One of the consistent themes on this blog has been the ways in which uncontrolled oil and gas drilling takes away the rights of property owners. It threatens water supplies, creates noise, traffic and dust for which owners receive no compensation; and it reduces property values.
Today we’re going to discuss a legal process in oil and gas drilling that forces mineral rights owners to participate in oil and gas leasing. In Montana it’s called involuntary pooling or compulsory utilization. The process is also generally known in the oil and gas industry as forced pooling. This mutation of eminent domain enables a forced legal taking of your property for the benefit of oil and gas drillers.
This post covers my understanding of the process, but it’s complicated and I am not an attorney. If someone who has personal experience with the process either as a landowner or attorney wants to provide more detail, clarification or correction, I’d welcome the participation.
To drill a well, the oil and gas operator needs to acquire, through purchase, lease, or agreement, the right to extract the oil and gas accessed by the well. But what if there is one mineral owner in that area who does not want to allow drilling? Then the operator has the ability to apply to the Montana Board of Oil and Gas Conservation (BOGC) for involuntary pooling for the non-complying owner. This allows the well to go forward. Laws regarding this practice are found in the Montana Oil and Gas Code, Section 82-11-202.
Before an operator can pool an area, the area must be included into a spacing unit. To create a spacing unit, the BOGC, according to Montana Code 82-11-201, may “differ in size and shape…but may not be smaller than the maximum area that can be efficiently and economically drained by one well.”
When there are multiple owners within a spacing unit, then “the persons owning those interests may pool their interests for the development and operation of the spacing unit.” (82-11-202). They then apply to the BOGC for a pooling order, the process for which is spelled out in this section.
- sell the mineral rights,
- lease the minerals,
- consent to voluntarily pool the mineral interest with the others and participate financially in the drilling operation, or
- be a “non-consenting” owner and be involuntary pooled.
If you are a non-consenting owner, or if the owner of one of the tracts in the spacing unit cannot be located, the BOGC issues an involuntary pooling order. The non-consenting owner then pays his share of the costs, plus significant penalties, out of the revenues from the well.
How involuntary pooling works
Once the BOGC issues an involuntary pooling order, which they can do if over 50% of the owners consent, there are three consequences for the non-consenting owner:
- The property of the non-consenting owner is pooled into the lease and drilling is allowed to go forward.
- The owner will get a 1/8 (12.5%) share of the royalty payment due him from the beginning of production until all costs are paid
- The other 7/8 of the mineral interest payments are withheld to pay the costs of the well as stipulated in 82-11-202.
If the mineral owner owns 100% of the minerals under a parcel of land, the operator will not be able to locate the well or facilities on that parcel without the rights owner’s permission.
Costs charged the involuntary pooled owner include:
- 100% of the non-consenting owner’s share of the cost of newly acquired surface equipment beyond the wellhead connections, including but not limited to stock tanks, separators, treaters, pumping equipment, and piping, plus
- 100% of the non-consenting owner’s share of the cost of operation of the well commencing with first production and continuing until the agreeing owners have recovered the costs; and
- 200% of the non-consenting owner’s share of the costs and expenses of staking, well site preparation, obtaining rights-of-way, rigging up, drilling, reworking, deepening or plugging back, testing, and completing the well, after deducting any cash contributions received from the refusing owners by the agreeing owners, and
- 200% of that portion of the cost of equipment in the well, including the wellhead connections.
A fictional example of how this works
Here is a completely made up example of how this would work. Let’s say that a fictional involuntary pooled mineral rights owner (Bob) owns 25% of the pool for a well.
- Bob receives 1/32 of the production proceeds from the well as a royalty (calculated as 1/8 of the owners 25% share). He receives this from the beginning of production.
- The other 7/8 of Bob’s proportionate income is held in escrow to pay his proportionate costs of annual operation (25% of the total), and double the proportionate costs of well set up and equipment (50% of the total).
- Bob would receive an annual check for any revenues above the amount held in escrow. In an actual scenario, it would likely take Bob several years to pay off his share of the cost before he receives any royalties, and at that point the well’s production would have dropped considerably.
So you’re stuck. If you own a portion of your mineral rights, or you’re a small property owner who owns part of a spacing unit, you have no choice but to voluntarily pool with others. If you don’t you get hit with 200% of a significant amount of the proportional share of costs. It is a law that pits neighbor against neighbor, family member against family members, and oil and gas drillers against rural property owners.
And if you just own the surface rights in a split estate, you don’t even get to have a say in the conversation.
It’s worth noting that the provision requiring involuntary pooled owners to pay 200% of costs is much more oppressive than the forced pooling statute in North Dakota, which only stipulates a risk penalty.
The oil and gas industry has a real interest in keeping the 200% provision in there, because it gives them tremendous leverage against rights owners. In fact, in the last legislature Montana House member Austin Knudsen, who represents a district in the Bakken, sponsored a bill that would bring Montana involuntary pooling law into line with North Dakota’s.
Not only did the bill not make it out of committee, but Knudsen was fired from his position as partner at the O’Toole Law Firm for proposing the bills. The Firm is one of only a handful of law firms in the state that handles complex oil and gas cases before the Board of Oil and Gas Conservation, representing many clients in the oil and gas industry.
Knudsen, once considered a rising star in Montana politics who was selected to give the rebuttal to Governor Bullock’s state of the state speech, made the mistake of valuing property owners over the oil and gas industry.
“There a lot of oil and gas exploration going on in my district. My family has had to deal with these issues. I’ve got neighbors and constituents who have had to deal with these issues. There gets to be a lot of tension and a lot of landowner problems,” Knudsen said.
The oil and gas industry opposed the bill because they feared “it would become an incentive for mineral rights owners to not sign reasonable lease offers from developers,” according to Dave Galt, executive director of the Montana Petroleum Association.
Stop me if you heard that one before.
Last note: You can compare forced pooling laws by state here.