intentionally drills on land (but he may not know the land is not
part of the lease). The driller brings hydrocarbons up and brings them
to market, normally. Here, the wet hole trespasser may be entitled to
charge for production as long as it acted in good faith. If it did not act
in good faith, some jurisdictions will place punitive damages on the
driller (Wronski).
Conversion:
Slander of Title: Slander of title cases are brought when someone is
still claiming to have a lease even after the lease period has allegedly
ended. There is a duty on the lessee to release an expired oil and gas
lease. Slander of title occurs when there is 1) Malicious 2) publication
Oil and Gas Law – Komatireddy – Spring 2013
or statement 3) that has false information 4) about another person’s
interest in property 5) that causes financial harm or loss of sale.
Slander of title must normally include ill will by the lessee. Damages
include the loss of speculative value (between value of the lease before
and after), assumpsit (value of the lease that should have been obtained
by the trespassor), and the difference between the offer lost and the
property value (Kidd v. Hoggett).
i. Shut-in Rule: Most leases have a clause where a well can be
“shut in” and closed up for a certain period of time. The well
must be capable of actual production and there is normally a
time limit on how long it can be shut in (Kidd).
f. Nuisance: Drilling a well and putting explosive stuff inside a well is
not necessarily a nuisance. Surface damage may be a legitimate claim,
but removing gas beneath will not satisfy this (Tyner).
V.
Lease of Ownership Interest: Grant, Duration, and Termination
a. Leases result from the transaction between two private parties. The
idea is that the lessee wants to explore without being obligated to own
the land.
i. Hunt Oil v. Kerbaugh: The mineral estate is the dominant
estate. The mineral estate has the right to use so much of the
surface as reasonably necessary, but must have due regard for
the surface rights. There is no right to use more of or do more
to the surface estate than reasonably necessary.
1. Accommodation Doctrine: Where there is an existing
use by the surface owner that would otherwise be
precluded or impaired, and where there are alternatives
available to the lessee, the rules of reasonable use may
require the adoption of an alternative.
ii. Granting Clause: This clause sets out = the scopes of the rights
granted. It must address:
1. What rights are given to use the land
2. What substances are covered (oil, gas, both?)
3. What land and what interests are subject to the lease
iii. Payment: 1) bonus (initial payment) followed by royalties
based on oil and gas production
b. Habendum Clause: Clause in a lease that allows for the lessee to hold
onto a lease as long as there is a producing well. Usually states the
time period a well must be in production for.
i. The majority rule is that most jurisdictions define production
as 1) bringing the oil to the surface 2) and bringing it to market.
The minority rule is that production means the well merely has
the ability to bring the hydrocarbons to the surface (Pack v.
Santa Fe Minerals).
Oil and Gas Law – Komatireddy – Spring 2013
c.
d.
e.
f.
VI.
ii. Cessation of Production Clause: In most states, this will require
the lessee to bring the oil to the surface and bring the
hydrocarbons to market. In even minority states, a lessee must
still diligently market the oil and gas as to not sit on a well for
all eternity.
Lease Classifications:
i. Profit a Prendre (OK): The lease is incorporeal and nonpossessory; the interest may be abandoned and is not subject to
the possessory remedies of trespass and ejectment. The interest
must be protected by non-possessory actions, such as a quiet
title suit.
ii. Fee Simple Estate (TX): Corporeal and possessory in nature.
The common law rules of abandonment should not apply, but
the possessory remedies of trespass and ejectment will be
available.
Lease Termination: A lessee can extend his lease with a working well.
Most leases will have a termination clause that states that a lessee can
do this. However, the well must be legitimately working. If time goes
by and a well is not considered working, a lessee can lose his lease
even if he has drilled an actual producing well (Rogers v. Osborn).
Force Majeur Clause: Most leases have force majeur clauses that state
that the lessee may stop production due to unforeseen circumstances.
However, these circumstances must actually be unforeseen and
reasonable effort needs to be put forth to try and bypass them
(Perlman v. Pioneer Limited Partnership).
Shut-in Royalty Clause: Allows the company to shut a well in and pay
a royalty on it even if it isn’t a currently producing well.
