Union Pacific and a Louisiana drilling company take the tension between surface and mineral rights to extremes

(AP Photo: Union Pacific)

On a Pointe Coupee plantation rich with Louisiana history, the nation’s largest railroad is doing battle with a local oil exploration company ominously named WarHorse.

Their dispute is a disconcerting reminder of what can happen when different parties own surface and mineral rights.

The tale begins on the 2,450-acre Kenmore Plantation in rural Pointe Coupee Parish. Once a cotton plantation, it was acquired in 1913 by Dr. William Archie Holloway, an Alabama native and surgeon who once served as sheriff of Iberville Parish. In 1930, the Holloway Planting Co. was incorporated, and Kenmore Plantation emerged as a prominent sugar cane producer.

Five decades later, industrial development along the New Orleans-Baton Rouge corridor was booming—and demand for railroad freight transportation was on the rise. Union Pacific came to the conclusion that it needed to build a major railroad classification yard. Plans at the time called for 42 tracks designed to handle as many as 3,000 cars. The Missouri-based company took an interest in four plantations in the area that lay along the west side of the railroad’s north-south main line—between the towns of Livonia and Maringouin—and south of the junction of the north-south main line with the east-west railroad line.

Faced with expropriation, Holloway Planting Co. settled with the railroad before the case went to trial, selling Union Pacific the land for more $5.6 million, according to an agreement signed in July 1982 and witnessed by Catherine “Kitty” Kimball more than a decade before she would be elected to the Louisiana Supreme Court. The Holloway family, however, retained the mineral rights for itself.

In 2007, the family leased the mineral rights to Rock Energy Inc., a Baton Rouge oil exploration firm, for $100 per acre. The following year, Rock Energy assigned the lease and its four wells to Pointe Coupee Energy Inc. for $100 cash. Though the corporation was based in Texas, one of Pointe Coupee’s owners was Steven Kent II of Jarreau, who is also listed—along with wife Jana—as the owner of WarHorse Oil & Gas. In 2013, Pointe Coupee transferred its rights to the mineral lease to WarHorse for $10.

But manufacturing was once again experiencing a boom, and Union Pacific once again had its eye on the Kenmore Plantation. As the mineral lease for the property was changing hands, the railroad was contemplating its next major project there: a storage-in-transit, or SIT, yard. Lower gas prices, Union Pacific surmised, meant its customers would likely require more storage for their products. In fact, the company says it is anticipating double-digit growth in Louisiana’s plastics industry.

“This project is a result of the strong relationship between Union Pacific and its chemicals and plastics customers in the region,” Jeff DeGraff, director of corporate relations and media for Union Pacific, says. “In response to shifts in the marketplace, UP recognized a need where major plastics manufacturers would require increased storage space for their products as demand for production grew. To address this need, Union Pacific developed plans to construct a new SIT yard, where product is loaded onto rail cars and those cars are stored on tracks in the yard, ready to be transported as required. With this option, Louisiana product could remain in the state, rather than be shipped and stored in other places like Texas, as is the current method. This allows Louisiana industries to be more competitive and the state look more attractive in the global marketplace.”

The Kenmore Plantation site, DeGraff notes, is ideal, given its proximity to its customers’ chemical and plastics production facilities—not to mention Union Pacific’s Livonia Rail Yard, which serves as the main hub for the entire state. “The corridor between Livonia and New Orleans is a key route, in which UP has invested a significant amount of capital over the last several years,” DeGraff says. “The new SIT yard is a key part of an overall strategy to efficiently serve customers in the transportation of chemicals and plastics on an intra and interstate basis.”

As designed, the SIT yard will be built on 75 acres of the property, with a planned buffer area for future expansion. Plans call for 21 yard tracks and two wye tracks that will triple its storage capacity in Louisiana. The first phase of construction will build 687 new SIT spots, which would increase by more than 50% the railroad’s current SIT capacity available, with plans to expand the capacity to 1,000 spots within the next few years.

The $30 million SIT yard is just a piece of the $600 million Union Pacific has spent in Louisiana to bolster its footprint. In 2015, the railroad has budgeted an additional $72 million-plus to strengthen its track network.

Barring any delays, DeGraff says, Union Pacific anticipates the SIT yard will be complete in mid-2016.

DUELING BULLDOZERS

In January of this year, Union Pacific engineers notified WarHorse of the railroad’s intention to build the Livonia SIT Yard on the property. Negotiations went downhill fast from there.

According to court documents filed in the dispute, WarHorse—which has one producing well on the property that is outside the planned location of the Livonia SIT Yard—insisted the construction would interfere with its mineral exploration rights.

In May, Jeremy Lacombe, a New Roads attorney representing WarHorse, fired off a letter to Union Pacific’s Omaha acquisitions office, noting that under Louisiana law, WarHorse “has a right to drill anywhere within reason … in their efforts to extract the oil and gas situated at the site. Any construction by UP upon the surface of this land that limits or impeded WarHorse’s ability to extract the oil and gas is done at UP’s own peril and subject to removal at UP’s expense.”

