Drillers can NOT pool a mineral owner’s lease without authorization!

UPDATE:  WE WERE RIGHT!  There is no “implied right to pool” in a lease.

    Drillers were approaching mineral owners who owned a share of minerals in a tract that had already been leased for conventional vertical drilling and saying that the driller wanted to modernize the lease to allow for horizontal drilling (in shale formations).  When the mineral owner asked to modernize the royalty percentage (upward) and other lease terms, some drillers were willing to negotiate.  Other drillers were saying that there was no need to modernize old leases by amending in a pooling clause – they were saying that there was an “implied right to pool”,  “So you better sign this and take the (paltry amount of) money we are offering to sign and be happy with the old royalty amount.”

    WVSORO, as you can tell by this web page, thought it was absurd that there was an implied right to pool for horizontal drilling in an old lease.

    The drillers did get one Circuit Court Judge to agree with them (see below), and then began parading that Judge’s order around the State, to persuade mineral owners to sign bad deals. 

    We created this web page and set out eleven reason why that ruling was wrong.

    Eventually the issue worked its way to the West Virginia Supreme Court.  And the Supreme Court unanimously – five to nothing – held that we were right in this decision.

    So if a driller comes to you and wants to get you to sign a lease amendment to add a pooling amendment, but will not agree to a higher royalty and other changes (You really should see a lawyer who can take their fee out of an increase is signing bonus money the lawyer would negotiate),  don’t do it.  And if the company says there is an implied right to pool and they really don’t need the amendment, then you know if are dealing with a real scoundrel and really need to see a lawyer.

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If a Driller or Landman Tells You They Can Pool Your Mineral Land Without a Pooling Provision in a Lease or an Amendment, Don’t Believe Them!

Newer oil and gas leases usually have “pooling” provisions that allow the leased mineral tract to be combined (or “pooled” or “unitized”) with other leased mineral tracts into “units”.  This authorizes the driller to drill a single horizontal well bore through several leased mineral tracts.  This is not necessarily a bad thing.  If there is going to be drilling, horizontal drilling has its advantages if done right, and if those affected are compensated according to the benefit the driller received (which is more than the loss for the person affected).  However, many of those pooling provisions have language that goes too far — way too far.

A pooling provision is needed in a lease for drilling horizontal well bores unless the leased tract is hundreds and hundreds of acres.  And a pooling provision is needed to state how the royalty from the well or wells in the unit will be divided between the owners of all of the mineral tracts included unit.  However, most of the pooling provisions drafted by the drillers do not have “Pugh” clauses that allow the acreage of the mineral tract that is not included in a unit or units to be leased to another driller.  So the driller will only pay royalty based, not on all the acreage that is in the tract, but only the acreage in the tract that is included in the unit.  A Pugh clause will let the mineral owner find a driller who will drill/pool those acres and pay royalties for that additional acreage.

Most pooling provisions drafted into leases by the drillers also allow units that are way too large – 640 acres when a single 5000 foot horizontal well will only drain about 120 acres.  Allowing units which are too large creates two problems.

First, as just explained, leases on all the acreage on all mineral tracts in a unit will be held by production when in fact all the tracts have not been drilled and royalty is not being paid on gas that could be produced out of all of the acreage.  But without a Pugh clause, the owners of the undrilled acreage in the tracts included in the unit cannot lease the un-drained acreage to another driller that will fully develop their tracts and pay full royalties.

Second, unless the driller drills enough wells to drain all of the acreage included in the unit, some or most of the royalties for gas produced from tracts in the unit that have actually been drilled will not be paid to the owners of those acres that actually were drilled.  Instead some or most of the royalties will be paid to the owners of other mineral tracts in the unit whose gas is not being drilled or drained.

No one should sign a new lease with a pooling provision in it without talking to a knowledgeable oil and gas lawyer!

What about lease amendments with pooling clauses?  Your tract of minerals may be subject to an old lease that is being held by production from older, conventional vertical wells.  If that old lease does not have a pooling clause, then the driller needs an amendment to the lease that adds a pooling provision in order to combine your tract with other tracts for the drilling of a horizontal well.  Do not let anyone tell you different!

Unfortunately, because of a recent ruling by one Circuit Court judge, some drillers may be telling people that drillers do not have to have a pooling provision or pooling amendment to put leased tracts into a unit with other leased tracts. The drillers will say that the judge ruled that there is an “implied covenant” in all leases, even old ones, to do so.  A driller may tell you this to get you to sign one of their unfair pooling provisions in a lease or an amendment. Don’t believe them! The judge’s ruling is wrong.

Here is a link to the judge’s ruling, which we say is wrong.

The thoroughness of the reasoning and the legal sophistry contained in the judge’s decision must be admired.  However, the result is pure alchemy. Lead cannot be turned into gold, and the law and the questionable facts relied upon by the ruling do not, and should not, lead to the conclusion that there is an implied covenant to pool in all leases.  In the words of a Farm Bureau lobbyist, there is no invisible ink in a lease.

There are eleven reasons why this ruling is bad and wrong — reasons why another Circuit Court judge should not rely upon it and why our West Virginia Supreme Court should not agree with the Tyler County judge’s ruling if the issue ever reaches them.  The eleven reasons that the ruling is wrong and should not be relied upon are set out in more detail on our web site.

Fortunately this decision which is so favorable to industry has no “precedental” value in other Circuit Court cases.  A decision like this by a Circuit Court judge is only maybe “authority” that can be shown to another Circuit Court judge to try to persuade that judge to rule the same way in another case.  It is not “precedent” that all Circuit Courts are supposed to follow like a West Virginia Supreme Court of Appeals ruling would be.

So don’t buy the argument from a driller that they do not need a lease provision or amendment to pool a leased tract with other leased tracts.

The driller may still try to get you to sign an amendment to the old lease that provides for pooling.  The driller wants this because the Tyler County judge’s ruling may be not used in other cases or in other counties.  But more than that, the pooling provisions the drillers ask for in most of those amendments go beyond just authorizing pooling. Outrageously, some of the pooling amendments offered by drillers have slipped in additional provisions that would take the royalty owners out of the class actions law suits for unfair and unlawful deductions of royally expenses the driller has been taking from royalty past checks!

Not only are such unfair provisions snuck into the amendment that the driller wants to modernize the lease for its purposes, but important lease updates that would modernize the lease for your benefits are left out of the amendment.  The drillers want amendments to modernize the old leases held by production from conventional vertical wells in order to add provisions that are needed for modern production techniques, including pooling and unitization provisions to take advantage of horizontal drilling.  However they do not want to put provisions in their amendments to modernize old leases to today=s standards for royalties and for bonuses for signing new leases.  Old leases almost always provide for “one-eighth”, or 12.5%, royalty and $1 to $5 an acre delay rental/signing bonus. Most modern leases have royalties up to 18% that do not allow for deduction of production expenses like “line loss”, and new leases generally have signing bonus of at least $1,000 an acre.  These higher royalties and signing bonuses are made possible by the modern techniques, so if a lease is modernized for the new techniques of drilling, it should also be modified for the new economics of drilling.

Again, do not buy the argument from a driller that they do not need a lease provision or an amendment to pool your leased tract with other leased tracts.  If you are a mineral owner who is offered an amendment to an old lease you should get the advice of an experienced oil and gas lawyer before signing the amendment and hold out for modernizing the economic provisions of the lease in addition to modernizing the lease for modern production techniques.