Using offsite locations for horizontal drilling is becoming increasingly popular as surface use becomes difficult. In Lightning Oil Inc. v. Anadarko Petroleum Corporation, the San Antonio Court of Appeals looked at what can happen when the offsite drill location is located on an adjacent tract of land covered by a different lease. The San Antonio Court of Appeals held that Lightning Oil Co. was not entitled to a temporary injunction stopping Anadarko Petroleum Corporation from drilling horizontally through Lightning Oil’s mineral estate to reach Anadarko’s lease on the adjacent property. On January 15, 2015, the San Antonio Court of Appeals denied Lighting Oil Co.’s Motion for En Banc Reconsideration.

Factual Background Lightning Oil owns the mineral estate of approximately 3,251.53 acres located in Dimmit County, Texas. Briscoe Ranch, Inc. is the surface estate owner on Lightning Oil’s lease. South of Lightning Oil’s lease, Anadarko has a mineral lease under approximately 15,200 acres used as a wildlife sanctuary by the Texas Parks and Wildlife Department. Anadarko’s mineral lease requires it to utilize offsite drilling locations “when prudent and feasible.”

Anadarko obtained permission from Briscoe Ranch to use its surface to drill wells, and to drill into and cross through Lightning Oil’s leased mineral estate in order to reach Anadarko’s mineral estate under the adjacent wildlife sanctuary. Anadarko notified Lightning Oil of its intention and placed stakes to identify the proposed surface location of a well site on Lightning Oil’s lease. Lightning Oil objected and staked its own proposed well site at the same surface location as Anadarko’s proposed well site. After negotiations broke down further, Lightning Oil filed suit against Anadarko, asserting trespass, tortious interference with contract, and seeking a declaratory judgment and injunctive relief.

District Court Rulings Based on the allegations in Lightning Oil’s petition, the district court granted a temporary restraining order preventing Anadarko from, among other things, entering upon the surface estate of Lightning Oil’s lease for the purpose of drilling any oil and gas well into or through Lightning Oil’s mineral estate. Lightning Oil then sought a temporary injunction. After the hearing, the district court denied the temporary injunction and dissolved the temporary restraining order, finding that Anadarko’s proposed operations would cause “no interference” with Lightning Oil’s mineral interest. Lightning Oil appealed.

The Appeal The issue on appeal was whether Lightning Oil proved that it would suffer an imminent and irreparable injury if Anadarko was permitted to proceed with its plan to drill through Lightning Oil’s mineral estate to reach to Anadarko’s mineral estate under the adjacent wildlife sanctuary. At the temporary injunction hearing, Lightning Oil presented the testimony of its owner, Walter Scott Light, and its petroleum engineer, Gary Bagnall. Light testified that:

• Anadarko’s proposed drilling operations “certainly could” harm the mineral estate’s value. Light stated that a casing failure in the field can cause damage to Lightning Oil’s producing formation.
• Anadarko’s drilling program would trigger an offset drilling obligation under its lease costing millions of dollars that “would disrupt our drilling plan completely”
• Anadarko’s drilling pipe passing through Lightning Oil’s mineral estate “will probably disrupt our drilling program [because] [t]hose pipes will be in the way of our wells,” and that it is “very difficult and costly” to turn and change drilling direction
• Any damage caused by a casing failure could be quantified and compensable based on reserve estimates
• The obligation to drill offset wells and associated expense would be present even if Anadarko drilled from a different surface location
• The wellbore for Lightning Oil’s proposed well would never encounter any portion of Anadarko’s planed wellbores because of the 330-foot spacing rules for the field

Bagnall, the petroleum engineer for Lightning Oil, testified that:

• There were “several known productive intervals” and others with “definite potential production” above the Eagle Ford Shale
• There were risks associated with drilling a well, including casing failures or underground blowouts that could damage formations and make them “irreparable”
• There was a “high likelihood that it probably won’t happen”
• Anadarko “probably will not lose control of the wells,” but that “it doesn’t preclude that it might happen”
• Anadarko’s proposed operations would not interfere with Lightning Oil’s proposed operations, except that Lightning Oil’s drilling plans would need to be altered based on how much pipeline Anadarko lays and where they put it, which could result in a significant expense to Lightning Oil

The court of appeals held that Light’s and Bagnall’s testimony failed to prove that Lightning Oil’s potential future injuries are not quantifiable or compensable. Moreover, Lightning Oil failed to prove that any injury to its mineral estate, and its rights to develop the mineral estate, is “probable, imminent and irreparable” in the interim pending trial. As a result, the San Antonio Court of Appeals concluded that the district court did not abuse its discretion in denying Lightning Oil’s application for a temporary injunction.

Conclusion This case demonstrates how difficult it can be to stop planned drilling operations before a trial on the merits, even as offsite drill pads for horizontal drilling become increasingly common. While the holding in Lightning Oil Co. v. Anadarko is critical to operators involved in offsite drilling operations, the court of appeals expressly declined to address issues related to trespass, and whether a third-party surface owner with no interest in the mineral estate has the right to consent to such drilling activity. These questions will be answered as Lightning Oil Co. and other cases like it work their way through the Texas courts.

Leah Rudnicki is a partner and Stephan Selinidis is a senior associate in Reed Smith’s Houston office. Leah and Stephan have a litigation practice where they represent exploration and production companies in disputes relating to the drilling and/or production of hydrocarbons.

Client Alert 2015-018