A simplified version is that Central Kentucky leased some land and drilled to remove the natural gas under the property they leased. Hammonds also owned land above the natural gas reservoir that contained the gas that Central Kentucky tapped into. See the diagram..because gas moves around, it would be impossible to separate the gas under Hammonds land from the gas under Central Kentucky's land-as soon as the process of removing the gas begins, the gas will move around. (The blue line is not physical just a representation of the property line.) Hammonds sued Central Kentucky claiming that some of the gas CK extracted was theirs and wrongfully taken by the defendant.

There are two different ways that ownership of the gas could be established... 1) First possession

One way to determine ownership of fugitive property is to give the property to the person that first possesses it. In this case, the gas wouldn't be owned by anyone until they extracted it from the ground. 2) Tied ownership

We could 'tie' the ownership of the fugitive property to the ownership of some other item. In this case, the owner of the surface property would have the rights to the gas found below their owned land.

Which is a better way to establish ownership? The advantage of first possession is that it is, in general, simple to apply. It is not too difficult most of the time to know who possessed or extracted the property first. The disadvantage of first possession is that there is an incentive to over-invest too early in order to try to establish possession of the scarce property. One might expend more resources to take possession "fast" and that might be inefficient. Let's look at an example to see how this works...

Imagine, like in the case we just discussed that there is an underground natural gas deposit, and two firms lease land above the deposit Let's say there was $100 worth of gas and the two companies could drill and extract it fast or slow If they drill slowly, it will cost them $5. If they drill fast it will cost $25. Let's look at the case of first possession: If the two companies dri|| at the same speed, they will each get half of the gas. If one company drills slowly and the other drills fast, the company that drills slowly will get 25% of the gas and the one that drills fast will get 75% of the gas. This chart shows the payoffs: WFirm two drills Slow Firm two drills Fast Firm one drills Slow 45, 45 20, 50 Firm one drills Fast 50, 20 25,25