Pennsylvania Superior Court Fractures Long-Standing Rule of Capture; Appeals court rejects frac company’s appeal

Court rejects fracking company’s appeal in “rule of capture” decision by Susan Phillips, June 11, 2018, State Impact Pennsylvania

A Pennsylvania appeals court on Friday rejected a request by a natural gas production company to rehear a case whose outcome could affect drillers across the country.

The case, Briggs v. Southwestern Energy Production Company, involves the legal principle known as “rule of capture,” which means a property owner has the right to extract or “capture” an underground resource such as water, oil or gas, even if it flows from beneath another property owner’s land. The case calls into question the longstanding practice as it applies to fracking, which requires subsurface rock to be deliberately broken in order to release trapped gas.

In 2015, the Briggs family sued Southwestern Energy for trespass and conversion, arguing that the company’s fracking efforts were illegal and it should not be allowed to use wells on neighboring properties to tap gas beneath their land. The family owns about 11 acres of land in Susquehanna County and did not lease its land for gas drilling.

The family argued that the use of hydraulic fracturing is different than conventional oil and gas drilling because it does not simply draw from a free flowing sub-surface resource. Instead, it requires breaking up rock to unleash oil and gas that had been trapped within the shale lying beneath the surface. They claim that without the fracking, oil and gas cannot flow from beneath one property to an adjacent property — so, they say, the rule of capture does not apply.

The trial court rejected their arguments and the family appealed to Pennsylvania’s Superior Court. On April 2, a two-judge panel ruled the Briggs’ arguments had legal merit. Superior Court Judge John Musmanno wrote that the differences between conventional and unconventional drilling are significant enough to warrant a trial.

“In light of the distinctions between hydraulic fracturing and conventional gas drilling, we conclude that the rule of capture does not preclude liability for trespass due to hydraulic fracturing. Therefore, hydraulic fracturing may constitute an actionable trespass where subsurface fractures, fracturing fluid and proppant cross boundary lines and extend into the subsurface estate of an adjoining property for which the operator does not have a mineral lease, resulting in the extraction of gas from beneath the adjoining landowner’s property.”

Southwestern Energy had sought an en banc rehearing of the case among the remaining Superior Court justices, referring to the decision as having “revolutionary significance.” Attorneys for Southwestern argued that even conventional oil and gas drilling, which taps a reservoir, requires human intervention. The company said the decision upends established Pennsylvania law and could result in a setback to the industry nationwide.

“The panel’s decision does not only affect Pennsylvania. Because hydrofracturing is the most economic and commonly used method of producing oil and gas across the country, and because Pennsylvania is the second largest natural gas producing state, this Court’s decision unsettles the legal landscape for the entire industry.”

Southwestern says it will appeal the decision to the Pennsylvania Supreme Court. In a statement, it expressed hope that the court will hear the case.

“Southwestern Energy Company would like to bring clarity and certainty to this potentially far-reaching matter as quickly as possible,” it said in the statement. “Given the sweeping impacts associated with the Superior Court’s ruling — for Pennsylvania’s entire natural gas industry, not just Southwestern — we will be filing a petition for allowance of appeal before the Supreme Court.”

If the Supreme Court does not take the case, or if it confirms the Superior Court’s decision, then the case will return to the trial court, where the Briggs family will have to prove that Southwestern did indeed siphon gas from beneath its property.

Pennsylvania Superior Court Fractures Long-Standing Rule of Capture by Blank Rome LLP, April 30, 2018, jdsupra

Citing distinctions between hydraulic fracturing and conventional gas drilling, the Pennsylvania Superior Court held on April 2, 2018, in Briggs v. Southwestern Energy Production Company[1] that the rule of capture does not preclude liability for trespass due to hydraulic fracturing, reversing a summary judgment that had been granted by the trial court in favor of Southwestern Energy Production Company. The Briggs ruling exposes operators to potential tort liability where subsurface fractures, fracturing fluid, and proppant cross boundary lines and extend into the subsurface estate of an adjoining property, resulting in the extraction of natural gas from the adjoining property.

