EnergyLegislatureNews

COVER STORY: The fight over forced pooling — should drilling-without-consent law be changed?

Author: Mark Jaffe - April 24, 2018 - Updated: April 26, 2018

IMG_2398-1280x960.jpg
Colorado state Sen. Matt Jones, D-Louisville (Joey Bunch, Colorado Politics)

From her front porch in Broomfield’s Wildgrass subdivision, Jean Lim looks out on a park and the Rocky Mountains beyond. There she sits, waiting for an oil and gas driller to use a state law to get the mineral rights beneath her home she doesn’t want to lease.

“We are just waiting to be pooled,” said Lim, 57, who moved to Colorado with her husband from Cincinnati four years ago. “This was all unexpected, a surprise … not a pleasant one.”

The 67-year-old Colorado law in question deals with “forced pooling.” It’s a law that enables an oil and gas operator to get an order from the state to combine the mineral rights of a group of property owners into a cohesive drilling unit—even if the property owners do not consent.

“Forced pooling is un-American,” said Colorado state Sen. Matt Jones, D-Louisville, a staunch critic of the oil and gas industry. “It is corporate eminent domain.”

Thirty-four states have forced-pooling statutes, including all the major oil-producing states save California. It’s widely seen as a key tool to ensure the orderly and efficient development of oil and gas resources, according to the National Council of State Legislatures.

And the industry maintains that pooling is not eminent domain. “Owners pooled under the statute retain full ownership of their mineral estate and are free to sell, lease, devise or otherwise transfer their interests,” Dan Haley, president and CEO of the Colorado Oil and Gas Association, a trade group, said in an email.

Dan Haley, CEO of the Colorado Oil & Gas Association. (File)

Still, Colorado’s statue is seen by critics as less transparent and less protective of the rights of property owners than in other states.

“The process is confusing,” said Sara Loflin, executive director of the League of Oil and Gas Impacted Coloradans (LOGIC), a coalition of community groups.

And it has gotten more so as drilling moves closer and closer to suburbs and homeowners, Loflin said.

In Wildgrass, where some houses sell for upward of $800,000, 510 homeowners got letters in their mailboxes in 2016 offering mineral leases, giving them 35 days or less to respond or face forced pooling.

Pooling was put on hold as the operator, Denver-based Extraction Oil & Gas Inc., negotiates with the city over its drilling plans.

“We prefer not to seek pooling orders until after we have given ample time for mineral owners to make an educated decision,” Extraction said in a statement. “We also believe that all parties can do a better job of providing information to mineral owners and helping them understand their choices.”

The trend has been heightened by the advent of horizontal drilling between Denver and Greeley in the oil-rich Niobrara Shale, which lies more than 6,000 feet below the surface. Operators drill dozens of wells from the same pad that can stretch more than two miles underground, scooping up many additional mineral rights.

LOGIC is now getting calls for dozens of Thornton residents who are receiving lease offers, Loflin said. “We need to come up with a legislation that reflects drilling in neighborhoods.”

Senate Bill 230, sponsored by Sen. Vicki Marble, R-Fort Collins, and Rep. Lori Saine, R-Firestone, would address some of the concerns. It would increase the time for property owners to respond to initial lease offers to 60 days from the current 35, provides more transparency and information to homeowners, and it would ensure mineral owners aren’t held liable for spills or accidents.

The bill also would raise the royalty payments for pooled mineral owners to 15 percent of the oil project’s profit from 12.5 percent.

Getting oil and gas bills through both Colorado legislative houses has been difficult, however. A forced-pooling bill sponsored by Rep. Mike Foote, D-Lafayette, last legislative session was opposed by the industry. It passed the Democrat-control House of Representatives, only to die in the Republican-dominated Senate.

Marble’s bill is supported by the industry, and on April 11 it was voted out of the Senate Agriculture, Natural Resources and Energy Committee 6-5. All five Democratic members of the committee voted against it, for while the legislation offers more protection for homeowners, it also would limit their share in oil and gas profits.

