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Archive for the ‘Mineral Rights’ Category

Free Land – South Dakota Style

Posted on: October 22nd, 2016
by David Ganje

Water and land do not mix well in South Dakota. In the last few days South Dakota gave up on its disputed claim to a 500 acre three-mile-long island known as Goat Island located in the Missouri River.  The state conceded jurisdiction over the claimed island giving control to the federal government. The lack of media coverage analyzing the pros and cons of this recent withdrawal of South Dakota’s disputed Goat Island land claim is disappointing. The state had argued that Goat Island was on the South Dakota side of the river when Lewis and Clark mapped the river in 1804. This is a public matter involving a state claim to land on the Missouri River. What were the reasons for the settlement of the claim? How is it good for South Dakota? The media did not ask. The government press releases did not say. Now the island is in the hands of the feds. The hand of government did this deal, but we know not the reasons for the decision.

Property boundaries matter when your land is next to a river or a body of water.  If the river deposits land onto your riverfront by “accretion”, then who owns it?   Accretion is the gradual increase to land, notably riparian land, stemming from the movement of water.  A meandering river has no master.  Certainly man-made law has not corralled a meandering river with anything close to perfection, or to some landowners, with any degree of satisfaction. Questions come up when riverfront boundaries naturally shift due to erosion or accretion.

South Dakota has enacted several laws regarding accretion rights.  The first important section states that when land forms from natural causes gradually over time next to a stream or river such land belongs to the owner of the bank, and it does not matter whether the water is navigable or not.  The second concerns avulsion, or the violent or sudden carrying away of land by a river or stream to another part of the river or opposite bank. Under the statute the owner of the original land may reclaim the land within one year of the new owner taking possession.  And the US Supreme Court has gotten into the act by ruling in the 1970s that the doctrine of accretion applies to changes in the river caused by both artificial as well as natural causes.

One lesson to learn from old man river is:  Don’t use fuzzy boundaries for the legal description in your deeds and contracts.  That is, do not let your lawyer describe the boundaries of your land by reference to a body of water. 

It must be wonderful to be the state.  South Dakota can give land away, and it can receive control of newly formed lakes for free. In a recent law case involving a dispute over the ownership of three newly-formed lakes in the state, the state Supreme Court ruled that effective ownership of these three newly formed lakes, all on privately owned land, should be held in the name of the state.  The Parks case ruling stated the lakebeds would continue to be owned by the private landowners but the lakes and water of the lakes are to be controlled by the state for the benefit of the people of the state.  The result:  more than two thousand surface acres of land, now in the form of lakes, would be controlled and supervised by the state and not the landowners.  Surprisingly, no mention of compensation to the landowners was made for this taking. The state taketh and the state giveth away. It is wonderful to be the state.

David Ganje practices law in the area of natural resources, environmental and commercial law.

Leaky Laws – Oil Spill Liability in North Dakota

Posted on: May 17th, 2016
by David Ganje

Pipelines, even privately owned, are a publically regulated transportation and operating system. The question is not whether pipelines are “essential to our society.”  Pipelines are already integral to the country: the US had over 1,700,000 miles of oil and gas pipelines in 2014, and North Dakota had 8,080 miles of pipelines in 2011. When a pipeline leak occurs, it only deflects from the problem at hand to discuss a pipeline’s place in modern society. The media puts its attention on the statements of politicians after a pipeline leak has occurred.  Such media attention does address the question of how to manage the risk.  Operating systems will malfunction. The process for legally authorizing operating systems should not. To paraphrase Norman Vincent Peale, the problem with most publically regulated systems is that they would rather be ruined by praise than saved by criticism.

In 2013, a pipeline operated by Tesoro Logistics began leaking thousands of barrels of oil into wheat fields. By the time the leak was caught and stopped, over 840,000 gallons of crude oil spilled into North Dakota. Tesoro Logistics originally estimated that the cleanup would take around $4 million. Two years later, the costs have passed $40 million and continue to rise. Oil spills are not going away – as more pipelines are built, spills are only increasing. The relevant question should be how regulated pipeline leaks will be cleaned up, and who will pay for them.

