Exploring Past, Present, and Future Roles for Correlative Rights - PowerPoint Presentation

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Exploring Past, Present, and Future Roles for Correlative Rights

David PierceWashburn University School of LawTopeka, Kansas

1Slide2

Correlative Rights

Concurrent rights in a common resource.Correlative rights in oil and gas have both individual and common components.

Exclusive and non-exclusive components.

Property law doctrine generally focuses on the individual and exclusive; boundary lines.

Conceptually it is more difficult to define the common and non-exclusive.

2Slide3

Correlative Rights

Those rights that owners in a connected resource have to

protect their individual rights

and

exercise their common rights.

3Slide4

Correlative Rights

To properly respond to increasingly complex oil and gas development issues, we must be prepared to fully define the “common and non-exclusive” aspects of ownership in the oil and gas reservoir.This will require further definition of each owner’s correlative rights and further development of a correlative rights doctrine to marshal those rights.

4Slide5

Correlative Rights

My talk will:Identify the history and current status of correlative rights under Arkansas law.

Demonstrate how a failure to consider correlative rights results in the use of ill-suited remedies such as trespass.

Introduce you to a recommended “

reservoir community analysis

.”

5Slide6

The Origins of Correlative Rights

Hague v. Wheeler, 27 A. 714 (Pa. 1893).The case best known as a rejection of a correlative rights doctrine is actually an early recognition of the concept.

Here, private rights prevail over public rights.

Supreme Court elected to protect the correlative rights

of the wasting party

.

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The Origins of Correlative Rights

The trial judge considered correlative rights limitations recognized under water law and commented on

“certain duties of good neighborhood”

that were applicable to the oil and gas reservoir.

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The Origins of Correlative Rights

“‘What then, are the rights of adjoining owners of oil and gas? Are they absolute and independent, or qualified and correlative?

’”

The

“right of each owner is qualified” because of the connected nature of the right; each must “submit to such limitations as are inevitable to enable each to get his own.”

8Slide9

The Origins of Correlative Rights

The Supreme Court:Owners in a common source of supply (a “reservoir”) are subject to two limitations:

“he must not disregard his obligations

to the public

,“he must not disregard

his neighbor’s rights

.”

An offer to sell gas to neighbor was the only recognition required under the facts.

9Slide10

The Origins of Correlative Rights

Ohio Oil Co. v. Indiana, 177U.S. 190 (1900).Protection of correlative rights of private owners relied upon to support state law protecting public rights.

Public actions to prevent “waste” caused by Ohio Oil acceptable when pursued to protect the private property rights (correlative rights) of other owners in the reservoir.

10Slide11

The Origins of Correlative Rights

Bandini Petroleum Co. v. Superior Court, 284 U.S. 8 (1931).

California “Oil and Gas Conservation Act” enforced to enjoin the “unreasonable waste of natural gas.”

Lower Court: public interest basis in doubt.

Supreme Court: statute can be upheld as one “regulating the exercise of the correlative rights” of the owners; a private property basis.

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The Origins of Correlative Rights

Correlative rights were first addressed by the Arkansas Legislature in the 1920s through broad prohibitions of “waste.”The prohibited conduct included actions that could impair the ability of other owners in the reservoir to exercise their capture rights.

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The Origins of Correlative Rights

Act 664 of 1923, §2: “The term ‘waste’ . . . shall include (1) escape of natural gas in commercial quantities into the open air; (2) the intentional drowning with water of gas stratum capable of producing gas in commercial quantities; (3) underground waste; (4) the permitting of any natural-gas well to wastefully burn; and (5) the wasteful utilization of such gas; . . . .”

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The Origins of Correlative Rights

The other major concern was equal access to marketing outlets. For example:Act 664 of 1923, §4 (restrictions

on

production

to match “market demand”) and §5 & §6 (pipelines must act as common purchasers and cannot discriminate in taking gas

).

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The Origins of Correlative Rights

The primary focus of the pre-1939 conservation acts was to protect the natural gas resource from being destroyed in the process of producing oil. The 1939 Conservation Law included a new focus on oil as well as gas.

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The Origins of Correlative Rights

Ratable production continued to be a major concern.The 1939 Act defined “waste” to include:“Abuse of the

correlative rights and opportunities

of each owner of oil and gas in a common reservoir

due to

non-uniform, disproportionate, and

unratable

withdrawals

causing undue drainage

between tracts of land.”

