The Texas Supreme Court heard oral arguments last week in a case that could substantially clarify, or even fundamentally reshape, the characterization and ownership of underground storage rights in Texas. The case was Myers-Woodward v. Underground Services Markham. The case remains pending before the Texas Supreme Court on petition for review.
This article summarizes the arguments made by the parties, and the Justices' questions and observations at the oral argument.
This case presents two critical questions:
- Who owns subsurface caverns created by salt mining operations, and
- How should in-kind royalties be calculated for salt production?
Background: A Tale of Salt, Storage, and Severed Estates
The dispute arose from a 1947 mineral deed covering 160 acres in Matagorda County, Texas. The deed severed the mineral estate from the surface estate, with Myers-Woodward LLC (“Myers”) now owning the surface estate and a 1/8th non-participating royalty interest in minerals. Underground Services Markham (“USM”) owns the executive rights to the salt portion of the mineral estate.
USM produces salt through solution mining - injecting water into underground salt formations and extracting the resulting brine. This process creates large underground caverns where the salt once existed. These aren’t just empty spaces; they’re valuable assets potentially worth millions in storage revenue. USM wants to use these caverns to store hydrocarbons and other substances for third parties, potentially generating storage revenues exceeding $1,000,000 annually per cavern.
The trial court initially ruled that USM owned the caverns but could only use them for activities related to salt production. The Corpus Christi Court of Appeals reversed, holding that Myers, as the surface owner, owns the subsurface caverns. As I recently summarized in my annual oil and gas law review (Austin W. Brister & Logan Jones, Oil, Gas & Mineral Law, 9 SMU ANN. TEX. SURV. 211 (2023)), this case highlights evolving questions about subsurface storage rights that are particularly timely given the current interest in carbon capture, utilization, and sequestration (CCUS) operations.
Part I: The Battle Over Subsurface Storage Rights
A. The Surface Owner’s Rights: Texas’s Well-Established Precedent
Myers’ position rests on a substantial body of Texas Supreme Court precedent establishing that surface owners own subsurface formations. In Humble Oil & Refining Co. v. West, 508 S.W.2d 812, 815 (Tex. 1974), the Court held that the surface owner owns “the matrix of the underlying earth, i.e., the reservoir storage space.” This principle was reaffirmed in Lightning Oil Co. v. Anadarko E&P Onshore, LLC, 520 S.W.3d 39, 47 (Tex. 2017), where the Court emphasized that “the surface owner owns and controls the mass of earth undergirding the surface.”
The Fifth Circuit, applying Texas law in Dunn-McCampbell Royalty Interest, Inc. v. National Park Service, 630 F.3d 431, 441 (5th Cir. 2011), explicitly stated that the surface owner “owns all non-mineral ‘molecules’ of the land, i.e., the mass that undergirds the surface estate.” The San Antonio Court of Appeals further clarified in Springer Ranch, Ltd. v. Jones, 421 S.W.3d 273, 282 (Tex. App.—San Antonio 2013, no pet.) that “ownership of the hydrocarbons does not give the mineral owner ownership of the earth surrounding those substances.”
During oral argument, Myers’ counsel Byron Keeling emphasized that numerous scholarly articles and treatises have cited these cases as definitively establishing that Texas surface owners own subsurface storage rights. He quoted from Lightning Oil: “the surface owner retains ownership and control of the subsurface materials,” arguing this principle should apply regardless of the type of mineral involved.
B. USM’s Position: Salt is Different
USM’s argument, through counsel Wallace Jefferson, challenges the application of traditional oil and gas precedent to salt formations. Jefferson demonstrated this distinction using a physical sample of a bowling-ball sized chunk of salt extracted from the dome, explaining to the Court: “This is what we’re talking about. It is a solid... This is the dome that underlies the property, it is completely salt from top to bottom, from left to right. There are no natural caverns within this.”
Unlike oil and gas, which exist within pore spaces of rock formations, salt forms a solid mass from which caverns are carved. USM stressed that the underground caverns at issue in this case are entirely encased within USM’s mineral estate - the salt formation itself. Justice Devine pressed Jefferson on whether this distinction justifies different treatment under Texas law. Jefferson responded that because salt is a solid mineral that forms the entire structure of the formation, any cavern created within it remains completely encased by USM’s mineral estate. Jefferson further stressed that, unlike oil and gas, which flows through pre-existing pore spaces in rock formations owned by the surface estate, these storage caverns are carved entirely within USM’s mineral property and would not exist but for USM’s extraction activities.
