Shale Play Litigation: A Study Of The Various Risks

May 2011, Vol. 238 No. 5

Patrick Byrd, Meghan Dawson and Bill Kroger, Baker Botts L.L.P., Houston

Although hydraulic fracturing has been around for decades, the law related to this revolutionary technology is in its infancy and varies from state-to-state. In particular, there are open questions about whether subsurface hydraulic fracturing of a natural gas well that extends into another’s property constitutes a trespass for which the value of gas drained as a result of the fracturing may be recovered as damages and/or injunctive relief.

To date, courts and regulators alike have yet to provide direct answers to these questions. In an effort to assess how the law regarding subsurface trespass might develop, this article will address some case law in the four states in which the Barnett, Eagle Ford, Haynesville, Fayetteville, and Woodford shale plays are located: Texas, Louisiana, Arkansas, and Oklahoma.

Hydraulic Fracturing
Hydraulic fracturing is a well-stimulation technique whereby fluids are pumped underground at high pressures causing gas and/or oil rich, but tight, shale formations to crack. After these fluids are removed, sand or other tiny, hard materials called proppants are then injected into the formation to keep the cracks open and allow hydrocarbons to flow to the wellhead.

Texas
Subsurface trespass is not a new cause of action in Texas; it has been recognized for many decades. The classic subsurface trespass claim involves slant well drilling, where a drilled well, whether intentionally or not, crosses a property line and bottoms out under a neighbor’s property.

In 2008, the Supreme Court of Texas released a long-awaited opinion addressing subsurface trespass in the context of hydraulic fracturing: Coastal Oil & Gas Corp. v. Garza Energy Trust. The plaintiffs in Garza filed suit for trespass and drainage damages after the defendants hydraulically fractured a well approximately two miles below the surface as close to the border of an adjacent unit as allowed by Texas Railroad Commission (TRC) spacing regulations—467 feet.

A majority of the court held that because plaintiffs held only a royalty interest in the minerals at issue (a nonpossessory interest), as opposed to a right to physically occupy the property (a possessory interest), they had to prove actual damages to prevail on their subsurface trespass claim. Because the court held that the rule of capture—the first to capture a natural resource like gas owns it—precluded drainage damages associated with the defendants’ hydraulic fracturing, the plaintiffs’ subsurface trespass claim failed.

Although developers might read Garza as a shield protecting them against subsurface trespass claims based on hydraulic fracturing, the case provides only incomplete protection. The narrow holding in Garza leaves a few avenues by which potential plaintiffs might still try to assert claims. First, it was the plaintiffs’ nonpossessory interest in the minerals that set the stage for the majority’s ruling. What if the plaintiffs had enjoyed a possessory interest? For instance, what if they had claimed that the hydraulic fracturing operation damaged their wells or the formation in their unit?

In that case, they would have been able to bring a traditional trespass claim, one that does not require actual damages to be actionable. The rule of capture would likely be irrelevant since the plaintiffs would not need to rely on drainage damages to support their claim. Thus, the plaintiffs would have a potentially viable claim that the court might not dismiss for failure to demonstrate damages.

In addition, a court faced with that situation would seemingly need to address the broader issue of whether hydraulic fractures do in fact constitute a trespass—not just whether the plaintiff can establish damages. Given the TRC’s role in permitting hydraulic fractures, the Texas courts’ deference to the TRC, and the strong public policy to maximize hydrocarbon recovery, the court might adopt the reasoning of the concurring opinion: as matter of public policy, encroachments resulting from hydraulic fracturing are simply not trespasses. A court might instead choose simply to extend the rule of capture to apply to those with possessory interests, or choose some other method by which to avoid the broader issue which prevents a putative plaintiff’s recovery.

More recently, subsurface trespass claims in Texas have arisen in the context of deep wastewater injection wells. In FPL Farming, Ltd v. Environmental Processing Systems, FPL Farming—a rice farming company—sought injunctive relief and damages for subsurface trespass after wastewater from EPS’s injection well allegedly migrated beneath its land. Relying in part on Garza and the fact that the Texas Commission on Environmental Quality (TCEQ) permitted the well with full knowledge that EPS’s waste plume was projected to migrate into the subsurface formation underlying FPL’s property, the Texas court of appeals held that no trespass occurred. The court also relied on Railroad Commission of Texas v. Manziel to support its decision.
In Manziel, the Supreme Court of Texas found that a secondary oil and gas recovery operation involving the subsurface injection of saltwater did not cause a trespass when the water migrated across property lines. As in FPL Farming, the Manziel court emphasized the fact that the TRC had authorized the operation.