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The Origins of Correlative Rights

This limited definition of correlative rights is carried forward, without change, to the present statutory definition. ARK. CODE ANN. § 15-72-102(15)(C) (2009)

.

The same definition is used in the Commission’s regulations.

ARK. OIL AND GAS COMM’N, GEN. RULES AND REGS., RULE A-4: DEFINITIONS, WASTE(3), 18 (Jan. 20, 2014).

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The Origins of Correlative Rights

In the Act’s “Declaration of policy” the Legislature equates “coequal

or correlative rights

of owners of crude oil or natural gas in a common source of

supply to produce and use

the crude oil or natural

gas” to “

compelling

ratable production

.”

ARK. CODE ANN. § 15-72-101 (2009).

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The Origins of Correlative Rights

The equal opportunity definition of correlative rights is carried through in the statutes requiring drilling units to:

“[A]

fford

the owner of each tract . . . the opportunity to recover

or receive his or her just and

equitable share

of the oil and gas in the pool without unnecessary expense and will prevent or minimize reasonably avoidable drainage from each developed unit which is not equalized by counter drainage.”

ARK. CODE ANN. § 15-72-304 (2009).

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The Origins of Correlative Rights

Common law correlative rights in Arkansas?As Thomas Daily has noted: “Please remember though, correlative rights are not common law rights; they are one hundred percent statutory

.” Thomas A. Daily, Lawyering the Fayetteville Shale Play – Welcome To My World, 44 ARKANSAS LAWYER 10, 12 (Spring, 2009).

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The Origins of Correlative Rights

Are there “common law” correlative rights?One commentator has suggested that Arkansas would likely recognize a limitation on the rule of capture similar to that imposed by the Texas Supreme Court in

Elliff

v.

Texon Drilling Co., 210 S.W.2d 558 (Tex. 1948). Susan Webber Wright, The Arkansas Law of Oil and Gas, 9 U. OF ARK. AT LITTLE ROCK L.J. 223, 234-35 (1987).

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The Origins of Correlative Rights

Any act that impairs the ability of other owners to

exercise their capture rights would be a violation of their correlative rights.

This

analysis is supported by the court’s observations in Young v. Ethyl Corporation

, 521 F.2d 771 (8th Cir. 1975),

cert. denied

, 439 U.S. 1089 (1979), where it noted the rule of capture would be constrained by “the doctrine of ‘correlative rights

.’”

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The Origins of Correlative Rights

However, Young was a “brine”

case

.

The “brine cases” demonstrate a reluctance by courts to grant any one party in a reservoir an undue advantage because of the connected nature of the reservoir.

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The Origins of Correlative Rights

If courts give the hold-out a trespass claim, the hold-out receives undue power over the operator desiring to invest in secondary and other enhanced recovery techniques that require use of the reservoir.

The

trespass remedy does much more than merely protect the owner’s land; it effectively impedes use of the entire reservoir.

When

dealing with a connected reservoir any trespass remedy will have considerable extra-territorial impact.

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The Origins of Correlative Rights

If courts give the operator the benefits of the rule of capture to deal with the hold-out, the operator receives undue power over the hold-out and may elect to simply ignore them.

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The Origins of Correlative Rights

The court in Young opined that if it adopted a capture remedy (which it rejected), the operator would nevertheless be subject to “the doctrine of ‘correlative rights.’”

The court, however, limited the doctrine to a duty not to “injure the source of supply” or to “take an undue proportion of the oil and gas from the common pool

.”

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The Origins of Correlative Rights

The court focused on the “undue proportion” language suggesting that allowing the rule of capture to operate in this situation would, in any event, violate correlative rights by allowing the operator to take an undue proportion of the brine.

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The Origins of Correlative Rights

The balance between trespass and the rule of capture was ultimately struck in Jameson v. Ethyl Corporation, 609 S.W.2d 346 (Ark. 1980).The

court allowed the otherwise trespassing activity to take place so long as “such operations are carried out in good faith for the purpose of maximizing recovery from a common pool

.”

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The Origins of Correlative Rights

However, the extracting party must “compensate the owner of the depleted lands for the minerals extracted in excess of natural depletion, if any, at the time of taking and for any special damages which may have been caused to the depleted property.”

