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CONSIDERATIONS FOR SURFACE OWNERS

The purpose of this web page is to discuss issues that surface owners may want to consider as mineral rights on their land are developed.  The discussion assumes the mineral and surfaces estates are severed.  A subsequent section, as well as a few comments on this page, briefly address alternative issues for individuals who own both the surface and mineral estates.

Also see North Dakota Petroleum Council's Surface Owner Info Center.

Will Mineral Development Impact Surface Use?

The basic concern is that mineral exploration and development will adversely impact use of the land surface.  For individuals who own the surface rights, but not the mineral rights, there is no opportunity to negotiate a mineral lease, and thus they have less opportunity to address concerns about how mineral exploration and production may impact surface owner's use of the the land.  This page briefly reviews the right of the mineral owner and mineral lessees to enter onto the surface to explore for and produce oil and gas.  It also addresses North Dakota statutes that are intended to help protect surface owners by requiring the mineral developer to notify and compensate the surface owners and to restore the surface after exploration or production.  This page also addresses North Dakota law that is intended to protect adjacent land owners.

One individual may own both the surface rights and mineral rights associated with a tract of land.  In that case, the owner will likely consider how developing oil and gas will impact both the mineral resource and the surface of the land.  In situations where the mineral rights have been severed from the surface rights and are now owned by someone other than the owner of the surface, the mineral owner may focus on developing the minerals without giving as much consideration to the impact to the surface.  In that situation, the interests or objectives of the mineral owner and surface owner may not be consistent, and the potential for a problem exists.

An important concept is understanding the extent to which the owner of severed minerals can or must address the issue of surface owner's rights in the mineral lease with the mineral developer.  If the surface rights and mineral rights are owned by the same person or group of individuals, concerns about use of the surface during exploration and production of minerals can be addressed in negotiating the mineral lease agreement.  However if the mineral rights have been severed from the surface rights, the answer is not as clear as to what the mineral owner can or must do to address the surface owner's rights in negotiating a lease with a mineral developer.  The next several points address those concerns.

Mineral Estate is Dominant over the Surface Estate

A stated on another page, the owner of the mineral rights has the right to enter onto the surface of the land to explore for and produce oil and gas without the permission of the surface owner.  Accordingly, the lessee of the mineral rights also has that right, based on the mineral owner's right.  The dominant nature of the mineral interest may leave the surface owner feeling stranded and without recourse to protect their surface rights.  Furthermore, there is no legal requirement that the owner of severed mineral interest attempt to protect the surface rights when negotiating a mineral lease with a oil company.

But the surface owner has some legal rights to protect their surface rights.  First, the mineral owner (and mineral lessee) cannot unreasonably damage the surface.  If the surface is unreasonably damaged, the surface owner can initiate a legal action against the mineral owner and mineral lessee.  If the mineral owner is obligated to pay for damages caused by the mineral lessee (the oil company), the mineral owner will likely rely on an indemnity provision in the mineral lease.  Bottom line -- the mineral company pays for damages resulting from unreasonable practices of the mineral developer.

Is the owner of severed mineral rights obligated to compensate the surface owner for damages caused by the mineral lessee?  Probably yes, but the mineral owner will likely demand that the mineral company reimburse the mineral owner, especially if the mineral lease includes an indemnity provision.  Recognize that the mineral owner has an obligation to compensate the surface owner only if the exploration and production activities are ?????

North Dakota legislature requires mineral developer to compensate the surface owner for all damages done; this is a broader obligation than the past requirement of compensating only for unreasonable damages.  This obligation is imposed directly on the mineral developer and is not imposed on the mineral owner.  In fact, this statute protects the surface owner from damages caused by the mineral company even if the surface owner also is the mineral owner who has leased the mineral rights to the mineral company.

Can a mineral owner waive this statutory protection?  Certainly no, if the mineral rights are severed from the surface.  Probably no, even if the mineral rights are not severed from the surface, but this interpretation is not absolutely clear.