The FPL Farming case has been appealed to the Supreme Court of Texas. One of the key issues under consideration is whether EPS, as the holder of a permit from the TCEQ for a deep wastewater injection operation, is immune from trespass liability when its wastewater migrates beneath the land of a neighboring property owner. A decision in this important case is pending and will likely further shape the landscape of Texas subsurface trespass law.

Louisiana
Like Texas, Louisiana courts have long held that slant well drilling is a form of subsurface trespass, for which a plaintiff may seek an injunction and drainage damages. However, Louisiana law with respect to subsurface trespass has had little development since, and no development in the context of hydraulic fracturing.

The starting point for courts wrestling with subsurface trespass claims in Louisiana is Nunez v. Wainoco Oil & Gas Co. In Nunez, the plaintiff—a participant in a drilling unit—sought damages for trespass and an injunction after the defendant drilled a two-mile-deep well on the property adjacent to Nunez’s property that bottomed out under Nunez’s land.

Relying heavily on the fact that the Louisiana Conservation Commission (LCC) had permitted the well, and that the plaintiff was already receiving his proportionate share of the value of the hydrocarbons produced from the reservoir underlying his land, the Supreme Court of Louisiana held that no legally actionable trespass had occurred.

In Raymond v. Union Tex. Petroleum Corp., a Louisiana federal district court applied Nunez to bar a trespass claim based on injected disposal saltwater that allegedly migrated and unlawfully invaded the subsurface of the plaintiffs’ property. The court concluded there was no actionable trespass for various reasons. First, there was no way to establish whether the injected saltwater was not from lands pooled with the plaintiffs’ land, such that it would have been “unauthorized” saltwater. Second, even if the injected saltwater was “unauthorized” saltwater, the well at issue was produced from a unitized field in accordance with a permit issued by the LCC. The court limited its decision, however, by concluding that a permit might not necessarily preclude recovery of actual damages.

This prediction came true in Mongrue v. Monsanto Co. where a Louisiana federal district court held that the migration of injected wastewater was an actionable trespass, even though the injection well was authorized by the LCC where the wastewater contained identifiable hazardous substances.

The Fifth Circuit Court of Appeals enjoyed the opportunity to revisit subsurface trespass regarding migrating wastewater in Boudreaux v. Jefferson Island Storage & Hub. In Boudreaux, the plaintiffs sued for trespass after the defendants’ injected waste saltwater migrated beneath the plaintiffs’ land. The injection well was permitted by the LCC. Relying heavily on Raymond and Nunez, the Fifth Circuit held that the claim was barred under Louisiana law. According to the Fifth Circuit, Nunez and Raymond stand for the proposition that wells drilled with the authorization of the LCC do not give rise to trespass where the injected materials migrate.

Although no Louisiana case has squarely addressed subsurface trespass in the context of hydraulic fracturing or horizontal drilling, the above cases shed some light on the viability of such claims. Nunez, Raymond and Boudreaux demonstrate Louisiana courts’ strong deference to the LCC. Thus, where the LCC has permitted a well or a fracture, the chances of recovery for subsurface trespass lessen.

However, the cases also recognize that this deference only protects drillers so far: if a plaintiff can show “that his property was actually damaged,” then that plaintiff might have a valid trespass action. Whether a Louisiana court would conclude that the rule of capture precludes drainage damages in the context of hydraulic fractures that cross lease lines is uncertain, but given Louisiana’s deference to the LCC, it seems plausible that Louisiana might, as in Garza, conclude the rule precludes drainage damages in those situations.

Arkansas
Arkansas courts have not directly addressed the issue of whether hydraulic fracturing across lease lines constitutes a subsurface trespass. However, four cases involving trespass suits against salt water (brine) recovery operations provide some guidance on how Arkansas courts will approach the issue.

In Budd v. Ethyl Corporation, the plaintiff alleged that a salt-water recycling operation was draining salt water from two tracts, and thus he was entitled to a share of the profits from the minerals being extracted from the salt water. As to the first tract of land outside the injection circle, the Supreme Court of Arkansas held that this claim was barred under a straight-forward application of the rule of capture. As to the second tract within the injection circle, the court held that because the plaintiff’s lease merely provided him with a right to explore the land and produce what was discovered, his right to the minerals was “merely inchoate” and thus no trespass upon an existing property right had occurred.

