Surface Use in the Age of the Marcellus: Will Horizontal Wells Be Considered Reasonably Necessary to Develop the Marcellus Shale?

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1 Surface Use in the Age of the Marcellus: Will Horizontal Wells Be Considered Reasonably Necessary to Develop the Marcellus Shale? By Lori A. Dawkins and Allison J. Farrell, Steptoe & Johnson PLLC The Marcellus Shale is nothing new. This black shale formation was created some 400 million years ago. And it has long been known that the Marcellus Shale contains reserves of natural gas. But conventional wells drilled vertically into the Marcellus produce this gas quite slowly, and the Marcellus Shale has long been overlooked as a major resource. Given the long dormancy of this formation, recent descriptions of the Marcellus Shale as a super giant gas field with the potential to supply the entire United States with natural gas for two years are new. 1 The widespread use of horizontal and directional drilling techniques is also fairly new. And the legal challenges that horizontal drilling poses for development of the Marcellus are so new, that many states do not yet have laws in place to handle them. At the time of this writing, it does not appear that any jurisdiction has exhaustively or specifically discussed the legal issues surrounding horizontal development of the Marcellus Shale. For example, no jurisdiction appears to have yet considered whether the drilling of horizontal wells is a reasonable and necessary use of the surface. For now, developers and operators must rely on their lawyers to read the tea leaves of existing law and predict how courts will handle the new challenges posed by development of the Marcellus Shale. Mineral Owners Have a Right to Use the Surface as Reasonably Necessary to Produce the Underlying Minerals. When minerals are severed from the surface estate, the severed mineral rights lack value unless the mineral owner can use a portion of the surface to access and develop the minerals. 1 Terry Engelder, Professor of Geosciences at The Pennsylvania State University, has described the Marcellus Shale as a super giant gas field and has said that the formation could contain as much as 516 trillion cubic feet of natural gas in place. See Engelder Homepage, available at bhttp:// (last accessed January 24, 2011).

2 See, e.g., Greeley-Roethe LLC v. Anadarko E&P Co., 2010 WL , *5 (D. Colo. March 31, 2010). Minerals owners have long had the implied right to use as much of the surface as is reasonably necessary to develop the minerals lying beneath the surface so long as such use does not interfere with or damage the surface owner s rights in the surface. Id; see also Getty Oil Co. v. Jones, 470 S.W.2d 618, (Tex. 1971). A mineral owner s right to make reasonably necessary use of the surface is often counter-balanced by a corresponding duty to give due regard to the rights of surface owners and to accommodate surface owners to the fullest extent possible consistent with their right to develop the mineral estate. Id. Conversely, a surface owner must respect a mineral owner s right to use the surface and cannot impose additional restrictions upon such use. For example, in Belden & Blake Corp. v. Pennsylvania et al., 969 A.2d 528 (Pa. 2009), the Pennsylvania Supreme Court recently held that the Pennsylvania Department of Conservation and Natural Resources could not unilaterally impose additional conditions upon the mineral owner s right to use the surface of a state park beyond those which are reasonable; such an imposition of additional conditions would shift the burden from the surface owner to the mineral owner to seek redress of surface rights. Id. at 532. Stating that a mineral owner s rights cannot be diminished simply because the surface is owned by the government, the Court held that the state had no authority to impose additional conditions without compensation. Id. at 533. Similarly, the United States District Court for the Western District of Pennsylvania held that the United States Forest Service did not have the regulatory authority to subject drilling proposals for the Allegheny National Forest to extra scrutiny. Minard Run Oil Co. v. U.S. Forest Serv., 2009 WL *31 (W.D. Pa. Dec. 15, 2009). In holding that the U.S. Forest Service s authority to regulate private drilling activities inside the forest was limited, the Court

