Surface Owner Protection Legislation

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.

1) AT LEAST TEN STATES IN THE U.S. HAVE THRIVING OIL AND GAS PROGRAMS AND HAVE ALREADY IMPLEMENTED SURFACE OWNER PROTECTION OR DAMAGE COMPENSATION LAWS.

• 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.

2) SURFACE DAMAGES LEGISLATION RESTORES BALANCE BETWEEN THE OIL & GAS INDUSTRY, AND IT DOESN’T CURTAIL PRODUCTION OR JOBS.

• 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.

3) COMPENSATING SURFACE OWNERS OR POSTING DAMAGE BONDS WILL NOT SIGNIFICANTLY HURT OIL AND GAS PROFITS OR PREVENT THE DEVELOPMENT OF PROJECTS.

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.

OIL PROFITS
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.

GAS PROFITS
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.

Selected states with surface owner protection laws

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Oil and Gas Landowner Support