Bubbling crude Featured

8:00pm EDT March 26, 2007
Drilling an oil or natural gas well involves much more than poking a hole in the ground, pumping petroleum, shipping it off and waiting for the profits to flow in as fast as the product flows out.

That procedure was not the norm even in the most romanticized days of oil- and gas-drilling operations, and it is less so today, particularly for landowners on whose property companies drill. Today, landowners must grapple with a complex range of legal and environmental issues, and many are best dealt with by involving attorneys who specialize in oil and gas issues and environmental liability.

“Landowners should work with attorneys to protect their property regarding oil- and gas-drilling operations, because there is such a disparity in knowledge and sophistication, especially among landowners who are fairly new to the process,” says Thomas S. Hoekstra, chair of the Energy and Environmental Law Practice groups in the Dallas office of Godwin Pappas Ronquillo LLP.

Smart Business spoke with Hoekstra about how landowners can protect themselves as much as possible from the legal and environmental problems associated with oil and gas production.

What is the key issue regarding drilling operations on private property?

One key issue is the prevention of petroleum releases, or spills, affecting ground water and surface water, which may result in additional contamination of subsurface aquifers. Similarly, releases of natural gas into the atmosphere can result in significant environmental issues.

Most companies in the industry today are sophisticated about preventing the environmental problems associated with the production and transportation of petroleum and natural gas.

Landowners, especially those who are relatively inexperienced in mineral leasing, are often less knowledgeable. They need to ensure there is no contamination of the soil or subsurface aquifers from crude oil or natural gas drilling that will affect them or their neighbors.

How can releases of hazardous substances adversely impact landowners?

Off-site migration of contaminants that are the byproducts of drilling can also be a problem. For example, if contaminants migrate off-site into an aquifer and contaminate the drinking water source for a neighbor’s livestock, the landowner may be a target of litigation, even if the drilling company is the culpable party.

The landowner might have claims against the drilling company, and probably would, but he still has the problem of the migration of contaminants off his property onto adjacent property.

At what point should landowners involve attorneys in leasing?

The earlier the better, particularly if they are relatively new to the process. These days, with oil at $60 a barrel, anybody can go out and drill for oil and gas.

So it makes sense for inexperienced landowners to work with attorneys to protect them against potentially expensive environmental problems.

How can attorneys provide guidance to landowners?

The simple answer is to help them minimize risks and maximize financial benefits from the lease. Attorneys can help draft and execute a lease that allows them to obtain the highest royalty, bonus and delay payments available from that lease. They can advise landowners about their risks and exposures, depending on the sophistication of the lessee company that is going to develop the minerals on the land.

The attorneys will make sure that the landowners require the lessee to have the appropriate insurance, determine that it has sufficient financial capabilities to respond to any damages not covered by insurance and take all proper precautions in building the pad site for drilling. They also can advise the landowner about what the company must do with the saltwater byproducts associated with the oil and gas coming out of the ground, and how it must handle the drilling mud and other materials used in the completion of an oil well that might have to be treated as a hazardous waste.

Finally, the attorneys can make sure that when the production cycle is completed, the property is returned as completely as possible to the condition it was in prior to development.

How does the landowner benefit from involving an attorney early in the process?

The most significant benefit is saving money in the long run. Even though the landowner may spend some money up front, he can more successfully avoid the environmental problems and associated costs that can be incurred if something goes wrong during the lease development. For example, if the drilling company goes broke, its insurance lapses, or it just abandons the lease, or does not or cannot restore the lease. The landowner may be facing major expenses with no means of recovering such costs from the drilling company. The landowner’s liability for these major costs can be prevented with proper management.

THOMAS S. HOEKSTRA is chair of the Energy and Environmental Law Practice groups at Godwin Pappas Ronquillo LLP’s Dallas office. Reach him at thoekstra@godwinpappas.com or (214) 939-4496.