Nuisance Easements: The New Cost of Doing Business in the Oil and Gas Industry

February 18, 2015
|

With the rise of hydraulic fracturing and horizontal drilling, oil and gas operations have transitioned from a predominately rural venture to one that is present in some of the most highly populated areas in the country. Surface property owners, whose properties are often just mere feet away from drilling sites, complain about contaminated water, air emissions, noise, decreased property values, and health problems. Residents attempt to enforce their rights by bringing nuisance claims against oil and gas companies. These nuisance suits pose a high risk to continued energy operations in the shales under heavily populated areas. Three recent Texas nuisance cases, all stemming from operations in the Barnett Shale, illustrate the unpredictable results these cases elicit. Ultimately, oil and gas companies may find nuisance suits too risky and will resort to nuisance easements as a cost of doing business in urban areas.

Traditionally, oil and gas companies operated solely in rural areas where exploration, leasing, and production rarely affected surface owners.[1] In the early 2000s, however, hydraulic fracturing enabled oil and gas companies to expand exploration and production operations.[2] During this boom, companies realized that some of the most valuable natural gas reservoirs were located under populated metropolitan areas in shale formations.[3] New hydraulic fracturing and horizontal drilling techniques allowed companies to pursue the recovery and production of natural gas beneath these urban areas.[4] These operations, however, posed new problems with which companies operating in rural sites had not previously dealt. Companies must now negotiate with thousands of surface owners and residents about operations, leasing, and production because it would affect their daily lives. For example, the Barnett Shale Field, located across nineteen North Texas counties, is the second largest natural gas field in the United States.[5] The field is also home to over 1.6 million people.[6] These residents now complain about groundwater pollution, air emissions, and the impacts that these new operations could have on their health.[7] Nuisance claims are becoming the predominate means by which surface owners redress these concerns.

What constitutes an oil and gas nuisance claim is unclear because hydraulic fracturing and its effects on populated areas are relatively new. Courts have applied regular nuisance law to this context.[8] In doing so, courts have determined that oil and gas operations are not per se nuisances.[9] A determination on the facts must be made in each case, and damage to the property must be shown in order to constitute a nuisance.[10] A nuisance can include underground contamination, wastewater, noise, light, and surface activity such as construction or heavy vehicle traffic.[11] To establish a nuisance, property owners must show that the oil and gas operation has “capacity, management, and location” that materially diminish the value of the property and substantially interfere with its ordinary comfort and enjoyment.[12]

Nuisance laws are defined broadly and courts determine outcomes on a case-by-case basis, making it difficult to predict results. Three cases decided in the past year—all involving oil and gas operations in the Barnett Shale region of Texas—demonstrate a trend that will likely force the hand of oil and gas companies. In Parr v. Aruba Petroleum, a jury awarded plaintiffs nearly $3 million after it determined that the energy company’s drilling caused a private nuisance.[13] In the suit, the plaintiffs alleged that the drilling had released pollution into the air, causing the family to suffer negative health repercussions.[14]  In Crowder v. Chesapeake Operating, plaintiffs asserted that hydraulic fracturing on their property had created health risks from air pollution and that the noise from the operations had disrupted the use of their property.[15] The jury in this case, while still finding that the activity was a nuisance, only awarded the plaintiffs $20,000.[16] The plaintiff in Teri Anglim v. Chesapeake Operating asserted an almost identical claim about the same wells that the jury called a nuisance in Crowder.[17] In this case, however, the jury found that the oil company’s operations were not out of place in the area and did not constitute a nuisance.[18]

These varied results demonstrate the unpredictability of nuisance claims in courts. It is likely that oil and gas companies will find it more appealing to resolve these potential issues on the front end of a lease rather than gamble on what a court or jury might find after the alleged nuisance has occurred. The oil and gas industry might find a solution by replicating the aviation industry. In the aviation industry, before an airport is built, most neighboring residents sign nuisance easements protecting the airport against nuisance liability.[19] By signing these easements/releases in exchange for money up front, residents effectively waive all potential claims against the airport for the impact of noise, fumes, vibrations, or other airport activities that might decrease the value of the property or lessen the ability of owners to enjoy their land.[20] Oil and gas companies could avoid significant jury awards and add predictability to their operations by convincing surface owners to sign similar nuisance easements.

In fact, at least one company already attempted this. EQT Corporation, one of the largest natural gas producers in the Appalachian Basin, offered property owners in Pennsylvania $40,000 each in exchange for a nuisance waiver.[21]  It is likely that this trend will continue; nuisance waivers appear to be the most efficient way to avoid or minimize risk.

Despite their benefits, nuisance easements have potential drawbacks. The additional cost of doing business is not cheap. As evidenced by the cost of EQT’s nuisance easements, these waivers will be expensive. Additionally, companies may worry about the perception of these transactions. Environmental groups or the media could portray the easements as oil and gas companies “buying off” and taking advantage of residents. Ultimately, however, the expense of nuisance easements and the potential for bad publicity are predictable and could be more favorable than the gamble of litigation.

Hydraulic fracturing and horizontal drilling permit oil and gas operations to tap into natural gas fields in populated areas. This change has spurred a move from rural sites to operations in urban settings.  As time passes and the effects of oil and gas operations in populated areas become clear, nuisance suits will be a primary way that property owners challenge drilling companies. As evidenced by recent Texas cases, juries are unpredictable and pose a risk to the continued use of hydraulic fracturing. It may be necessary for the oil and gas industry to adopt nuisance easements as another cost of doing business if it wishes to continue producing natural gas from shale fields underneath populated areas.

[1] R. Marcus Cady, II, Drilling into the Issues: A Critical Analysis of Urban Drilling’s Legal, Environmental, and Regulatory Implications, 16 Tex. Wesleyan L. Rev. 127, 129 (2009).

[2] EEC Environmental, A Brief History of Hydraulic Fracturing, http://www.eecworld.com/services/258-a-brief-history-of-hydraulic-fracturing (last visited Oct. 31, 2014).

[3] Id.

[4] Cady, supra note 1.

[5] Id.

[6] Id.

[7] Id.

[8] 55 Causes of Action 2d 1 (Originally published in 2012).

[9] Id.

[10] Id.

[11] Id.

[12] Id.

[13] Parr v. Aruba Petroleum, Inc., No. 11-01650-E (Dallas County Ct. at Law, filed Mar. 8, 2011).

[14] Id.

[15] Crowder v. Chesapeake Operating, Inc., No. 2011-008256-1 (Tarrant Co. Ct. at Law) (jury verdict May 2014).

[16] Id.

[17] Anglim v. Chesapeake Operating, Inc., No. 2011-008256-1 (Tarrant Co. Ct. at Law) (jury verdict April 2014).

[18] Id.
[19] Howard Beckman, Aviation Noise Law, Taking of Property: Avigation Easements and Zoning Regulations, Airport Noise Law, http://airportnoiselaw.org/takings.html.

[20] Id.

[21] Naveena Sadasivam, Aggressive Tactic on the Fracking Front, ProPublica (July 2, 2014, 9:01 AM), http://www.propublica.org/article/aggressive-tactic-on-the-fracking-front.

About

Kelly Hanen is a 2L at the University of Texas School of Law and is interested in litigation in the oil and gas industry. She earned her B.A. in History and Government from Dartmouth College in 2013 and graduated with honors.