Compulsory or "forced" pooling statutes are common in
oil and gas producing states and require landowners and/or
operators in an area that has been designated as a spacing unit to
participate jointly in the development of the mineral interests in
that unit. Similar to an eminent domain or condemnation proceeding,
forced pooling permits landowners or operators to apply directly to
the regulatory body with jurisdiction over oil and gas operations
in the area to compel all mineral interests in a designated spacing
unit to participate in its development.
It thus prevents a landowner from hindering or delaying the
unit's development by arbitrarily or opportunistically refusing
to lease his mineral rights to the operator. It also prevents the
operator from depriving a landowner of his right to an equitable
share of the oil and gas under his land by unfairly excluding his
mineral interests from the unit. Accordingly, a forced pooling
statute can be an effective tool for maximizing oil and gas
recovery, preventing waste and land disturbance, and providing a
fair economic result to all parties.
Pennsylvania's existing forced pooling statute does not apply
to the Marcellus Shale. To remedy this situation, House Bill No.
977 was introduced in the Pennsylvania legislature in 2009. The
bill would have extended to the Marcellus the application of the
state's existing forced pooling statute (the Oil and Gas
Conservation Law), which currently applies only to wells that
extend 3,800 feet below the surface and into the Onondaga horizon.
The bill was referred to the Environmental Resources and Energy
Committee in the spring of 2009 but was dealt a blow in early 2010
when some of its original sponsors withdrew their support, citing
concerns that landowners would be forced to lease against their
will.1
Subsequently, several lawmakers have announced their plans to
introduce a competing bill.2 Although no draft of this
bill has been publicly released, one of the potential cosponsors
has outlined some of his ideas for a new forced pooling scheme.
Governor Ed Rendell had thrown himself into the debate, announcing
that he would not sign any bill that did not contain a required
minimum distance between wells and did not give "full,
fair" compensation to landowners.3 Currently,
however, no action can be taken regarding forced pooling until
after the inauguration of Governor-elect Tom Corbett.4
Corbett apparently favors forced pooling but has not announced any
specifics of his ideas on the issue.5
Although there are some understandable concerns with forced
pooling, the benefits of a well-drafted forced pooling statute
would outweigh the drawbacks. Pennsylvania now has the opportunity
to extend the application of its forced pooling statute while at
the same time improving the statute by looking to the forced
pooling statutes of other states to see what works and what does
not. Pennsylvania lawmakers should take the time to ensure that the
final legislation provides a just and efficient means to enable
forced pooling in the Marcellus and not lose sight of the overall
goals of such legislation, which include providing fairness to
landowners and protecting the environment while fostering strong
economic growth in Pennsylvania.
Why Forced Pooling?
The status quo is unacceptable for landowners and operators who
have a stake in the Marcellus Shale because existing law fails to
protect landowners' rights and the state's environment.
According to the Pennsylvania Department of Environmental
Protection, for a well in the Marcellus (i.e., a well that
is not in a coal area and not subject to the Oil and Gas
Conservation Law), there are "no restrictions on well location
in proximity to tract boundaries."
In addition, the Rule of Capture applies, meaning that the operator
of such a well can freely drain the oil and gas from under
neighboring tracts and "cannot be compelled by law to pay
rents or royalties to owners of neighboring oil or gas
tracts."6 The owner of the neighboring tract could
try to enter into a pooling agreement, but what if no voluntary
agreement can be reached? The landowner's only recourse would
be to drill an offset well, which would unfairly burden the
landowner, especially those who own small tracts of land and may
not have the financial or technical resources to drill a well to
take full advantage of their mineral rights. People who oppose
forced pooling object to the intervention of the state in the
affairs of landowners and operators, complaining that such a
statute "infringes upon individual property
rights."7 In order to mitigate the harsh impact of
the Rule of Capture, however, some state regulation is clearly
needed. This is why all major oil and gas producing states except
Kansas now have forced pooling statutes.8
Likewise, although there are legitimate concerns regarding the
environmental impact of drilling oil and gas wells, a forced
pooling statute can help alleviate, not exacerbate, these concerns.
Environmental groups have complained that forced pooling would
serve only for "conserving the gas, not the land or the
environment."9 These concerns are misplaced. A
forced pooling statute would result in the drilling of fewer wells
than under existing law because it would restrict where wells could
be drilled and eliminate the need for adjoining landowners to drill
offset wells solely to defend their mineral rights. Drilling fewer
wells protects the land and the environment because it reduces the
number of locations at which a potential environmental impact could
occur.
House Bill No. 977
House Bill No. 977 would apply the existing forced pooling
statute, the Oil and Gas Conservation Law, to the Marcellus Shale
formation. Under the existing statute, the first step that an
operator takes to force pooling in Pennsylvania is to apply to the
Oil and Gas Conservation Commission for an order establishing a
designated spacing unit.10 After the spacing unit has
been established, the operators in that unit can apply for a forced
pooling or "integration" order covering the
unit.11 The integration order must be "just and
reasonable" and be issued after 15 days' notice and a
hearing.
