EconomyEnergyLegislatureNews

Oil and gas bill helps and hurts Colo. mineral owners, critics say

Author: Mark Jaffe - April 11, 2018 - Updated: April 23, 2018

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A pump jack in a field with the Rocky Mountains in the background. (Photo by RondaKimbrow via iStock)

A bill before the Colorado legislature that would sharply limit the chances of a mineral owner sharing in the production profits of an oil well is slated to be heard in the state Senate Agriculture, Natural Resources and Energy Committee Wednesday.

The legislation — Senate Bill 230, sponsored by Sen. Vicki Marble, R-Fort Collins, and Rep. Lori Saine, R-Firestone — is drawing support from the oil and gas industry and criticism from grassroots activists and attorneys who represent landowners.

The bill would reform the state’s statutory or “forced pooling” law (explained below), giving homeowners more time to respond to pooling orders and protecting them from any liability for spills and accidents.

But it also raises the amount mineral owners have to pay in before fully sharing in the profits for wells deeper than 5,000 feet.

Most of the wells being drilled in the area between Denver and Greeley are horizontal wells in the oil-laden Niobrara Shale, which is more than 6,000 feet below the surface.

“All of the issues addressed in this bill are issues that were discussed during the stakeholder meetings last summer, hosted by Senator Marble and Rep Saine,” Tracee Bentley, executive director of the Colorado Petroleum Council, said in a statement. “Industry listened carefully and evaluated ways we could address some of the concerns. This is reflected in SB 230.”

The Colorado Oil & Gas Association, a trade group, is also upporting the bill, said Scott Prestidge, the association’s spokesman.

The bill increases the time property owners have to respond to pooling orders to 60 days from 35 days, requires they be given information explaining the process, and since under pooling, they become fractional owners in the wells, it holds them harmless for operating spills and accidents.

“The transparency and protections are encouraging,” said Sara Loflin, executive director of the League of Oil and Gas Impacted Coloradans (LOGIC), a nonprofit umbrella organization for community groups. “Raising the [repayment] penalty is problematic.”

Neil Ray, president of the Colorado Alliance of Mineral and Royalty Owners, who also participated in the stakeholder panels, said his organization is supporting the bill. “As far as I’m concerned, the bill contains all of the best that was discussed and none of the worst,” Ray said in a statement

In Colorado, a driller can obtain rights for oil and gas by negotiating mineral leases with the property owners. If there are mineral-rights owners who do not sign leases, the operator can use the state’s statutory or “forced pooling” law, under which the Colorado Oil and Gas Conservation Commission can approve the consolidation of mineral rights into one drilling unit even without a mineral owner’s consent.

Forced pooling laws were adopted in the early 20th century to more efficiently exploit oil and gas fields and make sure everyone in the field shared in the proceeds—34 states including all the major oil-producing states except California have pooling statues.

Forced pooling has been controversial in suburban areas, such as Broomfield and Windsor, where many residents are opposed to drilling and would not voluntarily lease their mineral rights.

There has been a push in the legislature in the past two years to reform the Colorado statute, which critics say could better protect property owners.

The Marble-Saine bill addresses some of the problems, and it raises the royalty for forced-pooled mineral owners to 15 percent from 12.5 percent.

When mineral owners negotiate to 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 18 to 19 percent, said Lance Astrella, an attorney who negotiates leases for landowners.

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. But under the law, before they can get that money, they must pay their share of 100 percent of the equipment and operating costs and 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 share of the wells, their payout.

The Marble-Saine bill would raise that so-called penalty payment to 300 percent of exploration and drilling costs.

“Deep wells have had high success rates and even payout after the current penalty,” said Astrella. “At 300 percent, I don’t think it will ever payout.”

Matt Sura, an attorney who represents homeowners and communities on oil and gas issues, said that under a forced-pooling order received by a client, their share of costs was about $12,000. By raising the threshold to 300 percent, the bill, in this case would, have “shifted $12,000 from the pocket of the homeowner to the oil company.”

Fifteen states have forced-pooling statutes similar to Colorado’s and five have a 300-percent repayment threshold, although the way they define costs vary, according to a survey by the National Conference of State Legislatures. In Texas, the repayment threshold is 100 percent.

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."