Implied Lease Covenants: To Develop, Market, Protect, and Manage
a. Every oil and gas lease has these, but parties can still contract out of
them!
b. Covenant to Test: Since royalties are the primary consideration for the
lease and no royalties can be paid unless the property is tested, there is
an implied covenant to develop. This includes both testing the land, as
well
c. Covenant to Develop: Not triggered until the lease is propelled into the
secondary term by production or constructive production. Once oil is
discovered, the lessee has an obligation to continue to develop
reasonably.
i. Notice and a reasonable time to act must be given to a lessee
prior to cancellation of such rights for a failure to fully develop
them. This covenant is imposed to ensure natural resources are
fully developed and is viewed as advantageous to the country
as a whole. The lessor will generally have the burden of
proving that more wells can be drilled, the lessee acted
Oil and Gas Law – Komatireddy – Spring 2013
imprudently by failing to drill, and must prove its own
damages (Superior Oil v. Devon).
1. The majority rule is that notice is not required to
initiate this lawsuit if you suing for breach of implied
covenant and damages. However, if you are seeking
cancellation, notice is required since its an equitable
remedy.
d. Covenant to Market: Imposes upon the lessee the duty to use due
diligence to market oil and gas produced within a reasonable time and
at a reasonable price.
i. This may impose big time liability on someone who signs a
contract to market oil at a certain price. The lessee is under the
obligation to the lessor to get the best price possible for the
lessor. Damages will normally be given. (Amacco v. First
Baptist).
ii. Someone is giving you the heart of the mineral interest. All
they want is a royalty. Must protect the property value. To do
this, you construe and impose these implied duties upon the
lessee. Must act as a reasonably prudent operator would.
iii. When an agreement is silent, the owner of an overriding
royalty interest need not pay a share of post-production costs.
Every oil and gas lease contains an implied covenant to market,
obligating the lessee’s to complete all necessary steps to
market gas produced from the leasehold. A royalty is free from
“costs of production” but not “costs subsequent to production”
(i.e. actually getting the drill ready (Garman v. Conoco).
1. When is production complete?
a. Oklahoma (minority): Production is complete
when oil or gas is captured and made into a
marketable product (compression,
transportation, cleaning, and processing costs
are deductible after hydrocarbons are made
marketable).
b. Texas (majority): Production is a matter of law.
Production is complete when oil or gas are
captures. Once captured, all other sots are
subsequent.
e. Covenant to Protect and Manage: There is an implied covenant in the
lease that an operator will diligently manage a well. This implied
covenant forces the operator to do operate his well diligently in fear of
losing the lease. The lessee is held to the same burden of protecting the
lessor’s rights to maximum amount of recoverables. By not being safe,
there is a huge risk of waste.
i. Baldwin v. Kuebutz: In this case, the operator was sloppily
operating his lease in order to quickly develop the land before
he lost his lease due to a suspension clause. While he found oil,
Oil and Gas Law – Komatireddy – Spring 2013
he also acted in a dangerous manner – flammable material near
gas, defective wiring, etc. This dangerousness violated the
implied covenant.
f. Implied covenant cases often brought as royalty cases because the
lessee isn’t making as much money as it should be. Need to remedy
the implied covenant and give the holder the money that they should
have gotten.
VII.
Royalties
a. Distribution of: In the normal scheme of things, royalties are
distributed after the sale of hydrocarbons on the market. There are two
rules. The Vela rule (majority) and the Tara rule (minority) (Piney
Woods Country Life School v. Shell Oil)
i. Vela: The general rule is that when a company makes a price
for selling oil, it is to abide by that price. Even in long-term
contracts. So, when an oil company is distributing profits, the
profits must be based on the market value at the time of the
actual sale. This creates a disincentive to create long term
contracts if there is a risk of price increase.
ii. Tara: Market value is the amount of royalties based on the
profits actually recorded by the company. Equivalent to the
price assigned in the sale contract. This would seem more fair
for the gas companies, but potentially horrible for the lessor if
the price goes up in the future.
b. Division of: The division of royalties generally occurs when the lease
is signed. The lessor may reserve a specified quantity of royalties for
himself. There is a general number of 1/8th that seems to be the normal
amount for these contracts.
i. However, in odd cases, the lessor is free to assign himself a
higher royalty amount when he sells the mineral rights or
property rights. In Gavenda v. Strata Energy, the owner
reserved for himself a ½ interest in the hydrocarbon royalties.