Under both Federal and state laws, the party responsible for a leak is the one responsible for cleanup. Usually a company like Tesoro Logistics prefers to take care of the cleanup itself. Not only does this help soothe public relations problems resulting from a leak, but it helps the operator control the costs. While North Dakota’s Department of Health is supervising the cleanup, Tesoro Logistics manages the contractors for the cleanup. But a pipeline operator causing a spill may not always be willing or able to clean up a spill. The liable operator could be bankrupt, dissolved, or perhaps not have the money. In these cases, clean up cannot wait for years of court cases or bureaucratic lethargy. The money for a cleanup needs to be there, ready to be used.

The state tells us that ‘them what operates a car must financially assure the public against the risk of its operation.’ Thus, the state has mandatory car insurance. North Dakota can require operators to provide financial assurances of their ability to clean up a spill, but the state can only require such insurance after a spill has already happened. The North Dakota Department of Health “may require insurance coverage or other financial assurance for any additional environmental monitoring or remediation that may become necessary on the property…and must require such…when the projected cost of an active monitoring or remediation program exceeds five hundred thousand dollars.” This requirement applies only to “real property contaminated by regulated substance or other pollution or contamination.” In other words, the state can only require financial assurances for land that has already been contaminated. What about money to help before a spill occurs?

North Dakota also maintains the Petroleum Release Compensation Fund. Unfortunately, this fund is not there to help landowners damaged by oil spills – the PRCF is a fund designed to “reimburse an eligible owner or operator for ninety percent of the costs of corrective action.” In other words, the PRCF is a fund to pay back the operators for money they pay cleaning up their mistakes. The PRCF is funded by oil companies, not taxpayers. And landowners can recover from the fund, but only if very specific requirements are met: the pipeline must have complied with all state and federal rules, the Dept. of Health was notified properly, the operator must have already begun paying the costs of corrective action, and the operator must be cooperating fully. Why these requirements? Because the PRCF is not designed to protect landowners and reimburse them for damages – the PRCF is designed to help companies defray expenses. The only reason the PRCF includes the capability to pay landowners for damages is so the pipeline operator won’t have to do it themselves. The PRCF does help encourage companies to come clean and take responsibility for leaks, knowing that they will be paid back from the fund. But the fund does not solve the problem of providing ongoing financial assurance, also referred to commonly as insurance.

The best fund available to aid the state’s immediate spill response is the Hazardous Chemicals Preparedness and Response Fund (HCPPF). This fund is created through an annual fee paid by facilities housing hazardous materials ($25 per hazardous material housed, with a $475 cap) in the state, as well as other appropriations by the legislature. These fees are distributed between the North Dakota Department of Emergency Services and the many Local Emergency Planning Committees, and pay for training, equipment, and disaster relief. This kind of fund is a good start, and ensures that North Dakota has equipment and trained professionals in disaster relief ready to move when a spill is detected. But the limitations on fundraising for the HCPPF means that if a leak like Tesoro Logistic’s occurs, the HCPPF will not be sufficient to manage the cleanup effort – at least, not without taxpayer monies coming from the state to fill the gaps. And landowners should not be forced to pay for oil spills.

This is not to say that North Dakota would be alone in a crisis. Both the Coast Guard and the EPA have trust funds in place to help states and the federal government. But the Coast Guard’s fund only applies to spills into navigable waters, and cannot apply to cleaning up spills on land. Meanwhile, the EPA’s Leaking Underground Storage Tank Fund is funded with a tax on motor fuel – a tax paid by private citizens, not the companies causing the damages in the first place.

