Recently in Surface Damages Category

July 29, 2014

Jimmy McAllen's Judgment Against Forest Oil Affirmed

Jimmy McAllen's battle against Forest Oil has moved one step closer to conclusion. Last week the Corpus Christi Court of Appeals affirmed an arbitration award of more than $20 million against Forest Oil for environmental and other damages to the McAllen Ranch and personal injuries to Mr. McAllen.

The fight began in 2004, when McAllen sued Forest. He claimed that Forest had buried mercury-contaminated iron sponge wood chips on the 27,000-acre McAllen Ranch. The wood chips are waste from Forest's gas plant on the Ranch. He also claimed that he had contracted cancer from pipe containing naturally occurring radioactive material (NORM) that Forest had given him to build pens on his Santillana Ranch.  The pens were built to house endangered rhinoceroses.  McAllen contracted cancer that required amputation of his leg.

Forest responded that McAllen was bound by a prior settlement agreement that required him to arbitrate any claims arising out of Forest's operations on his ranch.  McAllen opposed arbitration. The trial court denied Forest's motion to require arbitration, and the Corpus Christi Court of Appeals affirmed. Forest appealed to the Texas Supreme Court, which held that McAllen was bound by the arbitration agreement. Forest Oil v. McAllen, 268 S.W.3d 51 (Tex. 2008).

So the parties arbitrated McAllen's claims before three arbitrators, one chosen by McAllen, one by Forest, and the third chosen by the other two.  Forest chose Daryl Bristow, McAllen chose Donato Ramos, and the third arbitrator was Clayton Hoover. The arbitration hearing lasted for 17 days.  The arbitrators issued a split decision, with Bristow dissenting. The arbitration award gave $15 million to McAllen for the reduced value of the McAllen Ranch resulting from Forest's contamination of the ranch, and $500,000 to Jimmy McAllen for his personal injuries. The panel also awarded $500,000 in exemplary damages and $5 million in attorneys' fees. Bristow dissented, based on his conclusion that the award interfered with the Texas Railroad Commission's jurisdiction to regulate remediation of hazardous waste associated with oil and gas production.

McAllen filed a motion in the trial court to confirm the arbitration award, which the trial court granted. Forest then appealed to the Court of Appeals in Corpus Christi.

Texas courts favor arbitration of disputes, so it is difficult to overturn an arbitration award. A court's review of arbitration awards is very limited.

The Court of Appeals first held that the award did not interfere with the Railroad Commission's jurisdiction over oil field contamination. The court made reference to sections 85.321 and 322 of Texas Natural Resources Code, the first of which expressly grants a private cause of action for damages for violation of Texas conservation laws, and the second of which provides that nothing in the law governing Railroad Commission jurisdiction "shall impair or abridge or delay a cause of action for damages or other relief that an owner of land .... may have or assert against any party violating any rule or order of the commission or any judgment under this chapter."

Forest also argued that the award should be vacated because of the "evident partiality" of Donato Ramos, the arbitrator chosen by McAllen. An arbitration award may be overturned if an arbitrator fails to disclose to the parties known facts that "might, to an objective observer, create a reasonable impression of the arbitrator's partiality." In other words, it is not the partiality per se that is objectionable, but the arbitrator's failure to disclose facts that might show his partiality. Forest said that Ramos failed to disclose that McAllen had proposed Ramos as a mediator in another suit brought by McAllen against Chevron. Evidence in the case indicated that Ramos was never told that he had been proposed as a mediator in that other litigation.  Because there was evidence that Ramos never knew he was being proposed as a mediator, the Court of Appeals held that Forest had not shown grounds for overturning the arbitration -- Ramos could not fail to disclose something that he never knew. The Court of Appeals distinguished a recent Texas Supreme Court case that did overturn an arbitration award on the same grounds, Tenaska Energy v. Ponderosa Pine Energy,  2014 WL 2139215. In that case, the arbitrator failed to disclose the full extent of his business relationship with a party's attorneys in the case.

There is some irony in Forest's complaints about the arbitration award in light of its insistence that McAllen's claims had to be resolved by arbitration. One of Forest's arguments for overturning the award was that McAllen's expert-testimony evidence of damages to the ranch would not have been admissible testimony in a trial court. The Court of Appeals cited the Texas Supreme Court's conclusion that an arbitration award need not be based on admissible evidence. "For efficiency's sake, arbitration proceedings are often informal; procedural rules are relaxed, rules of evidence are not followed, and no record is made." Nafta Traders v. Quinn, 339 S.W.3d 84, 101 (Texas 2011).

Forest is sure to seek review by the Texas Supreme Court. So Jimmy McAllen's ten-year fight with Forest is not quite over yet. 

June 23, 2014

Texas Supreme Court Decides Key Operating v. Hegar

The Texas Supreme Court last week decided Key Operating & Equipment, Inc. v. Hegar, No. 13-0156, reversing the courts below and holding that Key Operating has the right to use a road crossing Hegar's tract to produce from a well on adjacent lands.

The legal principle the Court applied is not surprising and did not substantially change existing precedent. But the unusual facts of the case illustrate how far the Court will go to protect the rights of mineral lessees when those rights conflict with interests of the surface owner.

