Mountain States

Colorado Oil & Gas Task Force Spotlights Mineral Takings

Previous Colorado oil and gas task force meetings in Denver, Durango, and Loveland focused primarily on topics such as the regulation of the oil and gas industry and the surface impact of its operations. The meeting in Rifle last week brought a new issue to the table: mineral takings. A panel that addressed the task force on the subject included Wayne Forman, an attorney with Brownstein Hyatt Farber Shreck, and Roy Savage, a board member of the National Association of Royalty Owners (NARO) Colorado. Forman outlined what the law says about mineral takings, and Savage pointed out that regulations prohibiting oil and gas development would violate property rights.

Forman, whose clients include a national homebuilder, a natural gas exploration and development company, and ranch owners, represented the Colorado Oil and Gas Association in recent cases regarding bans or moratoria on hydraulic fracturing. During his testimony, Forman explained that mineral rights are property rights that are protected by the Fifth Amendment and subject to the law of regulatory takings – meaning, as established by a US Supreme Court case in 1922, “if regulations go too far in diminishing the value of private property rights, compensation is required.” He explained that compensation is due in the case of a total take, in which the government eliminates “all economically valuable uses of private property,” and a partial take, in which the impact on a property does not destroy its value entirely. According to Forman’s analysis, Colorado law would require just compensation in the event of regulations, setbacks, or bans that either prevent or substantially hamper access to mineral interests.

Savage, a mineral owner and a cattle rancher, relayed his own experiences negotiating with oil and gas companies operating on his land as an example of ranchers and landowners working with operators to resolve conflicts. This kind of cooperation has resulted in “efficiency for the operators, huge financial rewards for royalty owners and tax payers, and much better land use.” Speaking on behalf of mineral owners, Savage also condemned public campaigns waged against the oil and gas industry without any basis in facts:

“Our experience over 50 years and hundreds of wells is that fracing has not polluted or physically harmed anyone…. Mineral owners object to the land use argument being played out in a public forum where propaganda and sensational journalism take the place of evidence and law in deciding the fate of our property rights.”

Although the task force has heard much about the effects of oil and gas operations on landowners, Forman and Savage offer the important reminder that the rights and interests of mineral owners are at stake as well. Their testimonies are reproduced below in full.

Wayne Forman:

(Our transcription, with emphasis added)

I intend to briefly address today the law on takings and the framework for assessing when regulations that devalue oil and gas assets would constitute a takings under the Constitution. The place we need to start is the US Constitution. The Fifth Amendment provides that private property shall not be taken for public use without just compensation. The Colorado Constitution has an analogous provision that’s even a little broader than the federal constitution. It provides that private property shall not be taken or damaged without the payment of just compensation.

So the typical takings context that people think of is where the government comes in and takes your property physically, appropriates it, or allows someone else to use or occupy your property. That’s not what we’re dealing with today.

We’re dealing with the law of regulatory takings. And since the US Supreme Court case in 1922: if regulations go too far in diminishing the value of private property rights, compensation is required.

Now, in the succeeding 90 years, the task has been to determine what does it mean when regulations go too far. All of these cases are difficult, fact-intensive cases, which usually means expensive, protracted litigation. I’m aware of a couple of takings cases that have recently been filed: one against the State of Illinois, and one in Mora County in New Mexico, over regulation of oil and gas. So this is going to be the new round, new generation of litigation over regulation of oil and gas.

There are two general types of regulatory takings: a total take, and a partial take. But before we get into those two types, the first question that we need to ask is: are mineral interests subject to the takings clause at all? Is it a property right in and of itself on which the takings clause operates?

Now, it’s very clear that property rights are defined by state law, and in Colorado, we have historically treated mineral interests as a separate and distinct property right from surface estate. There are cases that hold that. Russell Coal, involving the subsurface coal estate, the Grynberg, also a coal case, and the McKay case, which is a Federal Court of Claims case involving a clay resource, a clay mine in Jefferson County. All of those cases recognize that severed mineral interests are distinct and separate property rights on which the Fifth Amendment operates.

Now, a number of cases from other states similarly have held that severed mineral interests are protected by the takings clause. I’ll just review them briefly. The Miller Brothers case out of Michigan was an oil and gas case. Whitney Benefits, a Federal Court of Claims case, was coal. Shelly Materials, a decision by the Ohio Supreme Court, on sand and gravel. Two of those cases resulted in judgments finding takings of the mineral estate. All of them recognized that minerals are subject to the takings clause.