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The Origins of Correlative Rights

Water and correlative rights.The oil and gas industry shunned water law as a guide for correlative rights analysis because it was also used to allocate water quantity rights.

This allocative component ran counter to the rule of capture.

However, water law correlative rights has a non-allocative component that offers insight for dealing with intra-reservoir disputes.

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The Origins of Correlative Rights

Harris v. Brooks, 283 S.W.2d 129 (Ark. 1955) (adopting reasonable use theory as applied to surface waters).

“‘The use of the stream or water by each proprietor is . . . limited to what is reasonable, having due regard for the rights of others above, below, or on the opposite shore.’”

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The Origins of Correlative Rights

The rights of the riparian owner are “‘qualified only by the correlative rights of other riparian owners, and by certain rights of the public, and they are to be so exercised as not to injure others in the enjoyment of their rights

.’”

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The Origins of Correlative Rights

Jones v. Oz-Ark-Val Poultry Company, 306 S.W.2d 111 (Ark. 1957) (adopting reasonable use theory as applied to subsurface waters).

“‘[

T]he right of a landowner to appropriate percolating water in his own land is limited by the corresponding right of his neighbor, and extends only to a reasonable exercise of such right; or, as said by the court, the rights are correlative

.’”

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The Origins of Correlative Rights

“‘Where two or more persons own different tracts of land, underlaid by porous material extending to and communicating with them all, which is saturated with water moving with more or less freedom therein, each has a common and correlative right to the use of this water . . . .’”

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The Origins of Correlative Rights

Common law correlative rights, as applied to oil and gas law, reamin to be developed in Arkansas.I predict this will occur as courts find it necessary to more completely define aspects of oil and gas “ownership” that have, to date, not been defined.

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Previously Undefined Contours of Oil and Gas “Ownership”

Not changing or re-defining rights.Defining rights for the first time.

The precise circumstances have not been the focus of prior litigation.

Must be sure that all relevant circumstances are considered when declaring ownership and the resulting property rights.

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Property Law Defines Tort Law

Defining “ownership” as a matter of property law will also define the scope of tort law.The nature of an adjacent owner’s “ownership” (property law) will often be determinative when evaluating whether something is a trespass or nuisance (tort law).

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The Issues Triggering the Inquiry

The specific issue:

How should courts respond to a

frac

fissure that crosses subterranean property

lines?

The more general

issue:

How should courts

resolve cross-boundary intra-reservoir

conflicts?

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The Key Observation

Rights in a reservoir cannot be isolated from the reservoir.It is not possible to set apart “ownership” in a reservoir from the reservoir.Rights in a reservoir are connected and therefor collective.

Each owner has communal rights in the “reservoir community.”

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Negative and Positive Rights

In the past most of the focus has been on “rights and duties” that place

limitations

on what an owner can do within the reservoir:

negative

rights

.

The

fracing

issue, and other intra-reservoir conflicts, require that we explore

the

positive

rights aspects of correlative

rights

.

40Slide41

The Ad Coelum

DoctrineThe “

ad

coelum

doctrine” is the abbreviated term used to describe the extent of ownership in land within surface boundaries.

Ownership

extends above and below the land surface

.

Much of the law of

property

depends upon boundary lines drawn upon the surface of land.

41Slide42

The Ad Coelum

DoctrineThis extension of surface boundaries to define subsurface rights operates on the same fence-line mentality used to define surface rights.

Oil

and gas can move within the reservoir rock structure, and

migrate across the downward projection of surface boundary lines

.

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The Rule of Capture

It does not matter whether oil and gas rights are part of the “ownership of land” or a right to enter land to explore, develop, and produce oil and gas. In either case the right to search for, extract, and own the oil, gas, or other minerals,

is defined by what takes place on a tract of land that is described by surface boundaries

.

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Defining “Correlative Rights”

The term “correlative rights” is used in two contexts.The

public regulatory meaning:

if the state is going to limit my ability to drill under the Rule of Capture, the limitation must be applied equitably.

The private property meaning:

each owner overlying a reservoir can impact, and is impacted by, what happens within the reservoir.

