Laying Pipelines Over Lands Covered By Non-Surface Use Leases
WATCH OUT! Picture this:
1) Joe the Landowner signs a Non-Surface Use Lease with XYZ Exploration after assurances from XYZ's land broker that the company won't conduct any operations on the surface of Joe's tract.
2) Then XYZ drills and frac's well adjacent to Joe's tract.
3) Next, Joe is contacted by a Right-of-Way Agent from XYZ's wholly-owned subsidiary pipeline company who tells Joe that the they are going to run a pipeline across Joe's land and that he can either negotiate an easement with them or go through condemnation proceedings.
What happened to Joe's "Non-Surface Use Lease"? That was with XYZ, not XYZ's pipeline affiliate.
Is this right? No.
Are exploration companies doing this? All the time.
What can I do to protect myself? A few things. When negotiating your Non-Surface Use Lease, think about insert provisions to deal with this situation.
If you've already signed a Non-Surface Use Lease and they try to do this to you, consider suing them. In Texas, Courts can ignore the separate existence of two companies and impose liability on one for the other's actions if it appears that the subsidiary is being used as a sham to perpetrate a fraud, to avoid liability, or to avoid the effect of a statute or unless there exist other exceptional circumstances. I think using an subsidiary to do what the parent contractually could not do is "sham to perpetuate fraud." But be aware that such a case would be an expensive uphill battle as it is hard to get court's to ingore separate existence.
There is no perfect answer for the landowner in these situations. I just wanted to let everyone know about what is going on and to try to prepare yourself. Just because XYZ's landman gave you a non-surface use lease and said they wouldn't do anything on your tract, doesn't mean XYZ's pipeline subsidiary will stay off your land. BEWARE.
1) Joe the Landowner signs a Non-Surface Use Lease with XYZ Exploration after assurances from XYZ's land broker that the company won't conduct any operations on the surface of Joe's tract.
2) Then XYZ drills and frac's well adjacent to Joe's tract.
3) Next, Joe is contacted by a Right-of-Way Agent from XYZ's wholly-owned subsidiary pipeline company who tells Joe that the they are going to run a pipeline across Joe's land and that he can either negotiate an easement with them or go through condemnation proceedings.
What happened to Joe's "Non-Surface Use Lease"? That was with XYZ, not XYZ's pipeline affiliate.
Is this right? No.
Are exploration companies doing this? All the time.
What can I do to protect myself? A few things. When negotiating your Non-Surface Use Lease, think about insert provisions to deal with this situation.
If you've already signed a Non-Surface Use Lease and they try to do this to you, consider suing them. In Texas, Courts can ignore the separate existence of two companies and impose liability on one for the other's actions if it appears that the subsidiary is being used as a sham to perpetrate a fraud, to avoid liability, or to avoid the effect of a statute or unless there exist other exceptional circumstances. I think using an subsidiary to do what the parent contractually could not do is "sham to perpetuate fraud." But be aware that such a case would be an expensive uphill battle as it is hard to get court's to ingore separate existence.
There is no perfect answer for the landowner in these situations. I just wanted to let everyone know about what is going on and to try to prepare yourself. Just because XYZ's landman gave you a non-surface use lease and said they wouldn't do anything on your tract, doesn't mean XYZ's pipeline subsidiary will stay off your land. BEWARE.
Tags: lease, non-surface, pipeline, use
Views: 311
Replies to This Discussion
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Permalink Reply by Johnny on
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Is this a gathering line or a transmission line? The Lessee cannot put a gathering line on the property, but if interstate or intrastate commerce is impaired, perhaps a transmission line has the right to not prevent other Lessors from getting their gas to market... I bet the examples of this involve something like this...
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Permalink Reply by Eric Camp on
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Gathering Line from Lessee's well. Lessee is getting around non-surface use lease by having its wholly owned subsidiary pipeline company to acquire the pipeline easement.
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Permalink Reply by Bobi Carr ("parker") on -
Eric,
I cannot understand NOT wanting a gathering line on property.
I CAN understand provisions that would need to be put in place to ensure development, but how can drilling exist without gathering lines?
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Permalink Reply by Eric Camp on
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Parker,
Any type of gas pipeline - gathering, transmission or otherwise - is going to lower the property's value and future development uses.
Development requires gathering lines. However, if the pipeline company has two routes, one which goes across your property and one that goes across your neighbor's property, wouldn't you want it across your neighbor's property? That is why landowner's sign non-surface use leases - so that their minerals will be developed but their neighbor's acreage harmed.
No gas company is going to take non-surface use leases in a full circle around a drillsite. The question really becomes, should the gas company's subsidiary pipeline company have to respect the non-surface use leases and lay a longer pipeline across the regular leaseholders' property OR should the pipeline company say to hell with its parent's contracts and go the shortest (and cheapest) route?
Because of eminent domain, landowners can't stop pipeline companies from using their land. I am only saying that exploration companies should not be able to use their subsidiary companies to do things the parent company would not be allowed to do - installing a pipeline on lands covered by a non-surface use lease.
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Permalink Reply by Bobi Carr ("parker") on
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Understood.
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Permalink Reply by TXsharon on
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In Texas, private, for profit, gas pipelines have eminent domain power. It does not matter how many "no surface use" clauses you have in your lease, they can still exercise eminent domain and put a pipeline anywhere they want to. Bummer.
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Permalink Reply by sesport on
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Would it be possible to write the no surface use clasue as simply as you stated above? There will be no surface use by lessee or any of its affiliates.
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Permalink Reply by Eric Camp on
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While I agree with KB that the lease may bind the subsidiaries actions, perhaps a better way for the L/O to protect itself is to have the O&G company AND its subsidiary pipeline company to sign the lease.
But even in this circumstance, what is to stop the O&G company from hiring a 3rd party pipeline company to go across the L/O's land? I'm not sure.
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Permalink Reply by Spring Branch,mineral owner on
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KB, in the area of S W Caddo Parish where Chesapeake is most active, 15/15, etc. all the CHK wells that I am familiar with have, at a minimum, 8 inch gathering lines. I can't imagine CHK or any other operator in the Haynesville Shale, going forward, agreeing to a lease which had a 2 inch gathering line provision. Remember, multiple wells will be drilled from these 8-10 acre superpads. I'm not a petroleum engineer but a 2 inch line won't handle the quantity of gas we're talking about in the Haynesville imho. Might need to change that part of your lease agreement in the Haynesville.
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Permalink Reply by Spring Branch,mineral owner on
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Remember, these things started off as 4 or 5 million cu. ft./day IP's. Then after some months, and better fracs, they started coming in @ the 15-25million/day wells. I bet going forward they are going to want you to change that wording (the bigger the gathering line diameter, the better for your client imho).
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Permalink Reply by Eric Camp on
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Just FYI... Chesapeake's affiliated pipeline company in Louisiana is Louisiana Midstream.
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Permalink Reply by Bobi Carr ("parker") on
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I sure don't have any expertise in this area, but wouldn't the O/G company have a claim against the landowner that they were interfering with development of the properties that the mineral owner leased IF the O/G company could show the necessity of using the property for a flowline?
If it weren't really necessary wouldn't it stand to reason that the O/G company would go through a neighbor's property rather that litigate?
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