Landowners located in top-producing U.S. shale plays like the Bakken, Barnett, Eagle Ford, and Haynesville-Bossier are sitting on some seriously valuable property. Deposits in these regions are considered among the world’s richest, with some Eagle Ford landowners collecting over $12,000 per acre for leases with developers.
Oil and gas companies are more than eager to join forces with landowners and reap the benefits of these important resources. However, unscrupulous companies can quickly turn big expectations into time-consuming, financial nightmares.
Though oil and gas companies have a legal duty to protect every landowner’s interests, many are more focused on their own interests.
Intentional acts to skim money off the top of lease agreements and mistakes caused by oil and gas company negligence can lead to hundreds of thousands of dollars in financial losses and property damage for landowners.
Improper drilling techniques can destroy property value in seconds, property that has been nurtured and cultivated for generations. Blowouts can spoil acres of land, rendering it unusable for decades. Faulty hydraulic fracturing practices can contaminate groundwater, leaving it unfit for agricultural and human consumption.
In addition, royalty underpayment is common in the oil and gas industry. Oil and gas companies may miscalculate royalties or intentionally deny landowners their rightful royalty payments to boost their own profits.
Companies save billions in royalty payments every year by claiming inflated drilling expenses, piling on inappropriate fees and misrepresenting production volumes.
Experienced North Dakota property owners and Texas landowners know how to collect maximum compensation for any property damage or financial loss caused by the careless or corrupt actions of oil and gas companies, including full land remediation and complete financial recovery.
If you feel you deserve payment for property damage or reimbursement for lost royalties, read on to learn more about your rights as a landowner, the legal responsibilities of oil and gas companies, and how to maximize an oil and gas landowner injury claim.
Do You Own Surface Rights or Mineral Rights?
It can be difficult to know whether an oil and gas company is taking advantage of you. Becoming familiar with your rights as a landowner can help you determine whether an oil or gas company might be liable for financial loss or property damage.
Your rights as a landowner depend on whether you are a surface owner or mineral owner. When you purchase land, you own the rights to the surface of that land but may or may not own the rights to the minerals underneath.
Some landowners own both surface and mineral rights (a “fee simple” deed). But in many oil and gas producing states like Texas, North Dakota, and Louisiana, surface ownership and mineral ownership may be legally separate, or “severed.”
Different states define “mineral” versus “surface” differently. Most states include oil, gas, salt, uranium, and sulfur as part of the mineral estate, while the surface estate includes sand, gravel, stone, limestone, surface shale, near-surface (within 200 feet of the surface) iron and near-surface coal.
Groundwater is also included in the surface estate.
Surface rights include the right to farm your land, erect buildings, and develop wells or underground structures, but surface ownership does not grant a landowner the right to lease or sell their land to an oil company for development.
To do this, you must have mineral ownership.
Of course, when a mineral owner sells or leases mineral rights to an oil or gas company for exploration or production, that company automatically assumes some surface rights. There is no way to reach the minerals underneath without disrupting the surface in some way.
So, whether you are a surface owner or a mineral owner, you will indeed be affected by oil and gas activity.
A number of issues can arise from the use of surface land in oil and gas production, including a loss of land use and environmental impacts.
While oil and gas companies are exploring or producing on your land, you may temporarily lose the use of that land for livestock, growing crops, building or other projects. Wells, pipelines and access roads may take up to several acres. You may also lose access to off-site areas due to road blockages.
Truck traffic on unpaved roads can disrupt surface drainage, contribute to erosion and reduce land productivity. Crops or fences may be damaged, and oil and gas companies often have to clear bushes and trees.
While a wide variety of statutes and regulations are in place to prevent environmental damage by oil and gas operators, oil and gas companies may have accidents or even intentionally cut corners on environmental regulations to save money.
Oil spills and drilling fluid and wastewater leaks can occur, causing damage to the surrounding soil and groundwater. Spills and leaks can result in the exposure of your family, crops, and livestock to hazardous toxins.
Rainfall can spread this contamination across to areas of land not even included in the drilling project. In some cases, an oil and gas company working on a neighboring property can cause environmental damage to your property as a result of leaks, drainage or well damage.