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Conservation Regulation

The major limitation on the Rule of Capture is “conservation” regulation.Designed to place minimum ground rules for exercising the Rule of Capture.

Squares and rectangles.

Pooling to facilitate the squares and rectangles.

Unitization as the one means to remove boundary lines from operational decisions.

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Conservation Regulation

To a large extent, an owner is left to their own devices, under the rule of capture, to secure and protect their correlative rights.

As Professors Kramer and Martin note in their treatise on pooling and unitization:

“

The correlative right is having the

opportunity

to produce

, not having a guaranteed share of production

.”

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Conservation Regulation

When a conservation authority limits an owner’s self-help capture remedy -- the “

opportunity” --

it must do so in a fair and equitable manner.

A failure to do so would violate the owner’s correlative rights

.

E.g.

,

Zinke

& Trumbo, Ltd. v. State Corporation Commission

, 749 P.2d 21 (Kan. 1988).

47Slide48

Conservation Regulation

The court held the Commission violated Zinke’s correlative rights by failing to consider a statutory factor in adopting a proration formula for gas wells in the Morrow sand.

Sho

-Bar

completed a well with 11 feet of pay located 330 feet from

Zinke’s

lease line.

Zinke

had completed a well on its lease with 30 feet of pay.

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Conservation Regulation

Sho-Bar fraced its well; the court commented on the trajectory of the

frac

stating

:“Experts for both parties testified a fracture of this size would extend at least 400 feet in the area of least resistance. The center of the reservoir on

Zinke’s

lease is the area of least resistance. Since

Sho

-Bar’s location of the

Fincham

1-30 is only 330 feet from

Zinke’s

lease line, the fracture obviously penetrated

Zinke’s

lease

.”

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Conservation Regulation

After the frac treatment, production from Sho-Bar’s well increased by over 550

%.

This

was attributed to the highly porous and permeable nature of the reservoir and the frac traveling from the edge of the formation, where

Sho

-Bar’s well was located, to the heart of the formation, where

Zinke’s

well was located.

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Conservation Regulation

The Kansas Corporation Commission adopted Sho

-Bar’s requested 160-acre

spacing with a 50/50 proration formula: 50% of the total pool allowable based upon the open flow of each well and 50% based upon the acreage attributable to each well

.Zinke

objected, arguing for 640-acre spacing and a formula that was not so heavily weighted toward the open flow of

Sho

-Bar’s

fraced

well.

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Conservation Regulation

The applicable conservation statute required the Commission to “give equitable consideration to acreage, pressure, open flow, porosity, permeability and thickness of pay, and such other factors, conditions and circumstances as may exist in the common source of supply under consideration at the time, as may be pertinent

.”

Zinke

contended the Commission erred by not considering the impact of the fracture treatment as an “other factor” in developing field rules for the Morrow formation.

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Conservation Regulation

The court agreed, stating:“Under

the KCC’s duty to protect correlative rights to natural gas in a common source of supply, we find evidence of fracture treatment to a well or wells in the common field to be one of the

‘other

factors, conditions, and circumstances’

which must be considered in making a proration order

.”

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Conservation Regulation

The Commission’s error in the Zinke case was not necessarily the ultimate formula it chose to adopt,

it was the failure to consider the statutory factors in arriving at its decision

.

The court held this constituted a violation of Zinke’s

correlative rights.

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Correlative Rights

The Zinke case is an example of correlative rights in a public context designed to ensure fair treatment by government when it intervenes to marshal capture rights.

That

is a fairly routine issue that commissions, commissioners, and courts have dealt with extensively.

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Correlative Rights

Much less developed is the private context of correlative rights. The cases that follow are examples of courts resolving disputes that could have been better addressed using a

correlative rights analysis

.

Instead, the issues were forced into an ill-fitting

“property line” analysis

.

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The “Property Line” Analysis

To date, conflicts among owners within an oil and gas reservoir have been framed using an ad

coelum

/rule of capture analysis; a “property line” analysis

.The most notable recent intra-reservoir disputes have concerned

hydraulic fracturing where

frac

fissures cross a subterranean boundary line

.

57Slide58

Coastal v. Garza

Coastal Oil & Gas Corp. v. Garza Energy Trust, 268 S.W.3d 1 (Tex. 2008).

