An unwelcome gift from oil and gas developers

A drilling rig operates in Erie in 2015.RJ Sangosti, Denver Post file – A drilling rig operates in Erie in 2015.

As last Christmas approached, Janice Ward received a surprise packet, and it was a present. It was a 64-page offer, in dense legalese, to lease the oil and gas rights beneath her home in Windsor’s Highland Meadows Golf Community.

But there was something else in the packet, something more Grinch than Santa: a notice that if Ward, a 62-year-old retired government scientist, didn’t sign the lease, her mineral rights would be accessed by the driller using Colorado’s “forced-pooling” statute. Ward and her neighbors, who received the same packet, had 35 days to respond.

“Sending out a contract with a ticking clock between Thanksgiving and Christmas without any prior description of their project is not a very good way to start a relationship,” Ward said.

The statute at play — which dates from the 1930s — enables an oil and gas company to get a property owner’s mineral rights, with compensation, even if the owner doesn’t want to sell or lease them. “We were told you can’t fight it,” Ward said. “Forced pooling pretty much takes the decision away from local people.”

With an uptick in oil prices and increased drilling, the use of forced pooling is on the rise in Colorado, and it is being used in more developed and suburban areas. There were 80 requests for pooling orders on the Colorado Oil and Gas Conservation Commission’s March docket — and requests are rarely rejected.

This has left many Colorado landowners frustrated and feeling that the deck is stacked against them. A driller needs only a single mineral owner to sign a lease, and then everyone else is dragged into the pool. Add to that the oil and gas commission’s liberal approval of pooling orders and the stage is set for potential misuse of the statute.

“Some operators use forced pooling as a gun to the head to force landowners to sign leases,” said Matt Sura, an attorney representing local governments and homeowners on oil and gas issues, including Windsor residents.

Now a move to reform the forced-pooling statute is being led by State Rep. Mike Foote, D-Lafayette, and Rep. Dave Young, D-Greeley. The two have filed legislation that would offer property owners more safeguards and transparency.

The bill would require a pooling notice that is in plain English; 90 days to respond; and that the oil and gas commission keep public records on the number of property owners forced pooled. “This bill is about due process for what is corporate eminent domain,” Foote said.

Foote said he has seen homeowners in Erie, Broomfield and Windsor facing pooling and expects that when drilling comes to Boulder County, there will be more of it.

In Broomfield’s Wildgrass development, where homes sell for as much as $900,000, homeowners received letters last June from Denver-based Extraction Oil & Gas Inc. offering to lease their mineral rights and adding that those who didn’t sign would be force-pooled.

Forced pooling is being “abused,” said Wildgrass resident Anne Marie Byers, a 42-year-old attorney and mother of two. “Property owners need protection.”

Of the 510 Wildgrass homeowners who received letters, about 12 signed leases, or about 2 percent, Byers said.

Extraction has voluntarily put its plan, which calls for drilling 140 wells, on hold while there is a review of the proposals by a community task force.

The company has complied with or exceeded all regulations on its project, Brian Cain, an Extraction spokesman, said in a statement.

“We respect the design of the current statutory pooling law, which fundamentally protects all mineral owner’s property rights — even those with the least ownership among us — while minimizing the total number of development locations needed,” Cain said. “The current law represents the best way to accomplish this challenging goal.”

In the Windsor, Ward and her neighbors banded together and hired Sura, who got the driller, Great Western Oil & Gas Co., to extend the deadline. Sura then negotiated a more advantageous lease agreement with another operator.

Hal Writer, Great Western’s land manager, said that the process worked the way it was supposed to. The deadline was extended at the request of the property owners, who made a deal, even if it wasn’t with Great Western. “It was an open process,” he said.

The advent of horizontal drilling and hydrofacturing, or “fracking,” in oil shale rock, such as Colorado’s Niobrara formation, is leading to companies to use forced pooling more frequently, said Bruce Kramer, a professor emeritus at the Texas Tech University School of Law and an expert in oil and gas law.

