sizing up shale states: a comparison of mineral law in...

Sizing Up Shale States: A Comparison of Mineral Law in Ohio, Pennsylvania, and North Dakota

by

Zach Eccleston, Ilya Batikov, Carl Hensch, Christopher Houston, George Shires, and Sarah Bridges Hameline & Eccleston, LLP

Dallas, Texas and Cincinnati, Ohio

CONTENTS

OHIO: THE UTICA AND MARCELLUS .................................................................................................... 4

I. INTRODUCTION ................................................................................................................... 4

A. State Activity and Demographics ........................................................................... 4

B. Resources ............................................................................................................... 6

C. Definition of “Minerals” ......................................................................................... 6

II. REGULATORY BODIES .......................................................................................................... 8

A. Generally ................................................................................................................ 8

B. Developing Regulations ....................................................................................... 10

III. ESTABLISHIING TITLE ......................................................................................................... 11

A. Statutory Deed Forms and General Conveyance Information ............................ 11

B. Records and the Recording Acts .......................................................................... 12

C. Ohio’s Dormant Mineral Act ................................................................................ 13

D. Inheritance ........................................................................................................... 14

IV. LEASING ............................................................................................................................ 16

A. From Governmental Bodies ................................................................................. 16

B. Of Roads ............................................................................................................... 17

C. Under Bodies of Water ........................................................................................ 18

D. From Concurrent and Successive Owners ........................................................... 19

E. Effects of Liens and Foreclosures on a Lease ....................................................... 22

V. POOLING AND COMPULSORY POOLING ........................................................................... 22

A. Voluntary Pooling ................................................................................................ 22

B. Mandatory Pooling .............................................................................................. 22

C. Mandatory Unitization of a Pool ......................................................................... 23

VI. ISSUES DURING EXPLORATION & PRODUCTION ............................................................... 23

A. Competing Development ..................................................................................... 23

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B. Surface Owner Interaction ................................................................................... 24

C. Tortious Environmental Concerns ....................................................................... 24

VI. POST-PRODUCTION ISSUES ............................................................................................... 27

A. Termination of the Lease ..................................................................................... 27

B. Plugging and Abandonment ................................................................................ 27

PENNSYLVANIA: THE MARCELLUS & UTICA ....................................................................................... 29

I. INTRODUCTION ................................................................................................................. 29

A. State Activity and Demographics ......................................................................... 29

B. Resources ............................................................................................................. 31

C. Definition of Minerals .......................................................................................... 32

II. REGULATORY BODIES ........................................................................................................ 33

A. Generally .............................................................................................................. 33

B. Frack-Specific Regulations and Developing Regulations ..................................... 35

III. ESTABLISHING TITLE .......................................................................................................... 36

A. Records and Recording Acts ................................................................................ 36

B. Dormant Mineral Acts and Marketable Title Acts ............................................... 38

C. Inheritance ........................................................................................................... 38

IV. LEASING ............................................................................................................................ 39


B. Of Roads and Railroads ........................................................................................ 39

C. Lands under Waters ............................................................................................. 40

D. From Unlocatable Mineral Owners ..................................................................... 41

E. From Concurrent Owners and Successive Owners ............................................. 42


VI. MAINTAINING THE LEASE ................................................................................................. 45

A. Interpretation of Lease Terms ............................................................................. 45

VII. ISSUES DURING EXPLORATION AND PRODUCTION .......................................................... 48



VIII. POST-PRODUCTION ISSUES ............................................................................................... 51

A. Lease Termination and Filing Requirements ....................................................... 51

B. Plugging and Abandonment Issues ...................................................................... 52

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NORTH DAKOTA: THE BAKKEN ......................................................................................................... 54

I. INTRODUCTION ................................................................................................................. 54

A. State Activity and Demographics ......................................................................... 54

B. Resources ............................................................................................................. 55

C. Definition of Minerals .......................................................................................... 55

II. REGULATORY BODIES ........................................................................................................ 58

A. Generally .............................................................................................................. 58

B. Frack-Specific Regulations ................................................................................... 59

III. ESTABLISHING TITLE .......................................................................................................... 59

A. Records & Recording Acts .................................................................................... 59

B. Dormant Mineral Acts and Marketable Title Acts ............................................... 61

C. Inheritance ........................................................................................................... 62

D. Reservations/ Exceptions to a Third Party ........................................................... 63

IV. LEASING ............................................................................................................................ 64


B. Of Roads ............................................................................................................... 65

C. Lands under Waters ............................................................................................. 67

D. From Unlocatable Mineral Owners ..................................................................... 71

E. From Concurrent and Successive Owners ........................................................... 71

F. Effects of Foreclosure on a Lease ........................................................................ 72


VI. MAINTAINING THE LEASE ................................................................................................. 74

A. Interpretation of Lease Terms ............................................................................. 74

B. Implied Covenants and the Reasonably Prudent Operator Standard ................. 74

C. Non-Payment of Royalty Interests ....................................................................... 76

VII. ISSUES DURING EXPLORATION AND PRODUCTION .......................................................... 77


B. Surface Owner Interaction ................................................................................... 78


VIII. POST-PRODUCTION ISSUES ............................................................................................... 81

A. Lease Termination and Filing Requirements ....................................................... 81

B. Plugging and Abandonment Issues ...................................................................... 82

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OHIO: THE UTICA AND MARCELLUS

I. INTRODUCTION

A. State Activity and Demographics

1. History of Oil and Gas in Ohio

Ohio was among the earliest states to pioneer oil and gas exploration, with a rich history dating back to the early decades of the nineteenth century. In 1814, Silas Thorla and Robert McKee of Noble County, Ohio, inadvertently discovered a deposit of oil and gas while drilling for salt and soon built the first oil well in North America.1 Unsure of what to do with their discovery, Thorla and McKee bottled and sold the oil as “Seneca Oil” for tonic. Commercial applications for oil and gas soon followed. The first commercial oil well in Ohio was built in 1860. By 1896, Ohio produced twenty-four million barrels of oil a year. Since then, Ohio has continued being an active player in commercial oil and gas exploration.2

Although Ohio lost ground to other states in the years that followed, recent developments in production have reinvigorated Ohio’s oil and gas industry. Since December of 2009, the Ohio Division of Oil and Gas approved 291 horizontal well permits in the Utica Shale, and another seventeen in the Marcellus Shale. In 2011 alone, Ohio operators produced approximately 4.8 million barrels of oil and 73.3 million MFC of gas.

3 The growth in Ohio’s oil and gas sector is expected to significantly bolster Ohio’s economy. Some estimates suggest that Ohio will gain over 204,000 new jobs as a result of the development of the Utica Shale.4

2. Recent Litigation Trends

In Ohio, the bulk of recent oil and gas litigation has pertained to leasing of land. The following are a few of the recent notable cases:

Anschutz Lease Litigation: In February of 2012, landowners in Columbiana County and Carroll County filed suit against Chesapeake Exploration, LLC seeking to annul oil and gas leases taken by Anschutz Exploration Corporation between 2008 and 2010. The suit alleges that Anschutz offered royalties below the (present) going rate through “land agents who concealed, failed to disclose and/or

1 Thorla-McKee Well – “First Oil Well in North America”, NOBLECOUNTYOHIO.COM, http://www.noblecountyohio.com/thorlamckeewell.html (last visited July 18, 2012). 2 Ohio Oil & Gas Ass’n, OHIO CRUDE OIL AND NATURAL GAS PRODUCING HISTORY, 2 (posted online 2007), available at http://burchfieldcraig.org/FamLib/FamBus/OilGasGeneral/OhioOilandGasIndustryOverview-OOGA.pdf. 3 Ohio Dept. of Natural Res., Div. of Oil & Gas Mineral Res. Mgmt., 2011 Ohio Oil and Gas Summary, i (2011), available at http://www.ohiodnr.com/portals/11/publications/pdf/oilgas11.pdf. 4 Dr. Bob Chase, Chairman, Dept. of Petroleum Eng’g & Geology, Developing the Utica-Point Pleasant Shale: Economic and Environmental Impact (2012), available at http://www.marietta.edu/~delemeeg/ert/speakers/Chase_ERT.pdf (presentation at 2012 Economic Roundtable of the Ohio Valley).

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actively misrepresented material facts in order to persuade landowners to execute leases for as little money as possible.”5 Additionally, the suit alleges that the leases contained a clause that allowed lessors to seek third-party offers or renegotiate the terms before drilling began.6

Preferential Right to Renew. If, at any time during the primary term hereof, or within one (1) year from the expiration, cancellation or termination of this Lease, Lessor receives an acceptable, bona fide third-party offer to lease the Leasehold, in whole or part, Lessor shall promptly provide the Lessee, in writing, of all of the verifiable particulars of such offer. Lessee shall have thirty (30) days from the receipt thereof to advise Lessor, in writing, of its agreement to match said third-party offer as to all terms and consideration; immediately thereafter, Lessor and Lessee shall take all cooperative steps necessary to effectuate the consummation of said transaction and the survival of said transaction through any statutorily mandated right of cancellation thereof. Any lease or option to lease the Leasehold, in whole or part, granted by Lessor in contravention of the purposes of this paragraph shall be deemed null and void.

The provision in question reads:

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Leases Held by Gas Storage Provisions: Landowners in Jackson Township, Ohio have filed a class-action lawsuit against CNX Gas Company and other parties, seeking to terminate old leases held by gas storage clauses. The suit concerns the North Canton Gas Storage Field, which contains a number of dry wells that have been used for gas storage since the 1940’s. The plaintiffs allege that a mineral lessee has an obligation to develop natural gas rights or the lease terminates.

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Extension of Leases through Force Majeure in Coal Bearing Townships: Oxford Oil Company, based in Ohio, is seeking to use a force-majeure clause to keep certain leases in Belmont County, Ohio in effect after objections to drilling by a coal company. Oxford’s attempts to drill under the leases were met with objection from coal producer Murray Energy Corporation, which, pursuant to its statutory right, objected to the proposed location of Oxford’s wells. The wells were slated to be located in coal-bearing townships near Murray’s coal mining operations. The lessors under Oxford’s leases filed suit seeking to declare the leases terminated.

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Rescinding Leases over Defective Notarization: Landowners in Trumbull County, Ohio have filed a class-action suit against North Coast Energy of Youngstown, Ohio, alleging that leases taken by North

5 Dan O’ Brien, New Round of Landowners File Suit Against Chesapeake, THE BUSINESS JOURNAL (February 28, 2012), http://businessjournaldaily.com/drilling-down/new-round-landowners-file-suit-against-chesapeake-2012-2-28. 6 Id. 7 Kristy Foster, Chesapeake Files Lawsuit Against 95 Property Owners in Two Ohio Counties, FARMANDDAIRY.COM

(February 7, 2012), http://www.farmanddairy.com/news/chesapeake-files-lawsuit-against-95-property-owners-in-two-ohio-counties/34217.html. 8 Edd Pritchard, Landowners Sue for Mineral Rights in Jackson, CANTONREP.COM (June 30, 2012), http://www.cantonrep.com/news/x1873086293/Landowners-sue-for-mineral-rights-in-Jackson?zc_p=0. 9 Casey Junkins, Landowners Sue Over Held Leases, THE INTELLIGENCER: WHEELING NEWS REGISTER (July 2, 2012), http://www.theintelligencer.net/page/content.detail/id/571564/Landowners-Sue--Over-Held-Leases.html?nav=515.

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Coast Energy in 2006 were defectively notarized. The lessors allege that the leases and memoranda thereof were notarized by a public notary who never witnessed the signatures.10

B. Resources

One of the most helpful websites in Ohio is the Department of Natural Resources. The site gives constant updates on new legislation and executive orders. It also contains a link for a well site locator and various regulatory forms needed to conduct oil and gas operations in the state. The website can be found at www.ohiodnr.com/mineral/tabid/10352/Default.aspx. Additionally, the various county auditors’ websites contain GIS maps and tax information that is generally easily accessible.

The National Association of Royalty Owners has a message board devoted to Ohio, and the state is included in the “Appalachia” chapter. Access to both can be found at www.naro-us.org.

C. Definition of “Minerals”

Despite a statutory definition of “oil” and “gas,” what particular substances fall under the term “minerals” as used in the language of a conveyance or lease is not altogether clear in Ohio. Whether oil and gas falls within a conveyance or lease of “minerals” must be determined through reference to statute, case law, and the specific language in the conveyance itself.

Ohio statute defines “oil” to include “crude petroleum oil and all other hydrocarbons, regardless of gravity, that are produced in liquid form by ordinary production methods.”11 “Gas” is “all natural gas and all other fluid hydrocarbons that are not oil, including condensate,” condensate being liquid hydrocarbons that were gaseous in the reservoir.12 Case law further expands these definitions in the realm of oil and gas production, finding, for example, that gas is any gaseous mixture that is not atmospheric air.13

Ohio statute defines the process of “mining” by what substances are developed and lists those substances as coal, gypsum, asphalt, rock, or other materials containing the same; natural gas and petroleum extracted through similar means as items listed above;

14 and clay.15 Ohio case law, however, sometimes holds that a grant or reservation of “other minerals” or “other substances of value” includes oil and gas, broadening the statutory definition of “minerals.”16

10 Kristy Foster, Trumbull County: Landowners Sue North Coast Energy and Enervest over Gas Leases, FARMANDDAIRY.COM (July 4, 2012), http://www.farmanddairy.com/news/trumbull-county-landowners-sue-north-coast-energy-and-enervest-over-gas-leases/38974.html.

Ultimately, Ohio courts look to the four

11 OHIO REV. CODE § 1509.01(B). 12 § 1509.01(C), (D). 13 Alexander v. Buckeye Pipe Line Co., 374 N.E.2d 146, 151 (1978) (holding that a failure to restrict “oil” and “gas” in a reservation results in a reservation of gasoline, fuel oil, propane, and butane). 14 § 1561.01(A). 15 § 1561.07. 16 Wiseman v. Cambria Products Co., 572 N.E.2d 759, 760 (Ohio 1989) (finding “The words ‘other minerals,’ and ‘other valuable minerals,’ . . . would include petroleum oil”); Stocker & Sitler, Inc. v. Metzger, 250 N.E.2d 269, 276 (Ohio Ct. App. 1969) (finding reservation of coal and “other substances of value” resulted in reservation of fee simple title to oil and gas); see Lighthorse v. Clinefelter, N.E.2d 1146, 1147 (Ohio Ct. App. 1987) (referring to Ohio

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corners of the granting document to determine the intent of the parties. Generally, if the deed reserves “other minerals” or uses similar language, the courts are likely to include oil and gas, unless other language in the document suggests the intent of the parties is to reserve only “hard” minerals harvestable only by “mining.”17 In Detlor v. Holland, the Supreme Court of Ohio held that a conveyance of “all the coal of every variety, and all the iron ore, fire clay, and other valuable minerals” did not include petroleum oil and natural gas. In Detlor, the court applied rules of construction to conclude that terms in a contract are to be understood in their “plain, ordinary, and popular sense” with reference to their “commercial and scientific import,” especially in determining whether a specific mineral is included in a general designation.18

all the coal of every variety, and all the iron ore, fire clay, and other valuable minerals, in, on, or under the following described premises . . . together with the right in perpetuity . . . of mining and removing such coal, ore, or other minerals; and [grantee] shall also have the right to the use of so much of the surface of the land as may be necessary for pits, shafts, platforms, drains, railroads, switches, side tracks, etc., to facilitate the mining and removal of such coal, ore, or other minerals, and no more.

The instrument in question conveyed:

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The court conceded that petroleum oil generally falls under the broad meaning of “minerals” but found that such was not the intention of the parties. In so concluding, the court emphasized the easement language above, observing that the “easements granted, in connection with the mining right, are not applicable to producing oil, and show that oil was not intended to be included in the conveyance.” The court reasoned that if such had been the grantor’s intent, “apt words would have been used to express such intention.”

20 However, multiple other cases have distinguished Detlor, finding that oil and gas were included in a conveyance based on easement language used.21

law of minerals, “including oil and gas”). Note that an early case, Jones v. Wood, 1895 WL 1388 (Ohio Com. Pl. 1895) held that “minerals” were not meant to include petroleum; that determination was made, however, in determining the meaning of “minerals” in an 1878 statute, and the court there specifically determined that at the time the statute was passed, petroleum products were not thought of as an item of value in Ohio, and were not part of the legislature’s consideration; further, the case seems superseded by statute, as it would forego the application of “mineral” to petroleum extracted similarly to the listed substances.

17 See, e.g., Gordon v. Carter Oil Co., 19 Ohio App. 319 (Ohio Ct. App. 1924); Detlor v. Holland, 49 N.E. 690 (Ohio 1898); Minnich v. Guernsey Sav. & Loan Co. 521 N.E.2d 489, 493 (Ohio Ct. App. 1987); Stocker & Sitler, Inc., 250 N.E.2d at 276; Lighthorse, N.E.2d at 1147. 18 Deltor, 49 N.E. at 692. 19 Id. at 690. 20 Id. at 693. 21 See, e.g., Wiseman, 572 N.E.2d at 760 (finding “The words ‘other minerals,’ and ‘other valuable minerals,’ . . . would include petroleum oil”); Stocker & Sitler, Inc. 250 N.E.2d at 276 (finding reservation of coal and “other substances of value” resulted in reservation of fee simple title to oil and gas); Jividen v. New Pittsburgh Coal Co., 187 N.E. 124 (Ohio Ct. App. 1933) (noting that in a deed to convey the “surface only” of a tract, reserving coal and all other minerals, together with rights specific to mining, such as sinking air shafts and extending switches, the rights specified were not inconsistent with a reservation of oil and gas, and the “surface only” conveyance served to prove the parties’ intent that oil and gas be reserved).

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II. REGULATORY BODIES

A. Generally

1. Ohio Division of Oil and Gas Resources Management

From 1893 to 1965, Ohio had only sparse regulations governing oil and gas. These regulations were primarily self-enforced with a focus on underground miner safety.22 In 1963, a resource boom hit Morrow County, Ohio, when oil was discovered in the Trempealeau subsurface reservoir.23 The boom contributed to the enactment of Revised Code section 1509 and creation of a state-wide regulatory body. In 1965, the Ohio Department of Natural Resources (“ODNR”) established the Division of Oil and Gas and transferred most of the authority from the Department of Industries Relations, Division of Mines. In 1995, the Division of Mines was merged with the Division of Reclamation, forming the Division of Mines and Reclamation. In 2000, the Division of Mineral Resources Management was created by consolidating the Division of Mines and Reclamation and Division of Oil and Gas. Finally, On October 1, 2011, the Division of Oil and Gas Resources Management became a stand-alone division.24

The Division of Oil and Gas Resources Management is charged with the “sole and exclusive authority to regulate the permitting, location, and spacing of oil and gas wells and production operations within the state.”

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Permitting Process: Revised Code section 1509.06 governs the permitting process for an oil and gas well in Ohio. That statute requires that an application to drill a new well, drill an existing well deeper, reopen a well, convert a well to any use other than its original purpose, or plug back a well to a difference source of supply be filed with the Chief of the Division of Oil and Gas Resources Management.

Consequently, Ohio has a highly-centralized scheme for regulating oil and gas.

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Well Spacing: Ohio Administrative Code section 1501:9-1-04 governs well spacing in Ohio. The requirements are broken into four tiers as outlined by the table below.

The statute sets forth a complex procedure for the review and approval of the permit.

Depth Minimum tract size Minimum space between wells Distance from lease boundary

0 to 1,000’ 1 acre Not less than 200’ Not less than 100’ 1,000’ to 2,000’ 10 acres Not less than 460’ Not less than 230’ 2,000’ to 4,000’ 20 acres Not less than 600’ Not less than 300’ 4,000’ or deeper 40 acres Not less than 1,000’ Not less than 500’

22 Brent Bear, et al, Ohio Dep’t of Natural Res., Div. of Oil & Gas Res. Mgmt, Partnering for Safety in the Oil and Gas Industry (March 28, 2012), available at http://www.ohiobwc.com/downloads/blankpdf/osc12sessions/541bearbrent.pdf (presentation at 2012 Ohio Safety Congress & Expo). 23 Ohio Oil & Gas Ass’n, supra note 2, at 4. 24 Ohio Oil and Gas Summary, supra note 3, in introduction. 25 OHIO REV. CODE § 1509.02. 26 § 1509.06.

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Additional requirements for well locations in urbanized areas can be found in section 1509.021 of the Code. Further, there are several bills currently before the Ohio Legislature that speak to amending well spacing requirements.27

2. State supremacy in regulating oil and gas and preemption of local authority

The statutory scheme governing oil and gas in Ohio leaves little room for local regulation. Section 1509.02 of the Revised Code makes clear that the Division of Oil and Gas Resources Management is the “sole and exclusive” regulatory authority. That section notes that “the regulation of oil and gas activities is a matter of general statewide interest that requires uniform statewide regulation, and this chapter and rules adopted under it constitute a comprehensive plan with respect to all aspects of the locating, drilling, well stimulation, completing, and operating of oil and gas wells within this state, including site construction and restoration, permitting related to those activities, and the disposal of wastes from those wells.”

The broad grant of exclusive authority in 1509.02 led the court in Natale v. Everflow Eastern, Inc. to conclude that a local ordinance requiring gas storage tanks to be located a minimum of two hundred feet from a residence was preempted by state regulations that required only one hundred feet of clearance from an inhabited structure.28

Despite the near-exclusive grant of regulatory authority to the state, local governments are permitted to regulate, in a non-discriminatory manner, right-of-ways and streets impacted by oil and gas activity as a result of the taxing use of heavy equipment and oversized vehicles. Section 1509.02 provides:

Nothing in this section affects the authority granted to the director of transportation and local authorities in section 723.01 or 4513.34 of the Revised Code, provided that the authority granted under those sections shall not be exercised in a manner that discriminates against, unfairly impedes, or obstructs oil and gas activities and operations regulated under this chapter.

Counties and municipal corporations have broad authority to regulate streets. Section 723.01 of the Revised Code empowers municipal corporations with the “special power to regulate the use of the streets,” including the “care, supervision and control of the public highways, streets, avenues, alleys, sidewalks, public grounds, bridges, aqueducts and viaducts within the municipal corporation.” Similarly, section 4513.34 authorizes the Director of Transportation, with respect to all highways that are part of the state highway system, and local authorities, with respect to county highways, to issue special permits to applicants seeking to operate oversized vehicles on state and county roads. Importantly, the Director or local authority may, as a condition of issuance of an overweight permit, “require the

27 See, e.g., H.B. 493, 129th Gen. Assemb., Reg. Sess. (Ohio 2011). 28 2011-Ohio-4304, 959 N.E.2d 602, at ¶50 (Ohio Ct. App. 2011).

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applicant to develop and enter into a mutual agreement with the local authority to compensate for or to repair excess damage caused to the roadway by travel under the permit.”29

Substitute Senate Bill 315, enacted into law on May 24, 2012, requires all those seeking permit applications for a horizontal well to submit a Road Use Maintenance Agreement entered into on reasonable terms with the appropriate public official for each county, township, or municipal corporation, or an affidavit showing that the producer unsuccessfully attempted in good faith to enter into such an agreement.

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B. Developing Regulations

On June 11, 2012, Ohio Governor John Kasich signed into law Substitute Senate Bill 315,31

Definition of “Horizontal Well”: Prior to Substitute Senate Bill 315, section 1509 of the Revised Code, which governed oil and gas drilling, did not specifically define a horizontal well. The new amendment clarifies that a horizontal well means a “well that is a well drilled for the production of oil or gas in which the wellbore reaches a horizontal or near horizontal position in the Point Pleasant, Utica, or Marcellus formation and then well is stimulated.”

a bill that significantly expands the regulatory scope of hydraulic fracturing, addresses concerns over the contents of chemicals used in horizontal drilling, regulates water withdrawal and testing, increases cooperation between the ODNR and other state agencies, and regulates well construction and the disposal of brine and other fluids associated with natural gas development. The following are some of the key provisions of the new bill:

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Chemical Disclosure Requirements: The amendment requires producers to disclose the trade name and total amounts of chemical products, fluids, and substances, as well as the suppliers of each product used to facilitate the drilling or stimulation of a well.

Horizontal wells are now subject to heightened bodily injury and property damage insurance requirements of not less than five million dollars per well, as well as an environmental endorsement. The bill also requires the Chief of the Division of Oil and Gas to adopt rules governing horizontal wells that address drilling safety, protection of public and private water supplies, fencing and screening of surface facilities, containment and disposal of waste, construction of access roads, and noise mitigation.

33 The requirements exempt chemical information designated as a trade secret. However, the bill provides an exception for medical professionals, who are to receive information regarding chemical compositions, including trade-protected substances.34

Water Sampling and Use: Substitute Senate Bill 315 requires the sampling of water wells that are within 1500 feet of a proposed horizontal wellhead, or within three hundred feet of a proposed well in

29 § 4513.34(D) 30 See discussion of S.B. 315 below. 31 S.B. 315, 129th Gen. Assem., Reg. Sess. (substituted bill, as adopted on June 11, 2012). 32 § 1509.01G(GG). 33 § 1509.10 34 § 1509.10(H)(1) (as amended).

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urbanized areas, prior to the commencement of drilling.35 Permits must identify the proposed source of ground water and surface water that will be used in production operations, including whether any water will be withdrawn from the Lake Erie watershed or the Ohio River watershed, along with the volume of withdrawal.36

Road Use Maintenance Agreements: Horizontal well permit applications must now include a copy of a Road Use Maintenance Agreement entered into on reasonable terms with the appropriate public official, or an affidavit showing that the producer attempted in good faith to enter into such an agreement.

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Increased Penalties: The amendment provides for daily fines on operators of up to $20,000 for violations of environmental and safety regulations.

Increased Regulation of Pipelines: Substitute Senate Bill 315 creates new pipeline safety standards for operators of pipelines that transport gas produced by horizontal wells. The amendment also requires anyone planning to construct a gas gathering pipeline or a processing plant gas stub pipeline subject to the Act to file certain information with PUCO including the route of the pipeline, its maximum allowing pressure, its dimensions, and its yield strength.38

III. ESTABLISHING TITLE

Additionally, the Act exempts from regulation as a public utility any entity engaged in the business of the transport associated with gathering lines, raw natural gas liquids, or finished-product natural gas liquids.

A. Statutory Deed Forms and General Conveyance Information

Ohio’s Statutory Forms for deeds can be found in section 5302 of the Revised Code. Ohio statute expressly states that the use of the word “grant” is sufficient in and of itself to convey property.39 Further, Ohio has designated by statute that a conveyance transfers all interest held by the grantor unless the contrary is stated in the deed.40 In regards to warranties, Ohio has defined the use of the phrases “general warranty covenants” and “limited warranty covenants” so that practitioners may use such phrases in lieu of including the full language of such warranties in granting instruments.41

Section 5301 also contains general information regarding the requirements for conveying property in Ohio. Deeds, mortgages, land contracts, and memoranda of trusts are required to be acknowledged before a judge or clerk of court, county auditor, county engineer, notary public, or mayor in order to be effective.