As described by the North Dakota Supreme Court in the case of Hunt Oil Company v.Kerbaugh, severed mineral rights (that is, the mineral estate) are dominant over the surface estate.  Restated, the mineral owner (as well as the company that has leased the mineral rights from the mineral owner) has the legal right to enter onto the surface of the land to explore for and possibly produce oil and gas.  The mineral owner and assignees can enter the land without the surface owner's permission, but the mineral owner (and assignees) can use only as much of the surface as is reasonably necessary. The court decision also requires the mineral use of the surface to accommodate other existing surface activities.

There appears to be no legal obligation that the mineral owner to help protect the surface owner, such as include provisions in the mineral lease to protect the surface. Mineral owners are free to do this if they want, especially if they own both the mineral and surface estates, but there is nothing that requirements to negotiate surface protection as part of the mineral lease.  See

• Railroad Commission of Texas. Oil & Gas Exploration and Surface Ownership <http://www.rrc.state.tx.us/about/faqs/SurfaceOwnerInfo.pdf> July 14, 2010.
• Watt, D. Mineral Rights Pose Problems to Area Real Estate Development, Houston Business Journal, Sept. 8, 2006 <http://houston.bizjournals.com/houston/stories/2006/09/11/focus6.html> July 14, 2010.
• Duncan Energy Company v. United States Forest Service, 50 F.3d 584 (8th Cir., 1995) (cites Hunt Oil Co. v. Kerbaugh, 283 N.W.2d 131, 135 (N.D.1979) and N.D.Cent.Code Sec. 38-11.1-05 (1987)).  Addresses what a surface owner can do if the mineral owner is ready to explore for mineral rights.  In this case, it was federally-owned surface rights and privately-owned mineral rights.
• Bureau of Land Management. Split Estate. U.S. Dept. of Interior. <http://www.blm.gov/wo/st/en/prog/energy/oil_and_gas/best_management_practices/split_estate.html> July 14, 2010.  Describes steps BLM takes when it owns the mineral rights, an individual owns the surface rights, and BLM intends to lease the mineral rights for exploration and possible development.

Even though the company’s right to enter onto land to explore for and develop minerals is received from the mineral owner and based on the mineral owner’s dominant interest, the North Dakota law focuses directly on the relationship between the surface owner and the company, thereby implicitly diminishing the intermediate role of the mineral owner.  For example, see N.D.C.C. chap. 38-11.1.  Although this may feel like some relief to the mineral owner (that is, “I do not have to be responsible for the company’s actions that adversely impact the surface owner”), mineral owners should not assume they are totally removed from possible liability to the surface owner for the company’s actions.  CAN I FIND A CASE TO ILLUSTRATE THIS POINT?

Perhaps more importantly, North Dakota statutory law requires the company that is exploring or producing to compensate the surface owner (N.D.C.C. chap. 38-11.1).

Protection for Surface Owner when Mineral Rights are Severed

Also, surface owners must be compensated for all damages that occur during exploration and production (N.D.C.C. chap. 38-11.1).  Note the North Dakota legislature chose to impose this obligation to compensate the surface owner on the company, not the mineral owner.

If use of the surface is unreasonable, under common law, the surface owner's claim would have likely been against the mineral owner even though it was the company that was causing the damage.  The mineral owner would have then sought compensation or indemnity from the company.  The mineral owner would protect him or herself by including an indemnity clause in the mineral lease; for example, see paragraph 12 of the State lease.  Bottom line -- the company will be responsible for damages it causes from unreasonable use of the surface.

Statutory law in North Dakota, however, now imposes the legal obligation to compensate the surface owner directly on the company (N.D.C.C. chap. 38-11.1).  Consequently, the mineral owner does not have to be involved as an intermediary.  It is still a good practice for mineral owners to include an indemnity clause in a mineral lease.

This statute, however, appears to impose more responsibilities on the company by requiring that ALL damages to the surface be compensated, not just the unreasonable damages.  Another way to think about this statute is that prior to this statute being enacted, the surface owner would not have been compensated for damages resulting from reasonable mineral exploration and production activities.  This statute now assures the surface owner does not have to bear this cost, but instead is compensated for any damages, whether they are reasonable or unreasonable within the scope of mineral exploration and production.

