Hydraulic fracturing and ownership theories pdf

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Hydraulic Fracturing and Ownership Theories in Rule of Capture in Shale Trespass Litigation: United States versus

Emerging Shale Jurisdictions

MAVIS EKENEDILICHUKWU EKWECHI-WHYTOCK

LL.M Oil and Gas Law and Policy

MARCH 2016

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HYDRAULIC FRACTURING AND OWNERSHIP THEORIES AND THE RULE OF CAPTURE IN SHALE TRESPASS

LITIGATION: UNITED STATES VERSUS EMERGING SHALE JURISDICTIONS

DISSERTATION BY:

NAME: MAVIS EKENEDILICHUKWU EKWECHI-WHYTOCK

LL.M IN OIL AND GAS LAW AND POLICY

CEPMLP, UNIVERSITY OF DUNDEE

This dissertation is submitted to the Centre for Energy, Petroleum and Mineral

Law and Policy (CEPMLP), University of Dundee, in partial fulfilment of the

requirement for the award of Master of Laws (LL.M) degree in Oil and Gas

Law and Policy

SUPERVISOR: PROFESSOR PETER D. CAMERON

MARCH 2016

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DECLARATION

I declare that I, MAVIS EKENEDILICHUKWU EKWECHI-WHYTOCK, am the author of

this dissertation. I also declare that all references cited herein have been personally consulted;

that I have carried out this dissertation and no part has been previously accepted for any other

higher degree.

NAME: MAVIS EKENEDILICHUKWU EKWECHI-WHYTOCK

DATE: 31ST MARCH 2016

SIGNATURE: Mavis Ekwechi-Whytock

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DEDICATION

This work is dedicated to my late father, Engr. Enoch Chukwudolue Ekwechi, whom I had

wanted to behold me as I am today.

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ACKNOWLEDGEMENT

My gratitude goes to the Lord Almighty and my beloved husband James Graham Whytock,

for whom without, this work would not have been a success. This dissertation has been

written at a trial time but crowned with victory. I cannot thank God enough for His

faithfulness and grace upon my life. From the conception of the topic, it was perceived as a

very tricky one but God proved Himself “Omniscience”.

In the course of writing this dissertation, I attended and participated in many oil and gas

related conferences, symposiums, workshops, and had conversations with relevant

individuals whom the concept of confidentiality would not allow me to disclose. My heartfelt

appreciations go to you all.

I humbly and further extend my gratitude to all the lecturers at the CEPMLP University of

Dundee for their relentless effort in impacting knowledge to students.

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ABSTRACT

The study examined the role ownership theories and the rule of capture play in shaping

subsurface trespass liability in shale gas development in the United States (US), and whether

other emerging shale gas jurisdictions such as South Africa (SA) would play out differently.

Utilising a desktop-based, comparative and doctrinal methodologies, the study finds that

hydraulic fracturing and horizontal or directional drilling are scientific innovation with huge

economic, energy security and some environmental benefits. However, the extent of its

negative environmental and health impacts are still debatable. It is shown that ownership of

petroleum and mineral in the US is both government and private-owned while it is State-

owned in SA except for some communities with trust-like arrangements and with royalty

interest. The courts have found subsurface trespass relying on the rule of capture and

ownership theories such as ad coelom, ownership in place and non-ownership in place except

there are very compelling reasons to find otherwise. One of such is where there utility of the

technology which is alleged to constitute a trespass, or the courts consider it beneficial to

society at large as in Garza’s case, or where the court finds no damage. However, the courts

have found liability for subsurface trespass even in non-ownership in place jurisdictions such

as California. In the case of SA, it would appear that in the absence of private ownership

rights in SA, any action for subsurface liability may likely fail. However, hypothetically, a

licensee in an old concession agreement would be able to bring an action for subsurface

trespass because it owns the in situ petroleum and mineral. This is not the case with a PSA

because it re-emphasises State ownership of mineral and petroleum rights, and shale gas

development in SA will be based on a PSA. It is possible that communities that retained the

trust-like arrangements with royalty interest may be able to institute an action for subsurface

trespass especially when it is understood that they may obtain preferential mineral rights

under the MPRDA. The lack of ownership rights may prove meaningless in some cases for

subsurface liability if a litigant can show compelling circumstances as we saw in the US

cases bearing in mind that a landowner’s rights may still be preserved where the land is not

acquired by the government. Thus the issue of subsurface liability for shale gas development

in emerging shale gas jurisdictions must be approached with caution as it is possible to

address it through other tortious actions such as negligence, nuisance and conversion. The

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statute of limitation may also apply and public policy considerations may outweigh the

substance of an action. Finally, emerging shale gas jurisdictions would have to determine the

extent of liability where permits from Conservation Commissions are involved.

TABLE OF CONTENTS

i. Declaration……………………………………………………………………………………………3

ii. Dedication……………………………………………………………………………………………4

iii. Acknowledgement…………………………………………………………………………………..5

iv. Abstract……………………………………………………………………………………………...6

v. Table of Contents…………………………………………………………………………………….7

vi. Abbreviations………………………………………………………………………………………..9

vii. List of Diagrams………………………………………………………………..............................10

CHAPTER ONE: BACKGROUND TO THE STUDY……………………………………………12

1.1 Introduction……………………………………………………………………………………….12

1.2 Problem Statement of the Study ………………………………………………………………….13

1.3 The Question of the Study ………………………………………………………………………..14

1.4 The Importance of the Study ……………………………………………………………………..15

1.5 The Methodology of the Study …………………………………………………………………..16

1.5.1 Desktop-based Methodology……………………………………………………………………16

1.5.2 Comparative Methodology……………………………………………………………………...17

1.5.3 Doctrinal Methodology…………………………………………………………………………17

1.6 The Structure of the Study ……………………………………………………………………….17

CHAPTER TWO: HYDRAULIC FRACTURING AND SHALE GAS DEVELOPMENT……19

2.1 Introduction……………………………………………………………………………………….19

2.2 Oil and Gas Geology………………………………………………………………………………19

2.3 Oil and Gas Drilling ………………………………………………………………………………19

2.3.1 Vertical Drilling…………………………………………………………………………………19

2.3.2 Directional and Horizontal Drilling …………………………………………………………….20

2.4 Hydraulic Fracturing………………………………………………………………………………22

2.4.1 History…………………………………………………………………………………………..22

2.4.2 Meaning and Process…………………………………………………………………………....22

2.4.3 Implications……………………………………………………………………………………...24

2.4.3.1 Positive Implications…………………………………………………………………………..24

2.4.3.2 Negative Implications………………………………………………………………………....26

2.5 Shale Gas in United States and South Africa……………………………………………………..27

2.6 Conclusion………………………………………………………………………………………...29

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CHAPTER THREE: PETROLEUM AND MINERAL RIGHTS AND OWNERSHIP AND THE

RULE OF CAPTURE…………………………………………………………………………………30

3.1 Introduction………………………………………………………………………………………..30

3.2 Ownership in Law………………………………………………………………………………...30

3.3 Petroleum and Mineral Rights in the United States and South Africa……………………………31

3.3.1 United States…………………………………………………………………………………….31

3.3.2 South Africa……………………………………………………………………………………..32

3.4 Theories of Private Petroleum and Mineral Interest in the United States…………………………33

3.4.1 The Ad Coelum Theory…………………………………………………………………………33

3.4.2 Non-Ownership Theory…………………………………………………………………………33

3.4.3 Ownership in Place Theory……………………………………………………………………..34

3.4.4 Corporeal and Incorporeal Distinction………………………………………………………….34

3.5 The Rule of Capture……………………………………………………………………………….35

3.6 Conclusion………………………………………………………………………………………...38

CHAPTER FOUR: LIABILITY FOR SUBSURFACE TRESPASS: UNITED STATES VERSUS

SOUTH AFRICA……………………………………………………………………………………...40

4.1 Introduction………………………………………………………………………………………..40

4.2 Trespass to Land…………………………………………………………………………………..40

4.3 Liability for Subsurface Trespass in Shale Gas Development……………………………………41

4.3.1 Subsurface Liability in the United States……………………………………………………….42

4.3.1.1 Ownership Jurisdictions……………………………………………………………………….42

4.3.1.2 Non-Ownership Jurisdictions………………………………………………………………….46

4.4 Subsurface Liability in South Africa ……………………………………………………………..49

4.4.1 Contractual Arrangements………………………………………………………………………50

4.4.1.1 The Concession Agreement…………………………………………………………………...50

4.4.1.2 The Production Sharing Agreement…………………………………………………………...51

4.5 Conclusion………………………………………………………………………………………...52

CHAPTER FIVE: CONCLUSION AND RECOMMENDATIONS…………………………………53

5.1 Conclusion………………………………………………………………………………………...53

5.2 Recommendations………………………………………………………………………………...54

BIBLIOGRAPHY

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LIST OF ABBREVIATIONS BCF/D - Billion Cubic Feet per Day

CA – Concession Agreement

EIA - Energy Information Administration

EPA - Environmental Protection Agency

ER - Exploration Rights

GDP - Gross Domestic Product

MPRDA - Mineral and Petroleum Resources Development Act

NOC - National Oil Company

PASA - Petroleum Agency of South Africa

PSA – Production Sharing Agreement

PR - Production Rights

RP - Reconnaissance Permit

SA – South Africa

TCF - Trillion Cubic Feet

TCP - Technical Cooperation Permits

US – United States

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LIST OF DIAGRAMS Diagram 1: Traditional Wells vs. Unconventional Well

Diagram 2: Total Primary Energy Supply in South Africa, 2010

Diagram 3: Economic Benefits of Shale Gas in South Africa

Diagram 4: United States Shale Basins

Diagram 5: Map of Operators’ TCP coverage in the Karoo Basin

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CHAPTER ONE

BACKGROUND TO THE STUDY

1.1 Introduction

With the world’s oil and natural gas becoming increasingly difficult to harness, several

ingenious and technologically advanced steps are continuously being devised or harnessed to

meet with the difficulties of extracting and winning petroleum in situ1. One of such

ingenuous steps is the use of hydraulic fracturing or fracing.

Hydraulic Fracturing is nothing new. Hydraulic fracture was first performed in 1947 in

Hugoton natural gas field in Western Kansa2. It has been used since then for a variety of

purposes including as a means to overcome near well bore damage, creating deep penetrating

fractures to enhance well productivity.3 It has also been used for secondary recovery

operations and also to help in the disposal of salt water or other waste products4. Its most

prominent use today, is for the extraction of oil and natural gas from shale plays. Oil and gas

that would otherwise be un-extractable are now been liberated from tight rocks and sand

formations by the sheer pressure from the injection of chemical mixture, liquids and

proppants into a hydraulic fracture well.

Advancement in technology tends to reduce cost of production. The development of the

technology, with attendant decrease in cost of production, together with the difficulty in

finding petroleum by easier-to-extract means has meant that hydraulic fracturing which was

hitherto uncompetitive as a result of the cost of production has suddenly stormed the market

with a new competitive posture.5 It has suddenly emerged as the new means for getting more

gas out of the ground with the attendant result of more affordable energy in the United States.

Interestingly, the United States is not the only country with shale gas resources to benefit

from the process of hydraulic fracturing. Previous studies put the shale gas resource-rich

                                                                                                                         1 In many parts of the world, especially areas with long history of petroleum operations, easy-to-extract petroleum resources have been rather exhausted which simply means that if the current civilisation is to continue to run on oil, then the current advancements in drilling technology are a necessity. 2 Terry D. Ragsdale, Hydraulic Fracturing: The Stealthy Subsurface Trespass, 28 TULSA L.J. 331, 338, n.127 (1993) 3 Ibid. 4 Ibid. 5In general, conventional production methods are still cheaper than unconventional production methods, although one cannot overlook the fact that the gap is closing as a result of technological advancement.

