A common reaction to forced pooling when people first learn about the practice is shock. And no wonder — state law allows oil and gas companies to make mineral rights owners, against their will, join extraction operations as part of a drilling pool.
Industry critics say this gives private interests the power of eminent domain. Mineral rights owners forced into pools might have little knowledge of their legal options and scant time to respond when pricey corporate lawyers come knocking with thick contracts full of legalese. Unwilling owners can end up paying penalties if they resist. Colorado pooling laws were crafted back in 1951, when they might have been appropriate for the circumstances of the day. But technology and other factors have changed since then, and laws must be updated accordingly.
In the early days of oil and gas development, landowners, governed by what was known as the “rule of capture,” could extract oil and gas simply by drilling wherever they wanted and claim whatever oil or gas came out of the ground, even if those resources flowed from a subterranean pool that stretched beyond the surface property line to the underside of adjacent properties. Neighbors raced to drill, lest they forfeit profits, which led to drilling frenzies. States began to adopt laws that set minimum land-ownership standards that restricted the number of wells in a given area, or “spacing unit.” The rule of capture was superseded by property-protecting laws ensuring that mineral rights owners were compensated when their resources were developed. Companies that didn’t own all the mineral rights in a spacing unit now had to collect other owners, through leases or otherwise, into a pool before they could drill.
Given these new requirements, some states, such as Colorado, adopted provisions that allowed for compulsory pooling. Forced pooling laws were a way to deal with instances when, for example, an extraction company obtained leases on mineral rights associated with two properties that were separated by a third property whose owner was opposed to extraction, thereby blocking access to some resources. Mineral rights owners in a spacing unit that an extraction company wants to develop could have the choice either to sign a lease, participate as an owner in the well or be subject to a state-sanctioned pooling order, through which the nonconsenting owner would receive royalties after contributing to infrastructure and production costs.
States have an interest in protecting the property rights of owners who want to develop resources, and they stand to gain from the efficient extraction of oil and gas, because they collect tax revenues and enjoy indirect economic benefits. But if there is a legitimate purpose behind forced pooling, its use in Colorado has become imbalanced and unfair. It used to be commonly applied to, say, one or two farm properties. Now, as population growth on the Front Range has collided with booming energy development, it can apply to scores of unsuspecting property owners at a time. Technology has transformed the nature of drilling in Colorado. Where once extraction companies drilled holes straight down to pump out fluid resources, today almost every Colorado well involves horizontal drilling that can travel a couple of miles across many properties to frack resources locked in rock.
Colorado’s forced pooling provisions are comparatively favorable to industry. At least 34 states have forced pooling laws. In some of the those states, force-pooled owners are required to contribute to production costs only if the well successfully produces, and they bear none of the enterprise’s risks. Other states use a so-called risk-penalty scheme, in which force-pooled owners must pay their share of operation costs plus a certain amount — the risk-penalty — to cover the risks that come with the energy development. Still other states offer payment options to force-pooled owners. Colorado is a risk-penalty state. And its risk-penalty standard is a punishing 200 percent. This means the force-pooled owner must pay their full share of costs for surface equipment plus double their share of costs associated with the actual production.
Forced pooling in many states may be imposed only if a certain percent of owners within a spacing unit voluntarily joined the pool. Virginia requires 25 percent of owners to willingly join a pool before others can be compelled to. Ohio requires 90 percent. In Colorado a sole owner who wants to drill in a given spacing unit can force a pool. Forced pooling was in part meant to prevent a holdout from blocking neighbors from realizing ownership benefits, but in Colorado it can allow a single owner to force many neighbors to have their property developed. In 2017 and 2018, the state’s oil and gas regulator, the Colorado Oil and Gas Conservation Commission, handled 658 forced pooling orders.
In the debate over fracking on the Front Range, where heavy industry encroaches on homes and schools and residents worry about health and safety risks, oil and gas advocates often say that communities have a simple way of putting an end to energy development in their neighborhoods: They can buy up local mineral rights. But an adverse aspect of forced pooling is that it renders such an approach useless. What good is owning mineral rights for the sake of the environment if energy development is compulsory?
Efforts to change forced pooling laws in Colorado are numerous. Last month the Boulder-based advocacy group Colorado Rising filed a lawsuit against the state and the COGCC on behalf of the Wildgrass Oil and Gas Committee, which comprises Broomfield residents subject to forced pooling at the behest of Extraction Oil & Gas. The suit, which is in U.S. District Court in Denver, challenges the very constitutionality of compulsory pooling. Sen. Mike Foote of Lafayette has tried to change Colorado law so that properties, such as open space, owned by local governments and school districts are exempt from forced pooling. Matt Jones, formerly a state senator and now a Boulder County commissioner, was quoted in Colorado Politics last year as saying, “Forced pooling is un-American. … It is corporate eminent domain.”
A law that was enacted last year increased from 35 to 60 days the time mineral rights owners have to consider leasing offers before a forced pooling hearing can occur. It also enhanced the state-provided information available to mineral rights owners and established that nonconsenting owners are immune from costs arising from spills, injuries and other damages resulting from drilling. The bill was a good first step. But more changes are necessary if Colorado’s forced pooling provisions are to best serve the state’s current needs.
Public land should be off-limits. Taxpayers, through counties such as Boulder, sometimes buy open space not just to secure pretty views but also to curb energy development. The notion that a single corporate entity could force energy development on dozens of neighboring residents violates a basic principle of fair play. It’s time for lawmakers to consider a percent-standard before forced pooling can be imposed.
Forced pooling serves a purpose. But given demographic and technological changes, pooling laws as written in Colorado are susceptible to abuse. Legislators should enact provisions that will protect not just property owners who want to develop resources but also those who do not.
Quentin Young, for the editorial board, quentin@dailycamera.com, @qpyoungnews.