Protection Before Exploration

There is not much a surface owner can do to protect him or herself before exploration; but then, nothing is happening so there is no damage to the surface.  Likewise, there is no legal grounds for surface owner to force the mineral owner to do anything, such as include particular provisions in a mineral lease to protect the surface interests.

Protection During Exploration

Three North Dakota statutes of interest to surface owners:

Notify surface operator -- see N.D.C.C. §38-08.1-04.1

Compensate the surface owner -- see N.D.C.C. §38-11.1-04

Obligation to plug hole -- see N.D.C.C. §38-08.1-06

These state statutes are important to the surface owner who does not own the mineral rights -- they may be the primary means of protecting their surface interests.  These statutes can also be valuable for surface owners who also own the minerals, even though these individuals have an opportunity to negotiate some of these issues as part of the mineral lease.  However, at the time the mineral lease is being negotiated, details as to how exploration may occur may not be clear.  Thus an opportunity to discuss surface use again at a later time (based on either these statutes or provisions in the mineral lease) may be beneficial.  Mineral owners certainly do not want any language in the lease that diminishes their opportunity to protect their surface interests to some level less than is provided by these state statutes.

Surface owners and tenants should be aware of specific regulations pertaining to geophysical exploration (see N.D.C.C. §38-08.1-04.1, and N.D.A.C. chap. 43-02-12). For example, state law offers some protection for surface owners by restricting where exploration can occur:

"Seismic shot hole operations may not be conducted less than six hundred sixty feet from water wells, buildings, underground cisterns, pipelines, and owing springs.  Nonexplosive exploration methods may not be conducted less than three hundred feet from water wells, buildings, underground cisterns, pipelines, and owing springs" ( N.D.A.C. §43-02-12-05).

If these regulations fail to cover concerns that apply to specific situations, provisions pertaining to these situations should be agreed upon in writing. Issues for surface owners to consider are suggested on another web page.

Surface owners are entitled by statute to compensation for surface damages resulting from geophysical surveys; see N.D.C.C. chap 38-11.1. If an agreement as to the compensation is not reached by the time the company is ready to begin its exploration activities, the company can provide a written offer for compensating the surface owner when the company provides notice that it is ready to begin its activities (N.D.C.C. §38-11.1-05 and -08).  The surface owner can accept or reject the offer.  If the offer is rejected by the surface owner, the surface owner can bring a lawsuit against the company (N.D.C.C. §38-11.1-09).

The legislature hopes this communication between the company and surface owner culminates in an agreement as to the compensation the company will pay the surface owner (see N.D.C.C. §38-11.1-04.1).  In addition, there is an expectation that the surface owner will take steps to assure a tenant of the surface owner also is compensated for disruptions to the tenant’s surface activities, such as crop and livestock production.

As stated previously, North Dakota statutory law requires that the company compensate the surface owner for any damage arising from mineral exploration.  This statute requires that the company secure a permit from the Industrial Commission.  Perhaps of more interest to the surface owner, the company must provide notice to the surface owner and an offer to compensation.  This notice and offer becomes an opportunity for the surface owner to negotiate with the company about its use fo the surface. 

The notice and effort to agree on damages is an opportunity for the surface owner to negotiation an understanding about surface use with the company. Also, the mineral owner cannot waive (in the mineral lease) the surface owner's right to be compensated for surface damages.

Chance to discuss where testing will occur; whether there are areas sensitive to testing, etc.

The considerations listed below will help reduce further conflicts between the parties involved:

1. Make sure the permit man is aware of areas sensitive to testing.
2. Go over the area to be tested with the permit man and suggest routes to be driven to minimize damage to range and cropland.
3. Geophysical testing companies are usually hired by oil companies to obtain a great deal of information in a short period of time. Even so, attempt to schedule operations to minimize conflicts to both parties.
4. Inform the permit man if any area to be tested is rented to others.
5. Always get the name and address of a company representative to contact if any problems have to be corrected after the testing is finished.
6. Stress the need to clean geophyscial equipment before testing to minimize the spread of noxious weeds from one area to another.

