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Mosser v. Denbury Resources, Inc.

United States District Court, D. North Dakota, Southwestern Division

June 24, 2015

Randall Mosser, Douglas Mosser, Marilyn Koon, and Jayne Harkin, Plaintiffs,
v.
Denbury Resources, Inc. and Denbury Onshore, LLC, Defendants.

ORDER DENYING MOTIONS FOR SUMMARY JUDGMENT

CHARLES S. MILLER, Jr., Magistrate Judge.

In this action, plaintiffs allege that defendants (collectively "Denbury") have tortiously and unlawfully invaded the subsurface of their property by using it as a permanent site for disposing of salt water generated from oil and gas drilling operations without their permission. In addition to seeking damages for the affront of the claimed trespass and for nuisance, plaintiffs also seek statutory compensation under North Dakota's surface owner protection law for the loss of the economic opportunity to lease their subsurface property to Denbury or others for the disposal of salt water and other oil field wastes or, possibly, the storage of natural gas or CO2.

Denbury denies it has committed trespass. It contends the production of salt water is a necessary incident of oil and gas production and that it has the right to dispose of the salt water not only because it is an implied right of the dominant mineral estate but also because it has been authorized by a lease executed by plaintiffs' predecessors-in-interest. As for the claim of nuisance, Denbury contends that deep-earth disposal of salt water is a practical and environmentally-sound solution for disposing of this waste stream and, more importantly, it has been authorized and approved by the governing regulatory agency. Finally, Denbury contends that plaintiffs have no right to monetary compensation because, according to it, the surface owner protection law does not extend to the subsurface disposal of salt water and that, in any event, plaintiffs have suffered no demonstrable damage.

Before the court is Denbury's motion for summary judgment of dismissal and plaintiffs' motion for partial summary judgment on the question of liability. Unless otherwise indicated, the facts relied upon by the court in resolving the motions are either undisputed or have not been sufficiently controverted.

I. BACKGROUND

A. Plaintiffs' interests as burdened by the Mosser Lease

Plaintiffs are the owners of the surface estate only in the following described tract of land located in Billings County, North Dakota:

When plaintiffs acquired their interest, it was already burdened by an oil and gas lease dated November 28, 1977 ("Mosser Lease") granted by plaintiffs' predecessors-in-title, who, at the time, owned both the surface and the minerals in the following property included in the Lease:

(Doc. No. 64-2). The Mosser Lease remains in effect because of continuous production of oil and gas from wells located on the leased acreage.

B. The unitization of the lessee's rights in the Mosser Lease with other interests

By Order No. 9410 dated May 16, 2003, the North Dakota Industrial Commission ("NDIC") authorized the creation of the T.R.-Madison Unit ("Unit") by approving a plan for unitization for the following lands in Billings County:

(Doc. No. 6-2, p. 9). Denbury is the current operator of the Unit.

C. The Mosser Well

Prior to the creation of the Unit, the Mosser Well was spud as an oil and gas well on what is now plaintiffs' surface acreage in the NW¼ of Section 26. It produced oil and gas from January 1979 through June 2006. (Doc. No. 64).

On March 12, 2008, the prior Unit operator, Encore Operating, L.P. ("Encore"), submitted an application the North Dakota Industrial Commission ("NDIC") to convert the Mosser Well into an injection well for the disposal of salt water. As part of the application, Encore submitted an affidavit certifying that it had notified the surface owners. Plaintiffs acknowledge that at least Doug Mosser received the notice. (Doc. No. 6-5, p. 16).

On April 11, 2008, the NDIC approved Encore's application to use the Mosser Well for the injection of salt water into the "Dakota Group, " which is a formation that lies above the formation unitized by the NDIC's order creating the T.R.-Madison Unit. (Doc. No. 6-5). By administrative rule, the permit automatically expired if the conversion to a saltwater disposal well was not commenced within one year of its issuance. N.D.A.C. § 43-02-05-04(10). This same limitation was also reflected in the permit.

Encore did not begin the conversion within the one-year time period. However, on March 8, 2009, and prior to the permit expiring, Encore requested a one-year extension, which was approved by the NDIC on April 9, 2009. (Doc. No. 71-6). Later, on March 8, 2010, Encore requested a second extension, which was similarly approved by the NDIC on March 15, 2010. (Doc. No. 71-7).

On April 8, 2011, Denbury, which had now become the Unit Operator and owner of the Mosser Well, requested a third extension, which was approved by the NDIC on April 11, 2011. (Doc. No. 71-8). Following this extension and almost three and one half years after the application for conversion of the well was first submitted by Encore, Denbury completed the conversion of the well for saltwater disposal on September 26, 2011, and the first saltwater injection took place on September 30, 2011. (Doc. No. 6-7).

Other than the first notice that went out to one or more plaintiffs when Encore made its initial application to convert the Mosser Well for saltwater disposal in March 2008, the record is devoid of any notice being given of the NDIC's approval of that request, much less any of the three follow-on requests for extensions and NDIC approvals. As will be addressed in more detail later, Denbury argues that the notice given to one or more plaintiffs in March 2008 was sufficient to put plaintiffs on notice that they needed to be diligent about protecting their rights, but the court is skeptical of that given the permit automatically expired if the conversion was not commenced in one year, the lack of any follow-on notice of extensions being applied for and granted, and the long period of inaction.

