NC MEC study groups: Compulsory Pooling

Friday, January 11, 2013: Sanford, NC.

The Compulsory Pooling Study Group of the NC Mining and Energy Commission met Friday morning, January 11th, in Sanford to examine the process of recommending regulation regarding compulsory pooling. The existing law in North Carolina actually allows compulsory pooling, which is also known as “forced pooling.” In simplistic terms, forced pooling is when a landowner who does not want to lease his/her mineral rights is forced into a pool with adjacent properties that have signed a mineral lease; such pools can help reduce risk and economize development of the resources. Originally, forced pooling actually provided consumer protection when the resource beneath the surface migrated naturally, like water flowing downhill. But the situation with “tight gas” flips this around in that it primarily serves an economic interest as pooling resources reduces the cost of development. That is a very basic explanation, so I recommend you check out the nice description done by RAFI-USA, included below. WRAL also has a good description of forced pooling, with some interviews from the meeting with concerned citizens and with Jim Womack.

The meeting began with Ray Convington explaining his role in forming NC Oil and Gas – a landowner in Lee County sitting on carbon-rich Triassic Basin shale at a time when carbon-rich shale is being opened with new technologies to extract marketable carbon (natural gas). So he formed NC Oil and Gas to be a landowner interest group to explore resource development with air, land, and water resources protected.

The Study Group includes members of the MEC, plus the invited expertise of the Consumer Protection division of the State Attorney General’s office, RAFI, NCSU Cooperative Extension, DENR, the State Energy Office, and Lee County staff. Ray Convington heads the group, and mentioned that he is also seeking additional insight from experienced gas/oil development to have industry perspective.

The discussion of information started with a presentation of information of examples of forced pooling in other states, which included the Supreme Court case of Hunter Co. v McHugh, 1943 that established the Constitutionality of forced pooling. The minimum trigger, as I understand it, for compulsory pooling has not been determined in North Carolina, and that is one of the charges for this study group to recommend.The discussion included questions of what level of risk landowners would carry if they were compelled to sign a lease, and different states have different ways of addressing that, like placing all the upfront costs on the consenting landowners, but then the non-consenting landowners pay back with the profits from royalties. The USDA provides home mortgage loans to many rural residents, and the agency has adopted a policy where a USDA loan must be paid $5000 on the principle if the royalties of a mineral lease are greater than that amount, and that does not account for income tax. The Attorney General’s office has a memo for landowners to keep in mind about their property rights and leasing their mineral rights, and emphasized at the meeting to consult with your mortgage lender before signing a lease (or in the 7-day “cooling off” period after signing a mineral lease).

RAFI and John Humphrey, a lawyer, described the role forced pooling plays, and how tricky it can be in balancing state interests, private rights, environmental interests, and economic security. RAFI has taken a helpful approach in breaking down the whole fracking process from the landowner’s perspective in terms of the pre-leasing period, the leasing period, and then the development/remediation period which was not explored at this study group meeting. They have developed a flow chart, if you will, of the foundation (landowner education, statutes, regulations, local regulations), and the steps in the process: water quality baseline data, notice to buyer, landman registration, contract with landman. In negotiating the lease, there are options to sign a lease independently, with or without counsel, or with a pool. Remember the 7-day cooling off period in which a lease may be nullified if the landowner changes his/her mind. But here’s where compulsory pooling would kick in if a pool has been formed and the logical choice for development of extracting resources is through forcing a landowner into the pool. It is a matter of granting a sort of eminent domain to the pool.

Here’s where I really learned something: the mineral lease is in fact a last line of regulation. It is a contract. It is up to the landowner to make sure the lease favors his/her interests, though. The state should have some minimum standards for mineral leases, because those landowners compelled into a pool will basically only have the protections provided by the state regulations. The mineral lease can include greater protections on water use (in fact, current law states that the mineral lease must specify what access a well developer has to water from that property), well pad set backs, placement of access roads and storage facilities, site remediation, emergency response, and even dispute resolution protocol. Humphrey emphasized that he was not promoting everyone to go sign a lease, but merely to examine what minimum standards are acceptable, and then what options landowners have for leasing their rights.

During this latter presentation, the topic of contamination liability came up, causing several members of the public in attendance to question what kind of protection they would have from contamination. The staff from the Attorney General’s office quickly chimed in that the law as written now establishes a presumption of liability on any drill operator for any drilling-related contamination with 5000 feet of the drill pad, meaning that the operator would be held responsible unless he/she could prove their operation did not cause the contamination. Though that is reassuring, the fact that fracking wells may regularly extend beyond 5000 feet now, the law may already need an update. The most interactive portion of the meeting was captured on YouTube here in which Jim Womack reminds folks that the EPA has not found any evidence of water contamination from fracking, and people have claimed to be taken up by UFO’s (but this clip includes the description of the presumption of liability as explained by the counsel from the Attorney General).

A quick reflection: this is a very complicated issue of private rights vs. public good, but the public good in this case is allowing the extraction of a profitable commodity. What was fascinating to see was the members of the public in attendance speaking with concern for the environment, but equally as loud for private rights. There’s plenty more to come on this issue, and personally, I would hope the study group will consider dissecting the bank’s perspective on mineral leases.

More to come.

BT