Sunday, October 3, 2010

Conservation Pooling Forced Pooling in Pennsylvania - What is the Debate

" Landowners without gas leases could be compelled to allow companies to drill in the Marcellus Shale beneath their land under a procedure outlined in legislation proposed by two members of the state House of Representatives.

The Conservation Pooling Act, sponsored by state representatives Marc Gergely, D-Allegheny County, and Garth Everett, R-Lycoming County, which has not yet been introduced, would establish how gas companies form orderly units of land for developing the gas from the shale - a priority issue for the growing Marcellus Shale industry in the state."

The draft legislation would
1. Create an Office to oversee the process, develop a procedure that would put in place "forced pooling".
2. It is likely that this process - would provide some general provisions in the lease including bonus payments and royalities.
3. Industry indicates this is needed to minimize environmental issues  (???) - They are not specific about chemical usage.
4. The current bill requires an operator to have leases to drill on 75 percent of the land in a proposed unit .
5. Defines a standard drilling unit as 640 acres, establishes a notification and hearing procedure for objectors, sets a royalty of 12.5 percent for the gas produced, and protects an unleased landowner from having any surface impacts from the drilling.   (Guess what - royality payment is low - there has been deals that are as high as 25% - this is one of the problems- this approach prevents negotiation and in some cases could be used to force the hand of a private land owner that has access to a critical area - remember real estate is all about location, location, location.)
6.Three choices to unleased landowners who will be forced to join the pool-
a.  accept the terms of the lease offered to others in the pool;
b. pay their share of the costs of developing the well up front  (Really Now we are paying development costs) and
c. share in any profits; or share in the profits of the well after a penalty worth 400 percent of their share of the costs is deducted from their payments (Legisators are WORKING For Who?).

Guess What - I do not like forced pooling -and this proposal I like even less.
My thoughts
1. Forced Pooling - Ok may be needed but - the gas company should be required to own 90 % of the plot and not be permitted to use the surface for this additional area - no pipelines, compression stations, and not well sites.
2. Royality Payments - the payments should be market rate and be at a premium to the landowner.  This premium should be at least 25 %.
3. The landowner should not have to reimburse for cost of development.  Especially if the landowner is only getting wellhead price.
4. This right should not include other minerals or gas, have a depth provision, and the company should be prevented from any form of injection other than hydrofracing.
5. Agreement would need to have additional provisions and require the company to pay all growing greener fees or cost or fees, require long-term monitoring of surfacewater resources, and long-term assumed liability for the life of the well, plus 25 %.
6. Shut in fees need to be higher - and really account for the fact the company is using the well as a storage reservoir.  The fee should be based on a percentage of production prior to be shut in.  The minimum fee should be 25 % of production or should be a fee that approaches the storage cost for the gas.   They are leasing the space by shutting in the well and not paying rent.  Since the gas rights owner is only getting a portion of the wellhead price, the mineral rights holder is not truely benefiting from the value of storage.
7. Land owner should be given free gas or a flat check for the free gas provisions.
8. In addition to a bonus payment - land owner should receive a supplementary payment (tax free) to account for the landowner given access to something the landowner does not want to release but is being forced to release for the benefit of the community- This should not be a taking.
This is a working blog concept on forced pooling  - I would prefer not to have forced pooling.   Also, I do not think we need this regulation to promote horizontal wells.

1 comment:

  1. Conservation Pooling Act (Cover letter)

    Oil and Gas Conservation Law