West Virginia Supreme Court Rules That Horizontal Wells Cannot Be Drilled Into Adjacent Tracts Pursuant to 1901 Lease
Imagine your family has owned a 230-acre tree farm in Butler County for over 100 years. Back in 1937, your grandfather sold the oil and gas rights under ½ the farm (i.e., 115 acres) to his old friend, Andrew Van Slyke. Your family, however, kept the surface rights to this tract (“Van Slyke Tract”). In 1989, the Van Slyke family sold those same oil and gas rights under the Van Slyke Tract to the Drabek Family Trust. The Trust then entered into an oil and gas lease with Bucco Energy in 2000 regarding the Van Slyke Tract. Last week you were informed by the Bucco Energy land department that they intend to construct a ten-acre well-pad on the Van Slyke Tract. From that pad, Bucco 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. Your family has never signed an oil and gas lease with Bucco Energy or any other driller. Can Bucco Energy use your property (i.e. the Van Slyke Tract) as a platform to drill and remove gas from neighboring parcels? A recent June 5, 2019 decision by the West Virginia Supreme Court 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, the trial court 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.
EQT appealed the trial court’s order and the jury award to the West Virginia Supreme Court. In an opinion issued on June 5, 2019, the West Virginia Supreme Court affirmed and held that the 1901 Lease only granted the lessee (i.e., EQT) the right to drill a well which “removed minerals beneath the surface” of the original leasehold. The panel opined as follows:
“We therefore hold that a mineral owner or lessee has an implied right to use the surface of a trace in a way reasonable and necessary to the development of minerals underlying the tract. However, a mineral owner or lessee does not have the right to use the surface to benefit mining or drilling operations on other lands, in the absence of an express agreement with the surface owner permitting those operations.”
Since EQT had no “express agreement” with Mr. Wetnz and Ms. Crowder which authorized or permitted EQT to use their surface estate as a platform for horizontal wells extending beyond the original leasehold (i.e., 351 acres), the construction and operation of the 19.7 acre well pad on their property constituted a trespass. The West Virginia Supreme Court further noted that the purported 2011 Amendment did not grant such rights to EQT:
“EQT, however, contends that it modified the 1901 lease in 2011, when the current owners of the mineral estate signed an amendment allowing EQT to “pool” or “unitize” the Carr mineral estate with surrounding mineral tracts. EQT argues that this 2011 modification to the lease changed the rights attendant to the surface estate, an estate that split from the mineral estate in 1936. We reject this argument because, in 2011, the owners of the mineral estate no longer owned the right to use the surface estate for exploration on or production from neighboring tracts. Because the mineral estate was severed from the surface estate in 1936, the right belonged to the plaintiffs or, more specifically, was a right attached to their surface estate.”
The Crowder decision is consistent with established oil and gas law. See, Wiser Oil Co. v. Funley, 346 S.W. 2d 718 (Ky 1960) (“. . . it is well settled in Kentucky, as elsewhere, that in the absence of an express agreement, the mineral owner or lessee cannot use the surface for the production of minerals from other lands”); Russell v. Texas Co., 238 F.2d 636 (9th Cir. 1956) (noting that “the right to use the surface of land as an incident of the ownership of mineral rights in the land, does not carry with it the right to use the surface in aid of mining, or drilling operations on other lands”). 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 West Virginia Supreme Court correctly observed, the surface of one tract may not be used simply 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 2000 Lease, Bucco Energy has the right to construct a well pad on your farm but only for the purpose of extracting hydrocarbons from the Van Slyke Tract (i.e., 115 acres) itself. The horizontal well bores from that pad should not extend beyond the boundary of the 2000 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 of the Van Slyke Tract (i.e., your grandfather) did not grant any pooling rights to the Van Slyke family. The developmental rights granted under the 2000 Lease are therefore strictly limited to the Van Slyke Tract and no other parcel or tract. As such, if Bucco Energy did drill laterals that extend beyond the 2000 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.