This meant that any subsequent lease must give that owner ½
of all of the royalties. Like in Gavenda, if there is an erroneous
division order, recovery can be found through unjust
enrichment and other contract law claims.
c. Remedies for failure to pay: In most cases, there must be an express
provision in the lease to terminate a lease for failure to pay (Cannon v.
Cassidy). There are other remedies for failure to pay (such as breach of
contract claims), so equitable remedies are not required.
i. There is a public policy reason not to cancel a lease. It is a
large endeavor to drill a well, so it is inefficient to remove the
operator. This is true even in egregious instances.
ii. Can sue and be made whole without having to cancel a lease
d. Lessee’s Remedies: Sue for an injunction, monetary damages
Oil and Gas Law – Komatireddy – Spring 2013
e. Royalties in Kind: Can take royalty in kind (as portion of
hydrocarbons).
i. Can ask for a conversion (more hydrocarbons) or an
accounting if you do not feel you are getting enough.
f. Royalties in Cash: Can take royalty as cash
i. Can ask for more cash or an accounting here as well
Public Law: Regulation of Operations
I.
Regulation for Land Use
a. Pooling: Pooling involves the combination of several different tracts of
land into one big pool of land. The purpose is to share the production
and costs with all of the land owners (risk allocation). Pooling was
popularized due to spacing and density limits.
i. Voluntary Pooling: Individual landowners privately agree to
pool units together. Voluntary pooling on land with spacing
units and multiple lessees may come out quite unfair. In Ryan
Consolidated v. Pickens, the π was not allowed to drill due to
Rule 37 spacing requirements in Texas as his competition was
first to receive a lease.
1. Rule 37: Rule 37 is a statewide spacing rule from TX.
The rule states that a well must be located at least 467
feet from any property line and at least 1200 feet from
other wells on the same tract and producing from the
same source of supply.
a. Exception: To prevent waste or to prevent
confiscation of property
b. Can serve to limit what a neighboring
landowner can do with his lease. If the property
was subdivided after the rule came into being,
sometimes you can only have one oil and gas
well on the entire subdivision. This includes
even when others have the rights to drill on
other portiosn of land.
ii. Regulatory Pooling: Forced or compulsory pooling done by the
regulatory agency of the state.
1. Bennion v. ANR Production: In this case, there was
forced pooling of a 640-tract with one well allowed per
unit. One single hold-out refused to join. He was
allowed to join later at no penalty. A penalty was
established by law for hold-outs (75% penalty).
Regulatory agencies are allowed to establish these
penalties for the protection of correlative rights and risk
allocation against hold-outs. This hold-out did not take
the initial risk to find oil, he did not participate even
Oil and Gas Law – Komatireddy – Spring 2013
II.
when he had a chance to, and he only wanted to join
after oil was found. This is not considered a taking.
a. Court decides due process and correlative rights
are not hurt here
iii. Mississippi Judicial / Equitable Pooling: Pooling as a matter of
law. When a well is drilled on a unit that is an established
spacing unit, as a matter of law the land within that unit is
automatically pooled.
iv. Lessee Pooling: The lessee can establish a pooling clause in its
contracts. If it has a lease to multiple tracts of land in a single
area, these tracts can be pooled together at the lessee’s
discretion. However, this pooling clause can only be used in
good faith situations where the lessee is not trying to tie up
leases in order to avoid their expiration (Amoco Production v.
Underwood).
b. Unitization: While pooling is about putting together small pieces of
land to combat spacing and density requirements (end goal is one
drilling unit per space that you can), unitization is about the reservoir
as a whole. Unitization is especially common when enhanced recovery
techniques are needed after primary production is no longer available.
The emphasis is on making multiple wells work together as one. If a
mineral owner refuses to join a unitization group, he cannot recover
the value of oil found under secondary recovery. He may be able to
recover the value of oil that would have been accessible under primary
recovery (Baumgartner v. Gulf Oil).
i. Takings: Where a secondary recovery project has been
authorized by the commission, there is no willful trespass for
crossing lines for people that do not join when they are allowed
(Baumgartner).
c. When talking about pooling, unitization, etc. we are generally going to
have to talk about what level of deference to give to the administrative
body that normally decides this.
i. Must also look at the act that gave the legislative body the
specific authority. Look to the words of the act to see what the
act is actually entailing. Look at plain text, structure, purpose,
precedent, history, background policy arguments.