A better solution is required to ensure that those who cause the damages pay for it. Waiting until after a spill happens to look for money to fix it cannot be how pipelines are managed. This is especially troublesome when so many spills go undetected for months, like the 3 million gallons of fracking brine that leaked into the Blacktail Creek in 2015; the pipeline had been leaking for over three months before it was detected. The very same pipeline leaked another seven thousand gallons of brine this January. Pipeline spills are not going away. North Dakota reported approximately 1,400 hazardous material release incidents in 2014 alone. Financial assurances for spills must be required before the damage happens, in amounts sufficient to cover the hundreds of spills that happen every year. The legislature needs to create a modern statute addressing financial assurances for pipeline leaks.

David Ganje practices law in the area of natural resources, environmental and commercial law in South Dakota and North Dakota. His website is Lexenergy.net

DON’T LOOK FOR THE GOLD, LOOK FOR THE GRAVEL

Posted on: March 9th, 2016
by David Ganje

In the natural resources, mining and geological fields, the ‘experts’ are reluctant to call gravel a mineral.  It matters not whether they are a lawyer, judge or geologist.  But I set aside this ridiculous game of semantics.  I deal with reality.  My clients deal with reality.  So we start with the wisdom of my grandfather who was a farmer.  He said, “Don’t look for the gold, look for the gravel.”  What mineral has an immediate, practical and economic benefit regardless of where used, how used, or where located?  Gravel.

Gravel is everywhere – in South Dakota alone, there are more than 1,800 permits for gravel mining on file with the Department of Mining and Natural Resources. States have inconsistent histories with regard to whether or not gravel should be considered a ‘mineral’ requiring mining permits. As a result, the term ‘mineral’ will sometimes be construed so as to include gravel, and other times to exclude gravel. For this reason, those interested in gravel in South Dakota should be aware of the inconsistent legal nature of the commodity.

On private land, gravel rights are managed by the state. The SD legislature has passed statutes defining the term ‘mineral’ broadly when dealing with situations such as damages from mining, oil, and gas development, mineral exploration (but not mining), and abandoned mineral interests. In these statutes, gravel is included within the term ‘mineral’ – in fact, often ‘mineral’ is defined as expansively as “any substance with economic value, whether organic or inorganic, that can be extracted from the earth, including oil and gas, but excluding water” and in some cases, uranium. In these situations, then, there is no question that gravel is included. For example, like oil and gas, mineral interests in gravel are only abandoned if left unused for a period of twenty-three years, unless a statement of claim is made according to SD law.

Unfortunately, the South Dakota Supreme Court has implied that these definitions only fit the situations that their respective statutes dictate and, cannot always help define ‘mineral’ at other times. It would be easy if rights holders could look at these statutory definitions of the term ‘mineral’ universally. In South Dakota no statute provides a definition for ‘mineral’ or ‘mineral interest’ with the purpose of explaining existing mineral interests or leases. For example, North Dakota law states that “conveyances of mineral rights…in real property in this state…shall not be construed to grant or convey to the grantee any interest in any gravel…unless specifically included by name in the deed, grant, or conveyance.” South Dakota has nothing so specific, so the matter must fall to the courts.

As a result, the SD Supreme Court has instead chosen to handle the matter on a case-by-case basis. Those wishing to claim that gravel is included under their mineral interest or mineral right must show the court that gravel’s inclusion in a warranty deed was intended by all parties at the time the interest or right was created; if not, taking gravel from land on which you have mineral rights may well be prohibited, as the interest in the gravel remains with the surface estate. The SD Supreme Court has expressed concern about possible damage to the surface estate by removing subsurface or surface objects that the grantor did not intend to be removed – like gravel. When surface damage is likely to occur from deeding to the grantee an interest in gravel, courts will demand even a stringent showing of the grantor’s “intent.”

On federal land, where the federal government has reserved mineral interests, the analysis is similarly convoluted. The Supreme Court of the United States has held gravel to be included in a federal reservation of “all the coal and other minerals in the lands so entered” under the Stock-Raising Homestead Act of 1916, but more recently held gravel to not be included with the federal reservation of “all the coal and other valuable minerals” under the Pittman Act of 1918. Lest we feel comfortable that all federal reservations of regular minerals will include gravel, and all federal reservations of valuable minerals will exclude gravel, a two-justice concurrence in the Pittman Act case disparaged the “faulty reasoning” of the SRHA case, and implied that they might consider overturning that holding at some point in the future. This may indicate that whether or not a specific federal mineral reservation includes gravel can depend heavily on the composition of the court at the time of the case.