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countries at 41 spanning many continents such as Europe, Asia, Australia, South America,

Africa and the Middle East.6 However, current studies put the total number of countries with

shale gas resources at 46 with a total of 7,576.6 TCF (Trillion Cubic Feet) of shale gas.7 The

abundance of shale resources has not translated into its development in all countries but only

four countries have been able to commercially develop these resources, namely: Argentina,

Canada, China, and the US.8 Sinopec and PetroChina have successfully partnered in China to

report commercial production of shale gas from the Sichuan Basin with output of 0.163

billion cubic feet per day (Bcf/d). In Argentina, the National Oil Company (NOC), YPF has

partnered with Chevron to produce from the Vaca Muerta’s Neuquen Basin. In Canada, shale

gas production is from the Montney formation that increased from 1.9 Bcf/d in 2011 to 3.9

Bcf/d as of May 2014.9 Other countries that have started to explore the potential for

developing oil and gas resources from shale formations include Mexico, Colombia, Russia,

Australia, Poland, and Algeria. However, none of these countries have been able to replicate

the shale gas boom in that is experienced in the US leading to relatively cheap natural gas

that has helped in curbing carbon emissions. Shale gas production in the US occurs mainly in

the Appalachian Basin's Marcellus Shale tripling from an average of 4.8 Bcf/d in 2011 to an

average of 14.6 Bcf/d in 2014.10

1.2 The Problem Statement of the Study

Hydraulic fracturing has not been a process without negatives. From mere infringement of

legal rights to the speculations on the capability of the process to cause earthquake,

discussions about its negative implications have taken the centre stage with the voices of

environmental activists been the loudest in that respect. The central concern in many

litigations to date have stressed the potential health risks of hydraulic fracturing, and the

allegations have been that frac fluid and chemicals pollute underground water supplies.11 As

concerns sub-surface interference, there are several potential areas of conflicts with

                                                                                                                         6 United States Energy Information Administration (US EIA), “Technically Recoverable Shale Oil and Shale Gas Resources: An Assessment of 137 Shale Formations in 41 Countries Outside the United States”, Washington DC, June 2013. 7 US EIA, “Analysis and Projections: World Shale Resource Assessments”, 24 September 2015. Available at: https://www.eia.gov/analysis/studies/worldshalegas/ (accessed 23 March 2016). 8 US EIA, “Shale gas and tight oil are commercially produced in just four countries”, 13 February 2015. Available at: http://www.eia.gov/todayinenergy/detail.cfm?id=19991 (accessed 23 March 2016). 9 Ibid. 10 Ibid. 11 The American Oil and Gas Reporter, February 2012.

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established legal rules and they include: conversion, private nuisance, negligence, subsurface

trespass12 and one may add liability under the rule in Rylands V. Fletcher13 as developed by

the Courts in England.14 However, apart from the environmental issues that are still most

talked about, issues about how the process confronts established legal rights of adjourning

land owners have come before several courts, especially in the United States of America.

This study is strictly concerned with the issue of how subsurface permeation of frac mixture

confronts the old rule of trespass to land in the United States of America as a background for

other jurisdictions which may be confronted with similar situations. However, the discussions

on the subsurface trespass liability are intertwined with the age long principles of ownership

and capture. It must be stressed at the outset that the ownership of petroleum in situ in the

United States is somewhat different from that in many other jurisdictions and as concept of

individual right to petroleum resources in the United States has shaped discussions on

hydraulic fracturing and trespass, so too will mineral interest ownership peculiarities in other

emerging shale gas jurisdictions likely shape the outcome of any hydraulic fracturing trespass

issues that may arise. The ownership of petroleum in situ in the US is unlike in many other

countries where it is owned by the State. Thus the common law rule of capture that allows the

taking of another’s petroleum from adjoining fields through drilling as legal may play out

differently in other emerging shale gas jurisdictions. Therefore, any discussions on the

subject premised on the United States’ jurisprudence may serve as nothing more than

precedent for the US courts alone.

1.3 The Question of the Study

To these ends, this study seeks to answer the following main research question:

• What role has ownership theories and the rule of capture played in shaping subsurface

trespass liability in shale gas development in the United States, and would other

emerging shale jurisdictions play out differently?

In seeking to answer the main research question, the study would first provide answers to the

following questions:

• What is the rule of capture and how does it apply to oil and gas resources?                                                                                                                          12 Terry D. Ragsdale, Supra, note 2 13 (1865) 3 H. & C. 774 (Court of Exchequer); (1866) L.R. 1 Ex. 265 (Court of Exchequer Chamber) 14 “We think that the true rule of law is, is that the person who for his own purposes brings on his land and collects and keeps there anything likely to do mischief if it escapes, must keep it in at his peril, and, if he does not do so, is prima facie answerable for all the damage which is the natural consequence of its escape” per Blckburn, J in Rylands V. Fletcher (supra)

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• What is ownership and what are the various ownership theories for in situ oil and gas

resources?

• What is trespass and subsurface trespass?

• What is hydraulic fracturing and how does it relate to subsurface trespass?

1.4 The Importance of the Study

Whilst discussions on the environmental impact of this process are worth every seriousness

they receive, there is no doubt that the overarching focus on the environmental effects of the

process is capable of downplaying the other vital issue of how the process confronts

seemingly established legal rules in relation to the rights of adjourning land owners in the US.

Moreover, the world has witnessed a significant change in energy development and price. Oil

price recently fell to a 12-year low15. One of the main reasons for this is the development of

shale plays in the United States of America leading to over production. Hydraulic fracturing

is the main technology used in the process. As the use of the technology increases, it will not

be out of place to say that the courts are very likely to witness an increase in litigations

resulting from the process, which makes any discussion on hydraulic fracturing very

germane. This work is aimed at presenting a contribution to the emerging issues surrounding

the rights of adjourning land owners in areas subject to hydraulic fracturing. This legal issues

are x-rayed from the role ownership theories and the rule of capture would play in the US

jurisdiction and those of other emerging shale gas countries. It is interesting to see how even

the various contractual arrangements would play out with issues of subsurface liability for

hydraulic fracturing in shale gas development especially in other emerging shale gas

jurisdictions. It should be noted that as of today, the exploration and exploitation of shale gas

by hydraulic fracturing has been limited to a few countries most notably, the US, China,

Argentina and Canada. Deposits of Shale gas abounds in other climes. The speculation is that

if the process has proven to be an economic success in the United States, many other

countries are likely to cash in as to increase energy security and gain more foreign exchange.

The international Energy Agency has estimated that: unconventional gas will account for

nearly half of the increase in global gas production to 2035, with most of the increase coming

from the United States and Australia.16 For instance, there have been calls for the exploitation

                                                                                                                         15 See Aljazeera, “Tumbling Oil Prices Fall to 12-Year Low”, 12 January 2016. Available at: http://www.aljazeera.com/news/2016/01/oil-prices-160112084615394.html (accessed 23 March 2016). 16 World Energy Outlook 2012 Factsheet, How Will Global Energy Markets Evolve to 2035? http://www.worldenergyoutlook.org/media/weowebsite/2012/factsheets.pdf (accessed 23 March 2016).

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of shale resources in Nigeria.17 Within the African context, not much has been done for the

development of Shale resources. Nigeria has been fingered to have abundant deposits of shale

resources mostly in Benue, Bornu, Adamawa, Niger Delta and in parts of the South east and

South West.18 In Europe Shell has signed the biggest ever shale gas deal with Ukraine

amounting to about 10 Billion Dollars. The increasing international spread of Shale gas

exploitation makes the subject of Hydraulic fracturing central in the international Oil and gas

industry.

This study is important as it addresses the issues of subsurface liability with hydraulic

fracturing in shale gas development not only in the US as has been done by previous studies19

but also because it looks at these issues from the context of other emerging shale gas

jurisdictions. It is mainly concerned with the role differing ownership theories in these

jurisdictions and the rule of capture would play in the eventual outcome of the analysis

especially the role the different contract arrangements would play in shaping issues of

liability.

1.5 The Methodology of the Study

The methodology for this study is based on three approaches – a desktop-based methodology,

comparative methodology, and a doctrinal methodology.

1.5.1 Desktop-based Methodology: This methodology utilises the background search for

literature both online and offline using different tools such as Google Scholar, HeinOnline,

LexisNexis, Refworks and University of Dundee’s Library online search tools. The literature

for the discussions were also obtained offline using the University of Dundee main library to

get hard copy materials such as books, peer-review journals, conference reports, and

newsletters. The various primary and secondary data, and soft and hard copy materials on the

subject matter of hydraulic fracturing, shale gas, ownership theories, and trespass are

analysed to present a proper conceptual understanding of the subject. It is presented here as

                                                                                                                         17 See Damilola S. Olawuyi, “Hydraulic Fracturing Technology and Shale Gas Production in Nigeria: Legal and Sustainability Assessment”, Petroleum Technology Development Journal: An International Journal, Vol.2, July 2014. 18 Ibid. 19 Terry D. Ragsdale, Hydraulic Fracturing: The Stealthy Subsurface Trespass, 28 TULSA L.J. 331, 338, n.127 (1993)

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an overview of the issues raised in the materials aimed at pushing forward the arguments and

conclusions of this study.

1.5.2 Comparative Methodology: The comparative methodology in this study utilises the

US and other emerging shale gas jurisdictions to show similarities and differences in the

issues raised in the study. The country selected for this study from the group of emerging

shale gas resource-rich countries is South Africa (SA). The main reason for its selection is

that apart from being shale gas resource-rich, it has a different ownership theory for oil and

gas resources. It should be stressed that there is currently no commercial development of

shale gas in SA although there are exploration activities in SA. It presents the understanding

of issues such as ownership of in situ oil and gas resources as known in the US and other

emerging shale gas jurisdictions. The various views or schools of thoughts on ownership are

presented from the perspective of these two set of countries – the US on the one hand, and

SA on the other hand. The comparative methodology further examines the implications of

ownership theories on liability issues of subsurface trespass in these two set of countries. The

liability for subsurface trespass is also looked at from the various contractual arrangements

comparing a traditional concession and a Production Sharing Agreement (PSA) to determine

whether or not liability would be imposed by the courts.

1.5.3 Doctrinal Methodology: The doctrinal research is aimed at providing an exposition of

the rules governing subsurface trespass with hydraulic fracturing in shale gas development

utilising different jurisdictions such as the US on the one hand, and SA on the other hand.

The doctrinal research here would analyse the relationship that exists between the rule of

capture and the ownership theories that exist in the selected countries of study – US and SA.

1.6 The Structure of the Study

The study is structured into five chapters. Chapter one provides the background to the study

that provides the context and states the problem that offers the need for undertaking the study.

It further states the main question that the study seeks to provide answers to using different

methodologies such as a desktop-based approach, a comparative methodology, and a

doctrinal approach. Chapter one also provides the importance or significance of the study.

Chapter two provides further context and background by discussing the technology, hydraulic

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fracturing and shale gas development looking at its history, the technology around this

innovation, its implications whether positive or negative, and some key policy and legal

issues that arise with the use of hydraulic fracturing in shale gas development. Chapter three

examines the common law rule of capture and ownership theories for in situ oil and gas

aimed at determining subsurface liability. The ownership theories are explored from the

different jurisdictions of study to show differences in ownership rights. The chapter discusses

the ownership in place and non-ownership in place theories of ownership. Chapter four

examines the issues of subsurface trespass liability using the different jurisdictions of the

study to highlight what is obtainable in these countries. The cases are examined based on the

federating states of Texas on the one hand, and California, Louisiana and Oklahoma on the

other hand respectively. The chapter explores the issue of subsurface liability from decided

cases of the US courts where the issues have arisen. It then looks at the likelihood or

otherwise of a subsurface liability in the emerging shale gas countries based on the ownership

theories and the rule of capture. The various contractual arrangements earlier noted are also

examined to determined possible liability for subsurface liability with hydraulic fracturing in

shale gas development. Chapter five concludes the study with the major findings of the

research and recommendations.

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CHAPTER TWO

HYDRAULIC FRACTURING AND SHALE GAS DEVELOPMENT

2.1 Introduction

Hydraulic fracturing has developed with technology and helped with shale gas development.

This chapter provides the context for the study by discussing the historical development of

hydraulic fracturing, the science and technology about it and the impact it has created with

shale gas development. The chapter also looks at shale gas resources in the US and SA with

respect to their reserves and development.

2.2 Oil and Gas Geology

It is common knowledge that oil and gas deposits formed millions of years ago when organic

matter settled on the ocean bottom. By a combination of natural factors such as the impact of

bacteria pressure, heat and time, these matter were transformed into hydrocarbon entrapped in

those rocks. They are thus contained in reservoirs consisting of sedimentary rocks such as

sandstone or shale.20

Some rocks are more porous and permeable than others. The more permeable and porous

they are, the easier the extraction of the hydrocarbon they hold. The hydrocarbon in these

rock reservoirs are under enormous pressure hence their migratory propensity.