The Eighth Circuit Court of Appeals reached a different outcome in the next brine case. Specifically, in Young v. Ethyl Corp., the plaintiff sought an injunction and damages for the value of brine forcibly removed from beneath his land by the very same salt-water recycling operations at issue in Budd. Plaintiff’s land consisted of 180 acres surrounded by land controlled by the defendant. The Eighth Circuit first observed that the injection of debrominated waters from the defendants’ plant displaced the brine waters in the formation underlying the plaintiff’s lands, forcing it to move toward, and eventually produce through the defendants’ wells. It then distinguished Budd on the ground that the plaintiff in this case did not own merely an “inchoate interest” in his land, but owned his tract in fee simple. Accordingly, the court found that the defendants had trespassed on an existing property right.

The reasoning of this decision was later adopted by the Supreme Court of Arkansas in Jameson v. Ethyl Corp., where the plaintiff was also a fee simple owner. Notably, the court refused to find that a trespass or nuisance had occurred because the secondary recovery operations were “carried out in good faith for the purpose of maximizing recovery from a common pool.” Nonetheless, Ethyl was required to compensate the plaintiff for the minerals extracted in excess of natural depletion and for special damages that may have been caused to the depleted property.

In Deltic Timber Corp. v. Great Lakes Chemical Corp., Great Lakes placed its injection wells in a horizontal line to displace brine toward a roughly parallel line of producing wells to the north, and then later expanded its area of operations by adding a similar row of production wells to the south. Because the southward expansion brought plaintiff’s lands into the area between Great Lakes’ injection and production wells, the plaintiff sued for the value of brine taken from its lands, as well as for brine taken from lands lying outside of, but adjacent to, the recycling area.

Great Lakes conceded liability for the value of brine extracted from lands lying within the recycling area, but argued that, under Budd, the rule of capture applied to brine recovered from outside that area. The Arkansas federal district court rejected this formulaic interpretation of Budd and found that because the displaced brine was being forced into the production wells when it would not have otherwise moved, Great Lakes was liable for conversion of the brine taken from all of the plaintiff’s land, both inside and outside the recycling area.

Budd, Young, and Great Lakes provide that with respect to secondary recovery or water flooding operations, the rule of capture extends only to minerals extracted through “natural depletion” (or natural drainage), and not to minerals forced into wells by producers when they otherwise would not have moved. As a result, one expects the question Arkansas courts will face in determining whether the rule of capture applies to hydrocarbons drained from fractures that cross lease lines will be whether hydraulic fracturing is more akin to natural drainage or forced production. In that regard, at least three distinctions can be made.

First, hydraulic fracturing is a well-completion technology used to facilitate the primary recovery of hydrocarbons from unconventional sources of supply; it is not a secondary recovery application used to recover minerals from conventional sources of supply such as oil or brine. Second, unlike injection wells which forcibly convey brine or other minerals from point A to point B through a fluid, pre-existing reservoir, hydraulic fracturing is a means to create a reservoir by loosening a formation so that natural drainage can occur. Third, without the use of hydraulic fracturing, many shale formations would remain undeveloped completely.

The same cannot be said of brine or oil reservoirs, which can be drained until pressure in the field drops below a certain point. Implicit in each of these distinctions is a more subtle distinction that shale formations are not reservoir-like at all; they are vast rock formations that span multiple counties, sometimes states, in more of a sheet-like fashion. Thus, a rigid adherence to a natural versus artificial depletion test within this type of unconventional source of supply makes less sense.

Counter-arguments to these points might include that hydraulic fracturing and water flooding are more analogous than they are distinct, despite some technical differences, because both are recovery methods, and both—at their core—are artificial means that cause hydrocarbons to flow toward a wellhead. Regardless of whether an Arkansas court applied the rule of capture to hydraulic fracturing, it would almost certainly reject—as did the courts in Budd, Young, Jameson and Deltic Timber—a claim that hydraulic fracturing across lease lines constitutes either a subsurface nuisance or trespass. Rather, if it found the rule of capture did not apply because recovering gas through fracture operations is not a form of “natural” depletion, it would likely permit a plaintiff to recover in a conversion suit the value of hydrocarbons it could prove would not have escaped from its land but for the defendant’s fracture operations.

