E n v i r o n m e n t a l R e s o u r c e s & E n e r g y C o m m i t t e e:
M a y 2 0 1 0
House Environmental Resources and Energy Committee
Chairman Senator Camille "Bud" George's May 2010 Update:
SPECIAL UPDATE ON SEVERANCE TAX & FORCED POOLING & HB 2213
I have little doubt that the House will pass a severance tax this session. But when it does, we should be ready for what will come back to us. It is almost certain that the Senate will amend any severance tax bill with a controversial, ugly provision top on the list of the natural gas industry: forced pooling.
Pooling is a practice used by oil and gas companies to group adjoining mineral rights leases to form a larger drilling unit. This is an important issue for producers seeking to drill horizontal wells because a larger land unit would allow for longer and more cost-efficient drills. Typically companies attempt to pool through agreements, but when they encounter mineral rights owners who are unwilling, for whatever reason, to lease their rights, the companies have resorted to "forced pooling."
Forced pooling is a government process by which the unwilling or unavailable mineral rights owner would be forced to lease his or her interest in exchange for a royalty share. Currently, some form of forced pooling exists in Oklahoma, Louisiana, Texas, Colorado and New York, although the applicability of forced pooling as well as the rights and duties of those force-pooled vary considerably. The process is that a gas producer would file a pooling application with the appropriate government agency, and following notice and an opportunity to respond, the agency may issue a pooling order setting forth the terms and conditions of the forced pooling, including compensations for the unwilling owner.
Issue: Economic Efficiency v. Eminent Domain
Proponents of forced pooling assert that, as a policy matter, pooling promotes economic drilling and limits the environmental footprint of drilling. They also assert that pooling protects the interests of the willing mineral rights owners in the drilling unit who want to maximize their financial benefits and also protects the unwilling owner by counteracting the Rule of Capture—which states that any gas migrating from an unleased property into a well drilled on a leased property is fair game for extraction.
However, critics of forced pooling call it an eminent domain for mineral rights for the pure benefit of private companies. According to a local newspaper article, a mineral rights owner in Fort Worth, Texas, who refused to lease his mineral rights--for the simple reason that he did not want to be part of the gas development in his neighborhood, called forced pooling "compelled leasing" with "an eminent domain essence." He asserted, "This is my house, these are my minerals and I want to be the one who makes those decisions."
The Pittsburgh Business Times, in its February 5, 2010 article, predicted that the issue of forced pooling "is likely to heat up, as companies increasingly look to drill in more urban areas." It noted that Chesapeake Energy Corp. has been acquiring many small tracts in urban areas in Pennsylvania, including Lawrenceville and West Mifflin.
In Pennsylvania, there already exists a forced pooling provision in the Oil and Gas Conservation Law, but there is no official record indicating that this law was ever invoked or used. The provision would allow a currently non-existent Oil and Gas Commission to administer forced pooling applications and issue a forced pooling order after a public hearing. Importantly, this provision applies only to wells penetrating the Onondaga formation, just below the Marcellus, and Marcellus wells thus would not be covered.
Property Rights Sentiment in Pennsylvania
Following the deeply unpopular U.S. Supreme Court decision in Kelo v. City of New London, in which the court validated a local municipality's condemning of two private homes to turn them over to a private developer, Pennsylvania, along with 31 other states, condemned the decision and swiftly moved to toughen the requirements for condemnation. Acts 34 and 35 of 2006 were signed into law, making it more difficult to declare blight and prohibiting the use of condemnation strictly for purely private benefits.
Any severance tax bill that will be part of budget negotiations this year may spell trouble for the House Democrats and a win-win situation for the natural gas industry. As I have said, it is almost certain that any severance tax bill passed by the House will be amended by the Senate with a forced pooling provision. Once the word gets out, such provision is likely to be met with fierce public opposition, for good reason—an intrusive government would be depriving an individual's property rights to benefit private companies. The House Democrats will feel intense pressure to concur with the Senate amendments in order to enact a severance tax that will be necessary to fill a budget hole. They will face an ugly choice—either vote for the tax and for forced pooling and face the populist outcry, or reject the Senate amendments and forgo the severance tax. For the industry, it will either gain force-pooling or be saved from the tax. Once again, we won't be happy with the outcome.
The gas industry touts the environmental benefit of forced pooling, but we know the real reason for forced pooling is money. To protect the environment, including our waterways and drinking water, we must amend the badly outdated Oil & Gas Act. My HB 2213 contains provisions that will protect our drinking water sources and environmentally sensitive watersheds and place reasonable environmental safeguards on drilling activities. HB 2213 must be part of any solution to mitigate the environmental harms of gas drilling.
by: Steve Coffman, Dundee, NY
The Pennsylvania State Senate may soon be tagging 'Forced Pooling' onto the Gas Severance Tax Bill. This email covers some of what that topic may mean to you, as well as what may have already happened to your property values.
According to a comment I received from Texas, the drilling companies have a way where they don't even have to pay royalties to hold-outs (in forced leasing situations) even if they end up taking the holdout's gas.
A message from Colorado indicates that it was better for them to sign when they were going to be force pooled, since it gave them at least some negotiating power.
(See these comments at the bottom)
Imagine this: You lease your land to a gas drilling company, then, before or after drilling, you decide that you want to sell your land. You find plenty of prospective buyers---the problem is that none of them can find a bank to finance a mortgage, because most banks and insurance companies consider gas-leased land to be an unacceptable risk.
Where does this leave you? Most likely stuck. And what does it do to the value of your property? Most likely depreciate it, and the value of neighboring properties, too.