Supreme Court:

No

“actionable” trespass when a frac fissure extended into adjacent lands. Damages negated by rule of capture.

Court of Appeals & Trial Court:

Malicious trespass to engage in felony theft

.

$543,776 actual and $10,000,000 punitive damages.

58Slide59

Coastal v. Garza

The weakness with the analysis in Garza is the court never evaluated the legitimacy of the activity that made it possible to capture the oil and gas

.

The

predicate for being able to capture the oil and gas was the act of fracing the well.

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Coastal v. Garza

If the fracing was a legitimate act, then the drainage from the adjacent land would be protected by the rule of capture.

If

the

fracing was illegitimate, the subsequent capture would also be illegitimate.

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Coastal v. Garza

Although hailed by many as “solving”

fracing

trespass problems,

the court in Garza clearly

indicated it was not addressing the issue

.

After

noting its withdrawn opinion in

Geo Viking

,

that

held “

fracing

beneath another’s land was a trespass,” the court stated: “We need not decide the broader issue here

.”

The court held

that any damages the plaintiffs could assert were related solely to drainage which the majority deemed to be encompassed by the rule of capture.

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Stone v. Chesapeake

Stone v. Chesapeake Appalachia, LLC, No. 5:12-CV-102, 2013 WL 2097397 (N.D. W.Va. April 10, 2013),

vacated following settlement

, 2013 WL

7863861 (July 30, 2013).Rejected

the

analysis

in

Garza

and held that

frac

fissures extending into adjacent lands constituted an actionable trespass

.

“

The

Garza

opinion gives oil and gas operators a blank check to steal from the small landowner.”

62Slide63

Stone v. Chesapeake

The problem with the analysis in Stone is the court assumed that when a frac

fissure crossed a subterranean boundary line, it would constitute a trespass

.

It answered the question left unanswered in Garza

: recovery of oil and gas through a

frac

fissure that crosses property lines is a trespass and is therefore not protected by the rule of capture.

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Stone v. Chesapeake

The court noted that West Virginia fully embraces the ad coelum

doctrine.

The ad coelum

doctrine is a necessary component of the property line analysis

.

Once

a

frac

fissure crosses a property line a trespass has been committed and any drainage of oil and gas associated with the

frac

will be illegitimate and not protected by the rule of capture.

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Stone v. Chesapeake

As is frequently the case, the court chose to protect the landowner’s right to refuse to pool their land or otherwise participate in development of the reservoir; the right to just say “no.”

In many

states

the landowner’s ability to just say “no” is severely limited by compulsory

pooling statutes.

65Slide66

Not Alone in the Reservoir

In Nunez v. Wainco

Oil & Gas Co.

, 488 So.2d 955 (La. 1986), the court held

that:“[W]hen the Commissioner of Conservation has declared that landowners

share a common interest in a reservoir

of natural resources beneath their adjacent tracts,

such common interest does not permit one participant to rely on a concept of individual ownership to thwart the common right to the resource

as well as the important state interest in developing its resources fully and efficiently

.”

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Wrong Analysis?

The Stone analysis, like the

Garza

analysis, fails to consider

the connected nature

of the property interest at issue

.

Nowhere

in either opinion is there any analysis regarding the parties’ correlative rights in the reservoir.

The

observations made by Theresa Poindexter, in her student comment on

Garza

, are therefore equally applicable to

Stone

.

67Slide68

Wrong Analysis?

Theresa D. Poindexter, Correlative Rights Doctrine, Not the Rule of Capture, Provides Correct Analysis for Resolving Hydraulic Fracturing Cases [Coastal Oil & Gas Corp. v. Garza Energy Trust, 268 S.W.3d 1 (Tex. 2008)]

, 48 WASHBURN L. J. 755 (2009).

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Fence-Line Mentality

“Although an owner of land can construct a fence, and delineate his or her surface boundaries, this is not possible when the line is drawn within an oil and gas reservoir. Yet, all oil and gas conveyances and leases draw lines that purport to neatly carve up the oil and gas reservoir

.”

David E. Pierce,

Oil and Gas Easements,

33

ENERGY & MIN. L. INST. 317, 319 (2012).

69Slide70

It’s a Beautiful Day in the Neighborhood

The court in Stone made it clear that hydraulic fracturing is not protected by the rule of capture.

