West Virginia Jury Awards Damages to Surface Owner for Unauthorized Well Pad
Imagine your family has owned a 230-acre tree farm in Indiana County for over 100 years. Back in 1937, your grandfather sold the oil and gas rights under ½ the farm to his old friend, Syd Crosby. Your family has always had an amicable and civil relationship with the Crosby family and the Crosby’s agreed, on a handshake, never to drill any wells on that part of the farm. In 1947, the Crosby family sold the oil and gas rights to the Malkin Family Trust. Shortly thereafter, the Trust entered into an oil and gas lease with HNL Energy in 1949. Last week you were informed by the HNL Energy land department that they intend to construct a ten-acre well-pad on that portion of the farm which was part of the conveyance to the Crosby family in 1937. From that pad, HNL Energy will drill four to six horizontal well bores which will access and remove hydrocarbons from neighboring properties. The pad and related access road will disrupt and destroy a significant portion of your tree inventory. Can HNL Energy use your property as a platform to drill and remove gas from neighboring parcels? A recent West Virginia court ruling and award suggests they cannot.
At issue in Crowder v. EQT Production Company was a 351-acre parcel located in Doddridge County, West Virginia. The acreage was subject to an oil/gas lease that was signed in 1901 (the “1901 Lease”). Pursuant to the 1901 Lease, nine shallow wells were drilled on the property between 1910 and 1995. In 1936, the surface estate was conveyed by R.L. McCulty to Grace Lowther. Mr. McCulty retained the oil and gas rights. In 2011, Mr. McCulty’s successors agreed to amend the 1901 Lease by granting EQT Production Company (“EQT”) the right to pool the 1901 Lease with other lands (the “2011 Amendment”).
In 2012, EQT informed the current surface owners, Ms. Crowder and Mr. Wentz, that it planned to use their acreage to construct a well pad. From this well pad, EQT contemplated drilling nine horizontal well bores. Ms. Crowder and Mr. Wentz objected to the well pad site and informed EQT that it did not have the right or authority to drill horizontal well bores into neighboring parcels. EQT ignored their objection and proceeded to drill, perforate and hydraulically stimulate nine horizontal well bores between February 2013 and June 2014. Of the nine laterals drilled from the well pad site, 62.5% of the cumulative well bore length was outside of the footprint of the 1901 Lease.
In November 2014, Ms. Crowder and Mr. Wentz filed a trespass action against EQT. In their Complaint, Ms. Crowder and Mr. Wentz argued that, in the absence of a valid pooling clause, the 19.7 acre well pad site could not be used by EQT to drill and extract hydrocarbons from neighboring lands. According to Ms. Crowder and Mr. Wentz, the 2011 Amendment, which added a pooling clause to the 1901 Lease, was not binding on them because it occurred seventy-five years after the oil and gas rights had been severed from their surface. In other words, the current owners of the oil and gas rights could not sign an agreement with EQT which implicitly enlarged and expanded surface rights under the 1901 Lease without their (i.e., Ms. Crowder and Mr. Wentz) consent. Since there was no valid pooling clause, Ms. Crowder and Mr. Wentz further argued that the 19.7 acre well pad site could only be used to extract hydrocarbons from the original acreage subject to the 1901 Lease (i.e., 351 acres). This meant that the horizontal well bores drilled from this pad could not extend beyond the boundaries of the original 1901 Lease. In February 2016, the trial court agreed with Ms. Crowder and Mr. Wentz and entered summary judgment in their favor on the trespass claim.
Before we address the substance of the trial court’s opinion, a brief discussion on the concept of “pooling” is warranted. Pooling of oil/gas leases occurs when a driller combines independent leases into a production unit. In the Marcellus Shale region, these production units range in size between 600 acres and 1250 acres. In return for granting the power to pool his or her lease with others, the landowner will receive a production royalty from any well located within the production unit. The royalty, however, must be shared with the other landowners in the unit based on each landowner’s proportionate share of unit acreage. Many courts have described the effect of pooling as a “cross-conveyance” of each owner’s oil and gas interests. See, Montgomery v. Rittersbacher, 424 S.W.2d 210 (Tex. 1968) (“Pooling effects a cross-conveyance among owners of minerals…so that they all own undivided interests under the pooled tract…”). In essence, pooling results in each landowner owning a fractional interest in the overall production from the unit wells.
Returning to the Crowder decision, Judge Timothy L. Sweeney concluded that the absence of a valid pooling clause was significant. The 2011 Amendment was not controlling because at the time it was executed, the mineral owners did not have the power or authority to combine the surface estate with other lands:
“…because the mineral owners no longer owned the right to use the surface lands for exploration and production from neighboring lands, they could not have given that right to EQT in the subsequent pooling amendment…”
Since the 2011 Amendment was invalid, the trial court concluded that “[E]QT did not obtain the right to use Plaintiffs’ surface lands to drill well bores into neighboring tracts…” As such, the 19.7 acre well pad site was deemed an unlawful trespass, entitling Ms. Crowder and Mr. Wentz to compensatory damages. In August 2017, a jury awarded Ms. Crowder and Mr. Wentz $190,000 in damages for the unauthorized well pad.
The Crowder decision is consistent with established oil and gas law. There is no dispute or question that EQT had the right to construct a well pad on Ms. Crowder’s and Mr. Wentz’s surface in order to develop and extract the hydrocarbons underlying the original 351-acre leasehold. But, as Judge Sweeney correctly observed, the surface of one tract may not be used as a platform to extract hydrocarbons from an adjacent tract without the permission of that surface owner. Prominent oil and gas scholars, such as Professor Eugene Kuntz, have also reached this same conclusion:
“[I]f title to all minerals have been severed, the mineral owner is entitled to use the surface for the purpose for extracting minerals from such land…[s]uch mineral owner should not have the right to use the surface for other purposes, such as the purpose of removing minerals from another tract of land.”
See, Eugene Kuntz, A Treatise on the Law of Oil and Gas, §12.8.
Back to our example. Under the 1949 Lease, HNL Energy has the right to construct a well pad on your farm but only for the purpose of extracting hydrocarbons from the Malkin Family Trust acreage (i.e., 115 acres). The horizontal well bores from that pad should not extend beyond the boundary of the 1949 Lease. This is because the oil and gas rights were severed from the surface in 1937 and, at the time of the severance, the owner of the surface (i.e., your grandfather) did not grant this right to the Crosby family. As such, if HNL Energy did drill laterals that extend beyond the 1949 Lease and into neighboring tracts, an argument could be made that the well pad itself is unauthorized and could give rise to a trespass claim.