The Compulsory Pooling study group meeting, March 1st: rights, recommendations, interests, value, and planning

The Compulsory Pooling Study Group of the MEC met Friday, March 1st, in Pittsboro, from which the audio and presentations are available on the DENR web portal. The Fayetteville Observer wrote a brief summary of the meeting highlighting the recommendation the group wants to send to the MEC. During the meeting, no one opposed the recommendation that reads:

The Commission in ordering pooling of mineral, oil, and gas interests shall not have the authority to grant an operator any rights to the surface property above any mineral, oil, and gas interests compelled into a pool. Any access to surface rights above compelled mineral, oil, and gas interests may be obtained only through negotiation of a voluntary agreement between the operator and the owner of the surface rights, regardless of whether such surface rights are unified with or divided from the underlying mineral, oil, and gas interests.

I do not know if they were able to pass the recommendation to the MEC this past week as there was a question of whether the study group needed to vote on recommendations and if they needed a quorum or MEC members for that vote (only 2 of 4 members were present for the meeting). The Fayetteville Observer mentions the slight discussion that arose regarding the recommendation, whether this would imply the group recommends compulsory pooling, something that the group wants to disucss further. Personally, I agree that this recommendation does not endorse compulsory pooling, but merely establishes a condition to met should the state adopt a compulsory pooling requirement.

I encourage folks to download the paper written by Brigid Landry and Michael Reese – Brigid Landry had conducted research on compulsory pooling law while in law school and reports her findings in this paper, and shared a presentation of that paper via telephone at the meeting. The discussion after the presentation opened the topic to a richer extent, much of which to be examined by the study group in meetings to come. In short, she explained that, legally speaking, pooling:

  • is NOT a policy to force owners into a lease
  • is NOT a violation of property rights
  • is NOT an exercise of eminent domain
  • does not force owners to accept the minimum agreement for a mineral lease.

She explained the legal background for pooling comes from the need to update or refine “the Rule of Capture.” Pooling basically prevents waste and protects correlative rights (individual property rights). I admit that I’ve had difficult time wrapping my head around this in specific terms. I get that pooling helps economize where wells will be constructed in a strategic manner, thereby reducing the number of wells and the the risk on the surface associated with each well, and I also understand that the capture of minerals from adjacent property should result in that property owner being compensated for those minerals. But otherwise, I have to think of pooling as an effort to protect property owners in a similar fashion that a zoning ordinance does. Zoning ordinances trigger a negative connotation in many parts of the state, but it protects a property owner from an undesirable use of property adjacent to theirs that would significantly reduce his/her own property value.

The presentation covered the different ways in which states have set up their pooling structures, and the talk concluded with a good, lengthy discussion between study group members and Brigid – and simply between study group members. And credit to Ray Covington to go beyond reading a few written questions from folks in attendance to allow a couple of questions from the audience to the presenter directly (who also deserves credit for having such a thorough question and answer session via telephone). I want to draw attention to what I think is a fascinating question…

Grady McCallie of the NC Conservation Network, a member of the study group, asked Brigid outright (and I’m paraphrasing as best I remember the question): “I understand the state’s interest in pooling, but doesn’t the state’s interest vary whether the value of the resource being pooled is high or low? and then, given that the value of gas is as low as it ever will be, don’t property owners who have not signed a mineral lease who might be forced into a pool have an interest in waiting for the value of the resource to rise relative to what it is now?” The answer is just a straight forward: the state’s interest is merely from the aspect of reduction of waste, and to limit the number of wells needed to access those resources.

This question of value of our resource(s) seems to bridge the compulsory pooling issue to the broader issue raised by a fair assessment of the extent of our resources, the market itself as the price of gas is still quite low, and what kind of approach the state and the localities plan to take. I had the fortune to have a brief “walk and talk” conversation with Seamus McGraw in which I asked his perspective on how to soften the boom-bust cycle in a way that would stretch out the economic prosperity of the mineral extraction and thereby avoid, as much as possible, the bust. He said quite plainly: it’s all in how we plan it. If we go into fracking knowing that the riches are not great, the risks are high, but that there are valid financial rewards to it, and put the appropriate rules, regulations, ordinances, taxes, coordination, cooperation, foresight, patience, and common sense into practice, it could work. Right now, common sense tells me that SB 76 seems misguided on attracting industry to come in droves as early as possible due to the low taxes early. But common sense also tells me that we need to start planning, planning, and more planning for this to happen: if there’s no plan in place, fracking will indeed tear this region and state apart.

BT

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