Have you been threatened with forced pooling/unitization
by a driller or land company
because you will not sign
their lease or amendment papers?
Have you received papers giving you notice
of a forced pooling/unitization proceeding before the
Oil and Gas Conservation Commission
Have you been threatened with “forced pooling” (really forced “unitization”for mineral owners) or have you been threatened with a partition suit, or use of a “cotenancy” statute if you don’t sign a lease or lease amendment of your interest in some oil and gas minerals on terms the driller wants?
Have you been served with a notice of a proceeding in front of the Oil and Gas Conservation Commission of West Virginia for forced pooling/unitization?
If so, this web page is for you.
This web page is also for you if you will not sign a lease (or at least if you will not sign a lease or amendment on terms you do not like) and if you have received a letter from a driller or land company that says it is their “best and final lease offer” giving you options for an election of “production royalty” or an election of a “working interest”. This offer is the last step before the driller uses the Cotenancy Modernization and Majority Protection Act, often called just “cotenancy”, in order to force the terms of a lease signed by others who own a share of your tract on you. WVSORO has a web page on that, and you can read that too, but first you need to read all of this web page.
You in the end may wish to appear before the Oil and Gas Conservation Commission for the hearing on a driller’s application for a forced oil or gas drilling unit. You would be particularly interested in doing that if you think you have not been offered or do not think you will be receiving the highest royalty and a signing bonus that is the weighted average paid to other minerals owners signing leases in the proposed unit. However, an explanation of how to make an appearance and /or file any appeal is way beyond the preview of this web page. You probably need to hire a knowledgeable lawyer to do that. We suggest you read this web page first though.
The West Virginia Surface Owners’ Rights organization (“WVSORO”) educates and advocates primarily for surface owners. (And rest assured that WVSORO was able to get provisions in the new forced pooling/unitization law that prohibits the driller from forcing well pads, roads or other surface disturbance on your surface land (even if they force your minerals)! We have a web page on that you should read to understand you do not have to have a well pad, road, etc. on you, or if are willing to allow that, you should get a lot of money to allow them to do so.)
Even though WVSORO’s work is mostly for surface-only landowners, about one third of our dues paying members also own their minerals. Usually they share ownership of their minerals with other family members or other individuals (this is called “cotenancy” or “coparceners”). So on WVSORO’s web page we are offering some basic guidance to mineral owners with the questions at the beginning of this web page now that West Virginia has a forced pooling/unitization statute effective June 7, 2022.
Our first piece of advice.
Our first piece of advice is that understanding just the language of the provisions in oil and gas leases is difficult. And understanding on top of that your bargaining position and what leverage you have and do not have in negotiating and signing an oil and gas lease is very, very complicated — particularly with our relatively new cotenancy statues and our brand new forced pooling/unitization statute. There are lots of moving parts, and there is lots of money and there are lots property rights at stake. And what you sign will certainly last for decades. (We have seen leases still in effect after 100 years.) So your descendants will be bound by what you sign. Therefore you are advised to seek out the advice of a lawyer or other person who understands the oil and gas leasing business. We have a list of some elsewhere on our website.
It is particularly true that you need to seek advice if you own a tract of minerals all by yourself that is larger than a few acres or it is particularly true if you own a partial, large share of a tract of minerals with a large number of total acres. On the other hand, if you own only a small fractional interest in minerals with other extended family members (usually) or otherwise less than one “net acre”, or even if you own just a few “net acres” in minerals — either way, you can probably get by without going to a lawyer and just taking our second piece of advice.
Many people call us, particularly folks from out of state, who say they had no idea that their ancestors once owned a mineral interest and that they have now inherited a share of it. Often farmers who owned the surface and minerals in their tracts of land put in their wills or in deeds that each of their children would get a subdivision of the surface acreage, but had them all own all of the mineral interests. That way if a well was drilled anywhere on the farmers’ property, all the heirs would get some money. There are lots of things that can be done with surface land and even as heirs died off there were therefore motivations for ownership of a tract to be collected and owned all by one person. Not so with minerals that only have a purpose and value when the time comes that a driller wants to drill in the mineral tract. As a result it has often happened that generations passed on with no motivation to collect all the shares of ownership in any one person. So as long as at least one heir kept paying the very low property taxes, many heirs ended up owning some fractional share (measured using “net acres”) of the mineral tract. Now with the new horizontal drilling techniques and large scale frac’ing, drillers are trying to lease these old mineral tracts now that have shared ownership by dozens or even scores or hundreds of people.