While mineral owners may not be as worried about surface damage, they can suffer equivalent damage when an oil or gas company shorts them on royalty payments, charges inappropriate fees or deductions, or carelessly wastes their valuable underground resources.
Your right to file a claim against an oil and gas company for property damage, loss of royalties or other injuries will depend heavily on the terms and conditions included in the landowner’s oil and gas lease and / or surface use agreement with the company.
How to Review Your Oil and Gas Lease Agreement
Entering into a lease agreement with a developer means the mineral owner is authorizing the exploration, extraction, and marketing of certain subsurface resources during a certain time period, usually in exchange for royalties.
The lease agreement not only specifies your royalty interest but also the terms and conditions of the exploration and production – i.e., how your land will be treated during the specified time of the lease.
If an oil or gas company fails to follow the terms and conditions of your lease agreement, they may be liable to you for financial compensation. Both surface and mineral owners can benefit from reviewing certain components of the lease agreement regarding your rights, royalties and land protection, including:
- Royalty interest
- Third party rights
- Tract pooling
- Subsurface storage
- Environmental issues
- Water rights
- Removal and reclamation
- Lease term and extensions
- Termination clause
Your lease lists royalty terms and conditions of payment under the royalty clause. Your royalty interest is an agreed upon fraction of the total amount realized from oil or gas sales, minus reasonable production costs.
Mineral owners have the right to negotiate the royalty amount, schedule royalty payments and determine any interest charges for late payments. Your lease may also limit or prohibit certain royalty deductions for post-production costs like costs for gathering, compression, separation, marketing or transportation.
Third party rights
Some developers will sublease a portion of their lease and assign rights to third parties to obtain financing, often without the mineral owner’s consent. You will want to review your lease agreement to determine if the company must notify you before transferring rights to a third party. This can help you identify any liable parties should a problem arise.
As it isn’t cost effective to drill a separate well on each tract of land over a reservoir, many oil and gas companies will “pool” or “unitize” several tracts of land covering a reservoir. Surface owners of pooled projects should be aware that a company may use their surface materials, such as groundwater, to produce oil on someone else’s land – within reasonable limits. [Key Operating & Equipment, Inc. v. Hegar, 435 S.W.3d 794 (Tex 2014)]
Pooling helps to decrease costs and waste production, usually benefitting the landowner. But pooling can also cause problems. If the developer pools the actual oil and gas resources, mineral owners should review their lease to make sure that royalty interests are still optimized if production stops on their own land.
In addition, many oil and gas companies will participate in “bad faith pooling” as an attempt to sequester your non-producing land from use by other companies or to gain additional delay time to produce under the lease.
Having a “Pugh clause” in your lease can help prevent bad faith pooling, as it prevents the oil and gas company from holding onto land that isn’t involved in production.
Landowners should also be aware that natural gas developers may try to store resources in open spaces (caverns, empty reservoirs) under their property to save money.
If a gas company is using your land for underground storage, you may qualify for additional compensation. You will want to review your lease to see if you hold the rights to “pore space” and subsurface storage.
Environmental provisions in the lease will outline any requirements for surface and subsurface conservation of wildlife, water, agriculture, and development potential. Environmental provisions will include the company’s responsibilities regarding environmental mitigation during production and remediation after project completion.
If any problems with groundwater overuse or contamination arise, landowners should review the oil and gas lease for water use rights, and whether they have a separate agreement leasing water to an oil or gas company.
Removal and reclamation
Your lease should include terms and conditions regarding how the oil and gas company will restore your land upon completion of the project, including the time and extent of equipment removal, waste removal, erosion stabilization, infrastructure reclamation, and other actions necessary to return your property to as close to its original condition as possible.
If a company is late removing equipment or cleaning up your land, your lease may include a requirement that the company pays for this late time. Some leases also include a security deposit that sets aside funds for reclamation at the start of the project (“decommissioning security”).
Lease term and extensions
Oil and gas leases are typically limited to a specific time. If a company misses a deadline, the company may be liable for breach of contract. In addition, anything produced after a missed deadline may not be covered under the terms of the lease.
Most oil and gas leases contain a “shut-in” royalty provision, where the oil and gas company agrees to pay the landowner during downtime – when the well is in place but isn’t producing.