Regulation for Hydrocarbon Conservation
a. The state regulatory agency (part of the executive branch) is delegated
its power by the legislative branch. Usually, this delegation is in vague
terms (such as “conserve the present oil in the field”) and the state
branch can then fill in the gaps (such as “only XXX amount of barrels
can be removed per day”). The recourse is to appeal the agency ruling
to the judicial branch. State agencies receive varying amounts of
deference depending on the state. Some states will review the decision
de novo, while others will review the decision and take the agency’s
opinion as near-gospel.
Oil and Gas Law – Komatireddy – Spring 2013
III.
i. In federal cases, the Chevron doctrine takes hold and will
uphold reasonable agency decisions. This gives great
deference to the agency decision-making process.
b. Limits on Well Spacing: Well spacing orders generally come into
being in order to prevent waste, in order to prevent blow-outs, and in
order to prevent overly depleting an oil field. These spacing
requirements may sometimes remove the ability of a mineral rights
owner to drill on his land if there is an oil well a certain distance away
from where he wants to drill. Generally speaking, where a spacing law
would be inequitable or unreasonable, a state regulatory commission
may eliminate a well spacing order and allow for a mineral rights
owner to drill on his land even in violation of said spacing (Pattie v.
Oil & Gas Conservation Commission).
i. This would allow for the person to actually make use of his
mineral rights interest. Pattie held that it would be an
unconstitutional taking to not allow for this form of drilling.
ii. Unusual Circumstances: There may also be cases where a
driller has unusual circumstances to bypass spacing rules. In
Exxon Corp v. Railroad Commission, the Commission set aside
Rule 37 spacing requirements for a driller that had already
drilled a dry well in a different shale. The driller wanted to redrill the same well into another shale (would have violated
Rule 37). In unusual circumstances (such as economic
infeasibility or the inability of any other well to access said
oil), a commission may set aside drilling orders to prevent
waste, etc.
1. The appropriate test here would be whether or not the
original hole was drilled and completed in good faith
c. Limits on Density:
d. Limits on Production: A commission may also limit the amount of
hydrocarbons that can be produced on a daily basis. The commission is
generally free to set out any sort of formula that it would like to use (as
long as the commission is given deference) if the formula is fair and
equitable. Correlative rights of owners all around the area would need
to be taken into account in order to determine if the formula is actually
fair and equitable (Pickens v. Railroad Commission). The commission
is generally authorized to protect the gas, protect the oil, and protect
the escape of gas into the air in excess of a normal amount. Some
venting is allowed, but the commission is allowed to protect all of
these interests as long as it is respecting the correlative rights of the
mineral owners. (Denver Producing v. State). Certain types of limits
will protect the value of the land (and thus the correlative rights of the
mineral owners).
Regulation for Environmental Conservation: Discharges, Cleanup,
Emissions, and Disclosures
Oil and Gas Law – Komatireddy – Spring 2013
IV.
a. Clean Water Act: Date of discovery is the relevant date for liability
and assessment of who actually owns the land. This is because the
cleanup should encourage expeditious cleanup rather than historical
research into the owners of the land at the time of the actual spill. In
Quakerstate, the government was unable to show that Quakerstate was
the owner of the land after its lease had expired and was then stuck
with the cleanup costs (Quakerstate v. US Coast Guard).
i. Exempt: Drilling fluids are exempt from the CWA, but oil
byproducts are not.
b. Clean Air Act: New Source Performance Standards can govern wells
and what the wells are putting into the atmosphere. Can regulate
stationary sources and their air pollution.