2.3 Oil and Gas Drilling

2.3.1 Vertical Drilling

Vertical or straight drilling is the traditional well drilling pattern that just goes straight down

into the earth. The vast majority of oil and gas wells are considered vertical. It is estimated

that straight vertical holes account for about 70,000 of the oil and gas wells that are drilled

annually.21 However, it must be noted that vertical wells are not necessarily vertical because

of the nature of wells to deviate from verticality.22 There are certain conditions that would

                                                                                                                         20 See Travis Zeik, “Hydraulic Fracturing Goes To Court: How Texas Jurisprudence On Subsurface Trespass Will Influence West Virginia Oil And Gas Law”, 112 West Virginia Law Review, 599. 21 Guido Brusco, et al, “Drilling Straight Down”, Oilfield Review, 2004, p.14 22 Guido Brusco, et al, “Drilling Straight Down”, Oilfield Review, 2004, p.14

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dictate that an oil and gas company opts for a vertical well. Firstly, it facilitates running larger

casing with minimal clearance. It also affords the possibility of using an extra string of casing

at some later stage in well-construction operation.23 There are, however, some limitations

with vertical drilling that horizontal and directional drilling were able to address. The main

problem was that vertical wells are only able to access natural gas that immediately surrounds

the end of the well unlike horizontal that could access natural gas that surrounds the entire

portion of the horizontally drilled section.24

2.3.2 Directional and Horizontal Drilling

Directional or slant or horizontal drilling is the opposite of vertical drilling that see oil and

gas wells drilled at an angle other than vertical. They are used to obtain information by

hitting targets that are beneath adjacent lands, and stimulating reservoirs in ways that a

vertical well cannot achieve. Directional wells are also used to reduce the footprint of a gas

field, and to construct relief wells. In some cases, where excavation is impossible or

expensive, a directional or horizontal drilling can be used to install utility services beneath

lands. However, it is usually more difficult and complicated to drill a directional or horizontal

well than a vertical well because the depth of resource-rich layer has to be determined first.25

It is also slower and time consuming to drill a horizontal and directional well because the

driller needs to stop regularly to take surveys. Directional or horizontal drilling can

sometimes cause stealing concerns as was the case between Iraq and Kuwait in 1990 where

the former accused the latter of stealing its oil using slant drilling.26 Similar slant drilling

scandal was a major occurrence in the many fields including the East Texas Oil Field in the

mid-20th century.27

                                                                                                                         23 Guido Brusco, et al, “Drilling Straight Down”, Oilfield Review, 2004, p.14 24 Curtis, R. “What is horizontal drilling, and how does it differ from vertical drilling?”, Institute for Energy and Environmental Research of North-eastern Pennsylvania Clearinghouse website, 14 January 2014. Available at: http://energy.wilkes.edu/pages/158.asp (accessed 23 March 2016). 25 Curtis, R. “What is horizontal drilling, and how does it differ from vertical drilling?”, Institute for Energy and Environmental Research of North-eastern Pennsylvania Clearinghouse website, 14 January 2014. Available at: http://energy.wilkes.edu/pages/158.asp (accessed 23 March 2016). 26 Ministry of Foreign Affairs of Japan, “Diplomatic Bluebook: Japan’s Diplomatic Activities”, 1991. Available at: http://www.mofa.go.jp/policy/other/bluebook/1991/1991-contents.htm#CONTENTS (accessed 23 March 2016). 27 Julia Cauble Smith, "East Texas Oilfield," Handbook of Texas Online. Available at: http://www.tshaonline.org/handbook/online/articles/doe01 (accessed 23 March 2016).

21  

As will be seen later and related to the issue of stealing, the rule of capture encouraged

competitive drilling. Each adjourning land owners, in order not to be “cheated” out of the

common reservoir drilled as many wells as possible on his own land and very close to the

boundaries in dense geographical patterns.28 Again as will be shown later, the rule of capture

had not yet been qualified by conservation statutes.29 Also, knowledge of petroleum geology

and drilling technology was very limited, so the tendency was for adjourning land owners to

get as much oil as possible by drilling many wells.

In this atmosphere of competitiveness waste was the order of the day and the absence of

surveying instruments capable of ascertaining subsurface position of a well meant that a well

that is slanted (advertently or inadvertently) into adjourning lands were not detected for

possible trespass claims. Drillers at the time had no idea that even a well, intended to be

straight, could, drift in course of drilling.30 The industry, thus operated, for a time, in ignorant

bliss of the potential torts of which many operators were both tort feasor and victim.31 With

the development of Whipstock in the 1930s,32 mischievous drillers were able to divert the

well bore into a neighbour’s property. This development was however countered by the

invention of surveying equipment capable of determining the sub surface location of a well

and many a land owner were thus able to apply to court for permission to survey his

neighbour’s well if there were grounds to suspect that his well deviated across property lines.

Horizontal and directional drilling’s major contribution is in the area of natural gas shale

plays. It has contributed to the development of shale gas with the advent of hydraulic

fracturing. This will be discussed shortly.

                                                                                                                         28 Terry D. Ragsdale, “Hydraulic Fracturing: The Stealthy Subsurface Trespass”, 28 TULSA L.J. 331, 338 (1993). 29 Ibid. 30 Ibid. 31 Ibid. 32 A crude drilling equipment which permitted drillers to deviate a well across property lines.

22  

2.4 Hydraulic Fracturing

2.4.1 History

Shale gas development was a difficulty technically and commercially at a time even though

geologists have known about these types of formations.33 In 1821 at the Appalachian

Mountains in present day New York, shale gas was developed but this was done for very

little profits by a cottage business.34 In the Jurassic strata in the United Kingdom at the same

time was explored for shale gas but without any success.35 However, it was identified that

this area and those of the Carboniferous strata in the Midlands are rich in shale gas although

25 years after this discovery by researchers from Imperial College, nothing happened.36 The

discovery for shale gas in the UK finally occurred in 2010 at Cuadrilla.

2.4.2 Meaning and Process

Shale formations are usually different meaning that the issues faces by a particular formation

may not be the same as those faced by another.37 It’s the requirement for additional procedure

for extracting shale gas from its formations that makes it unconventional otherwise it is like

any other gas. Technological advances have made this additional processes possible called

horizontal drilling and fracking or hydraulic fracturing.38 Fracking allows for the

development of more gas in tight or difficult formations.39 It is defined as a process whereby

fissures are created in underground rock formations through the pumping of pressurised

material into the rock formation.40 These proppants could be sand and water mixed with other

chemicals.41 The process requires drilling a well vertically using directional drilling to depths

                                                                                                                         33 Kenneth Barry Medlock III, Modeling the Implications of Expanded US Shale Gas Production, Energy Strategy Reviews 1, 2012, pp.33 – 41 at p.36 34 Richard C. Selley, UK shale gas: The story so far, Marine and Petroleum Geology 31 (2012) 100 - 109 at p.100 35 Ibid. 36 Ibid. 37 Susan L. Sakmar, The Global Shale Gas Initiative: Will the United States be the Role Model for the Development of Shale Gas around the World? Houston Journal Of International Law, Vol. 33, No.2, 2011 pp.369 – 417 at pp.375-376 at p.382 38 Craig C. Douglasa, Guan Qina, Nathan Collierb, and Bin Gongc, Intelligent fracture creation for shale gas development, International Conference on Computational Science, ICCS 2011, published in Procedia Computer Science 4 (2011) 1745–1750; 39 Francis Gradijan, State Regulations, Litigation, and Hydraulic Fracturing, Environmental & Energy Law & Policy Journal, Vol.7, No.1, 2012, pp.47-85 at p.48 40 DE Pierce, “Developing a Common Law of Hydraulic fracturing”, U. Pitt. L. Rev., 2010. 41 Ibid.

23  

of about 5000 and 12,000 ft42 and using concrete to encase it to prevent seepage. Another

round of multiple horizontal drilling extends the well further thousands of feet with the

fracking fluids pumped through perforations under pressure to keep formation open and to

release gas.43 This procedure has been developed at a cheaper cost to make fracking

commercially viable.44 In an unconventional drilling, the well pad is a single one while in a

conventional drilling there is multiple well pads as shown in the diagram below, and this

makes it environmentally friendly.

Diagram 1: Traditional Wells vs. Unconventional Well

Source: Chesapeake Energy, 201245

With energy demand increasing and resource development increasingly becoming difficult,

the use of hydraulic fracturing in shale gas development is a necessity that is greatly

welcomed by modern society..46

                                                                                                                         42 Vaughan, A.D., Pursell, D., Frac Attack: Risks, Hype, and Financial Reality of Hydraulic Fracturing in the Shale Plays, Reservoir Research Partners and Tudor Pickering Holt and Co, Houston, 2010 available at: http://tudor.na.bdvision.ipreo.com/NSightWeb_v2.00/Downloads/Files/11930.pdf (accessed 22 March 2016). 43 Ibid. 44 D M. Guarnone, F. Rossi, E. Negri, C. Grassi, D. Genazzi, and R. Zennarom, An Unconventional Mindset for Shale Gas Surface Facilities, Journal of Natural Gas Science and Engineering 6 (2012) 14 - 23 at 15; Dianne Rahm, Regulating hydraulic fracturing in shale gas plays: The case of Texas, Energy Policy 39 (2011) 2974–2981 at p.2974 45 Mary Tiemann, et al., Marcellus Shale Gas: Development Potential and Water Management Issues and Laws, Congressional Research Service (CRS) Report, January 27, 2012, p.10 originally from Chesapeake Energy, “Drilling and Production”, 2012 available at http://www.askchesapeake.com/Eagle-Ford-Shale/Drilling-and-Production/Pages/information.aspx (accessed 14 December, 2012) 46 Travis Zeik, “Hydraulic Fracturing Goes To Court: How Texas Jurisprudence On Subsurface Trespass Will Influence West Virginia Oil And Gas Law”, 112 West Virginia Law Review, 599.

24  

2.4.3 Implications

2.4.3.1 Positive Implications

1. Environmental Benefits: Gas has a lower emission level when it is compared to coal and

crude oil. In this sense, there is some environmental benefit with shale gad development. For

instance, SA power generation is mainly from coal to about 76% and this made SA the

highest carbon emitter in Africa and the 12th globally. Thus shale gas is a potential for

reducing this huge statistics for SA. The chart below (diagram 2) shows the country’s 2010

energy supply with coal leading by 67%. However, the problem of climate change cannot be

tackled with shale gas discovery.47 Another environmental benefit of shale gas is the

horizontal drilling that prevents multiple vertical wells causing surface disturbance.

Diagram 2: Total Primary Energy Supply in South Africa, 2010

Source: U.S. Energy Information Administration, 201348

2. Geopolitical and Energy Security Benefits: Shale gas development is capable of

transforming the US from a net importer of gas to a net exporter of gas.49 This means that

reliance on Middle East energy becomes less and the problems of the oil embargo that

occurred in the 1970s becomes less problematic. However, exporting countries may realise

                                                                                                                         47 Jinsheng Wangn, David Ryan, Edward J. Anthony, Reducing the greenhouse gas footprint of shale gas, Energy Policy 39 (2011) 8196–8199 48 United States Energy Information Administration, South Africa: Overview, 17 January, 2013, available at: http://www.eia.gov/countries/analysisbriefs/South_africa/south_africa.pdf (accessed 28 February, 2013) 49 Kenneth Barry Medlock III, Modeling the implications of expanded US shale gas production, Energy Strategy Reviews 1 (2012) 33 – 41 at p.33

25  

that they need to move into more sustainable paths in energy security.50 For SA, although it

has over 75% power generation making it the highest in Africa, some of its population still

remain without electricity.51 Shale gas has the potential of helping SA boost its power

generation and reduce its gas import from Mozambique. .

