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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.
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
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:
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:
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:
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.
During drilling and production, state law imposes the same requirements on the company, that is,
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))
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.
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:
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.
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:
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:
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 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.
Some final thoughts for landowners who own both the surface and mineral estates.
Last Updated August 10, 2010
This material is intended for educational purposes
only. It is not a substitute for competent legal counsel. Seek appropriate
professional advice for answers to your specific questions.
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