The Oil and Gas Addendum

As the rush to access the Marcellus Shale formation continues, landowners throughout the Commonwealth are learning that their properties may be the next location for a horizontal well site. Given the lucrative signing bonuses being offered, this is welcomed news to some landowners. For those landowners who do not own the underlying mineral formations, however, this news can be troubling and disconcerting. Such uncertainty is well-founded.

Many oil and gas producing states, in an effort to strike a delicate balance between the rights of the surface owner and the interests of the mineral owner, have adopted what is popularly known as the Accommodation Doctrine. These states have either formally recognized the Doctrine as part of their common law or passed surface owner protection legislation. Pennsylvania, however, has done neither. The Doctrine has never been formally recognized by the Pennsylvania courts. Nor has the General Assembly passed surface owner legislation. As such, this area of Pennsylvania’s oil/gas jurisprudence remains ripe for clarification. Given the increased leasing and drilling activity associated with the Marcellus Shale formation, this issue can no longer be ignored.

The Accommodation Doctrine

A fairly unique feature of American law is the concept that one parcel of land can be comprised of multiple ownership estates. In Pennsylvania and many other states, it is possible to sever the right to the minerals in and under the land from the ownership of the surface itself. See, Chartiers Block Coal Co. v. Mellon, 25 A. 597 (Pa. 1893) (“…the surface of the land may be separated from the different strata beneath it, and there may be as many different owners as there are strata…”). As such, the owner of the surface might have no ownership interests in the oil, gas, or other minerals beneath the surface.

Under the traditional common-law rules of severed estates, the mineral estate is considered “dominant” to the surface estate. The rationale for the mineral estate being dominant was that the ownership of minerals would be meaningless if the mineral owner could not access and extract those resources through the surface. See, Chartiers Block Coal Co., v. Mellon, supra (“[A]s against the owner of the surface each of the several purchasers would have the right…to go upon the surface to open by way of shaft, or drift or well, to his underlying estate…”). Historically, the mineral owner generally had a broad and expansive right to use the surface in any manner reasonably necessary for extraction of the minerals. Dewey v. Great Lakes Coal Co., 84 A. 913 (Pa. 1912) (“when the soil belongs to one person and the mine another, the right to work the mine carries with it the use of so much of the surface as is strictly necessary and reasonable”). This “surface easement” included the right to install and construct any tanks, pumps, roads, holding ponds, buildings, and similar structures incident to mining or drilling. See, Baker v. Pittsburgh, 68 A. 1014, 1016 (Pa. 1908) (mining rights includes the right to open, work and occupy surface); Oberly v. H.C. Frick Coke Company, 104 A. 864 (Pa. 1918) (“The mine owner has the right to enter and take and hold possession even against the owner of the soil…and to use the surface so far and may be necessary…”). The mineral owner was only liable to the surface owner for damage to crops, damage to tangible improvements, or negligent activity. Holbrook v. Continental Oil Co., 278 P.2d 798 (Wyo. 1955). Any other damage to the surface land was not compensable.

The Accommodation Doctrine, as first adopted by Texas in the 1971 case Getty Oil Company v. Jones, 470 S.W.2d 618 (Tex. 1971), tipped the balance between mineral and surface estates significantly back toward equilibrium. In that case, the height of the oil pumps installed by Getty Oil interfered with the sprinkler system used by Jones to irrigate his property, and consequently much of his land could not be used to grow crops. Getty Oil, 470 S.W.2d at 620. Jones wanted Getty Oil to either install different pumps or to dig “cellars” to lower the height of the pumps. Id. Testimony in the case showed that neither option would be particularly expensive or would impact oil production. Id.

In a far-reaching decision, the Supreme Court of Texas held that Getty Oil had to “reasonably accommodate” Jones’ use of the surface, despite the traditional dominance of the mineral estate. The Getty Oil court observed that “the rights implied in favor of the mineral estate are to be exercised with due regard for the rights of the owner of the servient estate.” Getty Oil, 470 S.W.2d at 621. Given this observation, the Getty Oil court then held that the mineral owner may be required to accommodate the surface owner when: i) there is an existing use of the surface; ii) the mineral owner’s use of the surface precludes or impairs the existing use of the surface; and iii) under the established industry practices, there are alternatives available to recover the minerals. Id. at 622. The court ruled in favor of Jones and concluded that the pumps installed by Getty Oil would impair Jones’ existing surface use.

