Ethical Considerations in Horizontal Drilling Jennifer L. Keefe FTS International 777 Main Street, Suite 1600 Fort Worth, Texas 76102 Jennifer.Keefe@ftsi.com 1
Where are we now? 2
Where are we now? 3
4
Timeline of Considerations 5
Coastal Oil & Gas Co. v. Garza Energy Trust, 268 S.W.3d 1 (Tex. 2008) Plaintiff argued that drainage caused by fracing was analogous to a suit for trespass caused by drilling a slant well; The court rejected this argument under the auspices of the rule of capture; Gas produced through a deviated well, unlike fracing operations, does not migrate to the wellbore from another s property; it is already on another s property ; Jury had found trespass & drainage and had awarded actual and punitive damages 6
Some say Garza was wrongfully decided since gas itself did not migrate naturally and drained only because of an artificially created channel. West Virginia ruled the opposite in April of 2013. Court stated that [t]respass quare clausum fregit was limited to physical invasions, and plaintiff must show actual permanent harm to the property as to affect the value of his interest. But if a plaintiff suing in trespass could not prove actual harm, would a court refuse injunctive relief? Probably yes. Texas courts are not likely to allow a mineral owner to enjoin a frac operation. 7
However, an unleased mineral owner who suffered or was about to suffer a trespass by way of a frac operation may bring suit in trespass quare clausum fregit. Arguably, an unleased mineral owner could obtain injunctive relief as well as nominal damages because actual proof of injury is not necessary. However, the rule of capture should serve as a shield from liability in either case. Self remedy is to frac their own wells. Subsurface Trespass after Coastal v. Garza, Owen Anderson (2009). 8
Dissent: Today s ruling reduces incentives for operators to lease from small property owners because they can drill and hydraulically fracture to capture minerals from unleased and unpooled properties that would otherwise not be captured. Today s ruling effectively allows a lessee to change and expand the boundary lines of its lease... As opposed to contracting for new lease lines, offering to pool or utilizing forced pooling, or paying compensatory royalties. 9
Where does this leave us? Suit for trespass by fracing would require showing of wrongful entry and actual harm beyond drainage Injunctive relief possible for non-leaseholders Suit for conversion or action in assumpsit possible Actionable and intentional trespass could render punitive damages possible Negligence possible but not probable Intentional gathering of seismic from neighboring land without physical entry could still be a trespass. Kennedy v. General Geophysical Co., 213 S.W.2d 707, 713 (Tex. Civ. App. Galveston 1948, writ ref d n.r.e.). 10
Texas Supreme Court after Coastal FPL Farming Ltd. v. Environmental Processing Systems, 351 S.W.3d 306 (Tex. 2011). Most recently, the court declined to decide whether the injection of wastewater, which then migrates across subsurface property lines, constitutes a trespass. Now back before the Court, it is likely that the Court will rule this year on whether the subsurface disposal of fluids gives rise to a trespass claim. In this case, a company received a permit from the TCEQ to construct and operate two deep, non-hazardous wastewater injection wells. A neighboring rice farm brought suit claiming that the injection wells were causing a subsurface trespass of wastewater under its land. At trial, the jury found that a trespass had not occurred. The court of appeals held that there could be no liability for trespass damages because the TCEQ authorized and permitted the well. The Texas Supreme Court then reversed and remanded, holding that simply because the well was permitted did not mean there was not a trespass. Important Case on Subsurface Trespass Pending before the Texas Supreme Court, Brannon Robertson (2014). 11
Texas Supreme Court after Coastal On remand, the Court of Appeals re-examined the trespass issue and determined that the farming operation did have standing to sue for trespass. The court then ordered a new trial. The wastewater injection company appealed. Oral arguments in the case were held on Jan. 7, 2014. It is, of course, difficult to say how the court will rule and what the scope of that ruling will be. One important item to recognize about the FPL case is that the disposal well was a Class I well governed by the TCEQ. Had the well been associated with, or incidental to, oil and gas drilling or production, then it would have been a Class II well governed by the Texas Railroad Commission. The Court could find that this is an important distinction given how critical it is for oil and gas producers to be able to dispose of produced saltwater and fracking fluids. Thus, the court could rule that in a general wastewater disposal context, subsurface wastewater that crosses property lines can constitute a trespass. But in the oil and gas context, such movement does not constitute a trespass. 12
