Oil & Gas Property Law: The Homestead Principle of First Title

“In a Lockean world, mineral rights do not accompany surface rights in either original or transferred ownership. Minerals would not be owned until homesteaded by the acts of discovery and intent to possess. In the case of oil and gas, initial ownership would occur when the oil or gas entered the well bore and was legally claimed by the driller.”

In Oil, Gas, and Government: The U.S. Experience (Cato Institute: 1996), my discussion of the development of first title to oil and gas deposits, as well as government intervention at the wellhead, covered three chapters (pp. 57–221). To my regret, I did little to turn the major takeaways of these chapters into shorter pieces for greater reach and impact. Even today, some of those who are familiar with my argument have encouraged me to publish in this area.

In the Macmillan Encyclopedia of Energy (2001), I wrote a brief summary of the neglected private-property-rights alternative to the actual “rule of capture,” modified by “correlative rights.” [1]

This short piece is presented below.

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Property rights by homesteading is based on a theory of philosopher John Locke. Locke believed “as much land as a man tills, plants, improves, cultivated and can use the product of, so much is his property.” Such labor, Locke continues, “enclose(s) it from the commons.”

In a Lockean world, mineral rights do not accompany surface rights in either original or transferred ownership. Minerals would not be owned until homesteaded by the acts of discovery and intent to possess.

In the case of oil and gas, initial ownership would occur when the oil or gas entered the well bore and was legally claimed by the driller. The reservoir would then turn a “state of nature” into owned property. The homesteader (discoverer) could be the property owner directly overhead, another land owner, or a lessee of either.

The oil and gas lease under homestead law would simply be the right to conduct drilling operations on a person’s surface property. The lease would not constitute a claim to minerals found under a particular surface area as under the rule of capture. Since the reservoir could be reached from different surface locations with slant drilling, the economic rent of a homestead lease would be far less than the value of a capture-rule lease. The difference in value would accrue to the driller-finder, thereby encouraging production by making drilling more efficient and profitable.

Under a homestead theory of subsurface rights, the first finder of a mineral area would have claim to the entire recognized deposit. In the case of oil and gas, the geologic unit is the entire reservoir, however shaped, as long as it can be proven to be contiguous. Separate and distinct reservoirs in the same general area, whether vertical or horizontal, would require separate and distinct discovery and claim.

Alien wells draining a claimed reservoir would be liable for trespass if the homesteader can reasonably prove invasion (whether by well distance, well depth, crude type, geological formation, reservoir pressure, etc.). The pool could be left untapped, depleted, or used for storage. The reservoir pace, in addition to the virgin contents of the reservoir, is newfound property.

The operation of homestead property rights system can be facilitated by pragmatic rules established either by law or judicial opinion. When a new oil or gas field is discovered, the surrounding acreage could be declared off-limits for other producers until the discoverer has a “reasonable” opportunity to drill frontier wells to delineate the field. An exception would be made if another operator had begun to drill before the nearby discovery was made so long as opportunistic land drilling did not occur. If the discoverer does not drill development wells to delineate the field, the other operators may drill and become co-owners of the same contiguous reservoir upon discovery, requiring cooperation to minimize drilling costs.

While the homestead theory was never seriously considered in the United States experience, it has been recommended as part of a subsoil privatization program for Latin America. The major attraction is increased economic efficiency: Production and management of a contiguous oil and gas reservoir is most efficiently done by one operator, and homesteading creates one owner in place of multiple owners under the rule of capture.

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[1] Bradley, Robert. “Staking a Claim: The Homesteading Principle,” In John Zumerchik, ed. Macmillan Encyclopedia of Energy (Macmillan Reference USA, 2001).