EQUALIZING THE IMBALANCE BETWEEN MINERAL AND SURFACE OWNERS: The Case for Surface Owner Protection Legislation
- At least 10 states have already enacted surface owner protection or damage compensation laws, and still have thriving oil and gas programs.
- Surface damages legislation restores the balance between landowners and the oil and gas industry – and doesn’t curtail production or jobs.
- Compensating surface owners or posting damage bonds will not significantly hurt oil and gas profits or prevent oil and gas development.
- The State of Oklahoma’s Surface Damage Act (Title 52 Chapter 318.2) provides one model for restoring balance between the oil and gas industry and landowners. This legislation also requires companies to negotiate written contracts with surface owners before drilling begins.
- In Oklahoma – Mineral owners must negotiate a written contract with the surface owner for the payment of any damages that may be caused by a drilling operation. This agreement must be negotiated prior to entering the site with heavy equipment. If agreement is not reached: or all parties are not contacted, the district court will appoint appraisers to make recommendations to the parties and to the district court concerning the amount of damages. The mineral and surface owners are each allowed to select one appraiser, and the two selected appraisers then select a third appraiser for appointment by the court. The mineral owner and the surface owner share equally in the payment of the appraisers’ fees and court costs. No drilling may occur until an agreement is reached or a petition is made to the court to appoint appraisers. The courts may award triple damages where: the mineral owner willfully and knowingly began to drill without giving notice or without agreement of the surface owner; or the operator willfully and knowingly failed to keep posted the required bond.
- Oklahoma’s Surface Damage Act became effective July 1, 1982. Gas production in Oklahoma reached an all time high in 1990 and was not affected by the Surface Damage Act. In fact, oil and gas production in the State of Oklahoma as in every other Western state, is most predominately affected by national market price and other bottle necks, such as availability of drilling rigs and availability of workers.
According to statistics from the Independent Petroleum Producers of America (IPAA), it costs approximately $468,000 to drill and equip an oil well in Oklahoma and $444,000 in New Mexico. It costs approximately $650,000 to drill a gas well in Oklahoma, and $583,000 in New Mexico. Not only is it less expensive to drill and equip wells in New Mexico than in Oklahoma, the average well in New Mexico produces more oil or gas than an Oklahoma well. Thus, New Mexico producers are earning more profits per well. Oklahoma producers can afford to compensate surface owners, and so can producers in New Mexico and other states.
TYPICAL SURFACE OWNER PAYMENTS IN OKLAHOMA
Compensation received by surface owners in Oklahoma is tied to the amount of damage caused by the oil and gas activities. This provides a great incentive for companies to minimize the amount of damage that they do when they are building roads, pits and pads.
The amounts awarded range from $7,500 to $50,000. The latter award occurred when it was shown that the operator unreasonably damaged the surface owner’s property. Typically, courts have awarded higher damage amounts than appraisers.
- Anna Lee Cloud received $15,000 for damages largely related to diminution in the value of her land as a result of the oil and gas operations.
- John and Geraldine Turner received $8,000 for damages related to a well pad and access road. Two appraisers assessed damages of $8,000, while a third assessed damages at $7,500.
- A well was drilled on a section of Ed and Vicki Stewart’s land. Appraisers assessed damages at $8,600.
- Frank Bowlby et al., received surface damages in the amount of $20,000, which was decided by jury. Appraisers had assessed damages at $7,500, but both the mineral and surface owners disputed the findings and demanded the jury trial.
- In some cases, the damages awarded are much higher. In one case, the operator, Andover, disturbed 6 acres of land (construction of a road, pad, and pit site) on the Thompson farm. On the day prior to the actual spudding of the well, Andover abandoned this location in favor of a site on the opposite side of the farm. The preparation of the second well site was similar to the first. Andover utilized an area of a little more than eight acres in the construction of a road, a reserve pit, and a pad, but the second site was on sloping terrain and construction of the pad necessitated moving a large quantity of earth in order to create a level area. At the abandoned site, Andover removed most of the gravel used for the pad and road but was unable to remove all of the substance. In grading the abandoned location, the grade was changed slightly so that water occasionally stands in this particular area, thus making it unsuitable for certain crops, such as alfalfa. After restoration attempts were completed, the Thompsons brought suit against Andover, alleging that Andover had abused their rights by using more of their property than was reasonably necessary, and had failed to restore the property to its original condition. After viewing the property, the jury awarded the Thompsons $50,000 in actual damages.