C. Are Storage Caverns an “Appurtenant” Right?
A significant portion of oral argument focused on whether storage rights are naturally appurtenant to mineral ownership. USM argued that its ownership of the salt formation necessarily includes the right to use the caverns created within it, citing the deed’s grant of “all and singular the rights and appurtenances thereto in anywise belonging.”
Myers countered that commercial storage operations cannot be an “appurtenance” to mineral rights because storage caverns only exist after the minerals have been extracted - in other words, the storage space is created by removing the very mineral to which it would purportedly be appurtenant. Justice Blacklock probed this temporal paradox directly, asking: “If your client went in and extracted all of the salt, I don’t know, geologically whether that’s possible, but if it were to go in and extract all of the salt, leaving only limestone, shale, whatever the rock formation would be, you’d concede that your client would have no right to use that cavern to store hydrocarbons?” USM’s counsel agreed.
Myers further argued that even if the caverns could theoretically be considered appurtenant, allowing their use for commercial storage would exceed the scope of traditional mineral rights and improperly burden the surface estate. Justice Boyd noted that Texas courts have consistently limited mineral owners’ use of the surface to activities necessary for mineral extraction, questioning whether commercial storage operations would exceed this limitation since it would not be necessary for salt extraction. USM responded that its fee simple ownership of the salt formation includes the right to use the property for any lawful purpose, not just mineral extraction, and emphasized that storage operations would occur entirely within USM’s mineral estate without increasing the burden on the surface.
Part II: The Royalty Calculation Dispute
A. Competing Theories of Royalty Calculation
The 1947 deed entitles Myers to a “royalty of 1/8 of all ... minerals ... that may be produced from the [Myers property].” Myers argued this language creates an in-kind royalty interest, meaning it owns 1/8 of the actual salt production. Therefore, when USM sells Myers’ share of the salt, Myers contends it should receive 1/8 of the net proceeds from those sales. Under this theory, Myers calculates it is owed over $2 million based on USM’s salt sales to Formosa Plastics.
USM countered that the proper measure is 1/8 of the market value of the salt at the wellhead, and which it contended could be measured by reference to other salt royalty agreements which it argued were “comparable sales.” Under this methodology, USM argued Myers was entitled to only about $260,000.
B. The Market Value Debate
Justice Hecht pressed counsel on whether fixed-price royalty agreements could properly be considered “comparable sales” for establishing market value. Myers argued that royalty agreements are not sales at all - they merely represent the consideration a royalty owner receives for a conveyance of real property rights.
The Court appeared particularly interested in USM’s expert testimony, which relied heavily on other salt lease royalty payments as comparable sales. Justice Boyd questioned whether this methodology improperly conflated the value of future royalty rights with the actual market value of produced salt.
USM’s counsel vigorously defended its market value evidence, arguing that royalty payments reflect arm’s length negotiations over the value of salt at the wellhead. USM pointed to its expert Scott Jones’s testimony that “royalty payments are sales” for market-value analysis because “It’s the way the resource owner realizes value at the point of extraction... That’s the very definition of sale.” USM also emphasized that its calculation methodology aligned with the actual price structure in its contract with Formosa Plastics, where $1 per ton was allocated for royalties, with USM receiving 50 cents for its 6/8ths interest.
Myers countered that USM’s methodology would create an absurd result - if the costs to produce brine increases, so too would Myers’ royalty. USM responded that this criticism missed the mark because market value is determined independently of production costs, and its expert testimony properly focused on comparable transactions in the relevant market.
Looking Ahead
The Court’s decision could, potentially, have far-reaching implications for both underground storage projects and royalty calculations. Of course, the Court could also potentially issue a narrow ruling, perhaps only pertaining to salt mining, which could arguably have little impact on pore space ownership in relation to oil and gas development. With the growing importance of underground storage for everything from natural gas to carbon capture, any decision clarifying or impacting ownership of subsurface storage rights could be crucial for future oil and gas and projects and CCUS projects alike.