More from the TX Sup Ct The Edwards Aquifer Authority and the State of Texas v. Burrell Day and Joel McDaniel, 369 S.W.3d 814 (Tex. Feb. 2012). PROCEDURAL POSTURE: The Court of appeals agreed with the petitioner aquifer authority that groundwater from the well became state surface water in the lake and could not be considered in determining the amount of respondent landowners initial regular permit (IRP). It found, however, that the landowners takings claim should not have been dismissed. The judgment was affirmed by the Texas Supreme Court. OVERVIEW: The Supreme Court noted that there was substantial evidence to support the authority s finding that the groundwater became state water in the lake; thus, the authority s decision to issue an IRP for 14 acre-feet had to be affirmed. A landowner had a right to exclude others from groundwater beneath his property, but one that could not be used to prevent ordinary drainage. Where there were some differences in the rules governing groundwater and hydrocarbons, at heart both were governed by the same fundamental principle: each represented a shared resource that had to be conserved under the constitution. There was no reason to conclude that the common law allowed ownership of oil and gas in place but not groundwater. Neither the authority nor the State suggested a reason why the Edwards Aquifer Authority Act had to be more restrictive in permitting groundwater use that the Texas Water Code. The State had a legitimate interest in discouraging suits against groundwater districts to protect them from costs and burdens associated with such suits, and a cost-shifting statute was rationally related to advancing that interest. 13
New from the TX Supreme Court Key Operating & Equipment, Inc. v. Hegar & Hegar, 435 SW3d 794 (Tex. June 20, 2014) PROCEDURAL POSTURE: The court of appeals affirmed a trial court ruling appealed by an oil company which permanently enjoined the company from using the owners surface, including a roadway, for any purpose relating to the extraction, development, production, storage, transportation, or treatment of minerals produced from an adjoining tract. Supreme Court reversed & remanded. OVERVIEW: The company operated wells and produced oil. The property owners knew when they bought their property that it was subject to oil and gas leases and that the company used the road on the tract to service wells on an adjoining tract. The owners sued the company for trespass and sought an injunction. The trial court granted it. On appeal, the court held that the company had a right to use the road across the owners surface to explore and extract oil from their tract, even if comingled from adjoining tract, but in the absence of a pooling or other agreement, the company had no right to use the road across their surface to produce oil exclusively from the adjoining tract. OUTCOME: Garza was cited to support the finding that the Legislature has made it state policy to encourage secondary recovery of miners and declaring waste in the production of oil and gas is unlawful. 14
Courts of Appeals Vaughn & Vaughn v. Drennon & Drennon, 372 S.W.3d 726 (Tex. App. -- Tyler July 2012). PROCEDURAL POSTURE: Neighbors challenged a judgment that was entered against them on their neighbors counterclaim of intentional infliction of emotional distress and against them on trespass and violation of water code claims. The Tyler Court of Appeals reversed insofar as it awarded damages for IIED. Otherwise affirmed. OVERVIEW: The court held that the tort of IIED was not available as a remedy for appellees because the gravamen of their complaint was really a tort other than IIED. Instead of suffering distress, they wanted to slowly ruin the neighbors financially and eventually take over their property. The trial court did not err by disregarding the jury s answers on appellants claim that the appellees violated the Water Code. It determined that appellants right to have the surface water flow to appellee s property was lost when they altered their property in a manner causing damage to appellees. Garza was cited for the notion that trespass against a possessory interest does not require actual injury to be actionable and may result in an award of nominal damages. 15