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35 § 1509.06(A)(7)(b), (c) (as amended).

As of February 1, 2002, Ohio has abrogated the need for witnessing the

36 § 1509.06(A)(7)(a) (as amended). 37 § 1509.06(A)(11)(b) (as amended). 38 See §§ 1509.01, 4905.90, 4905.91, 4905.911 (as amended). 39 § 5302.03 40 § 5302.04 41 See § 5302.06 and § 5402.08 for the effect of using such phrases. See § 5302.10 for the effect of using the phrase “fiduciary covenants.” 42 § 5301.01.

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above-listed instruments. Further, instruments not witnessed prior to their effective date are “deemed properly executed and [are] presumed to be valid unless the signature . . . was obtained by fraud,” and serve as constructive notice to subsequent bona fide purchasers.43 Additionally, the lack of an acknowledgment in a deed is cured after being of record for twenty-one years.44

B. Records and the Recording Acts

Ohio has a notice type statute for deeds, land contracts, and other instruments “of writing . . . for the conveyance or encumbrance of lands, tenements, or hereditaments . . . .”45 The statute requires the recoding of the instrument in the county where the property is located and that “[u]ntil so recorded, they are fraudulent insofar as they relate to a subsequent bona fide purchaser having, at the time of purchase, no knowledge of the existence of that former deed, land contract, or instrument.”46 While this language can be read as a race-notice type statue, case law suggests it is a notice statute.47 Despite this, many practitioners report that Ohio is a race-notice state. The priority of mortgages, however, is governed by a race statute.48

As to a general land lease, section 5301.25 requires encumbrances of land to be recorded; however, under the immediately-following section, 5301.251, a memorandum may be recorded in lieu of a lease. Section 5301.09, however, separated from the two general lease provisions above, provides that all “leases, licenses, and assignments thereof, or any interest therein” involving the right to sink or drill wells must be filed in the record of leases. The statute further provides that no lease or license is valid until it is filed for record, except between the parties to the lease, unless the person claiming under the lease is in actual and open possession of the land. It is unclear whether the specific requirement in 5301.09 will supersede the allowance of recording a memorandum-in-lieu-of-lease in oil and gas drilling

43 Id. 44 § 5307.07. It should be noted that, effective January 10, 1961, this same provision applies to lack of witness attestation; the afore-mentioned statute abrogating the need for witness signatures was effective on July 20, 2004. 45 § 5301.25. 46 Id. 47 We note that despite case law and treatises suggesting the modern statute is a notice statute, it can be read as race-notice. In fact, many practitioners’ websites throughout the state opine that the statute is race-notice. For cases discussing the statute, see Northrup’s Lessee v Brehmer, 8 Ohio 392, (1838) (holding that under a prior version of the statute that read ‘unless an older deed shall be recorded within six months of its execution, it shall be deemed fraudulent against a subsequent bona fide purchaser without notice;’ and where such older deed was not recorded within the grace period, and absent all evidence of notice, the first deed must be held fraudulent. The court further held that the omission to record the second deed was immaterial because there was no claim by a later purchaser, thus treating the statute as a notice statute)(emphasis added); see also Tiller et al. v. Hinton, 482 N.E.2d 946 (Ohio 1985) (holding that an unrecorded easement is unenforceable against a subsequent bona fide purchaser for value who had no actual or constructive notice and omitting any analysis or requirement to record such instrument); but see In re Estate of Ault, 609 N.E.2d 568 (Ohio Ct. App. 1992) (commenting that “[p]ursuant to R.C. 5301.25, a prior unrecorded deed is invalidated by a later recorded deed only if the later conveyance is made to a ‘bona fide purchaser having, at the time of purchase, no knowledge of the existence of such former deed.’” It is unclear if the court was requiring the recording of the later deed or merely commenting on the factual scenario). 48 § 5301.23.

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situations, but it seems unlikely that it will do so.49

C. Ohio’s Dormant Mineral Act

However, until the statute is clarified through legislation or case law, one should exercise caution when depending on the recording of a memorandum to protect an oil and gas lease under the Recording Acts.

50

Ohio’s Dormant Mineral Act is codified in section 5301.56 of the Revised Code. Originally enacted in 1989, the statute was substantially amended in 2006; however, at least one Ohio court has applied the 1989 version to the period before the amendment, due to its self-executing nature. The two statutes are nearly identical in substance; however, they vary significantly in procedure. Each version allows a surface owner to reunite a severed mineral interest with the surface estate after a statutory period of twenty years and absent the occurrence of one of several specifically-delineated savings events (“Savings Event”).

51

An Ohio court has interpreted the 1989 Act as creating a look-back period from the date of enactment, plus a three-year grace period. However, no court has applied the statute where a Savings Event occurred in the original look-back period, but twenty more years elapsed with no Savings Event. A plain reading of the statute and legislative history suggests that a Savings Event must occur, first, within twenty years of enactment, and then successively for each twenty-year period thereafter.

In addition, both statutes except interests held by a government entity and all interests in coal.

52

The 2006 amendment changed the Act’s self-executing form by requiring the surface owner to give notice to the mineral owner that the interest is abandoned. After notice, the mineral owner has sixty days to file a claim to preserve a mineral interest or an affidavit showing a Savings Event occurred in the twenty years preceding the issuance of the notice. If the mineral owner fails to act, the surface owner can file an affidavit of abandonment with the county recorder, causing the recorder to note title has vested in the surface estate.

While the amendment clarified that the twenty-year period was calculated as immediately preceding the notice date, it offers a new ambiguity of its own. Under the statute, a mineral owner can prevent the county recorder from vesting title in the surface owner by filing a claim to preserve a mineral interest or an affidavit stating that a Savings Event occurred in the twenty years prior to notice. However, a separate provision states the mineral interest is lost if a Savings Event does not occur within the twenty years preceding notice. Therefore, a mineral owner can still prevent the county recorder

49 See § 5301.255, for example, allowing a memoranda of trust to be recorded. 50 For a more complete analysis of the Dormant Mineral Act, please see our publication available at http://helawfirm.com/?p=447. 51 For a list of savings events, see § 5301.56(B)(3)(a-f). 52 See § 5301.56 (D)(1) (1989 version), allowing a mineral interest to be preserved “indefinitely . . . by the occurrence of any of the circumstances described in division (B)(1)(c) of this section, including but not limited to, successive fillings of claims to preserve mineral interests. . . .“ Additionally, in the factual circumstance where a savings event occurs in the first three years of the original twenty-year look-back period (where twenty years would elapse before the end of the grace period), courts will likely interpret the statute as not vesting the mineral interest with the surface estate until after the end of the grace period. See Texaco v. Short, 454 U.S. 516, 528 (1982).

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from vesting title in the surface owner by filing a claim to preserve a mineral interest, even if no Savings Event occurred in the twenty years prior to notice; however, the statute’s direct requirement for a Savings Event in the twenty years prior to notice would allow a court of law to vest title in the surface owner despite the filing of the claim to preserve a mineral interest after receiving notice.53

Given ambiguities contained in both the 1989 and 2006 statutes, the lack of clarity regarding the interplay between each statute, and dearth of case law interpreting either statute, there are inherent risks in crediting mineral rights in Ohio. It is clear to practitioners that uncertainty already exists among energy companies, land owners, and their attorneys. Unfortunately, in light of such uncertainty, without a judicial determination or a stipulation of interest, there is risk of competing claims to the mineral interest. Consequently, in most instances where the Dormant Mineral Act could apply, a stipulation of interest or protection leases from the surface and prior mineral owners is recommendable.

While no court has decided this issue, a plain reading of the statute would suggest such an outcome.

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D. Inheritance

Since 1863, Ohio has had at least five different schemes for intestate succession.55 The current statute for intestate succession (March 22, 2001 to present) can be found at section 2105.06 of the Revised Code56

No surviving spouse: to children or their lineal descendants per stirpes.

and directs distribution of an intestate decedent’s estate in the following manner:

Spouse and one or more children of the decedent or their lineal descendants, and all of the decedent’s children who survive or have lineal descendants surviving area also children of the surviving spouse: all to spouse.

53 See John K. Keller & Gregory D. Russell, Ohio’s Dormant Mineral Act, OHIO LAWYER MAGAZINE (Nov./ Dec. 2011), available at https://www.ohiobar.org/NewsAndPublications/News/OSBANews/Pages/OSBANews-1808.aspx. 54 Additionally, given the fact that title examiners are typically only presented with instruments of record, in order to determine if certain Savings Events occurred, it would be wise to obtain 1) Affidavits from the Ohio Division of Mineral Resources and at least one other disinterested person with knowledge of the history of the property at issue, indicating that during the relevant period a) there was no production from the property, b) the property was not used for the underground storage of natural gas, and c) no drilling permits had been issued for the property; and 2) An Affidavit from the County Auditor establishing that no separate tax parcel number for severed mineral interest had been created during the relevant period. 55 For in-depth treatment, see Kenton L. Kuehnle and Jack S. Levey, Ohio Real Estate Law, in 1 BALDWIN’S OHIO

PRACTICE, 57-66 (research did not reveal the statutory scheme for any period prior to March 4, 1865). 56 There are various other provisions affecting intestate succession, including § 2105.01, which eliminates the former distinction made between ancestral and non-ancestral property; § 2105.04, which applies “permanent leasehold estates, renewable forever . . . ” to intestate succession; and § 2104.14, which allows children begotten before the intestate’s death to receive under the statutory scheme, but provides that “in no other case can a person inherit unless living at the time of the intestate’s death.” Finally, Ohio allows for designation of heirs under § 2105.15.

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Spouse and one child or lineal descendant and spouse is not the natural or adoptive parent of decedent’s child: first $20,000 plus one-half of the balance of the estate to spouse, and remainder to the child or child’s lineal descendants per stirpes.

Spouse and two or more children or their lineal descendants: if the spouse is the natural or adoptive parent of at least one child, first $60,000 plus one-third of the balance to spouse of intestate; the rest in equal shares to children, or their lineal descendants per stirpes; if spouse is not the natural or adoptive parent of any child, first $20,000 plus one-third of balance to spouse of intestate, rest in equal shares to children or their lineal descendants per stirpes.

Surviving spouse and no children: all to spouse.

No spouse and no children, or their lineal descendants: to parents of intestate equally or to surviving parent.

No spouse, children, or their lineal descendants, or parent: to brothers and sisters (whole or half-blood) of intestate or their lineal descendants per stirpes.

No spouse, children or their lineal descendants, parent, or siblings or their lineal descendants: one-half to paternal grandparents of intestate or survivor of them, and one-half to maternal grandparents or survivor of them;

If there is no paternal or no maternal grandparent: one-half to the lineal descendants of the deceased grandparents, per stirpes, if there are no such lineal descendant, then to the surviving grandparents, or their lineal descendants, per stirpes; if there are no surviving grandparents or their lineal descendants then to next of kin;

If there are no next of kin: to stepchildren or their lineal descendants, per stirpes;

If there are no stepchildren or their lineal descendants: escheat to state.

Some prior periods that directed distribution in differing manners were between December 17, 1986 to March 21, 2001; January 1, 1976 to December 16, 1986; January 1, 1932 to December 31, 1975; and March 4, 1865 to December 31, 1931 (this period made a distinction between ancestral and non-ancestral property).

The primary difference between the present statute and older versions is the gradual favor of spouses to receive from the intestate’s estate. The statutory scheme from March 4, 1865 to December 31, 1931 contains the largest difference and is arguably the most important distinction for title review. Under this version, the children of the deceased took all interest in the property, with the spouse only receiving a life estate.57

57 Kuehnle, supra note 55, at 71-77.

If the property was non-ancestral, the spouse would stand second in line to receive. Ancestral property was distributed among descendants of the family member that the deceased had received the property from. Subsequent revisions differed primarily in the amount of the

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estate the spouse would receive if there were surviving children or their lineal descendants, regardless of whether the offspring was the spouse’s natural or adoptive child. More recent provisions gave designated amounts to the spouse before splitting the estate fractionally, while older versions split the estate fractionally with no “guaranteed” amount to the spouse.

IV. LEASING

A. From Governmental Bodies

1. State Land

In Ohio, the Oil and Gas Leasing Commission is vested with exclusive authority to lease any portion of land owned or controlled by a state agency.58 Each state agency must submit to the Oil and Gas Leasing Commission an inventory of each parcel of land owned by the agency, classifying each as being a Class 1,59 Class 2,60 Class 3,61 or Class 462 property.63 The classifications of property determine the amenability of that parcel to leasing.64

A person interested in leasing for oil and production a formation owned or controlled by a state agency may submit a lease nomination to the Oil and Gas Leasing Commission.

65

58 OHIO REV. CODE § 1509.71.

The Oil and Gas Leasing Commission is comprised of five members, including the Chief of the Division of Geological Survey and four other members, each appointed by the Governor and serving staggered terms. In considering a decision to approve or disapprove the nomination of the parcel of land, the Commission must consider: (1) the economic benefits, including potential income, from the oil or natural gas operation that would result were the nomination approved; (2) whether the proposed operation is compatible with the current uses of the parcel; (3) the environmental impact; (4) the potential adverse geological impact; (5) any potential impact to the operations or equipment of a state university or college if that institution’s land is the subject of the nomination; (6) any objection to the nomination submitted by the state agency that owns or controls the land; (7) objections by residents of the state or other users of the parcel; (8) any other factor established in commission rules. The Commission must select the person who submits the highest and best bid for each formation within that parcel of land.

59 Class 1 property is property “owned or controlled by a state agency concerning which there are no encumbrances or deed restrictions that limit the exploration or drilling for oil or gas on the property.” 60 Class 2 property is property that is “owned or controlled by a state university or college or that is owned or controlled by another state agency concerning which there is a federal encumbrance or monetary interest that limits or prohibits the exploration or drilling for oil or gas on the property.” 61 Class 3 property is property “owned by or controlled by a state agency to which all the following apply: (1) the property is not a Class 2 or Class 4 property; (2) The property is of insufficient size or shape to meet the requirements for drilling a well on the property” under spacing or density requirements. 62 Class 4 property is “property owned or controlled by a state agency concerning which there is a provision in the deed that limits the exploration or drilling for oil or gas on the property.” 63 § 1509.70. 64 If the Commission approves a nomination for Class 1 property, the Commission must offer that parcel for lease. With Class 2 or Class 4 property, the agency that owns or controls the parcel must give its consent to the nomination. Class 3 property must be disapproved. 65 §§ 1509.71, .73.

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2. Counties

The Board of County Commissioners is authorized to execute mineral leases in instances when doing so would be beneficial to the county.66

3. Cities

No lease for oil or gas may be made for more than forty years from the date of its execution. The royalties from oil and gas leases are deposited in a fund to be used for county purposes.

Townships: Like counties, townships are authorized to execute mineral leases where doing so would be beneficial; the lease will be on terms agreed to by the Board of Township Trustees.67

Municipalities: No particular statutory provision governs mineral leases executed by municipalities. However, municipal corporations have the power to lease real estate when such real estate is not needed for any municipal purpose and upon the satisfaction of certain procedural requirements set forth in sections 721.01 to .26 of the Revised Code.

No lease for oil or gas may be made for more than forty years from the date of its execution. The royalties are deposited in the township general fund.

School Districts: A school board is authorized to execute mineral leases where doing so would be beneficial. Oil and gas leases are not subject to the fifteen-year limit placed on general leases. Royalties are deposited in the general fund for the school district.68

Park Districts: The Board of Park Commissioners may lease land for purposes consistent with the purposes for which the land was acquired, and upon terms the Board considers advisable.

69

B. Of Roads

1. Municipal Streets:

In Ohio, fee title to municipal streets is with the city or village, held for street purposes.70 By statute, the recording of a plat within the municipality operates to vest in the municipality the fee of the parcel of land designated as or intended for streets and alleys, and the municipality holds that fee in corporate trust for the public. Whether the municipality’s fee interest extends to minerals under the street is not clear in Ohio, but case law has defined certain limitations to the municipality’s interest. For example, in Sorg v. Village of Oak Harbor, the court restrained a city from erecting a “comfort station” that would have obstructed the street such that less than one-half of it would be usable for public travel.71

66 § 307.11

The court reasoned that the erection of a comfort station would be destructive of and inconsistent with street uses. With regard to the areas above and below the street, Ohio courts suggest

67 § 505.11 68 § 3313.45 69 § 1545.12. 70 Vernon v. Warner Amex-Cable Communications, Inc, 495 N.E.2d 374, 376 (Ohio 1986). 71 151 N.E. 800, 801 (Ohio Ct. App. 1925).

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such areas remain with the abutting landowners, though no case in Ohio has addressed this question with specific regard to minerals.72

2. County and Township Roads and Highways

Unlike municipal streets, county and township roads and highways are presumed to be owned to the centerline by the abutting landowner, with the public owning an easement for travel.73 However, this presumption may be rebutted where a particular conveyance vests the county or township with a fee simple interest in the road.74

3. Bond requirement prior to drilling under road:

Before drilling, any person owning land containing minerals over which any state, county, or township road or public highway passes must first deliver to the appropriate official a bond to cover any damage that may accrue as a result thereof.75

C. Under Bodies of Water

In Ohio, the owner of land adjacent to the bank of a stream owns the bed of that stream to the center.76 With navigable streams, although the title to the soil under a stream belongs to the adjacent owner to the center, such title is subject to an easement by the public for navigation purposes.77 If a riparian owner has property on both sides of a navigable stream, the owner has title to the land from bank to bank under such stream, subject to the public easement for navigation.78

72 See Henry v. Cincinnati, 25 Ohio C.C. 178 (Ohio Cir. Ct. 1898) (holding that an abutting owner to a street may maintain an electric wire across the street high above the surface, where such use would not interfere with the city’s use of the street); Callen v. Columbus Edison Elec. Light Co., 66 Ohio St. 166, 173 (1902) (noting “It seems plain that the effect of the provision is not to vest in the municipality a fee simple absolute in the streets, but only a determinable or qualified fee, and that what is granted to the city is to be held in trust for the uses intended, viz., for street uses, and street uses only”).

Additionally, section

73 Ohio Bell Tel. Co v. Watson Co., 147 N.E. 907, 908 (Ohio 1925) (stating that outside the limits of a municipality the fee to the land in the rural highway rests in the abutting landowner, subject only to such rights as are incident to and necessary for public passage); St. Albans Twp. Bd. of Trs. v. Columbia Gas Transmission Corp., 688 N.E.2d 48, 51 (1997) (holding “It is well settled that the [County Board of Commissioners] have an easement for the operation of the roadway; no subsurface rights as are claimed here attach. . . . And a landowner owns to the middle of the road, which permits the landowner to use the land thereunder in any manner not inconsistent with the public easement for the roadway”). 74 Fed. Gas & Fuel Co. v. Townsend, 14 Ohio Dec. 5, 11 (Ohio Ct. Com. Pl. 1903) (finding, in a suit by a natural gas supplier seeking to enjoin interference with the laying of pipe in front of defendant's premises on a street, the burden was on the gas supplier to establish that the street, conveyed to the government for road purposes, was conveyed in fee absolute, and in the absence of such proof, the presumption was that abutting landowner owned to the middle of the street). 75 OHIO REV. CODE §§ 1563.11(B), 5547.01. 76 Miller v. Wisenberger, 56 N.E. 454, 457 (Ohio 1900). 77 State ex rel. Brown v. Newport Concrete Co., 336 N.E.2d 453, 455 (Ohio Ct. App. 1975). 78 Id.

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19b of Article I of the Ohio Constitution recognizes the right of a riparian land owner in the reasonable use of water in a lake or watercourse flowing on the owner’s property.79

D. From Concurrent and Successive Owners

1. Forms of Tenancies in Ohio

Presently, Ohio recognizes three forms of tenancy: (1) the tenancy in common; (2) the statutory survivorship tenancy; (3) and the statutory Transfer on Death Affidavit. However, historically, Ohio has recognized forms of joint tenancy with right of survivorship and tenancy by the entireties, each of which is discussed below.

Tenancy in Common: A tenancy in common is a form of co-tenancy whereby each tenant holds a joint interest, a separate and distinct title, and the right to transfer his or her interest without the cotenant’s consent.80 The only essential element of a tenancy in common is a unity or right of possession.81 Ohio statute recognizes the common law tenancy in common; section 5302.19 of the Revised Code provides that absent survivorship language, “if any interest in real property is conveyed or devised to two or more persons, such persons hold title as tenants in common and the joint interest created is a tenancy in common.”82

Survivorship Tenancy: In 1985, the Ohio legislature created a statutory “survivorship tenancy” for conveyances executed on or after April 4, 1985.

83

Each survivorship tenant holds an equal share of the title during their joint lives unless the creating instrument provides otherwise; has the equal right to share in the use, occupancy, and profits from the property; and bears a proportionate share of the costs related to the ownership and use of the property. Upon the death of any of the survivorship tenants, title of the decedent vests proportionately in the surviving tenants. When only one survivorship tenant remains alive, the survivor is fully vested with title to the property as the sole title holder. If the last two survivorship tenants die under such circumstances that the survivor cannot be determined, title passes as if those last survivors had been tenants in common.

The statutory survivorship tenancy replaces the common law joint tenancies and tenancies by the entireties, which can no longer be created in Ohio. Language in a deed that shows a “clear intent to create a survivorship tenancy shall be liberally construed to do so.” The statute suggests one acceptable formulation: a deed conveying any interest in real property to two or more persons “for their joint lives, remainder to the survivor of them” creates a survivorship tenancy in the grantees.

79 Ohio Const. art. I, § 19b. 80 Kingman v. United States, C-1-96-1144, 2000 WL 1566280, *2 (S.D. Ohio Sept. 13, 2000) (citing Koster v. Boudreaux, 463 N.E.2d 39, 43 (Ohio Ct. App. 1982)). 81 Koster, 463 N.E.2d at 43. 82 OHIO REV. CODE § 5302.19. 83 § 5302.20.

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The distinguishing features of a survivorship tenancy from a common law joint tenancy is that a conveyance by one survivorship tenant to a third party will not terminate the right of survivorship.84

The only means to terminate a statutory survivorship tenancy by transfer is through a conveyance from all of the survivorship tenants to a third party or a conveyance from all but one of the survivorship tenants to the remaining survivorship tenant.

Said otherwise, one tenant, acting unilaterally, cannot sever the joint tenancy by conveyance. Where there is a conveyance from fewer than all survivorship tenants to a third party, the statute provides that such a conveyance vests the title of the grantor in the grantee. However, the grantee takes title conditioned on the survivorship of the grantor. Such a conveyance does not alter the interest in the title of any other survivorship tenants.

85

Transfer on Death Affidavits: In 2000, Ohio enacted a statute

86

The transfer of a deceased owner’s property as designated in a Transfer on Death Affidavit must be accomplished by recording with the county recorder an Affidavit of Confirmation executed by the Transfer on Death Beneficiary, indicating the date of the death of the deceased owner; a description of the real property; the names of any other beneficiaries who did not survive the deceased owner; and a certified copy of the death certificate for any beneficiary who did not survive the deceased owner.

creating transfer-on-death deeds, later restyled as Transfer on Death Affidavits. These instruments enable individuals to avoid probate by creating a new survivorship interest. However, unlike a survivorship deed, a Transfer on Death Affidavit creates no new present property interest. Any individual owning property in Ohio as a sole owner, a tenant in common, or as a survivorship tenant may designate his interest in that property as transferable on death to a designated beneficiary. A Transfer on Death Affidavit is recorded in the office of the country recorder in the county in which the real property is located and must include the following information: (1) description of the real property that is affected by the Affidavit and a reference to an instrument containing that description; (2) if less than the entire interest in the real property is to be transferred on death under the Affidavit, a statement of the specific interest or part of the interest in the property to be transferred; (3) a statement by the person executing the Affidavit affirming that he or she owns the property affected; and if married, a statement by the spouse stating that dower rights are subordinate to the vesting of title in the beneficiary; and (4) a statement designating one or more persons as a Transfer on Death Beneficiary.

Common Law Joint Tenancy & Tenancy by the Entireties: Ohio no longer recognizes joint tenancy with right of survivorship. Prior to the enactment of the survivorship tenancy statute in 1985, Ohio recognized joint tenancies with rights of survivorship only where created by contract or deed. The survivorship tenancy statute was effective April 4, 1985, and it provides that the survivorship tenancy framework does not affect conveyances prior to that date.87

84 Mathew Bender & Co., Inc., Cotenancy and Joint Ownership, ANDERSON’S OHIO REAL PROPERTY LAW AND PRACTICE, Section 9.01.

Consequently, a sufficiently-created

85 § 5301.20(C)(2). 86 § 5302.22. 87 § 5302.21.

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interest in a joint tenancy with right of survivorship created prior to April 4, 1985 is still effective under Ohio law.

Similarly, tenancies by the entireties are no longer valid in Ohio. Tenancies by the entireties were statutorily recognized in Ohio between February 9, 1972 and April 3, 1985.88

Dower: Ohio is one of a handful of states that still recognizes dower. In Ohio, a spouse has a dower interest in the form of a life estate of one-third of the real property of which the other spouse (called the “consort”) was seized during the marriage.

On April 4, 1985, section 5301.17 of the Revised Code abrogated tenancies by the entireties in favor of the above-described survivorship tenancy.

89

Where the consort conveyed the property during the marriage, and the surviving spouse did not relinquish his or her dower right; and

However, dower rights in Ohio are limited to a few select circumstances. The dower interest terminates upon the consort’s death, and the surviving spouse must take under Ohio’s intestacy statute, except in two circumstances:

Where the property was encumbered by a mortgage, judgment, lien (except tax lien), or subject to an involuntary sale.

In addition to the death of the consort, a dower interest may be released or terminate in one of several ways. The grant of an absolute divorce terminates a dower interest. Additionally, a conveyance by a grantor-spouse of an estate or interest in property to the grantee-spouse in lieu of dower that becomes effective on the death of the grantor-spouse terminates the grantee-spouse’s dower interest, unless the grantee was a minor at the time of marriage. Dower may be relinquished by either by specific release or by execution of the instrument of conveyance. For instance, the spouse of a grantor of a deed or lessor of an oil and gas may release his or her dower interest simply by executing the deed or lease. This is the case even if there is no particularly language releasing the dower interest. Nonetheless, Ohio’s form warranty deed provides for a specific release of dower.90

Life Tenant and Remainderman: In Ohio a life tenant’s interest in property is limited to possession, and consequently the life tenant may not take minerals from the land without the mutual consent of the remaindermen.

91 However, Ohio does follow the Open Mines doctrine.92

88 19 OHIO JUR. 3D Cotenancy & Partition § 5.

