Fundamental Issues in Mineral Rights Ownership - Module 1 of 5

Fundamental Issues in Mineral Rights Ownership

Introduction

Petroleum and other valuable minerals that formed underground over millions of years are extracted and transformed into valuable commodities across the world every day. Oil and gas, the liquid and gaseous forms of petroleum, are used in nearly all our lives.[1] Minerals like gold, platinum, and other rare metals are valued as commodities and resources in markets around the world. Petroleum and mineral extraction is big business, and an entire body of law has developed around the ownership, extraction, and sale of these underground assets.

In many countries, underground minerals are owned by the state. While the United States government is responsible for managing petroleum and mineral extraction on public lands, private ownership is the norm for subsurface minerals in America.[2] The regulation of private subsurface mineral ownership has evolved over time, starting with the principles of property rights embodied in the common law down to specific extraction activities controlled on the state and local levels.

This module discusses the characteristics of oil, gas, and mineral interests and how they fit into private property rights. It also explains key property law concepts specifically related to oil, gas, and mineral extraction. The discussion begins with a brief overview of the development of mineral and petroleum law in the United States. Next, we drill down on the rule of capture and the correlative rights doctrine, which form the basis of subsurface resource rights in modern America. We’ll then provide a brief overview of state conservation and use regulation before concluding with an extensive discussion of subsurface property rights and remedies for trespass to these rights.

Development of Oil, Gas and Mineral Law

The relevance of the law of oil, gas, and most minerals in the United States is about a century and a half old. The first oil well in the United States was drilled in 1859 and it took several years for the industry to mature into a viable enterprise from there.[3] During this time, most U.S. jurisdictions followed the ancient common law rule known as the ad coelum doctrine. Under the ad coelum doctrine, property owners were entitled to the full bundle of legal rights associated with the property, extending from the sky above to the core of the Earth below.[4]

The shortcomings of the ad coelum doctrine became apparent, however, with the growth of the oil and gas industry in the United States.

Unlike solid minerals like gemstones and metals, petroleum deposits flow from one place to another. Once a well is drilled, it becomes impossible to determine whether a particular barrel of crude it extracted came from beneath the property hosting the well or the neighboring land. This has led to legal battles over the extent to which neighboring subsurface property owners can claim resources physically located under another person’s land. The rise of oil and gas extraction in the United States also gave rise to the rule of capture, which quickly came to replace the ad coelum doctrine as the majority rule regarding the ownership of below-ground minerals.[5]

The Rule of Capture and The Doctrine of Correlative Rights

The rule of capture under the common law was developed to determine the ownership of naturally transitory things. For example, wildlife like wild game and waterfowl are valuable economic commodities that one takes ownership of by capturing them. The rule of capture has been applied to oil and gas extraction by vesting the ownership rights of subsurface assets in whomever is able to access them first.[6]

The rule of capture was primarily intended to encourage the development of oil and gas resources across early industrial America. This is why the rule of capture creates such robust legal rights for mine and well operators. Under the rule of capture, so long as the extraction operation does not interfere with the neighboring landowners’ rights, it is operating according to its lawful interests. This is true even if the operation drains every drop of oil and gas under the neighbor’s land.[7]

The rule of capture grants extensive rights to oil, gas, and mineral extractors, but it is not without its limitations. For instance, petroleum and mineral extraction operations run the risk of escape. In other words, if the valuable liquids or gasses captured under a surface property escape, their ownership is lost. This has led to cases of neighboring property owners redirecting oil, gas, and minerals onto their lands from nearby wells and mines.[8] While allowing these redirections may seem like an odd policy, it’s consistent with the goal of making the highest economic use of these valuable commodities by encouraging the quick and efficient exploitation and harvesting of natural resources.

Beyond the possibility that captured petroleum and minerals that are lost are re-captured by competitors, the doctrine of correlative rights creates an important limitation to the rule of capture. While the rule of capture was created to encourage exploration and extraction of valuable minerals, the correlative rights doctrine was adopted to ensure that wasteful operations would bring about legal liability.[9] The doctrine of correlative rights provides that anyone with a legal right to petroleum or mineral resources has an equal right to extract them. Thus, interfering with one’s neighbor’s rightful extraction of her subsurface minerals can trigger legal liability.

