Oil & gas bill limiting payout to Colo. mineral owners passes committee

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

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A bill providing more protection to property owners when drillers use state law to get access to their minerals, but limits their share in oil and gas profits, was passed by the state Senate Agriculture, Natural Resources & Energy Committee Wednesday.

The aim of the legislation is to update Colorado’s 83-year-old “forced pooling” law, which enables an oil and gas operator to get an order from the state consolidating private mineral rights into a drilling unit even if the property owner does not consent.

Pooling statutes—34 states have them—were adopted to more efficiently exploit oil and gas fields and make sure everyone in the field shared in the proceeds.

The legislation, Senate Bill 230, sponsored by Sen. Vicki Marble, R-Fort Collins and Rep. Lori Saine, R-Firestone, passed on a 6-5 vote, along party lines, after a hearing.

The bill was praised by all sides for increasing the time property owners have to respond to pooling orders to 60 days from 35 days, requiring they be given information explaining the process and in holding them harmless for operating spills and accidents.

They key point of contention is increasing by 50 percent the so-called risk penalty that forced-pool property owners must pay before they get their full share of the proceeds from the deep wells that are predominantly being drilled in Colorado.

“It is a needless giveaway to industry,” Matt Sura, an attorney who represents homeowners and communities in oil and gas issues, told the committee. “You are taking money from your constituents and giving it to the oil and gas industry.”

Jamie Jost, an attorney representing the Colorado Oil & Gas Association and the Colorado Petroleum Council, industry groups, spoke in favor of the bill. She said the legislation will bring Colorado law into the “modern age” of horizontal well development from multi-well pads.

The bulk of the drilling taking place in the state is horizontal wells in the Niobrara Shale more than 6,000 feet below ground. The bill would raise the risk penalty for these deep wells to 300 percent from 200 percent of the fractional cost of drilling the wells for each pooled landowner.

The increase penalty reflects the risk of drilling the more expensive deep wells, Jost said. She noted that part of the bill would raise the royalty rate pooled property owners get to 15 percent from 12.5 percent.

“The current version of the bill is a positive balance reflecting mineral owners concerns and the allowance of oil and gas development,” Jost said.

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.

An oil and gas operator usually first seeks to lease the mineral rights of property owners offering a signing bonus and royalty rates as high as 19 percent in Colorado, according to attorney who handles lease negotiations.

If property owners are 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 out of their share of the wells proceeds. The Marble bill would raise that to 300 percent.

The fraction well cost is paid off 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.

“Forced pooling is un-American, and this sweetheart deal makes it worse,” said Sen. Matt Jones, D-Louisville, a staunch critic of the oil and gas industry.

Doug Vilsack, legislative liaison for the Colorado Department of Natural Resources, which oversees oil and gas regulation, said the department is neutral on the bill, but is encouraged that there may be room for negotiation. “Oil and gas bills are notoriously hard to get through both chambers, and it looks like there are some areas of compromise,” Vilsack said.

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."