Under the Accommodation Doctrine, the surface owner must generally show that the particular surface activities are not “reasonably necessary” to extract the oil or gas. Haupt Inc. v. Tarrant County Water, 870 S.W.2d 350 (Tex. App. Waco 1994). The surface owner can satisfy this threshold burden by showing that the mineral owner has available other reasonable means of production that will not interfere with the surface owner’s use. “[I]f reasonable alternative drilling methods exist that protect [the surface owner’s existing use], then an accommodation by the mineral owner would be required.” Tarrant County Water v. Haupt Inc., 854 S.W.2d 909, 912-913 (Tex. 1993). Texas courts recognize, however, that “if there is but one means of surface use by which to produce the minerals, then the mineral owner has the right to pursue that use, regardless of surface damage.” See, Texas Genco LP v. Valence Operating Co., 187 S.W.3d 118, 122 (Tex. App. Waco 2006). As such, the burden is on the surface owner to introduce evidence that the mineral owner has alternative means of access and production and that the current surface usage is not “reasonably necessary” because a reasonable and cost-effective alternative exists.

Since the landmark Getty Oil decision, a number of other jurisdictions have adopted some version of the Accommodation Doctrine and have attempted to strike a delicate yet defined balance between the rights of the surface owner and the mineral owner. See, Amoco Production Co. v. Carter Farms, 703 P.2d 894 (N.M. 1985) (“Amoco’s surface rights and the servitude it holds, however, must be exercised with due regard for the rights of the surface owner”); Hunt Oil Co. v. Kerbaugh, 283 N.W.2d 131 (N.D. 1979) (“…the owner of the mineral estate must have due regard for the rights of the surface owner and is required to exercise that degree of care and use which is a just consideration for the rights of the surface owner…”); Flying Diamond Corp. v. Rust, 551 P.2d 509 (Utah 1976) (mineral owner and surface owner “each should have the right to use and enjoyment of his interest…”); Diamond Shamrock Corp. v. Phillips, 511 S.W.2d 160 (Ark. 1974) (mineral owner must make reasonable usage of the surface and is liable for damages caused by any unreasonable use); Buffalo Mining Co. v. Martin, 267 S.E.2d 721 (W.Va. 1980) (mineral owner’s use of surface must be “reasonably necessary for the extraction of the mineral” and “without substantial burden to the surface owner”).

Pennsylvania’s Approach

Although Pennsylvania has long recognized the broad and expansive rights of the mineral owner, the Pennsylvania Supreme Court has never formally adopted the Accommodation Doctrine. This area of Pennsylvania oil/gas law remains clouded and, as such, surface owners in Pennsylvania generally do not have the same level of protection as landowners in Texas or other jurisdictions that have adopted the Doctrine. While Pennsylvania courts have recognized the need to balance the competing interests of the surface owner and the mineral owner, the Pennsylvania Supreme Court has yet to announce or adopt a consistent and clear approach to this century old debate.

As early as 1915, the Pennsylvania Supreme Court recognized the growing imbalance between the rights of the surface owner and the mineral owner. In Gillespie v. American Zinc & Chemical, 93 A. 272 (Pa. 1915), the court affirmed the grant of an injunction which enjoined the well location initially selected by the mineral owner. The proposed location would have “interfered” with the surface owner’s improvements. Gillespie, 93 A. at 273. The Gillespie court held that “the lessee is not at liberty to choose locations for the drilling of wells in utter disregard of the rights of the landowner.” Id. at 274. The court further observed that “where a change of a few feet” in the location of a well will preserve the surface owner’s current usage, the lessee is under an obligation to do so. Id. The Gillespie court concluded that since an alternative well location was readily available and “would result in no injury” to the surface owner, the lessee was required to drill in the alternative location. Id.

Seven years later, in Friedline v. Hoffman, 115 A. 845 (Pa. 1922), the Pennsylvania Supreme Court again considered the scope of the mineral owner’s implied surface easement. In Friedline, the mineral owner sought to use the surface of the plaintiff’s land to access the minerals beneath an adjoining surface plot not owned by the plaintiff. Friedline, 115 A. at 846. The plaintiff filed suit seeking to enjoin such surface usage. The Pennsylvania Supreme Court affirmed the injunction and required the defendant/mineral owner to utilize his own surface property for access. Echoing the Gillespie holding, the Friedline court noted that “implied” surface access will not be available where an alternative means of access exists. Id. Such an alternative must be used so long as it “can…be mined at a profit and…is commercially feasible.” Id. Thus, according to Gillespie and Friedline, if the alternative means of access are unprofitable or infeasible, then the mineral owner has greater latitude and authority to use the surface without regard to the impact on the surface owner.

