PIERCE-Correlative-Rights-PowerPoints

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Exploring Past, Present, and Future Roles for Correlative Rights

David Pierce Washburn University School of Law Topeka, Kansas

1

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.

2

Correlative Rights

• Those rights that owners in a

resource

have to

connected protect their individual rights

and

exercise their common rights

.

3

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 to marshal those rights.

rights and further development of a correlative rights doctrine 4

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

.” 5

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

.

6

The Origins of Correlative Rights

The trial judge

considered correlative rights limitations recognized under water law and commented on

neighborhood” “certain duties of good

that were applicable to the oil and gas reservoir.

7

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.” 8

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

public

,

to the

“he must not disregard

his neighbor’s rights

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

9

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.

10

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.

11

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.

12

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 commercial of quantities; producing (3) gas in underground waste; (4) the permitting of any natural-gas well to wastefully burn; and (5) the wasteful utilization of such gas; . . . .” 13

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).

14

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.

15

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

disproportionate, and unratable withdrawals

causing undue drainage

non-uniform,

between tracts of land.” 16

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).

17

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).

18

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

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).

of the oil and gas in the pool 19

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).

20

The Origins of Correlative Rights

• • Are there “common law” correlative rights?

One commentator 234-35 (1987).

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, 21

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.’” 22

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.

23

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.

24

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.

25

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.” 26

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.

27

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.” 28

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.” 29

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.

30

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.’” 31

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.’”

32

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.’” 33

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 . . . .’” 34

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.

35

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.

36

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).

37

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?

38

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.”

39

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

.

40

The Ad Coelum Doctrine

• • • The “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.

41

The Ad Coelum Doctrine

• • This 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.

42

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

.

43

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.

44

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 rectangles.

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

45

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.” 46

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).

47

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.

48

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.” 49

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.

50

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.

51

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.

52

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.” 53

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.

54

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.

55

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

.

56

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

.

57

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.

58

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.

59

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.

60

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.

61

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.” 62

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.

63

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.

64

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.

65

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,

the common right to the resource resources fully and efficiently

.”

such common interest does not permit one participant to rely on a concept of individual ownership to thwart as well as the important state interest in developing its

66

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.

67

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).

68

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).

69

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 neighborhood?” of a “reservoir 70

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.

71

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.

72

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.

73

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

.” 74

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

.” 75

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.

76

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

.” 77

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

.” 78

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.

79

Reservoir Community Analysis

• The “reservoir community” analysis builds on Professor Kuntz’ special community but also provides a

component foundation for a positive rights

to correlative rights.

80

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.

81

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.

82

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 portions of the

“less” rights property lines were surrounding properties

.

because the

reservoir within their connected to

83

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: 84

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.

85

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.

86

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

. . . .” 87

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.

88

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.

89

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.

90

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?

91

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

.

92

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.

93

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

.

94

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.”).

95

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.

96

Evaluate the Activity at Issue

• • This step is where

correlative rights

analysis.

the positive aspects of

play a major role in the Because of the connected nature of the reservoir,

when it is consistent with reservoir community standards to lines and into adjacent lands

.

develop the reservoir, owners will have the affirmative right to send frac fissures across property

97

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.

98

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.

99

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 properties.

and set-backs from adjacent 100

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.

101

“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.

102

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.

103

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.

104

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).

105

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.

106

Tree Roots and Disposal Wells

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

107

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

the activity is acceptable by the reservoir community

issue.

whether

– the neighborhood that consists of the porous and permeable rock structure at 108

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.

109

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.

110

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.” 111

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.” 112

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.

113

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

.

114

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.

115

Concluding Thoughts

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

affirmative

116