“This bill makes a very bad problem worse and is a sweetheart deal,” Jones said casting his no vote in committee. The bill is awaiting action by the full Senate. If it passes, how it fares in the House remains a question..

“There are a number of areas of agreement or the hint of agreement in this bill, and there is an opportunity for compromise,” Douglas Vilsack, the legislative liaison for the state Department of Natural Resources (DNR), said in testimony before the Senate committee.

DNR, which oversees oil and gas development through the Colorado Oil & Gas Conservation Commission (COGCC), is neutral on the bill. But while Vilsack noted that “oil and gas bills are notoriously hard to get through both chambers, … it seems like in this one there are some areas of compromise.”

The opposition remains adamant. “Forced pooling is a relic of an outdated system,” Foote said in an email. “It may have been necessary fifty years ago, but now it is just used to force mineral rights owners to do something they may not want to do.”

Forced-pooling laws sprang from the scramble to pump oil in the early years of the oil business when the “rule of capture” was the law, which meant whomever got it first owned it.

A 1903 view of the Spindletop oil field near Beaumont, Texas. (public domain)

The result was drilling frenzies like the one that hit Spindletop, a 1901 oil strike near Beaumont, Texas.

In the first year, 400 wells were drilled on the 125-acre site. By 1904, there were 1,000 wells. “The cow was milked too hard, and moreover, she was not milked intelligently,” Capt. Anthony Lucas, Spindletop’s discoverer, lamented at the time.

The remedy was statutes limiting how close together wells could be, and those “spacing” rules in turn led to pooling regulations to ensure that a reserve was efficiently developed and that all mineral rights holders in the pool were compensated.

“Colorado’s spacing and pooling laws have been on the books since 1951,” Haley said. “In combination, they facilitate integrated development that provides economies of scale that allow operators to consolidate well pads, install state-of-the-art emission controls and, where possible, replace truck trips with pipelines.”

The rules, however, vary from state to state. In Kentucky, drillers can’t seek a forced-pooling order until they have leases for 51 percent of the unit. In Colorado, an operator needs only a single lease agreement. Wyoming requires “good faith” negotiations before seeking a pooling order. Colorado asks that a reasonable offer be made.

The Colorado statute gives property owners 35 days to respond to a lease offer, after which a pooling order can be sought. Mississippi requires 90 days, and North Dakota and Oklahoma offer more flexible ways for pooled mineral owners to be compensated. Ohio limits the number of pooling orders an operator can seek in a year.

Colorado and 15 other states have a “risk-penalty” statute. “When they developed it, there were so many dry holes that an operator had to be compensated for the risk,” explained Neil Ray, president of the Colorado Alliance of Mineral and Royalty Owners (CAMRO).

When mineral owners lease their rights to a driller, they receive a signing bonus and royalty on the oil produced. The royalty rate on the Colorado Front Range is around 16 percent to 19 percent, say attorneys who negotiate leases for landowners.

Leasing is “a much better option,” according to Extraction.”Leasing minerals provides financial upside to owners without requiring any investment or financial risk on the part of the owner,” the company said.

If a property owner is forced pooled instead of getting a royalty, they become a fractional owner in the well or wells and are entitled to a fraction of all the profits.

One concern about the fractional ownership is that a homeowner could be liable for a share of the cost of spills, accidents and fines. The Marble-Saine bill would make them immune from such liability.

But before fractional owners can get their full payout, they must pay their share of 100 percent of the equipment and operating costs plus a risk penalty of 200 percent of the costs of the exploration and drilling.

This is done by the driller taking 87.5 percent of the property owner’s share. Landowners who are forced pooled get the other 12.5 percent. Once they’ve paid their costs, they get their full payout. The Marble-Saine bill would increase the upfront royalty to 15 percent.

In the Niobrara, however, there is less risk since almost all wells yield oil as production has risen from near zero in 2009 to 1,200 barrels a day, according to the federal Energy Information Administration.