The doctrine of correlative rights is best illustrated by the case of Elliff v. Texon Drilling Co.,[10] which involved an oil well that malfunctioned and damaged a neighboring extraction operation. The defendant negligently permitted one of its wells to blow out and burn, which caused large quantities of oil from the plaintiff’s property to drain. The plaintiff sued for damages from the lost oil and was able to recover based on the principles of the correlative rights doctrine. The defendant was wasting the mineral resources in this case rather than making economic use of them, which gave rise to liability. The tension between the rule of capture and the correlative rights doctrine eventually led to the development of the so-called “fair share” doctrine, which provides that each property owner is entitled to a fair chance to extract the petroleum or minerals under his or her property.[11] The fair share doctrine has since been codified into the laws of many jurisdictions in the form of conservation statutes.

State and Local Conservation and Land Use Regulations

While making economic use of subsurface minerals is a good policy in general, it can lead to issues of over-extraction and pollution. This is due to the idea sometimes known as the “tragedy of the commons,” which occurs when there is common ownership. Each owner is incentivized to act in a manner that will benefit himself regardless of the costs imposed on the group.[12] While the rule of capture and doctrine of correlative rights have helped give rise to a robust and thriving mining and extraction industry in the United States, they have done little to protect the public interests implicated by these activities. This is why many state and local jurisdictions have exercised their powers to regulate petroleum and mineral extraction activities.

State mineral, oil, and gas policies balance the public interest against the private economic rights of extraction companies. In so doing, they try to maximize the economic value of underground resources without unreasonably interfering with the public health and welfare. For example, state and local jurisdictions may impose well or mine spacing rules, which regulate the number of extraction operations that can be carried out in a particular area.[13] Conservation laws may also regulate the amount of resources that can be extracted on a daily, weekly, or monthly basis. Often, these production limitations are useful for both conservation and market regulation purposes, as they can help stabilize the prices of oil, gas, and mineral commodities by preventing overproduction.[14]

Several major oil, gas, coal, and mineral-producing states have conservation statutes on the books. Arkansas passed one of the first oil and gas conservation laws on the books in 1939, which foreshadowed the departure of oil and gas policy from the traditional rule of capture.[15] Since then, states including New York, Pennsylvania and Colorado have passed similar conservation laws that follow Arkansas’ example of establishing spacing requirements and land use policies for mines and wells.[16] The Interstate Oil and Gas Compact Commission developed a proposed Model Oil and Gas Conservation Act in 1999, which was subsequently revised in 2004. The Model Act provides a uniform guide for states looking to develop policies to conserve underground resources.[17]

Ownership and Legal Protection of Subsurface Mineral Rights

Petroleum and mineral extraction rights vary by jurisdiction. However, among states that have taken up the issue, courts follow one of two theories of oil, gas, and subsurface mineral ownership: the non-ownership theory or the ownership-in-place theory. Both of these approaches rely on the law of capture to clarify subsurface mineral property rights, but they do so in slightly different ways.   

The non-ownership theory (also sometimes called the “right-to-take” rule) applies the rule of capture to vest an exclusive right to explore for and extract mineral and petroleum resources in the first person who is able to access them.[18] Under this rule, nobody has ownership rights in resources, as they are considered “wild” or “migratory” in nature. So, if a person is able to harvest natural resources under another’s land without trespassing, she may do so.

The majority of oil-producing states follow the ownership-in-place theory, which establishes ownership interest by looking at the resource’s physical location.[19] Though people own resources under their lands under this theory, the rule of capture still applies to allow others to harvest resources under their lands. Under this theory, "the owner of a tract of land holds [ownership of] oil and gas underlying the boundaries of his property. [but] the oil and gas are not the subject of actual possession until brought to the surface."[20] Thus, once a mineral or petroleum resource comes under the control of another person legally under the rule of capture, the landowner’s right to the resources is extinguished.[21]

Because the ownership-in-place theory is subject to the rule of capture, like the non-ownership theory, it allows harvesting of resources under another’s land in some cases. As such, the practical differences are subtle and apply mainly to remedies and available causes of action. For example, a person who wrongfully harvests another’s underground oil in an ownership-in-place state is more likely to be subject to a theft-related cause of action, while a similar defendant in a non-ownership state may be limited to causes of actions relating to damage to the plaintiff’s land.