The shut-in provision can often extend the termination date for this “constructive production” period, as long as the company continues to pay the landowner an agreed-upon amount. Oil and gas companies must invoke the shut-in royalty clause if they want to maintain the lease past the automatic termination date.
Should the oil or gas company fail to pay proper royalties, abandon the project, or neglect other terms of your lease, you may decide you want to cancel the agreement.
Normally, a landowner can’t terminate a lease except under very specific conditions. You will want to check the terms and conditions in the default and termination clause.
While its best to take these factors into account during lease negotiations, it’s never too late to gain an understanding of your already-existing lease and be prepared should any trouble arise.
Tips for Reviewing Surface Use Agreements
Many surface owners aren’t involved in mineral lease negotiations. Maybe the negotiations took place decades before, or the mineral owner and surface owner aren’t in contact with one another. Often, in major oil and gas producing states, the surface estate, and mineral estate have been “severed” years before the current landowner's purchase of the property.
Surface landowners who are unable to participate in mineral lease negotiations may enter into a surface use agreement with the mineral owner that outlines the terms and conditions of the land use.
Many states don’t require surface use agreements, so it’s a good idea for the surface owner to proactively seek a surface use agreement to protect their land if possible.
Like the oil and gas lease, a surface use agreement will include several protections regarding the use of your land. The surface use agreement may include:
- Advance notice requirements before project initiation
- Compensation for groundwater use
- Conditions and schedules for site restoration upon project completion
- Limitations on equipment and waste storage
- Limitations on off-road travel
- Limitations on pipeline depth or location
- Preservation of necessary land drainage
- Requirements for livestock escape precautions
- Requirements for secondary containment devices to control spills
- Requirements for temporary road maintenance
- Requirements for timely repair to buildings or fences
- Safe power line placement and maintenance
- Specific compensation schedules for crop, livestock or environmental damage
- Your right to be included in decisions impacting land use
4 Common Types of Oil and Gas Surface Owner Disputes
Experienced surface owners can reclaim what they have lost to an irresponsible oil or gas companies when they can prove one of the following three violations:
- The company used the land for more than what was “reasonably necessary” for operations
- The company violated the Accommodation Doctrine
- The landowner suffered injury due to the company’s negligence
In addition, some surface owners may be able to file a claim for a violation of the Common Courtesy Act.
“Reasonably Necessary” Violations
When an oil and gas company gains mineral rights, they automatically gain any surface rights that are “reasonably necessary” to be able to explore, drill, develop, produce, transport, market and store the resources.
Reasonably necessary surface rights usually include the right to enter the property, store equipment, build roads, pipelines and other infrastructure, use sand, clay or gravel located on the land, inject the subsurface with saltwater or other fluids and use the groundwater for production.
Different states have different definitions for what is “reasonably necessary,” but in general, the company does not have the right to use surface materials for anything unnecessary for or unrelated to resource development.
For example, an oil company can only use the amount of groundwater needed to produce the oil. They can’t just let the groundwater flow free or use it for other purposes.
If a developer uses your surface materials unreasonably, that company may be liable to you for damages.
Accommodation Doctrine Violations
Texas surface owners are also protected from oil and gas company land misuse by the “Accommodation Doctrine.” Under the Accommodation Doctrine, an oil or gas company cannot use any specified portion of the land when:
- Use would substantially impair the existing use of that portion of land; and
- Surface owner has no reasonable alternative and can only use that land portion for its existing use; and
- Reasonable alternatives exist for the company that won’t prohibit development [Merriman v. XTO Energy Inc. 407 S.W.3d 244 (Tex 2013)]
For example, say a Texas landowner wants to continue producing cornfields in the same spot he always has, but an oil company wants to erect a large storage facility in that spot.
If the company decides to build the storage facility on the cornfield location despite the farmer's protest, the landowner may have a claim against the company for violating the Accommodation Doctrine - if he can prove that:
- The storage facility would substantially impair the cornfield
- There is no other place to plant his cornfield
- The company could put the storage facility somewhere else on the property with little impact on production
The Accommodation Doctrine can be difficult to apply without an experienced oil and gas litigation attorney. Proving that there is no other possible place to put your cornfield may not be that simple, and oil and gas companies will fight to prove that they cannot possibly locate their storage facility anywhere else without serious cost inflation.
