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.