Legislature assumes surface owner will reach an agreement to share the compensation with others, such as a tenant who lost some crop as a result of mineral exploration.  The state law does not require the company to negotiate with the surface owner's tenant.  The surface owner needs to work that out with the tenant.

Protection During Drilling and Production

Remember -- water often is an issue during drilling and production

COMPANY’S FREE USE OF WATER RESOURCES

Related to the implied right to make reasonable and necessary use of the surface of the leased tract, a company has the implied right to use other available resources reasonably necessary for oil and gas operations, including water.

Water is essential to the entire drilling and production process and is also used in the preparation of drilling mud. Modern oil production technology may include a secondary recovery technique called water flooding. In a waterflood operation, water is injected into a partially depleted oil bearing formation to wash the oil out of the rock and into the well. Increased use of this technique could interfere with the supply of water to the owner's irrigation or domestic wells.

Because of these large demands, landowners should pay close attention to any provisions providing free water to the company for operations. Particularly in areas where water is scarce, certain limitations might be placed on these rights. The following suggestions may be helpful.

1. If free water privileges are granted to the company, limit free use to operations conducted on (not off) the leased premises. Consider limiting the free use of water to just salt water or deny the company the free use of any water supply and source (depth or acquifer) that is being used for domestic, irrigation, or stock-watering purposes.
2. At a minimum, do not allow the company to take water from wells, tanks, ponds or reservoirs without permission or without full compensation for the value of the water and for any loss of income that may result from such a use.
3. Stipulate that any water used by the company cannot restrict the supply of water for domestic, livestock or agricultural purposes.
4. If secondary recovery measures are undertaken by the company involving floodwater operations, deny the use of any water suitable for drinking.
5. If water is to be purchased, state how the market price will be determined.

During drilling and production, state law imposes the same requirements on the company, that is,

• Notice of intent to drill -- N.D.C.C. §38-11.1-05
• Compensate the surface owner -- see N.D.C.C. §38-11.1-04, including Obligation to compensate for water issues for surface owner -- see N.D.C.C. §38-11.1-06

• Opportunity for the surface owner to negotiate with the drilling company
• Time to discuss location of well relative to buildings, water resources, natural drains, etc.  The surface owner cannot stop the mineral activities, but it can force them to adopt reasonable alternatives to accommodate existing surface uses.

The Industrial commission also regulates the company's activities; these regulations can impact surface use and thus impact the surface owner.  Even though surface owner has little to do with these regulations, it is reasonable to at least be aware of them because their enforcement could help protect the surface.  Also, if mineral activities on the surface seem unreasonable, the surface owner knows enough to approach the Industrial Commission to assure the regulations are being followed.

Industrial Commission -- selected regulations from N.D.A.C. chapter 43-02-03

Industrial Commission is authorized to regulate (N.D.C.C. §38-08-04(2))

• The drilling, producing, and plugging of wells,
• The restoration of drilling and production sites
• The spacing of wells.
• The introduction of gas, water, or other substances into producing formations.
• Disposal of saltwater and oilfield wastes.
• The underground storage of oil or gas.

• 43-02-03-18 Drilling Units - Well Locations
• 43-02-03-18.1 Exception Location
• 43-02-03-19 Reserve Pit for Drilling Mud and Drill Cuttings - Reclamation of Surface
• 43-02-03-19.1 Fencing, Screening, and Netting of Pits
• 43-02-03-19.2 Disposal of Waste
• 43-02-03-19.3 Earthen Pits and Open Receptacles
• 43-02-03-20 Sealing Off Strata

Post production clean-up

Protection for Adjacent Surface Owners

Again, water is an issue.

The company's obligation to surface owners is based on ND statutory law.

Limiting use of surface to the development of mineral rights

With few exceptions, the granting of an oil and gas lease carries with it the implied right to use as much of the surface area as is reasonably necessary to explore and produce oil and gas. The mineral owner can grant this right to the company without the consent of the surface owner because the mineral owner has the right to enter onto the surface land to explore and produce the minerals.  Thus a lease agreement in which the surface owner has no opportunity to negotiate is documenting that the company can enter onto the land as a result of permission granted by the mineral owner.

