An Important Case On Subsurface Trespass

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1 Portfolio Media. Inc. 860 Broadway, 6th Floor New York, NY Phone: Fax: An Important Case On Subsurface Trespass Law360, New York (May 14, 2014, 6:27 PM ET) -- Fluids associated with oil and gas production frequently move across subsurface property lines. For example, injected fracking fluids and disposed saltwater often move beyond the lease upon which the particular injection well is situated. Generally, the Texas Supreme Court has held that when fluids are used in support of oil and gas recovery efforts, and those fluids happen to cross a subsurface property line, no actionable trespass occurs. But the issue is not wholly settled. A case currently before the Texas Supreme Court FPL Farming Ltd. v. Environmental Processing Systems will hopefully bring more certainty to the issue. The stakes are high, because fluid injection is critical to oil and gas production, and there is frequently little the injector can do to keep the fluids from migrating underneath other properties. Overview Three key Texas Supreme Court cases govern the issue of subsurface trespass: 1. Railroad Commission of Texas v. Manziel (1962). In this water-flooding case, the court held that when injected fluids cross property lines as part of oil and gas recovery efforts, a trespass does not occur. 2. Coastal oil and gas Corp. v. Garza Energy Trust (2008). In this case, the court held that the rule of capture usually trumps a claim for trespass when fracking fluids move across subsurface property lines. 3. FPL Farming Ltd. v. Environmental Processing Systems (2011). Most recently, the court declined to decide whether the injection of wastewater, which then migrates across subsurface property lines, constitutes a trespass. But this case is now back before the court, and it is likely that the court will rule this year on whether the subsurface disposal of fluids gives rise to a trespass claim. Analysis No trespass when fluids are used to stimulate production.

2 The Texas Supreme Court first addressed subsurface trespass by fluids more than 50 years ago in Railroad Commission v. Manziel, 361 S.W.2d 560 (Tex. 1962). In that case, the Railroad Commission permitted a water-flood operation as part of a secondary recovery effort. The plaintiffs owned the property adjacent to the water-flood injection site and sued to set aside the permit. All parties agreed that the water-flood operation would cause water to move across lease lines and under the plaintiffs property. Further, plaintiffs argued that the water-flood operation would cause the premature demise of a well on their property, by driving hydrocarbons from their property. In deciding the case, the court emphasized that the pressure on the reservoir had dropped significantly, so that the remaining oil was dead, and that water-flooding was the best means of increasing pressure on the reservoir to allow for additional recovery. Id. at 562. The court further recognized that once the water-flood began, there was no way to stop fluids from spreading across lease lines. Id. at 564. While recognizing the Railroad Commission had broad authority to issue water-flooding permits to prevent waste and protect correlative rights, the plaintiffs argued that the commission did not have the authority to sanction a physical trespass of water underneath their own land, so as to result in the premature destruction of their own producing well. Id. at 565. In reaching its decision, the court recognized that forcing water underneath the property of an owner that did not want it there, on its face, certainly seemed to be a trespass. But the court emphasized the important policy considerations behind allowing water-flooding, explaining that such operations should be encouraged in order to increase production levels, and that secondary recovery programs could not and would not be conducted if any adjoining operator could stop the project on the ground of subsurface trespass. Id. at 568. Also, the court reasoned that the nature of the subsurface and the surface were obviously different, and the rules governing one need not necessarily apply to the other. Id. Ultimately, the court concluded that where the commission appropriately authorizes a secondary recovery operation, a trespass does not occur when the injected, secondary recovery fluids move across lease lines... Id. at Importantly, the court did not address whether the injecting operator might have tort liability if the injection caused actual damages to the adjoining property. Id. at 566. Instead, the court addressed only whether a trespass is committed when secondary recovery waters from an authorized secondary recovery project cross lease lines. Id. at Thus, just because a trespass does not occur does not mean that the operator is shielded from other liability for actual damages. But, given the depth at which water-flooding occurs, it is difficult to conceive how a property owner could fashion a claim for any significant actual damages for negligence or some other tort. The rule of capture trumps trespass law in the context of fracking. More than 40 years after the court s decision in Manziel, it addressed whether hydraulic fracturing constituted a subsurface trespass in Coastal oil and gas Corp. v. Garza, 268 S.W.3d 1 (Tex. 2008). Given the decision in Manziel, it would seem that the court s decision would be rather easy. After all, like water-flooding, fracturing involves injecting subsurface fluids outside of lease boundaries in order to maximize recovery. But instead, the court returned a somewhat convoluted decision, with a majority, a