3 Economic and Employment Benefits: There are lots of economic benefits for the US and

SA with shale gas development. Shale gas production in the US contributed to almost $238

billion to its Gross Domestic Product (GDP) and $63 billion in taxes in 2012.52 Importantly,

shale production in the US will continue to increase.53 The employment rates in the US

increased by 28,000 between 2007 and 20011 due to shale gas activities.54 There are

estimates that point to the fact that employment from unconventional oil and gas activity

would rise to 3.5 million jobs in 2035.55 In SA on the other hand, studies have shown that

shale gas development can create up to 700,000 jobs and impact its GDP to about 9.6% if

between 20 and 50 TCF of shale gas is discovered. The table below (diagram 3) provides

these estimates. Another estimate shows that there would be direct and indirect employment

benefits of up to 850,000 people in SA as a result of shale gas development and it would

contribute to about $625m to the broader economy.56

                                                                                                                         50 Bill Law, Gulf states face hard economic truth about subsidies, BBC News Middle East, 18 December, 2012, available at: http://www.bbc.co.uk/news/world-middle-east-20644964 (accessed 23 December 2015) 5151 52 IHS, America’s New Energy Future: The Unconventional Oil and Gas Revolution and the US Economy, Volume 1: National Economic Contributions, An IHS Report, October 2012 53 Ibid. 54 IHS, America’s New Energy Future: The Unconventional Oil and Gas Revolution and the US Economy, Volume 2: State Economic Contributions, An IHS Report, December 2012 55 IHS, America’s New Energy Future: The Unconventional Oil and Gas Revolution and the US Economy, Volume 1: National Economic Contributions, An IHS Report, October 2012; Thomas C. Kinnaman, The Economic Impacts of Shale Gas Extraction: Moving Beyond Jobs and Tax Revenues, Energy Delta Institute (EDI) Quarterly, Volume 3, No. 4, December 2011 for general discussion on economic impacts of shale gas 56 Ivo Vegter, Shale Gas: Fracking for Africa, Africa in Fact – The Journal of Good Governance in Africa, Issue 4, September 2012, p.13

26  

Diagram 3: Economic Benefits of Shale Gas in South Africa

Source: Shell, 2012.57

2.4.3.2 Negative Implications

There is the potential for negative implications of shale gas development around the areas of

health and the environment especially when the production processes are not properly done.

The issues of wastewater treatment and its disposal in shale gas development has been of

serious concern to environmentalists.58 There are concerns that fracking can cause

underground water contamination due to the use of chemicals for drilling that some consider

hazardous,59 and these concerns become very real where there are cases of faulty well

construction. Shale gas development can further cause noise pollution and also air pollution

because the drilling process is noisy and can emit methane and other organic compounds

respectively.60 One of the environmental risks to shale gas development is the potential for

frac fluid to straddle into adjourning lands leading to allegations of sub-surface trespass, and

this will be dealt with in chapter four of this study.

                                                                                                                         57 Shell, “Supporting Communities”, July 2012, available at: http://s01.static-shell.com/content/dam/shell-new/local/country/zaf/downloads/pdf/karoobasin/supporting-communities.pdf (accessed 24 February, 2013) 58 Michael Greenstone, et al, Energy Policy Opportunities and Continuing Challenges in the Presence of Increased Supplies of Natural Gas and Petroleum, The Hamilton Project, Framing Memo I, Brookings, June 2012 59 See, Dianne Rahm, Regulating hydraulic fracturing in shale gas plays: The case of Texas, Energy Policy 39 (2011) 2974–2981 60 Michael Greenstone, et al, supra, note 58 above.

27  

The issue of negative environmental and health impacts of shale gas development continue to

pose a challenge and the US Environmental Protection Agency (EPA) has undertaken a study

on the effects of fracturing on water and the environment.61 A recent study has, however,

undermined the EPA blaming rising methane levels on farming and not on fracking.62 The

uncertainty with the effects of shale gas development on the environment and health of

mankind has led to two major schools of thought – one that believes that a moratorium on

shale gas development should be adopted based on the precautionary principle, and the other

that argues for more regulation of the industry to deal with these impacts.63

2.5 Shale Gas in United States and South Africa

Shale gas development in the United States occurs in the Marcellus, Barnett, New Albany,

Haynesville/Bossier, Fayetteville, and Antrim Shale Basins of the lower 48 federating states64

as shown in the map (diagram 4) below.

Diagram 4: United States Shale Basins

                                                                                                                         61 Environmental Protection Agency, Hydraulic Fracturing Research Study, June 2010, available at: http://www.epa.gov/safewater/uic/pdfs/hfresearchstudyfs.pdf (accessed 10 December, 2012) 62 Washington Times, Study undermines EPA, blames rising methane levels on farming, not fracking, Monday, 14 March 2016. Available at: http://www.washingtontimes.com/news/2016/mar/14/farming-not-fracking-likely-causing-methane-levels/ (accessed 21 March 2016). 63 Francis Gradijan, State Regulations, Litigation, and Hydraulic Fracturing, Environmental & Energy Law & Policy Journal, Vol.7, No.1, 2012, 47-85 at pp.83-85; Terry W. Roberson, Environmental Concerns of Hydraulically Fracturing a Natural Gas Well, Utah Environmental Law Review, VOL. 32 NO. 1, 2012, pp.67 – 136 64 Susan L. Sakmar, The Global Shale Gas Initiative: Will the United States be the Role Model for the Development of Shale Gas around the World? Houston Journal Of International Law, Vol. 33, No.2, 2011 pp.369 – 417 at pp.375-376 at p.382

28  

Source: Department of Energy, 2009.65 In South Africa, shale gas is mainly in the Karoo Basin and the US EIA estimates that the

country has about 485 TCF of technically recoverable shale gas.66 There are, however,

challenges with developing shale gas in the Karoo Basin because apart from being a semi-

desert arid area with little rainfall, it presents technical difficulties. With being a semi desert,

it means water is a problem for the region67 justifying its etymological name of ‘Khoisan’

translated to mean ‘thirsty land’.68 The technical difficulties arise with the limits on the use of

seismic imaging in production thus increasing the risks of development.69 However, the

region was once unsuccessfully explored for shale gas in 1965 by a government formed

company, Soekor (Pty) Limited.70 Another potential problem with shale gas development in

the region is the diversity of its people as it has a mixed ethnic population of about 300,00071

making meeting community expectations a tough one.72 The Petroleum Agency of South

Africa (PASA) has granted Technical Cooperation Permits (TCPs) to some companies

including Shell for exploring the Karoo Basin.73 The map below (diagram 5) shows the

various operators’ TCP coverage of the Karoo Basin.

                                                                                                                         65 Department of Energy, Modern Shale Gas Development In The United States: A Primer, April 2009, p.ES-2 66 Energy Information Administration, World Shale Gas Resources: An Initial Assessment of 14 Regions Outside the United States, U.S. Energy Information Administration, 2011 available at: http://www.eia.gov/analysis/studies/worldshalegas/pdf/fullreport.pdf 67 South African Water Research Commission, Regional Water Statistics, available at: http://www.wrc.org.za/Pages/Resources_Regionalstats.aspx (accessed 13 January, 2013) 68 Melissa Stark, et al, Water and Shale Gas Development: Leveraging the US experience in new shale developments, Accenture, 2012, p.36 69 Ibid, p.16 70 Environmental Management Plan South Western Karoo Basin Gas Exploration Application: Eastern Precinct, Shell Exploration Company B.V., Volume 1, Final Report, April 2011, p.25 71 Melissa Stark, et al, supra, note 68 above, p.48 72 See, Johnson, M.R. et al, Sedimentary Rocks of the Karoo Supergroup, In Johnson, M.R, et.al (eds.), The Geology of South Africa (Pretoria: Geological Society of South Africa and Johannesburg Council for Geoscience, 2006); Thomas Branch, et al, “The Whitehill Formation: A High Conductivity Marker Horizon in the Karoo Basin”, South African Journal of Geology, Vol. 110, 2007, pp. 465-476 73 Melissa Stark, et al, supra, note 68 above, p.16

29  

Diagram 5: Map of Operators’ TCP coverage in the Karoo Basin

Source: Melissa Stark, et al, 201274

2.6 Conclusion

The development of shale gas that is abundantly available in many states in the US and in

SA’s Karoo Basin is highly reliant on the innovation and engineering success of hydraulic

fracturing combined with directional and horizontal drilling. It has been shown that without

this ingenuity of petroleum engineers, most gas resources would have still been trapped in

rocks. However, the shale gas’ economic and energy security impact as shown in SA and the

US have been downplayed by the negative environmental and health impacts. The seepage of

underground fracking fluids to adjoining lands is a likely environmental impact that can lead

to an action for subsurface trespass. This may also arise with injected fluids in an enhanced

recovery process. Interestingly, possible cause of action for subsurface trespass may arise

with horizontally or directionally drilled wells.

                                                                                                                         74 Ibid.

30  

CHAPTER THREE

PETROLEUM AND MINERAL RIGHTS AND OWNERSHIP AND THE RULE OF CAPTURE

3.1 Introduction

This chapter provides further context for this study and underpins the conceptual framework

in this research. The concepts of ownership and the rule of capture will be explained in this

chapter by discussing their meanings and application in the petroleum industry. The

ownership rights in the US and SA will be examined with different ownership theories

explored. The nexus between the rule of capture and ownership theories will be further

explored in the chapter, and we will see how the application of the rule of capture has been

whittled down with statutory exceptions.

3.2 Ownership in Law

By law, ownership is the relationship that exists between an individual, group, corporation or

government and an object that may be corporeal or incorporeal (such as a patent, copyright,

annuity, furniture) and movable or immovable such as land, car, animal, and house). The

subject of ownership is complex because of its relative nature based on the culture, customs

and laws of a people at any given time. This makes it rather difficult to find a common

denominator of ownership. In strict legal terms, the term ownership from a property law

perspective means that the law protects ones possession, use and enjoyment of property to the

exclusion of others except with the consent of the owner of the property.

Ownership of land that includes anything that is affixed to the land such as crops and

buildings is considered real property in contrast to personal property or chattel such as

furniture, clothing or money. Oil and gas resources are located underground which is still

considered part of land at common law. Under common law, ownership of land includes to

the heavens and extends downwards to the centre of the earth.75 The issue of ownership of

resources on land in this discourse is important as it may provide the basis for determining

liability for subsurface trespass in the event of seepage of fracking fluids into adjoining or

adjacent fields.

                                                                                                                         75 Terry D. Ragsdale, Supra, note 2 above.

31  

3.3 Petroleum and Mineral Rights in the United States and South Africa

3.3.1 United States

The Ownership of oil and gas resources in the United State differs from that in most other

countries of the world. The situation of the title to petroleum within the United States is of

some interest since it embraces no less than four different types of ownership rights. These

are firstly the federal jurisdiction; secondly, that of the individual states; thirdly, that of the

individual landowner; and finally various mixtures of rights embracing native title. In this

connection, Americans came to believe that the land that they settled was Terra Nullius, that

is to say, empty. The existence of Native Americans, or Indians as they were later called, was

not recognised legally (indeed the original inhabitants of North America were only admitted

to citizenship quite late in the twentieth century). The great waves of European immigration

into America encouraged that nation to pass homesteading legislation and immigrants to take

up tracts of land. It also reserved great tranches of federal lands in some western states for

pastoral grazing.76 Individual American states vest title in petroleum in their contiguous

offshore areas out to the three-mile limit. Seaward of that line, and consequent upon the

Truman Proclamation of 1951, title to petroleum is vested in the federal government.77 Thus

there are about four different petroleum and mineral title regimes in the US.78 In the United

States, petroleum and mineral resources underneath individual or tribal lands belong to the

individual or tribal owner of the land, except as will be shown later, in cases where the rule of

capture applies.79 An exception is where the land in question belongs to the government

(federal or state) in which case, petroleum in situ belongs to the State. Ownership of mineral

rights means that the individual or tribal landowners have the legal right to explore, extract,

and sell any mineral that rests beneath the land, or receive royalty payment upon entering into

agreement with oil and gas companies for the development of resources underneath the

land.80 It should be emphasised that there are instances where there is a split ownership in

that the mineral rights are severed from the surface ownership of land.

