Compulsory Pooling Laws: Protecting the Conflicting Rights of Neighboring Landowners

Abby Harder 10/24/2014

What Is Compulsory 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. Although this process does not allow extraction companies surface access to the non-consenting landowner’s property, it does allow drilling to occur underneath their land, while compensating the owner for the extracted resource.

Solving Resource Disputes: Drilling Unitization and Pooling

Unitization and compulsory pooling laws are a response to state attempts to limit the number of oil and gas wells that may be drilled in an area to capture mineral resources. Historically, landowners and mineral extraction companies could drill as many wells on a parcel of land as they wished. Because the “rule of capture” governed natural resources, the first person or company to extract a mineral resource was entitled to collect exclusive profits on that resource. This meant that neighboring landowners often raced one another to extract the most oil or natural gas from a common pool underlying two properties, since the first to extract the resource was entitled to the profits. This practice also meant that, at times, landowners with mineral resources beneath the surface of their land had their share of the resource extracted by a neighboring landowner without compensation.

In order to prevent over-drilling, limit the number of wellheads on a parcel of land and protect the sub-surface mineral rights of neighboring landowners, many states have adopted minimum ownership requirements, mandating that oil and gas operators have control over a minimum amount of land before they can begin drilling operations. These mandatory unitization laws require the pooling of mineral interests into a drilling unit by the extraction company before resource extraction may occur (Figure 1). Mineral interests are “pooled” when extraction companies purchase or lease mineral rights from multiple landowners until the extraction companies own the rights to enough land to start drilling operations. Unitization laws are mandatory but do not force landowners who do not wish to extract minerals from their land to participate in the process. Rather, they require oil companies and consenting landowners to limit the amount of wells they drill.

Understanding the Lingo

Rule of Capture: The “rule of capture” originated in the early laws governing ownership rights of wild animals. According to these rules, the first person to bring a wild animal under their control by capturing, killing or mortally wounding the animal acquired ownership rights of that animal. Later, this rule was applied to the “capture” of natural resources. Sub-surface mineral rights in the U.S. generally belong to the owner of the surface land. When a common pool of oil or gas lies under the property of two or more neighboring landowners, the rule of capture applies unless it has been superseded by state statutes Accordingly, the first person to gain control over the resource (by extracting the resource from the ground) gains exclusive ownership over that resource. Pooling and unitization laws replace this common law tradition, thereby protecting the rights of landowners who are not the first to drill.

Drilling Unit: A “drilling unit” is a parcel of land of a specified size and shape upon which one well may be drilled into an underground pool or reservoir.

Pooling: During the pooling process, extraction companies purchase or lease mineral rights from multiple landowners and ‘pool’ them to form a drilling unit upon which they can legally place a drill rig.

Figure 1: Mandatory unitization versus the rule of capture

 
mandatory figure
 

When Does Compulsory Pooling Occur?

Compulsory pooling occurs most often in areas with high levels of hydraulic fracturing. In such circumstances, often one landowner, (Farmer A) is approached by an extraction company and asked to lease or sell his mineral rights. If Farmer A agrees, the extraction company will likely still need to obtain the mineral rights of his neighbors in order to form a drilling unit big enough to drill a wellhead. Now, let’s say Farmer C wants to similarly lease his land. Farmer B, however, is worried about the effects of extraction on his land and does not want to lease his mineral rights to the extraction company. In cases where Farmer B’s land is positioned so that, in order for the extraction company to include Farmer C and other landowners in the drilling unit, they must have access underneath Farmer B’s land, Farmer B’s land may be forcibly included in the drilling unit by the state.

How States Address Compulsory Pooling

Many states have adopted laws—in addition to mandatory unitization laws—to govern circumstances in which neighboring landowners disagree about whether or not to extract mineral resources from common pools underneath their land. Where, in certain circumstances, one adjoining landowner does not consent to a voluntary pooling agreement (unitization), compulsory pooling laws allow resources to be extracted from underneath the non-consenting landowner’s property by requiring this landowner to become part of a drilling unit. The non-consenting landowner is typically offered a chance to either participate in the voluntary pooling agreement or is granted a statutorily-specified compensation package. Landowners who do not ultimately consent to participate in a voluntarily pooling agreement retain all rights to surface access to their land—mining operations subject to a compulsory pooling order may only access a non-consenting landowners land under the surface (Figure 2).

