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Spotlight on Economics: Compensating Surface Users for Mineral Development

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David Saxowsky, Associate Professor - NDSU Agribusiness and Applied Economics Department David Saxowsky, Associate Professor - NDSU Agribusiness and Applied Economics Department
Recognizing the concerns of surface owners who do not own the minerals, North Dakota law has been modified through the years to offer the surface owner more property protection rights.

By David Saxowsky, Associate Professor

NDSU Agribusiness and Applied Economics Department

In the past, an oil and gas mineral lease was an opportunity for the mineral owner to negotiate issues such as a bonus payment, duration of the primary term of the lease and royalty payments. Leases also were an opportunity to address issues relating to the use of the land surface, such as location of the well, oil production facilities and pipelines.

However, if the owner of the mineral rights did not own the surface land, the mineral owner had no reason to negotiate these matters on behalf of the surface owner. Likewise, surface owners without mineral rights had little or no opportunity to negotiate with the oil company and had to rely on common law that provided compensation for the surface owner only if the oil company's activities caused "unreasonable" damage to the surface.

Further separation between the mineral and surface owners occurred with the adoption of horizontal drilling in which extensive areas of surface land directly above the oil were not being disturbed. However, smaller areas of the surface are being transformed from agriculture to industry to produce oil and gas from underlying adjacent lands. A network of pipelines also is emerging to connect well sites with other oil and gas production, processing and transmission facilities.

Recognizing the concerns of surface owners who do not own the minerals, North Dakota law has been modified through the years to offer the surface owner more property protection rights. The key legislation at this time is the Surface Damage Compensation Act, which defines two categories of surface damages. The first category is damage and disruption and the second is loss of production. The legislation includes examples of compensable damages, such as lost land value, lost use of and access to the land, and lost value of improvements.

The mineral developer must provide the surface owner a notice of planned activities (seven days for activities that do not disturb the surface and 20 days for oil and gas drilling operations) and a written offer to compensate for damages through a surface compensation agreement. If the surface owner does not accept the offer, the parties can proceed in court.

However, in an effort to reduce the number of court proceedings, the North Dakota Legislature has directed the Department of Agriculture to provide mediation services for surface owners and mineral developers. This statute also states that these payments are intended to compensate the surface users, such as a farm tenant.

The anticipated network of pipelines that is intended to reduce truck traffic and gas flaring is leading to a need for pipeline easements. Executing the easement is an opportunity for a surface owner to thoughtfully specify what rights are being granted to the pipeline owner.

Examples of concerns surface owners will want to consider in negotiating an easement are the location, use and duration of the easement, and remedial practices to reduce any adverse impact to the land surface.

Surface users and mineral owners may be told when they are offered a lease, compensation agreement or document to create an easement that states "this is standard language" or that it is "a standard document." However, there is no such thing as a standard document because all of these documents are negotiable.

Mineral owners and landowners should not feel obligated to accept the first offer. They should take their time to review the document, consider their situation, assess whether the document addresses their needs and concerns, and seek outside counsel if they so desire.

Even though there may be reason and opportunity to further refine North Dakota law to protect surface owners, it is appropriate to recognize three points. First, address mineral issues in a mineral lease even though there is far less mineral leasing in North Dakota at this time. Second, address surface damages in the surface damage compensation agreement. Third, address issues relating to pipelines, ingress and egress and other surface concerns when specifying the legal rights being granted in an easement.


NDSU Agriculture Communication – Jan. 8, 2013

Source:David Saxowsky, (701) 231-7470, david.saxowsky@ndsu.edu
Editor:Rich Mattern, (701) 231-6136, richard.mattern@ndsu.edu
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