Or, imagine this: You have not leased your property, but your neighbors have, and---because your property is within 300 feet of theirs---banks also balk at financing your property---because of volatile property values and environmental hazards.
Or, Imagine this: You own a farm or a lake cottage in an area where gas drilling is taking place and the value of your home and land has become so depreciated by the number of unmortgageable properties around you that your investment is no longer worth what you owe on it.
These are not just hypothetical examples. Ask your local bank or credit union.
FHA, HUD, GMAC and most major banks and credit unions hold exactly these policies on gas-leased property and the properties near them.
Reportedly, Wells Fargo, First Place , Fidelity, First Liberty and Bank of America all consider financing such mortgages excessively risky.
HUD, for instance (in its Handbook, 4150.2, page 2.7) puts it this way:
Operating and abandoned oil and gas wells pose potential hazards to housing, including potential fire, explosion, spray and other pollution.
No existing dwelling may be located closer than 300 feet from an active or planned drilling site. Note that this applies to the site boundary, not to the actual well site.
The appraiser must examine the site for the existence of or any readily observable evidence of a well.
As Yates County Attorney George Mathewson points out:
“An upstate Federal Credit Union now states its policy regarding refinancing on properties on which there are gas leases (as opposed to active gas wells), as:
If there is an oil and gas lease on your property, Visions will not give you a mortgage loan secured by your property. . . . If you presently have a mortgage with Visions Federal Credit Union and you subsequently enter into an oil or gas lease after September 14, 2009, then Visions Federal Credit Union, may require you to pay the balance of the loan in full pursuant to the terms of the existing note and mortgage. Please note that Visions Federal Credit Union will not sign a Subordination Agreement or other consent to lease with an oil or gas company.’
“For anyone trying to sell property in leased or drilled areas, if the buyers cannot obtain mortgage financing, this will eliminate 90% of the potential purchasers. And if the demand for the property drops drastically as a result of the unavailability of mortgages, then the price will also drop accordingly.”
Two other factors further complicate this risk to landowners, “Horizontal Drilling” and “Compulsory Integration.”
Horizontal Drilling --- While gas companies claim that they will only need one drilling pad per square mile, many landowners do not realize that that may include as many as 12 horizontal gas wells emanating from each single pad, or that those horizontal wells extend as far as a mile in all directions to make sure that the entire square mile will be exploited.
Each of these square mile coverages is called a ”unit.”
Compulsory Integration --- Within each “unit,” if 60% of the land is leased, then the remaining 40% of land can be taken and drilled---under the legal concept of “Compulsory Integration” ---even if that 40% who have not signed are opposed to drilling.
It’s true that victims of compulsory integration can only have gas sucked out from under their land, but cannot be trespassed upon on the surface without their permission. And it’s also true that such non-leasers still have to be duly compensated for any gas taken. However, what is not mentioned in cases of compulsory integration is that the non-leased land is also devalued---still considered damaged goods by banks and insurance companies when those unwilling parties seek financing or insurance.
In addition, long past any temporary uptick in housing values to accommodate incoming workers, that surplus housing meant to meet the temporary need will be added to the mortgage slowdown---even further glutting the housing market and depressing property values as soon as the majority of those transient workers hits the road.
Bottom Line --- Without a doubt, massive gas-leasing will inevitably lead to serious property devaluation and property tax decreases throughout our region.
Time is running out. The gas companies like to say they’re bringing us a windfall, but if you look at where they’ve been, it looks more like a tornado has blown through.
The banks and insurance companies know this perfectly well, and that’s why they often consider gas-leased land too risky to finance.
We need to wake up. Fight to protect our values (both property and otherwise)---before it’s too late.
I am in a forced pooling situation right now. The majority of people in my neighborhood signed leases 2 years ago. The neighborhood associations are now supporting XTO-EXXON's bid to force unsigned leases in to their pool. Can you imagine?
I turned down $25K an acre for a damn good reason. Now they can just take my NG against my will and not even pay for it. All to satisfy a greedy majority. This is war.
THEY CAN TAKE YOUR GAS WITHOUT PAYING FOR IT?
That's right. I'm still trying to understand it all. It's complicated. Even lawyers are confused. The state of texas has allowed such rules in rural settings for a long time. This is brand new territory in urbanized areas.
Drillers have gamed the system. In March, I was served notice about a hearing to force pool. There is something called Rule 37 that allows this but they have to pay me royalties. I had 30 days to file a protest. I got neighbors to join me. We sent letters to the State. The hearing was set for a day I couldn't go due to other commitments. The day of the hearing XTO withdrew their Rule 37 request. We thought we had won. Not so.
A few days later they refiled the hearing request but separated the lease acreage into 2 parts. The new hearing would not include my immediate neighborhood. That hearing happened last week. No one showed up to protest but several letters were sent. Unfortunately the court sided with the XTO folks who showed up.
The court examiner said they expect a new hearing to be filed soon that DOES include my property. It will not be a Rule 37 but something called an MIPA that allows them to not pay me. They may not even have to inform me this time because of the way they have gamed rules. Confusing I know.
To make things worse, the majority leaseholders in the neighborhood are HELPING XTO so they can start getting their royalties. So you have neighbor against neighbor. Disgusting indeed.
That’s exactly why we signed a lease. Because not only can they force pool here in Colorado, they can also simply come onto the land and drill. We could not even imagine such a scenario. In fact, EnCana held it over our heads for five years threatening just that. When they approached us to lease two years ago, we saw it as a very tiny bit of leverage to negotiate, so we negotiated for water monitoring and a no-surface occupancy clause. It was the best we could do under those circumstances. So what did they do? They’re putting ten wells on another neighbor. We’ll be surrounded by it, but at least, by God, they aren’t on our land.