For those who are interested not in interpretation of current mineral interests, but rather the creation of future mineral interests, the key is clear and careful writing. When mineral reservations and interests are written so as to explicitly include gravel as a mineral, or there is some compelling evidence that the grantor intended to include gravel within the grant, then courts will uphold the granting deed as including gravel. Sadly, the issue can become a grantee interpretation versus grantor interpretation, with the grantor likely to win. This is largely because SD law states that “a reservation in any grant. . . is to be interpreted in favor of the grantor.” This road is a little rocky.

David Ganje. David Ganje of Ganje Law Offices practices in the area of natural resources, environmental and commercial law in New York. The website is Lexenergy.net

Does ‘All’s Well That Ends Well’ Apply To An Oil And Gas Lease?

Posted on: February 19th, 2016
by David Ganje

In oil and gas leases, a shut-in royalty provision is essential to protect the interests of lessors and Operators alike. An Operator is the business responsible for the drilling, completion, and production operations of a well and the physical maintenance of the leased property. Oil and gas lessors like shut-in provisions because they provide that some money continues without the act of suing the Operator to start producing again or get out. Operators like shut-in provisions because they provide a path to maintaining the lease when “the market” makes production ill-advised.

As important as these provisions are for the parties, there are difficulties drafting these terms into an oil and gas lease. For an unprepared lessor, an inadequate shut-in provision allows a non-producing well to sit on his land, shut-in, for years while providing little or nothing to the lessor. For an unprepared Operator, an inadequate shut-in provision forces a lose/lose decision between bad money paid out during new production or losing both the lease and the well that took big bucks to negotiate and complete. For example, what is a fair shut-in period? 3 years? 1 year? Even leases with adequate shut-in provisions have problems in legal interpretation, and in such cases the state code should stand ready with answers. States have woefully inadequate road maps to cover these situations.

New York law requires that production continue with some consistency beyond the primary leasing term. Still, there are some important unknowns that the legislature and the courts have yet to make clear. New York courts have held that “If…there is no production and it is reasonable from the facts to determine that production has finally ceased, then the lessor may recover possession of his lands free of the lease.” But, “temporary cessation of production does not terminate the lease.” What exactly is a final ceasing of production? How long can production cease before it is no longer ‘temporarily’ so? Mechanical issues with wells can last for years, especially if not properly managed – and economic issues can make production untenable for even longer. Complicating this issue, New York courts have implied that these rules only apply when the Operators are not prevented from production by forces outside of their control (which can include market conditions). So how long can lessors be stuck with a non-producing well on their land that the Operators claim has only ‘temporarily’ ceased production because of outside forces? Answer: it is presently unclear.

Where there is no good statutory roadmap, it is vital for all parties to protect their interests with proper shut-in provisions when agreeing to an oil and gas lease. New York must fix their sparse guidance on oil and gas leases that extend past the primary leasing term. Vague statutes that force disagreeing parties into court in order to fill in the legislature’s gaps are not the answer. Astute lessors and Operators can protect their interests by writing a thorough shut-in provision. These matters are too important to be left to hand-me-down, boilerplate lease language.

David Ganje. David Ganje of Ganje Law Offices practices in the area of natural resources, environmental and commercial law in New York. The website is Lexenergy.net

Is the Trump Option Available In SD For Condemnation?

Posted on: February 13th, 2016
by David Ganje

Is the Trump Option Available In SD For Condemnation?

Eminent domain is one of the toughest and most controversial legal powers available to a government, but the South Dakota legislature has so far failed to manage it properly. Eminent domain allows a governmental body to convert privately owned land to another use, often over the objections of the current landowner. The Donald Trump Option is the right of a private party to use eminent domain.  This is done by developers, pipeline companies and hotel builders alike. This process is commonly known as a ‘taking’ or ‘condemning the land.’ There are rules, of course. A landowner must be paid “just compensation” for the condemnation of his land. Further, the land that is to be taken may only be taken to further a beneficial public use.