The statute provides three choices to nonparticipating operators
who may be forced to join the spacing unit under the terms of the
integration order:
- to participate in the spacing unit by paying their share of the "reasonable actual cost" plus a "reasonable charge for supervision and for interest on past due accounts";
- to sell their leasehold interests to the participating operators for reasonable consideration, as agreed upon or as determined by the commission; and
- to participate on a limited or carried basis upon terms determined by the commission to be just and reasonable.
For lands that have not been leased, the owner of the land is considered an "operator" as to 7/8 and a royalty owner as to 1/8. This means that an unleased landowner who is force pooled would receive a 1/8 royalty plus compensation under one of the three alternatives described above.
Proposed Alternative Legislation
The draft of the bill for the newer legislation, to be called the "Conservation Pooling Act," is not yet publicly available, but it has been described by potential cosponsor Representative Garth Everett in news reports and on his web site.12 The details of the bill are still being worked out, but the legislation might:
- require that an operator have leases covering a certain percentage of the land in the proposed spacing unit before applying for a pooling order (in the original draft of the legislation, the percentage was set at 75 percent, but Representative Everett has subsequently stated that this should be a "vast majority," i.e., 90 percent to 95 percent);
- specify a penalty of 400 percent for those nonparticipating operators who elect to participate on a carried basis;
- require that an operator have made a "good faith" effort to negotiate a lease; and
- protect unleased landowners from any surface impacts.
The legislation would also change how units are drawn to ensure that the minimum necessary number of wells are drilled and no landowners are left out; provide for an appeals process for those who are force pooled; and specify minimum acreage for units and setbacks from unit borders.
Analysis of Forced Pooling Proposals
House Bill No. 977 and the proposed Conservation Pooling Act
each have strengths and weaknesses. A final statute should
incorporate the strong aspects of each.
Minimum Percentage Leased Requirement. Under House
Bill No. 977, there would be no required minimum percentage acreage
leased for an operator to file a forced pooling application. In
contrast, the Conservation Pooling Act might require somewhere in
the range of 75 percent to 95 percent of a unit to be leased to the
same operator before that operator could force pool. A compromise
somewhere in the middle of these two extremes is preferable.
Requiring a large majority, whether 75 percent or 95 percent, of
land in a spacing unit to be leased to an operator before that
operator can apply to force pool is an unnecessary limitation.
Given the benefits that a forced pooling statute would confer, any
forced pooling statute enacted in Pennsylvania should not contain
requirements that result in the inability of an operator to use
forced pooling. There is no reason to enact a forced pooling
statute that has requirements so onerous that the practical reality
is that almost no one will be able to take advantage of it.
Many forced pooling statutes—those in Oklahoma, New
Mexico, and Wyoming, for example13—do not
require any minimum percentage of land to be leased to an operator
before it can apply to force pool. This means that an operator with
only a very small percentage of ownership could force pool an
entire unit. Although the lack of a minimum percentage for forced
pooling may seem problematic, these statutes are beneficial to both
oil companies and landowners. For example, the chairman of the
Coalition of Oklahoma Surface Mineral Owners Inc. has said that the
Oklahoma statute is a "good law" because "it
enhances drilling opportunities."14 He said,
"We can't lose sight of the fact that if they don't
drill the well, we're not going to make a dime and neither are
the oil companies." (Although generally supportive of the
statute, he notes that there is a concern with the ability of
operators to pool large areas at one time and with the lack of
clarity in defining what costs can be charged to those who are
force pooled.)
Other states require a certain percentage to be leased by an
operator before that operator can force pool. In Kentucky, for
instance, an operator cannot force pool without the consent or
agreement of owners of 51 percent of the relevant
tract.15 The Kentucky statute specifies that any
landowner who cannot be located will be presumed to have consented.
This 51 percent requirement would impose some burden on operators,
but it is a more reasonable goal than 75 percent to 95
percent.
Risk Penalty. The proposed conservation pooling
act would specify that a nonparticipating operator or unleased
landowner who chose to participate on a limited or carried basis
would not receive payments until 400 percent of the actual costs
allocable to that operator had been recouped. In contrast, House
Bill No. 977 does not specify a set "risk penalty," and
under the current Pennsylvania regulations, the risk penalty is set
at 200 percent.16 A risk penalty is not a
"penalty" per se but is meant to reimburse the operator
for the risks that it faces in drilling, primarily the risks of
drilling dry or marginally productive wells. The ideal statute
would either specify a risk penalty that accurately reflects the
true risks of drilling in the Marcellus or leave the risk penalty
to be set on a case-by-case basis by the state regulatory authority
charged with administering the law.
