Forced Pooling in the Age of Horizontal Drilling

Forced Pooling in the Age of Horizontal Drilling

Forced pooling of individual oil and gas leases has been a major focus and controversy over the past several years due to horizontal drilling. Forced pooling refers to a situation where owners of a certain percentage of acreage in a state-defined drilling unit lease to be drilled triggers a rule that forces those who did not lease to accept a lease at fair market value. At issue is the ability of small “holdout” mineral owners to block horizontal drilling at state spacing requirements. These days forced pooling most often has little or nothing to do with surface use but mainly with the subsurface. In order to be efficient and to extract the most gas or oil with the least surface impact the industry relies on multi-well pads with long laterals. Longer laterals require more acreage. Most forced pooling provisions only trigger forced pooling when a certain percentage of landowners in the state-defined unit are leased. One argument is that small percentages of acreage of landowners should not be allowed to take away the rights of adjacent landowners to have their minerals developed. Anti-drilling activists and landowners that are against development say forced pooling is unfair and takes away their property rights. However, most often these days their surface property is not affected, only the subsurface. There are situations where a well can be steered around a piece of property that is a holdout. Typically, the well path is required to remain a certain distance from the property boundary. However, there is also some potential that this could compromise the ability to finish the well.

While I can certainly understand a property owner’s objections to any kind of forced pooling of their surface rights even in those cases they should also consider the views and rights of their neighbors. I think that for surface disruption the percentage of acreage that triggers forced pooling should be higher than for mere subsurface development. I am not sure if this is the case in various state rules but it seems fair to me. In the recently proposed forced pooling bill in West Virginia it is two-thirds of acreage in a unit that triggers forced pooling. Severed minerals is another contentious issue that affects a lot of landowners in Appalachia, including me. I would probably be against most surface disturbance on my property but not subsurface development.

Drilling units for horizontal wells, which represent 80-90% of current wells, are developed in specific orientations due to the drilling direction that optimizes resource production. One issue that can arise is that a unit may be designed as many are, to drill wells in both directions from a common center which makes up the drill pad. This is the most efficient, least impact design when used with longer laterals. However, such a design leaves less choices for surface location and lease roads. Russell Gold, in his 2014 book about fracking, The Boom, mentions such as case where a land owner was disputing such surface location rights. In the Appalachian Basin Marcellus, Upper Devonian and Utica shales the well direction is perpendicular to the maximum principle stress direction of the reservoir rocks, which is in a northwest-southeast direction. Thus each unit is a rectangle with this orientation. In other plays in other basins the rectangles are oriented differently. But with horizontal drilling the units will be rectangular. Holdouts that trigger forced pooling are often small pieces of property amidst larger leased properties. Forced pooling in one sense is simple majority rules regarding local mineral development. While that may seem unfair to some it can also be seen as unfair to deny adjacent mineral owners the ability to develop their minerals and to a lesser extent to force well operators to limit the length of their wells thus reducing the efficiency of resource extraction. Reducing the efficiency of resource extraction results in more pollution and more carbon emissions per unit of energy produced and so allowing forced pooling can have the effect of decreasing pollution and carbon emissions relative to not allowing forced pooling.   

The West Virginia State Legislature voted down HB576 which called for forced pooling. However, EQT CEO Steve Schlotterbeck recently said he wanted the House to revisit the 'co-tenancy' part of the bill which would require 75% of owners of a tract to trigger drilling even if 25% of owners do not want drilling or cannot be located. He also noted that due to this EQT, probably the biggest player in Appalachia, has allocated funds to drill much more in PA (80%) rather than WV (20%) even though 60% of their acreage is in WV and only 40% in PA. It is simply less efficient and less economic to drill shorter laterals and build more well pads. Such a co-tenancy requirement would put WV with most other oil and gas states. Another outdated issue in WV is 'joint development' which apparently would update century-old leases so that landowners get modern royalties (>12.5%) like other states do rather than keeping very old leases where many were just at 8.5 %. This is simple common sense and fairness and should be addressed.

Reference:

EQT CEO Wants Co-Tenancy Addressed in Special Legislative Session - by Jim Ross, in West Virginia State Journal, April 27, 2017