Now, back to the 2 types of regulatory takings. The first is a total regulatory take. This doctrine was espoused in 1992 by the US Supreme Court Lucas case. And it holds that a government may not eliminate all economically valuable uses of private property without paying compensation. It is a categorical rule, and if property rights, including mineral interests, are devalued to the point of zero, the government needs to pay compensation as a result of that regulatory impact.

The clearest application of the total take doctrine in the oil and gas context is probably the Miller Brothers case that I just mentioned. That was a Michigan case in which the State of Michigan prohibited oil and gas development on about 4500 acres of land. The trial court found first that that was a total taking, both of the mineral interest, the owned mineral interest and the leased mineral interest, and found that a total take was appropriate and awarded $72 million in damages to the interest holders. The Court of Appeals affirmed, finding that it was indeed a taking, and a categorical taking, but reversed on the damages number for further consideration.

So the bottom line on the total take is if a local regulation or setback or ban, or a statewide setback or regulation, prevents access to severed mineral interest, that will result in a total take, and compensation will be due.

There’s an exception to the total take doctrine. That is, if the activity that is being regulated would have constituted a public nuisance under state law. So the Court has directed us to look at background principles of property law and nuisance law in order to determine whether operating oil and gas well exploration-development would constitute a public nuisance. A public nuisance is an unreasonable interference with the right to common to the public. I think it would be quite a difficult showing in Colorado in particular, but probably elsewhere, to show that oil and gas exploration-development as a general proposition constitutes a public nuisance in Colorado. In fact, Colorado law has for decades promoted and encouraged development of responsible oil and gas resources without waste. So I think that would be a difficult showing, and I don’t think that that exception would insulate a total take of a severed mineral interest in Colorado.

So the next category of taking is a partial take. Under United States Supreme Court precedent, that requires a balancing of factors. And the court in the Penn Central case in 1978 identified 3 primary factors as guideposts for deciding whether a regulation that impacts a property right, in this case, an oil and gas interest, but doesn’t devalue it to zero, requires compensation under the Constitution.

The first element is the economic impact of the regulation on the claimant. That’s typically measured by the value of the property interest, both before and after the impact of the regulation is felt. There’s no litmus test, there’s no strict percentage that has been adopted to say that a regulation has to diminish a property interest by x amount in order to constitute a taking. But the test that has been articulated in cases, qualitatively, requires a serious financial loss or a substantial diminution of value. Now that prong could be satisfied if a regulation, a ban, or a substantial setback substantially reduces the value of an operative mineral estate.

The second balancing test in the Penn Central test is whether the regulation has interfered with distinct investment-backed expectations, so what this measures is how much skin in the game does the mineral interest owner have and to what extent has the government changed the ground rules in a dramatic way so as to adversely affect the value of that mineral estate. It really measures the degree of surprise on the property owner.

But one factor that’s really important is, is the activity being regulated in an already heavily regulated scenario such that the property owner should have anticipated that new regulations would result. Well, it’s true that oil and gas is heavily regulated, but historically in Colorado, if an operator has met the requirements of the COGCC, the expectation is that the resource would be entitled to be developed, and a new regulation that imposes a significant new setback, or significant new requirements, that dramatically changes that paradigm, I believe, would constitute interference with reasonable investment-backed expectations.

The final element is the character of the governmental regulation, which really measures, which really is a balancing of the public benefit and the private burden. It often arises in the context of zoning authority, and courts are reluctant to find takings cases, or to award damages, in the context of a site-specific zoning decision. But where a government imposes a broad-based setback or set of rules, that do not take site-specific conditions into account, a court will strive to determine whether the public benefit could be achieved in a less dramatic fashion, in a more targeted fashion, and if it could, then I think this factor, too, would weigh in favor of a taking in the particular circumstances at hand.

So in conclusion, mineral interests are distinct property regulations in Colorado. Regulations, setback or bans that prevent access to minerals, and devalue them to zero, constitute a total take. Local constraints that result in a partial diminishment still could require compensation based on the balancing of the Penn Central factors. Thank you.

Roy Savage:

(Reprinted with thanks from NARO press release, with emphasis added)

Thank you for taking time today to listen to mineral owners. I am a board member of the National Association of Royalty Owners, a mineral owner and royalty owner, and cattle rancher. My family has been developing on Western Colorado resources for four generations. We have been mining claimants, sheep and cattlemen, homebuilders, energy technology patent inventors, and surface owners. We have been consultants to oil companies, contractors, co-tenants, partners, joint venture operators, and surface owners to many oil and gas companies, from Exxon and Shell to WPX and Mobil.