“With horizontal drilling, you are likely to go through more individual tracts of land, and therefore, you are more likely to come across people who don’t want to engage or lease,” Kramer said. “Some of the newer shale plays are in more urbanized areas and cut across more people.”

While the technology and nature of drilling has changed, Kramer said, the statues haven’t.

In the earlier years, the oil and gas industry operated under the “rule of capture,” in which whoever pumped it, owned it. A landmark 1889 Pennsylvania court decision compared oil and gas beneath the ground to wild animals roaming the forest.

The ruling sparked a drilling frenzy epitomized by Spindletop, a 1901 oil strike near Beaumont, Texas. In the first year, 400 wells were drilled on a 125-acre hill. By 1904, there were 1,000 wells. “The cow was milked too hard, and moreover, she was not milked intelligently,” Capt. Anthony Lucas, Spindletop’s discoverer, lamented.

The answer was spacing statutes limiting how close together wells could be, and that in turn led to pooling statutes to assure that a reserve was efficiently developed and — just as importantly — that all mineral rights holders in the pool were compensated.

There are forced-pooling laws in 33 states — all the major oil producers save California — and some include provisions that are more protective of property rights than Colorado’s rule.

For example, Kentucky, Arkansas and Idaho require an operator to have at least half of the mineral rights or more in an area before seeking a forced-pooling order.

Foote and Young originally sought a 50-plus-one threshold, but withdrew the language last week, bowing to pressure from the industry.

“The last time the state’s force-pooling rule was updated was in 1951,” said Sara Loflin, executive director of League of Oil and Gas Impacted Coloradans (LOGIC), a non-profit umbrella organization for community groups. “Colorado has changed a lot since then. We need to come up with legislation that reflects drilling in neighborhoods.”

State oil and gas regulators and industry officials say that the forced-pooling law is working as it was intended.

“The courts have consistently found statutory pooling laws to be constitutional,” Dan Haley, president of the Colorado Oil and Gas Association, an industry trade group, said in a statement.

“It has never been an issue or a problem before,” said Matt Lepore, executive director of the oil and gas commission. “If operators are giving 35-day notice and giving an opportunity to participate or lease, they are complying with the rules. If somebody feels they weren’t given a fair market or sufficient time, they can protest to the commission.”

But the commission has no record of how many mineral rights holders have been forced-pooled. The Foote-Young bill would require the commission to keep such records. “This is a transparency issue,” Foote said.

Still, the proposed legislation is just “a small step,” said Loflin. “It certainly doesn’t get at the full issue.”

When a landowner leases mineral rights, they get a percentage of the profits of their oil and gas. The relationship is akin to landlord and renter. But when mineral rights owners are forced-pooled, they become a fractional owners in the well.

Part of their profits goes to paying off the cost of the well. So while the range for oil and gas lease royalty rates in Colorado is between 16.6 percent and 20 percent, according to Sura, those who are forced-pooled receive 12.5 percent until they pay their share of 100 percent of the well’s equipment costs and 200 percent of the drilling costs.

Other states such as North Dakota and Oklahoma offer more flexible ways for pooled mineral owners to be compensated.

As owners in the well they could be liable for fines or clean-up costs. “Liability is a big issue,” Loflin said. The Ohio forced-pooling statute specifically exempts forced-pooled parties from liability.

Finally, some states, such as Montana, require an operator to make a “good faith negotiations” before seeking a forced-pooling order. All Colorado drillers have to do is make a reasonable offer, once they have a single, signed lease, they don’t have to negotiate.

Introducing a bill in the waning days of the legislative session, particularly one opposed by the oil and gas industry, is not a recipe for success. Still, Foote said that it was a beginning. “This is the type of effort that takes more than one year,” he said.

Young, the bill’s co-sponsor, said, “We just need to start the conversation.”

Mark Jaffe, a former Denver Post reporter, writes on Colorado environment and energy issues.

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