What is a “net acre”? “Net acres” is a way of expressing or measuring your share of ownership in a single tract of minerals (or even surface land). It is also used for expressing or measuring your share of ownership in a unit drawn to include several tracts. For ease of explanation this explanation will use your share of a single tract. The ownership of most mineral tracts in West Virginia is shared among extended family members and sometimes others (collectively called “cotenants”). To determine the share of signing bonus payments and the share of royalty payments to which you are entitled if you own a share of a tract, the driller calculates the “net acres” you own. For example, if ownership of a 16 acre tract is equally shared among 16 cousins, then each cousin owns 1 “net acre”. (It is unusual for that many cousins to own exactly equal shares because your aunts and uncles probably had different numbers of children, and so your aunt’s and uncles shares will have been divided up differently among the cousins. But for our example we will assume 16 people each owning an equal share) It is important to understand that even though the calculation of net acreage you own is used to express or measure your share when dividing up bonus payments and royalties, as a matter of law you own (using the example above) a 1/16th interest “undivided share) in every rock formation, and pebble in the 16 acres. Splitting off an actual acre with boundaries for you to have as your own separate tract would be done in a “partition” law suit (or in a deed all the cotenants would agree to and sign). Splitting off surface acreage into separately owned subdivision tracts is frequently done for surface land. However, in the case of mineral tracts, courts will not often do that because some believe that smaller mineral tracts are less useful and so are worth less per acre than larger ones. Instead courts usually allocate ownership of fractional interests to one of the owners of a factional interest and compensate the owners with a onetime payment. If you have been served with a partition law suit, or are otherwise interested go to our web page on that to avoid being taken advantage of in the law suit. You can fight this, though it is hard.
If you are approached to sign a lease or amendment/ratification, it is important to find out how many net acres you own in order to decide how to proceed. Sometimes it is easy to find out how many net acres you own. But it can also be difficult to learn how many net acres you own if you are approached to sign a lease or an amendment to a lease. Very often either the cover letter or the attached “order of payment” or other documents accompanying a proposed lease tell the number of net acres you own (not to be confused with the total acres in the tract!). Or they or the lease can have enough information for a knowledgeable person to figure it out. Or you can make a guess that if great- great- grandfather owned a total of 6 acres, your net acres are not going to be worth doing more than taking our second piece of advice. Or you can just ask the person who contacted you about the lease and they will often, but not always, tell you.
Our second piece of advice.
Our second piece of advice is again, unless you own all by yourself a tract of minerals that is larger than a few acres, or unless you own a large share of the net acres of a tract of minerals with a large number of total acres in a tract, you are usually better off to do nothing! DO NOT SIGN A LEASE OR AMENDMENT unless you have gotten advice from a knowledgeable person first — probably a lawyer. This is because the process of forced pooling/unitization will almost always get your better terms than the driller will offer you in the lease/amendment it wants you to sign. The reasons for that are very complicated and set out below if you want to do a deep dive into the process. But the requirements set out in the forced pooling/unitization statute will get you the highest royalty % that is provided in any other lease in the drilling unit! Royalties are payments made to you as the oil or gas is produced based ona percentage of the value of the gas. The forced pooling/unitization process will also get you the average signing bonus of all the other leases in the drilling unit! (A higher royalty percentage will in the long run almost always get your lots more money than a higher signing bonus.) If you respond to the filing or threat of filing of a forced pooling/unitization proceeding by signing a lease, you probably will not do that well financially!
In addition to financial terms, if you respond to the filing or threat of filing of a forced pooling/unitization proceeding by signing a lease offered to you by a driller, the fine print the driller sticks in the lease will almost always help the driller and take away any common law and property rights from you. In the past you may have signed paperwork to buy a house or a car without having your own lawyer. But for car buying and home buying, there are statutes and rules and regulations that require lots of consumer protection provisions in those kinds of papers. That is not the same for oil and gas leases. In the case of an oil and gas lease ALL of the fine print legalese of provisions in the lease or amendment were drafted by the driller’s lawyers!