Despite the adoption of the Open Mines doctrine, it is unclear in Ohio how to apportion royalties when a life tenancy is involved. At least one Ohio court in Fourth & Central Trust Co. v. Wooley delivered a holding that suggests Ohio follows the majority rule that a life tenant is entitled to the income from the investment of the

89 § 2103.02. 90 See § 5302.05. Additionally, the statutory short-form limited warranty deed, § 5302.07, the statutory deed of fiduciary, § 5302.09, and the statutory survivorship deed, § 5302.17, all provide for a specific release of dower. 91 Foster v. Foster, No. 79-CA-19, 1980 WL 353971, at *3 (Ohio Ct. App. July 31, 1980). 92 Breece v. Breece, 19 Ohio Dec. 734, 736 (Ohio Ct. Com. Pl. 1909); but see generally Foster, 1980 WL 353971, wherein the court forbid a life tenant to execute a new lease, but made its holding prospective.

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royalties.93

E. Effects of Liens and Foreclosures on a Lease

However, in light unsettled nature of the issue in Ohio, it is advisable to have life tenants and remaindermen contractually agree on apportionment of royalties prior to distribution thereof.

1. Judgment Liens

In Ohio, a judgment or decree issued by any court within the state, including a district court of the United States, is a lien upon lands and tenements of the judgment debtor within any county of the state from the time the certificate of judgment is filed in the office of the clerk of the Court of Common Pleas of the county where the land is located.94 Liens not in favor of the state become dormant if not re-filed within five years; those in favor of the state become dormant if not re-filed within ten years of the date of the judgment or within fifteen years from the date of issuance of the last execution thereon or the issuance and filing of the last such certificate, whichever is later.95 An action to revive a judgment must be brought within ten years of its becoming dormant.96

2. Effects of Foreclosure on an Oil and Gas Lease

In Ohio, statute provides that an oil and gas lease will not be extinguished by foreclosure and has priority over all prior recorded liens, claims, or encumbrances on the property.97

V. POOLING AND COMPULSORY POOLING

Further, any royalties due to the property owner who is foreclosed on are to be paid to the purchaser of the foreclosed property. Lenders have attempted to draft around this provision by framing the granting language of mortgages to read more akin to a fee conveyance; at the time of this writing, this issue has not been litigated.

A. Voluntary Pooling

The owners of adjoining tracts may agree to pool the tracts to form a drilling unit that conforms to minimum acreage and distance requirements of the Division of Oil and Gas Resources Management.98

B. Mandatory Pooling

Above, this paper discusses minimum well acreage and spacing requirements promulgated by the Division of Oil and Gas Resources Management. If a tract of land is of insufficient size or shape to meet minimum acreage or distance requirements, and the owner of the tract (who is also the owner of the mineral interest) has been unable to form a voluntary pooling agreement, that owner may make an application the Division of Oil and Gas Resources Management for a mandatory pooling order,

93 See 165 N.E. 742, 744 (Ohio Ct. App. 1928); see also In re Wernet’s Estate, 22 N.E.2d 490, 492 (Ohio Ct. App. 1938). 94 § 2329.02. 95 § 2329.07. 96 § 2325.18. 97 § 1509.31(D). 98 § 1509.26.

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accompanied by a drilling permit.99

C. Mandatory Unitization of a Pool

After receiving the application, the Chief of the Division shall notify all owners of land within the proposed drilling unit of the pending application, and the affected adjoining landowners have the right to a hearing. The Chief, if satisfied that the application is proper and that mandatory pooling is necessary to protect correlative rights and provide for the effective development of oil and gas, shall issue the drilling permit and mandatory pooling application.

The statute provides that the Chief of the Division of Oil and Gas Resources management, upon his own motion, or upon application by the owners of sixty-five percent of the land area overlying a pool, shall hold a hearing to consider the need for the operation as a unit of an entire pool, or any part thereof.100

VI. ISSUES DURING EXPLORATION & PRODUCTION

The Chief shall issue such order if he finds that such an order is reasonably necessary to substantially increase the ultimate recovery of oil and gas.

A. Competing Development

Coal mining in Ohio dates back to the early 1800’s, predating even Ohio’s entrance into the Union.101 While coal production has declined in recent decades, it still enjoys viability in the state, particularly in the “coal country” of eastern Ohio. Importantly, eastern Ohio, which rests above the Utica and Marcellus Shales, is also the key natural gas region for the state. By statute,102

If the owner or lessee of the mine objects to the location of the well or any location within fifty feet of the original location as a possible site for relocation of the well, the owner or lessee shall notify the Chief, giving reason for the objection. The permit may be granted if, in the opinion of the Chief, the objections offered are not sufficiently well-founded, or if no objection is lodged. However, if the objection is well-founded, the Chief shall disapprove the application and return it to the Chief of the Division of Oil and Gas Resources Management, along with a proposal for a new location.

coal producers have a voice in the placement of oil and gas wells in “coal bearing townships.” Upon receipt of an application for a drilling permit or plugging permit, the Chief of the Division of Oil and Gas Resources Management must determine whether the well is to be located in a coal bearing township. If the proposed activity, whether drilling, reopening, or converting a well, is in a coal bearing township, the Chief shall transmit to the Chief of the Division of Mineral Resources Management copies of the application. The Chief of the Division of Mineral Resources Management then notifies the owner or lessee of any affected coal mine that the application has been filed.

Conversely, no mining may be conducted within twenty feet of any known well, and no mine opening may be situated within three hundred feet of any well that produces oil or gas, unless the

99 § 1509.27. 100 § 1509.28. 101 Douglas L. Crowell, Ohio Dept. of Natural Res., Div. of Geological Survey, History of Coal Mining in Ohio, GEOFACTS NO. 14, May 2005, at 1, 1; available at http://www.dnr.state.oh.us/Portals/10/pdf/GeoFacts/geof14.pdf. 102 § 1509.08.

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owner or lessee of the mine obtain permission in writing from the Chief of the Division of Mineral Resources Management.103

B. Surface Owner Interaction

Statute governs operator interaction with surface owners in urbanized areas, and requires that an operator provide notice to any owner within five hundred feet of the surface location of the well to obtain a permit.104

Revised Code section 1509.06 requires well owners

However, the statute passes the buck to that surface owner as far as others living on his land are concerned, requiring him to give notice of the pending permit to each occupied residence on his property within five days of receiving his notice.

105 to file a restoration plan with the Chief of the Division of Oil and Gas Resources Management. Post-completion, section 1509.072 prescribes timeframes for a well owner to complete its reclamation obligations as outlined in the filed plan. The statute dictates that no oil or gas well owner or his agent shall fail to restore the land surface within the area disturbed in siting, drilling, completing, and producing the well as required by Ohio law. The timeframe for completing the required restoration depends on the location of the well—mainly, whether it is located in an urbanized area106

Within three months after a well that has produced oil or gas is plugged in an urbanized area and within six months in all other areas, or after plugging of a dry hole, the owner is required to remove all production and storage structures, supplies, and equipment, as well as any oil, salt water, or debris, and to fill any remaining excavations. The owner is also required to grade or terrace and plant, seed, or sod the area disturbed where necessary to bind the soil and prevent substantial erosion and sedimentation.

or not. Well owners are given fourteen days from the completion of the well to total in an urbanized area and two months in all other areas to fill all brine pits and remove all drilling supplies and equipment.

The owner can be released from responsibility of performing restoration requirements by filing a waiver request signed by the surface owner and obtaining the written approval of the Chief, which shall not be withheld unless substantial damage to adjoining property would result. Finally, the Chief can shorten the above time periods if damage to the public health or to the waters or natural resources of the state would occur, or may approve a longer time for completion.

C. Tortious Environmental Concerns

1. Trespass Issues with Hydraulic Fracturing

103 § 1563.111. 104 § 1509.06. 105 “Owner” is defined under § 1509.01 as “the person who has the right to drill on a tract or drilling unit.” 106 § 1509.01 defines “urbanized area” as “an area where well or production facilities of a well are located within a municipal coronation or within a township that has an unincorporated population of more than five thousand in the most recent federal decennial census prior to the issuance of the permit for the well or production facilities.”

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Ohio courts have not addressed the issue of whether hydraulic fracturing may give rise to a trespass claim by a non-consenting landowner. However, the Ohio Supreme Court has held that damage caused by lateral migration of injectate used in deepwell injection may give rise to a trespass claim. In Chance v. BP Chemicals, Inc.,107

However, the court rejected the claimants’ reliance on the ancient legal principle of cujus est solum, ejus est usque ad coelum et ad inferos—that the owner of land has absolute ownership of all the subsurface property. The court refuted this proposition, analogizing from an earlier decision that held that the right to airspace above property was limited to “as much of the space above [the landowner] as he uses, but only so long as he uses it.”

the court considered a claim by landowners who alleged that BP Chemicals injected hazardous waste from a refining plant through the deepwell injection process, some of which seeped into the area below the surface of the claimants’ properties, damaging their substrata and diminishing their property values. BP had claimed that its operations complied with all permits and regulatory practices of Ohio and the Environmental Protection Agency. The court found that regulatory compliance did not immunize BP from a trespass claim.

108 The court determined that the claimants’ subsurface rights in their properties were similarly limited, but included the right to exclude invasions of the subsurface property that actually interfered with their reasonable and foreseeable use of the subsurface. The court ultimately rejected the claimants’ contentions for lack of evidence of “actual interference with the reasonable and foreseeable use of the properties.”109

2. Waste Water Injection Issues

Nonetheless, the decision leaves the possibility of a trespass claim for injectate migrating from a well open where the evidence is less speculative regarding the actual damage to the adjoining property owner.

Ohio has a relatively new framework for regulating waste water disposal within its borders. Further, many of these statutes and regulations are in the process of being amended; therefore, oil and gas attorneys in Ohio have to monitor the changing landscape. Evidencing how quickly rules can change is an executive order signed on July 10, 2012, by Governor Kasich, directing continuous monitoring of injection wells and implementing a requirement that wells be outfitted with automatic shutoff valves if the approved pressure is breached.110

Currently, Ohio allows for conventional Class II injection wells, enhanced recovery injection wells, and annular disposal wells.

111 Before injecting brine, a disposer must obtain a permit from the Chief of the Division of Oil and Gas Resources Management.112

107 670 N.E.2d 985, 986 (Ohio 1996).

Transporters of brine also have to register with the Division of Oil and Gas Resources Management under section 1509.222. Permits for

108 Id. at 992 (citing Willoughby Hills, 278 N.E.2d 658, 665 (Ohio 1972)). 109 Id. at 993. 110 Exec. Order No. 2012-09K, The Emergency Amendment of Rules 1501:9-3-06 & 1501:9-3-07 of the Ohio Admin. Code by the Ohio Dept. of Natural Res., Div. of Oil & Gas Res. Mgmt. (2012), available at http://www.governor.ohio.gov/Portals/0/EO%202012-09K.pdf. 111 §§ 1509.22, 1509.21, 1509.226; see also OHIO ADMIN. CODE §§ 1509:9-3-05, 1501:9-3-06, 1501:9-3-11. 112 OHIO REV. CODE § 1509.22(D) through Sept. 10, 2012; thereafter, § 1509.22(D)(1). Additionally, OHIO ADMIN. CODE § 1501:9-3-06 provides the regulatory framework for underground injection.

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Class I, IV, and V injection wells are issued by the Division of Underground Injection Control, sometimes referred to as the UIC.113

Ohio requires a fee when waste water is injected.

114 A fee of five cents per barrel delivered to an injection well is charged when the substance to be injected was produced within the Division of Oil and Gas Resources Management regulatory district where the injection well is located or within an adjoining oil and gas resources management regulatory district. A twenty cent fee per barrel is charged to inject waste produced outside the regulatory district containing the injection well or districts adjoining it.115

In addition to regulating the injecting process, section 1509.22 requires the well owner to repair water supplies damaged during drilling operations. It also creates a rebuttable presumption in favor of the state that any violation of the section was caused by such well if it is located within a one-quarter-mile radius of the site of violation.

The revenue collected is eventually transferred to the State Treasurer who deposits the money in an oil and gas well fund created by section 1509.02; however, the owner of the injection well is allowed to retain up to three cents of the collected revenue.

3. Watersource Issues

Groundwater: Ohio has codified a reasonable use standard regarding groundwater. A landowner who withdraws a reasonable quantity of groundwater from his land and uses it for a beneficial purpose is not subject to liability for interfering with the use of the groundwater by a neighboring landowner.116 In Cline v. American Aggregates Corp., the Ohio Supreme Court provided for this non-liability on the part of the water-utilizing landowner, “unless: (a) the withdrawal of ground water unreasonably causes harm to a proprietor of neighboring land through lowering the water table or reducing artesian pressure; (b) the withdrawal of ground water exceeds the proprietor’s reasonable share of the annual supply or total store of ground water, or(c) the withdrawal of the groundwater has direct and substantial effect upon a watercourse or lake and unreasonably causes harm to a person entitled to the use of its water.”117 In 2008, in response to concerns surrounding the impact of the Great Lakes Compact on common-law water rights, the Ohio legislature amended the Ohio Constitution to explicitly protect property rights in groundwater. 118

113 See §§ 6111.043 (creating the UIC), .044 (governing permit issuance); OHIO ADMIN. CODE §§ 3745-34-01 to -63 (establishing standards for injection well classification, permit approval or disapproval, and review and testing of wells).

Article I, Section 19b of the Ohio Constitution codified Ohio common law principles by

114 OHIO REV. CODE § 1509.22(H) (effective Sept. 10, 2012). 115 This provision may be in violation of the Commerce Clause of the U.S. Constitution. 116 Cline v. Am. Aggregates Corp., 474 N.E.2d 324, 327 (Ohio 1984) (overruling a previous line of cases that denied the existence of correlative rights between the owners of adjoining lands as to use of subsurface waters and adopting a reasonableness standard); see also McNamara v. Rittman, 2005-Ohio-6433, 838 N.E.2d 640, at ¶ 10 (Ohio 2005) (holding that landowners have a property interest in the groundwater under their land and that government interference with that right could constitute an unconstitutional taking; also reinforcing disapproval of line of cases overruled by Cline). 117 Cline, 474 N.E.2d at 327 (citing RESTATEMENT (SECOND) OF TORTS § 858 (1979)). 118 See Nicholas T. Stack, Great lakes Compact and an Ohio Constitutional Amendment: Local Protectionism and Regional Cooperation, 37 B.C. ENVTL. AFF. L. REV. 493, 510-512 (2010).

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recognizing a property owner’s interest in the reasonable use of groundwater under the property owner’s land.

Regulation of Water Withdrawal: Any person who owns a facility with the capacity to withdraw water at a quantity of 100,000 gallons per day from all sources must register the facility with the Chief of the Division of Soil and Water Resources.119 Additionally, no person may divert more than 100,000 gallons of water per day out of the Ohio River Basin without having a permit issued by the Director of the ODNR. Likewise, no facility may withdraw an amount of Ohio water that would result in an increased use of more than an average of two million gallons of water per day in any thirty-day period without first obtaining a permit.120 Finally, the St. Lawrence River Basin Water Resources Compact, enacted in Ohio through House Bill 473 in May of 2012, prohibits the diversion of water from the Lake Erie Watershed.121 However, the above restrictions “do not affect common law riparian rights.”122

VI. POST-PRODUCTION ISSUES

A. Termination of the Lease

Ohio requires a lessee to release his lease of record whenever the lease has terminated or expired.123 In addition to filing a separate release, Ohio allows for the cancellation or assignment of leases by writing in the margin of the instrument; however, counties may require a separate instrument to be filed.124

B. Plugging and Abandonment

Therefore, consultation with the recorder’s office before evaluating the validity of such procedure is advised. The cancellation need not be acknowledged if written in the margin; however, it must be signed by the releasing party and attested to by the recorder.

1. Plugging Liability

To plug a well, a producer must first submit an application for plugging and abandoning to the Chief of the Division of Gas Resources Management.125 An oil and gas producer has a duty to plug a well in certain circumstances, such as where the producer discovers that the casing for a well is defective or not adequately constructed, or where a well threatens the surface of the land or public health and safety.126

119 OHIO REV. CODE § 1521.16.

When the Chief finds that a well should be plugged, the Chief shall notify the owner of the well and specify a reasonable time to comply. An owner who fails to comply with plugging a well within

120 § 1501.33(A). 121 H.B. 476, 129th Gen. Assem., Reg. Sess. (Ohio 2012) (as amended). 122 § 1501.31(B). 123 § 5301.09. 124 § 5301.33. 125 § 1509.13. 126 § 1509.12.

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the specified time is subject to forfeiture of a surety bond and/or forfeiture of equipment appurtenant to the well.127

2. Establishment of Funds for Plugging Abandoned Wells

By statute, certain resources are allocated toward the plugging of abandoned oil and gas wells. In the case of oil or gas wells abandoned prior to September 1, 1978, the Board of County Commissioners of the county in which the wells are located may submit the question of establishing a special fund, either by general levy, bond, or through current funds, to the electors of the county.128

Additionally, Senate Bill 165, passed in 2010, creates the Oil and Gas Well Fund,

The fund shall be administered by the Board and the plugging of oil and gas wells shall be under the supervision of the Chief of Oil and Gas Resources Management.

129 which is entrusted with the expenses necessary for the protection of human and environmental health and safety, as such pertains to oil and gas production. The fund is maintained through money collected through forfeiture of bonds, certain taxes, and civil penalties for violations of regulations pertaining to oil and gas development. The statute directs the Chief to annually spend not less than fourteen percent of the revenue credited to the fund during the previous year on plugging idle and orphaned wells, restoring the surface of the land, or correcting conditions that he reasonably has determined are causing imminent health or safety risks at an idle or orphaned well or a well for which the owner cannot be contacted.130

127 § 1509.071. 128 § 1509.12. 129 § 1509.02. 130 § 1509.071.

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PENNSYLVANIA: THE MARCELLUS & UTICA

I. INTRODUCTION


1. Generally

Pennsylvania is the birthplace of the American oil industry. In 1859, Colonel Edwin Drake drilled the first commercial oil well in Titusville. Jonathan Watson, a resident of Titusville who owned the land where Drake’s well was drilled, is generally credited as being the first oil millionaire in the United States. In recent times, Pennsylvania is again experiencing a boom in the oil and gas industry.

Most of the crude oil comes from the counties of McKean, Warren, Forest, and Venango, in the northwestern portion of the state, with addition production in the counties between Butler and Greene in the southwest part of the state. Natural gas is also produced in a wide swath of Pennsylvania. The Marcellus Shale natural gas formation extends through Pennsylvania, as well as parts of New York, Ohio, and West Virginia. The Marcellus Shale is a part of the Devonian Black Shale Field. According to the Pennsylvania Oil and Gas Association, the Marcellus Shale in Pennsylvania has an estimated 2.8 trillion cubic feet of proven natural gas reserves in the ground. The Marcellus Shale lies as much as 8,000 feet below the surface, and may contain as much as 170 trillion cubic feet of natural gas, according to the Pennsylvania Department of Conservation and Natural Resources. The Utica Shale, an oil and natural gas field first discovered in Canada and northern New York, but which has since been shown to extend into Ohio and Pennsylvania, lies below the Marcellus Shale. In 2011, 2,931 oil and gas wells were drilled in Pennsylvania, with 1,974 of those wells being unconventional wells. The heaviest drilling activity in 2011 was in Bradford County, with 396 unconventional wells drilled in that county alone, and other counties such as McKean, Tioga, Susquehanna, and Lycoming saw heavy drilling activity as well. As of July 20, Pennsylvania had seen 1,476 new oil and gas wells drilled in 2012, with 856 of those wells being unconventional wells; Lycoming County leads the drilling of unconventional wells with 128, and Warren County leads the drilling of conventional wells with 206. Many permits have been issued in 2012 as well, with 2,451 permits being issued through July 20, the heaviest concentrations being in Warren County (330 permits), Washington County (210 permits), Lycoming County (226 permits), and Bradford County (191 permits).

The recent surge of oil and gas activity in Pennsylvania has greatly benefited the state economically. A study conducted by Pennsylvania State University found that during 2010, Pennsylvania natural gas development generated $11.2 billion in value added, contributed $1.1 billion in state and local tax revenues, and supported nearly 140,000 jobs.131

131 Timothy J. Considine, et al, The Pa. State Univ. College of Earth & Mineral Sciences, Dept. of Energy & Mineral Eng’g, The Pennsylvania Marcellus Natural Gas Industry: Status, Economic Impacts, and Future Potential, ix (July 20, 2011), available at http://energy.wilkes.edu/PDFFiles/Economics/Final-2011-PA-Marcellus-Economic-Impacts.pdf.

The study also found that during 2010, Marcellus Shale production in Pennsylvania averaged 1.3 billion cubic feet equivalents per day of natural gas, and output at year-end 2010 from the Marcellus Shale in Pennsylvania was nearly two billion cubic

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feet per day. The study estimates that in 2012, more than $14.5 billion in value added will be generated, along with almost $2.6 billion in additional state and local tax revenues, and that support for local employment will expand to 180,000 jobs.

2. Trends in Legislation and Litigation

Recent legislative trends in Pennsylvania have focused primarily on protection of the environment, the imposition and allocation of impact fees derived from oil and gas well drilling activities, and the relationship of local governance to state governance in regulating oil and gas activities in the Commonwealth. Act 13 of 2012, amending Title 58 of the Pennsylvania Consolidated Statutes, provides for the imposition of an unconventional gas well fee (also called a drilling impact fee) and the expenditure of the funds generated by the fee to local and state purposes, which are specifically outlined in the Act. A significant portion of the fees generated will be used to cover the local impacts of drilling, while several state agencies will also receive funding for a variety of other purposes.132 This has caused considerable debate across the Commonwealth, in that virtually all the impact fees will be derived from drilling operations in the western half of the Commonwealth, while counties in the eastern half of the Commonwealth, where no drilling operations are being conducted, will also benefit. Chapter 33 of Act 13 is a preemption provision that governs local ordinances that impose conditions, requirements, or limitations on oil or gas operations. Chapter 33 is currently being challenged in Robinson Township v. Commonwealth by seven Pennsylvania municipalities that contest the constitutionality of the Act.133

Recent litigation has also focused on the basic definitions found in oil and gas leases and on provisions found in oil and gas leases. Such recent cases include construing the definition of the lease phrase “in paying quantities”,

The Commonwealth Court ruled in favor of the municipalities on July 26, 2012, holding that a portion of the law, section 3304 of Title 58, and the provisions of Chapter 33 that enforce it, are unconstitutional. However, the Commonwealth has announced that they will appeal the ruling to the Supreme Court of Pennsylvania. Other legislation introduced in the 2011-2012 Regular Session of the Pennsylvania General Assembly includes House Bill 2320 (imposing duties on lessees of oil and gas leases, and providing for the recording of releases from oil and natural gas leases and of affidavits of termination or cancellation – currently pending in the House), Senate Bill 1324 (to amend Title 42 of the Pennsylvania Consolidated Statutes, in particular rights and immunities, providing for actions to quiet title involving subsurface rights – passed the Pennsylvania Senate on March 6, 2012, and now pending before the House), and House Bill 2412 (to amend Title 58 of the Pennsylvania Consolidated Statutes, providing for further uniformity of local ordinances relating to oil and gas operations – currently pending in the House).

134 lease termination issues in regard to delay rental payments,135 statutes of limitations for actions concerning oil and gas leases,136

132 H.B. 1950, 168th Gen. Assem. (Pa. 2012) (as adopted on Feb. 14, 2012); Act 13 of 2012, PA. PUBLIC UTILITY

COMM’N, http://www.puc.state.pa.us/naturalgas/naturalgas_marcellus_Shale.aspx (last visited Aug. 6, 2012).

equitable tolling of the primary term due to

133 No. 284 M.D. 2012, 2012 WL 1429454, at *1 (Pa. Commw. Ct., Apr. 20, 2012). 134 T. W. Phillips Gas & Oil Co. v. Jedlicka, 42 A.3d 261 (Pa. 2012). 135 Hite v. Falcon Partners, 13 A.3d 942 (Pa. Super. Ct. 2011). 136 Pinebrooke Minerals, LLC v. Anadarko E & P Co., LP, 2011 WL 3584783 (M.D. Pa. 2011).

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litigation,137 and, in the pending case before the Pennsylvania Supreme Court, construing the term “minerals” in relation to unconventional Marcellus shale gas.138

B. Resources

i) Pennsylvania Department of Environmental Protection (“DEP”) Oil and Gas Programs: http://www.portal.state.pa.us/portal/server.pt/community/oil_and_gas

• DEP Oil and Gas Electronic Reporting Website: https://www.paoilandgasreporting.state.pa.us/publicreports/Modules/Welcome/Welcome.aspx - (allows users to view historical oil and gas well production information from conventional shallow wells and newer unconventional wells, as well as data on the waste each operation produces; users can search for information by well permit number, by operator ID, by county, or for the entire state)

• DEP Oil and Gas Reports Website: http://www.portal.state.pa.us/portal/server.pt/community/oil_and_gas_reports (provides a wide variety of reports pertaining to oil and gas activities statewide)

ii) Pennsylvania Department of Conservation and Natural Resources: www.dcnr.state.pa.us

• Pennsylvania Internet Record Imaging System/ Wells Information System (PA IRIS): http://www.dcnr.state.pa.us/topogeo/econresource/oilandgas/pa_iris_home/index.htm (provides twenty-four hour remote access to hundreds of thousands of scanned documents covering current and historical location plats, well record and completion reports, directional drilling survey reports, hydraulic fracturing fluid composition information, and plugging certificates; requires a subscription to access)

iii) Pennsylvania Spatial Data Access (PASDA): www.pasda.psu.edu (provides a variety of geospatial, transportation, and topographic GIS maps for the state)

iv) Pennsylvania Atlas: http://maps.psiee.psu.edu/paatlas (create and print maps of any area in Pennsylvania using PASDA data)

v) National Association of Royalty Owners – Pennsylvania chapter: http://www.naro-us.org/Pennsylvania

vi) Pennsylvania Bar Association Section of Environmental and Energy Law: http://www.pabar.org/public/sections/envco/

vii) Pennsylvania Bar Association Section of Real Property, Probate, and Trust Law: http://www.pabar.org/public/sections/rlpropco/

137 Lauchle v. Keeton Group, LLC, 768 F. Supp. 2d 757 (M.D. Pa. 2011). 138 Butler v. Powers Estate ex rel. Warren, 41 A.3d 854 (Pa. 2012) (granting appeal to the Supreme Court of Pennsylvania).

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viii) Allegheny County Bar Association (Pittsburgh) Section of Environmental and Energy Law: http://www.acba.org/ACBA/Members/Committees-Sections/EnvironmentalComm.asp

C. Definition of Minerals

1. Generally

In general, the term “minerals” in Pennsylvania conveyances does not include the oil and gas underlying the land. This is known as the Dunham Rule, and has been a fixture of Pennsylvania law since 1882.139

The Dunham Rule was further expanded to exclude the natural gas, as well as the petroleum, underlying the land from the meaning of the term “minerals” in 1906. In Silver v. Bush, the issue was whether the deed, which reserved “the mineral underlying” the land, also reserved the natural gas.

In Dunham, the court held that when used in a deed or lease, the word “minerals” should be narrowly construed and does not include petroleum.

