Forced Pooling? Do we have it or not?

I attended a seminar the other day by Terry Englander, most probably THE LEADING AUTHORITY on the Marcellus Shale in the world. He indicated two very interesting facts that I thought completely different about.

First, he said that there is force pooling in every state except PA and KS. He also stated that force pooling is only in effect above the Onondaga Horizon. The Utica is below the Onondaga, so force pooling is able to be done everywhere. (Oil and Gas Conservation Law Act 359 of 1961)

Secondly, he indicated that a frac can extend out as much as 2000ft and because of the Law of Capture, gas can be recovered from under an unleased property with no compensation to the unleased property owner.

 

Anyone with competant knowledge care to comment?

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Permalink Reply by mike4t on November 14, 2011 at 8:13am

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Permalink Reply by Jack Straw on November 14, 2011 at 9:10am

I do understand that there are some valid arguments in support of forced pooling.

But, I believe that forced pooling comes with opportunities for abuse; and I hate to see the rights of individual citizens eroded.

Dr. Englander is a superb Geologist who has done much to educate the industry and the public as to the potential of the Marcellus Shale (thus helping to kick off the Marcellus industry). I am a bit disappointed that he has decided to engage in the politics/economics of forced pooling. 

RE: “To not have forced pooling is a great waste of our natural resources both economically and environmentally.”

One problem I have with the above statement is “our natural resources”.

I look upon the O&G beneath my property as my natural resource.

It may seem selfish, but I never really felt comfortable with the collective ownership philosophies of such places as North Korea and formerly of the U.S.S.R..

RE: “If one small landowner, let's say 15 acres, decides that in no way will he ever sign (his absolute right), he will potentially block quite a few acres beyond the well pad  from production.”

I look as such arguments promulgated by the O&G industry to be a bit bogus. In PA, a small piece of acreage could be bypassed. With the “Right of Capture”, a well bore could theoretically be located along (but outside) that small property. Once frac’ed, the natural gas from that small property would be extracted; with no benefit to the recalcitrant small landowner. I believe that a landowner (whether small or large) should have the right to negotiate without a “sword of Damocles” hanging over his/her head. The prospect of forced pooling offers much for the O&G industry, offers much less for the landowner.

 

RE: “Those without a lease will probably get the federal minimum percentage of 12.5% and most probably will not get any upfront bonus money.”

I expect that the majority of landowners would prefer to be a party to voluntary negotiations rather than be forced to except terms dictated upon them; especially when these forced terms are designed to be punitively less attractive than terms received by neighbors.

 

RE:”I think when they start to drill below the Onondaga that the O&G cos will do everything they can to prevent a PR nightmare” 

Unfortunately, there have already been instances in which some O&G companies have abused Unitization (pooling) clauses contained within existing contracts.

I have a lease in front of me. Buried within the Unitization clause is the following sentence: “Lessee may at any time increase or decrease that portion of the acreage covered by this lease which is included in any drilling or production unit, or exclude it altogether ….”.

The act of (after the fact) decreasing a landowner’s acreage in a unit has been referred to a “clipping”. You will find several references on this website detailing situations where clipping has occurred.

Hypothetically: A person could have 160 acres under lease and in a 640 acre pool. Well(s) are drilled on a 5 acre pad at the edge of their property. Subsequent to the drilling of the wells, the O&G company informs the landowner that they have clipped their acreage back to 16 acres within a 496 acre unit. To add insult to injury, the 144 acres outside the unit are still considered to be held by production.

Above is a “hypothetical”; but, similar real situations have occurred that are not much different than the proffered hypothetical.

If we could trust all O&G companies to act in a fully ethical and responsible manner, the prospect of forced unitization (pooling) within the Marcellus would not seem to be such an onerous prospect. Regrettably, although I believe the majority of companies would indeed act in a fully ethical and responsible manner, there are some that have shown that they are not prepared to do so.

Although it seems that we have a difference of opinion, I do respect your opinion and feel that listening to differing opinions offers an opportunity to learn and rethink.