There are several factors that give you bargaining leverage where you might do better than just waiting for the forced pooling/unitization outcome. And if those factors apply to you, it may be worth it to contact a knowledgeable lawyer to help you negotiate a lease (or to negotiate one yourself). Here are the factors giving you extra bargaining leverage:
- If gas prices are high and the driller is in a real hurry to put a drilling unit together and drill horizontal wells, then you have extra bargaining leverage. (If gas prices are low, you might have trouble getting a good deal without waiting for forced pooling/unitization.)
- If the driller has already gotten a drilling permit to drill a well that is into or even just within 500 or 1000 feet of the boundaries of your mineral tract, then you have extra bargaining leverage. (Note that the boundaries of the mineral tract could be different from the boundaries of your surface tract if you also own the surface. Often the surface tract has been subdivided up into separate surface tracts over the years, but the underlining mineral tract was not divided up into separate mineral tracts.) There are websites that could allow you to find that out if you work at it, but it is complicated and beyond the scope of this discussion to explain all of that. Maybe that is one reason to hire someone to at least look into that possibility and negociate you a better lease than you would get by just allowing the pooling/unitization process to work.
- If your land is in an area — in a county — where drilling is “hot” for some reason — then you have extra bargaining leverage. If your area produces high quantities of rich gas or lots of associated liquids, then it is more likely that the driller will be in a hurry or willing to pay more. Most counties where there is Marcellus shale or the shale drilling are generally north of Rt. 50 and west of I-79. Among those counties some are hotter than others. And within particularly hot counties some areas often termed “districts” can be hotter than other districts.
- If you are the last or nearly the last mineral interest owner the driller needs to get signed up in order for the driller to be able to say that the driller has gotten 75% of mineral interest owners signed up, then you have extra bargaining leverage. This is true whether the driller is trying to get to 75% signed up in a particular individual mineral tract so the driller can use the cotenancy statute, or whether the driller is trying to get 75% signed up in a proposed drilling unit of many mineral tracts (or parts of tracts) so the driller can use forced pooling/unitization statute. Unfortunately this is almost impossible to find out. Even if the driller is recording the documents it gets signed in the courthouse as it gets them signed, you will not know all the names under which they will be indexed so you can look them up unless you do extensive, complicated title and ancestry research. And you might be able to look in the indexes under the driller’s name, but the driller is likely to have hundreds and hundreds of documents listed. And often drillers hold on to documents and wait for later do not record the documents as soon as they get them signed — so even if you could find all of the recorded documents you would not know what the driller still has in the driller’s office.
Should you still be inclined or persuaded to sign a lease rather than allow forced pooling/unitization, consider insisting on what is called in the industry a “most favored nation” clause being placed in the lease. The term comes from international trade laws originally. You could get a negotiated royalty percent and a negotiated signing bonus in the lease you sign. That would be the floor. But also insist on a clause that says that if the driller has or makes a lease for any other acreage in the unit that has both a higher royalty without deductions and a higher signing bonus, that you will instead get that higher royalty and signing bonus. Or even insist on the highest royalty without deductions in any lease and the hugest signing bonus in any other lease. Or maybe if the driller insists it will not go above a (very good) royalty percentage, but needs you to sign in order to get to 75% of a tract for cotenancy or 75% of the unit for forced pooling (or even to completely lease the unit), then insist on the highest royalty and a whopping signing bonus more than $5000 an acre. The driller might take that because the driller does not want to give you a higher royalty because a higher royalty costs them more over time and the driller would have to give it to lots of other tracts on which they use the forced pooling/unitization statute or even the cotenancy statute; but giving you a whopping signing bonus would only be raising the average signing bonus a little that they would have to give those forced in; so that would not cost them that much (and the signing bonuses cost them less in the long run). And they might give you more if you insist on a flat amount that is not related to your acreage. Note again that if you sign a lease, you will still be stuck with lots of their other disadvantageous language in the lease that you will not be stuck with if the driller use forced pooling/unitization or cotenancy. So you should insist on any arbitration clause being removed, any choice of law or jurisdiction clause being removed, no storage or injection language, a Pugh clause (un-leasing acreage in your tract they do not actually put in a unit to pay you royalty), and removing the title warranty. And if you own the surface and they want you for a well pad, lots of surface protections you can learn about on this web page.