140 The court stated that the intent of the parties must be assessed in light of their awareness of the Dunham Rule. Thus, in order to overcome the presumption that the term “mineral” did not include petroleum or natural gas, the party claiming against the presumption would have to present evidence that “should be clear and convincing that the parties used the words in a different sense.”141 The court emphasized that “if the parties intended to include gas, they would have said so expressly.”142 This ruling was further reinforced in 1960, when the court held in Highland v. Commonwealth that, in order to rebut the presumption established in Dunham that natural gas is not included within the word “minerals,” there must be clear and convincing evidence that the parties to the conveyance intended to include natural gas and oil within such word.143

2. Natural Gas in Coalbed Methane

The recent surge of activity in the Marcellus Shale has brought yet another question as to the meaning of the term “minerals.” There is a case currently pending before the Pennsylvania Supreme Court that raises the question of whether unconventional Marcellus shale gas is included within the term “minerals.”144 Butler v. Charles Powers Estate involves a quiet title action wherein the deed at issue contains the following exception from a prior reservation in favor of the Estate of Charles Powers: “One half the minerals and Petroleum Oils to said Charles Powers his heirs and assigns forever . . . .”145

139 Dunham v. Kirkpatrick, 101 Pa. 36, 43-44 (Pa. 1882).

While there is a rebuttable presumption in Pennsylvania that the term “minerals” does not include the oil and natural gas, there is also prior Pennsylvania case law in U.S. Steel v. Hoge supporting the idea that coalbed methane—methane gas contained in coal—belongs to the owner of the coal, not the

140 62 A. 832, 833 (Pa. 1906). 141 Id. 142 Id. at 834. 143 161 A.2d 390, 398 (Pa. 1960). 144 Butler, 41 A.3d 854 (granting appeal to the Supreme Court of Pennsylvania). 145 Butler v. Charles Powers Estate, 29 A.3d 35, 37 (Pa. Super. Ct. 2011).

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owner of the natural gas.146 Hoge involved a dispute between the owner of gas and U.S. Steel, the owner of the Pittsburg seam of coal. The gas owner claimed ownership of all of the gas under the parcel, including the coalbed methane gas, as the result of a deed reserving “oil and gas.” U.S. Steel claimed ownership of the coalbed methane, arguing that methane gas was considered a lethal byproduct of coal mining at the time of the conveyance of the gas, so that the original grantor and grantee cold not have intended to convey the coalbed methane when the rest of the gas was conveyed. Ultimately, the Supreme Court of Pennsylvania decided in favor of the owner of the coal owner, ruling that “such gas as is present in the coal must necessarily belong to the owner of coal.”147 Thus, an argument exists under Hoge that the rebuttable presumption of Dunham and its progeny would not apply to unconventional shale gas rock in Butler, in that at the time the reservation was made in Butler (1881), the grantor and grantee would have been unaware of the gas contained in the shale. As such, “minerals” should include unconventional shale gas rock as well. Again, Butler is currently pending before the Pennsylvania Supreme Court, so a decision supporting this interpretation is not certain. However, in 2011, a federal district court case, Hoffman v. Arcelormittal Pristine Resources, Inc., dealt with this very issue.148 Hoffman concerned a ninety-seven acre tract in Washington County, in which a 1928 deed reserved “all gas and oil within and underlying said premises” in favor of the defendants. The plaintiff, citing Hoge, argued that because Marcellus shale mining was not commercially exploitable at the time of the 1928 deed, the reservation in the 1928 deed was ambiguous. The plaintiff contended that under Hoge, it was “apparent from the deed and language concerning the operations contained within the deed that the intent of the parties was to except and reserve only the geological formations capable of the production of natural gas with then existing technology.”149

In conclusion, while there is a rebuttable presumption in Pennsylvania that the term “minerals” does not include the oil and gas unless expressly stated, there is still a pending question of whether this applies to unconventional Marcellus shale gas. Practically speaking, a person or company seeking an oil and gas lease or a mineral interest in land should clearly and expressly state what interests they are seeking to obtain.

The court rejected the plaintiff’s argument, stating that the 1928 deed’s language was “clear and unambiguous” and reserved the rights to all oil and gas to defendants, including unconventional Marcellus shale gas. Of course, the state courts of Pennsylvania are not bound by interpretations of deeds made by federal courts.


A. Generally

The Department of Environmental Protection (“DEP”) is responsible for reviewing and issuing drilling permits, inspecting drilling operations, and responding to complaints about water quality problems. DEP inspectors conduct routine and unannounced inspections of drilling sites and wells statewide. Other agencies directly responsible for monitoring the effects of drilling on water quality and

146 468 A.2d 1380, 1383 (Pa. 1983). 147 Id. at 1388. 148 No. 11cv0322, 2011 WL 1791709, at *3 (W. D. Pa. 2011). 149 Id. at *5.

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aquatic life include the Pennsylvania Fish and Boat Commission, the Susquehanna and Delaware River basin commissions, the U.S. Fish and Wildlife Service, and Pennsylvania’s county conservation districts. The DEP's Office of Oil and Gas Management is responsible for the statewide oil and gas conservation and environmental programs, facilitating the safe exploration, development, and recovery of Pennsylvania's oil and gas reservoirs in a manner that will protect the Commonwealth's natural resources and the environment. The Office “develops policy and programs for the regulation of oil and gas development and production pursuant to the Oil and Gas Act, the Coal and Gas Resource Coordination Act, and the Oil and Gas Conservation Law; oversees the oil and gas permitting and inspection programs; develops statewide regulation and standards; conducts training programs for the industry; and works with the Interstate Oil and Gas Compact Commission and the Technical Advisory Board.”150

Pennsylvania’s Oil and Gas Conservation Law

The Office is also responsible for all the various regulatory filings that oil and gas well operators must submit.

151

The Oil and Gas Act

is the governing statute for the Commonwealth’s oil and gas waste regulations, such as pooling requirements and well spacing regulations. However, it currently only affects wells drilled into or below the Onondaga formation. This formation lies below the Marcellus Shale, and thus the statute excludes operations in the Marcellus Shale; but, as the Utica Shale lies below the Onondaga formation in some parts of Pennsylvania, operations in the Utica Shale fall under the provisions of the Conservation Law. Therefore, an oil and gas operator in Pennsylvania needs to note the depth of the well being drilled in order to determine whether compliance under the Conservation Law is warranted.

152

150 Oil and Gas Programs, PA. DEPT. OF EVNT’L PROT. (2012), http://www.depweb.state.pa.us/portal/server.pt/community/oil_and_gas/6003.

is the law containing the environmental protection regime that governs oil and natural gas operations. On February 8, 2012, the Pennsylvania General Assembly passed a reform of this law in House Bill 1950, which provides a wide-ranging update to the Commonwealth’s Oil and Gas Act. The bill was signed into law on February 14, 2012 and is sometimes referred to as Act 13 of 2012, discussed above. While the new law still applies to all oil and gas operations in the state, much of the new language in Chapter 32 targets unconventional shale natural gas drilling operations that utilize hydraulic fracturing, including new setbacks and well siting restrictions; additional well permitting procedures, plans, and approvals; increased bonding requirements; stricter enforcement mechanisms; new chemical disclosure and reporting obligations; and new water supply protections. For example, under the Act, there are site restrictions for unconventional wells when they are near certain streams, springs, or bodies of water; no unconventional well may be drilled within three hundred feet of any wetlands greater than one acre in size; unconventional well sites must maintain a one-hundred foot setback from the edge or boundary of certain streams, springs, bodies of waters, or wetlands; and unconventional gas wells may not be drilled within one thousand feet measured horizontally from the vertical well bore to any existing water well, surface water intake, reservoir, or other water supply

151 58 PA. STAT. ANN. §§ 401-410. 152 58 PA. CONS. STAT. ANN. §§ 3201-3274.

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extraction point used by a water purveyor without the written consent of the water purveyor.153

A violation of the Oil and Gas Conservation Act is punishable by a fine ranging from $500 to $5,000, imprisonment of not more than six months, or both. Each day in violation is considered a separate offense.

Oil and gas operators planning projects in Pennsylvania should become familiar with these new regulations.

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For oil and gas operators who need to drill water wells as part of operations, or perform any other activity potentially affecting the Commonwealth’s water resources, the Department of Conservation and Natural Resources (“DCNR”) has guidelines set up as to licenses and permits required to do so. In addition, the DCNR oversees the leasing of the Commonwealth’s public lands, including land beneath navigable waterways.

B. Frack-Specific Regulations and Developing Regulations

1. Hydraulic Fracturing Regulations

Act 13 includes a new section on fracturing fluid chemical disclosure, requiring all operators to complete a chemical disclosure form and post the form on the chemical disclosure registry. The new provision allows for trade secret and confidential proprietary information claims to be made by operators, vendors, and service providers, and describes how such claims should be handled by the DEP. Also, a new “safe-harbor” provision clarifies that operators will not be required to disclose chemicals that are not disclosed to it by the fluid manufacturer, vendor, or service provider. The Act also partially codifies as statute environmental quality regulations found in Chapter 78 of the Pennsylvania Administrative Code that govern chemical reporting in completion reports.155

In addition, under Act 13, withdrawal or use of water for drilling or hydraulic fracturing an unconventional well requires a DEP-approved water management plan.

Additionally, Senate Bill 1514 was introduced in the Pennsylvania Senate on May 7, 2012; if passed, it would call for further hydraulic fracturing chemical disclosure requirements beyond those already enacted.

156 The presumption of responsibility for pollution of a water supply will be extended to 2,500 feet from the vertical well bore (increased from 1,000 feet) and twelve months (compared to the former six months) from the latest of completion, drilling, stimulation, or alteration.157 In this case, operators must provide a temporary water supply if no readily-available alternative source of water exists. Also, the DEP will establish a new toll-free telephone number that persons may use to report cases of water contamination. The DEP is now has contamination report requirements, and must post to its website any “confirmed cases of subterranean water supply contamination that results from hydraulic fracturing.”158

153 § 3215

Further, unconventional well operators that transport wastewater fluid will be required to maintain five years of

154 58 PA. STAT. ANN. § 412. 155 58 PA. CONS. STAT. ANN. § 3222. 156 § 3211. 157 § 3218. 158 Id.

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wastewater fluid records detailing the volume of fluids, who transported them, where the fluids were disposed of or transported, and the method of disposal.

2. Developing Regulations

Another area of developing regulation concerns the issues of state preemption of local ordinances regulating oil and gas operations. As previously stated, Chapter 33 of Act 13 is a preemption provision that governs local ordinances that impose conditions, requirements, or limitations on oil or gas operations, and is being challenged in Robinson Township. The Township currently awaits appeal to the Supreme Court of Pennsylvania. House Bill 2412, pending in the House, also seeks to address this problem by increasing uniformity of local ordinances relating to oil and gas operations. The competing interests of the municipalities, seeking to use their police powers to regulate such things as oil and gas well placement, noise regulations, and nuisance ordinances, and the Commonwealth, seeking to create a uniform regulatory scheme to enhance oil and gas operations in the Commonwealth, are a burden on oil and gas operators in Pennsylvania, as drilling activities can be subject to multiple layers of government regulation. Prior to the enactment of Act 13, the Pennsylvania Supreme Court addressed two cases addressing the extent to which the Oil and Gas Act preempted municipal regulation in the well permitting process administered by the DEP. In the first case, Huntley & Huntley v. Borough Council of Oakmont, the court upheld a local zoning ordinance that restricted the location of gas wells to particular zoning districts on the basis that such district designations are considered to lie within a municipality’s traditional zoning authority, and are not an attempt to regulate the features of the wells.159 The court determined in this case that a local zoning ordinance that pertained to technical aspects of well functioning did not address a feature of the Oil and Gas Act regarding location and placement of wells; thus, the ordinance was not preempted by the Act, such that the city council had authority to enact the ordinance and impose its conditions on a company seeking to operate a natural gas well on residential property. On the other hand, in Range Resources-Appalachia, LLC v. Salem Township, the court invalidated a local subdivision and land development ordinance that imposed extensive requirements similar to the Act’s, such as permitting, groundwater protection, and plugging that substantially overlapped with the Act’s stated goals.160


These cases, plus the current status of Act 13, leave the question of the relationship of local ordinances to state law concerning oil and gas operations in a state of flux.

A. Records and Recording Acts

Pennsylvania is a race-notice state. When parties claim competing interest in real estate, the party who has recorded his document and who lacks actual or constructive knowledge of the rights of

159 964 A.2d 855, 864 (Pa. 2009). 160 964 A.2d 869, 875-877 (Pa. 2009).

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the other party is deemed to have superior rights in the real estate. Pennsylvania law provides for the recording of all deeds and mortgages conveying real estate.161

Pennsylvania’s recording statute is found in Title 21, sections 321 to 482. In section 331, Pennsylvania adopted the Uniform Parcel Identifier Law, and most counties in Pennsylvania require the Uniform Parcel Identification Number to be on the deed prior to recording. In addition, under section 444, all deeds and conveyances are required to be recorded within ninety days of execution, and the failure to do so could expose a grantee to a superior claim from a bona fide purchaser. As a practical matter, many of the counties in Pennsylvania also have their own unique recording requirements, involving such matters a font size and margin sizes.

A sufficient legal description is required for recording. To be effective, a Pennsylvania conveyance must contain a description sufficient to enable the land to be identified. Full metes and bounds or courses and distances are not required. However, while Uniform Parcel Identification Numbers are required to be listed on the deed, it is important to note that such numbers are never appropriate identifiers for land titles, as those numbers can, and do, change as parcels are combined or subdivided.

In Pennsylvania, failure to record an oil and gas lease or a memorandum thereof can expose a lessee to superior claims from subsequent interest holders, including purchasers, lessees, mortgagees, or easement holders.162 Because granting an oil and gas lease affects the rights of a subsequent interest holder, the lease (or a memorandum) must be on record to protect the lessee against the claim of a party that obtains its interest in good faith.163 Pennsylvania’s recording statute enumerates certain provisions that are required to be included in a memorandum of lease.164 The statute also requires a memorandum of lease to be executed by every party to the lease and acknowledged by the lessor. The recording of a memorandum of lease that meets the foregoing provisions constitutes constructive notice to “subsequent purchasers, mortgagees, and judgment creditors of the lessor of the making and of the provisions of such lease . . . .”165 Pennsylvania courts have recognized that the recording of a memorandum of lease provides constructive notice to subsequent lessees as well.166

On July 5, 2012, House Bill 970 was enacted into law as Act 100 of 2012. Act 100 provides for the validity of electronic documents, authorizes county recorder of deeds to receive electronic documents as a means for recording real property, grants powers and duties to the county recorder of deeds, and prescribes standards of uniformity for electronic documents and their recording. The Act also allows electronic signatures for certain documents. Act 100 should greatly aid both oil and gas operators and county deed recorders in the ease and speed of filing real property records.

161 21 PA. STAT. ANN. § 351; see also Lesnick v. Chartiers Natural Gas Co., 889 A.2d 1282, 1284 (Pa. Super. Ct. 2005) (providing that mineral leases must also be recorded). 162 § 444; Lesnick, 889 A.2d at 1284. 163 Lesnick, 889 A.2d at 1282. 164 § 405. 165 § 407. 166 See, e.g., Lesnick, 889 A.2d at 1284; Appeal of Energy Explorations, 404 A.2d 741, 742 (Pa. Commw. Ct. 1979).

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B. Dormant Mineral Acts and Marketable Title Acts

In 2006, Pennsylvania passed a Dormant Oil and Gas Act.167

To initiate an action under the Act, any person who owns an interest in oil and gas underlying a tract of land may petition the appropriate division of the Court of Common Pleas of the county in which the tract or any portion of the tract is located to declare a trust in favor of all unknown owners of an interest in the oil and gas underlying the tract whose identity, present residence, or present address is unknown and cannot be determined by diligent efforts. In 2011, House Bill 1707 was introduced to amend this provision of the Act to allow an owner who only owns the surface to initiate a petition as well, but this amendment has not been enacted into law and is currently in committee review in the House.

This Act permits a trustee to be appointed for holders of “dormant” oil and gas interests, empowers the trustee to execute a lease as to those interests and to collect lease proceeds, and, after deducting the fees of the trustee, to periodically escheat the proceeds of production to the Commonwealth if the true owner thereof does not appear to collect them. The legislature only allows financial institutions to serve as trustees. To date, no cases interpreting the Dormant Oil and Gas Act have been reported.

To date, Pennsylvania has not enacted a Marketable Title Act, though several efforts to do so have been attempted and failed.

C. Inheritance

Pennsylvania’s rules of descent and distribution are found in Title 20 of the Pennsylvania Consolidated Statutes.168

If there is no surviving issue or parent of the decedent, the surviving spouse inherits the entire estate. If there is no surviving issue, but the decedent is survived by one or both parents, then the surviving spouse receives the first $30,000 of the estate, plus one-half of the balance remaining of the estate. If there are surviving issues of the decedent, and all are also the issues of the surviving spouse, then the surviving spouse receives the first $30,000 of the estate, plus one-half of the balance remaining of the intestate estate. If there are surviving issues of the decedent, one or more of whom are not issues of the surviving spouse, then the surviving spouse receives one-half of the intestate estate.

After the surviving spouse takes his or her share, the remaining intestate estate passes in the following order (and, if there is no surviving spouse, then the entire intestate estate will pass in this order): 1) issue of the decedent, 2) parents, 3) brothers, sisters, or their issues, 4) grandparents, 5) uncles, aunts, and their issues, and finally 6) the Commonwealth. Pennsylvania statute provides for two methods of distribution, and which method is used depends on the degree of the relationship of the survivors. There is per stirpes distribution, which is used when the decedent’s ancestors are not all in the same degree of relationship, and there is per capita distribution, which is used when all ancestors are in an equal degree of relationship. 167 58 PA. STAT. ANN. §§ 701.1-.7. 168 20 PA. CON. STAT. ANN. §§ 2101-2010.

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In Pennsylvania, it is also possible to forfeit an intestate distribution under the law. A surviving spouse’s intestate share is forfeited if the surviving spouse has either willfully and maliciously deserted the other spouse for one year or more prior to the death of the other spouse, or who has willfully neglected or refused to perform the duty to support the other spouse for one year or more prior to the death of the other. Also, a surviving spouse’s intestate share is forfeited under the law if, prior to entry of a decree of divorce, the other spouse dies domiciled in Pennsylvania during the course of divorce proceedings and grounds for divorce have been established as provided by statute.169

Pennsylvania imposes an inheritance tax on the value of a decedent’s estate transferred to beneficiaries by will or intestacy. All real property of a resident decedent located in Pennsylvania at the time of the decedent’s death is taxable.

Also, a parent’s intestate share is forfeited under the law if, for one year prior to the death of the parent’s minor or dependent child, has failed to perform the duty to support the minor or dependent child, has deserted the minor or dependent child, or has been convicted of one of the offenses listed in the statute.

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IV. LEASING

In the case of a nonresident decedent, all real property located in Pennsylvania at the time of the decedent’s death is taxable. The tax is due at the date of death and becomes delinquent nine months after the date of death. Thereafter, an inheritance tax lien attaches to the property. Therefore, when examining title involving a decedent, the examiner should check with the Register of Wills where the property is located to ensure that all inheritance taxes have been paid.


The regulatory framework for government leases is a confusing one for oil and gas companies doing business in the Commonwealth, in light of the nature of local government, which includes not only sixty-seven counties and 2,566 municipalities, but also special authorities created by the Commonwealth and municipal authorities created by local governments pursuant to specific and limiting enabling legislation. Each form of local government has different statutory authority regarding its ability to enter into leases. Some local governments are “home rule” and “optional charter” jurisdictions, with varying degrees of self governance. This may or may not include the right to lease. There are also some special limitations on the ability of some local governments to deal with certain types of lands (lands that have been donated for special purposes, such as a park), even if they have a general power to lease. In addition, the Commonwealth has its own procedure for dealing with real estate owned by the sovereign.

B. Of Roads and Railroads

Generally, lands subject to public road or railroad right-of-ways are owned by adjoining landowners to the center of the road. Where the side of a street is called for as a boundary in a deed, a

169 See 23 PA. CON. STAT. ANN. § 3323(g). 170 Register of Wills: Commonly Asked Questions, BUCKSCOUNTY.ORG, http://www.buckscounty.org/government/rowOfficers/RegisterofWills/InheritanceTax.aspx (last visited Aug. 6, 2012).

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grantee takes title in fee to the center of street, if the grantor had title to that extent and did not expressly or by clear implication reserve it.171 Where an owner of realty subdivides it into lots and streets on a plan and sells his lots accordingly, there is an implied grant or covenant to the purchaser that the streets shall be forever opened to the use of the public, and there is a dedication of the streets to public use. However, if said streets are not opened to or used by the public for twenty-one years, the plan for streets will have no effect, and the streets shall not be opened without the consent of the owner (the effect being to relieve the land of the servitude, i.e. a lapse of a dedication).172 In a conveyance, when the measurements in a legal description bring the boundary line only to the side of the street, those measurements are not sufficient to control the rule of law that carries the title to the center of it.173

C. Lands under Waters

The general rule in Pennsylvania is that where a body of water is non-navigable, the owner of the land bordering on it takes to the middle; but where the body of water is navigable in fact, its waters and bed belong to the state in its sovereign capacity, and the riparian owner takes the fee only to the water’s edge (i.e. the ordinary low-water mark, subject to the rights of navigation, fishery, and improvement of the stream between high and low water marks).174 The U.S. and Pennsylvania Supreme Courts have declared waterways to be navigable when they are or have been used in their ordinary condition as highways for commerce using the customary modes of trade and travel on water available at the time they were used for such purposes.175 The use of a particular waterway as a highway for commerce may be based on present or historical use.176

It is also important to note that the DEP is permitted by statute to allow private use of beds of navigable waterways by issuing submerged land licenses.

In addition, during the late 1700’s and 1800’s, many waterways in Pennsylvania were statutorily declared to be public highways for navigation.

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The Commonwealth owns the land under navigable streams forever under the doctrine of “accretion,” which is the natural and imperceptible deposit of alluvium brought down by the river over time, whereas artificial placement of fill is not considered accretion under Pennsylvania law and is subject to different rules.

However, these licenses do not grant the right to develop minerals beneath publicly-owned streambeds. Only the DCNR can lease the beds of navigable waterways for oil and gas development.

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171 In re Ordinance No. 132, Borough of Dillsburg, 222 A.2d 612, 614 (Pa. Super. Ct. 1966).

Changes in the low-water line resulting from natural accretion or erosion can add or diminish a riparian landowner’s interest and the Commonwealth’s title to the lands

172 Rahn v. Hess, 106 A.2d 461, 464 (Pa. 1954). 173 Paul v. Carver, 26 Pa. 223, 223 (Pa. 1856). 174 Conneaut Lake Ice Co. v. Quigley, 74 A. 648, 650 (Pa. 1909); see also Lehigh Falls Fishing Club v. Andrejewski, 735 A.2d 718, 720 (Pa. Super. Ct. 1999); Black et al. v. Am. Int’l Corp., 107 A. 737, 738 (Pa. 1919). 175 Cleveland & Pittsburgh R.R. Co. v. Pittsburgh Coal Co., 176 A. 7, 8-9 (Pa. 1935); see also Philadelphia v. Pa. Sugar Co., 36 A.2d 653, 655 (Pa. 1944). 176 See Mountain Prop., Inc. v. Tyler Hill Realty Corp., A.2d 1096, 1100 (Pa. Super. Ct. 2001). 177 32 PA. STAT. ANN. § 693.15. 178 Del. Ave., LLC v. Dep’t of Conservation & Natural Res., et al., 997 A.2d 1231, 1234 (Pa. Commw. Ct. 2010).

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underneath the water. Changes in the low-water line associated with artificial filling do not modify the boundaries of navigable waterways, regardless of whether the Commonwealth or a private entity was responsible for the fill.

D. From Unlocatable Mineral Owners

The Pennsylvania Dormant Gas and Mineral Act is the primary method for leasing unlocatable mineral owners. However, there are two other possible methods under Pennsylvania law for developing the minerals under a tract of land where all of the mineral owners cannot be located. These are 1) the action to quiet title and 2) the Inalienable Property chapter under the Decedents, Estates, and Fiduciaries Title of the Code. It should be noted that to pursue an action to quiet title in Pennsylvania, the plaintiff must do so on the strength of his own title, not based upon the imperfections in the title of the defendant.179

Under the Inalienable Property Chapter

Therefore, if a party has no title at all to a severed mineral interest, that party cannot quiet title to said severed mineral interest in himself.

180 of the Probate, Estates, and Fiduciary Code, it may be possible to develop the mineral rights of unlocatable mineral owners. Inalienability is the non-transferability of property.181

Currently, there is bill pending in the Pennsylvania General Assembly (Senate Bill 1324, which passed the Pennsylvania Senate on March 6, 2012, and is currently pending before the Pennsylvania House) seeking to amend Title 42 of the Pennsylvania Consolidated Statutes, in particular actions to quiet title involving subsurface rights. The bill seeks to create a rebuttable presumption that if a person other than the surface owner claiming to hold subsurface rights fails to exercise the subsurface rights for a period in excess of fifty years, then a rebuttable presumption would arise that the subsurface rights have been abandoned by such person in favor of the surface owner. “Exercise of subsurface rights” would include production of coal, oil, gas, or other minerals; a mortgage, assignment, conveyance, or pooling or unitization agreement; payment of taxes or fees on subsurface rights; a valid permit of any government agency pertaining to the use of subsurface rights; a statement of ownership of described

Thus, if the mineral rights under a tract of land are held by a party or parties whose whereabouts are unknown and whose heirs are unascertainable, rendering the interest inalienable, then a proceeding under the Inalienable Property chapter may allow for the sale of the interest, with the proceeds of the sale being held in trust for the unascertainable owners. Who may be considered an interested party, thus able to obtain standing in order to file a petition, is not defined in the Inalienable Property chapter. Hence, while only a person with title to an interest has standing to bring an action to quiet title, it appears that anyone with a valid interest, including possibly a potential purchaser of the inalienable interest, would have standing to petition the court for a proceeding and sale under the Inalienable Property chapter. There is a potential disadvantage for a party pursuing an interest under the Inalienable Property chapter—even though that party may have paid the costs for initiating the proceeding, there is always the possibility that they may be outbid in the subsequent judicial sale of the interest.

179 Kaiser Energy, Inc. v. Com. Dept. of Envtl. Res., 535 A.2d 1255, 1257 (Pa. Commw. Ct. 1988). 180 20 PA. CON. STAT. ANN. §§ 8301-8306. 181 In re Rupert’s Estate, 11 Pa. D. & C. 4th 538, 541 (Pa. Ct. Com. Pl. 1990).

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subsurface rights filed and recorded in the county deed records prior to entry of a final judgment; or actual use of the strata where the mineral is situated. Interestingly, the bill, as amended, includes a provision which reads “the rebuttable presumption established in this section shall not apply to fee interests, including, without limitation, deeds and long-term leases for coal and other minerals and oil and gas, including all appurtenant rights, which have been reserved or acquired by a duly recorded conveyance.”182

E. From Concurrent Owners and Successive Owners

Common methods by which more than one party holds property in Pennsylvania include the tenancy in common, joint tenancy, joint tenancy with right of survivorship, tenancy by the entirety, and life estate.