3 concurring, and a partially dissenting opinion. Nonetheless, the general rule that emerges from the case is that there is no trespass action for the subsurface movement of fluids during fracking operations. The plaintiffs in the case were royalty owners. They argued that Coastal had fracked wells on property that bordered theirs, thereby allowing substantial drainage of their hydrocarbons. Among other things, the plaintiffs claimed that the fracking constituted a trespass. At trial, a jury agreed with the plaintiffs on the trespass theory and awarded $1 million damages for lost royalties. Id. at 8. As the Manziel court had earlier done, the Coastal court emphasized the laws of trespass were not absolute and that what might constitute a trespass on the surface might not constitute one deep underground. Had Coastal caused something like proppants to be deposited on the surface of [plaintiffs land], it would be liable for trespass, and from the ancient common law maxim that land ownership extends to the sky above and the earth s center below, one might extrapolate that the same rule should apply two miles below the surface. But that maxim... has no place in the modern world. Id. at 11 (internal quotation marks omitted). Ultimately, though, the court declined to reach the trespass issue. Instead, it turned to the rule of capture and held that rule trumped any trespass claims: [A]ctionable trespass requires injury, and [plaintiffs ] only claim of injury that Coastal s fracking operation made it possible for gas to flow from beneath [plaintiffs land] to the Share 12 wells is precluded by the rule of capture. That rule gives a mineral rights owner title to the oil and gas produced from a lawful well bottomed on the property, even if the gas flowed to the well from beneath another owner s tract. Id. at (footnotes omitted). Driving the court s decision were at least four policy considerations. First, even under the rule of capture, the plaintiffs still had adequate protection without resorting to a trespass claim, either by drilling their own well, suing their lessee for a violation of the implied covenant to protect against drainage, or seeking a pooling arrangement, either by agreement or through the Railroad Commission. Id. at 14. Second, the court found it preferable to leave the Railroad Commission (rather than the courts) as the authority regulating fracking activities and any associated drainage. Id. at Third, the court found that the judicial system was ill-suited to determine the value of the hydrocarbons drained. Id. a 16. Fourth, there was wide-spread opposition from all corners of the industry against allowing hydraulic fracturing liability for improper drainage. Id. at Thus, the court held that a cause of action for trespass did not exist when the accusation was that the fracking activity had caused drainage. The court reserved judgment on whether fracking might constitute a trespass in non-drainage cases that resulted in injury to property. Id. at 37. In his concurring opinion, Justice Don Willett explained that he would have closed the trespass door entirely, stating that fracking was essential to the Texas economy and the possibility of allowing trespass by fracking threatens to inflict grave and unmitigable harm to the state. Id. at 29. For Justice Willett, the analysis in Coastal should follow the Manziel case: [T]his case should turn not on the absence of injury but on the absence of wrongfulness. Balancing the respective interests as we did in Manziel, this

4 type of subsurface encroachment, like the waterflood in Manziel, simply isn t wrongful and thus isn t a trespass at all, not just a nonactionable trespass. Id. at 30. The court leaves open the issue of whether wastewater disposal is a trespass. A few years after its decision in Coastal, the Texas Supreme Court again turned to the issue of subsurface trespass. This time, the court addressed wastewater disposal. FPL Farming Ltd. v. Environmental Processing Systems LC, 351 S.W.3d 306 (Tex. 2011). In this case, a company received a permit from the TCEQ to construct and operate two deep, non-hazardous wastewater injection wells. A neighboring rice farm brought suit claiming that the injection wells were causing a subsurface trespass of wastewater under its land. At trial, the jury found that a trespass had not occurred. The rice farm appealed, arguing that the jury charge had wrongly placed the burden of proof onto it to show that it had not consented to the trespass, as well as other grounds. Id. at 309. The Beaumont Court of Appeals avoided the jury charge issue and instead focused on whether the plaintiff could assert a trespass claim at all for wastewater disposal that crosses property lines. It held that there could be no liability for trespass damages because the TCEQ authorized and permitted the well. Id. at 309. The Texas Supreme Court then reversed and remanded, holding that simply because the well was permitted did not mean there was not a trespass. Id. at 314. Nonetheless, the court declined to decide the larger issues: whether subsurface wastewater migration can constitute a trespass, or whether it did so in this case. Id. at Instead, it sent the case back to the intermediate court to address these matters. On remand, the Beaumont Court of Appeals re-examined the trespass issue and determined that the farming operation [FPL] did have standing to sue for trespass. FPL Farming Ltd. v. Envtl. Processing Sys., 383 S.W.3d 274 (Tex. App. Beaumont 2012, pet. granted). The intermediate court determined that there was sufficient evidence that the injection operations had created a plume that did affect the briny water under FPL s land, albeit more than a mile beneath the surface. Id. at 282. We conclude that Texas law recognizes FPL s property interest in the briny water underneath its property... [and that] FPL has a cause of action for trespass at common law. Id. at 282. The court then ordered a new trial on the trespass claim because the original jury charge had erroneously placed the burden on FPL to show that it had not consented to the trespass. Id at 284. Predictably, the wastewater injection company appealed, and now the issue of whether wastewater disposal can constitute a trespass is back before the Supreme Court. Oral arguments in the case were held on Jan. 7, 2014, and it is reasonable to think that the court will issue a decision this year. It is, of course, difficult to say how the court will rule and what the scope of that ruling will be. One important item to recognize about the FPL case is that the disposal well at issue was not associated with the oil and gas industry. As such, it was a Class I well governed by the TCEQ. Had the well been associated with, or incidental to, oil and gas drilling or production, then it would have been a Class II well governed by the Texas Railroad Commission. This could be a distinction that does not make a difference. After all, both types of wells involve injecting potentially hazardous materials at zones beneath fresh groundwater. On the other hand, the Texas Supreme Court could find that this is an important distinction given how critical it is for oil and gas producers to be able to dispose of produced saltwater and fracking fluids. Thus, the court could rule that in a general wastewater disposal context, subsurface wastewater that crosses property lines can constitute a trespass. But in the oil and gas context, such movement does not

5 constitute a trespass. This would certainly keep with the decisions in both Manziel and Coastal, in which the court expressed a strong policy preference that subsurface property rights are not absolute, especially when an exercise of such rights might curtail oil and gas exploration and production. Conclusion In Texas, exploration and production companies are generally shielded from subsurface trespass liability when they use fluids to stimulate production. Whether they are also shielded from liability when their disposed fluids cross property lines remains an open question, but one that will hopefully be decided shortly. By C. Brannon Robertson, King & Spalding LLP C. Brannon Robertson is a partner in King & Spalding's Houston office. The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice. All Content , Portfolio Media, Inc.