New Laws, Technologies Lead to Continuing Increase in Oil and Gas Litigation

The past few years have seen a dramatic increase in the number of unconventional oil and gas-related lawsuits, with Texas seeing the most activity, followed by Oklahoma, Pennsylvania, Ohio and Louisiana. New trends and areas of litigation have also emerged over the past few years, and industry participants will continue to confront the challenge of adapting to emerging and often differing state laws, as well as a continually evolving legal landscape as landmark cases are decided by the courts.

One litigation trend arises out of the development and increased utilization of horizontal drilling and hydraulic fracturing.   Current issues related to horizontal drilling and hydraulic fracturing include disputes about water rights and water ownership, the mineral owner’s dominant right to use the surface estate for operations, and the land owner’s claim for damages to its property caused by or incidental to production. Recurrent allegations in these disputes include claims of trespass, private nuisance, negligence, environmental violations/liability and breach of contract.

FPL Farming Ltd v. Environmental Processing Systems is a recent noteworthy example of a surface owner dispute involving claims for subsurface trespass. In FPL, the defendant, Environmental Processing Systems, obtained permits from the Texas Commission on Environmental Equality to operate two deep wastewater injection wells on a tract next to land owned by FPL Farming Ltd in Liberty County. FPL sued EPS for tort damages and a permanent injunction for physical trespass based on alleged subsurface migration onto its property that contaminated its water supply. The Beaumont Court of Appeals held that FPL could not recover for trespass damages because the wells were authorized by the TCEQ permits obtained by EPS. Finding that EPS’s permits could not shield it from trespass liability, the Texas Supreme Court reversed and remanded, holding that “agency authorization or permission [does not result] in blanket immunity from trespass liability.” On remand, the Beaumont Court of Appeals held that waster water migration in deep, subsurface formations may constitute a trespass. The case is now pending in the Texas Supreme Court.

Wheeler v. Enbridge Pipelines, L.P. involved a landowner’s action against a pipeline company for breach of contract and trespass arising from the destruction of trees in preparing an easement area for pipeline construction. Distinguishing the differences in recovery for temporary and permanent injuries to property, the Texas Supreme Court found that the landowner was entitled to recover the damage to the fair market value of his property, but not the costs of restoring the property, because the restoration costs grossly exceeded the diminution in the fair market value caused by the company’s destruction. However, the Court also found that the landowner could recover the intrinsic value of the trees that were destroyed, which the jury found to be $288,000.

Finally, in Parr v. Aruba, a Texas jury in April of 2014 awarded $2.9 million in damages to a landowner for injuries allegedly caused by nearby drilling activities. In 2011, the Parr family, who own a 40 acre ranch in Wise County (atop the Barnett Shale), brought a lawsuit against Aruba Petroleum and several other energy companies, alleging that E&P activities near their ranch polluted the air with hazardous substances causing health problems, including asthma, ear ringing, headaches and nausea. Following a jury verdict in favor of the landowners, this case is now on appeal.

In MDU Barnett Ltd. Partnership v. Chesapeake Exploration Ltd. Partnership, a federal district judge from the Southern District of Texas ruled that the Texas Supreme Court’s opinion in Reeder v. Wood County Energy was now the controlling law in the Fifth Circuit in considering disputes involving joint ownership. In Reeder, the Texas Supreme Court addressed whether an exculpatory clause in a Joint Operating Agreement extended to all alleged breaches of the JOA or whether it was limited to claims that the operator breached its duties in operating the well. According to the Court, the scope of an exculpatory clause depends on the modifying language of the particular clause: if the JOA follows the 1977 or 1982 Model form, and contains language such as “Operator shall conduct all such operations in a good and workmanlike manner…”, then the exculpatory clause is limited to claims that the operator breached its duty in operating the well, and does not apply to claims that it otherwise breached the JOA. But, if the exculpatory clause follows the 1989 Model Form JOA and includes language such as: “operator shall conduct its activities…under this agreement as a reasonable prudent operator in a good and workmanlike manner…”, then the exculpatory clause applies to both claims that the operator failed to act as a reasonably prudent operator and claims that it breached the JOA. This highlights the importance of understanding what provisions the operator and the non–operators intend to include in their JOAs.

Key Operating & Equip., Inc. v. Hegar involved the question of whether an operator of a pooled unit has the right to use the road on adjacent surface property when there is no production from the adjacent tract, but the tract is part of the pooled unit. The trial court issued an injunction prohibiting Key from using the Hegars’ road because there was no production from the Hegar tract. The Court of Appeals affirmed that injunction. In June, 2014, the Texas Supreme Court held that because the Hegars’ tract was included in the pooled unit, the operator had the right to use the road regardless of whether there was production from that tract.

Finally, in Zachry Construction Corp. v. Port of Houston the Texas Supreme Court confirmed that contractual waivers for future gross negligence are void. The Court also called into question on public policy grounds any contractual waivers that seek to insulate a party from future, deliberate, wrongful conduct. This case may have significant ramifications for contracting parties that are attempting to limit claims for future damages in JOAs, purchase and sales agreements, and other contracts.

Other areas of disputes include preferential rights, payment of joint interest billings, gas flaring cases, royalty ownership disputes and lease termination lawsuits. Royalty disputes were the most common type of unconventional oil and gas cases in the second half of 2013. Land and lease rights disputes, which often involve issues such as the termination of leases, ownership disputes regarding mineral rights, or injunctions to stop or prevent drilling, were likewise among the most common types of disputes filed in 2012-2013.

Many of the cases being decided now will likely have major impacts on the oil and gas industry operating in Texas and throughout the country. As unconventional production and development of oil and gas continues to flourish, and new laws are enacted around the country, industry participants will likely continue to see a steady increase in the amount of unconventional oil and gas litigation in both federal and state court.