States have adopted mandatory pooling laws to attempt to protect landowner rights and promote the efficient extraction of natural resources. Without compulsory pooling laws, state governments miss out on revenues from state severance and income taxes, and, because a portion of the oil or gas resource cannot be developed, the remainder of the land cannot be drilled in the most efficient manner. Compulsory pooling orders also serve as anti-holdout laws, protecting the right of landowners to exploit their own mineral rights even where their own land is of insufficient acreage to allow for extraction under state law. This is particularly relevant where there is one holdout landowner among many consenting owners. The increase in the use of horizontal fracturing has made mandatory pooling laws particularly relevant. Without a mandatory pooling order, the owner of oil and gas on the opposite side of a non-consenting gas owner could be “blocked” so that the horizontal arms of the main hydraulic fracturing well could not reach this property. Mandatory pooling laws, however, have been controversial. Many view the forced-extraction of mineral resources as an issue of eminent domain and question the fairness of cost and risk sharing mechanisms. Despite this criticism, courts have consistently found mandatory pooling laws to be constitutional.

Figure 2: Comparing Properties With and Without Compulsory Pooling

Compulsory figure 2

In many states—including Kentucky, Ohio and Virginia—compulsory pooling orders may only be made once a certain percentage of landowners in a proposed unit have signed drilling agreements. This percentage varies among states, with Ohio’s law requiring the consent of 90 percent of landowners and Virginia’s law requiring only 25 percent before other landowners may be obliged to enter into the mandatory pool.

Almost all major oil and gas producing states—with the exceptions of California and Kansas—have adopted some kind of mandatory/compulsory pooling scheme. Landowners subject to a mandatory pooling order are generally compensated for their mineral resources according to each state’s compulsory pooling statute. In most states, non-consenting landowners must either pay an up-front cost to compensate the drilling company for bearing the costs and risks of production, or must pay these costs out of their share of the mineral profits. These statutory schemes generally reflect one of the following three approaches to compensation for non-consenting landowners:

“Costs-Only” Approach

(Alaska, Arizona, Indiana and Missouri)

Under “costs-only” statutory schemes, the non-consenting owner is held liable for production costs only if the extraction is successful, without bearing any of the risks associated with extraction. This approach heavily favors the non-consenting landowner, but also has the effect of discouraging voluntary pooling agreements by creating favorable conditions for hold-out landowners. It may also discourage production by forcing extraction companies to bear all of the risk of drilling, including the possibility that the well comes up dry.

  • In Alaska, non-consenting landowners may be charged only for the costs of production attributable to their proportionate share in the event that the drilling is successful. No additional risk-penalty is assessed for landowners who do not choose to participate in drilling. Alaska’s scheme is also unique in that it allows landowners to drill on their individual parcels in the event that a voluntary pooling agreement cannot be reached and the conditions are not met for a compulsory pooling order. In this case, a landowner would be allowed to extract only an amount of oil or gas proportionate to their share of the overall drilling area.

“Risk-Penalty” Approach

(The most common approach—used by most major oil and gas producing states, including Alabama, Colorado, North Dakota, and Texas)

Under this approach, a non-consenting owner is subject to a “risk penalty” to reward the extraction company for bearing the risks associated with drilling. This penalty is effective where the extraction is successful and is generally calculated as a pre-determined percentage of the landowner’s compensation. The risk-penalty approach is thought to encourage voluntary pooling agreements by landowners who want to avoid paying a risk-penalty—which can sometimes be as high as 300 percent of the reasonable costs of production. However, it has been criticized as being too favorable to extraction companies. This approach represents the most common statutory scheme among major oil and gas producing states.

  • Colorado uses a risk-penalty approach, wherein any non-consenting landowner must pay for 100 percent of his share of equipment and operating costs for the well as well as 200 percent of his share of costs incurred in well exploration (this is the risk penalty).

“Options Given” Approach

(Pennsylvania, Virginia and West Virginia)

Under this approach, non-consenting owners can choose an alternative from a list of options that best fits their own specific circumstances upon receiving a mandatory pooling order. Generally, such schemes include an automatic option that is triggered if the non-consenting landowner does not make a timely election. Advocates of this option stress that giving landowners options best reflects the actual marketplace by allowing landowners to choose the option that most benefits them. However, this scheme also discourages voluntary pooling by encouraging landowners to adopt a “wait and see” approach by which they may choose a more favorable option under the mandatory pooling order.