We have never been silent partners with the oil and gas industry. We’ve argued with operators over reasonable compensation for surface damages, over well pad location, and about reclamation. With our neighbors we contested royalty density applications in front of the COGCC.

We thought we were not getting paid fully for our royalties due, we litigated. When we thought that was insufficient, we formed our own oil company and we participated. I believe the public interest lobby objects to oil and gas drilling primarily because it is an industry done in full view.

I believe the issue before you is essentially a land use argument. Oil and gas is a peculiar industry. It does its work on other peoples’ land to produce other peoples’ resource in full view from the interstate.

The surface use argument over access for mineral development is not new in Colorado. We have had long arguments with operators over reasonable compensation for surface damages. With a number of our neighbors we contested well-density applications at the COGCC. The arguments created by split estates have always been heard in Courts or before the COGCC. The results have always held that the mineral estate is entitled to access, but with “reasonable accommodation” of the surface estate. The result of prohibitions and ever-increasing setbacks will be taking of mineral property without compensation for no demonstrable protection of public health and safety.

The oil and gas industry reacted to surface owner arguments with astounding and rapid applications of new technology. In a decade we have watched as oil and gas drilling has gone from a single well per section to ten acre spacing, three D seismic surveys, multi-well drilling pads, directional and horizontal drilling, remote fracing, and water recycling. In large measure, this industrial revolution has been driven by the oil and gas business’ incessant search for efficiency and by the “reasonable accommodation doctrine”. In some measure cooperation between landowners and oil and gas operators has aided the “unconventional” oil and gas phenomenon.

If you look hard at the oil and gas business in Garfield County you can see a real success story. Here big ranches and landowners have created an environment in which oil and gas operators have been able to innovate and the result is efficiency for the operators, huge financial rewards for royalty owners and tax payers, and much better land use. After 20 years of intense oil and gas development on our ranch lands, over 1,000 wells drilled, thousands of fracs, miles of pipeline our water is tested clean and safe, our air is cleaner, our agriculture is more efficient, and our wildlife more abundant. It is my opinion that the land is in better shape than it has been since homesteading began.

On our ranch and mineral lands we share the surface with oil and gas operators, ditch owners, public roads, accesses to public lands, private accesses, hunters, and literally hundreds of other mineral owners. Not all of these encumbrances are welcome and we don’t accommodate them out of altruism, but we do understand that some others have private property rights that require our accommodation. That includes the right of mineral owners to access their resource.

Our neighbors and the public must learn to understand the new public debate over oil and gas drilling, setbacks and moratoriums, is of great concern to land and mineral owners. We view the intrusion of public interest organizations into the oil and gas land use debate as illegitimate attempt to exert control over private property rights. We’ve never advocated irresponsible development, but we have no choice but to object to campaigns that deprive us of the valuable rights associated with mineral ownership.

The propaganda campaign against a vital industry without any clear science that indicates a risk to public health and safety is insupportable. The studies to date conclude only that more study is required. Our experience over 50 years and hundreds of wells is that fracing has not polluted or physically harmed anyone. There have been incidents when operators have lost control of produced water that has polluted ground and surface water. These incidents are no more serious nor more numerous than in any other industry with which we have all learned to live.

Mineral Owners object to the land use argument being played out in a public forum where propaganda and sensational journalism take the place of evidence and law in deciding the fate of our property rights. We do not think this is legitimate. We believe that abridging our property rights with pre-emptive law without due process of the Courts is an improper use of the state’s authority to protect public health and safety. Before sequestering mineral owners’ property to prohibit development the state must show clear and demonstrable risk. A drill rig in view on the neighbor’s land does not constitute a public risk.

Private ranch and farm owners have a long history of successfully managing their lands in cooperation and sometimes contention with oil and gas operators under the regulatory guidance of the oil and gas conservation commission and adding to our burdens as an already highly-regulated industry is counter-productive. Land owners will not abide a rule that takes over property rights by handing over authority to adjacent land owners. We have statutes and regulations adequate to protect the public.

We ask that any recommendation the task force makes to the legislature preclude taking of mineral owner property. The legal issues of takings is complex, but what I know with certainty is that legislative language stating the drilling prohibitions does not solve the issue. Legislative pronouncements that prohibitions do not constitute a taking will not alter the state and federal protections afforded private property rights.

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