But

, might it be protected under a more precise definition of the parties’ respective rights as members of a “reservoir neighborhood?”

70Slide71

The Reservoir Neighborhood Analysis

No property interest is absolute.Private

property is

often made

more valuable by recognizing limits on its free use because the property will benefit from similar limits imposed on surrounding owners.

71Slide72

The Reservoir Neighborhood Analysis

Carol Rose: property consists of: “

some

individual

rights, mixed with still more

rights shared with nearby associates or neighbors

, mixed with still more

rights shared with a larger community

, all held in relatively stable but nevertheless changing and subtly renegotiated relationships

.”

When

dealing with oil and gas in a reservoir, these reciprocal limitations, and corresponding reciprocal rights, are reflected in the concept of correlative rights

.

72Slide73

Correlative Rights

Why have correlative rights not played a bigger role in defining rights in oil and gas?Particularly positive or affirmative rights.

During the formative years of oil and gas law the greatest threat to the rule of capture was the correlative rights doctrine.

73Slide74

Correlative Rights

In 1931 the American Petroleum Institute sought to describe each owner’s correlative rights in a reservoir by stating: “

each owner of the surface is entitled only to his equitable and ratable share of the recoverable oil and gas energy in the common pool in the proportion which the recoverable reserves underlying his land bears to the recoverable reserves in the pool

.”

74Slide75

Correlative Rights

API’s 1942 clarification of its 1931 statement: “

Within

reasonable limits

, each operator shall have an opportunity equal to that afforded other operators

to recover the equivalent of the amount of recoverable oil [and gas] underlying his property. The aim should be to

prevent reasonably avoidable drainage of oil and gas across property lines that is not offset by counter drainage

.”

75Slide76

Correlative Rights

By the time this change in policy was announced, states were passing oil and gas conservation laws and the focus shifted from private correlative rights to ensuring equal treatment of owners by conservation agencies regulating drilling and production

.

The

only private correlative rights issues were those dealing with injury to the reservoir that impaired the capture rights of other owners in the reservoir.

76Slide77

Professor Kuntz’ Special Community

Professor Kuntz first described correlative rights as rules for a “special community” in a 1958 article for the Mississippi Law Journal.

In

summarizing the scope of the term “correlative rights,” Professor Kuntz observed: “

It is a simple doctrine that owners of rights in a common source of supply may not inflict loss upon one another by conduct which is considered socially undesirable

.”

77Slide78

Professor Kuntz’ Special Community

“The owners in the common source of supply operate in a special community, and the social acceptability of conduct within such community must be determined

, not only by applying the

standards applicable to conduct generally

, but by also considering the

utility of the conduct in the light of its peculiar consequence to others operating in the same community

.”

78Slide79

Professor Kuntz’ Special Community

In his treatise Professor Kuntz expands upon his analysis of correlative rights, mentioning “fracturing the sands” as being in a category where the rule of capture protects correlative rights by allowing impacted owners to “do likewise.”

He contrasts that with when the issue is secondary recovery.

79Slide80

Reservoir Community Analysis

The “reservoir community” analysis builds on Professor Kuntz’ special community but also provides a foundation for a positive rights component to correlative rights.

80Slide81

Reservoir Community Analysis

The foundation of a reservoir community analysis is the physical reality that it is not possible to draw a property line within a reservoir and thereby create a segregated portion of reservoir ownership

.

This

is also the inherent flaw with the ad coelum doctrine, the rule of capture, and the resulting property line analysis.

81Slide82

Reservoir Community Analysis

What the courts failed to realize in Garza and Stone is the undeniable fact that

neither party to the litigation had the sole rights to the reservoirs at issue

.

In

each case the parties owned

more, and less,

than the courts accounted for in their analyses.

82Slide83

Reservoir Community Analysis

They each owned “more” rights because they also possessed rights in the reservoir at large, which also

gave them rights in the properties of their neighbors

.

They each owned

“less” rights

because the portions of the

reservoir within their property lines were connected to surrounding properties

.

83Slide84

Reservoir Community Analysis

Because activities within the owner’s property lines could impact surrounding properties, the owner will be restrained to account for community rights.

The three step Reservoir Community Analysis:

84Slide85

Define Community Membership

Step #1. The reservoir community analysis begins where the property line analysis begins and ends: with surface boundaries.