  • For example, in West Virginia, non-consenting landowners may either: 1) sell their mineral interests to participating landowners for just consideration or 2) elect to participate on a limited basis (without sharing full costs) on terms to be determined by the board entering the order. These terms may or may not include the payment of a risk-penalty.

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. 

Compulsory Pooling Laws
       
Cost Only States Risk-Penalty States Enumerated Options States States With No Compulsory Pooling Laws

State

Statutory Provision

Type

Description

Alabama

Ala. Code § 9-17-13

Risk-Penalty Approach

Alabama uses a risk-penalty approach, wherein any non-consenting landowner who does not agree to pay a prospective proportionate share of drilling and completion costs is subject to a risk penalty of 150 percent of the tract’s share of the reasonable costs of drilling and production.

Alaska

Alaska Stat. § 31.05.100

Costs-Only Approach

Alaska uses a free-ride approach, by which non-consenting landowners may be charged for the costs of production attributable to their proportionate share only in the event that the drilling is successful. Alaska’s scheme is also unique in that it allows landowners to drill on their individual parcels in the event that a voluntary pooling agreement cannot be reached and the conditions are not met for a compulsory pooling order. In this case, such a landowner would be allowed to extract only an amount of oil or gas proportionate to their share of the overall drilling area.

American Samoa

NO Compulsory Pooling Laws

   

Arizona

Ariz. Rev. Stat. Ann. § 27-505

Costs-Only Approach

Arizona uses a free-ride approach, by which non-consenting landowners may be charged for the costs of production attributable to their proportionate share only in the event that the drilling is successful. This scheme is also unique in that it allows landowners to drill on their individual parcels in the event that a voluntary pooling agreement cannot be reached and the conditions are not met for a compulsory pooling order. In this case, such a landowner would be allowed to extract only an amount of oil or gas proportionate to their share of the overall drilling area.

Arkansas

Ark. Stat. Ann. § 15-72-304

Options-Given Approach

Non-consenting owners in Arkansas may either sell their interests in the unit to a participating landowner, lease their mineral interests to a member of the unit, or voluntarily pay for the costs of production as a working interest owner (become a consenting landowner).

California

NO compulsory pooling law

   

Colorado

Colo. Rev.Stat. § 34-60-116

Risk-Penalty Approach

Colorado uses a risk-penalty approach, wherein any non-consenting landowner must pay for 100 percent of his share of equipment and operating costs for the well as well as 200 percent of his share of costs incurred in well exploration (this is the risk penalty). The Colorado scheme allows these costs to either be paid to participating landowners upfront, at which point the landowner receives dividends as if he had been a consenting owner from the start, or, to pay for these costs through a calculated royalty system.

Connecticut

NO compulsory pooling law

   

Delaware

NO compulsory pooling law

   

District of Columbia

NO compulsory pooling law

   

Florida

NO compulsory pooling law

 

Florida has statutory rules regarding voluntary pooling and unitization; however, there is no forced or compulsory pooling law in the state. (Fla. Stat. § 377.28)

Georgia

NO compulsory pooling law

   

Guam

NO compulsory pooling law

   

Hawaii

NO compulsory pooling law

   

Idaho

Idaho Code § 47-322

Options-Given Approach

Idaho law provides that a landowner whose land is subject to a mandatory pooling order (an order of commission according to the statute) may either: 1) Choose to participate in the costs and risks of production or 2) Choose to sell his leasehold interest to the participating owners for just compensation.

Illinois

NO compulsory pooling law

   

Indiana

Ind. Code § 14-37-9-2; Ind. Code § 14-37-9-3

Costs-Only Approach

If an integration order is entered, the operator may charge each interested owner only for the actual reasonable expenditures required for the development of the resource.

Iowa

NO compulsory pooling law

   

Kansas

Kan. Rev. Stat. § 55-1305

Risk-Penalty Approach

Kansas has strict requirements that must be met before a compulsory pooling order will take effect; however, once granted, the non-consenting landowner may be required to pay up to 100 percent of his share of the aboveground drilling costs and 300 percent of his share of the physical drilling and underground pipeline costs.