Tenancy in Common: A tenancy in common is a form of co-ownership by which each owner has an undivided interest in the property. When each owner dies, his interest will pass to his heirs. Tenants in common can specify a percentage each owns (such as seventy percent/ thirty percent). A conveyance of two or more persons who are not husband and wife is presumed to create tenancy in common and not a joint tenancy, unless clear intent to the contrary is shown.183 This can hold true even when the unmarried persons are listed on the deed as husband and wife.184

It is important for a party seeking to develop the minerals under a tract of land to lease all of the owners of the mineral interests. Damages for drilling on land without leasing one-hundred percent of owners could subject an oil and gas operator to liability for trespass. If there are multiple owners of the mineral interest, and one of the owners does not want to lease, the remaining owners can petition the court to partition the property and possibly buy out the withholding owner. Afterwards, the remaining owners may lease the mineral interest.

Joint Tenancy: In a joint tenancy, each joint tenant is considered to own an undivided share of the entire property. As a general rule, a joint tenancy can be severed by an action which destroys one of the four unities. A joint tenancy is broken when one tenant transfers his interest, has his interest executed upon by creditors, or obtains a judgment of partition. A joint tenancy is also severed when an agreement of sale is entered into, because this creates a new equitable ownership interest in the buyer. The joint tenancy is severed by execution or an attempt to sell the property, if the attempt signifies a clear intent to sever.185

182 S.B. 1324, 196th Gen. Assem. (Pa. 2012) (as amended/ substituted).

A joint tenancy does not terminate upon entry of a money judgment against a tenant, nor upon a joint tenant filing for bankruptcy. If there are more than two joint tenants, and the remaining joint tenants are not, as between themselves, affected by the act which severs the joint tenancy, then the remaining joint tenants may still hold their interests as joint tenants in relation to one

183 Zomisky v. Zamiska, 296 A.2d 722, 723 (Pa. 1972). 184 1st Fed. Sav. & Loan Ass’n of Greene County v. Porter, 183 A.2d 318, 323 (Pa. 1962). 185 In re Estate of Quick, 905 A.2d 471, 475 (Pa. 2006).

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another.186 The severing joint tenant or his successor will hold his interest as a tenant in common with the remaining tenants.187

Joint Tenancy with Right of Survivorship: In a joint tenancy with right of survivorship, each joint owner owns an undivided equal joint interest in the entire property. When one of the joint owners dies, the remaining joint owner or owners gets the deceased owner’s share. Land held in joint tenancy does not, of itself, carry right of survivorship between the joint tenants—it must be clearly and expressly stated.

188 A Superior Court case recognized that a right of survivorship is not available in Pennsylvania when the percentage of ownership varies between co-owners.189

Pennsylvania imposes an inheritance tax on the value of a decedent’s estate at the time of his death. Jointly-owned property with right of survivorship, except between husband and wife, is taxable to the extent of the decedent’s fractional interest in the joint property (calculated by dividing the value of the joint property by the number of joint owners at the time of the decedent’s death). Joint property is taxable even though the decedent’s name was added as a matter of convenience. Further, if the decedent created the joint interest in the property within a year of his or her death, the full value of the property is taxable in the decedent’s estate.

Because the interest passes by operation of law, the right of survivorship cannot be defeated by a will or by laws of intestacy. As a general rule, a joint tenancy can be severed by an action which destroys one of the four unities. In joint tenancy with right of survivorship, the right of survivorship remains unless severance becomes final and complete before the death of a joint tenant.

190

Tenancy by the Entirety: Tenancies by the entirety are the default method by which married couples hold land in Pennsylvania. An instrument must expressly and specifically create another type of tenancy in order for a married couple to hold property any way other than this automatic tenancy. A tenancy by the entirety operates similarly to a joint tenancy with right of survivorship, except that the only two owners allowed are a legally-married husband and wife. The tenancy by the entirety also entails a special creditor-protection feature—the debts of one spouse cannot attach as a lien on property held in a tenancy by the entirety.

The tax is due at the date of death and becomes delinquent nine months after the date of death. Thereafter, an inheritance tax lien attaches to the property.

Property acquired while married, other than property acquired from separate funds, by gift, or through inheritance, is marital property in Pennsylvania. Marital property is owned as titled but is subject to a special “marital share” in the event of the death of a spouse. There is always a risk of a

186 Am. Oil Co. v. Falconer, 8 A.2d 418, 421 (Pa. Super. Ct. 1936). 187 Id. 188 68 PA. STAT. ANN. § 110; Maxwell v. Saylor, 58 A.2d 355, 356 (Pa. 1948) (holding that the statute governing joint tenancy and removing survivorship rights “does not prevent the creation of the right of survivorship by the express words of a will or deed or by necessary implication, and no particular form of words is required to manifest such an intention”). 189 Edel v. Edel, 424 A.2d 946, 949 (Pa. Super. Ct. 1968). 190 Register of Wills: Commonly Asked Questions, supra note 170.

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claim for a spousal share that will affect pre-death conveyances and leases that do not bear a spousal joinder.

It should be noted that in the 1940’s, Pennsylvania experimented with community property but repealed that regulatory scheme after a very short period of time. Title acquired during that period must be considered in that context.

Successive Interests: Life estates are another common form of joint ownership. In a life estate, one or more parties holds the right to possess the property for a given time period (called “life tenants”), which is the life of a person in being, and at the end of the life in being, the property reverts in fee to the remaindermen. Pennsylvania has adopted the Open Mine Doctrine, i.e. a life tenant has no power to open wells where none were open prior to the life tenancy.191


To be valid, an oil and gas lease must be signed by both the life tenant and the remainder beneficiaries.

The only statutory forced pooling authority is found in the Oil and Gas Conservation Act,192

The primary vehicle for pooling in Pennsylvania will be found in the contractual oil and gas lease provisions covering pooling and unitization. Voluntary pooling and unitization under the express terms of a lease are enforced in accord with their terms.

and is only for wells drilled in or below the Onondaga formation. This formation lies below the Marcellus Shale, and thus operations in the Marcellus Shale are excluded from the benefit of forced pooling under the Act. However, portions of the Utica Shale lie below the Onondaga formation, subjecting it to the Act. While there is no forced pooling otherwise, landowners who do not pool are still subject to the Rule of Capture, which allow their minerals to be drained from adjoining tracts that are producing.

193

For those oil and gas wells falling within the parameters of the Oil and Gas Conservation Act, an operator must first obtain a permit from the DEP before drilling into, or deeper than, the Onondaga horizon. The DEP has the authority to establish well spacing and drilling units of certain sizes and shapes for each pool of oil or natural gas.

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191 Marshall v. Mellon, 36 A. 201, 201 (Pa. 1897).

After a well is drilled, the well operator or land owners directly and immediately affected by the drilling of that well or subsequent wells in the pool can file an application for a well spacing order. An application for a spacing order cannot encompass more than ten square miles. The DEP then holds a public hearing to determine what area is to be included in the well spacing order and how much acreage will be in each unit. If an order is issued, the DEP will create a spacing unit that is at least as large as needed to be efficiently and economically drained by one well. The units within a pool will have uniform sizes and shapes, but the DEP has authority to vary those shapes and sizes to accommodate previously-drilled wells and property lines. Unit sizes for oil wells and gas wells can differ within the same pool.

192 58 PA. STAT. ANN. §§ 401-419. 193 See Fox v. Wainoco Oil & Gas Co., 46 Pa. D. & C.3d 439, 444 (Pa. Ct. Com. Pl. 1986); Snyder Bros. v. Peoples Natural Gas Co., 676 A.2d 1226, 1231 (Pa. Super. Ct. 1996). 194 § 407.

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For those oil and gas wells falling within the parameters of the Oil and Gas Conservation Act, forced pooling is available. An operator having an interest in a well spacing unit can apply for an integration order from the DEP. The DEP can issue an integration order after conducting a public hearing and notifying all interested parties.195

Pennsylvania is an apportionment state. If a tract is subdivided into separate parcels, the royalty arising from oil and gas operations anywhere on the original lease is shared among the holders of all parts of the land underlying the original lease on a pro rata basis in accord with their respective and relative acreage holding of the original leased acreage.

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VI. MAINTAINING THE LEASE

A. Interpretation of Lease Terms

In Pennsylvania, the initial title conveyed by an oil and gas lease is inchoate and for the purpose of exploration only. The lessee may perfect its inchoate title to a vested interest by bringing the property into production. At that juncture, the lessee gains a fee simple determinable in the oil and gas, and may continue to reap the benefit of his efforts in accordance with the terms and conditions of the lease.197

Production in “Paying Quantities”: If a well consistently pays a profit, however small, over operating expenses, it will be deemed to have produced “in paying quantities” within the meaning of habendum clause in oil or gas lease. Where production on a well has been marginal or sporadic, such that, over some period, the well’s profits do not exceed its operating expenses, a determination of whether the well has produced “in paying quantities” within the meaning of the habendum clause in oil or gas lease will require consideration of the operator’s good faith judgment in maintaining operation of the well. The court must consider the reasonableness of the time period during which the operator has continued his operation of the well in an effort to reestablish the well’s profitability. If the well fails to pay a profit over operating expenses, and the evidence establishes that the lessee was not operating the well for profit in good faith, the lease will terminate.

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“Commencement of Operations”: Operations commence when good-faith preparations are begun within the fixed primary term period to drill a well.

199

195 § 408.

The general rule seems to be that actual drilling is unnecessary, but that surveying a well location, hauling lumber and machinery onto it, erecting derricks, providing a water supply, and similar acts preliminary to the beginning of the actual work of drilling, when performed with the bona fide intention to proceed thereafter with diligence toward the completion of the well, constitute a commencement of drilling operations within the meaning of this clause of the lease. If the lessee has performed such preliminary acts within the time limited, and has thereafter actually proceeded with the drilling of a well to completion, the intent with which he did the

196 Wettengel v. Gormley, 28 A. 934, 935 (Pa. 1894). 197 Hite, 13 A.3d at 945. 198 T. W. Phillips Gas & Oil Co., 42 A.3d at 18. 199 Pemco Gas v. Bernardi, 5 Pa. D. & C.3d 85, 95 (Pa. Ct. Com. Pl. 1977).

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preliminary acts is unquestionable, and the court may rule as a matter of law that the well was commenced within the time specified by the lease.200

“Force Majeure” Clause: Good faith, meritorious litigation by the lessor against the lessee, which results in a suspension of the lessee’s operations under the lease, will not toll the primary term of the lease.

201

Royalty Calculations: Pennsylvania has enacted a Guaranteed Minimum Royalty Act

202 that requires all oil and gas leases to guarantee the lessor at least one-eighth royalty of all oil, natural gas, or gas of other designations removed or recovered from the subject real property. In Kilmer v. Elexco Land Services, Inc., the Pennsylvania Supreme Court held that calculation of an oil and gas lease royalty under the “net-back method” (one-eighth of the sale price of the gas minus one-eighth of the post-production costs of bringing the gas to market) does not violate the Guaranteed Minimum Royalty Act.203

B. Implied Covenants and the Reasonably Prudent Operator Standard

Pennsylvania recognizes an implied covenant of development. The lessee cannot hold the premises and refuse to operate them. So long as an oil or gas lessee continues to pay a landowner for the opportunity to develop and produce oil or gas, the lessee need not actually drill wells under an implied covenant to develop; at the point where that compensation ceases due to the expiration of the term of the lease, or pursuant to terms of the lease itself, the lessee then has an affirmative obligation either to develop and produce the oil or gas or terminate the landowner’s contractual obligations.204

Pennsylvania also recognizes an implied covenant of further exploration. In Aye v. Philadelphia Co., the court held that “where the parties to a lease of oil land provide for a test well, and what shall be done if it produces oil in paying quantities, but make no provision if the well proves dry, there is an implied obligation on the lessee, if the test well proves dry, to proceed with the exploration with reasonable diligence, according to the usual course of business.”

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Pennsylvania was one of the first states to recognize a lessee’s implied covenant to reasonably develop the leased premises.

The court further stated that “where an oil lease provides for the completion of a test well within a certain time, there is an implied obligation on the lessee, after having completed a test well which has proved dry, to proceed further with the exploration, and a failure to do so amounts to an abandonment which will sustain a re-entry by the lessor.”

206

200 Id. at 92

This covenant requires the lessee to drill as many wells as are

201 Lauchle, 768 F. Supp. 2d at 762. 202 58 PA. STAT. ANN. § 33. 203 990 A.2d 1147, 1157-58 (Pa. 2010). 204 Jacobs v. CNG Transmission Corp., 772 A.2d 445, 455 (Pa. 2001). 205 44 A. 555, 556 (Pa. 1899). 206 McKnight v. Mfrs. Natural Gas Co., 23 A. 164, 166 (Pa. 1892); see also Stoddard v. Emery, 18 A. 339, 339 (Pa. 1889) (noting “Had there been nothing said in the contract on the subject, there would of course have arisen an implication that the property should be developed reasonably”).

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reasonably necessary to develop the proven reservoir.207 Later, a Pennsylvania court also held that lessees are bound by an implied covenant to protect against drainage.208 This duty to was stated in Kleppner v. Lemon as follows: “it is an implied condition of every lease of land for the production of oil therefrom that, when the existence of oil in paying quantities is made apparent, the lessee shall put down so many wells as may be reasonably necessary to secure the oil for the common advantage of both lessor and lessee.” Pennsylvania courts have also recognized an implied covenant to market.209 Unlike some other jurisdictions, in Pennsylvania, if an oil and gas lease is not clear about how post-production costs are to be allocated, the implied covenant to market does not require the lessee to absorb all those expenses.210

In Pennsylvania, damages are the generally accepted remedy for breach of lease covenants. In one case, the court noted that when the lessee breached the covenant to pay royalties, damages were the appropriate remedy, rather than forfeiture of the lease.

211 In line with most jurisdictions, Pennsylvania law generally abhors forfeiture of oil and gas leases for breach of a lease covenant.212

To date, it is unclear whether Pennsylvania has adopted the reasonably prudent operator standard. It appears that the Commonwealth has not, but instead has adopted the more subjective business judgment rule. The first case to address the issue was Kleppner v. Lemon, wherein the court stated: “Whatever ordinary knowledge and care would dictate as the proper thing to be done for the interest of both lessor and lessee, under any given circumstances, is that which the law requires to be done as an implied stipulation of the contract . . . . He is not bound to put down more wells than are reasonably necessary to obtain the oil . . . .”

213 Thus, it appeared to adopt the reasonably prudent operator standard. However, since Kleppner, in the line of cases following Colgan v. Forest Oil Co.,214 the court has only held the lessee to the more-subjective business judgment standard. In Colgan, the court held that where there is no proof of fraud or bad faith, the court deferred to the lessee’s business judgment and stated: “so long as the question is one of business judgment and management, the lessee is not bound to work unprofitably to himself for the profit of the lessor; and the parties must be left, as in other cases, to their own ways.”215 The court also prescribed the subjective business judgment standard in Young v. Forest Oil Co.,216

207 Keith B. Hall, The Application of Oil and Gas Implied Covenants in Shale Plays: Old Meets New, 32 ENERGY & MIN. L. FOUND. ANN. INST. PROC. § 8.01 p. 5 (2011), available at http://www.emlf.org/Content/images/mineral_titles/Sample%20Outline.Hall.pdf.

decided at the same time as Colgan. A few years later, in Barnard v. Monongahela Natural Gas Co., the court appeared to apply a limited business judgment standard to the lessee, stating: “We think it is well settled that the lessee has the same rights in regard to the locating of his wells as the landowner would have if doing the operating, but he cannot take advantage

208 Kleppner v. Lemon, 35 A. 109, 109 (Pa. 1896). 209 Iams v. Carnegie Natural Gas Co., 45 A. 54, 55 (Pa. 1899). 210 Kilmer, 990 A.2d at 1157. 211 Girolami v. Peoples Natural Gas Co., 76 A.2d 375, 377 (Pa. 1950). 212 Penn-Ohio Gas Co. v. Franks’ Heirs, 185 A. 280, 282 (Pa. 1936). 213 Kleppner, 35 A. at 109. 214 45 A. 119, 119 (Pa. 1899). 215 Id. 216 45 A. 121, 122 (Pa. 1899).

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of the fact that he has leases on adjoining farms so as to fraudulently deprive either of his lessors of his royalty or annual gas rental. The law of this position is found in Kleppner v. Lemon, as explained in the later cases of Colgan v. Forest Oil Co. and Young v. Forest Oil Co.”217

VII. ISSUES DURING EXPLORATION AND PRODUCTION

Again, as in Colgan and Young, the court in Barnard held that the lessors could not prevail over the lessee absent a showing of fraud or bad faith.


The Coal and Gas Resource Coordination Act218 gives coal operators a right to object to the issuance of oil and gas well permits for wells that are over or that will pass through coal deposits, whether or not currently mined. Pennsylvania case law fairly clearly establishes that owners of oil and gas estates that are severed or operated after a coal severance or lease owe damages to the coal operator in some form.219

As to wind energy development, the two largest concentrations of high wind resource areas in Pennsylvania are found along the Allegheny Front (Southwest Pennsylvania) and near the Lake Erie shoreline.

In addition, under the Oil and Gas Act, there are certain requirements for plat filings from both the coal operator and an oil and gas operator with the DEP in certain situations.

220


As both of these areas are in the Marcellus gas development area, there may be future conflicts between the operators of wind farms and the developers of oil and gas.

Development in the Marcellus Shale requires different technologies than have previously been utilized in Pennsylvania natural gas operations. For example, for Marcellus shale drilling, larger well pad sites are required due to the needs of hydraulic fracturing techniques, such as storage of large quantities of water.221

Pennsylvania has never formally adopted the Accommodation Doctrine. The rights of surface owners in Pennsylvania are derived from 1) lease agreement provisions, 2) limited statutory provisions under the Oil and Gas Act, and 3) Pennsylvania court decisions. In the case of a severed mineral estate, the surface owner generally will not be able to rely on any lease provisions, since the severed surface owner generally does not take part in the lease negotiations. This can be disastrous for a severed surface owner, who has no say in the placement of well sites, use and construction of roads, building of structures, use of injection wells, and burying of pipelines. In this instance, there are some limited

217 65 A. 801, 801 (Pa. 1907). 218 58 PA. STAT. ANN. §§ 501-518. 219 Chartiers Black Coal Co. v. Mellon, 25 A. 597, 598 (Pa. 1893). 220 Chapter 4F: Issues, Threats and Opportunities – Energy Development, DCNR, available at http://www.dcnr.state.pa.us/ucmprd2/groups/public/documents/document/d_000608.pdf (last visited Aug. 7, 2012). 221 Ross H. Pifer, The Impact of Drilling on Surface Owner Rights, in BEST OF OIL AND GAS LAW COLLOQUIUM (May 2011), available at http://www.legalspan.com/pbi/webcasts.asp?ItemID=20110701-150226-132127 (published by the Pennsylvania Bar Institute as PBI No. 6753; available at domain cited for a fee).

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statutory provisions under the Oil and Gas Act that can aid the severed surface owner. Under the Act, a permit is required from the DEP in order to drill a new well or alter an existing well, and along with the application, a plat must be submitted describing certain information pertaining to the proposed well, such as the name of the record surface owner.222 This plat must be sent by certified mail to the affected surface landowner, and the plat must also be mailed to “surface landowners or water purveyors whose water supplies are within 1,000 feet of the proposed well location.” Upon receipt of the plat, the surface owner has fifteen days to submit their objections and the basis of those objections to the DEP, who will then proceed to issue or deny the permit after the required fifteen days. In addition, the Oil and Gas Act contains statutory restrictions on the location of wells, such as a minimum set-back distance from existing buildings and water wells and courses.223 Similarly, if the well falls under the governance of the Oil and Gas Conservation Law, there are additional location restrictions. Finally, owners and operators are required to restore the surface of lands they use during drilling and plugging operations within nine months after completion of drilling or plugging.224

Recent Pennsylvania court decisions have also addressed the issue of surface use. In Belden & Blake v. Pennsylvania Department of Conservation and Natural Resources,

225 the Pennsylvania Supreme Court denied the DCNR the right to precondition or to unilaterally control the access rights of owners of severed oil and gas estates under Commonwealth-owned surface properties. The court upheld the rights of severed oil and gas estate owners to access their property through reasonable use of the surface. This decision bans efforts by surface owners to impose conditions on the severed mineral owners' rights to access their properties. The court recognized that surface owners who attempt to impose surface use conditions that damage the value of severed oil and gas estates may be subject to claims for the loss of that value. Belden places the burden on the surface owner to demonstrate the “reasonableness” of his request. Although common law does not allow severed surface owners to impose conditions on surface use, Pennsylvania courts still restrict severed mineral owners to only reasonable use of the surface estate. The mineral estate owner’s surface use right is restricted “to reasonable use justifiable to related activities essential to the orderly removal of the mineral rights.”226

Gas companies seeking land for natural gas storage must attempt to reach an agreement with the surface owner regarding payment for surface damages before any storage activity can take place. If no agreement is reached, a surety bond must be posted.

There has been legislation introduced into the Pennsylvania House to address severed surface owner concerns. House Bill 1155 would provide for such items as compensation for damages due to loss of land value, timber production, and agricultural production; requirement of a surface use and compensation agreement to the severed surface owner before oil and gas operations could commence; and bonding requirements on operators. This legislation was introduced on March 31, 2009, but there has been no activity on this bill since September 11, 2009.

222 58 PA. CONS. STAT. ANN. § 3211. 223 § 3215. 224 § 3216. 225 969 A.2d 528, 531 (Pa. 2009). 226 Babcock Lumber Co. v. Faust, 39 A.2d 298, 304 (Pa. Super. Ct. 1944).

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Hydraulic fracturing produces wastewater as a by-product of the recovery. The wastewater disposal methods most commonly used in Pennsylvania differ largely from other parts of the country. On average nationally, ninety percent of wastewater is disposed of in injection wells. The Marcellus Shale region, however, poses particular problems because the geology cannot accommodate large volumes of injected wastewater. Therefore, gas companies there have to ship large quantities of it elsewhere.227

The DEP is responsible for reviewing and issuing drilling permits, inspecting drilling operations, and responding to complaints about water quality problems. DEP inspectors conduct routine and unannounced inspections of drilling sites and wells statewide. Other agencies are directly responsible for monitoring the effects of drilling on water quality and aquatic life, as discussed above. Recently, House Bill 2350 was introduced, called the Injection Well Safe Water Act, to deal with some of the environmental concerns arising from the use of injection wells to dispose of hydraulic fracturing wastewater. The bill was submitted to a House committee for review on April 16, 2012, and no other action to date has taken place.

Additionally, about one-third of Pennsylvania’s fracking wastewater in 2011 was recycled for reuse in fracking, and about ten percent was disposed of by underground injection, which mostly took place in Ohio. In Pennsylvania, total reported wastewater volumes more than doubled from the first half of 2011 to the second half.

When it comes to liability for toxic torts and groundwater pollution from fracking, Pennsylvania courts do not uniformly apply the general rule. In Pennsylvania Coal Co. v. Sanderson, it was held that no liability attaches where pollution of a stream is caused by mining operations conducted in the ordinary and usual manner.228

As far as trespass issues involving fracking are concerned, no Pennsylvania case deals directly with this issue. For now, it seems that a hydraulic fracture would be viewed no different than a wellbore, so therefore an intrusion would be considered a trespass. Although not binding on the courts of Pennsylvania, the most recent case involving trespass and unconventional oil and gas operations is the Texas Supreme Court holding in Coastal Oil and Gas Corp. v. Garza Energy Trust,

The damages in the case were considerable. While the case has not been overruled, subsequent decisions have severely limited its application to similar fact situations, i.e. where the water, which was not polluted by the defendants, flowed naturally from the mine.

229

And pollution of water supplies is not the only environmental concern associated with unconventional drilling. On December 6, 2011, the DEP alerted companies involved in unconventional

which held that oil and gas drained by hydraulic fracturing that extends beyond lease lines does not bring liability for trespass, due to the rule of capture.

227 Press Release, Natural Res. Def. Council, Five Primary Disposal Methods for Fracking Wastewater All Fail to Protect Public Health and Environment (May 9, 2012), available at at www.nrdc.org/media/2012/120509.asp. 228 6 A. 453, 458 (Pa. 1886). 229 268 S.W.3d 1 (Tex. 2008).

http://www.westlaw.com/Link/Document/FullText?findType=Y&serNum=1886001937&pubNum=161&originationContext=document&vr=3.0&rs=cblt1.0&transitionType=DocumentItem&contextData=(sc.Default)�

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natural gas development around Pennsylvania that they must submit to the agency data on their facilities' air emissions for 2011. The reports were due March 1, 2012.

VIII. POST-PRODUCTION ISSUES

A. Lease Termination and Filing Requirements

Pennsylvania has no statute requiring that a lessee record a release of an expired oil and gas lease. An oil and gas lease automatically terminates unless drilling operations have commenced or if gas is being produced in paying quantities (or payment of shut-in). Equitable remedies, such as waiver and estoppel, are generally not available to avoid the automatic termination rule.230 Temporary cessation of production will not terminate an oil and gas lease,231

An oil and gas lease can possibly be terminated due to a foreclosure. Foreclosures in Pennsylvania are civil law suits initiated in the Court of Common Pleas and governed under Rules 1141 through 1150 of the Pennsylvania Rules of Civil Procedure. As previously stated, Pennsylvania is a race-notice state. If there is a mortgage or lien on the property that was filed before the oil and gas lease or memorandum was filed, the mortgage or lien will take precedence. Thus, in a foreclosure proceeding, the party acquiring the foreclosed property would do so as it existed on the date the mortgage or lien was filed.

but it is unclear under Pennsylvania law as to how long a period of nonproduction can qualify. Pennsylvania does not have any cases providing for the cure of terminated leaseholds based upon continuous production after termination of an oil and gas lease.

Leases can also be terminated in Pennsylvania due to abandonment by the lessee. In Pennsylvania, the essential element that distinguishing “abandonment from other grounds for divesting the rights of the holder of an oil and gas lease . . . is the intention of the holder to give up the lease. If he did not so intend, the case is not one of abandonment, however remise he may have been in the performance of his obligations.”232

A vested title cannot ordinarily be lost by abandonment in a less time than that fixed by the Statute of Limitations, unless there is satisfactory proof of an intention to abandon; where, however, an oil lease contains a grant of a right to mine for and remove oil for twenty years at a certain royalty, the right of the lessee is to explore for and determine the existence of oil upon the land, and, if none is found, such right ceases when the explorations are finished and the lot abandoned.

Other Pennsylvania cases expand on this:

233

A failure to proceed with the exploration for oil, after a test well provided for in a lease of oil land proves dry, is an abandonment, which will sustain a reentry by the lessor.

