The Land Estate

Valuation Issues for Wind and Mineral Surface Development Rights

As wind energy has emerged as a leading source of energy, several issues have arisen with respect to the rights of parties holding surface and mineral rights. There are important legal issues that need to be explored to assess whether to develop a wind energy farm. This article provides a historical and brief legal overview of the issues.

By the mid-19^th Century, the effects of the Industrial Revolution had created a need for a cheaper and more convenient fossil fuel than coal: petroleum. Edwin Drake had drilled the first oil well in Pennsylvania in 1859. And, in Texas, a self-taught geologist, Patillo Higgins, convinced Pennsylvania oilmen John Galey and James Guffey to finance a drilling operation at Spindletop in October 1900. On January 10, the Lucas Geyser reached a height of more than 150 feet in the air, producing 100,000 barrels a day. The Spindletop oil field later spawned a bustling petroleum industry that included Gulf, Chevron, Texaco, and Humble. On January 26, 1931 the Lou Della Crim No. 1 sprouted oil at 22,000 barrels a day followed by the Lothrop No. 1 near Longview with 20,000 barrels a day.

Agriculture and cattle now had to make room for oil in Texas. Oil was King. And, it was transforming Texas. In over a month alone, Kilgore, Texas grew from a sleepy town of 700 to over 10,000. By the late 20^th century, oil refining chemicals and petrochemicals continued to dominate Texas industry.

Early Wind Development

Although fossil fuels replaced wind as the dominant energy source in powering factories and the expansion of the west, wind power never completely disappeared as farms and ranches continued to rely on wind to power water pumps. Then, in the 1970s, faced with oil embargos and long gas lines, the United States renewed its interest in the development of wind to hedge against a growing reliance on foreign oil. Wind farms began sprouting up in California in the early 1980s, beneficiaries of generous tax credits at the federal and state level. Soon thereafter, wind farms were erected in the McCamey region of Texas. By 2002, McCamey had over 750 megawatt (MW) of installed wind power (approximately 500 turbines) but the local grid was only able to serve 400 MW of transmission. Developers, spurred by generous tax incentives, looked elsewhere and began widespread leasing throughout the Texas Panhandle, West Texas, and other high wind regions in the Midwest. Leasing agents in many cases were Petroleum Landmen who previously leased adjacent land to oil and gas companies.

As wind development grew at almost exponential rates to take advantage of generous renewable tax credits and accelerated depreciation, concerns mounted over the prodigious leasing efforts of agents who, in many cases, had been petroleum landmen for oil and gas companies in the same geographic regions.

Initially, wind leases were hastily written by many developers eager to warehouse property to flip to major energy companies. Many provided minimal or no bonus, rarely were development clauses included (even in high capacity areas) and some had extended initial terms over five years. As wind farms became more prevalent, community sponsored programs were initiated to educate local landowners and, in some cases, to provide developers a forum for lease signing.[1]

Big oil, it seems, was now playing second fiddle to wind turbines. Texas billionaire T. Boone Pickens was even concentrating his energy development efforts into a $58 million advertising campaign for what would be the largest wind project ever developed. The initial order was for 667 turbines with a price of $2 billion.[2]

The project was cancelled, in large part, due to the rapid decline of gas from over $12/per thousand cubic feet (Mcf) to less than $4/Mcf. At the time the transmission network for the State’s power grid was being designed and modeled for construction, the price of gas (the major fuel for electrical power generation in Texas) was at $10/Mcf and increasing. The utility engineers at the time were using a conservative historical average of $7/Mcf for their cost/benefit analysis of the grid upgrade to rationalize the $4.9 billion transmission system primarily designed for wind power.

Wind and Mineral Development Conflicts

Wind farm construction is quite dramatic during the initial phases. Design, development, and planning must take into account any current surface usage. The size of the turbines, logistics of supplying foundation concrete, electrical interfaces, and associated road building all have to be planned around any existing structures such as drip irrigation systems, pump jacks, barns, animals, and any other topographical features of the land. Project construction consists of 34-foot wide roadbeds to accommodate the width and weight of 31-foot wide cranes, including 16-foot wide compacted crushed rock surface. Foundations vary but usually are 15-foot diameter by 20-feet deep concrete and rebar structures. In addition, electrical distribution lines from each tower must be trenched to include fiber optical control and monitoring cables between each tower and the main control room at the entrance.

The surface and subsurface use activities of the wind developer are made possible through a broad and extensive “purpose clause” in wind leases. Also, many wind leases contain a broad “no-interference clause”, which provides that the surface owner and its leases shall not currently or prospectively disturb or interfere with the construction, installation, maintenance, or operation of the wind-power facilities or other on-going management activities under the lease. These clauses are written to impose restrictions on oil and gas development.

It is more likely that a conflict will arise between surface estate owners and mineral estate owners who may hold separate title. Conflicts arise where the mineral estate has been severed from the surface estate. If the land has been leased, the wind developer will notify the mineral owner and seek to obtain a surface waiver or non-interference agreement from the mineral interest owners who do not own the surface estate. The best defense is for the grantor to negotiate clauses in the lease agreements that put pressure on the lessees to work together.[3]

Therefore, the first step in approaching conflict resolution between wind lessees and mineral lessees is reviewing the status of the lease. The wind lease is widely used as the legal instrument through which the landowner leases to a wind company for a defined number of years, the nature of the interest conveyed, development rights conveyed, development timelines, bonus, minimum rents, and length of lease. Under the “ad coelom” doctrine, the owner of the land estate, in fee simple, is ownership in the bundle of sticks or ownership rights in everything from the center of the earth to the skies. This doctrine may characterize wind blowing across a piece of land as a property right that may be possessed just as concepts and methods.[4] If the wind power estate is viewed as part of the surface estate, then traditional notions of the dominant-servient estate and accommodation doctrines may apply, and wind flowing across a piece of land may be viewed as severable.[5]

Although it is well established under Texas Law that the fee simple owner of the land estate can sever the surface from the minerals thereby creating two separate estates, in Texas there is no legal precedent directly addressing severance of wind rights. Deeds in Texas purport to sever wind rights creating income to landowners, in effect treating wind rights like oil and gas.