Lower Court Proceedings Mitchell v. Encana Oil & Gas USA, Inc., No. 10-2555 (N.D. Tex.); 2012 U.S. Dist. Motions 2555; 2011 U.S. Dist. Ct. Motions LEXIS 841 (N.D. Tex., Apr. 14, 2011). Plaintiff filed suit against Encana Oil & Gas and subsidiaries of Chesapeake Energy alleging groundwater contamination from Defendants hydraulic fracturing operations and disposal activities in vicinity of her property. Mitchell cited groundwater tests revealing contamination with various chemicals, including diesel range hydrocarbons, in support of her claim that well water is not fit for household use or consumption. Mitchell s First Amended Complaint asserted the following claims: nuisance, trespass, negligence, and exposure to toxic chemicals warranting medical monitoring damages. 2012 U.S. Dist. Motions 2555; 2011 U.S. Dist. Ct. Motions LEXIS 841 (N.D. Tex., Apr. 14, 2011). The case was dismissed December 27, 2011 pursuant to settlement. 16
Lower Court Proceedings Scoma v. Chesapeake Energy Corp., No. 10-CV-1385 (N.D. Tex. Aug. 11, 2010). Settled December 9, 2011. WASTE DISPOSAL RESERVE PITS Plaintiffs, Mr. and Mrs. Scoma, filed suit against Chesapeake Energy alleging contamination from drilling waste disposal injection wells and other disposal sites. The Scomas complaint reports they were no longer able to use their supply well due to contamination and cited water testing results showing increased concentration of the petroleum byproducts benzene, toluene, ethylbenzene, xylene, barium, and iron. Pls. Second Amended Compl. Aug. 11, 2010. Claims for nuisance, negligence, and trespass were dismissed pursuant to settlement. 17
Lower Court Proceedings Harris v. Devon Energy Production Company, 2012 WL 6082415; No.12-40137 (5th Cir. Dec.7, 2012) affirming dismissal but modifying to be with prejudice, Harris v. Devon Energy Production Company, No. 4:10cv708; 2012 WL 220212 (E.D. Tex., Jan. 25, 2012) granting Plaintiffs Motion to Dismiss Without Prejudice, 2011 WL 7092649 (E.D. Tex. Dec. 9, 2011). GROUNDWATER CONTAMINATION Plaintiffs filed suit against Devon alleging trespass and negligence resulting in contamination of Plaintiffs groundwater. They cited the presence of a gray substance containing chemicals and substances typically found in drilling mud, such as bentonite, as evidence of Devon s responsibility. Following Defendant s second motion for summary judgment in November 2011, Plaintiffs moved for voluntary dismissal without prejudice stating even though testing showed toxic contamination in Plaintiffs well water when this lawsuit was filed in December 2010, recent testing showed that the contamination is no longer at a toxic level for human consumption. FRCP 41(a)(2). The District Court granted Plaintiffs motion for dismissal without prejudice. Devon Energy prevailed on an appeal to the Fifth Circuit Court of Appeals for modification of the judgment to be with prejudice. Devon s MSJ presented evidence that a Texas Railroad Commission investigation had failed to find contamination of the well prior to the filing of the suit, a down hole video of Harris s water well showing that well casing had deteriorated and allowed aquifer sediment to flow into the well, and expert evidence that its activity could not have caused contamination of the well. The Harris s conceded that they could not prove that Devon was the cause of alleged contamination. 18
Lower Court Proceedings Lipsky v. Range Resources et. al. v. Rich, NO. CV11-0798 (filed July 14, 2011) Lipsky v. Range Production Company, No. 02-12-00098-CV, 2012 WL 3600014 (Ct. App. Tex. Aug. 23, 2012) rejecting appeal of dismissal of Plaintiffs Anti-Slapp Motion to Dismiss Range s Counter Claims for lack of jurisdiction. GROUNDWATER CONTAMINATION; DEFAMATION Plaintiffs filed suit sounding in tort against Range Resources and other Defendants allegedly responsible for well water contamination through hydraulic fracturing operations on two natural gas wells. A related Imminent and Substantial Endangerment Order enforcement action against Range, brought by the EPA under the Safe Drinking Water Act, was dismissed pursuant to a joint motion for dismissal following EPA s withdrawal of the Endangerment Order. U.S. v. Range Production Company, No. 3:11-CV-00116-F (N.D. Tex. Mar. 30, 2012) granting joint dismissal without prejudice. The case is notable for conspiracy and defamation counter-claims brought by Range against Lipsky s and third-party, anti-fracing activist, Alisa Rich. Range s petition alleges a conspiracy between Lipsky s and Rich to skew contamination testing results and induce EPA action against Range. Range has requested three million in damages and additional punitive damages for loss of reputation to their business as a result of negative media coverage. Final disposition of both Lipsky s underlying suit and Range s countersuit is pending. 19