234

230 Lauchle, 768 F. Supp. 2d at 762.

In Calhoon v. Neely, based on the facts in that particular case, the court held that when the leased premises are found to be dry; the lessee thereafter removes all his machinery, leaving nothing but an oil tank to rot on the premises, and

231 Cole v. Philadelphia Co., 26 A.2d 920, 923 (Pa. 1942). 232 Girolami, 76 A.2d at 377. 233 Venture Oil Co. v. Fretts, 25 A. 732, 735 (Pa. 1893). 234 Aye, 44 A. at 556.

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asserts no rights until after nine years; and the premises have been leased to others who find oil thereon, there is a presumption the lease has been abandoned.235

Recent legislation has been introduced pertaining to release of oil and gas leases. House Bill 2320 would require lessees to supply lessors with a release of the lease in recordable form within thirty days prior to the termination or cancellation of an oil and gas lease. In addition, the bill provides for requirements for contents of affidavits of termination or cancellation that can be recorded in county deed offices. This affidavit would be filed if, after notice from the lessor to the lessee, the lessee fails to provide a timely release to the lessor. The notice from the lessor to the lessee has statutory requirements as to what needs to be included to put the lessee on proper notice. House Bill 2320 has been pending in a House committee for consideration since April 18, 2012.

B. Plugging and Abandonment Issues

The Oil and Gas Act governs the regulations concerning plugging. Section 1 of Title 58 of the Pennsylvania Statutes states that “Upon the abandonment or ceasing to operate or use any well which shall have been drilled for oil or gas, it shall be the duty of the person or persons interested in such well to plug the same.” This law creates a duty both for the operator of the well and the well owner, and any subsequent assignees of the operator and well owner. Section 2 provides the penalty for violation of this duty, which reads: “Any person violating the provisions of this act shall be deemed guilty of a misdemeanor, and shall be sentenced, upon conviction thereof, to pay a fine of not more than one thousand dollars, or to undergo an imprisonment for a period not exceeding six months, or both, or either, at the discretion of the court.” If an owner of land is injured due to a violation of the Act, the owner can plug the well himself, and then recover expenses for both the cost of plugging and the related injury from the responsible party in the well. Further, adjoining landowners of abandoned wells have rights as well. Section 8 provides as follows: “Whenever any owner or operator shall neglect or refuse to comply with the provisions of this act, the owner of or operator upon any land adjoining or contiguous thereto that upon which such violation may occur may enter, take possession of said abandoned well, and plug or cap it as provided by this act, and recover the expense thereof in an action or tort against the owner or operator whose duty it may have been to comply with the provisions of this act.”236

The DEP maintains a Well Plugging Program to plug abandoned and orphan wells where no responsible party has been identified. In 1992, the legislature amended the Oil and Gas Act to allow certain oil or gas wells abandoned before April of 1985 to be classified as orphan wells, which also gave the DEP the authority to plug orphan wells if landowners, leaseholders, and oil and gas operators have received no economic benefit from the well after April 18, 1979.

The statute extends the punishment for violation of this Act to any “person, firm, or corporation, or the agents thereof,” and states that the fine imposed will be applied to the use of the school district in which the abandoned well is located.

237

235 50 A. 967, 968-969 (Pa. 1902).

In order to fund the Well Plugging

236 See also Steelsmith v. Aiken, 14 Pa. Super. 226 (1900). 237 Pa. Dept. of Envtl. Prot., Orphan Oil and Gas Wells and the Orphan Well Plugging Fund: Fact Sheet (2010), available at http://www.elibrary.dep.state.pa.us/dsweb/Get/Document-82185/5500-FS-DEP1670.pdf.

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Program, surcharges are charged on drilling permit applications. The orphan surcharge is $200 for a gas well or $100 for an oil well. The abandoned well surcharge is $50. If a registered well has not been operated for a year and the well has an inactive status, the well is considered abandoned, and the operator must plug the well. The DEP’s website, as of the date of this paper, lists 2,121 wells as abandoned and 6,144 wells as orphaned.

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NORTH DAKOTA: THE BAKKEN

I. INTRODUCTION


The Bakken formation is the primary source of shale oil in North Dakota, potentially holding eleven billion barrels of recoverable oil.238 Because the Bakken produces mainly oil, its production increased massively in 2010 and 2011 with the increasing price of oil, making North Dakota the second largest oil-producing state in the Unites States as of March of 2012.239 Increased use of horizontal drilling and hydraulic fracturing increased Bakken production 130 times between 2000 and 2010 and resulted in an employment boom in North Dakota, particularly in the western portion of the state.240 The unemployment rate in North Dakota is at 3.3%, and oil companies are actually reporting that there are more jobs than people to fill them.241

The primary activity in North Dakota is in the western portion of the state, with sixteen out of fifty-three North Dakota counties having commercial production.

242 The boom began in the Bakken and also in North Dakota’s Three Forks shale formation in 2006.243 In the spring of 2012, there were over seven thousand producing wells in North Dakota, with another thousand capable of production.244

Trends in North Dakota seem to promote a pro-development stance. In terms of legislation, concurrent resolutions and a statute passed by the state legislature hail hydraulic fracturing as the source of increased economic growth in North Dakota and greater U.S. energy independence, as Governor Jack Dalrymple emphasized in a letter to the groundwater office of the Environmental Protection Agency.

245

238 Christopher Kulander, The States’ Legal Framework: Texas/ Louisiana Region American Law and Jurisprudence on Fracing, 5 ROCKY MT. MIN. L. INST. 3A, 16 (2011).

The letter urged continued state-by-state monitoring of hydraulic fracturing and injection practices. Recent regulations in North Dakota have also been enacted to regulate hydraulic fracturing.

239 Id.; Kasia Klimasinska, Shell’s Alaska Drilling Delayed by Bureaucracy, Republicans Say, BLOOMBERG (Aug.. 2, 2012), http://www.bloomberg.com/news/2012-08-02/shell-s-alaska-drilling-delayed-by-bureaucracy-republicans-say.html. 240 See Bakken Formation Oil and Gas Drilling Activity Mirrors Development in the Barnett, EIA (Nov. 2, 2011), http://www.eia.gov/todayinenergy/detail.cfm?id=3750. 241 Selam Gebrekidan, Shale Boom Turns North Dakota into No. 3 Oil Producer, REUTERS (Mar. 8, 2012), http://www.reuters.com/article/2012/03/08/us-oil-output-bakken-idUSBRE82714V20120308. 242 George A. Snell, III, Finding, Assessing, Running, and Examining the Local Records and Preparing the Chain of Title, 4 ROCKY MT. MIN. L. INST. 4, _ (2007). 243 Gebrekidan, supra note 241. 244 Oil and Gas Production Report, N.D. Indus. Comm’n (July 10, 2012); available at https://www.dmr.nd.gov/oilgas/mpr/2012_05.pdf. 245 Letter from Governor Jack Dalrymple, Chairman of the Indus. Comm’n of N.D., et al, to Cynthia Dougherty, Office of Ground Water & Drinking Water (Nov. 11, 2011), available at http://www.nd.gov/ndic/ic-press/IC-EPA-Letter.pdf.

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On the litigation side, recent decisions address North Dakota’s policy that non-payment of royalties is a sufficiently significant failure of consideration to void a lease; the level of due diligence necessary to provide notice to a record mineral owner for a surface owner to claim abandoned minerals under the state’s dormant mineral act; and the ownership of minerals between the low and high watermark of lands surrounding navigable waters.

B. Resources

Listed below are useful resources for practitioners of oil and gas law in North Dakota:

• www.NDRIN.com (online search for county records; most counties have at least some information available online; requires short sign-up and $25 per month subscription)

• www.blm.gov/mt/st/en/fo/north_dakota_field.html (regulatory information for federal lands in North Dakota)

• www.dmr.nd.gov/oilgas/ (Oil & Gas Division of Department of Mineral Resources of the North Dakota Industrial Commission; information regarding production statistics; permitting and regulatory forms and submissions; GIS map server)

• www.naro-us.org/Default.aspx?pageId=697391 (National Association of Royalty Owners’ discussion forum for North Dakota)

• www.legis.nd.gov/information/acdata/html/Title43 (Online Access to the Industrial Commission Article of the Administrative Code)

C. Definition of Minerals

1. Defining Oil and Gas

Oil and gas are statutorily defined in North Dakota to encompass all liquid hydrocarbons.246

2. How “Minerals” Are Construed in Conveyances and Leases

The Century Code provides that “gas” includes natural gas and any liquid hydrocarbon not defined by the statute as “oil.” “Oil” is defined as crude petroleum and other hydrocarbons produced from a well in liquid form, including distillate and condensate extracted from gas other than casinghead gas.

As in other northern shale states, the issue of which minerals are included in a grant or lease can be problematic in North Dakota, where transactions involving coal and coal mining might be construed to have covered oil and gas as well. North Dakota law addresses what minerals are included in a grant, reservation, or lease of certain denoted substances and “other minerals” by statute and by case law.

Conveyances and Leases: As to conveyances and leases, the Century Code adopts a type of the one-hundred percent rule by providing that a mineral conveyance is construed to convey all types of minerals unless expressly excluded, except clay and gravel.247

246 N.D. CENT. CODE § 38-15-02.

Conversely, only minerals included by name will be covered under a lease, regardless of using the words “all other minerals.” Those minerals

247 § 47-10-24.

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specifically named in a lease include their compounds and by-products. Note that this alters previous statutory law, which, as of 1955, provided that neither a lease nor a conveyance of minerals would be construed to convey an interest in coal or other certain minerals unless the intent to do so was specifically set forth.248 In 1957, the legislature amended the form of this statute, moving “leasing” into its own paragraph, but providing the same general rule as the 1955 statute.249 It was in 1983 that the statute was amended to provide for a presumption that a mineral deed conveys all types of minerals unless specifically limited. As the meaning of language in deeds is to be determined by reference to “statutory guidelines of contract interpretation, as then in existence,”250

Reservations – Christman and the Coal Problem: As to reservations of minerals in a deed or conveyance, statute provides that reservations in deeds dated after July 1, 1983 reserve to the grantor all minerals of whatever nature except those expressly excluded by name.

it is essential that a title examiner understand the shifts in the statutory provisions for mineral transactions.

251 This statute is in complete opposition to coal reservations as controlled by now-repealed sections 47-10-21 and -22, which required specific, accurate descriptions of the length, width, and thickness of any coal to be retained by the grantor in order to be effective. Without the specific description of the coal, the deed or transfer of property was “construed to transfer to the grantee named in such deed, all right, title, and interest to such property . . . notwithstanding such attempted reservation.”252

The problem created here for oil and gas interests is incidental, but potentially problematic, as deeds are to be interpreted by reference to statutory guides in place when the deed was made. If a pre-1983 “transfer of real property” reserved “coal and all other minerals” or “coal, oil, gas, and all other minerals,” but did not sufficiently describe the coal reserved, were the oil and gas reserved despite the failure of the coal reservation? Or did “all right, title, and interest to such property” indeed pass to the grantee? The North Dakota Supreme Court did not simplify the matter. It declared sections 47-10-21 and -22 to be unconstitutional, but provided a fact-dependent balancing test to determine case-by-case whether its holding would apply or the old statutes would stand.

Sections 47-10-21 and -22 were held unconstitutional in Christman v. Emineth,253 wherein the Supreme Court of North Dakota determined that “the classification inherent in [the former sections 47-10-21 and -22] was unreasonable, the discrimination resulting therefrom invidious, and the statutes therefore unconstitutional as being in violation of the equal protection clauses” of both the North Dakota and U.S. Constitution.254

248 Evangelical Lutheran Church v. Stanolind Oil & Gas Co., 251 F.2d 412, 418 (8th Cir. 1958).

North Dakota courts might or might not apply Christman to pre-1983

249 See generally, Reiss v. Rummel, 232 N.W.2d 40 (N.D. 1975). 250 McDonald v. Antelope Land & Cattle Co., 294 N.W.2d 391, 393 (N.D. 1980). For example, in Reiss, the conveyance of “all other minerals” through a deed executed prior to the 1983 statute did not include coal, because it was interpreted in light of the 1957 statute, which, like the 1955 statute, required specific enumeration of minerals to be conveyed, whether through a deed or lease. 251 § 47-10-25. 252 Olson v. Dillerud, 226 N.W.2d 363, 365 (N.D. 1975). 253 212 N.W.2d 543 (N.D. 1973). 254 Olson, 226 N.W.2d at 366 (holding that a mineral reservation of “oil, gas, and other minerals” did, in fact, reserve all minerals).

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reservations255

Whether a decision should be applied retroactively is a matter to be determined by the court. Three factors will be considered.

—meaning there is no bright-line rule as to when to apply the repealed statutes. Whether the repealed statutes apply (thus reserving only the specifically-described coal, and perhaps other minerals) or whether the current Code sections rule (thus reserving all minerals) will turn on whether a court applies Christman retroactively.

256 The first is whether the decision establishes a new principle of law;257

The second factor asks the court look to the rule’s history, purpose, and effect, and whether retroactive application would further the rule’s operation. The effect of the former rule was unreasonable, discriminatory, and unconstitutional,

if so, it will not be applied retroactively. This factor was specifically addressed by the North Dakota Supreme Court in Olson v. Dillerud, wherein the court determined Christman was not a new principle of law, because it followed a previous decision, rather than overruling clear precedent, and was foreshadowed through prior court disapproval of the old statutes, rather than being an issue of first impression. As such, the first factor favors retroactive application of Christman and a reservation of all minerals. The first factor should consistently favor retroactive application, as no facts peculiar to Olson weighed in the court’s evaluation.

258

The last factor, however, involves a weighing process based on specific facts of the case and the inequity potentially imposed on the parties by the retroactive application. The balancing test will consider the particular parties and facts surrounding the disputed reservation; these parties and facts will vary and be the source of inconsistencies. In Olson, the court found that imposing Christman retroactively would not be inequitable or create injustice or hardship,

and the purpose and effect of Christman was to prevent the promulgation of such unconstitutionality. Again, there is no reason to believe that the favor this factor shows towards retroactive repeal of the 1955 and 1957 statutes would vary, as it is not based on the facts of Olson.

259

As a result, a title examiner, mineral purchaser, or potential lessee in North Dakota should exercise special caution when examining or claiming a mineral interest derived from a pre-1983 reservation of “other minerals.” While the repealed statute was, indeed, coal-geared, its plain language indicates it could affect other minerals. Likewise, one should not rely on the present-day ownership of the coal when determining the owner of oil and gas in the event there is such a reservation in his chain

but the particular facts of each case surrounding a pre-1983 reservation may not warrant such a conclusion.

255 Id. at 370 (holding that the unconstitutionality holding in Christman applied retroactively, such that all minerals were reserved by deed, despite the deed containing specific reference to the repealed reservation statutes and being executed when those statutes were in place). 256 Id. at 369. 257 A new principle law is established when the decision overrules clear past precedent on which the litigants may have relied, or decides an issue of first impression whose resolution was not clearly foreshadowed. 258 Olson, 226 N.W.2d at 366. 259 The court emphasized that although retroactive application would completely deprive one party of mineral ownership, that party’s lease of the minerals provided for him to be paid a certain amount on the coal removed were he not proven to be the true owner of the minerals, yielding an equitable result.

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of title. If the reservation does not specifically state the mineral interest concerned, and the interest has not been merged with the surface through a judicial confirmation of the self-regulating Termination of Mineral Interest Act (see below), there is inherent uncertainty as to the effect of that reservation as to the concerned, unnamed mineral interest.


A. Generally

The Industrial Commission in North Dakota has authority and jurisdiction over regulation of oil and gas operations.260 It has the authority to promulgate rules pertaining to operations and production, enforce such rules, and make investigations as to compliance with the rules or disputes regarding them. The Commission issues permits and determines when exceptions should be allowed to its general spacing and location requirements. Additionally, as waste is prohibited in North Dakota, the Commission may control production by production allowables, limiting production such that the “premature abandonment” of wells is prevented.261

The Commission has promulgated detailed regulations governing oil and gas operations.

262

Operators are required to furnish certain reports to the Industrial Commission or State Geologist without request. These include completion reports; mining plans; injection reports, including the amount, source, and composition of waters injected; and production reports.

A bond is required to receive a permit for exploration and production. Unless an exception is granted, a minimum of three hundred feet is required between a proposed well and any lease boundary. The Commission has specific requirements for fluid and drilling mud pits, sealing off strata, protection of water sources, and strength of casing and tubing.

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The Commission also regulates the plugging and abandoning of wells and explicitly makes the owner of a well liable for plugging in accordance with the rules. North Dakota statute is unique in requiring plugging in a style that will confine all subsurface minerals to their strata, not just oil and gas.

Other reports may be requested and must be furnished.

264 Any pits used in drilling must also be leveled and restored in a reasonable time. Failure to adhere to the rules and regulations promulgated by the Commission may subject a person to civil penalties; if such violation is willful, statute provides that it is a class C felony.265

In general, the Commission has jurisdiction over matters pertaining to its regulations, and the courts defer to its findings frequently. The Commission can hold an administrative hearing on its own motion or on petition, and findings from the Commission are reviewed by the District Court.

266

260 § 38-08-04.

Upon

261 § 38-38-06. 262 N.D. ADMIN. CODE § 43-02-02-11 to -50. 263 §§ 43-02-02-22, -29 to -31. 264 § 43-02-02. 265 N.D. CENT. CODE § 38-08-16. 266 § 38-08-11.

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review, the Commission’s findings must be upheld if they are sustained by the law and by “substantial and credible evidence.”267 This standard is such that “a reasonable mind might accept [the evidence] as adequate to support a conclusion,” and is a lower standard than a preponderance of the evidence.268 The Commission’s findings of fact must be sufficient that a reviewing court can see the rationale for its decision, providing administrative expertise towards statute in a manner that allows reviewing courts the benefit of that expertise.269 As the Supreme Court of North Dakota is the primary appeals court in the state, and the court of appeals only hears cases occasionally assigned to it by the supreme court, further appeal from an appellate decision by the district court in these matters will go directly to the supreme court.270

B. Frack-Specific Regulations

An overview of hydraulic fracturing regulations in North Dakota actually begins in the Century Code, wherein the legislature has deemed hydrofracking an acceptable recovery process.271


The Industrial Commission deals with fracking in section 43-02-03-27.1 of the Administrative Code, where the Commission mandates the standards for matters such as well monitoring, strength and testing requirements on pressure valves, and thickness of casing. The section provides testing, size, and pressure minimums. Additionally, like Texas, North Dakota necessitates disclosure of hydraulic fracturing fluids—subsection (1)(g) requires that the operator or service company performing hydraulic fracturing must post on FracFocus any element pertaining to fracking fluid that the website makes viewable. This post must be made within sixty days of the fracking operations.

A. Records & Recording Acts

County clerks in North Dakota are required by statute to keep both grantor/grantee and tract indices.272 They may choose to keep separate indices for mortgages, deeds, and other miscellaneous documents.273

Merely searching the county records in North Dakota may not be sufficient to determine if a lease will be burdened by an existing lien. Searching the Secretary of State records will reveal if there is a tax lien against a property, but judgment liens do not have to be recorded in the county clerk records to create a lien on property in the county of the judgment.

Within tract indices, most county recorders keep a “miscellaneous” set of records for filing documents that had no legal description and could thus not be indexed.

274

267 § 38-08-14.

These liens attach when docketed by the court clerk, or, for property outside the county of the judgment, when transcribed to the court clerk of

268 Hanson v. Indus. Comm'n of N.D., 466 N.W.2d 587, 590 (N.D. 1991). 269 Gadeco, LLC v. Indus. Comm’n of N.D., 812 N.W.2d 405, 412 (N.D. 2012). 270 The North Dakota Judicial System, NDCOURTS.GOV, http://www.ndcourts.gov/court/brochure.htm (last visited July 20, 2012). Notably, there are full years that pass without any hearings by the court of appeals. 271 § 38-08-25. 272 §§ 11-18-07 & -08. 273 Snell, supra note 242. 274 § 28-20-13.

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that county. Per the title standards in North Dakota, a title examiner is not required to check with the bankruptcy court clerk for bankruptcy proceedings, but only to assess whether any petition or notice had been filed in the county records.275

Because parties to a conveyance have actual notice of its existence, recording does not affect the validity of a transaction as between the parties or others who have actual notice.

276 One dealing in real property is charged with notice of recorded instruments affecting its title.277 North Dakota is a race-notice state; as such, to have priority against prior unrecorded conveyances, a purchaser must pay fair value, be without notice of prior conflicting interests, and record first.278 Whether a subsequent purchaser is in good faith and lacks notice constitute findings of fact, but the ultimate decision of whether he acted in good faith is a conclusion of law guided by statutory provisions.279

Recording an instrument is notice to all persons of its existence; this is constructive or inquiry notice.

280 While a recorded instrument outside the chain of title will not give notice, once an instrument is recorded that vests title in the grantor of that instrument, it is no longer considered outside the chain of title.281 For an instrument to give constructive notice, it does not have to comply with every statute pertaining to the register of deeds and how instruments should be recorded, but it should comply substantially with the statutes that pertain to notice;282

Thus, under North Dakota law, if a deed is in a purchaser’s chain of title, but has an indefinite or ambiguous description of the lands involved, then it is not only constructive notice of the contents of the deed itself, but also puts a purchaser on inquiry notice.

those statutes are in Chapter 47-19 of the Century Code.

283 Likewise, a recorded instrument that appears to be a deed, but is intended to be a mortgage, provides notice to subsequent purchasers.284 A reservation in a recorded deed phrased “subject to the usual [realty company’s] oil and gas reservations” is sufficient to put a subsequent purchaser on inquiry such that he was not an innocent purchaser.285

However, since county recorders are required to keep tract indices, courts regard this as the only practical index through which instruments can be located; thus, if a document is recorded but incorrectly indexed, it is not “substantial compliance” that will give notice.

286

275 N.D. Title Standard 16-01.

In so holding, the Supreme

276 Magnuson v. Breher, 284 N.W. 853, 855 (N.D. 1939). 277 Schulz v. Hauck, 312 N.W.2d 360, 361 (N.D. 1981). 278 N.D. CENT. CODE § 47-19-41. 279 Swanson v. Swanson, 796 N.W.2d 614, 617 (N.D. 2011). 280 §§ 47-19-19, 1-01-25. 281 § 47-19-46. 282 Hanson v. Zoller, 187 N.W.2d 47, 54 (N.D. 1971). 283 State v. Rosenquist, 51 N.W.2d 767, 282 (N.D. 1952). 284 Merchants' State Bank of Fargo v. Tufts, 103 N.W. 760, 761 (N.D. 1905). 285 N. Pac. Ry. Co. v. Advance Realty Co., 78 N.W.2d 705, 715 (N.D. 1956) (holding that because a mortgagee had knowledge that the property was mortgaged subject to the reservation of minerals therein, the mortgage was only a lien on the surface, and a post-foreclosure sheriff’s sale only passed title to the surface). 286 Hanson, 187 N.W.2d at 56.

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Court of North Dakota emphasized the duty of parties of an instrument to protect their interests by ensuring that the instrument was properly recorded.

B. Dormant Mineral Acts and Marketable Title Acts

Like some other shale states, the North Dakota Legislature has made efforts to simplify title searches and locating owners of land and minerals. These efforts include the creation of a dormant mineral interest act and a marketable record title act. Whether these efforts have in fact simplified title searches and ability to locate land and mineral owners seems to be the object of some bemused debate, but an understanding of each is essential to effective title examination and leasing.

1. The Termination of Mineral Interest Act

The Termination of Mineral Interest Act, effective in 1985, covers oil, gas, coal, and all other minerals.287 This particular Act is self-executing, meaning nonuse for a requisite period of years will deem a mineral interest abandoned as a matter of law, without requiring judicial action.288 The Act provides that if a mineral interest goes unused for twenty years, it is deemed abandoned and vests with the owner of the surface, unless the mineral owner files a statement of claim. “Use” is defined in the statute, and includes, among other things, production, operations for production, leasing, and payment of taxes on minerals.289

A surface owner intending to claim the abandoned minerals must provide notice to the mineral owner of record by weekly publication in the county newspaper for three weeks and, if a reasonable inquiry can reveal the location of the title owner, the claimant must also provide notice by mail. However, if the mineral owner’s address is shown of record, the claimant need not conduct a search to determine if the address he mails notice to is in fact the mineral owner’s location. Recent litigation has reinforced this standard, holding notice mailed to a mineral owner’s record address to be effective without any inquiry as to the correctness of the address, sometimes in absurd circumstances.

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Perfecting title can be accomplished by providing prima facie proof of fulfilling the requisite steps to the district court in a quiet title action. After entering judgment for the claimant, which the

After notice is perfected, the mineral owner has a sixty-day savings period during which to claim the minerals.

287 N.D. CENT. CODE § 38-18.1-01 to -08. 288 Timothy C. Dowd, Clearing Title of Long-Lost Mineral Owners, 54 ROCKY MT. MIN. L. INST. 30-1, _ (2008). For a thorough explanation of the self-executing nature of the Act despite the additional statutory provisions allowing a surface owner to confirm title, see 1995 N.D. Op. Att’y Gen. L-44 (1995), wherein the Attorney General reaffirms the self-executing nature of the Act despite the availability of process to reassure a surface owner or lessee of solid title. 289 § 38-18.1-03. Note, however, payment of royalties to an unlocatable mineral owner trust will not constitute “use,” and the provision that paying taxes on the minerals will constitute “use” is likely pointless, as severed minerals are not taxed in North Dakota. Dowd, supra note 284. 290 Sorenson v. Alinder, 799 N.W.2d 797 (N.D. 2011) (holding that mailing notice to the mineral owners’ address of record was sufficient to fulfill the statute, even though the owners had died decades before); see also Sorenson v. Felton, 793 N.W.2d 799, 802 (N.D. 2011) (providing that, because a reasonable inquiry was only required when the mineral owner’s address was not shown of record, the presence of the mineral owner’s address in a recorded representative deed precluded need for further investigation).

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district court must do if prima facie proof is established, a mineral lessee is deemed a bona fide purchaser, and, in the event the judgment is vacated, the lease will still be effective, and the lessee will have no liability for payments rendered. In the event the concerned minerals have been leased by way of the statutory unlocatable mineral owner trust, a surface owner acquiring the minerals through this Act may recover the funds held in trust. Not surprisingly, minerals owned by governmental units are not subject to abandonment by non-use.

2. The Marketable Record Title Act

The Marketable Record Title Act291 is another legislative attempt to “simplify and facilitate real estate title transactions” such that leaseability and alienability may be increased.292 Under this Act, a person who is legally able to own property, has an unbroken chain of title for twenty years, and is in possession of the lands he is claiming will be deemed to have marketable title. An “unbroken chain of title” is defined by statute to mean the county records where the land is located reveal a transaction that purports to vest title in the owner or his immediate or remote grantors, and there is nothing of record purporting to divest him of such.293

Thus, to defeat the title of one in possession of property and having a title transaction of record purporting to vest the property in him, an adverse claimant must file notice of his claim within twenty years from the recording of the possessor’s title transaction. Once the twenty-year period has elapsed, possession can be proved by filing one or more affidavits in the county records. As with the Termination of Mineral Interest Act, the Marketable Record Title Act will not affect the interests of the state- or federally-owned property.

