What is forced pooling?
Compulsory pooling, also known as forced, statutory or mandatory pooling, forces landowners —who do not wish the mineral resources underneath their land to be extracted—to become part of a drilling unit.
The Oklahoma statutes authorize the Corporation Commission to create drilling and spacing units, and if necessary, to pool the interests of the owners therein to prevent waste and to protect the correlative rights of the interested parties.
In other words, if most (but not all) of the parties within a drilling and spacing unit wish to drill a well to produce the oil and gas, any reluctant parties cannot prevent the other owners from benefiting from their interests.
If an energy company is unable to reach an agreement with a mineral owner after a good-faith attempt, generally in the form of an oil and gas lease, that company may file an Application with the Corporation Commission to pool that party’s interest with the other owners in order to move forward with drilling the well.
What are your options if you are subject to a Pooling Application?
Forced pooling causes the proposed operator to search records in the county and other sources to determine all persons with the right to drill and locate them with their correct addresses. The application to pool is filed with OAP (Office of Administrative Proceedings) and the owners who have not leased are named as respondents, listed on Exhibit A. Notice is mailed and published giving the respondents notice of the time, place and purpose of the hearing, together with the requested pooled formation. At the hearing all persons who have a right to drill may appear and let their interest be known.
At the hearing, the Administrative Law Judge (ALJ) will insure the applicant has given the respondents proper notice, mailing and publication. The ALJ will inquire whether the applicant has made a good faith effort to bargain with the respondents prior to filing the pooling application and from testimony set the costs of drilling and completing the well. The ALJ will also inquire as to the fair market value of the mineral interests in the unit; that inquiry includes testimony on what was paid for leases in that unit and the eight surrounding units within the last year. Generally, the fair market value of the mineral interest is determined by consideration of open market transactions, impacting oil and gas rights, between willing buyers and willing sellers in the vicinity.
The unleased mineral owners are always entitled to retain the statutory one-eighth royalty, however, the fair market value for royalty often provides for a royalty percentage above the one-eighth. The fair market value consists of a cash bonus and royalty (percentage of revenue share on production). Frequently less cash and more overriding royalty combinations are found to be equivalents and alternates.
The ALJ requires the applicant to prepare a Pooling Order and submit it for review and signature of the ALJ and the full Commission. The operator must mail copies of the order to each respondent within three days. The order provides Respondents 20 days to either participate in the well or elect to take one of the fair market value alternatives. Payments to respondents of any cash consideration are required to be made within 30 to 35 days of the date of the order, depending on the recommendation made in the order.
The Pooling Order will contain other provisions, usually requiring the operator establish an escrow account for owners whose addresses are unknown or owners with title problems, provisions describing rules for future wells and limiting the time to drill to six months, longer if good cause is shown.
If any party objects to the pooling application, they will be able to present their case at the hearing and a report will issue recommending the case be granted or denied. That report can be appealed to the Referee who will issue a report recommending the report be approved or overturned or modified. This can also be appealed to the Commission en banc who will then grant or deny the case. Upon issuance of a Pooling Order from a protested application, it can be appealed to the Oklahoma Supreme Court.
A look at Pooling Laws across the country
The following map and chart details current state compulsory pooling laws. At least 34 states have laws permitting forced pooling. Some additional states, like Florida, have laws governing pooling and unitization but do not have compulsory pooling laws currently in effect.
As the voice of Oklahoma’s energy industry, representing active vertical and horizontal producers, midstream operators, and supply chain small businesses, OIPA-OKOGA, the newly formed oil and natural gas trade association created by the merger of the Oklahoma Independent Petroleum Association and the Oklahoma Oil & Gas Association, engages in a fact-based dialogue aimed at strengthening Oklahoma’s oil and natural gas industry and overall economy.
Back in March of this year, the OIPA-OKOGA published an article addressing the claims by the OEPA, an association representing a small group of Oklahoma vertical oil producers, who have been displeased with the pooling process in Oklahoma.
OEPA CLAIM: “Forced pooling in Oklahoma allows a company that wants to drill a horizontal well… to tak[e] the oil and gas the vertical well owners have the right to – and oftentimes compensating them little or nothing. Forced pooling is used only in Oklahoma to allow horizontal drillers the ability to drill through someone else’s oilfield.”
In that article, the OIPA-OKOGA provided an informative video on the Oklahoma Pooling Process that we would like to share with you.
Back in August of 2017, Paula Burkes with NewsOK interviewed Melissa R. Gardner who is a director and attorney at Phillips Murrah P.C., and practices in the Energy & Natural Resources Practice Group. That interview provided some insight into the drawbacks and benefits of Forced Pooling. Here is an excerpt from that interview.
What are the pros and cons of leasing versus being made subject to a forced pooling order?
A: If you choose to sign a lease, you will have the ability to negotiate more of the specifics of the usage of your minerals. You are in a position to get the oil and gas companies to agree to some conditions and special provisions. If you are subject to a forced pooling (as managed by the Oklahoma Corporation Commission), you’re not in a position to negotiate these details.
Second, you can negotiate bonus and royalty costs. If you are subject to a forced pooling order, you’re given three options, being a combination of the prevailing prices in the surrounding areas, with no option to negotiate those prices. In the alternative, if you allow yourself to be subject to the OCC forced pooling order, the applicant is given a shorter time within which it has to commence operations. The average lease is valid for three to five years, whereas the average pooling order is valid for six months to a year, both of which extend after production has been initiated. This keeps your minerals under contract for a shorter period of time.
Additionally, the minerals only are forced pooled as to certain, limited geological formations. If a well is drilled and producing from those zones, your minerals are still open and unleased as to other, non-pooled zones. In the alternative, most leases cover all depths or, at a minimum, from the surface to a certain depth below the surface. Finally, forced pooling orders expire at the end of production. If a producing well is drilled during the first year of a five-year lease and only produces for two years, the lease remains valid, and your minerals remain unmarketable for re-lease, for an additional three years.
If you or someone you know has acreage that is currently being pooled, and you are looking for better terms than the pooling is offering, please reach out to us HERE to see if one of our vetted partners can provide you with a better offer.
Compiled and Published by GIB KNIGHT
Gib Knight is a private oil and gas investor and consultant, providing clients advanced analytics and building innovative visual business intelligence solutions to visualize the results, across a broad spectrum of regulatory filings and production data in Oklahoma and Texas. He is the founder of OklahomaMinerals.com, an online resource designed for mineral owners in Oklahoma.
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