Review denied with the Supreme Court Stroud Production, LLC v. Hosford, et al, 2013 Tex. App. LEXIS 2119 (March 5, 2013), petition for review denied April 25, 2014. PROCEDURAL POSTURE: Buyers and others sought review of a Galveston trial court decision which found in favor of president and others for breach of contract, intentional termination of overriding royalty interest, conversion, tortious interference and conspiracy. OVERVIEW: The appellate court reversed the Galveston court s decision except for the breach of contract claim pertaining to the overriding royalties on production from the leases. With regard to the breach of contract claim, the evidence was legally sufficient to support the jury s finding that one appellant failed to comply with its contractual obligation to pay appellees their overriding royalties on production from 2004 leases. The appellate court was unable to say that the absent of a surrender clause indicated the existence of some sort of special duty owed to appellees. OUTCOME: Garza was cited in the dissent for the appropriate measure of damages for breach of the covenant to protect an oil and gas lease as the value of the royalties lost because of the lessee s failure to act as a reasonably prudent operator. The case was remanded for a new trial on the issue of attorney s fees and interest. 20
21
The National Society of Professional Engineers maintains in their Code of Ethics for Engineers that Engineers must hold paramount the safety, health, and welfare of the public. The Society of Petroleum Engineers in their Guide for Professional Conduct stresses both the protection of the environment and safeguarding the public welfare. In the Canons of Professional Conduct, The Society of Petroleum Engineers stresses the need to warn the employers, clientele and public of instances where the consequence of their professional duties adversely affects[s] the present or future public health and safety. Another cannon emphasizes the need for technical and economic measures that reduces the impact on the environment. Code of Ethics for Engineers. National Society of Professional Engineers. http://www.nspe.org/ethics/codeofethics/index.html Guide for Professional Conduct. Society of Petroleum Engineers. http://www.spe.org/about/docs/professionalconduct.pdf 22
The American Society of Civil Engineers (ASCE) supports the exploration and production of oil and natural gas energy resources by means of hydraulic fracturing when based upon sound engineering and industry practices that protect public health, safety, and the environment. ASCE strongly recommends that current regulations be reviewed, revised or enhanced, as needed, to: Mandate full public disclosure of all chemicals and other propping agents in the fracturing fluid. Control the handling, use, and disposal of chemicals in the hydraulic fracturing process. Establish well construction and decommissioning standards to protect underground sources of drinking water and to prevent methane loss. Establish site closure and restoration standards. Reduce the freshwater footprint for each fracturing operation by reuse of the flowback fluid. Assure the safe treatment and disposal of used fracturing fluids, flowback fluid and producer well waters. Ensure adequate controls over stormwater runoff or overflow from the well site. Ensure that there is no surface infiltration of waste and production fluids into near-surface aquifers and recharge zones. Promote research on hydraulic fracturing, including the effects of multiple drilling operations in a single watershed. Protect in-stream water flows and determine the cumulative impact of multiple drilling operations within a single groundwater basin or watershed. 23
What Lies Ahead - Challenges An Exxon Mobil subsidiary faces criminal charges in Pennsylvania of spilling more than 50,000 gallons of what the state attorney general described as toxic wastewater from a hydraulic fracturing operation. The charges stem from the discovery by a state environmental officer in November 2010 that a storage tank on an XTO Energy fracking site outside Pittsburgh had been leaking water and chemicals used to extract natural gas. Traces of the contaminants were found in a nearby tributary of the Susquehanna River. XTO says the incident was accidental. An investigation by the U.S. Environmental Protection Agency and U.S. Department of Justice yielded no criminal charges. In a settlement with federal agencies, XTO agreed to pay a $100,000 fine and make improvements to its well monitoring systems & wastewater recycling operations of $20 million. But in a grand jury indictment filed Tuesday, XTO is charged with eight counts of violating Pennsylvania s clean water and solid waste laws. 24
Ethical Considerations in Horizontal Drilling Jennifer L. Keefe FTS International 777 Main Street, Suite 1600 Fort Worth, Texas 76102 Jennifer.Keefe@ftsi.com 25