With respect to the Act, once mineral interests have been severed from the surface estate, neither is capable of being possessed through the possession of the other.294

C. Inheritance

As such, a title examiner should be aware that a holder of marketable title of the surface as provided by this Act will not necessarily hold minerals through the same; a quiet title action in the district court may be required to confirm title in such an owner via the Termination of Mineral Interest Act.

For purposes of determining title of interests that pass through intestate succession in North Dakota, a title examiner should look to chapter 30 of the Uniform Probate Code.295

291 §§ 47-19.1-01 to -11.

However, before looking to the Probate Code, a title examiner must determine which statutory scheme applies to the owner in question, as which scheme used will depend on date of death: 1) after January 1996, 2) from July 1, 1975 to December 31, 1995, and 3) prior to 1975. Prior to 1975, there were several amendments to the intestacy laws in North Dakota, so a title examiner should evaluate a descent in this time frame

292 § 47-19.1-10. 293 § 47-19.1-02 (providing also that such a transaction can be by direct conveyance, court decree, will, intestate descent, or other enumerated transaction). 294 N. Pac. Ry. Co., 78 N.W.2d at 719. 295 §§ 30.1-04-01 to -21.

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with special caution. The particular sections within the Probate Code provide examples and illustrations to aid in understanding of each of their provisions.296

The subsequent provisions of the chapter provide additional details for intestate descent. For example, if an heir is related to the descendent by two lines, he is still one heir for the purpose of inheritance; likewise, an heir who is a half-blood relative counts as one heir. A parent-child relationship is not dependent on the marital status of the parents. An adoptive child-parent relationship is regarded as a natural one, and an adoption will typically terminate the inheritance rights of the gestational parents. Dower and curtesy have been abolished by statute in North Dakota.

The first three sections of the chapter illustrate the basic pattern of inheritance, providing that certain dollar amounts of the estate go first to the surviving spouse, then to other heirs, with the dollar amounts varying based on existence of certain types of heirs.

Nuances of inheritance under North Dakota law to be aware of also include the Elective Share of the Surviving Spouse and the Anti-Lapse Statute. Under Chapter 30.1-05 of the Century Code, enacted by the legislature to protect a surviving spouse from destitution by disinheritance,297 a surviving spouse is entitled to take an amount equal to fifty percent of the decedent’s augmented estate. This right is separate and distinct from any rights under a will, but may be waived by clear express waiver in a qualifying prenuptial agreement.298 The augmented estate generally includes the decedent’s net probate estate; the decedent’s gratuitous transfers to donees other than the surviving spouse; the value of the surviving spouse’s property, to the extent it came from the decedent; and the value of property transferred by the surviving spouse to donees, to the extent the property came from the decedent.299 The North Dakota Anti-Lapse statute provides that if a grandparent-devisee fails to survive the grandchild-testator, the issue of the deceased grandparent-devisee who survives the testator by 120 hours takes in place of the grandparent-devisee.300

D. Reservations/ Exceptions to a Third Party

Determining the effects of an attempted reservation to one who is not a party to a conveyance has complicated title examination in many jurisdictions. The North Dakota Supreme Court may have abandoned the common law rule when it held that “reservation or exception can be effective to convey a property interest to a third party who is a stranger to the deed or title of the property, where that is determined to have been the grantor’s intent.”301

296 See § 30.1-04, Ed.’s Notes; §§ 30.1-04-01, -02.

In so doing, the court emphasized the contracting parties’ intent. It also cited statutory law, Code section 47-09-17, stating that a “present interest and

297 In re Estate of Zimmerman, 579 N.W.2d 591, 595-96 (N.D. 1998). 298 Id. (noting that the prenuptial agreement must meet certain formal requirements and either be a waiver of “all rights” in the estate of the spouse or a complete property settlement). 299 § 30.1-05-02. 300 § 30.1-09-05. 301 Malloy v. Boettcher, 334 N.W.2d 8, 9 (N.D. 1983) (rejecting the common law rule stated in Stetson v. Nelson, 118 N.W.2d 685 (N.D. 1962), that a reservation or exception in a conveyance cannot operate as a conveyance to a third party who is a stranger to the title or deed).

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the benefit of a condition or covenant respecting property may be taken by any natural person under a grant although not named a party thereto.”

However, Malloy and the “rule” associated therewith are complicated by the facts of the case and by its three concurring opinions, which seem to limit its application. In Malloy, the grant was from a man to his daughter, reserving an interest to his wife. Both the husband and wife executed the document, although the wife owned no interest in the property conveyed. Concurring opinions emphasize that the wife joined in the grant and, because of the laws of inheritance in North Dakota, and the clear interest of a wife in her husband’s property, she was a “necessary party” to the instrument.302

In all, the sweeping language quoted above by the Chief Justice in Malloy would indicate that a reservation/ exception to a third party would be valid in any situation. But, going forward, it is unclear whether, because of the concurring opinions, Malloy will be applied so liberally, or if it will only be applied to a husband/ wife scenario—and even then, perhaps only when a grantor’s spouse is a party to the deed or title to the property. Until the law is clarified, a title examiner can reliably recognize a third-party reservation only if the reservation is in favor of a spouse who is a named party to and who executes the instrument. In other situations, but especially where the third party is not a spouse of the grantor, the examiner should request stipulations of interest from all possible claimants.

One concurring justice felt that it was a stretch to say that a necessary or interested party could actually be a stranger to title.

IV. LEASING


The procedure for leasing state-owned lands may be of particular importance in North Dakota, where patents or conveyances issued by the state on or after March 13, 1939 reserved a portion or all of the mineral estate.303 From March 13, 1939 through February 19, 1941, a reservation of minerals by the state included a five percent oil and gas reservation. From February 20, 1941 through June 27, 1960, the same rule applied, except that the reservation served to retain fifty percent of the minerals. Since June 28, 1960, any transfer of original grant lands by North Dakota has reserved all minerals. The provisions differ for non-grant lands.304 The procedure for leasing from a governmental body is prescribed by statute.305

1. Townships and Cities

“The governing body of any township, city, school district, or park district in this state may lease the grounds or lands of such political subdivision, or any part thereof” 306

302 Malloy, 334 N.W.2d at 11 (Pederson, J., concurring specially).

for oil and gas exploration for a term not exceeding ten years, provided the lease not interfere with the primary purpose for which the

303 N.D. Title Standard 2-02.1, 2-02.2, 2-02.3-01. 304 Id. at 2-02.3-02.1 & 2-02.3-02.2. 305 §§ 38-09-01 to -20. 306 § 38-09-02.

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lands are currently used and occupied. The lease may allow pooling by the lessee. No drilling is allowed within one hundred feet of any public building.

2. Counties

The Board of County Commissioners is the primary source for leasing county lands or lands burdened by delinquent taxes. Statute defines some of the processes and minimum provisions for leasing county lands, but also allows for the Board of County Commissioners or governing body of any political subdivision to generate its own rules for leasing, so one desiring to take a government lease should check the local rules to ensure compliance.

Failure to comply by the statutory leasing provisions could result in lease termination, subject to a few exceptions enumerated by statute. A county desiring to lease its lands must advertise such and make the lease at the office of the county auditor or clerk. Offers and bids by potential lessees can be made in writing or orally at the time of leasing, and they must be made for the minimum rental as provided by statute and any additional bonus offered. The winning bidder is required to pay the first year’s rental and any bonus offered at the time of leasing, and a lease will not be made otherwise.

Minimum provisions for the lease are defined by statute, but may be inconsequential in the modern market, as they provide for no less than a one-eighth royalty and a $.25 per acre deferred drilling payment.307

3. State

This is likely an area where local rules will dominate. No lease may provide for a primary term of less than five years.

The notice and leasing requirements for state minerals are statutorily-derived and are very similar to those for county lands. The Board of University and School Lands controls the administration of state minerals, as such, one should look to the Board’s chapter of the Administrative Code.308

B. Of Roads

Leases are to have a maximum of 160 acres and must have a primary term of five years, with a royalty ranging between one-eighth and one-sixth. While there is no pooling provision in the lease form sometimes used by the Board, the Board is authorized to allow for pooling. The form contains fairly typical offset and reporting requirements. Any assignments of a state lease must be approved by the Board.

In North Dakota, the general rule regarding ownership of streets and highways is that the abutting owner owns to the center of the road, unless the contrary may be shown.309

307 § 38-09-18.

Stated more specifically, “In the absence of a statute expressly providing for the acquisition of the fee, or of a deed from the owner expressly conveying the fee, when a highway is established by dedication or

308 N.D. ADMIN. CODE § 85-06-06. 309 N.D. CENT. CODE § 47-01-16.

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prescription, or by the direct action of the public authorities, the public acquires merely an easement of passage, the fee title remaining in the landowner.”310

Thus, as to city roads, when a street was dedicated in the common manner of platting and acceptance by city, the abutting owner retained the fee simple to the center and granted only an easement.

311 Moreover, when a landowner conveyed two strips of land adjacent to a highway to the county using fee granting language and a warranty deed, the right granted was still only an easement, as the county only had an easement in the existing highway, and the purpose of the grant—expanding that highway—could be accomplished through an easement.312

Conversely, the statute granting the eminent domain proceedings may alter the general rule in some cases. When the extent of the title taken by eminent domain depends on the statute conferring that power, that statute will be strictly construed; if the type of title to be taken is not specifically stated, only what is reasonably necessary to accomplish the statute’s purpose is acquired.

In that particular case, the title to the underlying oil and gas remained in the abutting landowner-grantor.

313

Thus, when an Act granting eminent domain powers used the words “purchase,” “title,” and “vested” throughout, there was a legislative intent that a fee simple be acquired in certain lands, rather than just an easement.

314 That same Act was construed nineteen years later in Wallentinson v. Williams County to grant rights in fee simple determinable to the county, including the right to lease for oil and gas. However, the statute also authorized the highway commission to re-vest title in the people who granted it when such rights became no longer necessary for purposes taken. Thus, when a statute was enacted in 1953 providing that oil and gas were not essential for highway purposes, and that any such rights were thereby vacated and returned to persons from whom they were taken,315

These nuances can create difficulties, at the least, for title examiners and potential lessees. Determining the classification of city streets created through a dedication is relatively simple, requiring only a review of the dedicating instrument for any evidence that rebuts the presumption that only an easement was granted. However, as shown in Wallentinson, roads granted through eminent domain powers are more complicated. The Session Laws referred to therein could imply, at the most, that any lands taken for roadway purposes took a determinable fee in the surface only, and the minerals from such either have been re-vested or remain in the grantors; at the least, it mandates that any minerals acquired (1) prior to 1953, (2) by a taking for highway purposes, (3) under a statute allowing for the re-

the title of the oil and gas returned to the grantors of the streets or their heirs and assigns. The statute also provided that the return of the minerals was subject to existing agreements, so a mineral lease that had already been made by the county was unaffected.

310 Casey v. Corwin, 71 N.W.2d 553, 555 (N.D. 1955). 311 Dacotah Hotel Co. v. City of Grand Forks, 111 N.W.2d 513, 515 (N.D. 1961). 312 Lalim v. Williams County, 105 N.W.2d 339, 344 (N.D. 1960). 313 Wallentinson v. Williams County, 101 N.W.2d 571, 575 (N.D. 1960) (stating “In eminent domain, therefore, that construction must be adopted which leaves the owner with the greatest possible estate, in the event of uncertainty or indefiniteness in the statute”). 314 State Highway Comm'n v. State, 297 N.W. 194, 195 (N.D. 1941). 315 Laws 1953, c. 177, § 100.

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vesting of lands once the purpose they were taken for had ended, are not owned by the county or state, but owned by the original grantees or their heirs and assigns. Until such determination is made, title examiners and potential lessees should exercise caution in leasing lands under highways.

C. Lands under Waters

1. Generally

Generally, ownership of minerals underlying waters in North Dakota is determined by whether the waters are navigable. North Dakota acquired title, in trust for the public, to all lands under its navigable waters from the United States when it became a state.316 Thus, the state owns the fee in all lands under its navigable waters—this includes the oil and gas.317 The boundary of such ownership is the water line, not the meander line.318 Given the shifting nature of waters and tides, measuring ownership boundaries in lands abutting waterbeds can cause confusion. There has been significant debate over this issue in North Dakota,319

Conversely, if waters were non-navigable when North Dakota entered the United States, the United States retained ownership in the lands underlying.

and it is one source of recent oil and gas litigation (see below).

320 There was no constitutional declaration regarding the ownership of the beds of non-navigable waters in North Dakota.321 Thus, when lands surrounding non-navigable waters were patented by the federal government, the common law rule that a riparian owner of non-navigable waters owns out to the center applied, unless the conveyance provided otherwise.322 As such, the general rule in North Dakota is that owners of title to land bordering a non-navigable lake, river, stream, or the like own to the center of the waterbed.323 The boundaries of these lands are determined by “extending from each end of their respective meander lines, lines converging to a point in the center of the waters.”324

Thus, to determine ownership under a waterbed, one must determine whether it was navigable at the time of North Dakota’s admission to the United States, which is a federal question.

325 “A legislative declaration that all meandered lakes are navigable will not make them so if they are not navigable in fact.”326

316 N.D. Const. art. I, § 8, cl. 3.

Absent a legislative determination of navigability, the presumption is in favor of

317 J.P. Furlong Enter., Inc., v. Sun Exploration & Production Co., 423 N.W.2d 130, 132 (N.D. 1988). 318 In re Ownership of Bed of Devils Lake, 423 N.W.2d 141, 143 (N.D. 1988). 319 State ex rel. Sprynczynatyk v. Mills, 592 N.W.2d 591, 592 (N.D. 1999) (“Mills II”) (determining that the state’s rights extend to the ordinary high watermark, which is determined by the line reached by the water when the river is “ordinarily full and the water ordinarily high,” based on the lake or river’s current conditions, despite artificial interference); see also Devils Lake, 423 N.W.2d at 143. 320 Ozark-Mahoning Co. v. State, 37 N.W.2d 458, 468 (N.D. 1949). 321 State v. Brace, 36 N.W.2d 330, 334 (N.D. 1949). 322 United States v. Vesterso, 828 F.2d 1234 (U.S. Ct. App., 8th Cir. 1987). 323 Brace, 36 N.W.2d at 334; Brignall v. Hannah, 157 N.W. 1042, 1045 (N.D. 1916); see Ozark-Mahoning Co., 37 N.W.2d at 467 (holding that if waters in a state were not navigable at the time the state was admitted to the United States, the title to the lands underlying the waters remains in the United States). 324 Ozark-Mahoning Co., 37 N.W.2d at 472. 325 Id. at 468 (applying federal law to determine a water’s navigability). 326 Brace, 36 N.W.2d at 332-33.

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non-navigability.327 Factors courts have considered when determining the navigability of a body of water include evidence that use had been or could be made for trade or travel, habitability for fish, suitability for purposes of pleasure, and presence of inlet or outlet.328

2. Changes in the Riverbed

Rivers that have been deemed navigable include the Missouri River, Yellowstone River, Devils Lake River, Red River, and James River; the Heart River and Little Missouri River have both been deemed non-navigable.

Changes in the direction of a river, gradual or sudden, can change the boundaries of lands; North Dakota deals with the results of these changes through statute and case law, and in these cases, the navigability of a body of water is unimportant. A brief summary of the types of changes can be found in J.P. Furlong Enterprises, Inc., v. Sun Exploration & Production Co.:

“Accretion” refers to gradual deposit and addition of soil along bank of water body caused by gradual shift of water body away from accreting bank, while “erosion” refers to gradual loss of soil along bank of water body caused by gradual encroachment of water into eroding bank. “Avulsion” refers to sudden inundation or sweeping away of land resulting from sudden change in course of water body. “Reliction” technically refers to sudden baring of land resulting from sudden change in course of water body; however word is also commonly used to describe gradual receding of water resulting in gradual baring of previously submerged land.329

Statute provides that when accretion occurs, the newly-formed lands belong to the owner of the bank, subject to any right-of-way existing on the bank.

330 This statute applies to ownership of oil and gas as well.331 When a riparian owner conveys his land, there is a presumption that the conveyance includes accretion attached thereto, but the presumption may be rebutted by a clear intent to separate the accretion from the upland.332

The opposite process is also provided for in the Century Code. If a stream forms a new course, abandoning its former waterbed, the owners of the lands lost take the lands abandoned, by way of indemnity.

Once accretion occurs, each owner will acquire a portion of the newly-formed shore line in the same proportions as he had owned before.

333 The purpose of this statute was to “compensate former owners of the new riverbed for loss by bestowing upon them ownership of the abandoned bed in a quantity proportionate to their former ownership.”334

327 Note that the statutory definition of navigability for determination of state ownership of the actual water in lakes and rivers, N.D. CENT. CODE § 61-15-01, does not apply. Brace, 36 N.W.2d at 322 (holding that the state legislature cannot adopt a rule that would destroy a title vested by federal grant).

Again, there is no distinction between treatment of the surface or minerals, so this statute applies to the proportionate ownership of oil and gas as well. This doctrine of reliction will

328 Ozark-Mahoning Co., 37 N.W.2d at 491. 329 423 N.W.2d at 133. 330 N.D. CENT. CODE § 47-06-05. 331 J.P. Furlong Enter., Inc., 423 N.W.2d at 140. 332 Jennings v. Shipp, 115 N.W.2d 12, 14 (N.D. 1962). 333 § 47-06-07. 334 Kim-Go v. J.P. Furlong Enter., Inc., 460 N.W.2d 694, 696 (N.D. 1990).

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not be inapplicable to determine new boundaries of land simply because the impermanent nature of the varying water level.335

Ownership of lands after avulsion is also governed by statute. If a river or stream “carries away by sudden violence” carries away a discernible and considerable part of a bank to another bank or another part of the same bank, the owner of the lost land may reclaim it within a year that the owner of the land it joined takes possession thereof.

336 North Dakota is one of only few states rejecting the common law rule that avulsion does not change ownership boundaries.337

3. Boundary Determinations in Navigable Waters

With recent drilling activity in North Dakota and the potential profits associated with mineral ownership, a question has arisen regarding the ownership of shorelines—the area between the low watermark and the high watermark338

The Controversy: North Dakota statute provides that the owner of the upland of a navigable stream or lake “takes to the edge of the lake or stream at low watermark” unless his grant provides otherwise.

—in navigable waters. Statutory and older case law indicate the low water mark is the boundary for riparian landowner title, while newer North Dakota Supreme Court cases not only complicate the matter, but blatantly refuse to address the issue of fee ownership.

339 This concept was echoed by the North Dakota Supreme Court in Hogue v. Bourgois,340 which provides that an abutting landowner to a navigable stream “owns title to the low water mark.” However, the court later qualified this statement in J. P. Furlong, stating “Whether North Dakota has limited its title to the area below the low watermark has not been decided.”341 Six years later, in Mills I, the court reinforced this qualification, and further stated that “Any statements in our prior decisions that ‘the owner of the lands riparian to a navigable stream owns title to the low water mark’ are dicta.”342

These assertions appear in complete opposition to the Century Code section above and to the court’s own prior holdings. In Mills I, the court emphasized that those prior holdings, including Hogue, did not interpret the statute as it pertained to competing interests of the state and riparian landowners in the shore zone. It further justified its apparent rejection of legislatively-imposed statute based on the term “takes” and on the equal footing and public trust doctrines. It determined the word “take” was ambiguous, and thus used extrinsic comparisons, including the statute providing that an abutting owner “owns” the fee to the center of a road, to hold that “take” did not necessarily refer to absolute fee

335 Devils Lake, 423 N.W.2d at 145. 336 § 47-06-06. 337 Jannie L. Bricker, River Channels and Lake Beds: Legal Issues in Boundaries and Ownership, 57 ROCKY MT. MIN. L. INST. 28-1, _ (2011). 338 The “watermark” has been described as the state supreme court to “mean what its language imports,” such that a high watermark would be the limit of the bed of water, so continuous that it destroys regular land vegetation. Devils Lake, 423 N.W.2d at 144-45. 339 § 47-01-15. 340 71 N.W. 2d 47, 52. 341 J.P. Furlong Enter., Inc., 423 N.W.2d at 132. 342 State ex rel. Sprynczynatyk v. Mills, 523 N.W.2d 537, 540 (N.D. 1994) (“Mills I”).

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ownership. It used the equal footing and public trust doctrines to determine that a state could not completely abdicate its ownership to the high watermark, where the waters—under which the state has fee ownership—sometime extend. Because of the incongruous nature of the statute compared to the state constitution and the statute’s initial focus on the grant under which the riparian land is held, the court concluded that the statute was not absolute, but merely a “rule of construction” to aid in determining boundary lines of such lands. The court reaffirmed its findings of state “rights” up to the high watermark in Mills II.

To complicate matters, reliction and accretion, described above, gradually change the shoreline. The North Dakota Supreme Court dealt with these processes in 1988 in Devils Lake, wherein it determined that the ordinary high watermark forms the boundary of land as an incident to reliction and accretion. In that case, reliction changed the ordinary high watermark and reduced the amount of state-owned land over time, and the state attempted to assert that the changing nature of the waterbed did not affect its original ownership line. The court in this case consistently used the high water mark as the boundary for the lands, and determined that the presence of vegetation, particularly decades-old trees, evidenced the extent of the high watermark and thus the state’s ownership.

These cases indicate that the mineral and surface ownership above the low watermark and below the high watermark is as of yet undetermined. One can be certain that, unless a conveying instrument provides otherwise, the riparian owner retains absolute ownership down to the high watermark, and the state retains absolute ownership up to the low water mark,343 as based on current conditions, even artificial ones.344 However, absolute ownership of the shore line between them is not vested in either; rather, each has correlative, coexistent, overlapping interests, with the riparian owner’s being something more than the right of access to the water.345

It is notable that none of these cases involved mineral ownership or payment of royalties after leasing and production in the shoreline. The North Dakota Supreme Court observed the limited applicability of its ruling, stating “in this case no specific right or claim for use of the shore is contested. The shore zone presents a complex bundle of correlative, and sometimes conflicting, rights and claims which are better suited for determination as they arise . . . .” Therefore, not only is the issue of mineral ownership in a shoreline unclear, but what effect a shifting high or low watermark due to accretion, reliction, or submersion would have on a previously-drilled well is even more uncertain.

The Effect – Present-Day Litigation: On March 12, 2012, a lawsuit was filed by private landowners among the Missouri and Yellowstone rivers against the state, the Board of University and School Lands, and the Trust Lands Commissioner.346

343 Mills I, 523 N.W.2d at 544; 2004 Op. N.D. Att’y Gen. L-33, *1 (2004).

The plaintiffs, who are seeking class action status, accuse the defendants of unlawfully taking their mineral interests, saying the high water mark boundary measure is outdated and incorrect. Asserting millions of dollars in lost mineral interests, the plaintiffs claim that

344 Mills II, 592 N.W.2d at 592. 345 Mills I, 523 N.W.2d at 544. 346 Joe Carroll, North Dakota Shale-Oil Boom Rushes Past Riverbank Dwellers, BLOOMBERG (Mar. 15, 2012), http://www.bloomberg.com/news/2012-03-15/north-dakota-shale-oil-boom-rushes-past-riverbank-dwellers.html.

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the low water mark has always been the measure of ownership for navigable waterways. The case has had little activity since the beginning of August, but is scheduled for a status conference in September. Pending resolution of this claim, oil companies have been double leasing and placing millions of unpaid royalties in escrow.

D. From Unlocatable Mineral Owners

North Dakota statute provides a means by which the interests of an unlocatable mineral owner may be leased without liability on the part of the lessee.347

While the ability to develop the interests of missing mineral owners without fear of liability constitutes an obvious advantage for lessees and cotenants alike, the statute is not specific in its requirements, and case law is lacking. The statute does not define “due diligence,” proof of which is required to establish the trust, or what constitutes when an owner’s location can be “reasonably” ascertained. It is possible that a reasonable search as defined by the Termination of Mineral Interest Act would suffice, given the similarity of the purpose of the statutes. In that case, a reasonable inquiry as to the address of a mineral owner involves searching the county records, court’s records, the social security death index, and one or more public internet databases.

If the owner’s place of residence and present location cannot be reasonably ascertained after a diligent search, an owner of the leasehold, mineral, or royalty interest under the same tract may ask the district court in that county to appoint a trustee for the missing owner. The petitioner is then relieved of liability for payments based on the concerned interest. Half of the funds received by the trustee go to pay for the trust’s administration, said trust remaining in force until the mineral owner claims his interest, which can be done by filing notice in the county records.

348

E. From Concurrent and Successive Owners

However, as no case law has developed regarding the Unlocatable Mineral Owner chapter, the level of diligence necessary may prove to be greater or lesser than that prescribed by the Termination of Mineral Interest Act and will likely be an issue for the fact finder.

As in other states, co-tenancy is the default form of concurrent ownership in North Dakota.349 Likewise, North Dakota sides with the majority of states that have held that each cotenant has the right to drill for and produce oil and gas under the commonly-owned lands without the permission of the other cotenants.350

347 §§ 38-13.1-01 to -04.

On such production, the producing tenant must account to the others for the share of the net profits attributable to their fractional interests. Likewise, a cotenant may lease his undivided interest without the consent of the others, but such a lease is only valid as to the leasing cotenant’s undivided interest and will be ineffective as to the interests of the others. A lessee under such a lease will become a cotenant with the other tenants.

348 § 38-18.1-06. 349 See § 47-02-08. 350 Schank v. N. Am. Royalties, Inc., 201 N.W.2d 419, 429 (N.D. 1972). Note, however, when owners of tracts or interests within a spacing unit do not own undivided interests under the same tract of land, no co-tenancy exists. Come Big or Stay Home, LLC v. EOG Res., Inc., 2012 ND 91,¶ 19, _ N.W.2d _ (N.D. 2012).

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Joint tenancy in North Dakota is defined by statute, removing such tenancies from the common law scope of the four unities.351 Section 47-02-06 defines a joint tenancy with rights of survivorship as an interest owned by several persons in equal shares created by a single will or transfer that clearly expresses an intent for of ownership with rights of survivorship. A straw man is not necessary to create rights of survivorship between two parties—a grantor may create a valid joint tenancy by conveying an interest to himself and another.352

North Dakota has also removed the termination of a joint tenancy from typical common law rules. Severance of a joint tenancy may be accomplished by partition, by alienation, by sale under execution of a judgment lien, by mutual agreement, and by court decree, as in divorce proceedings. However, a mere judgment lien without execution will not serve to sever the joint tenancy. Likewise, the North Dakota legislature, in an attempt to avoid automatic joint tenancy termination in ambiguous situations, enacted a statute providing that a contract for deed for the sale of real property signed by all joint tenants will not sever the sellers’ joint tenancy relationship unless it is specifically provided for in the contract.

353

A husband and wife as co-owners cannot convey or encumber homestead property without both acknowledging the conveyance.