Leases more favorable to the company expand these implied rights and specifically permit a much wider range of surface activities, especially if the mineral owner also owns the surface.  In that case, the company may include language that affects the landowner’s land that does not overlay the mineral rights.  For this reason, the mineral owner (who also owns the surface rights), at a minimum, will want to limit the granting clause in the mineral lease so it does not grant the company the right to use the surface of the land to develop other lands not owned by the landowner.

The clause should only permit surface use that directly relates to the development of the landowner’s leased tract. Also, be sure that the company retains no rights in the leased premises, such as rights of way, after termination of the lease.

Recommendations

Even though the company may be held liable for surface damages, the inconvenience of unwanted structures and entries upon the surface area by the company may be avoided to some degree by the following:

1. Do not allow the unrestricted right to build permanent facilities such as power stations, storage tanks, or employee's quarters. State that the prior written consent of the landowner is needed for both the construction and location of such structures and sites.
2. Attach a map of the proposed lease area showing where roads, pipelines, telephone lines, salt water disposal sites, and even wells may be located. Depending on the circumstances, additional compensation may be in order for certain rights of way. Do not allow a well to be drilled within a stipulated distance of a dwelling (e.g., 1320 feet).
3. Provide that all pipelines and telephone lines must be buried below plow depth where cropland is involved and consider the same requirement for electric lines.
4. Direct the company to use the double ditch method for laying any pipe if the area above the pipeline is to be cultivated or grazed. Double ditching requires placing the top soil on one side of the ditch and the subsoil on the other. When backfilling, the subsoil should be replaced first, followed by the topsoil.
5. Indicate whether the oil company's structures and equipment must be removed or be forfeited when the well is abandoned. If they are going to be removed, a reasonable amount of time should be allowed for their removal.
6. When a well is determined to be unproductive, procedures approved by the State Industrial Commission must be followed in plugging the well. These procedures include restoring the drill site as nearly as practical to its original condition. Similar procedures apply to pits built to contain drilling mud and the accumulation of drill cuttings during the drilling process. If these general regulations fail to cover unique individual circumstances, provisions for an agreed upon level of reclamation should be contained in the lease. Consider retaining the option to take over a well when the company has plugged the well below freshwater depths for use as a water well. A landowner wishing to take over a well must so notify the North Dakota Industrial Commission Oil and Gas Division, secure the Division’s permission, and assume responsibility for the well.
7. State regulations require that provisions must be made by the company to prevent livestock from gaining access to pits used to store saltwater liquids or brine. If additional fences, gates and cattle guards are necessary, provide for installation of such items at the company’s expense.

North Dakota law prohibits companies from allowing saltwater liquids or brines from flowing over the surface of the land or into streams. State law also authorizes the Industrial Commission to regulate underground disposal of oil field brine. Any company planning to dispose of salt water in underground formations must obtain a permit from the Commission. They also must follow accepted disposal procedures and report monthly regarding amounts of salt water injected, injection pressures, etc. Remember that disposal operations that involve the disposal of saltwater or other substances from other lands or involve the underground storage of gas should be expressly outside of the scope of the granting clause of an oil and gas lease. A separate agreement should be required for such matters, including a volume-based disposal fee.

Surface Damages

When the company acts negligently or exceeds the bounds of reasonable surface use, the company is liable in damages and possibly subject to injunction. http://www.ag.nd.gov/Opinions/2007/Letter/2007-L-07.pdf

In addition to fault liability, North Dakota law requires the payment of surface damages and disruption payments to both the surface owner and to others affected by a company’s use of land, even though the use is both reasonable and non-negligent (see N.D.C.C. 38-11.1-04).  Specifically:

• The mineral developer must pay the surface owner for loss of agricultural production and income, lost land value, and lost value of improvements caused by drilling operations.
• The amount of damages may be determined by any formula mutually agreeable between the surface owner and the company.
• When determining damages, consideration shall be given to the period of time during which the loss occurs and the surface owner may elect to be paid damages in annual installments over a period of time.
• The payments shall only cover land directly affected by drilling operations.
• Damage payments to the actual surface owner cannot be assigned to others except to a tenant of the damaged surface area.

