Exploration: Attorney discusses 'Oil and Gas in Michigan'

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Arthur Siegal, a partner with Jaffe, Raitt, Heuer, & Weis who specializes in environmental law, governmental affairs, energy law, and administrative laws, spoke to the WCBA?Real Estate Section.


Photo courtesy of Brook McCray-Smith

By Sheila Pursglove
Legal News

Arthur Siegal, a partner with Jaffe, Raitt, Heuer, & Weiss in Southfield and chair of the firm's Environmental Practice Group, recently gave a presentation about "Oil and Gas in Michigan" to the Washtenaw County Bar Association Real Estate Section.

When it comes to ownership of oil and gas, under Michigan common law, the surface owner owns the subsurface unless they have been severed, noted Siegal, a cum laude graduate of the University of Michigan Law School who specializes in environmental law, governmental affairs, energy law, and administrative law.

The "reasonable use" doctrine permits reasonable use of the surface necessary or convenient for the exploration and development absent express provision to the contrary in the lease or instrument severing the mineral rights, Siegal explained. "This might include cutting trees, using brine products for on-site operations, housing employees onsite, and constructing roads to the drill site."

Excessive use may lead to compensation.

"Other states' cases have held that excessive use has included non-negligent spills, leaks and abandonment of equipment; failure to prevent erosion during development, and roads that are more than the minimum required to develop the site," Siegal said.

Lease terms include bonuses, royalties, and term extension payments. A royalty is agreed upon as a percentage of the lease, minus what was reasonably used in the lessee's production costs, and is based on a percentage of the gross production from the property and is free and clear of all costs, except for taxes.

"Traditionally, a royalty can be 1/8, or 12.8 percent of production; however, it can be any fraction of production, depending on 'the royalty' clause in a lease," Siegal said. The landowner should negotiate for as high a royalty as can be arranged."

The Pugh Clause is intended to protect a lessor from all their land being tied up under an oil or gas lease if only a small portion of the lands if the lessor's lands are actually producing, are pooled or are combined with other lands, he said.

Severed oil or gas rights revert to the surface owner after 20 years unless a drilling permit is issued, oil or gas is actually produced or withdrawn; the interest is used for underground gas storage; the severed interest is sold, leased, mortgaged or transferred by written instrument; or a written notice is filed with the county register of deeds, Siegal noted.

Permits are required to drill for oil, gas, to dispose of saltwater, brine or oilfield waste and to conduct secondary recovery, Siegal said. No wells are allowed below the Great Lakes; and drilling units, per rule, are typically 40 acres in size. Pooling-either voluntary or compulsory- refers to a combination of interests of different owners in a drilling unit or larger area.

"Compulsory pooling can force a pooled owner to advance the owner's costs or have them deducted from the owner's revenues," Siegal said.

According to Siegal, the Administrative Rules regulate the entire life cycle of a well: from drilling, through production, to plugging and abandonment; they regulate flowlines, production facilities, waste disposal, release reporting and noise and odor performance, as well as production rates. Unitization is a process by which separately owned tracts and rights are combined for operation as a single unit to maximize production.

Cities may preclude and/or regulate oil and gas wells and operations; townships and counties may not, Siegal explained.

"The Zoning Enabling Act, per a 2011 amendment, provides that a zoning ordinance cannot prevent the extraction of valuable natural resources by mining from any property unless 'very serious consequences' would result from the extraction," he said.

The rule was commonly referred to as the "no-very-serious-consequences" rule, and is aimed at mining and may apply to cities. Siegal said that the rule raises questions about the disparity in treatment between the regulation of oil and gas and of non-metallic minerals.

Fracking includes the drilling of both vertical and horizontal wells. Siegal explained.

"High Volume Fracturing more than 100,000 gallons of hydraulic fracturing fluid," he said.

Under MDEQ Regulations addressing water use, applicants must: use the state's Water Withdrawal Assessment Tool (WWAT); meet well construction standards and testing; comply with used water management regulations; document sources of fresh water used and report the total volume of fracturing water recovered during operation; report on chemical additives used in fracking; and keep records of fracturing volumes, rates and pressures.

Permit applicants must identify wells within 600 feet; "special hazards or conditions" within 1,320 feet of the wellhead; endangered and threatened species within 1,320 feet; evaluate the environmental impacts expected from their projects and provide a notice to the county clerk, Siegal noted.

Operational requirements include the prevention of pollution, waste, as well as nuisance odors and noises; and companies are prohibited from "taking" any species of plants, fish, wildlife on specific lists, Siegal said.

Regulations also address environmental protection, banning any operations likely to impair or destroy the air, water or other natural resources or the public trust in those resources.

Published: Thu, Jul 09, 2015

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