On June 20, 2014, the Supreme Court of Texas ruled in Key Operating & Equipment, Inc. v. Hegar (PDF) that a mineral lessee in a pooled oil and gas unit has the right to use the entire surface of the pooled acreage, regardless of the location of the producing well or whether actual production from beneath the accessed surface can be proven. Key Operating is a significant, though not surprising, victory for the Texas oil and gas industry. Liskow & Lewis attorneys Butch Marseglia and Jillian Marullo submitted an Amicus Curiae brief (PDF) on behalf of the Texas Oil and Gas Association.
Key Operating involved the surface rights of a mineral lessee operating in a pooled unit. Key Operating & Equipment, Inc. (“Key”) held oil and gas leases on two contiguous tracts, the Hegar Tract and the Richardson Tract. Key built a road across the Hegar Tract to access wells located on both tracts. In 2000, the only well located on the Hegar Tract stopped producing, and Key’s lease on that tract expired. That same year, Key’s owners purchased an undivided 12.5% interest in the mineral estate of the Hegar Tract and immediately leased that interest to Key in a lease which gave Key the right to pool the minerals. Key then pooled the Hegar and Richardson Tracts and continued to use the road across the Hegar Tract to access a producing well on the Richardson Tract. Soon after, Will and Loree Hegar purchased the surface of the Hegar Tract, and they later brought suit, claiming that Key’s use of the road constituted a trespass. The trial court enjoined Key from using the road on the Hegars’ property, finding that Key’s use was a trespass because it was not reasonably necessary to extract minerals from beneath the Hegar Tract.
The First Court of Appeals initially reversed, but on rehearing withdrew its opinion and affirmed, basing its decision on the trial testimony of a petroleum engineer that no minerals were being extracted from beneath the Hegar Tract by the well located on the Richardson Tract. The court first found that because Key’s lease and pooling agreements were not part of the Hegars’ chain of title (because they were not executed at the time of severance), they did not bind the Hegars and could not “contractually expand Key’s right to use the Hegars’ surface.” The court further reasoned that Key’s implied right to use the surface of the Hegar Tract was conditioned on proof of actual production from beneath that tract. Disconcertingly, the court of appeals held that the case was “decided under the accommodation doctrine,” which neither Key nor the Hegars contended applied.
The Texas Supreme Court unanimously reversed, holding that a mineral lessee has the right to use the entire surface of a pooled unit to produce minerals from anywhere on the unit. Noting that pooling serves the important Texas policy of preventing waste and relying on the longstanding legal principle that production anywhere on a pooled unit is treated as taking place on every pooled tract, the Court reasoned that
. . . once pooling occurred, the pooled parts of the Richardson and Hegar Tracts no longer maintained separate identities insofar as where production from the pooled interests was located. . . . Because production from the pooled part of the Richardson Tract was legally also production from the pooled part of the Hegar [T]ract, Key had the right to use the road to access the pooled part of the Richardson [T]ract.
The Court further reasoned that, as owners of 12.5% of the minerals beneath the Hegar Tract, Key’s owners had the right to use the surface to develop those minerals as well as the right to pool those minerals. Key’s owners’ inherent rights as mineral interest owners, therefore, which they leased to Key, “include[d] the right to ingress and egress over the surface of any pooled acreage for the purpose of producing minerals from any part of the pooled acreage.” Because the Court concluded that its decision turned on Key’s implied surface rights, it declined to address the court of appeal’s chain of title reasoning. However, the Court did note that “the Hegars took their surface title subject to the mineral lease assigned by Key’s owners to Key” which gave Key the right to pool and “gave rise to Key’s right to use the road.” The Court also declined to address the accommodation doctrine because it was not raised in the trial court and thus was not properly before the court of appeals.