Barnett Shale

Railroad Commission ruling forces unleased land owners into drilling unit

The Texas Railroad Commission has issued a ruling allowing more than two dozen east Fort Worth landowners who didn’t sign a mineral rights lease to be forcibly included in a drilling plan, a move that gives producers added leverage against leasing holdouts. It is the first time the commission, which regulates the oil and gas industry in the state, has used a 1965 law to take such action, called a force pooling, against small land owners. Experts said the ruling is particularly applicable in urban areas, where hundreds of small tracts often must be assembled, or pooled, into a drilling unit. Jacqueline Weaver, a University of Houston law professor who has written extensively on Texas oil and gas law, said the issues involved are important enough that they likely will have to be resolved by state courts. Historically, she said, the Mineral Interest Pooling Act has been used to protect small land owners from getting squeezed out of drilling units, rather than forced into one.

“It sets a precedent,” Weaver said of the August ruling. “Horizontal drilling is going gangbusters in the Barnett Shale, and other producers will have the same difficulties.” To see the Railroad Commission examiner's original ruling, the revised ruling and the final order, click here and then click on the third item from the bottom, titled "Application of Finley Resources, Inc. ..."

See the full report from the Friday Star-Telegram here.

-- Jim Fuquay

What if I don't sign a lease?

We received an e-mail recently from a reader who wanted to know what happens if he simply refuses to sign a lease when most landowners around him have signed. Could he be "force pooled" into the lease?

Editor's note: What follows is an updated response to this question in light of the Texas Railroad Commission's August 2008 ruling on a force pooling case. (For a report on that decision, click here.) Our original response remains further below for historical context.

You can be force pooled into a drilling unit, but you still can't be forced to sign a lease. In August 2008 the Railroad Commission granted a request from Finley Resources to force pool an east Fort Worth neighborhood. It was the first time the commission used the Mineral Interest Pooling Act of 1965 to force a small property owner into a unit whether he wanted in or not. The statute previously had been used occasionally to allow a small property owner to force his way into a unit against the wishes of the larger property owner. In its ruling, the commission required that Finley and its partners, Chesapeake Energy and Dale Resources, to pay unleased property owners a 20 percent royalty on the value of production. In addition to that, the companies also must pay unleased property owners a working interest on the remaining 80 percent of production after costs are recouped.

Here's our original response, based on information we received from the Texas Railroad Commission in October 2007:

First, Texas does not allow “force pooling” for what is called “primary production.” Primary production is the initial drilling and development of a field. The Barnett Shale is under “primary development” now.

Texas does allow forced pooling for “secondary production,” an example of which is when water is injected into an older reservoir (called waterflooding) to boost production.

Oklahoma, by the way, does allow force pooling for primary production.

Regarding the lease: A landowner who does not sign a lease cannot be forced to participate in a lease. The unleased property may not be included in the operator’s lease acreage when applying for a drilling permit. (This could present a problem if there are a number of unleased properties in a small area, since the operator might not be able to put together enough contiguous acreage to allow a well.) In addition, the well bore may not pass directly beneath the unleased property, and it must remain at least 330 feet from their property line. If it comes closer than that, the operator must ask the Railroad Commission for an exception to this spacing rule. The unleased property owner could protest the exception, and there would be a hearing. Finally, if a landowner does not sign a lease and the well is drilled anyway, the landowner may then ask to be included in the lease. If the operator refuses, the landowner may petition the Railroad Commission to be included in the lease.

-- Jim Fuquay