Oil and Gas Company Negligence
Unreasonable use of your land isn’t always the problem. Sometimes a developer’s negligence causes damage to your property.
Perhaps a company failed to maintain their equipment, resulting in leaks that polluted your groundwater. If a landowner can prove that the oil and gas company’s negligence caused the pollution, that company will have to pay for the damages.
Unreasonable land use and negligence can be difficult to prove. For example, Texas courts will usually refuse to find negligence in cases where an oil company allows livestock to escape an enclosure or allows excessive drainage of groundwater.
Common Courtesy Act Violations
Another statute that aims to protect surface owners from oil or gas company disruption is the “Common Courtesy Act,” requiring oil and gas developers to give surface owners 15-days’ written notice prior to entering the property for well drilling or maintenance.
The Common Courtesy Act can also be very difficult to enforce without an experienced oil and gas litigation attorney. Mainly because it doesn’t “restrict, limit, work as a forfeiture of, or terminate any existing or future permit issued by the commission or right to develop the mineral estate in land.” [Tex Nat Res Code §91.751-755]
An experienced oil and gas litigation attorney can help you gather the evidence needed to prove these violations and optimize your claim for damages.
Call Williams Attorneys at 361.885.0184 to learn your rights.
7 Common Types of Oil and Gas Mineral Owner Disputes
Mineral owners often suffer damages at the hands of oil and gas companies through improper payment of royalties or negligent treatment of mineral resources. Seven common types of disputes often arise regarding the mineral owner’s rights and terms of a lease agreement.
- Executive Rights Disputes
- Bonus Payment Disputes
- Delay Rental Disputes
- Royalty Disputes
- Co-tenant Disputes
- Drainage Claims
- Bad Faith Pooling Claims
Executive Rights Disputes
Mineral owners have the right to lease their portion of minerals, also called the “executive right.” If more than one mineral owner is involved, only the ones with executive rights have the right to lease their portion of the minerals.
Non-participating royalty owners (“NPRO”) are mineral owners that are excluded from executive rights. They still enjoy the other mineral rights, just not the right to lease minerals.
But executive rights holders still have a duty of “utmost good faith and fair dealing” to NPROs when entering into lease agreements. Arranging leases that shortchange NPROs out of financial compensation or other benefits may be a violation of this duty.
If you own NPRO rights, always be ready to contact an experienced oil and gas litigation attorney to determine if your rights have been protected during lease negotiations.
Bonus Payment Disputes
Some oil and gas companies will offer a bonus payment (usually in dollars per acre) to be made when the mineral owner signs the lease. Failure to pay this bonus or paying behind schedule could be cause for a lawsuit against the oil and gas company.
Delay Rental Disputes
Once a mineral owner leases or sells mineral rights to an oil or gas company, actual production may be delayed for quite some time. However, an oil and gas company cannot merely sit on a landowner’s mineral rights forever without offering some sort of financial compensation.
Some leases contain delay rental provisions that compensate the mineral owner while the company prepares to drill, prior to production. These are scheduled, usually annual payments. If a company fails to pay required delay rentals, you may have cause to file a claim against the company.
Unfortunately, underpayment of royalties is widespread in the oil and gas industry. Royalty payment amount calculations are complex, involving market fluctuations, production levels, and other factors. Oil and gas companies frequently miscalculate royalties resulting in unfair payments.
Also, oil and gas companies may intentionally deny landowners their rightful royalty payments to boost their own profits. Companies may use several tactics to intentionally underpay landowners, including:
- Deducting post-production costs when the lease expressly does not allow deductions
- Failing to market extracted resources and obtain the best sale prices properly
- Inflating production and post-production expenses
- Selling resources to affiliates at sub-market prices
- Subtracting unsold fuel or extraneous fees from royalty payments
- Understating the volume extracted / production amount
- Using false product sale amounts to calculate royalties
- Using incorrect market prices to calculate royalties
- Withholding sections of land from royalty calculations
- Refusing to pay shut-in royalties
- Overextending the constructive production / shut-in period (non-producing downtime)
Whether improper royalty payments are the result of a simple miscalculation or blatant, intentional act, landowners still have a right to file a claim for financial compensation.