Finally, in determining damages, it will be difficult to apply Arkansas’s good faith versus bad faith test to hydraulic fracturing in light of the consensus view that no one can precisely design or control the direction that a fracture will follow. Working within the good faith versus bad faith dichotomy, however, it seems quite likely that a subsurface trespass would be committed, or at the very least a bad faith conversion of minerals, where the lateral section of a horizontally drilled well actually extends into an unleased adjoining tract. Courts might also conclude that depositing proppants into an adjoining tract is a trespass or evidence of bad faith conversion of minerals.

Oklahoma
Given that hydraulic fracturing of horizontal wells in the Woodford Shale did not begin until 2005, it is not surprising that Oklahoma courts have not yet directly addressed the question of whether hydraulic fracturing across lease lines constitutes a subsurface trespass. Perhaps the most factually analogous cases to hydraulic fracturing decided by Oklahoma courts involve private nuisance claims arising out of the encroachment of salt water injected pursuant to state-permitted oil field waste disposal projects and secondary recovery operations.

In West Edmond Salt Water Disposal Association v. Rosecrans, the plaintiffs sought ejectment and damages for a continuing underground trespass based on allegations that salt water injected by the defendants on an adjoining tract migrated beneath their land. The Supreme Court of Oklahoma held that where plaintiffs failed to show that they had suffered any actual damages or deprivation in the use and enjoyment of their property, defendants could not be liable for trespass for the forced migration of the injected salt water into the substrata beneath plaintiff’s land.

The actual injury requirement was again tested in West Edmond Hunton Lime Unit v. Lillard, where the plaintiff’s active oil wells were destroyed and several thousand yards of valuable well casing lost due to water flooding operations of the defendant. This time, the Supreme Court of Oklahoma held that the plaintiff was entitled to recover the actual damages that resulted from the defendant’s injection of salt water.

In Greyhound Leasing & Finance Corp. v. Joiner City Unit, the Tenth Circuit Court of Appeals held that under Oklahoma law mineral owners could recover damages for nuisance after salt water injected pursuant to state-permitted secondary recovery operations on an adjacent, unitized tract flooded their gas wells. The decision rested on three key aspects of Oklahoma law. First, the Oklahoma State Constitution creates a modified cause of action for nuisance that does not require a showing of negligence by the injuring party. As such, it was legally irrelevant that the defendant unit carried out the operations reasonably and with care. However, as in Rosecrans and Lillard, the requirement of a showing of actual damages remained.

Second, the court refused to find that a permit somehow allowed the unit operations to invade the portion not unitized. The presence of a permit, however, is generally recognized as a bar to the recovery of punitive damages as well as an action for an injunction. Third, the Court rejected the defendant’s argument that damage occurring from the operations was no more than what would result from drainage under the rule of capture. Thus, it appears that the rule of capture in Oklahoma applies only where hydrocarbons are drained, not where they are displaced.

Oklahoma’s constitutional provision providing strict liability for private property damage creates a unique legal environment for drilling companies exploring the Woodford Shale. Until an Oklahoma court determines whether the rule of capture applies to hydraulic fractures that cross lease lines, operators cannot be sure they will avoid liability for the value of hydrocarbons drained by those fractures.

Conclusion
Texas is the only state of the four discussed with case law addressing subsurface trespass in the context of hydraulic fracturing. However, even Texas’s law is less than clear. Analogous case law in Louisiana, Arkansas and Oklahoma exists with respect to slant-well drilling (a subsurface trespass in each of these states), airspace trespass, brine recovery operations, water flooding or secondary recovery operations, and deep injection of salt water and other forms of waste. However, the technology of hydraulic fracturing and the unconventional nature of shale formations are unlike anything courts in these states have previously addressed.

Consequently, the analogous body of case law in Louisiana, Arkansas and Oklahoma falls short of providing a precise framework for analyzing the issue of hydraulic fracturing at drilling unit boundaries. One common thread appears to be that courts are reluctant to bar claims—whether in trespass, nuisance or otherwise—by landowners who can show actual damage to wells, the quality of water, or the formation beneath their land caused by subsurface operations.

Authors
Patrick Byrd and Meghan Dawson are litigation associates in the Houston office of Baker Botts L.L.P. whose practices focus on energy and commercial litigation. Bill Kroger is a partner in the Houston office of Baker Botts L.L.P. whose practice concentrates primarily on litigation involving energy, alternative energy and commercial disputes.

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