The time to drill a well has also declined. For Denver-based Whiting Petroleum Corp., one of the drillers in the region, it dropped 50 percent to 5.8 days between 2014 and the fourth quarter of 2016, according to company filings.

“In the Niobrara, maybe the risk penalty shouldn’t be so high; there is less risk,” Ray said.

But the Marble-Saine bill goes the other way, raising the risk penalty to 300 percent for wells deeper than 5,000 feet — which is virtually all the wells being drilled in the Niobrara.

“This a huge giveaway to the industry,” said Matt Sura, an attorney who represents communities and homeowners — including Lim and her Wildgrass neighbors — on oil and gas issues.

While opposing the 300 percent risk penalty, Ray said CAMRO supports the bill because “there are a lot of good things in it.”

Niobrara horizontal wells are much more expensive to drill, ranging between $6 million and $10 million, said Jamie Yost, an attorney representing COGA and the Colorado Petroleum Council, the state’s division of the American Petroleum Institute.

Raising the penalty threshold “reflects an increase in the proposed royalty rate to 15 percent and also reflects an operator’s business costs, the risk of development and the economic analysis put into a more productive and expensive horizontal drilling world,” Yost said in testimony to the Senate committee. “Pooling is an essential element to the responsible development of oil and gas with Colorado.”

Lim also gave the committee a piece of her mind at the hearing. Since the initial lease offers came nearly two years ago, she has been part of the Wildgrass Oil and Gas Committee, trying to keep track of the negotiations between the city of Broomfield and Extraction and the third-party offers to lease homeowners’ mineral rights that still land in their mailboxes every week.

“I do not support the industry profiting from the busy lives of my well-educated neighbors who will be forced pooled,” Lim told the committee. “I object to the 300-percent penalty.”

After nearly a year of negotiations, Extraction and Broomfield reached an agreement on a blueprint for the company to drill 89 wells at four sites. While the city and the company are now reviewing the comprehensive development plan for the projects, Extraction has already filed applications for state drilling permits, according to Tami Yellico, Broomfield’s director of strategic initiatives.

“Extraction supports pooling legislation that seeks to clarify language in pooling notices and we created the precedent for increasing the pooling notification period through our agreement with the City and County of Broomfield,” the company said.

The COGCC rules on both drilling permits and pooling orders and rarely refuses either. The commission doesn’t keep statistics on how many pooling orders it approves, but on its April-May docket, there are nearly 100 applications for pooling orders, including 23 by Extraction.

Lim and some of her neighbors hired Sura to keep track of the ever-more complicated affairs around Extraction’s plan, the lease offers that are still coming in, COGCC and actions. “People have their lives, they can’t keep up with all this,” Lim said.

At the end of the day, homeowners are going to face one of two options: signing a lease or being forced pooled. Sura said he is seeing if he can find a better deal for his clients.

Near Christmas of 2016, residents of the Highland Meadows Golf Community in Windsor received a 64-page lease offer in dense legalese from the Great Western Oil & Gas Co. offering a royalty of 16 percent minus some cost.

“The stuff is written so you can’t tell what the hell they are talking about,” said Guy Mendt, one of the community’s residents. Mendt and some of his neighbors also hired Sura. A lease agreement was negotiated with another operator who offered a 20-percent royalty without the costs deducted.

The group rented a conference room at the nearby Poudre Valley Rural Electric Association where four notaries set up shop with stacks of lease agreements.

“When we arrived, there was line out the door,” Mendt said. “We stood in line for about an hour to sign the lease.”

Mark Jaffe

Mark Jaffe

Mark Jaffe has covered energy, environment and government issues for The Philadelphia Inquirer, Bloomberg News and The Denver Post. He was a Knight Fellow at Stanford University and studied environmental economics as a Nieman Fellow at Harvard. He is the author of two books, "And No Birds Sing, The story of an ecological disaster in a tropical paradise" and "The Gilded Dinosaur-The fossil war between E.D. Cope and O.C. Marsh and the rise of American science."