In addition to disputes with the oil and gas company, you may have questions as to who owns the mineral rights or portions of the mineral rights. If you come across obstacles regarding your interest in the mineral rights, an experienced oil and gas litigation attorney will be able to help you obtain an accurate chain of title and determine your status as mineral owner.
Oil and gas companies have a duty to prevent reservoir drainage by neighboring wells. Landowners harmed by a company’s failure to meet this duty can bring a claim for damages against the company for breach of the duty to protect.
This violation can be difficult to prove. The landowner must be able to prove that a significant amount of drainage occurred and that the drainage resulted in a specific profit loss.
Calculating profit probability can be complex, dependant on whether a well is currently producing or a new well would need to be drilled to produce, and then adding in the costs of drilling that new well.
If you suspect that a shared reservoir under your land is being drained, an experienced oil and gas litigation attorney can help you determine whether you have a claim for damages.
Bad Faith Pooling Claims
Tracts of land covering a reservoir are often unitized or “pooled” into a single production unit to keep costs and environmental damage low. Companies can drill one well and then extend horizontal well legs out to various tracts of land from that one well, rather than drill individual wells on each tract of land.
But many landowners suffer great royalty losses when an oil or gas company participates in bad faith pooling.
For example, say a reservoir exists under three separate properties, one of them being your 200-acre property. An oil company pools these three tracts into one production unit of 600 acres. In doing this, the company only includes three of your 200 acres, meaning you will only collect royalties on three acres of your land.
The problem is, the remaining 197 acres of your land is now cut off from production by any other company. Because the oil company has control over your entire 200 acres, the 197 effectively sits, unusable, until the lease with the current company terminates.
Companies use bad faith pooling to maximize profits, keep land out of the hands of competition, or extend the termination of a lease. By including a small fraction of your property in the pool, you could be losing thousands of dollars in bonus payments, rental delays or royalties.
It also harms the other landowners in the unit, who will miss out on your three acres of production if your land isn’t actually producing as part of the “pool.”
Without a Pugh clause in your lease that limits company ownership only to that land included in the production unit boundaries, one of the only ways you can free up your land for production is to bring a claim against the oil or gas company for bad faith pooling.
If you can show that the company has breached its duty to maximize profits from the use of your land, you may be able to file a claim for release of your land.
What Landowners Can Recover in Oil and Gas Company Lawsuits
Landowners who have suffered losses at the hands of careless or corrupt oil and gas companies have the right to file a claim for damages. Injured property owners and/or local residents can file a claim to:
- Receive full compensation for injuries caused by the company
- Restore the property to its original / acceptable condition
- Maintain and protect the land from further damage
Property contamination damages
When a company’s negligence or breach of other duty causes soil, water or air pollution, the landowner may file a property contamination lawsuit.
The Court will use applicable state and federal laws in determining the damages available for environmental damage, considering the extent of damage, loss in property value, historical use of the land, and any cost of remediating and restoring the property.
If an investigation of the land reveals environmental damage significant enough to require remediation according to current environmental regulations, the Court will hold the company responsible for restoring the land to its original condition, usually ordering a scheduled a remediation plan.
Should the contamination be so severe that it causes health problems for residents, the company would also be responsible for all related medical expenses, including projected future medical costs.
When the property is used as a source of income, such as farming, and damage to the property is considerable enough to render the land unusable, the property owners must also be compensated for any current and future wages lost to the damage.
In cases where an oil and gas company fails to protect the property against drainage, landowners can file a claim for damages for the probable royalties that would have resulted without the drainage, taking into account whether a well is currently producing or a new well would need to be drilled to produce.
Landowners who suffer underpayment of royalties, rental delay payments or other payments can file a claim for the amount of underpayment. In some states, you may also file a claim for any interest that would have accumulated across the time period in question.
How Landowners Win Lawsuits Against Oil and Gas Companies
Step 1: Contact an Oil and Gas Litigation Attorney
The guidance of a lawyer is critical. Reporting your concerns to insurance representatives or others before speaking with an attorney can seriously jeopardize your chances for full compensation or land remediation.
An experienced oil and gas litigation attorney will have access to the nation’s leading engineers, environmental analysts and landmen, who will help conduct title and division order research, determine levels of property damage and fair estimates on costs of property remediation and calculate financial compensation for property owners.
