Pooling in West Virginia A Historical and Prospective Analysis Overview – What is Pooling? Pooling – the integration of tracts or fractional mineral interests to meet state spacing requirements—e.g. State XYZ requires a minimum of X feet between wells drilled to the ABC formation: Lease A Unit Lease B Well What is Pooling? • Pooling is the assembly of leases and pieces of leases to create a drillable site under state spacing laws, rules and regulations – NOTE: WV has NO spacing laws, rules and regulations • THUS: There is NO “pooling” in West Virginia utilizing the standard, classical definition – BUT: Broadly used term anyway! Unitization • Unitization: – joint operations on large scale – e.g. “unit operation” – combines leases to develop entire reservoir or defined parts of a reservoir B Select Field Area – Operated as one unit D G A C E F Unitization • “. . . the joint operation of all or some portion of a producing reservoir.” • Unitization is important where there is – separate ownership of portions of the rights in a common producing pool – in order to make it economically feasible to develop minerals at considerable depths. • The best results in conservation can be attained only by unitization. • W&M Manual of Oil and Gas Terms Types of Pooling and Unitization • Voluntary –Pure matter of contract between Lessor and Lessee (typically through lease provision or through lease modification) –Usually a right granted to Lessee subject to defined limitations –Usually triggered by the recording of a declaration of “pooling and unitization” Policy Behind Pooling & Unitization − Encourages efficient land use − Ensures mineral development for owners of small tracts whose minerals would not otherwise be developed − Ensures that non-consenting owners cannot impede development of cotenants’ or neighbors’ minerals Pooling in West Virginia Statutory Pooling 1. Shallow Wells 2. Deep Wells & Secondary Recovery 3. Coalbed Methane Wells Pooling in West Virginia Shallow Wells W.Va. 22-6-1 Defined as “any gas well, other than a coalbed methane well, drilled no deeper than one hundred feet below the top of the “Onondaga Group”: Provided, That in no event may the “Onondaga Group” formation or any formation below the “Onondaga Group” be produced, perforated or stimulated in any manner.” Pooling in West Virginia Shallow Wells – Pooling Process ** Not available generally ** • Was included in WVDEP Regulatory Legislation in 2011 Regular Session, but was not passed • Marcellus “fatigue” prevented consideration in 2012 Pooling in West Virginia Deep Wells W.Va. 22C-9-1, et seq. Defined as “any well, other than a shallow well, drilled and completed in a formation at or below the top of the uppermost member of the ‘Onondaga Group.’” Pooling in West Virginia Deep Wells – Pooling Process 1. Operator must drill “discovery well” to establish pool 2. Application then filed by operator of well or other operator affected by a well in the pool 3. Notice, including area to be covered by spacing order 4. O&G Conservation Commission enters order setting spacing and acreage for each drilling unit 5. Must have lease/agreement on tract where drilling operations will be located 6. Operator must have written consent and easement from surface owner of record identifying the well location Analysis of 2010 – 2011 Proposal • Senate Bill 424 – Incorporated new pooling provisions for shallow horizontal wells into existing Deep Well statute – Provided for administrative pooling of leased and unleased tracts – Included a fix to legislatively reverse the Tawney decision by authorizing deduction of PPEs – Pooling provisions were included in comprehensive regulatory proposal addressing development of Marcellus Shale – Pooling quickly became known as “forced pooling,” and was labeled a taking by critics Observations – Why Pooling Failed in 2011 • Regulatory Portion of SB 424 overshadowed pooling provisions and Legislature had not yet reached consensus on regulatory provisions • Lack of unified position within industry • Coalition of diverse, vocal opponents to development had platform to oppose bill from environmental, surface owner and royalty owner points of view • Tawney fix portion of pooling provisions created additional challenges not squarely related to pooling concepts • Critics had defined public perception of industry leading up to 2011 • Industry had not adequately educated Legislature on topic Path Forward • Two options: pooling or lease integration? • Expand Deep Well Conservation Law – Traditional pooling for shallow horizontal wells – Apply to leased and unleased tracts – Follow current procedure established by the WV Oil and Gas Conservation Commission – WV Code Section 22C-9-1 and 39 C.S.R 1 and 2 • Create Lease Integration Statute – Authorize integration of leased tracts – Cannot integrate unleased tracts or tracts controlled by others – Limited version of existing Deep Well Conservation Law – Limit to shallow horizontal wells WVONGA Decision • Pursue Lease Integration legislation in 2013 • Proposed legislation provides that Lessee: – Must own or control leases for 100% of mineral interests in tract. – Must use reasonable efforts to obtain lease modifications to authorize pooling. – Can seek order to integrate leases that do not have pooling clauses if • Mineral interests are unknown or unlocatable, or • Have obtained modifications authorizing pooling from majority (final percentage to be negotiated) of mineral interest owners. – Order will authorize the integration of the leases, which authorizes pooling of the gas in the unit. – Order will require the operator to pay the mineral interest owners a lease modification payment, the exact terms of which are still being negotiated. Big 191H • 62 acre lease tract • Producer holds lease (lessee) – No pooling clause in lease – Thus, must modify lease to allow for pooling • 21 interest owners – 14 signed lease modification – 6 unknown / unlocatable – 1 refused to sign lease modification • Cannot drill two laterals on BIG 191H – Oil and gas will likely be left in ground • Lateral shortened on BIG 190H H9 well – Reserves will be left in ground www.eqt.com 17 Oxford 152 Pad • 200 acre lease tract • Producer holds lease (lessee) – No pooling clause in lease – Need to modify lease • 49 interest owners – 47 signed lease modifications – 2 refused to sign • 0.0008% interest nonconsent • Must shorten 8 laterals • Can’t drill 1 lateral • Acreage will be stranded and oil and gas will not be developed www.eqt.com 18 Successful Legislative Strategies • Horizontal Well Control Act (Marcellus Bill) – Special Session December 2011 – Only 5 “No Votes” out of 134 Members – Provided first step toward regulatory certainty • Mine Safety Bill (Response to UBB Disaster) – Regular Session 2012 – Unanimous Approval – Sufficient Compromise Achieved Common Core Strategies • Build consensus within the industry first • Involve the interested parties early • Establish good rapport with Governor’s Office and legislative leadership in both Houses • Convene working sessions with interested parties • Work with Chairmen and key committee members • Maintain consistent message and outwork opponents Points to Take Away • Lease integration is a good first step in an incremental legislative strategy • WVONGA and IOGA must work together • Enlist early support of Governor and legislative leadership • Reach agreement on as many issues as possible with other interested parties • Actively engage during legislative session, and remain agile in order to respond to unanticipated developments Thank You! G. Kurt Dettinger Charleston, WV [email protected] 304.353.8152 Material Disclaimer These materials are public information and have been prepared solely for educational purposes to contribute to the understanding of energy and oil and gas law. These materials reflect only the personal views of the author and are not individualized legal advice. It is understood that each case is factspecific, and that the appropriate solution in any case will vary. Therefore, these materials may or may not be relevant to any particular situation. Thus, the author and Steptoe & Johnson PLLC cannot be bound either philosophically or as representatives of their various present and future clients to the comments expressed in these materials. The presentation of these materials does not establish any form of attorney-client relationship with the author or Steptoe & Johnson PLLC. 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