II. DISCUSSION

A. Introduction

Plaintiffs claim they are entitled to damages under three separate claims for relief: trespass; nuisance; and a statutory claim for damages pursuant to N.D.C.C. ch. 38-11.1. They ask in their motion for partial summary judgment that the court adjudge Denbury liable, contending liability is clear and that the only question for trial is the amount of damages.

Denbury, on the other hand, contends it has the right to dispose of salt water in the subsurface of plaintiffs' property without having to provide compensation. Consequently, it seeks summary judgment of dismissal.

For ease of discussion, the court will address the competing motions in the context of plaintiffs' individual claims for relief.

B. Trespass and nuisance claims

1. Denbury's claim of rights under the Mosser Lease

Denbury makes several arguments for why plaintiffs have no claim for trespass or nuisance. The one that has percolated to the forefront with the supplemental briefing is its argument that by executing the Mosser Lease, plaintiffs' predecessors-in-interest expressly granted the right to use the subsurface of plaintiffs' property for the disposal of salt water. The language of the Lease that Denbury relies upon is found in the "granting clause" and reads, in relevant part, as follows:

That the lessor... has granted, demised, leased and let and by these presents does grant, demise, lease and let exclusively unto said lessee, with the exclusive right of mining, exploring by geophysical and other methods and operating for and producing therefrom oil and all gas of whatsoever nature or kind, and laying pipe lines, telephone and telegraph lines, housing and boarding employees, building tanks, power stations, gasoline plants, ponds, roadways, and structures thereon to produce, save, market and take care of said products and the exclusive surface and subsurface rights and privileges related in any manner to any and all such operations and any and all other rights and privileges necessary, incident to, or convenient for the economical operation alone or conjointly with neighboring land for such purposes, [the lands described above].

(Doc. No. 64-2) (emphasis added).

Before turning to the lease language, the court notes that plaintiffs have failed to rebut the evidence proffered by Denbury that their predecessors-in-interest granted the Mosser Lease, that it is still in effect, and that they are bound by it. Also, it is clear that Denbury, as the Unit Operator, has succeeded to and may exercise the rights of the lessee under the Mosser Lease for the benefit of the Unit's operations generally, and not just those actions occurring on the Lease premises, given the unitization provisions of the Mosser Lease and the Unit Agreement and Plan.[1] But, even without the express language of the Mosser Lease, the result would be the same with respect to the implied rights under the Lease given the provisions of North Dakota's unitization statutes as implemented by the NDIC-approved Unit Plan. See N.D.C.C. §§ 38-08-9.4 & 38-08-09.8; cf. Continental Resources, Inc. v. Farrar Oil Co., 1997 ND 31, ¶¶ 12-17, 559 N.W.2d 841; see generally 5 Eugene Kuntz, A Treatise on the Law of Oil and Gas § 78.4[a] (Matthew Bender, Rev. Ed.); 2 Bruce M. Kramer and Patrick H. Martin, The Law of Pooling and Unitization, § 20.06 (3d ed. LexisNexis Matthew Bender 2014).[2]

Also, before addressing the language of the Mosser Lease, it is helpful to consider the North Dakota Supreme Court's decision in Feland v. Placid Oil Co., 171 N.W.2d 829 (N.D. 1969). In Feland, the North Dakota Supreme Court discussed whether the lessee of an oil and gas lease, which was binding upon the surface owner, had the right to construct a second saltwater disposal pit under lease language that granted the lessee the right to use the surface estate for the purposes of:

operating for and producing therefrom oil, gas, casinghead gas, casinghead gasoline, and laying pipelines, telephone and telegraph lines, and building tanks, powers, stations, gasoline plants, ponds, roadways and structures thereon to produce, save and take care of said products, and the exclusive right of injecting water, brine and other fluids into subsurface strata, and housing and boarding employees and any and all other rights and privileges necessary, incident to, or convenient for the economical operation alone, or conjointly with neighboring land, for the production, saving, and taking care of oil, gas, casinghead gas, casinghead gasoline and the injection of water, brine and other fluids into subsurface strata, * * *'

Id. at 832 (the language from the lease as set forth in the opinion with italics added).

Before the North Dakota Supreme Court addressed the significance of this lease language, it discussed the fact that the granting of an oil and gas lease will give rise to an implied right to use the surface of the leased land as reasonably necessary for the production of oil and gas, quoting Summers Oil and Gas as follows:

"An oil and gas lease carries with it the right to possession of the surface to the extent reasonably necessary to enable the lessee to perform the obligations imposed upon him by the lease. (Citations omitted.) This rule is based upon the principle that when a thing is granted all the means to obtain it and all the fruits and effects of it are also granted.' (Citations omitted.) Accordingly, the right to such use of the surface is implied if it is not granted, whether the form of conveyance is a mineral deed or a lease." (Citations omitted.) 4 Summers, Oil & Gas, Sec. 652, page 2.

Id. at 833-34. The court then concluded, however, that the lessee's right to use the surface for a second disposal pit in Feland was based upon the rights expressly granted by the lease and not the lessee's implied rights. The court pointed to the catchall language set forth in italics above, stating:

Of course, in the instant case, the rights of the operator to use the land are not based on implied rights but rather on the rights expressly granted by the lease. The lease expressly designates the lessee's surface rights, including the broad authorization to "all other rights and privileges ...

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