On March 5, 2018, the West Virginia Legislature passed new legislation known as the Cotenancy Modernization and Majority Protection Act, W. Va. Code § 37B-1-1 et seq. (Cotenancy Statute). This new Cotenancy Statute, which became effective June 3, 2018, is intended to facilitate oil and gas development of West Virginia properties that have numerous fractional oil and gas owners. It applies to tracts in which there are seven or more owners of the oil and gas in place, and changes West Virginia law by allowing an operator to produce oil and gas without the consent of all oil and gas owners under certain circumstances.
Prior to passage of the Cotenancy Statute, West Virginia law mandated consent of 100 percent of the oil and gas owners before an operator could lawfully develop the oil and gas estate. If any oil and gas owner refused to sign a lease, regardless of how small that non-consenting owner’s fractional interest, the operator was compelled to either forego development or file a partition action under W. Va. Code § 37-4-3. Through partition, an operator could acquire the non-consenting owner’s interest at fair market value, as appraised by three special commissioners appointed by the court.
The Cotenancy Statute reduces the onus on operators by allowing operators to drill once they have:
- Acquired the consent of oil and gas owners vested with at least three-fourths of the executive rights (i.e. 75 percent of the undivided oil and gas estate)
- Made reasonable efforts to negotiate a fair lease with all non-consenting owners
- Provided specific statutory notice to the non-consenting owners
By complying with these requirements, the Cotenancy Statute gives an operator a defense to claims of trespass or waste which could otherwise be brought by non-consenting owners of any part of the oil and gas estate. And, unlike partition, the Cotenancy Statute does not require an operator to initiate legal action before proceeding with drilling. Thus, the Cotenancy Statute offers a streamlined and efficient way for operators to account for non-consenting oil and gas owners, while also protecting the rights of the majority of the oil and gas owners who favor oil and gas development.
Since there is no minimum “head count” set forth in the Cotenancy Statute for either consenting or non-consenting oil and gas owners, an operator could hypothetically move forward with development if a single cotenant owning 76 percent of the oil and gas in place signed a lease, even if six (or more) other cotenants, together owning 24 percent interest, did not consent.
A non-consenting oil and gas owner is entitled to receive, based on his/her election, either a weighted-average bonus payment and a prorata share of gross proceeds from drilling equal to the highest royalty paid to a consenting cotenant in the same property, or a carried working interest share in revenue from the well, exclusive of any royalty or overriding royalty reserved in any lease, and reduced by two-times certain operating costs of the operator (this is the default position if the non-consenting owner fails to make an election).
Despite the passage of the Cotenancy Statute, many of the details of how the law will operate are yet to be determined. We look forward to forthcoming rulemaking from the Oil and Gas Conservation Commission to address such questions as what “reasonable efforts” must be made to negotiate with non-consenting oil and gas owners, and exactly what obligations and requirements will apply to non-consenting owners who receive a working interest in a well under the terms of the statute. Additionally, the West Virginia Oil and Gas Conservation Commission is working through a debate over the scope of the Commission’s rulemaking authority pursuant to the Cotenancy Statute.