Applying the Rule of Capture to Residential Subdivions in the DFW Area

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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Disclaimer: This blog is for informational purposes only. Do not rely on any part of this blog as legal advice. Instead, seek out the advice of a licensed attorney.

Before You Lease Your Minerals, Check the Facts

Before you lease your mineral rights, make sure that you know what you have so that you understand what you are giving up. Contrary to popular opinion, not all mineral rights are the same. The value of your rights depends on the location of your land, the location of nearby wells, the production of nearby wells, the presence or absence of immediate drilling plans, the status of the title history to your neighbor’s lots, the stage of regulatory approvals that your drilling unit is in, the type of regulatory approvals that have been requested, the way that the drilling unit lines have been drawn in your area, the ability of the operator who intends to develop the unit, and most importantly the unique history of title to your particular piece of land.

There are two serious consequences of failing to check the facts. First, you could sign a bad lease. You may be able to easily negotiate better terms if you know how much leverage you have. Second, your minerals could be drained without any compensation to you. Yes, you heard that right. Under the Rule of Capture, which is followed in Texas, your minerals can be taken without paying you anything. When Daniel Day-Lewis talks about drinking someone else’s milkshake in the movie There Will Be Blood, he is talking about the Rule of Capture. It is a real law and it can affect you.

You can obtain most, if not all, of the information that you need from three sources: (1) the Texas Railroad Commission, (2) the Texas Comptroller’s Office, and (3) the county deed records for the county that you are in. You may also need to look at records kept by the city of municipal regulations and regulatory proceedings, as well as information from the county appraisal district. A comprehensive guide to all of these sources of information would be too long to fit in a blog post. In brief, what you want to do is start with the websites for the Railroad Commission and the county. You will find a great deal of the information that you need there. You will also want to get yourself a mapping program. There are many professional programs available for purchase, but for the most part, you should be able to accomplish your goals with a free Google Earth download.

If you need help or have questions, feel free to call our office.

Disclaimer: This blog is for informational purposes only. Do not rely on any part of this blog as legal advice. Instead, seek out the advice of a licensed attorney.

House Bill 2590 (Continuation of Oil and Gas Leases After Foreclosure) Would Reward Wrongful Conduct

Virtually all mortgage loans are drafted to encumber the mineral estate with a lien. Lender consent is generally expressly required to lease the minerals. Despite this requirement, many operators, particularly in urban areas have become lax about obtaining subordination agreements.

To solve the problem, Bill HB 2590 was promoted, which passed the Texas House and Senate in the Eighty-Third (83rd) regular legislative session. Fortunately, the Governor vetoed it. The bill would have forced the foreclosure-sale purchaser into a lease that neither he nor his precedessor-in-interest negotiated. Instead the buyer would be stuck with whatever lease the debtor negotiated in blatant violation of the lender-consent provisions of the mortgage.

This bill’s constitutionality is doubtful. The foreclosure-sale buyer acquires the interest encumbered by the lien, not whatever interest is held by the debtor. The lender never agreed to the lease terms, then when the buyer buys the lender’s interest, this bill would force the buyer into an agreement that he never made, that the owner of the interest purchased never agreed to, and that violated the mortgage contract, probably tortiously.

This bill should not be resubmitted to the Governor because it would interfere with private property rights by forcing landowners to accept terms that no one agreed to except the debtor, who violated the mortgage terms by leasing without obtaining lender consent and who only owned part of the interest sold, and the operator who failed to obtain a subordination agreement with full knowledge of its necessity.

When the mineral lessee executed the lease, the lessee knew that the lease violated the terms of the recorded instruments. The lessee also knew about the risk of foreclosure yet made the voluntary business decision to assume that risk. Now that the risk has materialized, the lessee should not be able to shirk its obligations by pushing that risk off onto the victims. This bill would reward lessees for ignoring mortgage terms, tortiously interfering with the mortgage, willfully disregard the obligation to obtain a subordination agreement, and then be rewarded for the foregoing conduct.

Disclaimer: This blog is for informational purposes only. Do not rely on any part of this blog as legal advice. Instead, seek out the advice of a licensed attorney. Also, this information may be out-of-date.