Applying current Texas Oil and Gas Law to micro-tract owners in urban areas ripe for horizontal drilling is often like attempting to put a square peg into a round hole. The Law was written with vertical drills and large and small, but not micro-sized, rural tracts in mind. Inside large metropolitan areas where tracts often consist of a mere tenth of an acre, application of current law may result in a taking of private property even if only in small amounts.
With modern horizontal drilling and hydraulic fracturing techniques for natural gas extraction, a single pad site located in an urban area can be used to drill ten or more lateral wells miles beneath the surface each extending for thousands of feet in different directions. In the Barnett Shale, in an area like Fort Worth, Texas, hundreds of houses often lie on top of the surface of the drilling area.
The Texas Supreme Court held in Coastal Oil and Gas Corp. v. Garza[1] that subsurface fracking of unleased property does not constitute trespass and further than no compensation for taken minerals must be given when four conditions exist. Each of these conditions serves to ensure that the property rights of the unleased landowner are adequately protected.
In urban areas, often only one of the four conditions exists, and even then, the last remaining condition likely only offers partial protection. This partial protection may result in a taking of property.
The four conditions are as follows: (1) if the unleased landowner can drill his own well, then his only remedy for drainage is to do so (this is the basic Rule of Capture), (2) if the landowner leased and his lessee negligently fails to drill an offset well, then the landowner can sue the lessee for damages, (3) the Railroad Commission can regulate production to prevent drainage, and (4) if none of the other remedies are available, then the aggrieved landowner can use the Mineral Interest Pooling Act (“MIPA”) to force pool her interest. For the urban landowner on less than an acre with a house taking up much of the surface area, drilling an offset well is both legally and practically impossible, which cancels out the first two conditions. The third condition offers no relief because regardless of how production is regulated, the unleased landowner will be subjected to uncompensated drainage. The fourth condition does potentially offer relief, but even if the micro-tract urban landowner can clear all of MIPA’s hurdles, relief is almost certainly not available as of the date that drainage began.
The Supreme Court of the United States has held that even slight physical occupation of property is a taking “to the extent of the occupation.”[2] Consequently, MIPA cases involving unleased urban micro-tract owners subject to Rule 37 spacing exceptions could result in a confiscation claim for (a) drainage occurring between the time that drainage began and entry of the Railroad Commission’s interim escrow order, or (b) for drainage that goes uncompensated due to inadequate protection under Texas’s anachronistic forced-pooling act.
In the current environment where the rights of unleased, urban, micro-tract owners are unclear, offers are generally made to lease and sometimes to participate as a working interest owner. Often, however, no significant competitive market exists once an operator has filed a courthouse unit, and been designated as operator of the urban unit. Offers are sometimes made with take-or-leave-it, adhesion-basis terms possibly because the urban, micro-tract landowners are thought to lack the sophistication and leverage to bargain for their rights, unlike their rural, small-tract counterparts who have grown savvy over many decades of rural development.
[1] Coastal Oil & Gas Corp. v. Garza Energy Trust, 268 S.W.3d 1 (2008).
[2] Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419, 434–35 (1982).
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