Best regards,

                       JS

 

 

Permalink Reply by mike4t on November 14, 2011 at 9:41am

Jack,

Some great premise to your arguments. My rebuttal:

 

Re: "I am a bit disappointed that he has decided to engage in the politics/economics of forced pooling."

I do not feel that Dr Englander has a political agenda regarding forced pooling- he was explaining the law already if effect for 50 years and the consequences, finacially and environmentally, of not having forced pooling

Re:  "One problem I have with the above statement is “our natural resources”. I look upon the O&G beneath my property as my natural resource."

When I say "our natural resources" I mean "our" as a human race, not individually, unless it is also "your" air and "your" water

Re: "unit clipping"

The O&G cos should have the right to "clip" the unit if they can't produce from it. One reason they might not be able to produce is because "Mr Smith" won't sign a lease. If you sign a lease that doesn't have a pugh clause, then yes, your property may still be HBP even though it is not producing.

 

Agreed, we would like to think we could trust the O&G cos to be ethical and responsible, but be reminded that this law was passed in 1961, and until it changes or is amended, we are all bound by it, and it is the O&G cos absolute right to use this to their advantage, good or bad as it may be.

 

Mike

Permalink Reply by Jack Straw on November 14, 2011 at 12:09pm

In PA, there has not been forced pooling for production above the Onondaga Limestone, and yet this has not seemed to have led to undo financial or environmental consequences. If you can point to documented instances for which the lack of forced pooling above the Onondaga Limestone has led to undo financial or environmental consequences, I would very much like to hear of these instances.

To date, in PA, there has been insufficient drilling below the Marcellus Shale to determine whether the existing (50 years of) forced pooling has been of benefit. If I am mistaken in this regard, please direct me to literature which documents such benefit.

RE: “When I say "our natural resources" I mean "our" as a human race, not individually, unless it is also "your" air and "your" water”

I would strenuously argue that the natural gas beneath my property does not belong to the “human race”. Should some chap in India wish to purchase my natural gas -  if we come to a mutually beneficial agreement, I would be prepared to sell it to him (as a member of the human race).
Natural gas (in the ground) is a commodity for which we can have individual/personal ownership.

There are indeed a very limited number of things (mainly intangible) that collectively belong to humanity; natural gas is not one of them. Natural gas present beneath PA Public Game Lands belongs to the citizen’s of PA, natural gas present beneath Federal land/waters belongs to the citizens of the USA, natural gas present beneath Kuwait belongs to the Emir of Kuwait, natural gas present beneath my land belongs to me. It's is not always fair, but who said tha life was fair?

Also, I look upon the water that comes either from my water well on my property or from my spring on my property as my water; in PA, it is there to use for my sole benefit. I am willing to share it, but would not agree to it being forcibly taken. And, this morning, I was working in my shop and filled up the air compressor – since I captured and am storing this air for my future use, it is (at least temporarily) my air.

Et domus sua cuique est tutissimum refugium.

Re: “The O&G cos should have the right to "clip" the unit if they can't produce from it. One reason they might not be able to produce is because "Mr Smith" won't sign a lease.”

In your above example: If they can’t produce it, why should they have the right to HBP? Perhaps someone else are able to deal with "Mr Smith" regarding the signing of a lease; thus producing the natural gas in a financially and environmentally responsible manner.

A more likely scenario is that the O&G company “clips” the property to HBP, holding that land “ad nauseum” without remuneration (a situation detailed in real examples posted in Discussions on this board).

Re: “If you sign a lease that doesn't have a pugh clause, then yes, your property may still be HBP even though it is not producing”

Many people find themselves subjected to leases signed by others; leases signed before they were born – leases signed before Mr. Ebenezer Pugh came up with his famous clause.

 

I view forced pooling to be a solution for a problem which does not seem to really exist. If there were a cadre of "Mr Smith"s out there preventing Marcellus Shale drilling, I think that such a reality would show up in Discussions on this venue. If there have been “Discussions” on this board regarding a common situation of individuals holding up or preventing the drilling of Marcellus wells, please direct me to those discussions (as I would definitely find this of interest).

