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In Texas, Surface Estate Owner Does Have the Ability To Allow Subsurface Horizontal Drilling Despite Separate Ownership Of The Mineral Estate

Case: Lightning Oil Company v. Anadarko E&P Onshore, LLC
           Texas Supreme Court
           2017 Tex. 15-0910 (3/21/2017)

Anadarko wished to produce minerals beneath the Chaparral Wildlife Management Area controlled by the Texas Parks and Wildlife Department, which, though possible, was subject to considerable restrictions and expensive. Anadarko’s mineral lease with Chaparral required drilling locations “be established off the Chaparral...when prudent and feasible.” Instead, to access the minerals, Anadarko entered into a contract with Briscoe Ranch, Inc., the owner of the adjacent property’s surface estate, which contract allowed it to drill from the surface, then horizontally to access the Chaparral minerals.

Years before, the mineral estate beneath the Briscoe Ranch property had been severed from the surface estate. The mineral estate was owned by the Hurd Family, which in turn leased the minerals to Lightning. Lightning sought to enjoin Anadarko’s efforts which were to result in well bores passing through the subsurface, where Lightning held the rights to mineral bearing formations. Anadarko represented there was no intent to perforate or produce from Lightning’s leasehold. Lightning also sought damages for trespass and tortious interference with its mineral lease. Both the trial and appellate courts rejected Lightning’s claims. Lightning appealed.

The Texas Supreme Court initially set forth several legal principles impacting its decision. It noted the surface owner “owns all non-mineral ‘molecules’ of the land, i.e., the mass that undergirds the surface estate.” Dunn–McCampbell Royalty Interest, Inc. v. Nat’l Park Serv., 630 F.3d 431, 441 (5th Cir. 2011). It further noted the “rule of capture” requires “that the mineral estate owner is only entitled to ‘a fair chance to recover the oil and gas in place or under’ the surface estate,” citing Coastal Oil & Gas Corp. v. Garza Energy Tr., 268 S.W.3d 1, 15 (Tex. 2008).

The Court set forth the rights of a mineral estate owner (here the Hurd Family), as follows: “(1) the right to develop, (2) the right to lease, (3) the right to receive bonus payments, (4) the right to receive delay rentals, and (5) the right to receive royalty payments.” Hysaw v. Dawkins, 483 S.W.3d 1, 9 (Tex. 2016) (quoting French v. Chevron U.S.A., Inc., 896 S.W.2d 795, 797 (Tex. 1995)).” However, the rights of a mineral lessee are limited to the right to develop minerals under the lease, which includes “the right to go onto the surface of the land to extract the minerals, as well as those incidental rights reasonably necessary for the extraction.” Merriman v. XTO Energy, Inc., 407 S.W.3d 244, 248-49 (Tex. 2013). A mineral lessee does not have “the right to possess the specific place or space where the minerals are located.”

Further, a trespass exists only if the “unauthorized interference with the place where the minerals are located” “infringe(s) on the mineral lessee’s ability to exercise its rights.” Speculation of potential future interference is not enough. To obtain injunctive relief, there must be proof that “absent such relief, it will suffer imminent, irreparable harm.”

Applying the foregoing to the facts presented, the Court accepted Lightning’s position that drilling though the subsurface would necessarily introduce permanent structures which might interfere with its exclusive right to produce minerals. The Court also agreed that, although small, the amount of minerals contained in the dirt and rock displaced by the wellbore would be lost to Lightning. Nevertheless, the Court held Lightning’s “individual interests in the oil and gas lost through being brought to the surface as part of drilling a well are outweighed by the interests of the industry as a whole and society in maximizing oil and gas recovery,” such that “the loss of minerals Lightning will suffer by a well being drilled through its mineral estate is not a sufficient injury to support a claim for trespass” or injunctive relief.

The Court acknowledged Lightning’s mineral estate remained the dominant estate (not because its interests are superior to the surface owner’s but because it has the right of use of the surface estate, as well as of the subsurface), but refused to allow it to prevent any surface or subsurface use which might in the future interfere with its use of the mineral estate. The Court found giving Lightning such rights would render the mineral estate “absolutely dominant” and alter oil and gas law in Texas dramatically.

Instead, the Court found the accommodation doctrine adequate to protect the mineral estate, stating, “[t]he accommodation doctrine has long ‘provided a sound and workable basis for resolving conflicts’ between owners of mineral and surface estates that allows the mineral owner to use as much of the surface—and subsurface—as is reasonably necessary to recover its minerals. Coyote Lake Ranch, LLC v. City of Lubbock, 498 S.W.3d 53, 63 (Tex. 2016).”

With respect to Lightning’s claim for damages arising from intentional interference with contract, the Court held, “[t]ortious interference with a contract occurs when a party interferes with a contract willfully and intentionally and the interference proximately causes actual damages or loss. See Murray v. Crest Constr., Inc., 900 S.W.2d 342, 344 (Tex. 1995). Justification is an affirmative defense to such a claim and ‘is established as a matter of law when the acts the plaintiff complains of as tortious interference are merely the defendant’s exercise of its own contractual rights.’ Prudential Ins. Co. of Am. v. Fin. Review Servs., Inc., 29 S.W.3d 74, 81 (Tex. 2000). As Anadarko was exercising its rights under its contract with Briscoe Ranch, the tortious interference claim was also dismissed.

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