Look for an attorney who has first-hand experience with America’s largest oil and gas companies in energy law-related matters, who understands the nuances of oil and gas leases and surface use agreements, and who won’t settle for less than maximum possible compensation.
Step 2: Gather Evidence of Property Damage or Underpayment
While an experienced oil and gas litigation attorney will have access to a skilled investigative team that will help gather evidence for your case, you may want to go ahead and collect as much information as you can on your own.
Evidence of Oil and Gas Property Damage
If possible, obtain records of the condition of your land at the time it was purchased or leased for use by the oil and gas company. Many companies will conduct Environmental Baseline Studies (EBS) to examine the environmental state of the land before proceeding with a project.
Obtaining a copy of this EBS is very helpful if you ever need to prove that your property was free of contamination before a company arrived. You can also conduct your own EBS if you think a developer is interested in your property using the Standard Practice for Conducting Environmental Baseline Surveys.
Another way to show the environmental quality of your land prior to an oil and gas company’s entry is to gather historical records from federal and state agencies regarding groundwater quality, environmental quality, historical crop yields, and previous industrial activities on your land.
Likewise, personal crop and livestock records can be useful in proving any changes in environmental quality.
You can compare these data to current conditions by taking samples of your soil, vegetation, and water and sending them to a local National Environmental Laboratory Accreditation Program (“NELAP”)-certified laboratory.
You may also want to hire an engineer to test groundwater flow rates in case oil and gas company activities have affected your water quantity.
Other forms of evidence helpful in proving environmental damage are before and after images of your property.
Collect any photos showing relevant areas of your land that you have taken in the past. Past aerial images of your land can be found at the USDA Farm Service Agency or using online tools like Google Maps, Google Earth or TerraServer.
Also, take several current photos of your land. You can obtain current aerial images using flight photography, purchasing satellite images, or using unmanned aerial imagery via drones.
If medical costs are involved in a pollution case, be sure to keep a log of any receipts or payments relating to medical expenses.
Evidence of Oil and Gas Company Underpayment
The most valuable evidence that can be used to demonstrate that an oil and gas company has underpaid royalties, bonus payments, delay rentals or participated in other misconduct regarding finance or marketing is a thorough analysis of the oil and gas company’s records regarding the total amount of resources produced, prices used in royalty calculations and a list of all deductions and fees charged to your account.
However, most oil and gas companies aren’t willing to share this information unless they are required to do so.
Certain states have statutes in place that require oil and gas companies to supply their records for review, but the level of disclosure required by law may not be that high. For example, you may not be able to obtain the company’s royalty amount calculation methods.
Your oil and gas lease may contain an audit clause giving you the right to request company books and records at least once annually, but many leases do not contain an audit clause as oil and gas companies don’t usually include them voluntarily.
If you have difficulty obtaining access to oil and gas company book and records, your oil and gas litigation attorney will be able to pursue means to access these important data.
Step 3: File A Lawsuit for Financial Compensation
Once you have discussed your case with an experienced oil and gas litigation attorney, you may decide to proceed by filing a claim against the oil and gas company. Your attorney will guide you through the appropriate procedures, making sure you meet all statutes of limitations and procedural requirements.
During discovery, your attorney will help you compile evidence for your case, obtain depositions and witness testimony, and will determine the best means for approaching your claim based on that evidence.
If an oil or gas company has violated your rights in any way, it is vital that you hold them accountable. Don’t hesitate to act. No oil or gas company is too large to fight for what is rightfully yours.
An experienced oil and gas litigation attorney will have the resources and know-how to discover any company’s wrongdoing and maximize any financial compensation due to you the landowner.
Learn more about oil and gas landowner lawsuits in our free ebook, Oil & Gas Underpayment Lawsuits & Land Damage Claims.
If you have suffered harm at the hands of an oil and gas company, Williams Attorneys PLLC can help you file a claim and maximize your compensation. Our Corpus Christi and North Dakota-based oil and gas litigation lawyers represent landowners and other injured parties located in Texas, North Dakota, and in oil states across the U.S.
Call 361.885.0184 or CONNECT ONLINE for a Free, Confidential Case Evaluation