In Texas, there are several caselaw analogs supporting severance of wind rights:

• Groundwater caselaw follows an “absolute ownership theory” that allows a grantor to reserve groundwater rights when it conveys the remainder of the fee.
• Oil and Gas caselaw is subject to the rule of capture but owned in fee simple absolute. Texas has long recognized severance of oil and gas.
• Flowing Surface Water and Wild Animals. Wind is analogous to flowing water and wild animals that move across property lines. Caselaw supports leases, grants, and contracts dealing with the transfer of rights in flowing water in a natural course. Texas law allows landowners to lease hunting rights to third parties to harvest game animals.

Methods for Resolving Conflicts

Dominant-Servient Estate and Accommodation Doctrine. Early decisions by the Texas Supreme Court held that the mineral estate is dominant over the surface for purposes of exploration and production. The rationale was that the grant or reservation of minerals as stated in the lease would be worthless without access. Those decisions helped to develop a doctrine of implied rights. Basically, the mineral owner has the implied right to use the surface as reasonably necessary for mineral exploration and production without asking independent permission from the surface owner, restoring the surface when operations cease, and having to pay surface damages.[6] However, the “reasonably necessary” provision implies that the mineral owner must use the surface and conduct its exploration and production operations in a non-negligent manner. The most recent exception is the accommodation doctrine introduced by the Texas Supreme Court in Getty Oil Co. v. Jones. In a judicial non-statutory concept, the mineral owner must act with prudence and “due regard” for existing surface uses. The focus is on alternative recovery methods that may be more reasonably adopted by the mineral lessee and not the right of extraction. The limitation to this method for the wind developer is being at the mercy of the judge’s discretion in weighing the factors in making decisions. Most wind lessees have express agreements with the surface owner and have mandated in most cases that all future oil and gas leases entered into by the surface owner contain express provisions referencing the wind lease and requiring the oil and gas lessee to enter into a surface use or accommodation agreement with the wind lease.[7]

In multiple mineral development contexts where mineral leases currently exist or are contemplated with wind development, the land estate owner may proactively approach potential conflicts through alternative common law models.

• “Avoidance”: Avoidance is a strategy whereby the estate prohibits competing developments where conflicts could be detrimental to potential lessees of either minerals or wind.
• “First in time, first in right”: This is the traditional approach where the first lessee of either mineral or wind rights has special stipulations in the lease limiting concurrent or future development of second in time lessees. In effect, those that come in second are “second in time, second in right” with respect to development provisions and express rights.
• “Equal dignity or multiple mineral approaches”: This approach contemplates the land estate as a true bundle of sticks in which each stick has economic value independent from the others and carefully plans for multiple mineral developments. Leases are carefully written limiting “express rights” of development and providing appropriate indemnification clauses.

However, the landowner may find it more profitable to develop the traditional mineral estate. Depending on location, geography, commodity pricing, renewable policy, competitive framework, and other considerations, lessees often have alternative development sites. There is no best strategy other than knowing your options and current market conditions.[8]

This was previously published on Astek Energy website, June 09, 2016, based on the article “Who’s on First? Resolving Wind and Mineral Surface Development Rights”. It is republished with the author’s permission.

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Frank Horak, CVA, MAFF, appraises renewable surface rights, performs wind turbine valuations, and potential turbine siting discount damages. Current engagements include contemporary issues in estate planning for renewables and accommodation of mineral development. He also assists renewable stakeholders in analyzing project development and feasibility. Mr. Horak, as principal, has developed mineral valuation guidelines and standards for the Bureau of Land Management and the Department of Interior. He also has been a subject matter expert for the Departments of Defense, Energy, and Justice on energy related engagements.

Mr. Horak is a Certified Valuation Analyst, credentialed by the National Association of Certified Valuators and Analysts and is a Master Analyst in Financial Forensics. He also holds a certificate in Petroleum Land Management from the University of Texas. He is credentialed by the North American Board of Certified Energy Practitioners as a NABCEP Associate. He is a current member of the Forensic Expert Witness Association.

Mr. Horak can be contacted at (512) 470-1771 or by e-mail to Frank@astekenergy.com.

[1] Horak, Frank and Rod Wetsel. “Current Issues in Wind Energy Law 2008­2009.” University of Texas at Austin, School of Law. Microsoft Power Point. 10 Nov. 2009.

[2] Krauss, Clifford. “Move Over Oil, There’s Money in Texas Wind.” New York Times. Web 23 Feb. 2008.

[3] DuVivier, K.K. and Roderick E. Wetsel, “Jousting at Windmills: When Wind Power Development Collides with Oil, Gas, and Mineral Development.” Rocky Mountain Mineral Law Institute 2 Sept. 2009.

[4] Chavarria, Lisa. “Undertaking the Severance of Wind Rights.” Oil and Gas & Energy Resources Law Section Report Dec. 2007

[5] Horak and Wetsel supra note 3.

[6] Fitzgerald, Patrick. “Understanding and Settling Surface Damage Claims”. Professional Land Management Workbook March 2012:2.

[7] DuVivier and Wetsel supra note 5.

[8] Horak and Wetsel supra note 3.