Oil technology has, for a number of years, allowed oil wells to run at an angle and not simply straight down, allowing oil companies to access different parts of a reservoir from a single installation and improve recovery.
However, it has taken a while for the law to catch up with this development. In a recent decision, the Court of Appeal has confirmed that drilling and maintaining an oil pipeline under someone’s property, even at a depth of many hundreds of feet below ground, can amount to a trespass under English law.
This is so even where the oil company has been granted a licence by statute to exploit the oil there. However, the compensation payable in many situations – including the facts of the present case – may be a very small figure.
The case concerned three pipelines drilled into an oil&gas reservoir under property belonging to the Bocardo SA (a company ultimately owned by Mohammed Al Fayed). Star Energy had been granted a petroleum production licence that allowed it to drill down to the reservoir and extract the oil.
The pipelines were drilled along a deviated path, which meant that they ran into, and then under, the ground at an angle. The pipelines crossed the boundary of Bocardo’s property at around 800ft below the surface and terminated between 2,300ft and 2,800ft underground.
The Court of Appeal decided that Bocardo’s title to the land extended at least as far as the strata around 2,800ft below the surface of its estate. How much further did not need to be decided. It also had a right to possession of those strata even if it could not be said to have actual possession in any meaningful sense.
Following commonly accepted principles, only the Crown, or someone licensed by the Crown, was entitled to bore for or extract petroleum within the UK, so the oil was not “owned” by Bocardo even though it owned the land within which the reservoir was located.
However, although Star had been granted the necessary production licence, the statutory regime did not create a right to intrude on to (or under) the land of others. The regime required a licensee to acquire such “ancillary rights” as might be necessary to allow it to exercise its licence.
Of course, such ancillary rights come at a cost – the owner will expect compensation, and if agreement cannot be reached between the affected parties, the licensee will need to apply to the court. If the court needed to decide compensation, it should do so on the basis of what would be fair and reasonable between a willing grantor and a willing grantee, plus a 10% uplift to reflect the fact that the acquisition of the right is compulsory.
Since Star had not obtained permission from Bocardo for the drilling, the intrusion into the ground under Bocardo’s estate was an interference in its possessory rights over that part of the land, and was therefore a trespass. This was held to be the case even though Bocardo’s use of the land had not been interfered with “one iota”.
Compensation for the trespass was normally to be determined by reference to the principles generally adopted for compulsory-purchase compensation. On this basis, the court would have ordered £82.50 be paid to Bocardo.
However, compensation can also be determined by reference to the amount the parties would have negotiated. According to the Court of Appeal, the parties in this case would have negotiated a higher figure, estimated as £1,000, for the ancillary right. This was held to be the quantum of the claimant company’s loss.
The conclusion on compensation will be a relief to oil companies. At first instance, the judge had quantified the compensation at 9% of the value of the oil extracted, which produced a figure of more than £620,000.
Reassuringly for oil companies, this figure was greatly reduced on appeal to £1,000. The decision is significant in that it clarifies that oil companies drilling under land should seek the landowner’s agreement or court approval even where the landowner’s right to possession will not, for all practical purposes, be interfered with.
It is important to note that this decision is applicable only to onshore drilling in England. Since Scotland has its own separate system of property law, any issue in relation to Scottish land would need to be considered under Scots law principles.
Penelope Warne is head of oil&gas at CMS Cameron McKenna LLP
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