In a recent decision which will provide comfort to oil and gas companies, the Supreme Court has upheld the decision of the Court of Appeal in the case of Star Energy v Bocardo SA.  Click here to read our Law-Now on the Court of Appeal decision The case concerns compensation for trespass in relation to the drilling of oil wells, and the continued presence of the well casing and tubing within them, underneath someone else's property.  The Supreme Court confirmed that such drilling and the presence of the well casing and tubing may amount to a trespass if permission is not obtained from the landowner or granted by a court, but that compensation will in most circumstances be small.

Star Energy held a licence to explore and drill for and extract petroleum under property owned by Bocardo. The wells in question had been drilled along a deviated path from a neighbouring property and only entered Bocardo's property at a depth of 800 ft.  The drilling and existence of the wells did not affect Bocardo's use or enjoyment of the property. The Mines (Working Facilities and Support) Act 1966 allowed a licence holder to acquire ancillary rights required to access the petroleum if agreement with the landowner could not be reached. However, neither Star Energy nor the previous holders of the petroleum licence had sought to negotiate rights of access with Bocardo, nor did they apply for such rights under the relevant statutory provisions.

The questions before the court were 1) did the drilling constitute a trespass; and 2) if it did, what was the appropriate measure of damages?  The court held as follows:

1. the drilling did interfere with the possessory rights over the land and therefore constituted a trespass.  On this point, the Supreme Court upheld the decision of both the High Court and the Court of Appeal;

2. compensation in respect of the compulsory acquisition of ancillary rights over (or under) land should be determined using the same principles that are applied to the compulsory purchase of land.  This meant that compensation would reflect what the grantor was losing rather than what the grantee was gaining.

The court considered whether Bocardo could nevertheless benefit from the key value of the right of access which Star Energy required to extract the petroleum.  The court referred to the decision of the House of Lords in Waters v Welsh Development Agency [2004] 1 WLR 1304 which reaffirmed that any increase in value in land which was consequent on the scheme for which the land was being acquired must be disregarded.  In Waters it was recognised that if the land had a special value because it was the key to the development of other land, that would represent part of its value to the owner which could be taken into account in the assessment of compensation in the same way as it would if the owner was negotiating in the open market.   However, although the ancillary right to access the petroleum through Bocardo's land had a key value in relation to the exploitation of the petroleum licence (the 'scheme' in this case), that value only existed because of the scheme.

The Supreme Court agreed with the Court of Appeal's rejection of the measure of damages adopted by the trial judge.  At first instance, the judge had quantified the compensation at 9% of the value of the extracted oil and damages of more than £620,000 were awarded.  In the Court of Appeal, the damages were reduced to £1,000. 

In rejecting the appeal, the position continues to be that oil companies drilling under land without the landowner's consent or court approval risk being found liable in trespass, but that where such a trespass has not interfered with the landowner's use of the land the compensation awarded is likely to be small.

The full case transcript can be accessed here

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 17/08/2010.