As shown above, typical payments in Oklahoma are $8,000, unless there has been unreasonable damage done to the surface. This amount is a drop in the bucket in terms of the profits made by oil and gas wells, or when compared to the overall cost of finding and drilling a well. Surface damage payments or bonds are NOT going to make or break an oil or gas operation.
The average New Mexico well produces 8.5 barrels of oil per day. In January 2006, crude oil sold for $60 to 65 barrel. That means that on average, an oil well in New Mexico made $510 to 552 per day. IF AN OIL PRODUCER PAYS A SURFACE OWNER $10,000 IN COMPENSATION, THE PRODUCER WILL COVER THAT COST IN 18 TO 20 DAYS. IF A PRODUCER POSTS A $25,000 BOND, THE PRODUCER WILL COVER THAT COST IN 45 TO 49 DAYS.
The average New Mexico gas well produces 69,900 Mcf of gas a year, or 192 Mcf per day. According to the Energy Information Adminstration, the average wellhead price in December 2005 was $10.02/Mcf. That means that on average, a gas well in New Mexico makes about $1,924 per day. IF A GAS PRODUCER PAYS A SURFACE OWNER $10,000 IN COMPENSATION, THE PRODUCER WILL BE ABLE TO COVER THAT COST IN LESS THAN 6 DAYS. IF A GAS PRODUCER POSTS A $25,000 BOND, THE PRODUCER WILL COVER THAT COST IN LESS THAN 13 DAYS.
DRILLING AND EQUIPPING WELLS
According to statistics from the Independent Petroleum Producers of America (IPAA), it costs approximately $444,000 to drill and equip an oil well and approximately $583,000 to drill a gas well in New Mexico. SO IT IS HIGHLY UNLIKELY THAT AN EXTRA $10,000 WILL STOP A COMPANY FROM DRILLING A WELL.
FINDING AND DEVELOPING OIL AND GAS WELLS
The federal Department of Energy (DOE) collects information from major oil and gas producers in the U.S. The DOE reports that in 2002 it cost producers, on average, $8.5 million to find and develop an oil or gas well. A SURFACE DAMAGE PAYMENT OF $10,000 IS 0.12% OF THE COST OF FINDING AND DEVELOPING A WELL. Even if most producers spend even half that amount to develop a well, it is very clear that $10,000 will not even add add a drop to the overall “bucket” of development costs.
