Texas Supreme Court Rules Surface Owner Owns Pore Space Beneath Land Absent Agreement Otherwise
The Texas Supreme Court issued an important opinion last week in Myers-Woodward, LLC v. Underground Services Markham, LLC. [Read Opinion here.]
This case answers the pressing legal issue of who owns the pore space beneath land in Texas. Given advances in technology that now enable oil and gas to be stored in such pore space, the answer to this question has real world implications and economic consequences.
Background
Myers-Woodward, LLC (“Myers”) owns 160 acres in Matagorda County.
1947 Mineral Deed
In 1947, prior to Myers owning the property, the property owners transferred the mineral estate to the predecessor of Underground Services Markham, LLC and United Brine Pipeline Company (collectively, “USM”). The mineral deed provided that USM’s predecessor obtained:
“an 8/8th interest in all of the said oil, gas and other minerals in, on, and under said land, together with all and singular the rights and appurtenances thereto in anywise belonging, with the right of ingress and egress and possession at all times for the purpose of mining, drilling and operating for said minerals and the maintenance of facilities and means necessary or convenient for producing, treating, and transporting such minerals, and for housing and boarding employees, unto said grantee, his heirs, successors and assigns, forever . . .”
The deed (and a correction deed filed the same year) reserved to the surface owner a perpetual 1/8 royalty on all gas or other minerals on, under, or that may be produced from the property.
2008 Salt Deed
In 2008, USM acquired a salt deed on the property that conveyed “all right, title, and interest, in and to all of the salt and salt formations only, in, on and under and that may be produced from the property…” The deed was subject to any and all royalty obligations. USM and the royalty interest owners could not agree on the proper royalty owed for the salt production. From 2015-2019, USM produced 2.6 million tons of salt but did not pay Myers any royalty.
Lawsuit
In 2013, USM sued the royalty owners, including Myers, seeking two declarations from the court: (1) how royalties were to be calculated; and (2) that USM owned the cavern space underlying the property and that Myers had no rights in or to any substances stored in any caverns. Myers filed a counterclaim for recovery of unpaid royalties.
Lower Court Decisions
This case has been working its way through the legal system for a decade.
District Court
In 2015, the trial court ruled USM owned the subsurface caverns created by its salt mining on the property. The court, however, rejected USM’s request for a declaration that they had the right to inject hydrocarbons or other minerals from off-sight into the caverns, thus limiting USM’s use of the caverns only for the purposes listed in the 1947 deed, which was limited to salt mining, producing, treating, and transporting salt. With regard to the royalty calculation, the court ruled Myers was entitled to 1/8 based on the market value of the salt at the point of production. The parties disagreed on how to apply that approach, with Myers arguing comparable sales must be from third party, arms-length transactions and USM claiming fixed price royalty agreements were sufficient evidence. The court sided with USM’s calculations, ordering a royalty payment of $258,850.41, a fraction of the $1.3 million Myers’ experts calculated. Myers appealed on both the issue of royalty calculation and salt cavern ownership, and USM appealed the ruling that their use of the caverns was limited.
Corpus Christi Court of Appeals
In 2022, the Corpus Christi Court of Appeals affirmed in part and reversed in part. With regard to the royalty calculation issue, the court affirmed, agreeing with the trial court that USM’s calculations were correct. As to ownership and use of the salt caverns, the court reversed. The court held that Myers retained ownership of the non-mineral elements of the subsurface, including the empty space. Thus, the court held USM did not own the subsurface caverns and had no right to use them for purposes not specified in the deed. Both parties petitioned the Texas Supreme Court to review.
Texas Supreme Court Opinion
Chief Justice Blacklock delivered the opinion of the Court. The opinion walks through each of the issues in detail.
Ownership of the salt caverns
The Court began with the concept that Myers owns every “stick in the proverbial bundle” except for the mineral interest that was conveyed in 1947. Out of that broad mineral estate conveyance, USM obtained only one stick–the salt. Importantly, the court noted, not all mineral estates are created equal, and the rights encompassed therein depend on the language used by the parties in the particular conveyances. In light of this, courts must begin by looking at the language of the conveyance at issue.
Both parties agreed USM owns the salt underlying the property. They also agreed that Myers’ surface estate includes not only the surface of the land, but also any portion of the subsurface that was not included in the 1947 conveyance. The question, then, was whether the empty spaces within the salt formations, created as a byproduct from the salt production, were included within the meaning of “other minerals” in the 1947 deed.
Myers relied on a number of oil and gas cases including Humble Oil and Refining Co. v. West, where the Texas Supreme Court drew a distinction between the mineral estate and the reservoir storage space, which it suggested would remain with the surface owner after severance. That distinction was not decisive, however, because there, the surface and mineral estates had not been severed. Years later, the Texas Supreme Court ruled in Lightening Oil Co. v. Anadarko E&P Onshore, LLC, a case where the court held the mineral owner did not have the right to exclude the surface owner from underground spaces within the mineral estate so long as the surface owner’s action did not diminish the minerals or interfere with development. In 2021, the Court stated in Regency Field Servs., LLC v. Swift Energy Operating, LLC, “the surface owner, and not the mineral lessee, owns the possessory rights to the space under the property’s surface.”
