Iskandia Energy Operating, Inc. v. SWEPI LP

In Iskandia Energy Operating, Inc. v. SWEPI LP, the 8th Court of Appeals addressed the issue of trespass associated with deep subsurface wastewater migration and highlighted problems related to saltwater disposal. The court held that a trespass claim based on unauthorized interference with a lessee’s development right is recognized by Texas law if the injury is not outweighed by competing interests. 

Background  

In 2017, Iskandia Energy Operating, Inc. (“Iskandia”) purchased oil and gas leases covering over 5,000 acres with operations limited to the “shallow” layer of the Delaware Mountain Group (“DMG”) formation of the Permian Basin. At that time, Shell Western E&P (“SWEPI”) also operated in the Delaware Basin, but in the deeper Wolfcamp and Bone Springs formations. 

In the Permian Basin, the production of oil and gas is accompanied by production of large volumes of saltwater. Federal and state regulations control saltwater disposal procedures, but the primary method of disposal is through saltwater injection wells. Central to this dispute is Iskandia’s claim that SWEPI, during oil and gas production in the DMG formation, was producing more than 110,000 barrels of saltwater per day from the Wolfcamp and Bone Springs formations, and then reinjecting this wastewater.  Iskandia claimed this reinjection was “‘swamping’ its oil reserves with waste and in some cases forcing saltwater to spill over the top of Iskandia’s DMG wellheads.” Watering out or “swamping” made these oil reserves unrecoverable, resulting in a steep drop in oil production from the affected wells. 

Iskandia sued SWEPI for trespass under Texas law. By disposing of more saltwater than the formation could handle, Iskandia argued, SWEPI’s wastewater migrated into Iskandia’s producing zone. At trial, Iskandia estimated that its economic damages totaled approximately $29.9 million. 

Further, Iskandia argued that SWEPI’s trespass was a violation of its right to develop. Specifically, the trespass deprived Iskandia of its exclusive possession of its property, its right not to have its producing reservoir polluted by waste, and its legal rights to explore, produce, obtain, and possess minerals under its oil and gas leases. 

SWEPI moved for summary judgment on Iskandia’s trespass claim, asserting that Iskandia had no evidence of illegal trespass. SWEPI also filed motions to exclude two of Iskandia’s expert witnesses, a petroleum engineer and a professional geologist. Iskandia challenged both motions on appeal to the 8th Court of Appeals.  

Analysis 

While both motions are relevant for operators, most commentary on this case centers around Iskandia’s trespass claim. 

Broadly speaking, the elements of trespass in Texas include: (1) entry (2) onto the property of another (3) without the property owner’s consent or authorization. The Supreme Court of Texas addresses trespass jurisprudence in relation to the type of property interests at issue, and the rules for trespass “are different on the surface of the earth from those that apply two miles above or below it.” 

First, the appeals court looked to Lightning Oil and Regency Field Services for guidance to establish a subsurface trespass claim. Next, the court applied the analysis from  Helena Chem. Co. v. Cox for the importance of proving causation in a trespass claim. 

Trespass   

Lightening Oil Co. v. Anadarko E&P involved a dispute between two mineral estate lessees operating adjacently in the subsurface of a lessor’s tract of land. One issue before the court was whether Anadarko trespassed onto Lightning’s mineral rights when Anadarko extracted Lightning Oil’s minerals during drilling operations.  

The Texas Supreme Court held that “an unauthorized interference with the place where the minerals are located is a trespass onto the mineral estate only if the interference infringes on the mineral lessee’s ability to exercise its rights.” These rights include the operator’s right to develop and the right to possess, use, and appropriate oil and gas. 

This analysis also requires balancing the competing interests at play. Specifically, courts must weigh the interest of society and the interests of the oil and gas industry against the interests of the individual operator. Common examples of these interests include the maximum recovery of minerals and waste minimization. 

Here, Iskandia’s development rights included the right of exclusive possession of its property, its right to have its producing reservoir free of waste, and its legal rights to explore, obtain, produce, and possess minerals under its oil and gas leases. The 8th Court of Appeals explained that SWEPI’s interference with Iskandia’s wells was a trespass as a matter of law because the saltwater seriously impaired the production potential of Iskandia’s wells. Specifically, Iskandia couldn’t exercise its development rights because the wells were damaged beyond repair. Notably, the Iskandia court did not perform a balancing test of interests because neither party addressed these interests in their appeal. 

However, a trespass claim can still be actionable even if no damage is done or the injury is minimal. The plaintiff need only show that their possessory interest in the minerals was violated. For example, in Regency Field Services, the claimant’s action for trespass was successful merely because of its status as a mineral lessee to the oil and gas lease. Here, the court found that Iskandia’s role as lessee and operator of its oil and gas lease established the necessary baseline for Iskandia to bring a trespass claim. 

Causation  

The 8th Court of Appeals applied Tex R. Civ. P. 166a(i), as referenced in Helena Chem. Co. v. Cox, which states that “a nonmoving party must present evidence that raises a genuine issue of material fact as to each element in the summary judgment motion.” Here, the court reasoned that in order to survive summary judgment on the element of causation, Iskandia must demonstrate that SWEPI’s wastewater exposed Iskandia’s wells to levels of water sufficient to cause the loss it claimed in its pleadings. 

Iskandia used a reservoir simulation model, created by expert witnesses, to prove that underground channels connected SWEPI’s saltwater injectors with Iskandia’s producing intervals. Iskandia’s experts demonstrated “with reasonable geologic certainty” that these channels allowed saltwater to flow from SWEPI’s deeper production zones to Iskandia’s shallower production areas. 

The court concluded that Iskandia had produced sufficient evidence proving that SWEPI’s injections had interfered with Iskandia’s possessory rights. The case was reversed and remanded to the trial court for further proceedings. 

Takeaway 

Subsurface water migration is a growing problem in Texas, particularly within the Permian Basin. Decreased disposal capacity and increased seismic risk are just two reasons for inoperable wells and unrecoverable minerals in the area. Iskandia marks a Texas court’s official recognition of a trespass claim due to subsurface wastewater migration and offers guidance to operators navigating the issue.  

Kuiper Law Firm, PLLC specializes in all aspects of onshore operations including oil, gas, & mineral leases, and saltwater disposal agreements. We will continue to monitor any legislative updates on this subject. If you have any questions about the information in this article or how it may affect your operations, please do not hesitate to contact us.