                                                                                                                         76 Bunter, M.A.G., “Modern Practice in Petroleum Licensing”, Conwy: B & R Co., 2002, p.281 77 Ibid. 78 Ibid. 79 See, Duval, C. et al, International Petroleum Exploration and Exploitation Agreements, United States of America, Barrows Company Inc., New York, 2nd edn 2009. 80 Kilmer v. Elexco Land Servs., Inc., 990 A.2d 1147, 1150 (Pa. 2010); Kropa v. Cabot Oil & Gas Corp., 609 F.Supp.2d 372, 379-382 (M.D. Pa. 2009);

32  

3.3.2 South Africa

This is in contradistinction to the situation in many other parts of the world where petroleum

in situ in all parts of the country belongs to the government of that country or State and only

the government can grant a right to explore for them. This is the situation in which South

Africa finds itself although historically the country had dual mineral ownership regime –

private and State ownership with the former based on the right to own property mainly

skewed in favour of the whites in the then apartheid regime. This was facilitated by the 1913

Black Land Act that barred blacks from owning land other than 13% of the rural land.

Importantly, the then mineral rights laws granted white owners surface rights up to the sky

above and down to the earth below as envisaged under the common law. State ownership

came in diverse forms and by virtue of the South African Development and Trust Act, 1936

some states held mineral rights while in some instances, the government held the mineral title

in trust for specific local communities.81 However, with the enactment of the Mineral and

Petroleum Resources Development Act 2002 (MPRDA), as promulgated in May 2004, the

idea of State ownership of mineral rights is now the only recognised form of title in South

Africa. However, the ‘old older’ mineral rights remained in force for five years to allow the

owners apply for new mineral rights which will remain in force for another 30 years. Under

section 3(1) of the MPRDA, mineral wealth of SA is considered a national asset and common

heritage belonging to every South African with the State as a custodian. Section 2(a) of the

Act recognised the right of the SA government to exercise sovereignty over the entire mineral

and hydrocarbon resources in the country.82 However, the transitional provisions of the

MPRDA made a provision that recognised some old practice whereby local communities that

were in the trust-like arrangements with designated trustees had entered into contractual

agreements with mining companies and were receiving royalty payment for use of land

and/or mineral rights. Item 11 of Schedule 2 to the MPRDA retained this old arrangement or

right by providing that royalties that accrued to such local communities would continue to

accrue to them subject to certain conditions such as submitting annual reports to the Minister

on the use and disbursement of the funds.

                                                                                                                         81 South African Development and Trust Act, 1936; Lebowa Minerals Trust Act, 1987; Ingonyama Trust Act, 1994; Rural Areas Act, 1974; for a discussion on these, see F.T. Cawood and R.C.A. Minnit, A Historical Perspective on the Economics of the Ownership of Mineral Rights Ownership, Journal of the South African Institute of Mining and Metallurgy, November/December 1998, pp. 369-376 82 Article (2)(1) of the United Nations (UN) Charter of Economic Rights and Duties of States (CERDS) grants States permanent sovereignty (includes possession and disposal) over its natural resources.

33  

The subject of ownership of petroleum and mineral rights is indeed of great significance in

determining whether there has indeed been subsurface trespass as only an owner or a person

in possession can maintain an action in trespass. As will be seen below, many a claim on sub-

surface trespass have turned on whether an owner or a royalty interest owner who has granted

possession to someone else can maintain a claim in trespass. It would appear that in countries

where there is no individual ownership of petroleum and mineral resources, there can hardly

be any issues of trespass if the complaint is, without more, an allegation that mineral wealth

underneath the owner’s land has been tampered with as he has no rights to them in the first

instance, although it is usually a crime to tamper with mineral wealth without government

license.

3.4 Theories of Private Petroleum and Mineral Interest in the United States

3.4.1 The Ad Coelum Theory

As noted above, the United States of America typifies the situation where mineral wealth

underneath the land of an individual or native tribe belongs to the individual or native tribe

subject to the rule of capture as will be shown shortly. This ownership presumption was

founded on the Ad Coelum Doctrine.83 By this doctrine, ownership of the surface includes

ownership to the heavens and extends downwards to the centre of the earth.84 Courts soon

discovered that the fugacious nature of oil and gas made strict application of the ad coelum

doctrine impractical. Application of the traditional ad coelum doctrine in the oil and gas

context would have obstructed development of an important natural resource by subjecting

producers to liability for draining oil and gas from offsetting properties. For this reason,

courts developed the "rule of capture"85 to be discussed shortly.

3.4.2 Non-Ownership Theory

The non-ownership in place theorists hold the view that oil and gas underneath the ground are

like wild animals and as such not subject to ownership until captured. Thus oil in the ground

does not belong to the owner of the land until he has taken steps to reduce it into possession

                                                                                                                         83 cujus est solum ejus est usque ad coelum et ad inferos 84 Terry D. Ragsdale, Supra, note 2 above. 85 Ibid.

34  

through his well bore. All he has is a right to explore for and reduce same into possession and

after which it becomes subject to ownership. His interest is in the nature of a profit a prendre,

an exclusive right to explore and develop the property in order to reduce the oil and gas into

possession.86 Federating states in the US that fall into this category include Louisiana,

California and Oklahoma.

3.4.3 Ownership in Place Theory

In the ownership in place jurisdictions, the view is that oil underneath the land belongs to the

owner of the land since they are part of the realty or land. This strict adherence to the ad

coelum doctrine in held in states like Texas, Kansas, Mississippi and New Mexico. Thus the

owner of the ground does not also necessarily need to reduce the oil into possession before it

becomes his own. In addition to this, the mineral interest owner retained the exclusive right to

explore and develop the property in order to reduce oil and gas to possession.87 However, this

ownership in place is subject to the rule of capture88.

In dealing with the subject, the Texas Supreme Court in Elliff v. Texon Drilling Company89

stated as follows:

“In our state the landowner is regarded as having absolute title in severalty to the

oil and gas in place beneath his land. The only qualification of that rule of

ownership is that it must be considered in connection with the law of capture and

is subject to police regulations. The oil and gas beneath the soil are considered a

part of the realty. Each owner of land owns separately, distinctly and

exclusively all the oil and gas under his land....”

3.4.4 Corporeal and Incorporeal Distinction

It is very tempting to think that since both theories of ownership do subject oil and gas in the

ground to the rule of capture that the practical difference between them is blurred and of no

moment. However some of the cases dealing on trespass have turned on whether the owner of

                                                                                                                         86 Ibid 87 Ibid 88 Ibid 89 210 S.W.2d 558, 561 (Tex. 1948)

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land actually has ownership of oil underneath his land. In places where the ownership in

place theory holds sway, the owner of land has a corporeal interest over the oil underneath his

land, whilst in non-ownership jurisdictions, the land owner has incorporeal interests over the

oil underneath his land in the nature of a profit a prendre.

At common law, a corporeal interest in land included the right of physical possession,

whereas an incorporeal right merely included the right to use the land.90 Although not

specifically related to trespass, a land owner in ownership in place jurisdictions may be able

to pledge the oil in the ground as he has a separate ownership interest whilst a non-owner

may not be able to do so as he does not own the oil underneath his land. A royalty interest is

an incorporeal interest in both non ownership and ownership in place jurisdictions, since a

royalty is a right to oil and gas when produced, not a right to present possession.91

3.5 The Rule of Capture

The rule of capture is a common law principle that originally states that with regards to water,

and in the absence of wilful waste or malice, a landowner could take all the water they could

under their land and do with it as it pleases them. Interestingly, the landowner(s) will not be

liable to their neighbours even if in collecting water under their land, deprived the neighbours

of the use of the water under the neighbour’s land.92 The rule of capture is in contrast to the

doctrine of reasonable use that states that a landowner’s right to groundwater is not absolute

restricted to the quantity that is necessary for his reasonable use.93 The rights of adjoining or

adjacent landowners is also relative and subject to reasonable use.94

The rule of capture was first articulated in 1843 in the classical case of Acton v. Blundell95 as

follows:

“That the person who owns the surface may dig therein, and apply all that is there

found to his own purposes at his free will and pleasure; and that if, in the exercise

of such right, he intercepts or drains off the water collected from the underground

springs in his neighbour’s well, this inconvenience to his neighbour falls within

                                                                                                                         90 Terry D. Ragsdale, Supra, note 2 above. 91 Ibid. 92 See Sipriano v. Great Spring Waters of America, Inc., 1 S.W.3d 75, 76 (1999). 93 See Friendswood Development Co. v. Smith-Southwest Industries, 576 S.W.2d 21, 25 (1978). 94 See Friendswood Development Co. v. Smith-Southwest Industries, 576 S.W.2d 21, 25 (1978). 95 152 Eng. Rep. 1223 (Ex. Ch. 1843), quoted in East, 81 S.W. at 280.

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the description of damnum absque injuria,96 which cannot become the ground of

an action.”

The rule of capture applicable to water resources was extended to the petroleum industry. In

the early years of the development of the petroleum industry, courts being faced with trespass

claims involving drainage of oil in the ground applied a teleological approach in determining

liability for trespass and thus developed the rule of capture. Moreover the migratory character

of oil in the ground resulted in the courts in the United States, likening petroleum in the

ground to wild animals with “fugacious” propensities. As with the law relating to wild

animals, where petroleum in the ground migrates to adjoining lands, the landowner may drain

the oil as long as the well from which the oil is drained is situated on his own land for the rule

of capture does not admit of trespass by directional drilling or slant well.97 Thus the rule of

capture has been defined as a common law legal doctrine that permits a landowner to extract

as much oil and gas as possible from a well located on his own property regardless of

whether the oil and gas extracted were originally located under his land or under

neighbouring tracts.98

The rule of capture was adopted in the state of Texas by the Texas Supreme Court in the

landmark case of Houston and Texas Central Railroad Corporation v. East.99 In that case, a

well was dug by a railroad company on its property in order to supply water to its machine

shops and it produced about 25,000 gallons of water per day but had dried up a neighbouring

landowner’s well used for household services. The landowner sued the railroad corporation

for the loss he suffered due to the dry well. Citing the decision in Action v. Blundell, the court

was faced between the rule of capture and the rule of reasonable use, also called the

American Rule. Based on public policy considerations, the court opted for the rule of capture

bot noting that the legislature could by its powers regulate groundwater

Again, in describing the rule of capture the Texas Supreme Court noted in the case of Elliff v.

Texon Drilling Co.100 as follows:

“Courts generally have come to recognize that oil and gas, as commonly found

in underground reservoirs, are securely entrapped in a static condition in the                                                                                                                          96 A loss or damage without injury. 97 Travis Zeik, Hydraulic Fracturing Goes To Court: How Texas Jurisprudence On Subsurface Trespass Will Influence West Virginia Oil And Gas Law, 112 West Virginia Law Review, 599. 98 Ibid. 99 98 Tex. 146, 81 S.W. 279 (1904). 100 210 S.W.2d 558 (Tex. 1948).

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original pool, and, ordinarily, so remain until disturbed by penetrations from the

surface. It is further established, nevertheless, that these minerals will migrate

across property lines towards any low pressure area created by production from

the common pool. This migratory character of oil and gas has given rise to the so

called rule or law of capture. That rule simply is that the owner of a tract of land

acquires title to the oil or gas which he produces from wells on his land, though

part of the oil or gas may have migrated from adjoining lands. He may thus

appropriate the oil and gas that have flowed from adjacent lands without the

consent of the owner of those lands, and without incurring liability to him for

drainage.”

Thus, the rule of capture, a rule of non-liability, addressed the concern that the ad coelom

doctrine would discourage vigorous exploration for oil and gas resources.101 The Rule of

capture on its face seems to be in conflict with the traditional theory of ownership; that is, the

ad Coelum doctrine. An attempt in various states of the United States to reconcile both

doctrines gave rise to bifurcated theories of ownership. Whilst courts in some states felt the

need to deny private ownership of petroleum in situ because of the rule of capture (non-

ownership in place theory), others thought it appropriate to maintain private ownership of

petroleum underneath his land but subject only to the rule of capture (ownership in place

theory). Two dominant theories thus reigned supreme, depending on the federating state in

which the individual or native tribe finds themselves.

The rule of capture has been criticised since its adoption in the state of Texas over 100 years

ago and Texas remains one of the very few states that have retained the rule of capture.102

Many states in the US have come up with conservation laws in order to mitigate the problems

associated with the rule of capture such as the drilling of too many wells that can cause waste,

and the dissipation of an oil and gas reservoir. Conservation laws have sought to enforce rules

on fair share, pooling, prorationing, and well spacing for maximum recovery.103

• Fair Share: With fair share also known as correlative rights rule, landowners are

afforded equal opportunity to capture a reasonable amount of recoverable oil and gas

although the landowner does not have a right to that quantity of oil and gas so that

                                                                                                                         101 Terry D. Ragsdale, Supra, note 2 above. 102 Sipriano, 1 S.W.3d. at 82, fn. 14. 103 See, e.g., Arkansas Code Annotated § 15-72-101 et seq.

