In Douglas v. Denbury Onshore, LLC, the court of appeals of Mississippi held, in a matter of first impression, that an abandoned wellbore belongs to the mineral owners rather than the surface owners when the mineral and surface estates are severed

Forester, Marcial D., Jr.

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Texas A&M University School of Law

Texas Wesleyan Law Review Volume 19 Issue 2 Article 17 3-1-2013 Mississippi Oil and Gas Update Marcial D. Forester Jr. Follow this and additional works at: https://scholarship.law.tamu.edu/txwes-lr Recommended Citation Marcial D. Forester Jr., Mississippi Oil and Gas Update, 19 Tex. Wesleyan L. Rev. 401 (2013). Available at: https://doi.org/10.37419/TWLR.V19.I2.15 This Article is brought to you for free and open access by Texas A&M Law Scholarship. It has been accepted for inclusion in Texas Wesleyan Law Review by an authorized editor of Texas A&M Law Scholarship. For more information, please contact aretteen@law.tamu.edu. MISSISSIPPI OIL AND GAS UPDATEeBy: Marcial D. Forester, Jr.'In Douglas v. Denbury Onshore, LLC, the court of appeals of Mis-sissippi held, in a matter of first impression, that an abandonedwellbore belongs to the mineral owners rather than the surface own-ers when the mineral and surface estates are severed. 2The facts of Douglas involved circumstances that are not uncom-mon. In 1937, M.R. Douglas and his wife, Connie Douglas ("Les-sors"), executed an oil, gas, and mineral lease covering lands that theyowned in fee simple, which provided for a primary term of ten years.Following execution of this lease, the Lessors executed a series ofdeeds over time that ultimately severed all minerals from the surfaceestate of the land ("Land") on which the subject well ("Well") waseventually drilled.' The Well was drilled by Chevron in 1947 and com-pleted as a producing oil well in the Mallalieu Field.sIn 1968, after twenty years of production, Chevron plugged theWell. In plugging the Well, Chevron abandoned the tubing and cas-ing, which it had cut below ground level, plugged the wellbore withcement, and covered the cemented wellbore with dirt. The Well re-mained plugged and abandoned for nearly forty years until DenburyOnshore, LLC ("Denbury") sought to re-enter the Well in 2005.61. Brunini, Grantham, Grower & Hewes, Jackson, Mississippi. J.D. 1983, Uni-versity of Mississippi; B.A. 1980, University of Mississippi.2. Douglas v. Denbury Onshore, LLC, 78 So. 3d 912, 917, 920 (Miss. Ct. App.2011).3. Id. at 913-14.4. Id. at 914-17.5. Id. at 915.6. Id.401DOI: https://doi.org/10.37419/TWLR.V19.I2.15 1Forester: Mississippi Oil and Gas UpdatePublished by Texas A&M Law Scholarship, 2022TEXAS WESLEYAN LAW REVIEWBy 1982, Connie Mack Douglas, grandson of the Lessors, and hiswife, Charlene T. Douglas (the "Douglases") had become the ownersof the Land's surface estate.' Although they did not own any mineralinterests in the Land, the Douglases did own minerals in other tractsin the surrounding area that would eventually become a field-wideunit."Beginning in 2001, Denbury obtained leases from the mineral own-ers in the Land and surrounding lands.' On Denbury's petition, thestate Oil and Gas Board ("Board") formed a compulsory field-wideunit for the East Mallalieu Field Unit ("Unit")."o The Unit wasformed for tertiary oil recovery by injection of carbon dioxide."Rather than leasing their minerals, the Douglases chose to participatein the Unit as working interest owners.12 The Douglases, as unleasedmineral owners in the Unit, received notice of Denbury's petition butneither attended the hearings nor objected to the plans for the Unit."Since the Land on which the Well was located was included withinthe boundaries of the Unit, it was subject to the Unit Agreement andOperating Agreement.14 The Douglases, as working interest ownerssubject to the plan of unitization,s were eventually paid working in-terest income of over $300,000 for Unit production.' 6In 2005, Denbury obtained a permit from the Board to re-enter theWell and complete it as a producing well." The Douglases did notobject to the permit' but did claim that they owned the hole (subsur-face wellbore) and all rights to its use. Denbury later received a per-mit to convert the Well to an injection well.The Douglases filed their complaint against Denbury in chancerycourt, claiming ownership of the Well and the equipment cementedtherein' 9 and alleging re-entry of the Well without their permission.They sought damages for the use of the Well in addition to claims fornuisance and personal injury.20 They did not, however, allege or at-tempt to prove that Denbury had used more of the surface than wasreasonably necessary to exercise its rights in the Unit, nor did theyallege that Denbury's use of the property was for an unreasonable7. Id. at 913, 915.8. Id. at 915.9. Id.10. Id.11. Id. at 916, 918.12. Id. at 915.13. Id. at 915-16.14. Id. at 916.15. Id.16. Id. at 919.17. Id. at 916.18. Id.19. Id.20. Id.402 [Vol. 192Texas Wesleyan Law Review, Vol. 19 [2022], Iss. 2, Art. 17https://scholarship.law.tamu.edu/txwes-lr/vol19/iss2/17DOI: 10.37419/TWLR.V19.I2.15purpose.21 Denbury's motion for summary judgment was granted bythe lower court, and the Douglases appealed.2 2In ruling for Denbury, the court of appeals noted that in Mississippi,the severance of all or part of the mineral estate from the surface cre-ates separate and distinct estates in real property, with the mineralestate as dominant over the surface estate.2 3 One right enjoyed by themineral estate owner is the right to "use as much of the surface as isreasonably necessary to exercise its right to recover minerals, withoutliability for surface damage." 