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.