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March 2, 2009

Surface Damages for Oil and Gas Activities in Texas

Landowners in Texas are often surprised to learn that oil companies have no obligation to compensate them for use of their lands, or to restore the lands after their use, absent a contractual requirement to do so in their oil and gas lease.  The typical oil-company form lease provides only that the lessee will pay for damages "caused by its operations to growing crops and timber on the land."  Under such a lease, the company does not have to compensate the surface owner for use of or damage to the surface caused by its operations.

Most exploration companies do compensate the surface owner for surface use.  The usual practice is for the company to agree with the surface owner on a single lump-sum payment for each well location, with its attendant roads and flow line easements.  The company pays this compensation for two reasons: first, to maintain good relations with the surface owner, and second, to obtain from the surface owner a release, which is presented to the surface owner at the time of the payment.  The release typically contains language absolving the company from any and all damages caused by the company's operations on the property for the well.  In other words, part of the consideration for the payment is the landowner's release of the company from further liability.

 Absent a contractual obligation in the lease, the oil company has no obligation to compensate the landowner unless it negligently or intentionally causes damages in excess of the reasonable and necessary damages resulting from its operations.  The mineral estate is the "dominant estate," which means that the mineral owner and his/her lessee have the right to use so much of the surface estate as is reasonably necessary to explore for and produce oil and gas.  Texas courts have historically been very careful to protect the rights of the mineral lessee.  After all, the oil and gas industry was the principal source of wealth and revenue in Texas for decades, and courts obligingly crafted legal principles designed to facilitate oil and gas exploration and production.

Even where the oil company has negligently or intentionally caused excess damages, it is very difficult to recover for those damages absent express contractual authority.  A good example of the difficulty faced by landowners suffering surface damages is Primrose Operating Company v. Senn.  In that case, the Senns bought a large ranch in West Texas that had extensive oil and gas activity at the time of their purchase, with 500-600 producing wells.  After their purchase, the Senns had particular problems with one of the operators, Primrose, which had more than 86 spills of oil and salt water.  Testimony at trial showed that it would cost more than $2 million to clean up the spills.  The Senns obtained a judgment, after a jury verdict, for $2,110,000 in actual damages and $880,000 in punitive damages.  But the court of appeals reversed and held that the Senns were entitled to no compensation.  It ruled that, because it was not "economically feasible" to remediate the spills, the damages were limited to the reduction in market value of the ranch caused by the spills, and that, since the value of the ranch had increased since the time of the spills, there was no evidence that the Senns had been damaged.

Any lease by a mineral owner who owns the surface of the leased premises should therefore address the rights of the lessee to use the surface estate and the lessee's obligation to pay compensation for use of or damage to the surface of the lands.