354 The North Dakota Supreme Court has applied this rule to apply to mineral estates, making instruments that are not executed by both husband and wife and acknowledged before a notary void between the original parties and subsequent grantees.355 North Dakota law does consider a mineral lease a “conveyance,”356

North Dakota follows the majority of states in holding that a life tenant may not take oil or gas or make a valid mineral lease on the property without ratification of the remainderman.

so it is very likely a valid lease will require execution by both the husband and wife.

357

F. Effects of Foreclosure on a Lease

As with the majority of states, the bonus, royalty, and income from production are considered corpus and are retained for the remainderman, to be paid on the life tenant’s death; the life tenant receives rental payments and any interest derived from the corpus during his life. Whether North Dakota will adopt the “open mines doctrine” is uncertain.

North Dakota is a lien-theory state.358 Royalty and mineral interests, whether accrued or not, are deemed real property in North Dakota.359

351 Renz v. Renz, 256 N.W.2d 883, 885 (N.D. 1977) (explaining that the four unities were never required under North Dakota law, and that statutory Joint Tenancy likely only requires the two unities of title and time).

As such, when a mortgage is executed on land by a

352 § 47-10-23. 353 § 47-19-54. 354 § 47-18-05. 355 Hoffer v. Crawford, 65 N.W.2d 625, 628 (N.D. 1954). 356 1A Summers Oil and Gas § 9:27 (3d ed.). 357 Eide v. Tveter, 143 F. Supp. 665, 671 (D.N.D. 1956); see also N.D. CENT. CODE § 47-02-33 (providing that “The owner of a life estate may use the land in the same manner as the owner of a fee simple, except that the owner of a life estate must do no act to the injury of the inheritance”). 358 5 Tiffany Real Prop. § 1380 (2011).

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mortgagor who owns both the surface and the minerals, the mortgage will cover and include the minerals.360 If a mineral lease or conveyance is made prior to a lien, foreclosure has no effect on the mineral interest or lease; if the lien came prior to the lease, the mortgage includes the underlying minerals, and the lease is subject to the mortgage. Foreclosure will wipe out lessee’s interest.361 North Dakota courts, however, consistently hold that in order for one’s interest to be terminated under a foreclosure, the interest holder must be joined in the judicial foreclosure action; failure to join such owner will result in his interest being unaffected.362


Under the general air of encouraging development and enjoyment of natural resources, North Dakota law allows forced pooling and mandates that the Industrial Commission “balance the competing interests of the mineral owners and operators to achieve a just and reasonable result and afford to the owner of each interest in the spacing unit the opportunity to receive his just and equitable share.”363 These laws fall under the constitutional police power of the state.364 Section 38-08-08 of the Century Code provides that, while voluntary pooling of fractional tracts within a spacing unit is allowed, upon the application of any one interested person, notice, and hearing, the Commission shall enter a pooling order for development and operations. These orders may be issued retroactively365 and do not require the consent of any royalty owner for an operator to seek them.366

Statute further provides that any one owner producing on the pooled unit has a lien on the production attributable to other owners.

Operations and production from any portion of a pooled unit are deemed to be operations upon each separately owned tract therein. The statute also provides for minimum royalties for unleased mineral interests pooled under such an order.

367

359 GeoStar Corp. v. Parkway Petroleum, Inc., 495 N.W.2d 61, 67 (N.D. 1993).

North Dakota is a “risk-penalty” state under this same statute, meaning it allows the participating owners to recover from any non-participating owner a penalty for the risk the participating owner took in drilling the well. The penalty is two-hundred percent of the costs of drilling and completing the well if the nonparticipating owner’s interest is leased and fifty percent if it is unleased, such penalty only to be taken from the production from the pooled unit. Recovery by the operator under this section requires a good faith attempt to lease the unleased mineral owner or to have the leased mineral owner join in the drilling of the well. The statute also requires

360 Corbett v. La Bere, 68 N.W.2d 211, 214 (N.D. 1955). Recording of an attachment of a judicial lien to real property will also attach non-severed minerals, and any prior grantee—and presumably lessee—takes subject to such attachment. Texaro Oil Co. v. Mosser, 299 N.W.2d 191, 196 (N.D. 1980) (receded from on unrelated issue by GeoStar Corp., 495 N.W.2d 61). 361 See generally Olvera v. Johnson, 609 N.W.2d 432 (N.D. 2000) (holding that a mineral interest acquired by a conveyance in 1921 was terminated by 1922 foreclosures of mortgages taken in 1915). 362 See, e.g., Corbett, 68 N.W.2d at 216; Remmick v. Whitman, 627 N.W. 2d 376, 378 (N.D. 2001), citing Yttredahl v. Fed. Farm Mortg. Corp., 104 N.W.2d 705, 707 (N.D. 1960). 363 Texaco Inc. v. Indus. Comm’n of N.D., 448 N.W.2d 621, 624 (N.D. 1989). 364 Slawson v. Indus. Comm’n of N.D., 339 N.W.2d 772, 778 (N.D. 1983). 365 Id. 366 Egeland v. Cont'l Res., Inc.,616 N.W.2d 861, 865 (N.D. 2000). 367 N.D. CENT. CODE § 38-08-10 (providing that the lien may be fixed on the debtor’s interest by filing an affidavit in county records).

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notice before the penalty is enacted, to give the penalized owner a chance to object. However, objecting owners are required to exhaust administrative remedies before commencing judicial action, as North Dakota courts defer to the jurisdiction of the Industrial Commission in administrative matters.368

VI. MAINTAINING THE LEASE

A. Interpretation of Lease Terms

In terms of general contractual interpretation, North Dakota has incorporated into statute the common law canon of construction that uncertainty in a contract is resolved strongly against the causing party.369 This rule applies to construe lease terms against a lessee, as the lessee usually provides the lease form and controls the terms thereof, and could thus protect himself with more complete coverage if he so desired.370

General use of the term “production” in a lease can create inconsistencies as to whether or not production must be in paying quantities to maintain the lease, and as to whether actual production is required, or if capability of production is enough. North Dakota courts generally hold that production must be in paying quantities to extend the primary term of a lease.

371 However, they also recognize that oil and gas “found” in paying quantities is synonymous with oil and gas “produced” in paying quantities.372

North Dakota law requires the following to regard operations as having commenced: (1) work is done in preparation of drilling, (2) the operator is actually capable of doing the drilling, and (3) the operator has a good-faith intent to actually complete the well.

373 Thus, actually penetrating the ground with a drill bit is not necessary. Whether the operation is associated with the physical site of the well is a key element in defining drilling operations.374

B. Implied Covenants and the Reasonably Prudent Operator Standard

A lessee in North Dakota makes six implied covenants when taking a lease: (1) to drill an exploratory well; (2) to protect against drainage; (3) to use reasonable care in producing the minerals; (4) to reasonably develop the leased premises; (5) to explore further upon production; and (6) to market the product.375

368 Froholm v. Cox, 934 F.2d 959, 964 (8th Cir. 1991).

To obtain lease forfeiture from failure to abide by an implied covenant, a lessor must

369 § 9-07-19. 370 West, 298 N.W.2d at 490-91. 371 Sorum 344 N.W.2d at 77 fn. 2; see Olson, 345 N.W.2d at 36. 372 Greenfield, 521 N.W.2d at 89 n.1. 373 Anderson, 733 F.Supp.2d at 1107. 374 Id. (holding that “operations” had commenced when a lessee surveyed, staked, and permitted a well, leveled the well site, dug and lined the drilling pit, and moved equipment to the well location, even though the well had not yet been drilled). 375 Olson, 345 N.W.2d at 42 n.5.

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notify the lessee of his breach, demand compliance, and allow the lessee a reasonable time to become compliant.376

North Dakota holds that the duty to reasonably develop the leased premises is not abrogated by the expiration of the lease’s primary term, nor is it limited to drilling operations.

377 Further, while the lessee may consider his own interests in developing the premises, failure to develop the premises simply because it is not profitable to do so can be a breach of the implied covenant to develop.378 North Dakota courts look at a number of factors to determine if the covenant to develop has been breached, including evidence that the lessee has engaged in seismic operations, undertaken farm-out agreements, analyzed geological data, considered nearby dry holes and producing wells, and evidence that the lands concerned do or do not contain economically recoverable minerals.379

While recognizing it is impossible to state an exact standard to determine whether an operator has acted with reasonable prudence,

380

(1) the quantity of oil and gas capable of being produced as indicated by prior exploration and development; (2) the local market and demand therefor; (3) the extent and results of the operations, if any, on adjacent lands; (4) the character of the natural reservoir-whether such as to permit the drainage of a large area by each well; (5) the usages of the business; (6) the cost of drilling, equipment, and operation of wells; (7) the cost of transportation, storage, and the prevailing price ... (8) general market conditions as influenced by supply and demand or by regulation of production through governmental agencies ... (9) evidence of the willingness of another operator to drill on the tract in question; (10) the attitude of the lessee toward further development; and (11) the elapsed time since drilling operations were last conducted.

the Supreme Court of North Dakota has promulgated a list of factors that it considers:

381

This standard could be judged by looking at practices state-wide or field-wide.

382 Whether the operator has been prudent is a question of fact. If an operator has failed to act as a reasonably prudent operator, the lessor may recover damages, require the operator to conduct additional operations or conduct them in a different manner, or obtain lease forfeiture, but, as with a breach of an implied covenant, the lessor will only be awarded forfeiture in the event he has made demand on the operator to comply with the implied covenant and given him reasonable time to comply.383

376 Johnson, 392 N.W.2d at 58.

377 Id.at 57; Olson, 345 N.W.2d at 39. 378 Johnson, 392 N.W.2d at 57. 379 Id. at 60; Slaaten, 459 N.W.2d at 769. 380 Olson, 345 N.W.2d at 39. 381 Johnson, 392 N.W.2d at 57-58. 382 Kenneth M. Klemm, Implied Covenants: Recent Developments in Failure-to-Develop Cases and Other Implied Obligations Under Mineral Leases, 57 ROCKY MT. MIN. L. INST. 20-1, 20-21 (2011). 383 Hermon Hanson Oil Syndicate v. Bentz, 40 N.W.2d 304, 308-09 (N.D. 1949).

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C. Non-Payment of Royalty Interests

North Dakota is unique in providing by statute that failure to pay royalties may void a lease, if a court determines that equity so requires.384 The North Dakota legislature has deemed payment of royalties of the essence to the lease contract, determined that traditional damage remedies are inadequate to protect the interests of royalty owners, and thus supplanted the traditional principle that failure to pay is not grounds for termination.385 In enacting this rule, the legislature gave regard to land owners, who felt that the lag in their payments was unreasonable, and to the unequal bargaining power between large oil companies and small royalty owners.386

Factors the courts look to in determining if the non-payment of royalties was reasonable include:

Further, it determined that because forfeiture would still be within a court’s discretion, the rule would not inequitably cancel a lease when an operator had good reason for his tardiness.

(1) whether the lessee consistently made payments according to the provisions of the lease; (2) whether the failure to pay royalties resulted from the lessee's negligence; (3) whether the lessee acted in good faith; (4) whether the lessor failed to notify the lessee of the nonpayment and therefore has unclean hands; (5) whether the lessee attempted to remedy the deficiency after learning of the nonpayment; and (6) whether the lessor accepted payment.387

Thus, failure to pay royalties did not result in lease forfeiture when there was a legitimate dispute over the amount of royalties to be paid.

388 However, a lessee’s intentional failure to pay $12,000 in royalties caused termination of a lease, even though it caused the lessee to sustain $691,000 in losses, when the lessee’s failure considered over many years and despite requests from the royalty owner for payment.389

Recent litigation indicates this rule could be used in the opposite. In Irish Oil & Gas, Inc. v. Riemer,

390 a lessor failed to make bonus payments of $160.00 per acre on a lease that also called for a one-sixth royalty payment. Using the same logic described above, the lessee claimed that failure to pay the bonus was not failure of consideration such that the lease should be voided, because the royalty was actually the primary consideration for the lease. The Supreme Court of North Dakota recognized that a bonus payment was an “important part of the consideration” of the lease.391

384 N.D. CENT. CODE § 47-16-39.1 (also providing for an 18% interest payment once payments are 150 days past-due, without the royalty owner having to request it).

However, the court refused to conclude that the failure to pay the bonus was a total failure of consideration, supporting

385 Imperial Oil of N.D., Inc. v. Consol. Crude Oil Co., 851 F.2d 206, 210-11 (8th Cir. 1988). 386 Imperial Oil of N.D., Inc., 851 F.2d at 211 (citing Legislative Research Comm., Report to the Legislature, at 42 (1961)). 387 Id. at 210. 388 West, 298 N.W.2d at 492 (also emphasizing that the lessor’s acceptance of the miscalculated royalties was inconsistent with their request to cancel the lease). 389 Imperial Oil of N.D., Inc., 851 F.2d 211. 390 794 N.W.2d 715 (N.D. 2011). 391 Id. at 721.

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cancellation, as to do so would require a conclusion that the remaining consideration—royalty—was “insubstantial and unimportant to the contract.”392 Notably, in refusing to grant summary judgment for the lessor, the court emphasized executory consideration and that the “possibility of future production and future royalties”393

VII. ISSUES DURING EXPLORATION AND PRODUCTION

was not so speculative that it did not provide adequate consideration, even though the lessee under this lease had achieved no production and paid no royalties. The case was remanded to determine the importance of the royalty clause to the lessors, indicating that there is some possibility that lease provisions could solidify, or disregard completely, the statutory possibility of lease forfeiture based on unpaid royalties.


The North Dakota legislature enacted the Resolution of Conflicts in Subsurface Mineral Production chapter, Sections 38-15-01 through -05 of the Century Code, in 1980, making it the first state with a statute solely dedicated to addressing the issue of competing resource development.394

The chapter begins with a declaration that it is in the public interest to foster development of coal, gas, oil, and other minerals in a way that will allow a greater ultimate recovery and the “greatest possible economic recovery” from such resources.

Despite this exclusive treatment, and despite legislative declaration that it is state policy to promote the development of mineral interests, the hierarchy of competing development operations in North Dakota remains indefinite; the statute provides for Industrial Commission authority to resolve conflicts after they have arisen but speaks in vague terms otherwise.

395

While there is no case law demonstrating the specific application of these chapters to competing development, the Industrial Commission has promulgated regulations in the spirit of due regard for competing development. For example, the Subsurface Mineral Exploration and Development chapter of the Administrative Code charges operators with preventing waste and damage to mineral-bearing formations as a matter of practice.

It goes on to charge the Industrial Commission with enforcing that aim, and authorizes it to make investigations, require bonds from competing producers, resolve conflicts, and make rules to effectuate the purpose of the chapter. Failure of an operator to adhere to these rules can result in civil penalties, criminal penalties, and injunction.

396 Similarly, North Dakota requires the filing of a mining plan prior to operations and mandates that the portion of such a plan providing for the “protection of natural resources, other than the mineral being mined,” be filed with the state geologist.397

392 Id.

393 Id. 394 Phillip Wm. Lear, Multiple Mineral Development Conflicts: An Armageddon in Simultaneous Mineral Operation? 28 ROCKY MT. MIN. L. INST. 2, _ (1982). 395 N.D. CENT. CODE § 38-15-01. 396 N.D. ADMIN. CODE § 43-02-02-05. 397 § 43-02-02-29.

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In the absence of specific protocol to determine the pecking order among resource developers, there is speculation that the alternative means doctrine applied in the familiar case of Hunt Oil Co. v. Kerbaugh could lend some guidance.398


While that case involved surface owner conflict, it could apply to competing development, with the existing development taking the place of the owner of the dominant mineral estate and the new developer replacing the owner of the servient surface estate. In such a case, if the established mineral development interfered with the newer operations, the newer operator would have to seek alternative means of development first; only if no alternative means existed would the established operator need to seek alternatives.

As in most states, the operator’s implied grant of surface use has been limited by the “reasonably necessary” doctrine and by common law concepts such as nuisance and trespass. In addition, North Dakota statute provides additional protection for surface owners and to some degree subrogates the general rule that a lessee can avoid liability to a surface owner by restricting his use to that which is reasonable.

The North Dakota Supreme Court has adopted the rules set forth in Getty Oil Co. v. Jones regarding reasonable surface use and alternative means.399

The North Dakota Supreme Court has applied this doctrine as recently as 2012, holding that the use of reserve pits for storing water, drilling fluid, and well cuttings was reasonable, as it was authorized by statute and every North Dakota well drilled in the time period used a reserve pit, regardless of the fact that a closed-loop system could also be used to accomplish the same goal.

Thus, in North Dakota, if there is only one reasonable means by which to develop minerals, the operator is entitled to use it, regardless of damage to the surface or interference with the usage made by the surface owner. However, if an alternative means of production exists that is reasonable given the time, place, and current surface use, that alternative means should be utilized.

400 Conversely, when an operator chose not to develop a lease, but still drilled a salt water pit on the leased premises to use for other leases, and subsequently failed to restore the surface, the use was not a reasonable one.401 In Hunt Oil Co., when surface owners offered no evidence of reasonable alternatives to seismic operations, those operations were a reasonable use of the surface, even though the seismic activity caused a stream used for agricultural purposes to cease flowing and left holes and debris on the lands concerned.402

398 283 N.W.2d 131 (N.D. 1979); see Lear, supra note 381.

However, despite this broad acknowledgement of the dominance of the mineral estate and a lessee’s

399 Hunt Oil Co., 283 N.W.2d at 136-137 (“adopting the accommodation doctrine set forth in Getty”). 400 Kartch v. EOG Res., Inc., No. 4:10–cv–014, 2012 WL 661978, at *10 (D.N.D. 2012) (noting, however, that a reasonable use can still be utilized in an unreasonable way, such that finding the use of the reserve pit reasonable would not preclude summary judgment as to how the pit was maintained). 401 Slaaten, 748 F.2d at 1276 (applying North Dakota law and finding the use so unreasonable as to approach willful and wanton disregard, opening the operator to liability under then-existing exemplary damages statute). 402 283 N.W.2d at 137.

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right to make reasonable use of the surface, the result of this case would likely have been different under today’s statutory scheme.403

North Dakota has afforded surface owners additional protection since 1979, when it enacted the Oil and Gas Production Damages Compensation chapter.

404 The statute, which is to be interpreted to benefit the surface owner regardless of whether he was also the lessor, alters the standard of liability for surface damage from negligence or unreasonable use on the part of the lessee to one of strict liability. The statute was upheld under numerous constitutional attacks, including claims of violation of due process and impairment of contract rights.405

The statute requires notice to the surface owner seven days prior to exploration activities and twenty days prior to operations, subject to waiver by mutual agreement of the parties.

406

Further, the statute provides that the developer shall pay both the surface owner and his tenant, if any, an amount equal to the damages resulting from loss of land value, loss of use and access, and loss of any improvements. The surface owner and lessor may mutually agree on the formula for calculating these damages, but the North Dakota Supreme Court has held that these damages are not necessarily capped by the land’s fair market value.

The written notice requires, among other things, sufficient disclosure of the work to be done to allow the surface owner to evaluate the potential effect of the operations on his use of the property.

407 The statute also provides for reimbursement for loss of income from agricultural crops lost or damaged by development.408 Any claims under the statute must be made within two years from the date the injury should have become reasonably apparent, and there must be a settlement offer from the lessee unless the parties contract otherwise.409 If a court awards an amount greater than this offer, the surface owner will also recover fees, costs, and interest, giving the developer good reason to make efforts at a reasonable settlement agreement—especially since recovery under this chapter will not preclude the surface owner from seeking other remedies during litigation.410

403 See N.D. CENT. CODE § 38-11.1-06 (regarding protection of surface and ground water and providing “Any person who owns an interest in real property who obtains all or a part of that person's water supply for domestic, agricultural, industrial, or other beneficial use from an underground source has a claim for relief against a mineral developer to recover damages for disruption or diminution in quality or quantity of that person's water supply proximately caused from drilling operations conducted by the mineral developer”).

404 §§ 38-11.1-01 thru -10. Section 38-08-05 also requires notice to any owner of an occupied dwelling within a quarter mile of a proposed well, and stipulates that a permit will not be issued for a well within five hundred feet of such a dwelling without an exception being given by the industrial commission. 405 Murphy v. Amoco Prod. Co., 729 F.2d 552 (8th Cir. 1954). 406 § 38-11.1-04. 407 Kartch, 2012 WL 661978, at *11. 408 § 38-11.1-08.1. 409 § 38-11.1-07, -08. 410 § 38-11.1-09, -10.

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Kartch v. EOG Resources, Inc. represents current litigation pertaining to tort and environmental concerns in North Dakota and how courts resolve them.411

While nuisance is statutorily-defined in North Dakota, statute also provides that no act done under statutory authority is deemed a nuisance, i.e., is not a nuisance per se.

In Kartch, landowners sued an operating company in nuisance and in trespass, seeking recovery for harms done by the company’s excessive litter, noise from a generator, contamination of soil and water, use of flare, excessive odors, and failure to remove a pit liner. Kartch is an ideal example because it demonstrates the court’s reluctance to determine that a regulated activity is a nuisance, illustrating its deference to the legislative law-making power. It also illustrates the difficulties that may preclude landowner recovery under nuisance and trespass claims.

412

In Kartch, therefore, the use of a flare and associated odors were not a nuisance, as such use was governed by the Administrative Code.

This essentially gives an operator blanket protection from suit for operations that are statutorily-governed; however, it does not mean that because the action is not a nuisance per se that it cannot still be done in a manner that makes it a nuisance.

413

The landowners’ claim for trespass by the operating company was based on the operating company’s failure to remove a pit liner and waste during reclamation of the well site—instead of removing the liner and waste, the company buried it four feet deep. While again permitting discovery to proceed regarding whether the soil or water around the site was polluted, the court found that, as a matter of law, burying waste and a synthetic liner in a reserve pit were not trespass. In so finding, the court emphasized that reserve pits were regulated by the Industrial Commission, and synthetic liners were normally and customarily used in the industry.

The landowners’ claim of nuisance from noise was likewise dismissed, as they did not prove the noise excessive and could have mitigated its effects by granting an easement to an electric cooperative. The claim of excessive litter made by the landowners only concluded in a court finding that “run of the mill” litter at well sites is not a nuisance as a matter of law. The only nuisance claim that survived summary judgment in this case was the landowners’ claim that a tear in the liner of the reserve pit caused soil and water contamination; the court allowed discovery to proceed on this matter—use of a reserve pit was governed by statute and thus reasonable, but contamination from the manner in which the pit was maintained could still be a nuisance.

Considering the North Dakota legislature devoted an entire chapter of the Administrative Code to underground injection, it appears unlikely that wastewater injection will necessarily constitute a nuisance when conducted per the statutory guidelines.414

411 2012 WL 661978.

Thus, the injections will have to be performed with some degree of negligence, or perhaps even a greater degree of misconduct, to constitute a

412 § 42-01-12. 413 § 43-02-03-45. 414 § 43-02-05.

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nuisance. Likewise, as fracking operations are governed by regulation, the results in Kartch could predict the outcome of nuisance cases pertaining to such.

Subsurface trespass in North Dakota, which consists of bottoming a well on the land of another without his consent, occurs because of slant or directional drilling.415

While these stances do not directly touch on the issues developing in Texas with hydrofracking—for example, whether proppants invading another’s land can constitute trespass—they may be indicative of a pro-development mindset of the North Dakota Supreme Court. Further case law will be necessary to define specifically the boundaries that operating companies should respect; however, it seems safe to infer that a good faith compliance with all rules and regulations, and attempts to defer to the desires of the surface owner, will provide operators with some protection from liability.

However, when addressing whether an operator may conduct horizontal drilling through a tract compulsorily pooled with his tract, the Supreme Court of North Dakota deferred to the statutory provision that operations on one tract of pooled land are proper operations on all pooled tracts. The court determined that the law of trespass does not apply in such situations, and, as such, the horizontal drilling was permitted.

VIII. POST-PRODUCTION ISSUES

A. Lease Termination and Filing Requirements

In keeping with the spirit of clean title that inspired the Termination of Mineral Interest Act and the Marketable Record Title Act, North Dakota statute provides for and mandates the recording of releases of mineral leases. The problems that arise when a lessee fails to release a lease of record are dealt with in clear statutory provisions.

Most simply, if a lessee chooses to surrender a lease, he may record a certificate of cancellation, and such cancellation will be noted on the margin of the recorded lease.416 If a lease terminates or is forfeited, the lessee must file a surrender of the lease within fifteen days of the forfeiture or surrender.417 If the lessee fails to do so, the lessor may serve notice on the lessee that he has twenty days to notify the county recorder that the lease has not been forfeited, or else the lease is void. Notice can be served in person, by registered certified mail, or, if there is no address shown of record, by publication once a week for three weeks in the county newspaper. The twenty-day period begins from the personal service of notice, the date of mailing notice (not receipt of such), or the first date of publication.418

415 Cont'l Res., Inc. v. Farrar Oil Co., 559 N.W.2d 841, 844 (N.D. 1991) (also holding that damages from such trespass are the value of oil produced).

If the lessee or his assigns take no action in those twenty days, the property owner may file a copy of the notice and a satisfaction of lease, stating the basic facts as to the termination of the lease or failure of the lessee or his assigns to comply, and declare the same void. Once the satisfaction is recorded, the record of the lease is no longer notice of the existence of the lease, and the recording of

416 N.D. CENT. CODE §§ 47-16-38, -39. 417 § 47-16-36. 418 Taurus Corp. v. Roman Yourk Equity Pure Trust, 264 N.W.2d 688, 691 (N.D. 1978) (also noting that a judicial determination of lease forfeiture is not necessary before the lessor begins this statutory process).

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the lease cannot be used against the lessor as evidence in court. If, however, the lessee or his assign, within the twenty-day period, gives notice in writing to the county recorder that he still claims the lease and that the lease is not forfeited, the county recorder may not record the satisfaction. Instead, the recorder will send notice to the property owner, who will have to seek the remedies at law for lease cancellation.

A lessor’s action for release is provided for by statute.419 However, unless a lessor has additional damages to claim, he will only obtain the release, and perhaps damages of one-hundred dollars and attorney’s fees. Even if the statutory damages are slight, however, they do not apply if a lessee prevails at court, reflecting the legislative intent to equalize bargaining power between lessor and lessee and provide motivation to lessees to release lands containing valuable minerals.420

B. Plugging and Abandonment Issues

North Dakota has a plugging and site reclamation fund for wells that have been abandoned.421

The fund consists of revenues from permitting fees, forfeiture of drilling bonds, actions against operators for failure to plug, sales of equipment and oil confiscated from abandoned leases, and other sources. In the event the Commission plugs a well, the state has a cause of action to recover its expenses against not only the operator but also any working interest owner in the lease, limited, however, to that working interest owner’s proportionate share of working interest ownership. Further, the Commission may confiscate the lessee’s equipment and any salable oil at the well site; the Commission pays the mineral owners the royalties due from the reclamation fund.

419 § 47-16-37. 420 Nygaard v. Robinson, 341 N.W.2d 349, 360 (N.D. 1983). 421 § 38-08-04.5 to -4.9.

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