Back in the day I worked as a permit agent for one of the biggest U.S. oil companies. Once in a while I had to tell some hay farmer that I was going to take several acres of his irrigated alfalfa out of production for several years or decades. There was no guarantee, of course, that any well we drilled would turn out to be a producer. But if the well did come in the farmer would lose control of his surface for the life of the well. Operations such as re-fracturing, casing repairs, hauling off oil or condensate and connecting to a natural gas pipeline would be ongoing I told them. If that farmer owned the mineral rights he would get a royalty. More often than not the surface damages that I paid up front were the only compensation. To add insult to injury “forced pooling” may have forced the farmer to lease or sell his rights in the first place.
Fast forward to the burgeoning Niobrara shale play in Colorado. Here’s a report about leasing tactics in Elbert and Douglas counties, from Mark Jaffe writing for The Denver Post. From the article:
Across Elbert and Douglas counties, where energy companies are competing for leases, landmen are using the “forced pooling” card as leverage, property owners say. “Everybody was told the alternative to a lease was forced pooling,” said Steve Budnack, president of the homeowners association for Centennial Ranch in Douglas County.
Under the state’s 1951 Oil and Gas Conservation Act, the mineral rights of a landowner who has not signed a lease, or refuses to sign one, can by state order be force pooled, meaning he or she can be included in an energy company’s drilling plan. In 2010, the state oil and gas commission issued 136 orders for items such as variances and rule changes, and 48 of the orders were for forced pooling, according to agency data. “It sounds like eminent domain, but it is really there to assure orderly oil and gas development,” said Lance Astrella, an attorney who represents landowners. “The problem is that it can be abused.”[…]
Whether forced pooling is employed as a prod, its use in the Denver area — parts of Boulder, Arapahoe and Adams counties also sit atop the Niobrara — is likely to grow.
The horizontal wells the industry is drilling to capture oil from the Niobrara’s shale can extend 5,000 feet or more, requiring larger drilling areas that will affect more landowners, Astrella said.
“It may start out as a threat,” said Debbie Trujillo, an Elbert County homeowner who began researching leasing after landmen knocked on her door. “But when an oil company decides to drill in an area, it becomes a very real possibility.”[…]
For parcels that don’t have leases, the driller returns to the oil and gas commission seeking a pooling order. There are cases where as much as 40 percent of the land in the spacing order has been force pooled, according to the oil and gas commission staff. “It really is there to protect landowners,” said Thom Kerr, the commission’s permit manager. “It is a way to make sure they benefit from the exploitation of the resource.”[…]
A forced-pooled landowner gets a royalty equal to 12.5 percent multiplied by the fraction of the drilling area owned. For example, a property owner with 10 percent of the land in the spacing order gets a 1.25 percent royalty as soon as the well begins producing. While some oil company leases deduct some well costs from the landowner’s royalty, there are no costs deducted from a pooling royalty. When the well has produced oil and gas valued at roughly twice the cost of the well — $4 million if it costs $2 million to drill — the royalty for the pooled landowner is replaced with a working interest in the well. If a landowner owns 10 percent of the land, that person gets a 10 percent share of the well’s production, less 10 percent of the cost of operating the well.