Regulations for Environmental Conservation: Water, Spills,
Investigation, and Aftermath
a. Clean Water Act: The CWA is designed to be a broad statute that
prevents 1) the discharge 2) of pollutants 3) into the navigable waters
of the US. Even if a tributary is not navigable per se, if it flows into
navigable waters at various parts of the year it will be considered
navigable.
i. SWANCC & Rapanos did place some limits on the CWA (the
waters must be semi-permanently flowing, wetlands if
connected with body of water, etc – but isolated waters do not
count).
ii. Under the Commerce Clause, the government does have the
right to regulate these navigable in fact waters.
iii. Essentially, if you are dumping waste products into dredged
out areas, etc. you may be in violation of the CWA if these
areas will eventually connect to navigable in fact waters at
some point (Quivira Min. Co. v. EPA).
iv. NPDES permits: In order to discharge a pollutant into
navigable waters, a NPDES permit is required.
1. Exempted: Gas introduced into a well to facilitate
production, water derived with production and disposed
of in well
a. If the well was approved by relevant state and
state determined that injection would not
degrade ground or surface waters
2. The Safe Drinking Water Act also exempts gas
injection for storage and injection of water & proppant
for hydrofracking
3. The EPA sets its own requirements and the states
formulate regulations for permits under the EPA’s
guidance.
b. CERCLA: In order to establish a CERCLA case, the π must
demonstrate: 1) the hazardous waste site constitutes a “facility,” 2) a
release or threatened release of a “hazardous substance” has occurred;
Oil and Gas Law – Komatireddy – Spring 2013
V.
3) The release or threatened release will necessitate the incurring of
response costs; and 4) the ∆ is jsubject to liability under CERCLA.
CERCLA defines petroleum as a compound of hydrocarbons that may
be refined and produced into other useful products.
i. Exemptions: CERCLA expressly excludes petroleum products
or “any fraction thereof.”
1. There is an exception to this exemption. Where
petroleum waste material is cleaned up and recycled, it
does not fall within the definition of hazardous
substance. However, where such product is not properly
disposed of, it may become a waste product if it is not
recovered for refuse. Thus, the crude oil tank bottoms
in Cose do not fall within the definition of recyclables,
tending to add additional weight to the conclusion that
they do not fall within the petroleum exemption (Cose
v. Getty Oil).
c. Oil Spills: Governed by the CWA and the OPA. Prohibits discharges
even just for sheen of the water. Not reporting a discharge is criminal.
OPA puts onus on owner and operator for liability and does not
preempt state liability. Limit in place, but this limit is void for gross
negligence, intent, or for violation of federal regulations.
Public Ownership: Sovereign Lands and Operators, Onshore and
Offshore
a. Federal lands make up about 50% of the lands in the country
b. Offshore land – approximately three miles ceded to state (Texas and
Florida get nine because they are special snowflakes)
i. After that, the next 200 miles out is federally owned (the outer
continental shelf
c. Department of the Interior manages both on and offshore drilling
under two different sub agencies on federally owned land
i. Bureau of Land Management – Regulates on-shore drilling
ii. Bureau of Ocean Energy Regulation Management and
Enforcement – Regulates off-shore drilling
iii. The surface rights are normally regulated by other agencies of
the DOI (Fish & Wildlife, Forrest, NPS, etc.). These agencies
would regulate what goes on on the surface of the land in
preparation of drilling (including the actual drilling itself).
iv. The government uses similar standard leases as a private
landowner would. The government may have similar 60 day
production requirements before it terminates a lease just like a
private landowner (In re Great Plains Petroleum).
v. Depending on how contracts are signed, new legislation may
actually cause a contract to breach in the favor of the lessee
(getting paid royalties for breach just because the government
legislated a contract into oblivion in an issue of material
breach) (Mobil Oil Exploration v. US).
Oil and Gas Law – Komatireddy – Spring 2013
d. Environmental Impact Statements: These statements are required of
federal agencies. They basically set out what the environmental
impacts are. Essentially, these impact statements need to be at least
somewhat reliable and actual scientific studies need to be done before
they can issue a FONSI. A federal agency needs to take a true “hard
look” at the environmental impacts of proposed courses of action
(Pennaco Energy v. US DOI).
e. Maritime Law: Maritime law is notoriously complex. For
simplification, maritime law generally pre-empts state law. In order for
maritime law to apply, the work at the time of the injury is going to
have to be considered either on shore or off shore. The court is going
to look at all of the circumstances surrounding the injury before it
decides what law to apply. (Davis & Sons v. Gulf Oil).
