September 30, 2013. The federal appeals court for the Fourth Circuit issued a decision on September 4, 2013 concluding that West Virginia common law gives the owner of mineral rights authority to build pits for disposal of drilling waste without permission from the property owner. The decision in Whiteman v. Chesapeake Appalachia, L.L.C., 2013 U.S. App. LEXIS 18359, 43 ELR 20205, 2013 WL 4734969 (4th Cir. W. Va. 2013), may have implications beyond West Virginia since the Fourth Circuit Court of Appeals also decides cases from North Carolina and other mid-Atlantic states.
The Facts. Chesapeake Appalachia, L.L.C. owns the mineral rights under 101 acres of farmland owned by the Whitemans. Ownership of the property comes through two deeds. When Mr. Ellis O. Miller sold the property that is now the Whiteman farm, each deed retained “the oil and gas within and underlying the above-described parcels as well as all of the coal not heretofore conveyed, and all other minerals within and underlying the above described property, with the necessary rights and privileges appertaining thereto.” The deeds did not mention retaining any uses of the surface property. Chesapeake Appalachia ultimately acquired the mineral rights retained by Mr. Miller.
Chesapeake has three natural gas wells on 10 acres of the Whiteman property. When Chesapeake applied for state drilling permits, the company indicated that drilling waste (including drill water, flow back, and formation cuttings) would be disposed of by land application. After drilling on the Whiteman property, Chesapeake put the drill cuttings into open pits located near the wellheads. At the end of the drilling process, Chesapeake removed the plastic liners from the waste pits, mixed the drilling waste with clean dirt and compacted and covered the pits.
The Whiteman Lawsuit. The Whitemans sued to force Chesapeake to remove the waste pits, arguing that Chesapeake’s ownership of the mineral rights did not give the company authority to put waste disposal pits on the property. Although the Whitemans admitted that the pits had not caused a significant financial hardship, the family had concerns about possible future liability associated with the waste. The lawsuit originally included a number of claims under West Virginia common law; the only claim that survived to reach the Fourth Circuit Court of Appeals alleged that Chesapeake trespassed by building the waste pits without the Whitemans’ permission.
The Legal Issue. Common law trespass means entering another person’s property without lawful authority. Leaving a structure (such as a waste pit) on the property without lawful authority would be considered a continuing trespass. Under West Virginia common law, the owner of mineral rights only enters the property unlawfully if, under a “reasonable necessity” standard, the mineral owner goes beyond the mineral rights that have been granted and intrudes on the rights of the surface owner. So the Fourth Circuit Court of Appeals described the legal issue in the Whiteman case as: “whether Chesapeake’s permanent disposal of drill waste upon the Whitemans’ surface property is “reasonably necessary” for the extraction of minerals.” If creation of the waste disposal pits was reasonably necessary for extraction of the natural gas, Chesapeake did not need the Whitemans’ permission.
The Decision. The Whitemans argued that building a waste pit on site was not reasonably necessary to extract natural gas because Chesapeake had other waste disposal alternatives. The Fourth Circuit admits that Chesapeake could have used a “closed loop” waste system and offsite disposal of the solid waste instead of open pit disposal. (A closed loop system keeps all liquid drilling waste in pipes or tanks to avoid contact with the ground.) Although the technique was relatively new when the Whiteman wells were drilled in 2007 and 2009, Chesapeake had begun using closed loop systems in Texas and Oklahoma as early as 2004-2005. But the Fourth Circuit concluded that open pit waste disposal could still be “reasonably necessary” to extract natural gas on the Whiteman property for two reasons: 1. open pit waste disposal was the most common waste disposal technique used in West Virginia at the time Chesapeake drilled the Whiteman wells; and 2. state environmental standards allowed use of open pit disposal. (This part of the court’s analysis led to the kind of statement only a lawyer could love — “reasonably necessary” does not mean “necessary”.) As a result, the court concluded that Chesapeake’s ownership of the mineral rights gave the company authority to dispose of drilling waste on the Whiteman property even though the original reservation of mineral rights made no mention of that use of the surface property.
The Whiteman decision has to be troubling for surface owners. Many cases have recognized that ownership of mineral rights includes authority to access the property to extract the minerals (by putting in roads, for example). The Whiteman decision suggests that ownership of mineral rights also gives a drilling company authority to use the surface property for any number of auxiliary processes associated with oil and gas extraction. Such an expansive interpretation of mineral rights virtually eliminates the surface owner’s power to negotiate with the drilling company over surface impacts.
Another concern is that the Fourth Circuit decision relied on common use of open waste pits in West Virginia and consistency with state environmental standards to recognize a right to build waste pits without the surface owner’s permission. The court does not make a particularly strong case for allowing a drilling operator to impose a use on the surface owner simply because the practice is common and has not yet been prohibited by the state. Given the pressures on environmental programs — particularly in states that rely on revenue from oil and gas– state acquiescence in a practice should not be sufficient reason to force it on the surface owner.
Implications for North Carolina. North Carolina common law on trespass is very similar to West Virginia law, but North Carolina has few court decisions on the scope of mineral rights. (With no oil, gas and coal mining to speak of, there have been few controversies between surface owners and the owners of mineral estates.) But in 2012, the North Carolina General Assembly provided some additional protection to surface owners by statute. G.S. 113-423.1 requires an oil or gas operator to accommodate the surface owner by minimizing intrusion on and damage to the surface. That means “selecting alternative locations for wells, roads, pipelines, or production facilities, or employing alternative means of operation that prevent, reduce, or mitigate the impacts of the oil and gas operations on the surface, where such alternatives are technologically sound, economically practicable, and reasonably available to the operator.”
But the N.C. law goes on to say that it should not be interpreted to “prevent an operator from entering upon and using that amount of the surface as is reasonable and necessary to explore for, develop, and produce oil and gas…” [Emphasis added]. We now know what the Fourth Circuit Court of Appeals believes “reasonably necessary” means in the context of a drilling operator’s construction of a waste disposal pit on a West Virginia drilling site. The question is whether the first half of the new North Carolina law –requiring minimization of surface impacts — may lead to a different decision about what will be considered “reasonable and necessary” here.