Kentucky

Ky. Rev. Stat. § 349.085

Options-Given Approach

Kentucky's compulsory pooling laws pertain primarily to coal bed methane gas pools. Non-consenting owners have the option to either sell or lease their mineral interest to a participating owner OR share in the proceeds from the pool minus 200 percent of his share of the total production costs.

Louisiana

La. Rev. Stat. Ann. 30:10

Risk-Penalty Approach

 

Maine

NO compulsory pooling law

   

Maryland

NO compulsory pooling law

   

Massachusetts

NO compulsory pooling law

   

Michigan

Mich. Comp. Laws Ann. § 324.61513

Combination Costs-Only/Risk-Penalty

Michigan's compulsory pooling law gives a non-consenting owner a cost-free royalty equal to 1/8 of their interest. The remaining 7/8 interest is subject to a risk-penalty amounting to 100-300 percent of his share of the costs of development.

Minnesota

Minn. Stat. § 93.515

 

Minnesota's statutory guidelines do not specifically allow for mandatory pooling; however, the statute indicates that such rules "may" be adopted by the state commissioner of natural resources.

Mississippi

Miss. Code Ann. § 53-3-7

Risk-Penalty Approach

Non-consenting owners in Mississippi are required to pay, from their share of profits from the well, 100 percent of their share of any new surface equipment, 250 percent of their share of the reasonable costs as provided in the pooling order, 250 percent of their share of any new subsurface well equipment, and 100 percent of their share of the cost of operation of the well commencing with first production.

Missouri

Mo. Rev. Stat. § 259.110

Costs-Only Approach

The non-consenting owner’s share of the production costs are carried by the operator and the owner is only responsible for the proportionate share of the costs of drilling if the well is successful. 

Montana

Mont. Code Ann. § 82-11-202

Risk-Penalty Approach

A non-consenting landowner in Montana may be required to pay up to 100 percent of his share of the costs of the operation of the well, plus 100 percent of his share of any equipment acquired to drill and operate the well, plus up to 200 percent of the costs of staking and well-site preparation.

Nebraska

Neb. Rev. Stat. § 57-909

Risk-Penalty Approach

The Nebraska statute describes a complicated risk-penalty scheme that calculates the risk-penalty owed by non-consenting owners according to the depth of the well at issue. Non-consenting owners, under the Nebraska scheme, may have to pay from 200-500 percent of their share of the costs of drilling and production applicable to his interest in the well.

Nevada

Nev. Rev. Stat. § 522.060

Risk-Penalty Approach

Under the Nevada compulsory pooling law, non-consenting landowners may be forced to pay a penalty of up to 300 percent of the costs of production, to be calculated based on the cost of extraction from that owner's land.

New Hampshire

NO compulsory pooling law

   

New Jersey

NO compulsory pooling law

   

New Mexico

N.M. Stat. Ann. § 70-2-17

Risk-Penalty Approach

New Mexico's compulsory pooling law requires non-consenting owners to pay their share of production costs, plus a risk-penalty of up to 200 percent of these costs, out of that owner's share of the profits from the drilling unit.

New York

New York Environmental Conservation Law § 23-0901

Options-Given Approach

The New York statutory scheme enumerates a list of compensation and penalty options for non-consenting landowners.

North Carolina

N.C. Gen. Stat. § 113-393

Costs-Only Approach

North Carolina currently operates as a "free ride" statute; however, the state has recently established a commission to review and recommend updates to the state's statutory scheme. No legislation is currently pending in North Carolina.

North Dakota

N.D. Cent. Code, § 38-08-08

Risk-Penalty Approach

North Dakota's statutory scheme requires a non-consenting owner to pay a risk penalty of 50-200 percent of his share of the costs of drilling; this amount varies according to whether or not the non-consenting owner agrees to lease his or her mineral rights. Owners of un-leased properties pay a greater risk-penalty.

Northern Marina Islands

NO compulsory pooling laws

   

Ohio

Ohio Rev. Code Ann. § 1509.27

Risk-Penalty Approach

Under the Ohio scheme, the operator or owner of a well (or members of a voluntary drilling unit) who bears the costs and risks of production may deduct from a non-consenting owner's share of the well's profits his share of the costs of operating the well plus a risk penalty of up to 200 percent of these costs.