"Mr. Smith" is a “red herring”, a bogus argument put forward the O&G industry to simplify their assembling units (through threat of confiscation) – on terms that are unduly beneficial to the O&G industry. I have not heard of examples where drilling in the Marcellus has slowed down in PA because of a proliferation of "Mr Smith"s. Has anyone seen rigs stacked along the side of the road due to a lack of Marcellus drilling locations? If the lack of forced pooling of the Marcellus has proven to be a problem, I would very much like to hear of concrete examples. Absent a plethora of concrete examples (in the literature or on the web), I re-iterate my belief that forced pooling of the Marcellus Shale is a solution for a problem which does not seem to currently exist.

Unless and until I am confronted with documented examples of where the lack of forced pooling of the Marcellus Shale has resulted in “undo financial or environmental consequences”, I continue to believe that the primary benefit of forced pooling of the Marcellus Shale is to facilitate leasing for the O&G industry (under terms beneficial to the O&G industry and to the detriment of landowners who have been robbed of a key element of their limited bargaining power).

What is to prevent a landman from confronting a landowner with the ultimatum: “Sign our crappy lease, on our crappy terms, or we will hit you with a forced pooling agreement that contains even crappier terms!”?

JV

 

Permalink Reply by Finnbear on November 17, 2011 at 4:09am

Jack Straw

Re: “The O&G cos should have the right to "clip" the unit if they can't produce from it. One reason they might not be able to produce is because "Mr Smith" won't sign a lease.”

In your above example: If they can’t produce it, why should they have the right to HBP? Perhaps someone else are able to deal with "Mr Smith" regarding the signing of a lease; thus producing the natural gas in a financially and environmentally responsible manner.

A more likely scenario is that the O&G company “clips” the property to HBP, holding that land “ad nauseum” without remuneration (a situation detailed in real examples posted in Discussions on this board).

In reference to the above - the O&G should be able to "clip" because the landowner did not use legal counsel who had the foresight to include a Pugh clause to protect against it. In historical leases that predate the Pugh clause, you obtain a piece of property "as-is" which may well include previous contracts against that property. When one purchases a property, due diligence would indicate a title abstract and this would reveal any existing limitations due to such contracts. I agree that being HBP on a parcel that is not producing income for the lessor stinks, but, the lessor did not have to sign the deal in the first place. They should have known what they were signing or paid someone who does to explain it to them. The overwhelming majority of "horror stories" we hear about O&G are directly due to the lessor's negligent non-use of competent legal counsel.

Permalink Reply by Finnbear on November 17, 2011 at 4:34am

Here is a summary of Engelder's presentation. Look it over and you will have a better idea of his view on the subject. Pages 10 and 11 are especially interesting.

Attachments:
Permalink Reply by mike4t on November 17, 2011 at 5:29am

Finnbear, Thanks for the attachment. Some people just don't understand it unless they see it

 

mike

Permalink Reply by Jack Straw on November 17, 2011 at 5:31am

RE: "In historical leases that predate the Pugh clause, you obtain a piece of property "as-is" which may well include previous contracts against that property. When one purchases a property, due diligence would indicate a title abstract and this would reveal any existing limitations due to such contracts. I agree that being HBP on a parcel that is not producing income for the lessor stinks, but, the lessor did not have to sign the deal in the first place."

When that person would have bought a property with an existing lease, due dilligence would have informed him that the law only called for forced pooling below the Marcellus Shale.

A Pugh clause in the lease would not have been necessary above the Onondaga Limestone, because forced pooling was not in place. Lacking a unitization (pooling) clause for the sediments above the Onondaga Limestone would mean that you would not expect a Pugh clause inserted for a non-existant situation.

Should forced pooling for the Marcellus in PA become the law; the only ethical and equitable solution I could envision would be that the forced pooling only apply to leases signed subsequent to the signing of the forced pooling into law. 

No amount of "due dilligence" can protect an individual from laws passed and applied ia a retoactive fashion.