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where the landowner fails to act diligently, others can drain the oil and gas from under

her or his land.

• Pooling: this is a procedure or practice that allows for the combination of all or

portions of multiple oil and gas fields to form a unit or pool for the drilling of a single

oil and gas well. Conservation laws usually provide for pooling to be contained in the

oil and gas leases allowing the oil and gas companies to consolidate the leased

premises with adjoining leased tracts. Revenue from the pooled unit is shared on the

basis of surface or mineral acreage as owned by each interest owner.

• Well-Spacing Rules: Federating states’ laws and regulations usually specify the size

of the area in which one well may be drilled (drilling unit) and where another well

may be drilled within each unit. This prevents the drilling of multiple wells even

when one well could drain the same area.

• Proration or Proration Orders: This is a situation whereby laws of federating states

authorises regulatory bodies to set limits on rate of production from oil and gas wells

so as to protect the fair share that each oil and gas owner is entitled to. Proration

orders further helps to protect against over-production.

The rule of capture has thus been modified to prevent wilful waste, malicious harm, and

subsidence together with the fact that a legislature can by law modify the rule of capture. This

is not to say that its impact has been completely diminished in the petroleum industry. Its role

in subsurface trespass is linked to the various ownership theories for mineral rights that the

courts in the US have applied particularly in the state of Texas.

3.6 Conclusion

This chapter has shown that ownership of land extends to the heavens and downwards to the

centre of the earth under common law, ownership of resources on land is crucial in

determining liability for subsurface trespass litigation. Ownership of petroleum and mineral

resources in the US could be by the federal or state governments, or by individual and tribal

landowners although there may be split ownership with the mineral rights severed from the

surface land ownership. Unlike the US, ownership of petroleum and mineral rights is vested

with the government of SA under the MPRDA and the constitution allows the government to

exercise sovereignty on the people’s behalf. However, the MPRDA retained the rights of

communities with trust-like arrangements with designated trustees that allowed them to enter

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into contractual agreements with mining companies and were receiving royalty payment for

use of land and/or mineral rights. The different ownership theories such as the ad coelom,

ownership and non-ownership theories and their application to the rule of capture showed

that liability is also dependent on extenuating circumstances.

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CHAPTER FOUR

LIABILITY FOR SUBSURFACE TRESPASS: UNITED STATES VERSUS SOUTH AFRICA

4.1 Introduction

The tort of trespass is an old common law action that plays out in different forms. The

chapter examines subsurface liability for trespass in shale gas development by exploring the

US and SA jurisdictions. The chapter will examine liability bearing in mind the ownership

theories applicable in each jurisdiction and by implication the rule of capture. Subsurface

liability will further be examined from a contractual perspective using the two most popular

petroleum contractual arrangements – the Concession Agreement, and the Production Sharing

Agreement (PSA).

4.2 Trespass to Land

Trespass, originating as a common law in England simple means any wrongful conduct

causing injury or loss. It is divided into three, namely trespass to the person, trespass to

chattels, and trespass to land. This study is mainly interested in trespass to land that means

the “unjustifiable or wrongful interference with the possession of land or ones possessory

rights in real property”104 There is trespass whether or not the trespasser knows he is

trespassing as long as there is intention to enter upon the land in question.105Thus it is no

defence that the only reason for his entry was that he had lost his way or even that he

genuinely believed the land was his own.106 For there to be trespass, there must be

interference with possession107 and the commonest way to show this is by showing that there

is a subsisting lease in favour of the claimant. The common law principle in Latin that states

that, cuius est solum eius est usque ad coelum et ad inferos and meaning "for whoever owns

the soil, it is theirs up to Heaven and down to Hell" has consistently shaped the discussions

on trespass although the courts have in modern times restricted the right of absolute dominion

over the subsurface. By definition, a subsurface trespass to land occurs where there is an

unlawful or wrong interference with the subsurface possessory rights of a landowner. In the

context of the oil and gas industry, a subsurface trespass may arise under about three different                                                                                                                          104 Winfield & Jolowicz on Tort, United Kingdon, Sweet and Maxwell, London, 15th edn, 1998; see also, Robert's River Rides v. Steamboat Dev., 520 N.W.2d 294, 301 (Iowa 1994) 105 ibid 106 ibid 107 ibid

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circumstances – a) through directionally drilled wells; b) via injected fluids in enhanced

recovery projects; and c) through hydraulic fracturing operations for shale gas development.

The issues that arise then becomes whether it can be considered trespass to land where a third

party drills a directional or horizontal well that bottoms out beneath another’s property in

trying to access oil bearing in mind the rule of capture and the theories of ownership,

Similarly, would it amount to subsurface trespass if in fracturing a well, there is underground

seepage of contaminated water or chemical into another’s property again bearing in mind that

the rule of capture and theories of ownership, and knowing that the act occurred while trying

to recover oil and gas.

4.3 Liability for Subsurface Trespass in Shale Gas Development Hydraulic fracturing is only one form of sub-surface invasion. Other forms of sub-surface

invasion are injection of fluids to enhance the flow of petroleum otherwise referred to as

secondary recovery projects, drilling a well such that it deviates into adjourning property

(directionally drilled wells). Since there are not too many cases directly dealing on hydraulic

fracturing operation, cases dealing with secondary recovery operation and directional drilling

will be used as analogies in the examination of liability for subsurface entry. The application

of these cases to hydraulic fracturing operation, will inevitably turn on how similar or

dissimilar the courts considers them to be. From both a functional and physical perspective, a

hydraulic fracture is largely analogous to a directionally drilled well. Hydraulic fracture

creates fissures that extends into adjourning lands through which proppants and other

chemical mixture flows into adjourning land. In a directionally drilled well the well bore

deviates from the land of origin to adjourning lands. In both situations, oil and gas are

produced from adjourning lands in a way not contemplated by the rule of capture.108

The courts in the various states of the United States of America have not been consistent in

their decisions as to what actually constitutes subsurface trespass in the hydraulic fracture

context. The foregoing is aimed at presenting various decisions from the superior courts in

various states in the US especially decisions from the state of Texas so as to provide a broad

view of how the issue has so far been handled. It is worthy of note that it is only the Supreme

Court of Texas that has dealt with the issue holistically although as will be seen later, the

common law of hydraulic fracturing, as it presently stands still leaves an important vacuum to                                                                                                                          108 ibid

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be filled. Importantly, this study is interested to see how the courts have dealt with the rule of

capture and the theories of ownership in reaching their decisions because this study is aimed

at exploring the role these principles have played in court decisions in the US, and to

determine whether the situation would be different in other shale gas emerging countries such

as South Africa. Thus the cases discussed hereunder reflect cases from federating states in the

US with both ownership in place theory and non-ownership in place theory. Court cases from

federating states that are non-ownership in place jurisdictions, mainly states such as

California, Louisiana and Oklahoma on the one hand are examined with cases from the state

of Texas that is an ownership in place jurisdiction, on the other hand. These cases are also

looked at from subsurface trespass circumstances related to mainly directionally drilled wells,

and hydraulic fracturing as these are the subsurface trespass circumstances that are connected

to shale gas development.

4.3.1 Subsurface Liability in the United States

4.3.1.1 Ownership Jurisdictions

In ownership in place jurisdictions, the landowner generally holds a corporeal possessory

interest in the land or real property and as such is considered able to sue for trespass to land,

and the courts have had little difficulty in reaching a conclusion of subsurface trespass.109 The

state of Texas is an ownership in place jurisdiction and has dealt with issues of subsurface

trespass than any other state in the US. The Texas jurisprudence can only be gleaned from a

consideration of the cases dealing with or relating to the subject and they have been few and

far between. These cases will be examined hereunder.

The first case dealing with the issue of subsurface trespass is perhaps the 1950 case of

Hastings Oil Co. V. Texas110 although its core is the allegation of directional drilling. In that

case, the Texas Company complained that Hastings had re-entered a well and side-tracked it

using a Whipstock,111 such that the well deviated and bottomed at the land leased by the

Texas Company. The issue before the court was whether the trial court had the jurisdiction to

permit an independent survey to confirm the allegation of trespass. The court held that both

                                                                                                                         109 See SUMMERS, I.W.L., THE LAW OF OIL AND GAS, 26, at 26 (1954 & John S. Lowe, Supp. 1990). 110 234 S.W.2d 389 (1950) available at: http://law.justia.com/cases/texas/supreme-court/1950/a-2623-0.html. Last visited on 13/02/2016 111 A drilling tool used to prepare or "cut a window" in the casing of an existing well bore; that is for sidetracking the original well bore

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the Texas procedural rules and the inherent jurisdiction of the courts gave it the powers to

order such a survey. What is clearly implied in this case is that a directional well bottomed on

an adjoining land could in appropriate cases constitute a trespass.112 This case highlights the

fact that in an ownership in place jurisdiction, a directional well subsurface trespass only

raises questions as to whether the elements of the tort of trespass to land has been satisfied.

The Delhi-Taylor cases113 are four Texas cases dealing with identical facts and involving the

same plaintiff. In these cases, the Defendants owned leases very close to the Plaintiff’s lease.

They spud a well and planned to perform a hydraulic fracture operation to enhance the well

productivity.114 The issue before the court was whether the railroad commission (an

administrative body) had primary jurisdiction to hear the cases rather than the District courts.

The Texas Supreme Court held that an allegation of trespass by hydraulic fracture is

inherently judicial. The courts therefore had jurisdiction to hear the case. In the opinion of the

court:

We think the allegations are sufficient to raise an issue as to whether there is a

trespass. The invasion is direct and the action taken is intentional. Gregg's well

would be, for practical purposes, extended to and partially completed in Delhi-

Taylor's land. The pleadings allege a physical entrance into Delhi-Taylor's

leasehold. While the drilling bit of Gregg's well is not alleged to have extended

into Delhi Taylor's land, the same result is reached if in fact the cracks or veins

extend into its land and gas is produced therefrom by Gregg. To constitute a

trespass, entry upon another's land need not be in person, but may be made by

causing or permitting a thing to cross the boundary of the premises.

What this implies is that a hydraulic fracture could in fact be trespass in appropriate cases.

The case did not, however, go as far as stating the circumstances in which hydraulic

fracturing could constitute trespass.

                                                                                                                         112 Terry D. Ragsdale, Supra, note 2 above. 113 Gregg v. Delhi-Taylor Oil Corp., 344 S.W.2d 411 (rex. 1961); Delhi-Taylor Oil Corp. v. Holmes, 344 S.W.2d 420 (Tex. 1961); Delhi-Taylor Oil Corp. v. Gregg, 337 S.W.2d 216 (Tex. Civ. App. 1960), aff'd, 344 S.W.2d 411 (Tex. 1961); Holmes v. Delhi-Taylor Oil Corp., 337 S.W.2d 479 (Tex. Civ. App. 1960), rev'd, 344 S.W.2d 420 (Tex. 1961). Collectively, these four opinions will be referred to as the Delhi-Taylor cases 114 See Delhi-Taylor V. Holmes, Greggs V. Delhi--Taylor

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The opinion in the Delhi-Taylor cases remained the precedent in Texas for about three

decades on hydraulic fracturing subsurface trespass until the decision of Texas Supreme

Court in the case Geo Viking Inc. V. Tex-Lee Operating Co.115 Here, Tex-Lee hired Geo

Viking to fracture treat its well. Due to equipment breakdown, Geo Viking was not able to

fracture treat the well to the desired length. Tex-Lee sued Geo Viking for breach of contract.