The case has been remanded to the trial court to afford the adjoining landowners the opportunity to fully develop their trespass claim and a conversion claim that the trial court had also concluded was barred by the rule of capture. In a further development to this case, Southwestern Energy Production Company filed with the Pennsylvania Superior Court an application for reargument en banc. Absent reversal or modification of the ruling in the appellate courts, Briggs will be binding precedent that requires trial courts to permit subsurface trespass and conversion claims for hydraulic fracturing to move forward.

Often regarded as the most important single doctrine of oil and gas law, the rule of capture is so foundational that almost every law school course on oil and gas law begins with it. A common law principle that can trace its legal lineage to a dispute over a fox that crossed property boundaries, the rule of capture has been applied to oil and gas extraction for over a century. Under the rule, while a mineral estate owner has a real interest in oil and gas in place, that right does not extend to specific oil and gas beneath the property; instead, ownership of the specific molecules occurs only after the oil and gas has been captured through drilling and production. Because the mineral estate owner secures title to specific oil and gas only when it is captured, there is no liability for drainage so long as there has been no trespass and all relevant statutes and regulations have been observed.[2]

In the leading case applying the rule of capture to hydraulic fracturing, Coastal Oil & Gas Corp. v. Garza Energy Trust,[3] the Supreme Court of Texas held in 2008 that hydraulic fracturing was not an actionable trespass under Texas law, at least as regards to a mineral lessor who only held a royalty interest with a possibility of reverter.[4]

In reaching this conclusion, the Coastal Oil majority relied on four justifications, including that: “(1) the law already affords the owner who claims drainage full recourse [by drilling his own offset well, or if the minerals are already leased, suing the lessee for violation of the implied covenant to protect against drainage]; (2) allowing recovery for the value of the gas drained by hydraulic fracturing usurps to courts and juries the lawful authority of the Texas Railroad Commission to regulate oil and gas production; (3) determining the value of oil and gas drained by hydraulic fracturing is the kind of issue the litigation process is least equipped to handle because trial judges and juries cannot take into account social policies, industry operations, and the greater good[,] which are all tremendously important in deciding whether [hydraulic fracturing] should or should not be against the law;” and (4) “the law of capture should not be changed to apply differently to hydraulic fracturing because no one in the industry appears to want or need the change.”[5]

In Briggs, the Pennsylvania Superior Court acknowledged these professed justifications, but decided that the analysis of the dissent in Coastal Oil (authored by Justice Phil Johnson) and a more recent ruling from the U.S. District Court for the Northern District of West Virginia, Stone v. Chesapeake Appalachia, LLC,[6]were more persuasive.[7] First, the Briggs court observed that the rule of capture had arisen because of the migratory or fugitive nature of oil and gas, which originate in subsurface reservoirs or pools and can migrate freely within the reservoirs and across property lines according to changes in pressure. Citing earlier Pennsylvania precedent, the Briggs court said “…the rule of capture is traditionally applied where the drainage of minerals ‘occurs as the inevitable result of the tapping of a common reservoir.’”[8] By contrast, “…natural gas, when trapped in a shale formation, is non-migratory in nature,” the Briggs court wrote.[9]“Shale gas does not merely ‘escape’ to adjoining land absent the application of an external force.”[10] The Briggs court embraced Justice Johnson’s formulation of the rule of capture: “[t]he rule of capture precludes liability for capturing oil or gas drained from a neighboring property whenever such flow occurs solely through the operation of natural agencies in a normal manner, as distinguished from artificial means applied to stimulate such a flow.”[11] (Emphasis in original.)