At the least; should legislation effectively alter their lease in a retroactive manner; that law should have a provision such that idividuals can modify the lease to insert a Pugh Clause - should they wish. The passing of a forced pooling law that confiscates some of their rights should provide them with at least minimal protections (such as a Pugh Clause) as recompense.

 

JS

 

 

 

Permalink Reply by Finnbear on November 17, 2011 at 5:37am

What does the Pugh clause have to do with forced pooling?

A Pugh clause requires the lessee to release all land not unitized and producing at the end of the primary term. It is important to include in any lease, regardless of whether the state allows forced pooling or not.  My statement about the Pugh clause was in reference to clipping. The Pugh clause would take those "clipped" acres and release them back to the landowner.

Permalink Reply by Jack Straw on November 17, 2011 at 6:00am

Actually, there are various types of "Pugh Clauses".

The one that we have both been referring to is the one that does "release all land not unitized and producing at the end of the primary term".

Another type of Pugh Clause is a Vertical Pugh clause.

Never-the-less, I agree with you in that a Pugh clause or Pugh clauses should be included in all new leases.

However, I would not expect there to be a Pugh clause (addressing clipping) to be present in an old lease - a lease that had no provision for unitization (pooling) of any type.

Old leases very frequenty had no clause/provision for pooling contained within their contents. One cannot expect a Pugh clause to have been contemplated in a lease that did not address the idea of pooling.

Were forced pooling above the Onondaga Limestone to become law of the land (and applied in a retroactive fashion), this has the effect of modifying the terms of existing lease.

This is a country of laws; but it is also a country with a tradition of protecting the rights of individuals (a tradition going back to the earliest days of the Republic - the Bill of Rights as a primary example).

I reiterate:

At the least; should legislation effectively alter their lease in a retroactive manner; that law should have a provision such that idividuals can modify the lease to insert a Pugh Clause - should they wish. The passing of a forced pooling law that confiscates some of their rights should provide them with at least minimal protections (such as a Pugh Clause) as recompense.

There seem to be two seperate issues: "forced pooling" as it might apply to new leases (and unleased properties) and "forced pooling" thrust retroactively (by fait) into existing leases.

 

JS

Permalink Reply by Finnbear on November 17, 2011 at 6:51am

Forced pooling deals with holdouts who won't sign a lease agreement to allow the building of a drilling unit. They may be unleased landowners or other companies who already hold lease on the parcel in question. Old leases that have no pooling provision written into them arguably can pool or not pool anything the lease holds, no forced pooling law required or even applicable. If there is nothing in the lease that limits the O&G, most boilerplate lease language allows them to do about anything they want with the oil and gas rights that they have paid for.  The forced pooling laws really don't have much effect since the lease already allows pooling by the lessee.

Permalink Reply by Jack Straw on November 17, 2011 at 8:13am

RE:"If there is nothing in the lease that limits the O&G, most boilerplate lease language allows them to do about anything they want with the oil and gas rights that they have paid for." 

Indeed the language contained in the old lease language allows them to do just about anything they want; typically they can do such things as:

put in pipelines,

put in water lines.

erect telegraph lines,

erect building,

construct access roads,

take timber to build well derrick (with compensation for the value of the timber),

If coal is being mined on the property, they can use coal to power the boiler of their steam engines (with compensation for the value of the coal),

they can freely use water present on the land,

etc., etc. etc.

RE:"The forced pooling laws really don't have much effect since the lease already allows pooling by the lessee."

I have five old leases at my elbow. One of these leases has a blanket unitization (pooling) clause. Four of these old leases do not have a unitization (pooling) clause.

Contrary to your statement, four of these leases do not provide for pooling by the lessee (above the Onondaga Limestone). Should the lessor agree to a modification/ammendment, these old leases can be changed; but only with the agreement of the lessor.

The absence of language allowing unitization/pooling in no way implies that they can pool in a unilateral fashion.

Should the PA legislature act at the behest of the O &G industry in a manner that would allow for forced pooling of the Marellus Shale, the rights of those who possess these old leases could be eroded.

JS

 

 

 

 

 

 

 

 

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