Surface

boundaries define membership in the reservoir community.

85Slide86

Define Community Membership

Using the Garza case as a guide, assume the reservoir at issue, the community, is

a defined geologic structure: the

Vicksburg T

Formation.

Property

lines will be used to define

membership

in

the Vicksburg T

reservoir

community.

Property lines, however,

will not define

rights

as a community member

.

86Slide87

Physical Attributes of the Community

Step #2. Understand how the reservoir community works.

Gas reservoir located at a depth between 11,688 and 12,610 feet below the surface.

“[A] ‘tight’ sandstone formation, relatively

imporous

and impermeable,

from which natural gas cannot be commercially produced without hydraulic fracturing stimulation

. . . .”

87Slide88

Evaluate the Activity at Issue

Step 3. Evaluate the activity being conducted within the reservoir community.The

activity for this example is the hydraulic fracturing conducted by Coastal in the Vicksburg T formation

.

The first issue is whether any hydraulic fracturing should be allowed in the Vicksburg T formation.

88Slide89

Evaluate the Activity at Issue

What if a landowner owning oil and gas rights in the Vicksburg T formation objects to all hydraulic fracturing?

Perhaps

they are concerned about

frac fissures coming onto their part of the formation from adjacent lands.

Perhaps

they fear producing additional fossil fuels will contribute to climate change and the ultimate destruction of planet Earth.

89Slide90

Evaluate the Activity at Issue

The matter will not be put to a vote.The answer will be provided by considering the physical attributes of the Vicksburg T formation

.

Because

the Vicksburg T is worthless without hydraulic fracturing, it is an appropriate activity and one that should be promoted.

90Slide91

Evaluate the Activity at Issue

But what if prudent development of the Vicksburg T formation requires that frac fissures extend across property lines

?

Can

an owner object to the practice?

91Slide92

Evaluate the Activity at Issue

Unlike the ad coelum/capture property line analysis,

the issue is not the proximity of a

frac

fissure to a property line

.

The issue is whether the conduct is in harmony with development of the reservoir community

.

92Slide93

Evaluate the Activity at Issue

Consider only what is necessary to maximize value from the Vicksburg T formation

.

Surface

use and other collateral issues should not enter into the analysis.

Purely

an exercise for the technicians seeking to get the most out of

the

reservoir economically possible.

93Slide94

Evaluate the Activity at Issue

The proper focus should be on the conduct; the justification for what was done, how it was done, and its impact on the reservoir community.

It

will be a matter of time and place;

the state of the art combined with the special requirements of the reservoir.

94Slide95

Evaluate the Activity at Issue

Time and place.Crocker v. Humble Oil & Ref. Co., 419 P.2d 265 (Okla. 1965) (“no reasonable or prudent operator would drill additional wells on the lease until after the advent of

sandfracing

.”).

95Slide96

Evaluate the Activity at Issue

Development techniques and practices that were reasonable at one time may become unreasonable as they are eclipsed by new techniques and practices.Correlative

rights within a particular reservoir community must be evaluated on a case-by-case basis.

96Slide97

Evaluate the Activity at Issue

This step is where the positive aspects of correlative rights play a major role in the analysis.

Because

of the connected nature of the reservoir,

when it is consistent with reservoir community standards to develop the reservoir, owners will have the affirmative right to send

frac

fissures across property lines and into adjacent lands

.

97Slide98

Evaluate the Activity at Issue

When properly viewed as a property right of a common owner in the reservoir community, trespass will not be an issue.

The

intrusion across property lines is authorized as a member or the reservoir community pursuing development of the reservoir.

98Slide99

Evaluate the Activity at Issue

When a court is asked to evaluate the legitimacy of frac fissures that cross property lines, the concept of “trespass” should not be considered until the property interests of all parties have been accurately defined

.

Trespass

will always be dependent upon an accurate definition of the affected parties’ property rights.

99Slide100

Evaluate the Activity at Issue

The reservoir community analysis recognizes communal rights in the reservoir that will often extend beyond property lines. The issue can also arise before a state oil and gas conservation commission, often regarding spacing and set-backs from adjacent properties.

100Slide101

Evaluate the Activity at Issue

The communal rights of all parties in the reservoir must likewise be acknowledged to prevent adopting development rules that create unnecessary buffer zones for no reason other than to accommodate property lines.

