In January of last year, the Court of Appeals for the First District of Texas issued an opinion that centered on surface use by an oil and gas operator. The Court of Appeals affirmed the lower court’s judgment, which found in favor of the surface owners, Will and Loree Hegar. The operator, Key Operating & Equipment, Inc., appealed the decision to the Texas Supreme Court. The Court agreed to hear oral argument, which is scheduled for early February.
The facts of the case are this: in 1994, Key built a road across a tract of land in Washington County that it had leased (the “Curbo Tract”). It used this road to access wells on two separate tracts: the Curbo Tract and the Richardson Tract. In 2000, after the wells on the Curbo Tract stopped producing, the owners of Key (who also owned a small mineral interest in the tract) re-leased it to Key. Key then pooled portions of the Curbo Tract and the Richardson Tract, and used the road on the Curbo Tract to access the wells on the Richardson Tract.
In 2002, the Hegars purchased the surface estate and a one-fourth mineral interest in the Curbo Tract. The Court of Appeals noted that “[t]he Hegars knew when they bought the property that it was subject to oil and gas leases and that Key Operating used the road on the tract to service wells on the adjoining Richardson tract. The Hegars themselves currently use the road to access the home they built on the property. They tolerated Key Operating’s use of the road until Key Operating drilled a new well on the Richardson tract that increased its use of the road. Will Hegar testified, ‘We’re trying to raise a family and we can’t do it with a highway going through our property.’”
The Hegars brought suit, asking the court to enjoin Key’s use of the road. The Hegars argued that none of the oil produced by Key was actually produced from the Curbo Tract. Instead, the Hegars claimed that Key pooled simply to have continued use of the road. Key, on the other hand, argued that the oil was migrating to the Curbo Tract, and they were, in fact, producing oil from both tracts. The lower court found for the Hegars, and permanently enjoined Key from using the road “for any purpose relating to the extraction, development, production, storage, transportation, or treatment of minerals produced from an adjoining” tract.
On appeal, Key argued first that it had the right to use of the road under its lease. The Hegars countered that Key had no right to use the road to produce from a pooled unit because the lease that authorized pooling had been executed after the mineral and surface rights were severed, thus was not in the Hegars’ chain of title. As a result, the Hegars claimed that “they did not take their title subject to the lease and their interest in the surface is not limited by it.” According to the Hegars, Key’s use of the surface estate “is limited to those rights that existed whenever the Boatright mineral estate was first severed, which was before [their] purchase [of the surface estate] and before the creation of the Key oil and gas lease and pooling agreement.” The Court of Appeals agreed that the lease was not in the chain of title, and that Key could not expand their right to use the surface of the Curbo Tract (that right being the right to use as much of the surface as is reasonably necessary to produce the minerals from under the tract).
What this means is that the Court agreed that Key must prove there is production from the Curbo Tract in order to continue its use of the road, instead of relying upon the authority in the lease to pool, because the lease was not in the Hegars’ chain of title. Operators must take note, and know the history of their tracts well if the Supreme Court affirms this decision. The timing of the severance of the estate would impact an operator’s ability to exercise his right to pool, especially if the surface estate is conveyed before he exercises this right. As Key’s Petition for Review points out, “the mineral owner’s property right—which was conveyed by deed—would somehow be converted to a license that terminates with each conveyance of the surface estate.”