Oklahoma

Okla. Stat. tit. 52, § 87.1

Options-Given Approach

Oklahomans who receive a forced pooling order may choose to either receive enumerated royalty payments from the operator of the well (with no costs deducted) or may choose to participate in the operation of the well, paying operating costs up front and receiving a greater share of the well's profits.

Oregon

Or. Rev. Stat. § 520.220

Options-Given Approach

The Oregon statute stipulates that tracts of land may be integrated based on terms that are "just and reasonable" to be determined by the Department of Geology and Mineral Industries and laid out in the compulsory pooling order.

Pennsylvania

Pa. Cons. Stat. tit 58, § 408

Options-Given Approach*

Pennsylvania's statutory scheme provides for several different alternatives for non-consenting landowners, including the option to participate in the operation of the well (paying some up-front costs); the option to lease their rights to participating landowners; and the option to accept royalty payments minus the costs of production and a risk-penalty assessment.

Puerto Rico

NO compulsory pooling laws

   

Rhode Island

NO compulsory pooling law

   

South Carolina

S.C. Code Ann. § 48-43-340

Options-Given Approach

South Carolina's statutory scheme requires the non-consenting owner either lease his interest to participating landowners or participate in the costs and risks of production in a manner to be determined by the integration order.

South Dakota

S.D. Codified Laws § 45-9-33

Options-Given Approach

The South Dakota statute allows non-participating owners to participate in the risk and cost of the drilling or may elect to surrender his or her leasehold interest to the participating owners on some "reasonable basis and for a reasonable consideration", to be determined by the pooling order.

Tennessee

Tenn. Code Ann. § 60-1-202

Options-Given Approach

Under the Tennessee statute, a forced integration order may be entered if more than fifty percent of landowners with interests in the pool request such unitization. The board is to set just compensation mechanisms for non-consenting owners.

Texas

Tex. Natural Resources Code § 102.052

Risk-Penalty Approach

Under the Texas statute, any non-consenting owner who is subject to a compulsory pooling order who elects not to pay a proportionate share of the operating costs and risks of production will be subject to a risk-penalty fee of up to 100percent of his share of the costs of production (effectively doubling his share of cost).

U.S Virgin Islands

NO compulsory pooling laws

   

Utah

Utah Code Ann. § 40-6-6.5

Risk-Penalty Approach

Non-consenting owners in Utah may be required to pay up to 100 percent of their share of the costs of drilling and production; additionally, they may be accessed a risk-penalty of not less than 150 percent nor greater than 300 percent of their share of the costs of staking the location, well-site preparation, rights-of-way, rigging up, drilling, reworking, recompleting, deepening or plugging back, testing, and completing, and the cost of equipment in the well.

Vermont

29 Vt. Stat. Ann. § 525

Risk-Penalty Approach

In Vermont, non-consenting owners may be compelled to pay his or her share of costs out of his or her share of production, plus a supervision, risk, and interest assessment (a risk-penalty)of up to 300 percent of that owner's share of the costs.

Virginia

Va. Code Ann. § 45.1-361.21Bottom of Form

Options-Given Approach

Non-consenting owners in Virginia may be accessed a risk-penalty fee of between 200 and 300 percent of their share of the costs of production.

Washington

NO compulsory pooling law

   

West Virginia

W. Va. Code § 22C-9-7

Options-Given Approach *

In West Virginia, non-consenting landowners may either: 1) sell their mineral interests to participating landowners or 2) may elect to participate on a limited basis (without sharing full costs) on terms to be determined by the board entering the order.

Wisconsin

NO compulsory pooling law

   

Wyoming

Wyo. Stat. § 30-5-109

Risk-penalty approach

Wyoming uses a risk-penalty approach, through which non-consenting owners may be required to pay their full share of the costs of production, plus up to 300 percent of their share of the costs and expenses of drilling, reworking, deepening or plugging back, testing and completing. In addition, non-consenting owners may be required to pay up to 200 percent of their share of any new equipment costs.

 

*Pennsylvania and West Virginia include statutory language that exempts compulsory pooling laws in the the Marcellus Shale region. Statutory provisions in those states apply only to mineral resources outside of the Marcellus Shale formation.

 

Sources