Buffer

zones can strand oil and gas reserves resulting in waste.

101Slide102

“Frack Hits” and Correlative Rights

Current issues amendable to a reservoir community analysis:“

Frack

hits.”

Geophysical communication between offset wells during hydraulic fracturing.

Colorado Oil and Gas Conservation Commission’s Statewide Offset Policy.

102Slide103

Tree Roots and Disposal Wells

Louisiana Civil Code Article 688 provides

:

A landowner has the right to demand that the branches or

roots of a neighbor’s trees

, bushes, or plants, that extend over or into his property be trimmed at the expense of the neighbor

.

A landowner does not have this right if the roots or branches do not interfere with the enjoyment of his property.

103Slide104

Tree Roots and Disposal Wells

Geologic structures suitable for the disposal or storage of liquid or gaseous substances will be porous, permeable, and therefore connected

.

Problems

arise when the tract of land where the injection well is located is in proximity to other lands such that physics will ultimately run its course and injected substances will migrate into surrounding lands.

104Slide105

Tree Roots and Disposal Wells

Applying a property line analysis means a trespass will occur the moment the injected substances cross surface boundary lines. Consider:

Hill v. Southwestern Energy Company

, No. 4:12-cv-500-DPM, 2013 WL 5423847 (E.D. Ark. Sept. 26, 2013) (licensed disposal of

frac fluids into disposal well).

105Slide106

Tree Roots and Disposal Wells

Because the geologic structure is not an oil and gas reservoir, correlative rights, at least of the oil and gas type, will not apply.

106Slide107

Tree Roots and Disposal Wells

Must courts account for the connected nature of the formation underlying separately-owned properties?

107Slide108

Tree Roots and Disposal Wells

Although the “waste” and other issues unique to oil and gas are not involved, the same sort of reservoir community analysis applies because of the connected nature of the rock structure

.

The

question then properly becomes whether the activity is acceptable by the reservoir community

– the neighborhood that consists of the porous and permeable rock structure at issue

.

108Slide109

Tree Roots and Disposal Wells

It may not matter in the least that migration is occurring if the conduct giving rise to the migration is in harmony with community standards.

109Slide110

Tree Roots and Disposal Wells

Community standards will often be measured by the “harm” either to the community or certain members of the community.

If

the harm is significant, the activity may be unacceptable to the community

.If the harm is slight, unlikely, or unprovable at the moment, the activity may be acceptable when it involves making a productive use of property within the community.

110Slide111

Tree Roots and Disposal Wells

This is where the law of tree roots may be instructive in evaluating waste injection issues

.

The

roots are “down there,” and they have broken the defining plane under a property line analysis, but the Civil Code tells us the landowner has no cause of action because the presence of the invading roots does not “interfere with the enjoyment of his property.”

111Slide112

Tree Roots and Disposal Wells

This issue is currently the subject of on-going litigation in Texas

.

FPL

Farming LTD. v. Environmental Processing Systems, L.C., 383 S.W.3d 274 (Tex. App. 2012

),

petition for review granted

Nov. 22, 2013.

“We

conclude that Texas law recognizes FPL’s property interest in the briny water underneath its property. We do not agree with EPS that no trespass action exists under Texas law to protect FPL’s legal interest to its property

.”

112Slide113

Concluding Thoughts

Whether termed correlative rights, reservoir community, or subterranean neighborhood, the goal is to ensure that oil and gas ownership is viewed in its proper multi-dimensional context.

Each

owner within a reservoir is “connected” to varying degrees with other owners in the reservoir.

113Slide114

Concluding Thoughts

This places restrictions on all owners to not do things in the reservoir that could injure the reservoir community.At the same time, it gives each owner

affirmative rights that can extend into the community to such an extent that property lines may not be the limitation encountered at the surface

.

114Slide115

Concluding Thoughts

Hydraulic fracturing is a good example.Because

developers must operate in an interconnected reservoir, it will often be reasonable to allow

frac

fissures to venture beyond property lines to achieve effective development of the reservoir community.

115Slide116

Concluding Thoughts

When the activity is appropriate to meet the needs of the reservoir community, it becomes one of the developer’s affirmative

correlative

rights.

116