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West Virginia Royalty Owners Association
Forced Pooling occurs when a corporation forcibly takes an individual’s oil and gas property in order to maximize the development of oil and gas production. Force Pooling is used when an oil and gas corporation has leased a portion of the mineral rights for a unit of acreage. If the corporation is unable to acquire enough of the acreage to begin production, it goes through a hearing process with the state to forcibly take the acreage from the individual in order to have enough property interest to begin production. This process may occur because the oil and gas ownership for a tract has a clouded title or the tract has lost and/or unaccounted for heirs. While ownership issues may make Forced Pooling is necessary in some rare instances, the major concern is when it is used to forcibly take the property rights of owners who refuse to be leased or who refuse to accept leases that are below the market price.
The Force Pooling process will affect negotiations for all leasing in West Virginia and impact the property rights of many West Virginia mineral owners.
According to the West Virginia State Tax Department, there are over 500,000 owners of oil and gas mineral interests in West Virginia. In other words, roughly a quarter of the state is subject to the tactic of Forced Pooling. Forced Pooling raises many constitutional issues similar to those that arose during eminent domain arguments; in particular, with use of Forced Pooling, it must be assured that the individual property owners’ rights are protected. Proper negotiation and fairness in the Force Pooling process must be the basis of any bill that impacts so many West Virginians. If the tactic of Forced Pooling is to be allowed, there are several issues the legislature must consider in order to protect the property rights of West Virginians:
1. Acreage Secured: A company should have the vast majority of the acreage unit leased before it employs the tactic of Forced Pooling to invade the property rights of owners. Any bill that allows Forced Pooling should require an operator to have at least 90% of the unit leased before the Forced Pooling process can begin. This standard requires oil and gas operators to work with owners to negotiate leases and not use the Forced Pooling process to avoid such negotiations. An exception should be made when significant acreage within a proposed unit is owned by individuals who cannot be located or acreage is tied up in heirship. These particular protections will protect the negotiation rights of owners while still allowing Forced Pooling to occur in situations that warrant its use. Those submitting a request for force pooling must identify all the tracts within the unit by County Assessor’s surface Tax Map and Parcel number.
2. Permission to Force Pool: There must be a process in place to ensure adequate negotiations have occurred before any oil and gas corporation is permitted to Force Pool individual mineral owners. Forced Pooling should only be a last resort used when the oil and gas corporation has made every effort to work with mineral owners to secure a fair lease. Simply sending out a form letter with no specific lease terms hardly provides the sort of notice and negotiation that must be required if an individual’s mineral interests are at stake. In order to ensure fair negotiations have occurred, an operator must show the date he or she has met with the oil and gas owner, provide a detailed account of the negotiation process (terms offered, counteroffer, etc.), and give an explanation of why the owner’s terms could not be met.
3. Acreage and Formations in the Pool: Forced Pooling should only apply to the acreage that is being petitioned for production. [For Example: If an individual owner has 100 acres of oil and gas property and only 25 acres of the oil and gas property is listed in the submitted unit description, the 25 Forced Pooled acres should not tie up the entire 100 acre parcel. An operator should show a map with the 100 acres clearly marked in relation to the 25 acres that is trying to be pooled.] Any acreage not in the boundary should not be included in the Forced Pooling order. Additionally, the formation(s) covered by a forced pooling lease will only be those formations identified by the operator as target zones in the well permit application.
4. Leasing Terms: Oftentimes, a company will submit a “standard” lease to a governmental board or committee to illustrate the leasing terms which would bind all who are force pooled into a particular drilling unit. In the interest of transparency, oil and gas operators should provide the terms of leases they have taken within a 10 mile radius of the proposed well within the last 36 months. If the company provides an Order of Payment which only lists the net acreage of the unit and the total Bonus payment for the acreage, the property owner should be paid the highest amount paid by any operator within the area and time frame stipulated. Property owners deserve fair compensation for their interests and transparency in the leasing terms and this process will help achieve that goal. The amount to be paid to a mineral owner as a royalty payment shall be equal to the highest price paid for any lease executed within the time frame stipulated; however, under no circumstances should the royalty paid to forced pooled owners be less than 3/16th’s (18.75%) of the gross sales with no post production deductions.
5. Adequate State Oversight: When Forced Pooling has been raised with other State legislatures, including Pennsylvania and Virginia, a main concern has been adequate state oversight of payment to mineral owners. Any such bill should cause the Operator to have a West Virginia independent accounting firm audit the accounting for the forced pooled unit and submit the report to the State Tax Department annually. These reports should be made available to any owner in the unit upon request.
Summary
Forced Pooling will provide private corporations the ability to take an individual’s property. If the legislature is going to permit this tactic to be used, it should ensure that the property rights of West Virginians are at the forefront of the discussion and that just compensation is assured through the terms of any statutory scheme.
A private corporation seeking to Force Pool an owner must secure a substantial portion of the oil and gas ownership and show that legitimate lease negotiations have been attempted yet been unsuccessful. The corporation’s use of Force Pooling must not impede the rights of the mineral owner to use portions of the property that are not in the order. Additional, the corporation must fully disclose the terms of the lease in order to promote transparency and fairness in the transaction. Finally, there must be state oversight including in any statute to assure payment to the owners.
Last Updated (Monday, 21 March 2011 15:20)
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