The “rule” espoused by Gillespie and Friedline was curtailed in Babcock Lumber Co. v. Faust, 39 A.2d 298 (Pa. 1944). In Babcock Lumber, the surface owner filed suit to remove certain structures and roads erected by the mineral owner. The mineral owner defended the suit on the grounds that it had an “implied easement” to use as much of the surface as necessary to conduct mining operations. Babcock Lumber, 39 A.2d at 301. The court observed that the mineral owner’s surface easement is “not limitless and [does] not confer upon them a moving commission to subject any remote part of the surface lands to occupation at their pleasure.” Id. at 303. In rejecting the surface owner’s claim, however, the court concluded that the mineral owner’s use was, in fact, reasonable and therefore within the implied easement. “[T]he uses made by defendants of plaintiff’s lands should therefore be restricted to reasonable ones justifiable as to place and mode…” Id. Unlike the Gillespie and Friedline decisions, the Babcock Lumber court’s analysis did not turn on whether “alternative” and less intrusive means of access were available.[1]

The Gillespie “rule” was further diluted in Belden & Blake Corp. v. Department of Conservation and Natural Resources, 969 A.2d 528 (Pa. 2009). In Belden & Blake, Belden owned the oil and gas underlying Oil Creek State Park, which was owned by the Commonwealth of Pennsylvania. Prior to the commencement of any drilling operations, Belden provided the Department of Conservation and Natural Resources (“DCNR”) advance notice of its drilling plans, including maps of proposed access routes and well sites. Belden, 969 A.2d at 529. Belden also posted an appropriate bond pursuant to § 215(a)(1) of the Oil and Gas Act. DCNR, however, sought to impose additional surface restrictions and fees by requiring Belden to execute a “coordination agreement.” Id. In response, Belden filed a petition for review with the Commonwealth Court seeking to enjoin DCNR from interfering with its surface easement. Id. at 530. The Commonwealth Court, citing Chartiers Block, agreed with Belden and invalidated the DCNR’s request. Id.

On appeal, the Pennsylvania Supreme Court affirmed and observed that Belden “has the right to enter the surface property to access which it owns…” Id. at 532. The court held that the “conditions” imposed by DCNR constituted an improper “diminution” of Belden’s surface easement. Id. at 533. Remarkably, the court made no inquiry into whether reasonable, alternative means of access were available or even offered by Belden. Instead, the court simply opined that “a regular surface owner cannot unilaterally impose extra conditions on the subsurface owner beyond those that are reasonable…” Id. The court made no reference to the “alternative” access test formulated by Gillespie or Friedline.

After Belden, it appears that surface owners have less latitude to suggest or request surface accommodations. It is unclear what Belden’s prohibition on “extra conditions” really means. Can the landowner make any surface accommodation requests? Does that equate with making an improper “unilateral extra condition”? Instead of focusing on whether the proposed drilling operations would “interfere” with the surface owner’s use, the analysis espoused by the Belden court focuses on whether the accommodations requested by the surface owner “interfere” with drilling. Belden places the burden on the surface owner to demonstrate the “reasonableness” of his or her request. This framework is at odds with Gillespie and the majority of jurisdictions that have adopted the Accommodation Doctrine. As such, the current status of Pennsylvania law is muddied and is ripe for clarification by the Pennsylvania Supreme Court.[2]

[1]In an unpublished opinion, the United States District Court for the Western District of Pennsylvania followed Gillespie and noted that “where two alternative methods of proceeding are available to the mineral owner…the mineral owner must select the method which does not act to the detriment of the surface owner.” See, United States v. Minard Run, No. 80-129, 1980 U.S. Dist. Lexis 9570 (W.D. Pa. 1980). [2]It should be noted Rep. Camille “Bud” George (D-Clearfield) has introduced HB 1163, the Surface Owners’ Protection Act. Like other jurisdictions that have passed surface owner legislation, the Act requires the gas producer and surface owner to negotiate and execute a surface access agreement addressing, inter alia, compensation for lost value and the placement of wells, roads and pipelines.