In addition to the protection provided by state law, the surface owner who also owns the mineral rights also may want to consider the following factors when negotiating the mineral lease:

• Describe the method to be used in determining the extent of damages suffered. In the event the parties cannot agree, provide for arbitration or some other means of resolving the dispute; however, never agree to arbitration without having knowledgeable legal counsel review the arbitration provision.
• Resolve beforehand how payments will be distributed among respective surface owners or tenants of the surface area.

When receiving a damage payment, the company will want a signed release. Before signing any release for surface or for any other damages, be sure to have the release reviewed by knowledgeable legal counsel so it does not include a waiver for other harm, present or future, or otherwise contain terms that are unfavorable to the surface owner.

Protections for Adjacent Surface Owners

See N.D.C.C. §38-11.1-06.

• If the domestic, livestock, or irrigation water supply of any person
  • who owns an interest in real property within one-half mile of where geophysical or seismograph activities are or have been conducted or
  • within one mile of an oil or gas well site

has been disrupted, or diminished in quality or quantity by the drilling operations and a certified water quality and quantity test has been performed by the person who owns an interest in real property within one year preceding the commencement of drilling operations, the person who owns an interest in real property is entitled to recover the cost of making such repairs, alterations, or construction that will ensure the delivery to the surface owner of that quality and quantity of water available to the surface owner prior to the commencement of drilling operations.

• Any person who owns an interest in real property who obtains all or a part of that person's water supply for domestic, agricultural, industrial, or other beneficial use from an underground source has a claim for relief against a mineral developer to recover damages for disruption or diminution in quality or quantity of that person's water supply proximately caused from drilling operations conducted by the mineral developer. Prima facie evidence of injury under this section may be established by a showing that the mineral developer's drilling operations penetrated or disrupted an aquifer in such a manner as to cause a diminution in water quality or quantity within the distance limits imposed by this section.

• A tract of land is not bound to receive water contaminated by drilling operations on another tract of land, and the owner of a tract has a claim for relief against a mineral developer to recover the damages proximately resulting from natural drainage of waters contaminated by drilling operations.

• The mineral developer is also responsible for all damages to person or property resulting from the lack of ordinary care by the mineral developer or resulting from a nuisance caused by drilling operations.
  • This section does not create a cause of action if an appropriator of water can reasonably acquire the water under the changed conditions and if the changed conditions are a result of the legal appropriation of water by the mineral developer.

   

  The company responsibilities to others affected by drilling operations:

  • The company is responsible for all damages to persons or property, both real and personal, from the lack of ordinary care by the company and from a nuisance caused by drilling operations.
• To receive compensation, the injured party must notify the company of the damages within two years after the injury occurs.
• Within 60 days after the company receives notice of damages, the company must make a written offer of settlement.
• If the settlement offer is unsatisfactory or no reply is received, the injured party may bring action for compensation in court.
• If the award offered by the court exceeds the original offer of the company, the court will award the injured party reasonable attorney fees and court costs.

See N.D.C.C. §§38-11.1-06, -07, -08, and -09.

• An action brought under this section when not otherwise specifically provided by law must be brought within six years of the time the action has accrued. For purposes of this section, the claim for relief is deemed to have accrued at the time it is discovered or might have been discovered in the exercise of reasonable diligence.

Summary

If the minerals and surface estates are severed, the mineral company will want whatever rights the mineral owner has, that is the right to reasonable and necessary use as defined by common law. The mineral owner has not authority to grant more than those rights and may or may not be interested in granting less than those rights.  The surface owner, when the notice is provided, will have an opportunity to try directing how the company uses the surface even if the mineral owner has granted the maximum legal rights (reasonable and necessary) to the company.

If the minerals and surface are not severed, the mineral owner can grant more or less than the "reasonable and necessary" rights associated with the mineral estate.  These rights can be defined 1) in the mineral lease or 2) when the notice is given, as long as the mineral lease has not already addressed those rights.  It is probably better to address these in the mineral lease or at least make sure nothing in the lease prevents future restrictions when the notice is given.

Next page

Some final thoughts for landowners who own both the surface and mineral estates.

Last Updated August 10, 2010

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