The legal precedent the Court followed is this:  when two tracts are combined to create a pooled unit, the operator of the unit has the right to use the surface of all of the land covered by the leases included in the unit to operate wells located anywhere on the unit, regardless of the location of the well.

The facts of the case are these:  Hegar bought 85 acres of land in 2002, and built a house there in 2004. The 85 acres was originally part of a 191-acre tract, the Curbo/Rosenbaum tract.  When the Hegars bought the land, 1/8th of the minerals under the Curbo/Rosenbaum tract were owned by the owners of Key Operating, who had leased the mineral interest to Key Operating. Key had a well on an adjacent tract, the Richardson #1, and had created a pooled unit including 10 acres of the Curbo/Rosenbaum tract and 30 acres of the Richardson tract. An existing road crossed the Hegar land and led to the Richardson #1. After the Hegars built their home, Key Operating drilled another well on the pooled unit, the Richardson #4, and traffic on the road increased substantially. The Hegars filed suit, arguing that Key had no right to "access or use the surface of the Hegar Tract in order to produce minerals from the Richardson Tract."  At trial, the Hegars produced expert testimony that the Richardson #4 Well was draining only 3 1/2 acres, and that the well's drainage area did not reach the Hegars' property and was not draining the Hegars' property. The trial court held that Key did not have the right to use the road across the Hegars' property to produce from a well that was not actually draining their property. The court of appeals affirmed. 403 S.W.3d 318 (Tex.App.--Houston [1st Dist] 2013).

The facts recited in the opinion reveal that Key appears to have created the pooled unit primarily if not solely to preserve its right to use the existing road to get to the Richardson #1 well. Key's owners apparently bought 1/8th of the minerals under the Curbo/Rosenbaum tract so that they could lease the interest to their own company and create the pooled unit. The opinion does not say for sure, but Key apparently pooled its lease of the 1/8th mineral interest in 10 acres from the Curbo/Rosenbaum tract even though it had no lease on the other 7/8ths of the minerals in that 10 acres. Because the new well, the Richardson #4, was not draining the Curbo/Rosenbaum tract, there was apparently no geological reason to create the pooled unit.

Even so, the Supreme Court held that, once the pooled unit was formed, Key had the right to use the Curbo/Rosenbaum tract to produce from wells on the pooled unit. The court held that

once pooling occurred, the pooled parts of the Richardson and Hegar Tracts no longer maintained separate identities insofar as where production from the pooled interests was located. So the legal consequence of production from the pooled part of the Richardson Tract is that it is also production from the pooled part of the Hegar Tract, and the Hegars do not contend that Key did not have the right to use the road to produce minerals from their acreage. Because production from the pooled part of the Richardson Tract was legally also production from the pooled part of the Hegar tract, Key had the right to use the road to access the pooled part of the Richardson tract.

So the Hegars will have to put up with the road and the traffic. They are bound by the legal fiction, found to be untrue as a matter of fact, that production from the pooled part of the Richardson tract was "legally" production from the their tract, thus giving Key the right to use its road.

A footnote in the Supreme Court's opinion raises an interesting question: "The Hegars do not argue that the Richardson lease does not grant the right to pool or that the pooling was in bad faith."  Clearly, the mineral owners under the Richardson tract could complain that the pooling of their lease with 10 acres of the Curbo/Rosenbaum tract was in bad faith because the Richardson #4 was not in fact draining the Curbo/Rosenbaum tract. But would the Hegars, who apparently had no mineral interest in their tract and no right to share in production from the unit, have standing to argue that the pooled unit was created in bad faith? The court does not say, but the footnote implies as much.

June 9, 2014

Reclamation of Lands Impacted by Oil and Gas Operations

In the last century in West Texas, oil and gas exploration in the Permian Basin scarred the landscape. Below is a Google Earth view of an area of Ward County in far West Texas, showing the drilling pads and roads from oil and gas development.

Ward County Google.JPG

At the time of this development the surface of this land, dry and semi-desert, was considered relatively worthless, and the impact of oil exploration to the surface of the land was considered a small price to pay for the wealth of oil found under the ground.

Today, landowners have become more ecologically conscious and protective of the natural environment of their lands. Increasingly, oil and gas leases are including provisions requiring restoration of the surface by exploration companies. But restoration of semi-arid lands in West Texas is not a simple task and requires patience and expertise, as well as significant resources.

I recently ran across a series of publications by the University of Wyoming that describes strategies for restoring Wyoming lands disturbed by oil and gas activities. The University has created a Reclamation and Restoration Center in its College of Agriculture and Natural Resources, working with its School of Energy Resources. It has published a series of informative bulletins describing best practices for restoration of severely disturbed lands - how to preserve topsoil, re-establish plant species, and preserve natural habitat.  One bulletin describes considerations for including restoration requirements in oil and gas leases on private lands. The bulletins are online and can be found here. While Wyoming habitat is not the same as West Texas habitat, they have a lot in common.

A resource for landowners wishing to learn more about habitat restoration in South Texas is the Caesar Kleberg Wildlife Research Institute at Texas A&M University in Kingsville, which has experts on native habitat and vegetation.

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.