USM did not directly challenge these precedents; instead, it sought to limit them to minerals that migrate like oil and gas. USM conceded that space left behind by the migration or extraction of flowing minerals belong to the surface estate but contended a different rule should apply to solid minerals like salt. USM argued the precedent cases, all involving oil or gas, are derived from considerations unique to those substances. Essentially, USM argued ownership of the salt formations themselves, essentially claiming that if it improves the formations by creating usable caverns within them, then the caverns are simply part of the salt formation that USM already owns, and, thus, it owns the caverns just like it owns the salt. USM also pointed to the only Texas case involving the ownership of salt caverns, Mapco Inc. v. Carter, in which the appellate court held that a mineral owner retains a property interest in the underground storage caverns created by salt mining. The Texas Supreme Court reversed Mapco on other grounds and did not address the issue of pore space ownership. Here, the Court described the Mapcoappellate court opinion as “difficult to parse” and citing little Texas law in support of its conclusion. It has not often been cited, and commentators consider it the minority view. Thus, the Court expressly overruled Mapco.
The Court noted the “intuitive appeal” of USM’s argument. “A rule under which the owner of an underground salt formation maintains ownership of valuable caverns it created by its own labor would strike few observers as altogether unjust or unreasonable.” The Court went on to say it need not precisely define every contour of USM’s mineral estate, but stated that two simple considerations caused it to reject USM’s ownership arguments.
First, USM does not own the salt formations. At most, it owns the salt. In the 1947 deed, USM’s predecessor was granted the “oil, gas, and other mineral in, on, and under said land.” In 2008, USM received “the mineral estate holder’s right, title, and interest, in and to all of the salt formations.” Critically, however, USM’s predecessor never held the right to the salt formations. The predecessor could not convey to USM a greater or better title that it held. The predecessor received the minerals, which includes the salt itself, but does not include the salt formations. “Put more simply, despite its apparent complexity, much of this case boils down to the elementary observation that empty space is not salt. No matter who created the underground empty space or where it is located, the space itself is not salt, which means the mineral estate generally does not entail physical ownership of it (absent some indication to the contrary in the conveyance, which we do not see here.)”
Second, the Court noted that it “considers Texas law reasonably clear that underground storage space generally belongs to the surface owner absent a contrary agreement.” The Court noted its desire to draw simple, bright line rules to apply consistently across a variety of fact patterns when that is possible in cases. The Court preferred this approach to the idea of having one rule for storage space encased in salt or other mineral formations and a different rule for space encased in non-mineral rock formations.
Thus, the Court held that the surface owner, and not the mineral lessee, owns the possessory rights to the space under the property’s surface absent an agreement otherwise. Myers, as the surface owner, owns the space under the property’s surface, including the space contained within the hollowed-out salt formations.
Dominant estate right of use of salt caverns
USM also argued even if it did not own the salt caverns, it had a right of access and use due to the dominance of the mineral estate in Texas law. Texas law is clear that a severed mineral estate owner has the implied right to use as much of the surface as is reasonably necessary to produce and remove the minerals. This right includes the use not only of the surface of the land but the subsurface as well. This means USM does have a right to use the salt caverns. That right, however, is limited to the uses that are reasonably necessary to recover the salt. USM had not shown that the storage of hydrocarbons produced elsewhere is reasonably necessary to produce its salt. In fact, it seems the opposite may be true, and the hydrocarbons may hinder salt production. The Court rejected this argument.
Royalty calculation dispute
Myers contended that the 1947 deed language reserves an in-kind royalty for which Myers is entitled to either physical possession of 1/8 of the salt produced from its land or 1/8 of the net proceeds from USM’s sale of the salt. USM, on the other hand, argued that Myers’ royalty entitles Myers not to 1/8 of the net proceeds from the sale of any particular salt, but to 1/8 of the market value of the amount of salt produced from the land.
The lower courts sided with USM. The Texas Supreme Court reversed.
The Court noted the “curious nature” of this dispute. USM claimed that 1/8 of the salt’s market value is $260,000 and did not proffer a dollar value for the 1/8 of the net proceeds of the actual sale of the salt to Formosa Plastics. Myers’ calculation of the value is over $2 million–seven times the market-value USM offers. While the Court realized there can be an economic reality where a mineral’s market value and the price paid in a given transaction can differ, precedent assumes there is generally a connection between the two measures. The Court noted that salt is not a mineral with volatile sales prices. In fact, during the disputed period, the value of salt was fairly stable.
The legal question turns on the meaning of “a royalty of 1/8 of all the gas or other minerals in, on, or under, or that may be produced from the above described land.” There were no prior Texas court decisions on this particular royalty language. The focus of the Court was to ascertain the intent of the parties who agreed to this language. The Court agreed with Myers that this language did create an in-kind royalty. Nothing in the conveyance conflicts with this understanding of the clause. The Court then analyzed specific language in the 1947 deed and the correction deed filed shortly thereafter. When examining the entire deed and correction deed in context, the Court found the parties intended to create in-kind royalties.
In light of this reading, the Court reversed and remanded for further proceedings on the royalty calculation based on the Court’s opinion.
Key Takeaways
The issue of pore space ownership is one that has been in the news for several years around the country. With more and more projects aimed at storing substances like hydrocarbons in underground pore space, having a clear answer to who owns this space is important for Texas landowners and mineral producers alike. We have done podcast episodes related to these issues. To learn more, listen in to Episode #193 on pore space legal issues and Episode #163 on carbon capture and sequestration pipelines and wells.