The nature of subsurface resource ownership recognized by the state also impacts how and under what circumstances mineral and petroleum rights can be conveyed. Mineral rights ownership includes a number of rights, including the right to profits from mineral production, the right to sell or lease mineral rights as an easement and the right to use surface lands in any manner that is reasonably necessary to extract subsurface minerals.[22]

Causes of Action for Resource Owners

Mineral rights owners or leaseholders are also entitled to defend their property rights in court. This means they are entitled to legal protections against trespass and other infringements of their economic rights. When these issues arise, subsurface commodity owners typically pursue one of four actions available in the common law: damage to the lease value of the property, slander of title, assumpsit and actions for conversion and ejectment.

In an action based on damage to lease value, the case arises from a defendant’s interference with mineral exploration or extraction activities. So, for example, if someone installs a well or mine to access minerals he is not legally entitled to possess, he may be liable for an action based on damage to lease value.[23] However, showing causation and damages may be difficult. In one early case, Thomas v. Texas Co., an oil and gas exploration company entered the plaintiff’s property without permission and drilled an exploration well. The company discovered no oil on the plaintiff’s property and shared this information with other oil companies in the area. The oil companies that had bid on the property’s mineral rights interest all withdrew their offers, and the land owner sued the oil exploration company for destruction of the mineral lease value. The plaintiff was unable to recover, as the reviewing courts determined there was no sufficient causal link between the oil exploration company’s trespass and the loss in the plaintiff’s mineral lease value.[24]

Slander of title actions do not require physical interference with mineral property rights. Rather, these claims arise when a defendant makes a false claim of title to mineral rights with malicious intent and made in a manner that causes monetary damages.[25] Slander of title actions tend to arise in mineral rights cases when landowners execute successive oil and gas leases on the same tract of land. The multiple lessees may interfere with each other’s property rights by failing to record or give proper notice of their interests.[26]

Actions for assumpsit are used to enforce implied contracts for mineral rights, which may arise when extraction companies discover and tap mineral or petroleum deposits to which they don’t have legal rights. In these cases, property owners may allow the operations to continue, but sue for the value that the trespassing operation should have paid to obtain the mineral rights in the first place. A contract would be “implied” by nature of the landowner’s tacit assent to the operations.  

Otherwise, the property owner may choose to sue for ejectment and conversion, which would remove the trespasser and require her to pay compensation for the value of the minerals removed from the land. The outcome of an ejectment action often depends on whether the trespasser acted in good faith. Where mineral and petroleum rights trespassers acted in bad faith, defendants are often held responsible for damages in the amount of the full value of the minerals extracted from the land. If the trespassing extractions operate in good faith or under genuine mistake, courts typically allow them to subtract from damages the costs they incurred setting up the offending well or mine.[27]

Moreover, subsurface property rights are not the only legal rights property owners are entitled to defend in court. When petroleum or mineral extraction activities unreasonably interfere with the use of the surface property, the extraction company may be liable under the so-called “accommodation doctrine,” which was first established by the Texas Supreme Court in 1971 in the case of Getty Oil Company v. Jones.[28] Getty involved the installation of oil pumps that interfered with irrigation of neighboring agricultural land. In this case, the Texas Supreme Court held that the oil company had to reasonably accommodate the farmer’s existing use of his land. The accommodation doctrine prohibits the mineral owner’s use of his or her property in a manner that impairs the existing use of the surface lands so long as commercially viable alternatives are available.[29]

Conclusion

Owners of subsurface mineral and petroleum resources are entitled to several legal protections of their property rights and the economic value of their underground commodities. In the next module, we’ll go over how oil, gas, and mineral interests are created and conveyed, as well as what limits the law imposes on them.