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Forced Pooling in Colorado Becomes a Contentious Debate

by Kenneth E. DuBose on August 15, 2011

Forced Pooling in Colorado is being used as leverage to coax landowners into signing leases and you can bet the topic will become a major debate within the mineral owner community. The state regulation has previously been enforced in areas where the oil & gas operator is only able to secure 60% of the minerals needed for a producing unit. That means 40% of landowners in some units are forced pooled. Force pooling is a necessary evil for proper development of resources, but it will be interesting to see how liberally the law is applied in the growing shale plays of Colorado.

One question mineral owners will have in regards to forced pooling in Colorado is whether or not 12.5% (1/8th) is a fair royalty in today’s oil & gas environment. 30 years ago landowners were happy with 12.5% royalty, but that was long before the days of 20%+ rates in many of the major shale plays. While we’re not on the ground and aware of leases with a 20% royalty, the simple difference can mean thousands if not millions to mineral owners. There’s also a big difference in 1/6th and 1/8th. 16.67% (1/6th) is what many states levy on public (state owned) lands. For mineral owners, a 12.5% royalty versus the 16.67% and 20% rates can mean anywhere from $4-$7.5 in lost revenue per barrel of oil produced, without consideration for costs, at $100 oil.

You can bet the terms of forced pooling in Colorado will be challenged if oil & gas companies experience the success seen in plays like the Eagle Ford Shale, Haynesville Shale, and Marcellus Shale. 12.5% is not the most common royalty rate agreed to today in those plays and I doubt mineral owners will be happy with it in Colorado. This will not be the last time you hear about forced pooling in the Centennial State.

Under the state’s 1951 Oil and Gas Conservation Act, the mineral rights of a landowner who has not signed a lease, or refuses to sign one, can by state order be force pooled, meaning he or she can be included in an energy company’s drilling plan.

In 2010, the state oil and gas commission issued 136 orders for items such as variances and rule changes, and 48 of the orders were for forced pooling, according to agency data.

“It sounds like eminent domain, but it is really there to assure orderly oil and gas development,” said Lance Astrella, an attorney who represents landowners. “The problem is that it can be abused.”

Landmen for Oklahoma City-based Chesapeake are raising the prospect of forced pooling, according to homeowners in five developments in Elbert and Douglas counties. Landmen are outside brokers hired by energy companies to negotiate mineral leases.

A forced-pooled landowner gets a royalty equal to 12.5 percent multiplied by the fraction of the drilling area owned.

For example, a property owner with 10 percent of the land in the spacing order gets a 1.25 percent royalty as soon as the well begins producing.

While some oil company leases deduct some well costs from the landowner’s royalty, there are no costs deducted from a pooling royalty.

When the well has produced oil and gas valued at roughly twice the cost of the well — $4 million if it costs $2 million to drill — the royalty for the pooled landowner is replaced with a working interest in the well.

If a landowner owns 10 percent of the land, that person gets a 10 percent share of the well’s production, less 10 percent of the cost of operating the well.

Read the full news release at the denverpost.com

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