3 held that the Forest Service could nevertheless prevent undue degradation of the surface estate through the long-standing cooperative agreement between the Forest Service and drillers, and by exercising its rights as a servient surface-estate holder under Pennsylvania law. Id. Some States Regulate Surface Use Via Surface Use Statutes. Some states have passed surface use statutes which not only regulate surface use but also define the types of use for which surface owners are to be afforded damages. For example, Kentucky s surface statute requires that mineral owners give notice to surface owners at least ten days before drilling, and pay reasonable compensation for, among other things, damages to growing crops, trees, shrubs, fences, roads, structures, improvements, and livestock thereon caused by the drilling of a new well. The surface owner shall be entitled to reasonable compensation from the operator for subsequent damages to growing crops, trees, shrubs, fences, roads, structures, improvements, and livestock caused by subsequent production operations of the operator thereon. The surface owner shall be entitled to reasonable compensation for all negligent acts of the operator that cause measurable damage to the productive capacity of the soil. In addition, the operator shall not utilize any more of the surface estate than is reasonably necessary for the exploration, production and development of the mineral estate. Ky. Rev. Stat. Ann (3), (5). Other states surface use statutes, such as West Virginia s, provide surface owners with compensation for items such as damages to a pre-existing water supply, diminution in value of the surface, and cost of repair of personal property. W. Va. Code Some surface use statutes, such as Montana s, go even farther. Montana s surface use statute broadly makes mineral developers and operators responsible for damages to real or personal property caused by oil and gas operations and production and responsible for all damages to real or personal property resulting from the lack of ordinary care. Mont. Code. Ann

4 Will Horizontal Wells Be Considered a Reasonably Necessary Use of Surface? It is against this legal backdrop that horizontal wells into the Marcellus Shale are popping up on the legal scene. In horizontal drilling, there is a need to do multiple wells from a relatively close common location to achieve the avoidance of stranded gas and oil. This results in substantially larger well pads than conventional well pads. Thus, the question looms as to whether a surface owner could validly argue that a horizontal well is not a reasonably necessary use of the surface. As illustrated above, the courts must balance the equities when considering whether a mineral owner s proposed use of a surface tract is reasonable and necessary for the development of the minerals. See, e.g., Haupt, Inc. v. Tarrant County Water Control and Improvement Dist. No. One, 870 S.E.2d 350, 353 (Tex. Ct. App. 1994). The courts must balance the mineral owner s dominant right to develop his minerals against the surface owner s use of his surface. Id. Under the accommodation doctrine, the mineral owner should consider alternatives so he can develop his minerals in such a way as to minimize disruption of surface use. Id. But before a mineral owner can be required to consider the alternatives of vertical and horizontal drilling, the alternatives must be reasonable. Id. That is, the mineral owner cannot be required to spend exorbitant sums of money to produce his minerals via inefficient vertical wells because the requirement of such an extreme alternative would, in essence, render the mineral estate worthless. Accordingly: Id. (emphasis added). the accommodation doctrine preserves absolute and unfettered the right of the dominant mineral estate to use the surface estate under certain circumstances: [I]f there is but one means by which to produce the minerals, then the mineral owner has the right to pursue that use, regardless of surface damage

5 At bottom, the mineral owner has a dominant right to use the surface to develop his minerals because, as discussed above, the mineral estate is valueless if it cannot be produced. Thus, based on the fundamental principle of law that mineral owners rights are dominant, mineral owners could argue that horizontal drilling is a reasonably necessary use of the surface at least in cases where a horizontal well is the only reasonable means by which the natural gas of the Marcellus Shale can be produced. Where vertical wells are not a reasonable alternative for developing the Marcellus Shale, horizontal drilling should be allowed as reasonably necessary because it is the only means by which the mineral owner can develop natural gas. Often times, vertical wells will not be a reasonable alternative for developing the Marcellus Shale because they are inefficient and, in the end, more costly because many more vertical wells need to be drilled to accomplish the same production as one horizontal well. Moreover, because one horizontal well can produce more natural gas than several vertical wells, a horizontal well could very well use less of a surface tract than numerous vertically drilled wells. In sum, where horizontal drilling is the only reasonable means by which a mineral owner could produce natural gas, courts would surely have to allow it as a reasonably necessary use of the surface. This situation may occur with some frequency as the Marcellus Shale is developed, because vertical wells are often times insufficient to produce the natural gas therein. However, until the courts catch up with the rapid development of the Marcellus Shale and decide these issues, mineral owners are left to make predictions about this new development based on old laws. Authors Biographical Notes Lori A. Dawkins is a member of the law firm of Steptoe & Johnson PLLC, and has been practicing energy law in both West Virginia and Pennsylvania for sixteen years. Allison J

6 Farrell is a second-year associate and practices energy law and general litigation in Steptoe & Johnson s Bridgeport, West Virginia office