|Alaska||Before undertaking operations an oil or gas company must provide for full payment to the surface owner for all damages resulting from entering the surface estate. If an agreement can not be reached: the company may post a surety bond in an amount determined by the Director of the Department of Natural Resources Division of Lands. The surface owner may institute legal proceedings to determine damages that the surface owner may suffer.|
|Illinois||The surface owner is entitled to reasonable compensation from the company for damages to growing crops, trees, shrubs, fences, roads, structures, improvements and livestock caused by the drilling of a new well, as well as subsequent production operations. The surface owner is entitled to reasonable compensation for all negligent acts of operator that cause measurable damage to the productive capacity of the soil. Award of damages: The compensation required above is paid in any manner mutually agreed upon by the company and the surface owner. Failure to agree upon, or make the compensation required, does not prevent the company from beginning its drilling operation. If an agreement cannot be reached: the surface owner may undertake an action for compensation in the circuit court. If the court finds that the company’s offer was not reasonable, the surface owner is entitled to reasonable compensation as well as attorney fees.|
|Montana||Mineral developers are required to pay the surface owner a sum of money equal to the damages for loss of agricultural production and income, lost land value, and lost value of improvements caused by drilling operations. The amount of damages may be determined by any formula mutually agreeable between the developer and surface owner, and consideration shall be given to the period of time during which the loss occurs. Payments only cover land directly affected by drilling operations and production.|
|Companies developing oil and gas must pay surface owner a sum of money equal to the damages for loss of agricultural production and income, lost land value, lost use of and access to land, and lost value of improvements caused by drilling operations. The companies are also responsible for damages to the domestic livestock or irrigation water supply of any person who owns an interest in real property within one-half mile of drilling operations. The amount of damages may be determined by any formula mutually agreeable between the developer and surface owner. If the surface owner rejects a companys offer: the surface owner can take the company to court. Attorney fees, costs and interest will be awarded to the surface owner if the amount awarded by the court is more than the amount offered by the company. Punitive damages may be awarded if the operator fails to give the surface owner notice of the operations.|
|Oklahoma||Mineral owners must negotiate a written contract with the surface owner for the payment of any damages that may be caused by a drilling operation. This agreement must be negotiated prior to entering the site with heavy equipment. If agreement is not reached: or all parties are not contacted, the district court will appoint appraisers to make recommendations to the parties and to the district court concerning the amount of damages. The mineral and surface owners are each allowed to select one appraiser, and the two selected appraisers then select a third appraiser for appointment by the court. The mineral owner and the surface owner share equally in the payment of the appraisers’ fees and court costs. No drilling may occur until an agreement is reached or a petition is made to the court to appoint appraisers. The courts may award triple damages where: the mineral owner willfully and knowingly began to drill without giving notice or without agreement of the surface owner; or the operator willfully and knowingly failed to keep posted the required bond.|
If gas companies seek to appropriate land for the purposes of natural gas storage, the companies must attempt to reach an agreement with the surface owner about payment for damages to the surface property prior to any appropriation. If no agreement is reached: the company must post a surety bond. If the surface owner does not believe that the bond will cover the cost of the damages, the surface owner may petition the court, who may then appoint three disinterested freeholders of the county to serve as viewers to assess the damages. After the viewers have filed their report with the court, the court will fix reasonable compensation for the service of said viewers. Upon the approval of the bond, the right of the company to store gas and to enter on the property for the purpose of locating, reconditioning, maintaining, plugging or replugging any active or abandoned wells or operating any wells within the storage reservoir boundary or within the reservoir protective area shall be complete.
|South Dakota||Mineral developers are required to pay the surface owner a sum of money equal to the damages for loss of agricultural production, lost land value, and lost value of improvements caused by drilling operations. Mineral developers are responsible for all damages to property resulting from the lack of ordinary care by the mineral developer. The amount of damages may be determined by any formula mutually agreeable between the developer and surface owner. To receive compensation under the surface damage statutes, the surface owner must notify the mineral developer of damages within two years after the injury becomes apparent or should have become apparent to a reasonable person.|
Oil and gas developers are obligated to pay surface owners for: lost income or expenses incurred as a result of being unable to dedicate land or for drilling operations which prohibit access to the land for a preexisting dedicated use; the market value of crops destroyed, damaged, or prevented from reaching market; damage to water supply; cost of repair of personal property; and the diminution of value after completion of the surface disturbance. To be compensated, the surface owner must notify the oil and gas developer of the damages within 3 years after the injury occurs. The person seeking compensation may bring an action in court or request that compensation be determined by binding arbitration.
Leases issued for unsold school land must include a provision requiring the compensation for damages from the use of the surface in prospecting for, exploring, developing, or producing the leased minerals.
|Wyoming||Oil and gas operators must provide surface owners with 5 days notice prior to staking, surveying or performing other evaluations; and 30 days notice prior to commencing operations. Also, prior to commencing operations operators must attempt good faith negotiation of a surface use agreement. If no agreement can be reached prior to operations, the operator may obtain a waiver from a surface owner, or post a $2,000 bond with the state. If landowners feel this bond amount is inadequate to cover the cost of damages, they have the right to challenge the amount in state district court.|