24 Another incident of mineral owner-ship is the exclusive right to drill a well and "the absolute right toselect the location for drilling."2 5 The court of appeals agreed withthe lower court's finding that the plugged and abandoned Well waspart of the mineral estate and that as part of the mineral estate, thedominant estate owners have the right to use the Well to access themineral estate:In the present case, we find that the Well is part of the mineral es-tate. The wellbore and casing are clearly part of the subsurface; nopart of the abandoned Well is above ground, and the Well can onlybe used for development of the mineral estate. The Well is a pas-sageway or entrance to the mineral estate, and the Douglases admitthat they have no use for the abandoned Well, nor can they extractit from the property.26As the court of appeals noted, the plan of unitization gave Denburythe right to access the Well and, as lessee of the mineral rights andUnit operator, Denbury had the right to enter the Land as was reason-ably necessary for mineral exploration and to use the Well to gainaccess to the mineral estate. Therefore, the court of appeals upheldthe lower court's decision." The Douglases' request to the MississippiSupreme Court for certiorari review was denied.2 8In Pursue Energy Corp. v. Abernathy, the Mississippi SupremeCourt addressed the reasonableness of deducting from royalty pay-ments the operation and investment costs for a gas processing plant.221. Id. at 916-17.22. Id. at 917.23. Id.24. Id. at 918.25. Id.26. Id.27. Id. at 920.28. Douglas v. Denbury Onshore, LLC, 80 So. 3d 111 (Miss. 2012).29. Pursue Energy Corp. v. Abernathy, 77 So. 3d 1094, 1098-99 (Miss. 2001).4032013] MISSISSIPPI3Forester: Mississippi Oil and Gas UpdatePublished by Texas A&M Law Scholarship, 2022TEXAS WESLEYAN LAW REVIEWIn the 1960s, Shell Oil Company built a sour gas processing plant.30To recover the costs of operation and its investment in the plant, Shellcharged all royalty owners under a two-part formula comprised of (1)the actual capital investment combined with a return on investmentand (2) the cost per day of operating the plant. Shell used thisformula to deduct processing and investment costs from its royaltyowners' checks.32After Shell had completed recovery of its capital investment, Pur-sue Energy Corp. purchased Shell's position in the field and theplant.3 3 Pursue began using Shell's two-part formula to recoverprocessing costs by charging each royalty owner a pro rata share ofthe capital investment previously recovered by Shell.34The Mississippi Supreme Court agreed with the lower court thatPursue had been unreasonable in requiring royalty owners to continueto pay the capital investment cost after it had already been recov-ered.s The Court held that, while an oil company may "deduct rea-sonable processing and investment costs from the payments made toroyalty owners . . . it is unreasonable for [royalty owners] to pay fortheir share of investment costs repetitively."" The lower court reliedon Pursue's records to determine that the Shell plant was a "non costitem" of the purchase by Pursue, requiring no additional capital in-vestment costs, and should have been assigned a zero value.37 Fur-thermore, it held that Pursue could continue to deduct daily plantoperating expenses but that the royalty owners were entitled to relieffor any amount charged above and beyond operating expenses." Inthis regard, the Mississippi Supreme Court affirmed the ruling by thelower court.The Court also addressed the applicability of the Mississippi statuterequiring purchasers of oil or gas production to pay interest on delin-quent royalty proceeds.4 0 According to the pertinent part of thestatute,[p]urchasers of oil or gas production from any oil or gas well shallbe liable for the payment of interest on royalty proceeds which havenot been disbursed to the royalty owners from and after one hun-dred twenty (120) days following the date of the first sale of oil orgas.30. Id. at 1099.31. Id.32. Id.33. Id.34. Id.35. Id.36. Id.37. Id.38. Id.39. Id.40. Id. at 1101.404 [Vol. 194Texas Wesleyan Law Review, Vol. 19 [2022], Iss. 2, Art. 17https://scholarship.law.tamu.edu/txwes-lr/vol19/iss2/17DOI: 10.37419/TWLR.V19.I2.15The rate of interest shall be eight percent (8%) per annum and shallbe computed from the date of one hundred twenty (120) days aftersuch first sale.41In the subject case, the lower court awarded the royalty owners 6%simple interest from the time Pursue began using the two-part formulato deduct costs through the time the royalty owners filed the com-plaint; 6% interest compounded annually from that time through thedate the final judgment was entered; and 6% simple interest followingthe final judgment.42 However, the Mississippi Supreme Court ruledthat pursuant to section 53-3-39 of the Mississippi Code, the entireaward should have accrued 8% simple interest.4 3 The Court reasonedthat because Pursue had actually received the revenue that the chan-cellor had deemed unreasonable by withholding from the royalty pay-ments, the award of prejudgment interest was correct; however, theinterest rate should have been 8% rather than 6%."41. Miss. CODE ANN. § 53-3-39 (2003).42. Pursue Energy Corp., 77 So. 3d at 1101.43. Id. at 1102.44. Id.4052013] MISSISSIPPI5Forester: Mississippi Oil and Gas UpdatePublished by Texas A&M Law Scholarship, 2022

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