Bruce Kramer, formerly a professor at Texas Tech Law School, has
argued that the risk penalty should be determined on a case-by-case
basis. According to Professor Kramer, a "fixed risk penalty
... is inconsistent with the purpose of imposing a risk penalty
because the risks change from well to
well."17
While Kramer's view makes sense, in practice it may turn out to
be difficult for the state entity charged with administering the
law. The Pennsylvania Oil and Gas Conservation Commission, the
entity that under the statute is to issue the pooling orders, is
currently nonexistent.18. This means that the regulators
charged will have no past experience in this type of analysis, and
it may be preferable to have a statutory fixed rate. In addition,
it is important that the statute spell out exactly what costs can
be charged to those who are force pooled.
Good Faith Offer. House Bill No. 977 does not
require an operator to make a good faith offer to nonparticipating
lessees before applying to force pool, while the Conservation
Pooling Law allegedly would require such an offer. The problem with
such a requirement is that what constitutes a "fair and
reasonable" or "good faith" offer is open to
interpretation.
It may seem that there is no reason not to have such a requirement.
After all, in a perfect world, everyone would enter into voluntary
agreements and no one would have to force pooling. Interestingly,
though, such a requirement is present in most other states'
forced pooling statutes. Texas is one of the only states to have
such a requirement, and its forced pooling statute is considered
"cumbersome and often ineffective."19
Surface and Environmental Impacts. The
Conservation Pooling Law, unlike House Bill No. 977, would
explicitly prohibit an operator who has forced pooled from drilling
on the property of an unleased landowner. Protecting unleased
landowners from surface damage is a reasonable way to make the
statute more acceptable to the state's landowners, without
placing unnecessary burdens on operators. The utilization
horizontal drilling will also reduce surface
damage.20
Likewise, there is no reason why a forced pooling statute could not
contain other provisions to protect unleased landowners, such as an
explicit requirement that drillers will provide compensation and
remediate in the event that some type of contamination of the
surface or the water underlying a property were to be contaminated
by drilling or completion. After all, such a forced pooling statute
has as one of its purposes the protection of the environment.
Conclusion
A good forced pooling statute should contain a clear time frame for the administrative process and avoid vague terminology that may lead to legal battles. To that end, Pennsylvania lawmakers should review carefully the forced pooling statutes of other states, taking into account not only the interests of landowners and industry, but also the environmental effects. There is, however, no simple way to determine the ideal statute, and legislators will have to make value judgments and weigh competing interests in determining the final statute. Although there is certainly room for debate, it seems that an effective statute would have the following characteristics: it would not require a large majority to be leased by an operator before that operator could apply to force pooling; it would set a risk penalty that accurately reflects the true risks of drilling in the Marcellus; it would not require a "good faith" offer to pool; and it would minimize surface impacts on unleased lands.
Footnotes
1.Anya Litvka, "Marcellus Shale Leaders to Push Pennsylvania on Drilling Rights Issues," Pitt. Bus. Times, Feb. 5, 2010.
2.Laura Legere, "'Forced Pooling' Legislation for Gas Industry Planned in Pennsylvania," Scranton Times Trib., July 11, 2010.
3.Marc Levy, "Rendell Would Insist on Environmental, Compensation Requirements before Signing 'Pooling' Law," Assoc. Press, August 11, 2010.
4.Elizabeth Skrapits, "Gas 'Pooling' Law Unlikely this Year," Citizen Standard (Valley View, PA), October 11, 2010.
5.Amy Worden, "Corbett Inaugural to Include Gas Drilling Protest," Inquirer (Philadelphia), December 8, 2010.
6.Commonwealth of Pennsylvania, Department of Environmental Protection, Landowners and Oil and Gas Leases in Pennsylvania, Fact Sheet (November 2010).
7.See Rory Sweeney, "Reps Withdraw Drill Bill Support over 'Forced Pooling,'" Times Leader (Wilkes-Barre, PA), Jan. 27, 2010.
8.Bruce M. Kramer, "Basic Conservation Principles and Practices: Historical Perspectives and Basic Definitions, Federal Onshore Oil and Gas Pooling and Unitization," Rocky Mtn. Min. L. Inst. (2006).
9.Legere, supra note 2.
10.58 Pa. Stat. Ann. § 407 (2010).
11.Id. § 408.
12.See Legere, supra note 2, and Garth Everett, " Marcellus Pooling Legislation," Aug. 30, 2010.
13.See Okla. Stat. tit. 52, § 87.1(a) (2010); N.M. Stat. § 70-2-17 (2010); Wyo. Stat. Ann. § 30-5-109 (2010).
14.Adam Wilmoth, "Forced Pooling Law Boosts State's Natural Gas Economy," Daily Oklahoman, Feb. 17, 2006.
15.Ky. Rev. Stat. Ann. § 353.630 (2010).
16.See 25 Pa. Code § 79.31(3) (2010).
17.Kramer, supra note 8, at 266.
18.House Environmental Resources and Energy Committee Chairman Camille "Bud" George's May 2010 Update: Special Update on Severance Tax & Forced Pooling.
19.H. Phillip Whitworth, Jr., "Pooling and Unitization before the Texas Railroad Commission, Onshore Oil and Gas Pooling and Unitization," Rocky Mtn. Min. L. Inst. (1997).
20.Skrapits, supra note
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