Forced Pooling – Overview
Written by Eric Johnson about Drilling and Producing + Leases + Royalties on December 13, 2013
Before drilling an oil and gas well in the state of Ohio, a driller must first apply for a permit from the Ohio Department of Natural Resources (ODNR). Part of the driller’s permit application includes a map indicating the leased lands the driller wants to include in the drilling unit. Several considerations dictate the size this drilling unit can be. The underlying oil and gas lease, for example, might specify a maximum unit size. Ohio law also speaks to minimum well unit sizes. Generally speaking, the deeper the well, the larger the unit size must be. A vertical well drilled deeper than 4,000 feet requires 40 acres of unitized land. Horizontal wells, like those drilled in the Utica shale have different requirements.
Let’s use an example to demonstrate how Ohio’s unitization/pooling laws operate. Let’s say Company X wants to drill a vertical Clinton sandstone well that will be 5,000 feet deep. ODNR regulations promulgated via 1509.24 require this Clinton sandstone well to include a minimum of 40 acres in the drilling unit, that the well needs to be 1,000 ft away from any neighboring wells, and that the well must be farther than 500 ft from all unleased property lines. If Company X can’t lease enough acreage to meet all of these three requirements, and has acquired, say, 98% of the required acreage, they could request that ODNR loosen some of these restrictions via 1509.27. After a hearing, the Chief of ODNR may then make minor adjustments to certain requirements if Company X demonstrates that they made a reasonable attempt to obtain the necessary leases. This is a very fact-based determination. Our firm has litigated the reasonableness of these determinations in the past (see Johnson v. Kell, 89 Ohio App. 3d 623 (1993).
Unique Geologic Structures
1509.28 operates a little differently. 1509.28 has to do with unique geologic structures that need to be drilled in a specific way to properly develop same. In these circumstances, if Company X can demonstrate the existence of a specific geologic feature and that this feature is unique enough to require a specific well unit, then the ODNR chief may modify the unitization requirements. Such modifications can include the forced pooling of unleased land. Under 1509.28, this can only occur if Company X has acquired at lease 65% of the required acreage.
What happens to the landowner whose land was forced pooled into a well unit? Both 1509.27 and 1509.28 give the chief of the ODNR discretion to address that question. Typically, such orders have recognized that a non-consenting landowner takes no risk and makes no investment in the subject well. Thus, the oil and gas developer who does take that risk and pays for the well should first make a return on said investment before the non-consenting landowner is entitled to receive any royalty. Where the planned well is of the type that is not particularly risky, the oil and gas developer might be given the right to recoup 125% of its investment before the non-consenting landowner would receive any royalties. Where the planned well is very risky (say a Utica well in an area where few have previously been drilled) the developer may be given the right to recoup 300% of its investment. Once the developer does receive the stated percentage, the non-consenting landowner is then entitled who what might be thought of as a ‘super royalty.’ Instead of receiving 12.5% of the well income, the landowner receives 100% of the income based upon the acreage the landowner has in the drilling unit.
Landowners also have the ability, if they have sufficient assets, to begin receiving royalties immediately from any well they are forced into – this requires the landowner to actually invest in the well. Essentially, they become a partner with the oil and gas developer and pay their pro-rata costs of drilling and operating the well (based upon their acreage). This right to invest can also be held by a competitor of the oil and gas operator; by way of example, if the operator has 90% of the required leases and its competitor has leased the remaining 10%, the competitor could be given the right to acquire a 10% interest in the well by putting up 10% of the costs of the well.
Read more about recent forced pooling trends, as well as the benefits and detriments to landowners here.
About Eric Johnson
ERIC C. JOHNSON attended Ohio State University, earning a degree in economics and then graduated from the University of Cincinnati Law School in 1983. His areas of practice are personal injury law, real estate, oil and gas, contracts, litigation and appeals.