Part of its claim was for the value of oil and gas it would have realised if the well had been

fracture-treated to the desired length. The trial court awarded damages to the tune of

$300,000.00. Geo Viking appealed, contending that the instructions to the jury ought to have

limited the value of oil and gas to what Tex-Lee would have legally obtained. In other words,

fracking beyond property lines would be trespass and Geo Viking would not be entitled to the

value of oil and gas resulting from such invasion. The intermediate Court of Appeal held that,

that argument ran counter to the rule of capture. On further appeal to the Supreme Court of

Texas, it was decided that fracking which crosses property lines was trespass. However, six

months after this opinion, the Texas Supreme Court withdrew its opinion, which simply

means that the decision of the Court of Appeal stood as final position with questionable

precedential value.116

In Railroad Commission V. Manziel,117 the Texas Supreme Court had to decide whether the

injection of water into a well as part of secondary recovery process, that could result in

premature flooding and capable of damaging adjourning wells constituted trespass. The

Texas Supreme Court (overruling the trial court) considered the importance of secondary

recovery process and the fact that the injection of the water had the permit of the railroad

commission and came to the conclusion that there was no trespass. The court’s emphasis on

the permit to inject the water is note-worthy. It stressed that: when the railroad commission

“authorises secondary recovery projects, a trespass does not occur when the injected,

secondary recovery forces move across lease lines, and the operations are not subject to an

injunction on that basis.” The court did not however foreclose liability for trespass whenever

a permit is obtained from the commission. This case highlights the situation where a permit

may displace the rule of capture and ownership in place theories for a case on subsurface

trespass.

                                                                                                                         115 817 S.W.2d 357 (1991). 116 Terry D. Ragsdale, Supra, note 2 above 117 361 S.W.2d 560 (Tex. 1962).

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The case of Coastal Oil and Gas Corp V. Garza118 is perhaps the closest a court in the United

States has come in taking a stand on the issue of hydraulic fracturing and trespass, although

the view generally held is that it did not go far enough in making definitive and reliable

pronouncement on whether hydraulic fracturing constitutes a trespass. In this case, the

plaintiff, Salinas was the lessor of a mineral estate to Coastal Oil Corp. Coastal itself owned

the mineral estate in the adjacent tract. Coastal fracture treated wells on both tracts and the

claim of the plaintiff was that this fracture treatment cause substantial drainage of oil and gas

from the tract of the Salinas. The majority opinion did not directly pronounce on the issue of

whether hydraulic fracturing by itself constitutes a trespass. The court however held that

“actionable trespass” required an injury and none has been shown in this particular case,

except “drainage”. The drainage itself is precluded by the rule of capture. The Court stressed

that the rule of capture only gave Salinas the right to capture oil and gas beneath his land but

not ownership. There the sustenance of a claim in trespass requires actual damages. Justice

Hecht, writing for the majority distinguished between surface trespass and subsurface

invasion and declared as follows:

But that maxim—cujus est solum ejus est usque ad coelum et ad inferos—“has

no place in the modern world.” Wheeling an airplane across the surface of

one’s property without permission is a trespass; flying the plane through

the airspace two miles above the property is not. Lord Coke, who pronounced

the maxim, did not consider the possibility of airplanes. But neither did he

imagine oil wells. The law of trespass need no more be the same two miles

below the surface than two miles above.

Justice Willet in concurring argued that there was indeed no trespass at all as opposed to there

being no actionable trespass as was decided by the majority. The plaintiff might, if he likes

bring a claim in negligence. He would rather end definitively any lingering flirtation of Texas

law with equating hydraulic fracturing with trespass,” and “say categorically that a claim for

‘trespass-by-fracking’ is non-existent in either drainage or non-drainage cases.”119 Justice

Willet relied heavily on the importance of oil and gas to the Texas economy, thus adopting a

teleological stance on the subject.

                                                                                                                         118 268 S.W.3d 1 (Tex. 2008) 119 Garza, 268 S.W.3d at 29. See Vol. 9 No.2 Energy Committees Newsletter, May, 2012.

46  

The dissenting opinion in Coastal V. Garza was influenced by a practical concern for the

rights of unsophisticated individuals who own small parcels of land and are unlikely to utilize

such remedies as self-help and pooling; the majority’s opinion reduces incentives for

operators to lease from such property owners.120

The more recent case dealing with subsurface trespass in Texas is FPL Farming Ltd. V.

Environmental. Processing System121. In that case, Environmental Processing Systems

operated a wastewater injection well on a land adjourning that of the claimant. Environmental

Processing had the permit of Texas Commission on Environmental quality to operate the

well. FPL Farming Ltd sued Environmental Processing Systems for trespass on the grounds

that its waste water contaminated its own water supply used in rice farming. In dismissing the

appeal against a decision of the trial court which had ruled against FPL Farming Ltd, the

Appeal Court held that because Environmental Processing Systems Ltd had the permit of the

Texas Commission on Environmental Quality, a claim in trespass is not maintainable. On

further appeal, the Supreme Court of Texas held that a permit is not a get-out-of-tort-free

card. It however pointed out that it was not deciding whether subsurface migration

constitutes trespass or not. It remanded the case for reconsideration. This case is important

because it stresses the point noted earlier that the permit of the conservation commission,

does not by itself excuse an act that otherwise would be trespass. It is important to note how

the rule of capture and ownership theories have continued to play crucial roles in the

decisions of the courts in Texas although under certain extenuating circumstances, the courts

have jettisoned these principles. One of such extenuating circumstance is where the

technology occasioning the subsurface trespass is considered beneficial to the larger society.

4.3.1.2 Non-Ownership Jurisdictions

In non-ownership jurisdictions, the interest of the landowner is in the nature of a profit a

prendre which is an incorporeal right allowing the landowner to only search for and develop

oil and gas. This would ordinarily mean that the landowner cannot strictly speaking sue for

trespass because the landowner own only a non-possessory interest. However, it would seem

                                                                                                                         120 Energy Committees Newsletter, May, 2012 121 L.C., 351 S.W.3d 306 (Tex. 2011)

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that this notwithstanding, courts in non-ownership jurisdictions have resolved cases for

subsurface trespass in favour of the landowner.

In a 1935 directional drilling case of Union Oil Co. v. Reconstruction Oil Co.122 the court by

implication recognised that in the state of California directional well subsurface trespass was

a viable cause of action. Californian courts have further recognised subsurface trespass in

directional drilling as tortious even without reference to incorporeal rights in California, a

non-ownership jurisdiction. In the case of Hancock Oil Co. v. Meeker-Garner Oil Co.123 the

court in sidestepping issues of incorporeal lease interest, granted an injunction against the

respondent for subsurface trespass via directional drilling stating that "one who drills through

leased land to cause drainage from it violates the lessee's rights and commits a trespass

against him. Such conduct being a trespass against the lessee, it can make no difference that

the owner-lessor has consented".124 Thus notwithstanding that California is a non-ownership

jurisdiction, the courts have relied ownership theories to grant relief to a landowner for

subsurface trespass.

In the Louisiana case of Gliptis V. Fifteen Oil Co,125 although the Louisiana Supreme Court

did not specifically deal with the issue of hydraulic fracturing, it however did deal with

deviated well which has been likened to hydraulic fracturing in many respects. The facts of

that case are that: the defendant drilled a well on his own portion of land but only 33 feet

from the plaintiffs own tract. The well been so close deviated and was bottomed on the

plaintiff’s tract of land and in fact was so close to the plaintiff’s well that it destroyed it. The

Louisiana court in noting that although the landowner in the state does not own the in situ oil

and gas but an exclusive right to explore for minerals, such ownership right prevents third

parties from invading his subsurface to extract fugacious minerals as such would amount to

trespass. Thus the courts overlooked non-possessory nature of the lease to hold that the

actions of the defendant amounted to subsurface trespass. In essence, ownership theories and

the rule of capture continues to play a crucial role in the determination of subsurface liability

actions.

                                                                                                                         122 51 P.2d 81 (Cal. 1935) 123 257 P.2d 988 (Cal. Ct. App. 1953). 124 Id. at 992. 125 204 La. 896 (La. 1944).

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In Edwards v Lachman (Lachman II),126 Lachman who was the lessee of a tract called Fuqua,

drilled a well that deviated into adjourning track of land called Graham. In an action by the

Royalty interest and working interest owners for an injunction and an accounting as to

income for oil as drained from the Graham tract, the court held that the directional well which

bottomed at an adjourning tract constituted sub-surface trespass. On appeal, the Oklahoma

Supreme Court upheld the finding of trespass against Lachman, but remanded the case for a

consideration of the measure of damages. This case confirms the willingness of a court to

find a defendant involved in a deviated well liable for trespass even though Edwards held

only incorporeal interests.

From the foregoing cases discussed in this study, certain conclusions are deducible to the

effect that:

1. The courts are particularly concerned about the rights of an individual to his land and

where there is a subsurface invasion, the courts will find in trespass unless there are

very compelling reasons to find otherwise. Interestingly, it has been shown that in

holding subsurface trespass, the courts have relied on the rule of capture and

ownership theories. However, the courts have been more practical than technical so

that even in non-ownership jurisdictions, subsurface trespass for shale gas

development have been found.

2. The courts are willing to derogate from the traditional view of trespass and in this

wise are influenced by external considerations. One external consideration which has

influenced the courts in the United States is the Utility of the technology which is

alleged to constitute a trespass. Where the invasion is the result of a process which the

courts consider beneficial to the society at large then the court might although, not

saying so expressly find the rights of the individual inferior to the necessities of the

larger society.127 This is the purport of the decision in Garza’s case where Justice

Willet stressed the importance of hydraulic fracturing to the Texas economy.

Following conversely from the above is that where the operation in question has little

or no value to the community as a whole, then the courts may find for trespass. This is

the purport of Hastings V. Texas Co, and other cases dealing with directional drilling.

                                                                                                                         126 1974 OK 58, 534 P.2d 670. 127 This is usually captured in the latin maxim: salus populi suprema lex, which literally means: the interest of the people is the supreme law.

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3. Lastly, the damage suffered by an individual land owner has proven to be a decisive

factor in many cases. The courts are unwilling to find a liability for trespass where no

damage has resulted from the operation complained of. This is deducible from

Garza’s case.

There are other important points that need to be highlighted as well in the discussions on

subsurface liability. Firstly, intention plays a crucial role in when ascertaining damages for

subsurface trespass because the ‘good faith’ and ‘bad faith’ trespasser comes into play. In the

case of the former, damages are the value in place of the oil and gas that was removed.128 An

honest and reasonable belief in the superiority of title is used as the test for good faith, and

for a subsurface trespasser, s/he must have reasonably believed that the drilling had not

wandered off into adjoining lands.129 In the case of a bad faith trespasser, liability is for the

extent of the value of the produced oil and gas without deductions from trespasser’s cost of

production. This is more of both a pecuniary and punitive damage unlike the good faith

trespasser that only gets a pecuniary damage liability.

Secondly, in the case of a directionally drilled well subsurface trespass case, the owner of the

mineral interest and the oil and gas lessee are the proper plaintiffs because they own a

corporeal interest in the property.130 The lessor retaining a royalty interest but lacking a

present possessory interest is theoretically prevented from bringing an action for subsurface

trespass.131 The potential defendants in a subsurface trespass action would include the

operator that drilled trespassing well, principal officers of the company and even shareholders

provided they had active charge and management of the company’s affairs.132 The potential

defendants can also include independent contractors and agents.133

4.4 Subsurface Liability in South Africa

It was noted that mineral and petroleum rights in South Africa are now vested in the South

African people with the government as the custodian. Invariably, mineral and petroleum

                                                                                                                         128 Bender v. Brooks, 127 S.W. 168, 170 (Tex. 1910). Cf Payne v. Benavides, 693 S.W.2d 500, 504 (Tex. Ct. App. 1985). 129 Payne, 693 S.W.2d 504, 504 (1985). 130 See WILLIAM L. PROSSER, THE LAW OF TORTS § 13 (4th ed. 1971). 13, at 77 131 Grasty v. Wood, 230 S.W.2d 568, 571 (Tex. Civ. App. 1950) 132 Pacific Western Oil Co. v. Bern Oil Co. 87 P.2d 1045 (Cal. 1939). 133 Schlumberger Well Surveying Corp. v. Nortex Oil & Gas Corporation 435 S.W.2d 854 (rex. 1968).

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rights are held by the government that can issue licences to oil and gas companies to explore

for and exploit these resources. The production rights are real rights over a particular field

entitling the holder to enter the specified land to which the rights relate. The landowner

cannot preclude the mineral lease holder from accessing or entering the land although the

former is expected to consult with the landowner before undertaking development of the

resources. It should be noted that the landowner can get compensation for loss sustained by

reason of the mineral and petroleum development on his or her property.

The foregoing shows that whether there would be a successful action for subsurface liability

for shale gas development would depend on the existence or not of ownership rights. It would

thus appear that in the absence of private ownership rights in SA, any action for subsurface

liability may likely fail.