To help you understand more about mineral leasing dynamics in considering whether it is worth it to negotiate your own lease, you may want to read the next section on these dynamics. Drafting this next section (and talking to fellow travelers) is what led us to the advice above. We apologize in advance for how difficult it is to read and understand. But this is a difficult to understand area, and to come up with our advice, we had to analyze back to front, not front to back.
Leasing dynamics after passage
of the forced pooling/unitization legislation in
Senate Bill 694 effective June 7, 2022
Note that these moving parts do not always move in the same rational order presented here. Sometimes drillers will be trying all of the dynamics set out below at the same time to see which turns out sooner or better for them. And in advance we want to say that we understand this is very hard to follow. That is because it is very hard to explain because there are so many moving parts. Yet another reason to, if you know you only have a fraction of a net acre or just a few net acres, to do nothing and let forced pooling and/or cotenancy proceed. But if you have a lot and/or if you are interested, try to understand all of this before proceeding.
- The driller will first try to get to a full unit of tracts or parts of tracts to be drained by the wells it wants to drill into the unit by signings of all owners of all interests in all tracts in the proposed unit if it can lease a whole unit full of tracts that way.
(The driller can use cotenancy in a particular tract instead of getting all 100% of them signed up if it gets 75% of the interests in a single tract signed up. IF it gets 75% signed up it can deem the other 25% signed up also and go ahead and drill/unitize that tract. However, the driller does not want to use the cotenancy statute if it does not have to because if it uses cotenancy against an unsigned mineral owner in the 25%, it has to give them the highest royalty and weighted average signing bonus from the leases of the 75% that has been signed. Instead of using cotenancy to get that last 25%, the driller would prefer to try to talk an unsigned mineral owners in the 25% it could use contenancy against into signing a lease with a lower royalty and into a less than average signing bonus than would result from the use of cotenancy.)
So the driller will first tries to get the owners of all of the mineral interest in its proposed unit to sign leases. We expect that will not happen all that often. If it gets close, the driller will sometimes shorten or otherwise change the size of the unit to avoid unsigned tracts. If this results in leaving out tracts that actually are drained by the unit’s wells, then the owners of those tracts may have a good court case for bad faith pooling or even trespass frac’ing, and that court case would be worth lots and lots of money.
- The driller will next try to get a full unit by using cotenancy on incompletely signed individual tracts in the proposed unit if it needs to in order to get a full unit of tracts.
(The driller does not want to force pool/unitize tracts into a unit because 1) it is an expensive and time consuming proceeding before a government commission, and it is very hard to change the unit after the commission rules on its initial application, and that happens a lot now with units created without using any commission we understand; and 2) that would give unsigned mineral owners the highest royalty and average signing bonus anywhere in the whole proposed unit, whereas cotenancy gives the 25% unsigned mineral interest owners of a particular tract only the highest royalty etc. in their particular tract.
-To get to signing 75% of the interest in the mineral interests of a particular tract in order for the driller to be able to use cotenancy, the driller will tempt mineral owners with large signing bonuses, but the driller will not want to offer high royalty percentages. This is because that high royalty percentage would go to any of the 25% cotenants who might remain unsigned, and higher royalty pays more to the mineral owners out of the driller’s packet in the long run than a high signing bonus.
-Once the driller gets 75 % of the mineral interest in a particular tract signed up by their owners so cotenancy can be used, the driller’s offers will be low. The offers from drillers to sign the 25% of interests that have not signed will be low so that new leases from these folks will not raise what the driller has to pay to other unsigned owners of mineral interests in that particular tract. Also the driller will want to avoid going above the highest royalty or average bonus of what was already signed because the driller would have to recalculate highest royalty and average signing bonus it is offering, or may already have given, to other unsigned mineral owners. Too bad the calculation is not as of the time of filing of the application. Then it would be easier to bargain higher.