The ability to exercise eminent domain is so powerful that it almost always remains the final legal option. The use of eminent domain is not solely limited to governments. Private parties as well as corporations may exercise the immense power of eminent domain. For example, South Dakota law states that “Any person may exercise the right of eminent domain…to acquire as a public use any property or other rights necessary for application of water to beneficial uses.” Private parties as well as corporations may exercise the immense power of eminent domain.

The law allows a private party to manage water rights by a taking. The statute states, “except as otherwise provided…no person may appropriate the waters of this state for any purpose without first obtaining a permit to do so.” The power of eminent domain may used if the taker puts water to a beneficial use. For this reason, a party may not successfully exercise eminent domain without first having a water permit.

This right to take comes into play when a party seeks access to land he doesn’t own in order to access water. What is a beneficial use? South Dakota law is intentionally vague on this subject. It says beneficial use is the use of water “that is reasonable and useful and beneficial to the appropriator, and at the same time is consistent with the interests of the public.” For courts, this is a balancing test, as opposed to a concrete definition. The question in eminent domain cases, then, is whether or not a proposed use of water fits this vague legislative definition of ‘beneficial use.’ The Supreme Court has implied that it can. As a result, eminent domain cases involving water can span an enormous berth of cases, with those claiming eminent domain seeking water for everything from irrigation to oil extraction.

There is irony in too much of what the South Dakota legislature does. Counties and municipalities are forbidden from using eminent domain for the benefit of a private party. Yet the field is wide open for private parties to use eminent domain for a private party’s benefit.

Whether it is a taking to obtain water rights or land for a pipeline, the matter of ‘just compensation’ to be given to the landowner is paramount. I have advocated in prior blog articles the need to revisit the matter of just compensation. This issue applies to a government or private taking.  The ‘valuation process’ should be changed.  The SD Supreme Court has stated that the state legislature has the authority to create the method of compensation in a condemnation proceeding.  The State Constitution is interestingly stronger from a landowner’s perspective than is the US Constitution on the issue of eminent domain.

State Senator Monroe, or his speechwriter, state that that my argument (and that of 5 states and counting as of 2012) is wrongheaded. He has stated, “We have well established legal mechanisms to compensate property owners and treat them fairly.”  Good negotiations by a landowner may result in more favorable compensation. But the playing field should be level between the land taker, who has the power of the law to take, and the landowner.  Senator Monroe’s refusal to look at the issue is a belittlement of efforts to protect property rights.

I do not know whether the Senator has had a pipeline run through his property under an eminent domain proceeding. A taking is not a normal market transaction because the landowner has no choice.  A landowner can’t walk away from the table. The legal process of taking private property is just as important as the right to free speech, freedom of religion and the protection against unreasonable search and seizures.

There are several problems with South Dakotan condemnation law. The law should be revised to include written disclosures following the requirements of Wyoming law. Wyoming law provides new rights for landowners in all condemnation proceedings, whether initiated by the government or private parties. SD law should require that the taker show the details of the proposed project plan and the written basis behind any compensation offer. An additional provision that should be changed is the legal taking procedure. Currently the procedure does not allow the landowner the recovery of all of his court costs, appraisal costs, expert witness fees and attorney’s fees even in the event he should prevail in the case. This forces landowners to fear spending money defending their own land, something that a citizen should never have to do. SD law should provide that a landowner is entitled to an award of all court costs, appraisal costs, expert witness fees and attorney’s fees if the taker failed to negotiate in good faith, or if the compensation awarded by the court or jury exceeds the amount of money offered by the taker to the landowner. Until then, the playing field will remain skewed in favor of takers.

David Ganje. David Ganje of Ganje Law Offices practices in the area of natural resources, environmental and commercial law in South Dakota and North Dakota. The website is Lexenergy.net