Shale Development Rights Issue Certified to West Virginia Supreme Court

April 8, 2013

On March 28, 2013, in Cain v. XTO Energy, Inc., United States District Judge Irene M. Keeley issued an order that asks the Supreme Court of Appeals of West Virginia to answer a specific question of law that could have a significant effect on development of the Marcellus and Utica shale in West Virginia. Specifically, West Virginia’s highest court is asked to determine whether a mineral owner or lessee may utilize the surface of a subject tract to produce oil and gas from neighboring tracts. In other words, the court must determine if an oil and gas company may utilize the surface of one tract of land to drill a horizontal well that extends beyond the borders of the tract to extract oil and gas from adjoining and/or neighboring tracts. Judge Keeley noted that resolution of “this issue is the absolute heartland of this case” and that there is “no clear controlling West Virginia precedent to guide the Court’s decision.” See Order.

In Cain v. XTO Energy, Inc., Richard L. Cain allegedly owns the surface rights to approximately 105 acres of land located in West Virginia but he does not own the mineral estate underlying this property. Rather, the oil and gas rights were severed from the surface estate and were thereafter leased to XTO Energy, Inc. (XTO). Pursuant to this lease, XTO has utilized 12 acres of Mr. Cain’s property to drill three horizontal gas wells that are currently producing natural gas. The vertical portions and some portion of the horizontal wellbore of XTO’s wells are under Mr. Cain’s property, but the horizontal well bores allegedly extend beyond the boundaries of Mr. Cain’s surface rights. Notably, most of the gas produced from these wells is allegedly being produced from the horizontal lengths of the well bores that reach neighboring natural gas estates.

Mr. Cain objects to XTO’s use of his land to drill wells that extend horizontally, beyond the borders of his property, to extract oil and gas from a shared pool of oil and gas estates. Mr. Cain argues that the severance deed limits XTO’s surface rights to the removal of gas underlying the original mineral tract. In relevant part, the severance deeds reserved

all of the oil and gas within and underlying said tract of land aforesaid, as well as rights and privileges necessary and convenient for the mining and removal of said oil and said gas, or either of them ….

If the Supreme Court of Appeals of West Virginia ultimately agrees with Mr. Cain’s position, then XTO, and other natural gas companies that place a well pad on one tract of land to extract gas from another tract of land, depending on the language of the severance deed, ultimately may need to negotiate extended surface rights with the current surface-right holders to drill a horizontal well. In addition, companies that already drilled a horizontal well to extract gas from neighboring tracts may become obligated to compensate the current surface owners for the use of the surface rights.