POLICY
Vertical Rules in a Horizontal World By: Bill Keffer
W
e had a running back on my high-school football team that was fast and could put a move on you. But his problem was that instead of running forward downfield towards the other team’s end zone (what commentators call running “north-south”), he had a tendency to run sideline to sideline (running “eastwest”). Understandably, running really fast from sideline to sideline didn’t do much to advance the ball. Likewise, laying a ladder on the ground on its side isn’t nearly as useful as standing it up so you can climb to the desired height. Things that are meant to be used vertically aren’t very beneficial when they’re horizontal, nor are things that are meant to be used horizontally worth much when they’re vertical. The oil-and-gas industry – more specifically, oil-and-gas lawyers are now confronted with a similar issue. With the advent and proliferation of horizontal wells, lawyers have to figure out which parts of the jurisprudence that has developed over the past one hundred years premised on vertical wells also applies to horizontal wells. It turns out not all concepts and principles are easily transferred or are even relevant. Early on, in 2000, in the Texas case of Browning Oil v Luecke, the Austin court of appeals concluded that the fundamental doctrine of the rule of capture doesn’t apply to horizontal wells. With vertical wells, the rule of capture was meant to protect adjacent mineral owners from being liable for drilling vertical wells and draining oil and gas from underneath your property and to encourage you to drill your own vertical well to produce your oil and gas before it migrates away to your neighbors. Your vertical well is on your property, and your neighbors’ vertical wells are on your neighbors’ property, so the rule of capture makes sense. However, with a horizontal well that travels under multiple properties with specific take points (where the oil and gas from the formation enters the well)
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along the way, the principle behind the rule of capture is no longer relevant. Luecke also pointed out the need for a different methodology to allocate royalties. In a pooled unit, royalties are allocated based on the proportionate share of acreage contributed to the pooled unit; if you contribute 100 acres to a 400-acre pooled unit, then you’re entitled to one-fourth of the lease royalty, regardless of how much oil and gas is actually produced from your property. But, where there is no pooled unit, and there is only a horizontal well crossing under and producing from several properties, then you are entitled to the percentage of production actually coming from your property. In the 2017 case of Lightning Oil v Anadarko, the Texas supreme court decided that a mineral lessee (Anadarko) that couldn’t drill on its lease because of restrictions imposed by a wildlife refuge could drill a horizontal well from an adjacent property and required the permission only from that adjacent surface owner (Briscoe Ranch). The adjacent mineral lessee (Lightning Oil) objected to Anadarko allegedly trespassing by drilling through their (Lightning Oil’s) mineral interest to get to Anadarko’s mineral interest. The court concluded that whatever oil and gas that might be removed from Lightning Oil’s interest as a result of Anadarko drilling its well 8000 feet down and then laterally onto their property was insignificant compared to the overall value Anadarko would be able to derive from accessing its minerals in this way. In the 2018 case of Murphy Exploration v Adams, the Texas supreme court had to decide how to interpret a provision in a lease that required the lessee (Murphy Exploration) to drill an “offset” well on the lessor’s (Adams) property, should an adjacent mineral lessee ever drill a well within a certain distance of the property line. An adjacent mineral lessee (Comstock) did that, so Murphy Exploration had to drill an offset well. Traditionally, in cases involving vertical wells and conventional formations (sandstone, limestone, and other
