This is the second in a multi-part series on the practice of compelled participation – forcing unwilling mineral rights owners to participate in oil and gas production from their property. Part I discussed the history and constitutionality of this practice in the U.S.
Every day, crowds of title researchers and landmen pack county offices in Eastern Ohio looking for the owners of unleased property. They are discovering a quilt of landowners with varying degrees of interest in leasing their land for oil and gas drilling. But even after attempting to negotiate with landowners, oil and gas companies often cannot lease enough land to comply with Ohio’s minimum spacing laws. As a result of those laws, uncooperative landowners threaten to interfere with landowners who have leased and want to have oil produced from their land.
Fortunately, under the right circumstances, an operator or the consenting landowners may be able to invoke Ohio’s mandatory pooling laws, the most common form of compelled participation. Mandatory pooling laws force hold-out landowners to submit their mineral rights to oil and gas operations when their recalcitrance prevents an operator from meeting state spacing requirements. Read more about these and other industry terms in a previous post.
As explained by the Ohio Oil and Gas Commission:
Mandatory pooling prevents a minority landowner, whose acreage is small but necessary to form a legal drilling unit, from disrupting the majority landowner’s ability to develop property. Mandatory pooling is solely designed to protect landowners’ correlative rights. It is a tool of last resort. (See E.R. Ashmus, 11.)
Conserving Resources and Protecting Owners’ Rights Sometimes Warrants Mandatory Pooling
In 1965, Ohio followed other oil producing states by enacting minimum spacing and set-back requirements. The purpose of these requirements, often called “conservation laws,” “was twofold, to conserve oil and gas resources and to protect the correlative rights of adjoining owners.” (See H.B. 234.) The chief of the newly created Ohio Department of Natural Resources was given the authority to establish these requirements, which are currently determined based on the depth of the well, as follows:
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The graphic at right illustrates these conservation laws in practice. Well A represents an operator’s proposed well, at a depth below 4,000 feet. For a well of that depth the operator must:
- Have under lease at least 40 “compact and contiguous” acres of mineral rights
- Place the well at least 500 feet from the boundary of the drilling unit
- Place the well at least 1000 feet from any other well producing from the same underground source of oil (Well B)
Ohio law explicitly encourages the “voluntary pooling” of lease rights to form a drilling unit through private negotiation between landowners and oil and gas operators that result in an arrangement acceptable to all parties. But some landowners won’t agree to a lease at any price, leaving small pieces missing from a potential drilling unit and therefore preventing the other property owners from receiving the benefit of their leases. It is in these situations that mandatory pooling becomes necessary.
The mandatory pooling statute, R.C. 1509.27, allows an operator to apply for a pooling order if two conditions are met:
- The tract is of insufficient size or shape to form a drilling unit
- The operator has been unable, through “just and equitable efforts” to gather sufficient acreage through private negotiation with mineral rights owners under R.C. 1509.26. E.R. Ashmus v. Division of Mineral Resources Management, #797, 13 (Ohio Oil and Gas Commission, Nov. 18, 2008)
The chief will also typically require the operator to obtain consent from the owners of at least 90% of acreage in the proposed unit before a mandatory pooling order will be issued.
To illustrate, imagine an operator who successfully negotiated leases with every landowner in a potential unit — Austin, Jackson, Roberts, O’Reilly, and Goldman — except Smith. The graphic at right shows that the operator needs at least the shaded corner of Smith’s land to secure the necessary 40 acres for a well. If the operator has presented Smith with multiple offers, including fair royalty payments and a signing bonus but Smith will not sign a lease, the operator has probably satisfied the two conditions to mandatorily pool Smith in Drilling Unit A.
Procedure and Legal Standard for a Mandatory Pooling Order
To compel Smith to participate in Drilling Unit A under the mandatory pooling statute, the operator must submit an application for a mandatory pooling order to the chief of the Division of Oil and Gas Resource Management (DOGRM).
Upon receipt of the application, the chief informs the “owners of the land within the area proposed to be included within the drilling unit of their right to a hearing.” (See R.C. 1509.27.) After a hearing, or after 30 days if the affected landowners do not request a hearing, the chief will issue the mandatory pooling order if he finds it “necessary to protect correlative rights and to provide effective development, use, and conservation of oil and gas…” (See R.C. 1509.27.)
In the above example, Smith’s unwillingness to lease prevents the other landowners from developing their mineral resources. To protect Smith’s and the neighbors’ correlative rights, the chief will issue a mandatory pooling order forcing Smith’s land into the drilling unit.
A few consolation prizes are given to the forced-in mineral rights owner. First, Smith will receive an allocated share of production from the Unit. Second, no surface operations are allowed on Smith’s land. This means the well cannot be placed on Smith’s land (in the graphic above the well is placed on Roberts’ land). Finally, not all of Smith’s property is forced in; only the shaded portion of Smith’s property that is necessary to create a drilling unit will be included. To learn more about how compelled participants are compensated, read this previous post that describes a similar situation.
In the real world, mandatory pooling applications come in all shapes and sizes, and get complicated very quickly. In the following example from Municipality of Sebring v. Division, #839 (Ohio Oil and Gas Commission, Aug. 6, 2012), the land sought to be mandatorily pooled is shaded in yellow and the sprawling perimeter of the unit is marked by a bold dashed line.
This example also illustrates that not all applications are successful. In this case, the commission overturned the chief’s mandatory pooling order because the unit’s snake-like shape was not “compact and contiguous” as required by R.C. 1509.24(A).
As the Ohio Oil and Gas Commission stated, mandatory pooling is a “tool of last resort,” one reluctantly used to protect correlative rights and to ensure the development of Ohio’s oil and gas resources.
If you think forming a 40-acre drilling unit is complex, imagine forming a unit for a mile long unit required by a horizontal shale well. That topic is next in our series.