(The law says that before the driller can use cotenancy, the driller has to make “reasonable efforts” to sign up owners of unsigned interests in the 25% of the interests that are unsigned. It may be possible to challenge the use of cotenancy against an unsigned mineral interest owner in a tract by arguing that the driller has not made “reasonable efforts” to lease unsigned mineral owners before using contenancy because the driller will not offer highest royalty and average signing bonus of existing leases?)
(Partial mineral owners, particularly of small interests in a tract, are often better off to just allow cotenancy to lease their interests because they will get the highest royalty, no deductions, no arbitration clause, no choice of law clauses, and no injection or disposal or storage clauses. If the driller still needs a mineral owner’s share in order to get to 75%, mineral owners should insist on including those terms at least. Drillers may be reluctant to raise the royalty above any they already have in the unit, but they may be more willing to give a higher bonus in order to induce a mineral owner to sign a lease that gets the driller over 75%. They are more likely to offer a whopping big bonus instead of a higher royalty. Perhaps mineral owners should insist on a “most favored nation” clause that gives them the best anyone else gets/got.
(Forced pooling/unitization probably will put an end to partition suits. It may not be an end to the threat of partition suits to try to get a mineral interest owner to sign a lease. Or they might even file the partition suit as leverage and not really be willing to pursue it if that is cheaper for one problem tract than using forced pooling/unitization. If that happens that may raise the issue whether such tactics are reasonable efforts. But now they will probably threaten forced pooling/unitization instead of partition.)
So if the driller cannot get all the interests in all the tracts signed up, but if it can get 75% of the interests in all of the tracts it needs for a unit signed up, it will use forced pooling/unitization.
- If the driller cannot get all the owners of all of the tracts it wants in its unit to sign leases, then it will look at the tracts that have not been fully signed up and see if it has 75% of the total interests signed up. If it does, it will most likely stick with using cotenancy as explained above if it can. However, if there are still some tracts for which it does not have 75% of the interests in a particular tract signed up (maybe even a tract with no owners signed up) then it will need to use forced unitization of mineral tracts into a unit for horizontal drilling. (Forced unitization of mineral tracts is often called “forced pooling” though that term can also refer to other processes — like pooling lessee/driller/operator interests who are arguing who gets to be the one to drill wells in the unit). The driller will use forced pooling/unitization because, 1) some tracts will have no one signed (wholly owned by one person or a whole family that will not sign), or 2) the driller can’t get near 75% interests signed up to be able for cotenancy on one or more of the tracts it needs.
-If afer using cotenancy the driller does not yet control 75% of the interests in the whole unit yet, then it is in big need. So the driller will push hard to get more tracts or more portions of partially signed tracts. But the driller will be reluctant to go high on royalties on a new lease because a new highest royalty will apply to all other unsigned mineral owners in the whole unit that it was not to force into the unit. But if badly needed, the driller may go high, particularly on bonuses which are not as valuable in the long run the driller may be particularly willing to go high, maybe very high, if a mineral owners’ tract/interest is the last one they need to get to 75%. (Maybe for small interests/tracts, the mineral owner should agree to a lease that says “highest royalty and highest signing bonus in any other lease in the unit” — something called a most favored nation clause. This would get the driller towards 75%. A problem for the mineral owner in signing such a lease will be that other lease terms that drillers stuff in leases these days. Drillers will insert in their “standard form” leases clauses like arbitration and waiver of implied covenants. So such a lease may not be as good for the mineral owners as if being forced. If the driller needs this interest to avoid forced pooling/unitization that may work! If the driller insists on a lease that only provides the highest royalty and average signing bonus then the mineral owner may as well just get forced because the bonus will not be as high and the mineral owner will get stuck with onerous terms in the lease the driller uses.)
-Driller is going to go for the biggest, most uninformed tracts first to try to get to 75% with leases with lowest royalty and bonus.
-If already has 75%, of the unit signed, then it will try to satisfy “good faith” negotiating requirement but still try staying low on royalties and bonus,
– So may be bad faith on the part of the driller to offer terms that stay below what would pay if force pooled?.