Later that month, WarHorse started surveying and staking two proposed drilling sites within Union Pacific’s planned construction site. Then in July, Louisiana’s Office of Conservation granted WarHorse two permits to drill from those very surface locations.

On Aug. 3, according to court documents, Union Pacific broke ground on its Livonia SIT Yard. WarHorse alleges the railroad’s heavy equipment operators destroyed the drilling locations of the wells it had staked and surveyed, dumped dirt on and dug a ditch around the proposed sites and damaged the gravel road on the lease that WarHorse allegedly maintains. The oil exploration company insisted the work impeded its own employees from accessing the existing well and “creat[ed] a potentially dangerous situation for all on-site personnel.”

Then late in September, WarHorse claims, Union Pacific contractors “began to dig, expose and potentially damage certain pressurized natural gas flow lines owned and operated by WarHorse” without prior notification.

In October, the oil exploration firm from Jarreau allegedly struck back with its own bulldozers. Union Pacific complained in a filing that month that two bulldozers “with WarHorse logos on them” removed dirt from the Livonia SIT Yard site and filled in ditches that had been dug for the railroad project.

Both sides have sued one another seeking permanent injunctions against the other; the cases are pending in Baton Rouge federal court. On Nov. 3, both companies attended a settlement conference before U.S. Magistrate Michael North in New Orleans, but to little avail. “Negotiations were productive but unfortunately no resolution of this matter could be achieved at the present time,” North wrote. “The District Judge will be so advised.”

The legal battle boils down to this: WarHorse has obtained permits to drill its two additional wells—a contention backed by a letter in the court record from Louisiana Commissioner of Conservation James Welsh. But Union Pacific argues that the federal preemption clause bars state regulation of rail transportation—including construction or operation of a yard, tracks, storage or other facilities or equipment involving the movement of property by rail, and that WarHorse should use directional drilling to extract the oil.

DeGraff declined to comment on the pending lawsuits directly, but did say that “significant interruptions in construction would lead to UP’s inability to accommodate the growing business of its customers in Louisiana. This would have a tremendous adverse impact on UP and the chemical and plastics manufacturers that are relying on the availability of the much needed storage.” Questions submitted to WarHorse attorney Carroll Devillier Jr. and ‎the company’s vice president of exploration and development, Kenny Savoie, were not answered by deadline.

THE DOMINANT ESTATE

When surface and mineral rights are owned by different parties, disputes do occasionally arise, though it’s rarely to the level they have in this case, says Keith Hall, director of the Louisiana Mineral Law Institute at LSU and the Campanile Charities Professor of Energy Law. When they do, the law is clear: Those who own mineral rights are generally viewed as the dominant estate.

“That’s one of the tensions when a landowner, such as the railroad in this case, purchases land without purchasing the mineral rights,” Hall says. “It’s well established that the mineral rights owner—unless the parties have agreed otherwise—has the right to come on the surface as reasonably necessary for mineral production. If push comes to shove, generally the mineral rights owners are the rights that trump. So occasionally, you do see these disputes.”

Louisiana law requires that each have “reasonable regard” for one another’s interests, Hall notes—but even so, it’s understood that the owner of the mineral rights has the option to utilize the surface property for mineral production. For example, one who owns the mineral rights under a soybean farm could legally destroy a reasonable amount of crop acreage to drill a well. “If the landowner has any inconvenience, it’s really tough luck,” Hall says. “The thought behind that is, that’s part of the deal if you sell your mineral rights or if you buy land without getting mineral rights.”

And what of Union Pacific’s insistence that WarHorse use directional drilling, rather than constructing its wells on the site of the Livonia SIT Yard, in the interest of “reasonable regard”? Hall says that if the court follows precedent, the burden would be on the railroad to show that would not “unreasonably burden the mineral rights owner. The presumption would be if they need to drill a well on spot X to use their mineral rights, then they have a right to do it.”

In Louisiana, it’s fairly common for landowners to reserve the mineral rights when selling their property, Hall says. “They like keeping that speculative value,” he notes. “They worry about what if someone comes and strikes oil next year?”

When commercial buyers purchase property, they’re often more concerned about surface location and price—and not mineral development—so they often are willing to accept the risk of potential conflicts between the two. Also in Louisiana, mineral rights that aren’t used within 10 consecutive years revert to the surface owner, so some may view it as worth the gamble.

New provisions written into Louisiana law in 2006 now allow those selling surface property but retaining mineral rights for themselves to include a provision in the sale that specifies or limits the surface rights that the mineral rights owner enjoys. Absent that, while the “reasonable regard” doctrine and permitting requirements do provide some protection to  surface owners, Hall says, the acquisition of both the surface and mineral rights is the only sure means to avoid conflicts down the road.

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