Recently, there has been significant media attention given to the idea of the forced pooling of oil and gas interests. In addition, there is legislation pending in the Colorado legislature that could alter the concept of forced pooling in the state. Despite this attention, many people do not understand the concept of pooling or why it is important to oil and gas development.
At its most basic, pooling is the joining together or combination of small tracts or portions of tracts to create sufficient acreage to receive a drilling permit under applicable state spacing rules and regulations, and for the purpose of sharing the production from the pooled unit among the pooled interest owners.
Often, pooling is done voluntarily. That is, interest owners agree to the benefits of the combined acreage. Most oil and gas leases contain provisions allowing the lessee to pool the acreage covered by the lease; sometimes this right is virtually unlimited.
At times, however, there are unleased mineral interests which makes voluntary pooling impossible. In such a case, many states (but not all) provide for “statutory” or “forced” pooling whereby unleased mineral interests are combined, even without the consent of the mineral interest owner. The policy behind forced pooling is that a mineral interest owner who refuses to enter into a lease should not be permitted to forestall development and production of the oil and gas resources.
Forced pooling is accomplished through the administrative processes of the state oil and gas commission, in Colorado the Colorado Oil and Gas conservation Commission (the “COGCC”). Colorado’s process is illustrative of the process in most states with forced pooling laws.
An application for an involuntary pooling order may be filed by a party owning an interest in the mineral estate of the tracts to be pooled. Most commonly, the application is filed by the operator of the well. Under Rule 530, the operator can apply for a pooling order any time prior to or (commonly) after the drilling of a well. However, any involuntary pooling order issued is retroactive to the date the application is filed.
Following the filing of the application, notice is provided to mineral interest owners. A hearing generally is held before the COGCC where objections to the pooling request can be heard. If a mineral owner, after notice, does not elect to participate in the cost of the well or does not agree to a reasonable offer to lease, the mineral owner is deemed to be a nonconsenting owner.
There are economic consequences associated with being deemed a nonconsenting mineral interest owner. As to each nonconsenting owner, a pooling order will provide for the reimbursement of costs to the consenting owners. That is, there is a non-consent penalty equal to 100% of the costs of the surface equipment beyond the wellhead and operations, and 200% of drilling costs. A nonconsenting owner is entitled to a royalty of 12.5% until the recovery of costs is complete.
Generally, small mineral interest owners or owners of small tracts are more likely to be subject to forced pooling efforts. At times, however, forced pooling is used as a weapon when lease negotiations breakdown: “Accept our offer or we will force pool you.”
Recently, long laterals on horizontal wells in the Niobrara have resulted in larger spacing applications, sometimes at large as 1280 acres. Under those circumstances, pooling may not be so straight-forward. For example, if pooled, could one well hold a 1280-acre unit? Should it?
As mentioned above, legislation is being considered now that would alter some of the conditions and processes for forced pooling in Colorado. That, though, is the subject of a separate article to be published later this week.