[WOW! says jess] The Briggs court also challenged Coastal Oil’s rationale that a landowner can adequately protect his interests by drilling his own well to prevent drainage, pointing out that hydraulic fracturing is a “costly and highly specialized endeavor,” with recourse to “go and do likewise” not necessarily readily available for an average landowner.[12]

Finally, the Briggs court echoed the concern raised in both the Coastal Oil dissent and Stone that precluding trespass liability based on the rule of capture would eradicate a mineral lessee’s incentive to negotiate mineral leases with small property owners, since the lessee could locate a well near the lease’s boundary line and withdraw natural gas from beneath the neighbor’s land without paying a royalty.[13]

In the appeal, there was virtually no discussion of the facts relating to the alleged trespass, the court observing that it was unclear from the record whether the hydraulic fracturing operations have resulted in a subsurface trespass to the landowners’ property and that there was no evidence, not even an estimate, as to how far the subsurface fractures extended from the wellbore of Southwestern’s lease.[14]

The case now goes back to the trial court, where the landowners will be given the opportunity to develop the factual record, even as the court acknowledged that establishing the occurrence of a subsurface trespass and determining the value of natural gas drained through hydraulic fracturing will likely present evidentiary difficulties, albeit ones that are not, in and of themselves, sufficient justification for precluding recovery. Additionally, the parties will argue on Southwestern’s application for reargument whether the Briggs decision should hold.

For now, Briggs means that operators who perform hydraulic fracturing near adjoining tracts in which they do not hold a mineral lease must now be conscious of the potential for litigation and review their completion plans in light of how those plans could later be characterized—indeed, used as evidence against the operators—at trial. Although the Briggs court identified Section 158 of the Restatement (Second) of Torts as the standard of liability for trespass, and § 158 applies only if an actor “…intentionally…enters land in the possession of another or causes a thing …to do so,” it did nothing to clarify under what circumstances such intent would be found. Moreover, having jettisoned the rule of capture for intentional torts, it would not be too much of a stretch for the court to do the same for unintentional torts, creating the possibility that operators could be held liable for negligence when fractures reach neighboring properties.

In Coastal Oil, the majority was clearly concerned that abandoning the rule of capture for hydraulic fracturing would open the floodgates to litigation and impede the single most essential technique in modern oil and gas production. Pennsylvania may now test whether these dire predictions were accurate.

[1] Briggs v. Sw. Energy Prod. Co., 2018 PA Super 79 (Apr. 2, 2018).

[2] Briggs, 2018 PA Super 79, p. 2, n.2 (citing Rule of Capture, Black’s Law Dictionary (10th ed. 2014)).

[3] Coastal Oil & Gas Corp. v. Garza Energy Tr., 268 S.W.3d 1 (Tex. 2008).

[4] In Coastal Oil, the nature of the interest of the plaintiff was pivotal. A royalty interest is not a possessory interest. Under Texas law, for a possessory interest, any unauthorized entry is a trespass, even if no damage is done. For a non-possessory interest, however, Texas law requires that actual injury be proven. Given the rule of capture—that there was no title to the oil and gas until it was captured, the holder of a non-possessory interest could not demonstrate actual injury.

[5] Briggs, 2018 PA Super 79, at 15-16 (quoting Coastal Oil, 268 S.W. at 14-17).

[6] Stone v. Chesapeake Appalachia, LLC, No. 5:12-CV-102, 2013 WL 2097397 (N.D.W.Va. Apr. 10, 2013), order vacated, 2013 WL 7863861 (N.D.W.Va. July 30, 2013)(the order was vacated as a result of a Joint Motion to Vacate due to a settlement amongst the parties).

[7] Justice Johnson’s opinion was both a concurring and dissenting opinion, but the concurrence related to a separate issue that was not relevant to the trespass issue, so the Briggs court referred to Justice Johnson’s minority decision as “the Coastal Oil dissent.”

[8] Briggs, 2018 PA Super 79, at 20.

[9] Id.

[10] Id.

[11] Id. at 21.

[12] Id.

[13] Id. at 22-23.

[14] Id. at 23-24.

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