4.4.1 Contractual Arrangements

However, it is possible the prevailing contractual arrangements may also determine otherwise

as to whether there would be liability for subsurface trespass. In this context, this study

intends to examine two major contractual arrangements in the oil and gas industry – the

Concession Agreement (CA), and the Production Sharing Agreement (PSA).

4.4.1.1 The Concession Agreement

Under the traditional concession agreement, the licensee is granted exploration and

exploitation rights to develop the resources utilising its capital and paying royalty and taxes

to the government. Importantly, the licensee is believed to possess title to the mineral and

petroleum resources in the ground; that is, ownership of the oil and gas resources. In the

event of this scenario, one can safely argue that it is most likely that the licensee in a

traditional concession would be able to sustain an action for subsurface trespass in shale gas

development. However, as we have seen that most countries including SA have state

ownership of petroleum and mineral resources preventing such a scenario from occurring.

Besides, modern concessions have been structured in a way that prevents the shortcomings of

the traditional concession such as ownership to resources in the ground. Furthermore, modern

concession agreements no longer grant the licensee wide contract area that may even be the

entire country as was the case with traditional concessions.

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4.4.1.2 The Production Sharing Agreement

This is the baby of the petroleum industry because it is loved by both companies and

governments for its attractive features. It offers the licensee the right to explore and exploit

using its own capital but is allowed cost recovery and sharing of profits on percentage hasis.

The licensee is liable to pay tax from its profit oil and signature bonus for contract signing. It

allows governments to retain ownership of in situ resources and in most cases, for its interest

to be carried by the oil and gas company. It is clear that with a PSA, the licensee cannot

maintain an action for subsurface trespass because it lacks ownership of the mineral rights.

South Africa offers oil and gas companies a reconnaissance permit (RP), technical

cooperation permit (TCP), and an exploration rights (ER) or production right (PR) granted by

the Petroleum Agency of South Africa (PASA) under the MPRDA of 2004. The 30 years

production rights that are exclusive, transferable and renewable would be governed by a

signed non-standard production sharing contract (PSC) between the operators and the state. It

is argued here that with a PSC-style contractual framework in place in SA, the licensee may

not be able to sustain an action for subsurface trespass for shale gas development.

It is still doubtful if the landowner would be able to succeed in bringing such a subsurface

trespass action against a trespasser where there is a directionally drilled well that bottoms of

on adjoining lands, or for hydraulic fracturing or waste seepage into adjoining land. In the SA

experience, the landowner does not even possess any royalty interest as this is earned by the

State and would be difficult to argue that the landowner possesses a reversionary interest.

However, communities under Item 11 of Schedule 2 of the MPRDA with trust-like

arrangements that entered into contractual arrangements with companies allowing them to

receive royalty payment for use of land and/or mineral rights may be able to bring an action

for subsurface trespass. Furthermore, by virtue of section 104 of the MPRDA, communities

that can seek and obtain preferential mineral rights to explore and exploit resources may be

able to sue for subsurface trespass if they can show that the possess ownership of the in situ

mineral and petroleum.

Notwithstanding the foregoing, it is likely that despite the lack of ownership rights the SA

courts may be willing to grant a claim for subsurface trespass brought by either a company or

52  

landowner if they can show any compelling circumstances as was the case in the US. We saw

how the US courts upheld actions for subsurface trespass even where the plaintiffs lacked any

ownership of mineral rights. It would be interesting to see under what circumstances such a

claim for subsurface trespass would succeed in SA. What is owned by the government is the

mineral wealth underneath the ground but not the soil itself. In many countries, where

petroleum is discovered in commercial quantities in a particular location, the government

usually acquires the surrounding lands and right of ways so that the individual is divested of

all interests. It is submitted that without any form of acquisition by the government, an

individual should be able to bring an action in trespass if his land has been tampered with or

damaged as opposed to mere drainage of mineral wealth, which ab initio will belong to the

government.

4.5 Conclusion

Subsurface trespass to land occurs where there is an unlawful or wrong interference with the

subsurface possessory rights of a landowner. The courts in US have been inconsistent in their

decisions as to what actually constitutes subsurface trespass in the hydraulic fracture context.

The courts have found subsurface trespass relying on the rule of capture and ownership

theories except there are very compelling reasons to find otherwise. One of such is where

there utility of the technology which is alleged to constitute a trespass, or the courts consider

it beneficial to society at large as in Garza’s case, or where the court finds no damage.

However, the courts have found liability for subsurface trespass even in non-ownership in

place jurisdictions such as California. In the case of SA, it would appear that in the absence

of private ownership rights in SA, any action for subsurface liability may likely fail.

However, hypothetically, a licensee in an old concession agreement would be able to bring an

action for subsurface trespass because it owns the in situ petroleum and mineral rights. This is

not the case with a PSA because it re-emphasises State ownership of mineral and petroleum

rights, and shale gas development in SA will be based on a PSA. It is possible that

communities that retained the trust-like arrangements with royalty interest may be able to

institute an action for subsurface trespass especially when it is understood that they may

obtain preferential mineral rights under the MPRDA. The lack of ownership rights may prove

meaningless in some cases for subsurface liability if a litigant can show compelling

circumstances as we saw in the US cases bearing in mind that a landowner’s rights may still

be preserved.

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CHAPTER FIVE

CONCLUSION AND RECOMMENDATIONS

5.1 Conclusion

The United States is championing the shale oil and gas revolution, but it is not the only

country endowed with the resource. There are many countries that have recoverable shale oil

and gas reserves including Canada, South Africa, China, Russia, Algeria, Columbia, Mexico,

Australia etc.134 The objective of this study was to understand the role that the rule of capture

and ownership theories would play in determining liability for subsurface trespass in shale

gas development in the US and SA. The issues of sub-surface trespass may pose a challenge

in emerging jurisdictions as well.

As at when the rules relating to trespass were formulated by the common law courts, there

was nothing like hydraulic fracturing or even oil wells. One of the great attributes of the

common law is its ability to expand itself to meet with novel challenges. Despite this

elasticity of the common law, the courts in the United States of America have struggled with

the seemingly simple question of whether hydraulic fracturing, directionally drilling and

underground injected water seepage constitutes subsurface trespass.

Under the traditional definition of trespass these actions should easily be said to be a trespass.

However as Oliver Wendell Holmes would say: the life of the law has not been logic but

experience. Legal rules have therefore been influenced and coloured by extraneous

considerations. In the United States of America, several extra-judicial factors have influenced

the courts in its quest to adequately classify these shale gas development actions as

subsurface trespass. Some of those considerations include: the utility of the process

complained of and the presence of a permit from conservation authorities.

The popularity of shale gas development is spreading to other parts of the world. The

jurisprudence emanating from the United States may not apply mutatis mutandis not just

because of mineral ownership and rule of capture peculiarities but also public policy

considerations. In the United States, individual ownership of petroleum wealth prevails. This

has given rise to two dominant theories of ownership vis: ownership in place theory and non-

                                                                                                                         134 World Resources Institute, 40 Percent of Countries with Largest Shale Energy Resources Face Water Stress, 2 September 2014. Available at: http://www.wri.org/blog/2014/09/40-percent-countries-largest-shale-energy-resources-face-water-stress (accessed 13/02/2016).

54  

ownership in place theory. In the ownership in place jurisdictions, the individual owns the oil

underneath his land; it is part of the realty. In the non-ownership in place jurisdictions, the

individual does not “own” the oil underneath his land but has interests in the nature of profit a

prendre, an exclusive right to reduce it into possession, in which case it becomes his own. In

both jurisdictions, the rule of capture allows for drainage of the oil and gas which migrates

across property lines as long as there is no trespass. The dichotomy between ownership in

place theory and non-ownership in place theory does not seem to have led to differences in

the treatment of issues relating to trespass. Rather they have been influenced by the

externalities aforementioned. In all, there has never been conflicting pronouncements on what

constitutes subsurface trespass.

Where the government has given authorisations to an oil and gas company to prospect for and

develop petroleum wealth, whether the operator or oil company will be able to maintain an

action in trespass or not should depend on the authorisation in question. The old concessions,

which have or are fading out in many parts of the world conferred title and possession to the

oil in situ on the oil and gas companies. It would therefore be logical to assume that an oil

and gas company having the old type of concession may be able to maintain an action in

trespass if the oil underneath his acreage is tampered with. The same may not necessarily

follow for Production Sharing Contracts. Title and possession does not pass from the

government until the oil and gas has been won and reduced to possession.

Emerging shale gas jurisdictions such as SA will have to apply the principles emanating from

the courts of the United States with caution. One of the major differences between the United

States and many other jurisdictions including SA is the difference in ownership of petroleum

in situ. In SA, petroleum in situ belongs to the government. The individual cannot sue in

trespass for drainage of oil and gas underneath his land. However, if the land in question has

not been compulsorily acquired by the government, then he may be able to claim in trespass

for the land but not for the oil and gas. In summary, it is difficult to tell how the issue of

subsurface trespass will play out in other jurisdictions such as SA.

5.2 Recommendations

1) The Possibility of Alternative Remedy to Subsurface Trespass.

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Subsurface invasion may be redressed by reference to other legal rules such as negligence,

nuisance and conversion. For negligence, the claimant will have to show that it has suffered

real damages. Traditionally, this is not a requirement for trespass claims as it is usually

actionable per se135.The requirement of damages in many case in the United States may mean

that hydraulic fracturing is better dealt with by reference to other torts than trespass. For

instance, in a nuisance case of alleged contamination from fracking operations causing

personal injuries, a Texas jury awarded $2.9 million to the plaintiff family.136 A jurisdiction

faced with issues relating to subsurface trespass will have to make a decision whether to deal

with it under the law of trespass or to deal with it under other rules of law.

2) Limitation of Action.

Where an action is pursued for subsurface trespass, the statute of limitations for ordinary

trespasses generally applies.137 Depending on the jurisdictional peculiarities, a different

limitation time may be prescribed by statute

3) Public Policy Considerations

Public policy considerations have featured prominently in the cases. As noted earlier, easy-to-

extract hydrocarbon is becoming a thing of the past and if the current civilisation must

continue running on oil and gas, then ingenuous steps will have to be devised. Here lies the

importance of shale gas in today’s world. However, public policy considerations will differ

from country to country. In Countries like Saudi Arabia and other gulf states, hydraulic

fracturing will not carry any high value as it can still cheaply extract oil from the ground

using conventional technology. But in places like the United States where easy oil wells have

been depleted, the use of hydraulic fracturing is an absolute necessity. Indeed it has been

noted that probably, the strongest reason for overlooking the technical aspects. In Garza the

judgment of Justice Willet was replete with the utility of the process of hydraulic fracturing

and of oil and gas to the Texas economy. Thus a teleological approach was favoured.

                                                                                                                         135 Without the need to prove damages 136 Parr v. Aruba Petroleum Inc., Tex. County Ct., No. CC-11-01650-E, 4/22/14; see Peter Hayes, $4.2 Million Fracking Verdict Likely to Spark More Suits, Toxics Law Reporter, 16 March 2016. Available at: http://www.bna.com/42-million-fracking-n57982068570/ (accessed 22 March 2016) 137 Terry D. Ragsdale, supra, note 2 above.

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4) The Importance of Conservation Commissions

Some decisions in the United States have been justified by reference to the permit of the

conservation commission. For instance in Manziel the court held that because the defendant

has the authority of the commission to do the act in question, there was no trespass. But in

FPL, the decision of the trial court was reversed because it placed an overarching premium

on the permit of the conservation commission as an excuse for the defendant to escape

liability. Whilst the permit of a conservation commission is of great authority, it is not a get-

out-of-tort free card and the possibility is open that in appropriate cases, a defendant who has

the permit of the conservation commission can be held liable in trespass.

Emerging jurisdictions intending to harness the hydraulic fracturing technology, will have to

decide the extent to which value will be placed on the permit of a conservation commission.

A high value is likely to be placed on the administrative decisions of a conservation

commission if it is comprised of highly skilled professionals. This is indeed an alternative to

costly court actions.138 The conservation agency would be responsible for the approval of

fracturing treatments and thus be in a position to protect against waste and ensure correlative

rights.139

                                                                                                                         138 Travis, supra 139 ibid

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