i. In terms of offshore drilling, vessels can include things that can
be used for transportation but also semi-submersible drilling
rigs that can anchor to the ground and can move around on
their own. Maritime law would govern these rigs.
ii. Drilling rigs that are anchored to the ground but can only move
when being towed are not considered vessels and would be
governed the state or federal common law.
f. Suits Against Foreign Governments and Government Owned Oil
Companies: Foreign-owned oil companies that are run by the state will
get the same foreign immunity that a foreign government would get in
a tort case. Here, the company can only be hauled into court for very
specific reasons.
i. US citizens can only sue arms of foreign states if the Foreign
Sovereign Immunity Act permits suit. The foreign governments
are immune from suit unless the government was essentially so
involved in the country as to actually effect actions in the
country. (Rogers v. Petroleo Brasileiro).
1. In Petroleo, the foreign company merely denied
payment on expired bonds. The bonds were issued form
the foreign company’s home land and were in their
language. Just not enough contacts with US soil for a
case.
Litigation and Policy: Moratoria and Burdens of Proof
I.
Lone Pine Orders: The purpose of Lone Pine orders is to reduce the
number of defendants and reduce the ability to force coercive settlements.
A Lone Pine order works by requiring the people bringing the case to set
out what their damages are and to provide proof that they were really
damaged. Case management orders may require π’s to provide some facts
and/or proof of their injuries. Normally, expert testimony will be required
(testimony about the injury, notes from doctors, doctor testimony).
Basically, you need to show a link of causation between any supposed
pollution or damage to the injuries suffered (Lore v. Lone Pine Corp.).
Oil and Gas Law – Komatireddy – Spring 2013
II.
III.
a. The π’s in Lone Pine failed because they were so lax in gathering
evidence and showed zero link and causation. Their experts were
terrible, did not visit the homes to calculate damages, and the personal
injury expert could make no connection between pollution and
supposed injuries.
b. These orders are around so that forced, coercive settlements don’t
occur and inefficient, costly discovery is avoided. There is likely some
limited discovery that would be granted. Essentially, the policy behind
this is that the π’s will need these documents for trial, anyway. Why
not force them to gather them now so we avoid a fishing expedition?
(Strudley v. Antero).
c. When there are massive amounts of π’s or ∆’s, the cases will normally
be joined. Discovery is not considered unilateral and does not have to
take place on both sides with Lone Pine orders. Expert opinion, like
always, must be based on the normal Daubert factors (Avila v. Willits
Environmental Remediation Trust).
i. If a doctor cannot eliminate other sources of contamination
besides that of the potential ∆s, the case is already iffy.
d. Some courts (more litigation happy states like West Virginia) will not
allow for a Lone Pine order and consider it an order of last resort.
Other methods such as summary judgment will be enough (you allow
some limited discovery and can then go to summary judgment if
nothing is there (Hagy v. Equitable Production Co.).
Moratoria: A federal moratorium was imposed on drilling for six months
after the BP spill. The moratorium was put at an arbitrary depth of 500
feet and set for an arbitrary time period. It also governed every single
company and not just BP. Generally, moratoria are allowed to be used in
the law. However, they tend to have to be narrowly tailored to the specific
causes and actions that caused it to be required. Typically, these moratoria
cannot be shown to be arbitrary and capricious (if governed by the APA).
a. In Hornbeck, the moratorium on drilling was the result of a 30 day
investigation where a moratorium was recommended. However, the
report itself did not find anything wrong with deep water drilling at a
certain depth. The government imposed this moratorium without
adequate evidence and could not back up its reasoning.
i. There was no explanation of timeline.
ii. There was no explanation of the depth (plus, the literature
claimed that 1000+ was deepwater while the government
banned “deepwater” over 500 feet).
iii. However, reasoning such as the fact that the government could
not cope with another spill due to how thin it was stretched
could have been used. The government failed to bring this up,
though.
iv. (Hornbeck Offshore Servs. V. Salazar)
Land Use Regulations: So far, states have been able to zone their land for
what they want (outside of federal land, of course).
Oil and Gas Law – Komatireddy – Spring 2013
a. If a state wants to ban oil and gas exploration, it may do so via a
zoning ordinance. Basically, states can do what they want with their
own land as long as it is not too crazy (AEC v. Dryden).