Texas has been the top oil and gas producing state in the country since at least the 1970s, today contributing 42% of the nation’s crude oil and 27% of its natural gas.[1] Now, the Lone Star State is also experiencing a boom in renewable energy and data center development thanks to its abundant land, economic incentives, light regulations, and favorable energy prices. However, developers should exercise caution when purchasing or leasing property in Texas for these types of projects, as it is not uncommon to discover that this land may also be home to abandoned or even active oil or gas wells.
Title Diligence
This is possible due to the fact that land ownership in Texas carries two distinct sets of rights, or “estates”: the surface estate and the mineral estate. While initially established under single ownership, these estates may be “severed” and thus owned by separate people or entities. This is especially common in areas of historic oil and gas development, where an owner may choose to sell the surface of the land and retain all or part of the minerals (or vice versa). These types of conveyances or reservations would (or should) be revealed in a title search, title commitment, title opinion, or mineral ownership report.
Legal Implications
When the estates are severed, Texas law holds that the mineral estate is dominant, which means that the owner of the minerals has the right to freely use the surface to the extent reasonably necessary for the exploration, development, and production of oil and/or gas under the property. These activities can include: conducting seismic testing; drilling wells; building, maintaining, and using roads; building and using pipelines to serve wells and other facilities on the property; using surface and subsurface water; and drilling and operating injection wells to enhance, recover, and dispose of lease-produced water.
This broad right of the mineral estate to use the surface can be limited by the “accommodation doctrine”.[2] A mineral owner or oil and gas lease operator may be required to accommodate the surface owner’s use of the surface if the following conditions are met:
- The mineral owner or operator’s use completely precludes or substantially impairs an existing surface use;
- There is no reasonable alternative method available to the surface owner by which the existing use can be continued; and
- There are alternative, reasonable, customary, and industry-accepted methods available to the mineral owner or operator which will allow recovery of the minerals and also allow the surface owner to continue the existing use.[3]
However, if the mineral estate owner does not have an alternative way to produce its minerals, the surface owner must yield to the mineral owner.[4]
Applicable Regulations
The official rules of the Texas Railroad Commission[5] (“RRC”, the governing body of oil and gas production and development in the state) will generally apply to situations involving oil and gas activity. The RRC has established various well classifications, which include the following: (1) a permitted location, where an operator has applied for and been granted a drilling permit (expect a well to be drilled here); (2) a producing or active well (it is not possible to build a structure here); (3) a dry hole, a well which was drilled but never produced oil or gas in paying quantities (these are abandoned or “orphaned” but not always properly plugged); and (4) a plugged and abandoned (“P&A”) well (in some instances it is possible to build on top of these, but there are myriad associated risks).
The RRC regulations do not currently include any specific setback rule with regard to building structures on or near wells or pipelines; the regulation of these activities is largely left up to municipal zoning laws and ordinances, which necessarily vary based on location. Applicable local rules may or may not have setback or other restrictions, which could include a requirement to P&A any wells before building within a certain distance of them. This can be very costly, difficult, and time-consuming.
Safety and Other Considerations
Even if there are no setback, P&A, or other rules that apply to a certain project, developers should be aware that building near active wells presents various safety hazards such as explosions, fires, chemical exposure, and health risks from air or water pollution. Even wells that have been properly P&A can contaminate soil and groundwater, create sinkholes and other structural dangers, and leak harmful gasses. The presence or discovery of hazardous materials such as those possibly emitted by drilling is the subject of many lawsuits, indemnifications, and environmental cleanup mandates.
Options
Thus, if a developer discovers that the surface of the land on which it hopes to build is severed from its mineral estate, is subject to an oil and gas lease or leases, or is home to active, dry hole, or even plugged and abandoned oil or gas wells, that developer may seek to: (a) purchase the severed mineral rights; (b) execute a surface use agreement if the mineral estate is already bound by an oil and gas lease (or negotiate a surface damages provision in a future lease); and/or (c) adjust the site location. In any event, it is very likely that the developer will have to allow for access by the mineral owner or operator and any RRC representatives.
Conclusion
Anyone planning to purchase or lease land in Texas for the development of renewable energy projects or data centers should seek to gain a thorough understanding of the legal issues, regulatory hurdles, structural dangers, health and safety concerns, environmental impacts, and cost and time considerations that may be associated with the presence of oil and gas activity on site, whether past, present, or planned.
[1] U.S. Energy Information Administration – Texas, https://www.eia.gov/state/?sid=TX/.
[2] Getty Oil v. Jones, 470 S.W.2d 618 (Tex. 1971).
[3] Merriman v. XTO Energy, Inc., 407 S.W.3d 244, 249 (Tex. 2013).
[4] Tarrant Cnty. Water Control & Improvement Dist. No. One v. Haupt, Inc., 854 S.W.2d 909, 911 (Tex.1993) (citing Getty Oil, 470 S.W.2d at 622).
[5] Texas Administrative Code (TAC), Title 16, Part 1, Chapters 1 through 20.