I often visualize landmen sitting at their desk with deck full of cards and depending on what a landowner asks for, the landman draws a card and elicits a response. One card that is routinely played in Colorado is the forced pooling card. When lease negotiations don’t progress, a land or mineral owner may be told “Sign this lease or you will be forced pooled.” The use of this “card” in Colorado is common as detailed in a Denver Post article last summer entitled “Colorado property owners faced with possibility of being forced into drilling plans.” While some land and mineral owners may be at risk for forced pooling, many are not and being forced pooled may not be as bad as one would think.
What is forced pooling?
Forced pooling in a process available through the Colorado Oil & Gas Conservation Commission (COGCC) set forth in Rule 530 that essentially forces production on an unleased mineral interest. The public policy behind forced pooling is that minority interest(s) should not be able to forestall development or production. The forced pooling process begins with an operator filing an application with COGCC. From there, mineral owner(s) with unleased acreage are provided notice of the application and subsequently have an opportunity to be heard at a COGCC administrative hearing. Forced pooling is typically a last resort for operators when they cannot come to terms on an oil and gas lease with a mineral owner. With offers of eight to ten years leases in many parts of Colorado, it seems unlikely that production will be occurring in the near future, and accordingly, those areas seems to be a long ways from a forced pooling application even being filed.
What happens at a COGCC hearing?
If you are unable to resolve the terms of an oil and gas lease, and a hearing is held before COGCC (only 62 applications were filed in 2010 for forced pooling), then owners still have options. An owner could prevail at the hearing over the operator and essentially prohibit development of the acreage. Conversely, if the offer presented is found to be reasonable, an owner can still accept it after the hearing within a specified time period, or an owner can proceed as a non-consenting owner. Colorado law entitles a non-consenting mineral owner to a royalty until the producer recovers 200% of their cost (only 100% of certain costs). After that, the force pooled owner becomes a working interest owner entitled to their proportionate share of the net profits.
How do I know if I’ll be forced pooled?
Majority mineral interest owners in large tracts are unlikely to be force pooled in Colorado. On the other hand, small minority mineral interest owners or majority mineral owners of small tracts of land may be at risk of being forced pooled. Many mineral or property owners are not at risk of being force pooled; however, a land or mineral owner whose had the forced pooling card played by a landman should be sure to evaluate whether he or she is likely to be forced pooled before signing a lease because of forced pooling concerns. Begin by reviewing any spacing orders for the property (or nearby properties) and calculate your net minerals acreage to determine your overall percentage in the spacing unit. For example if there is a half ownership of the minerals in the NE¼ and spacing units are generally full sections (640 acres) in the area, then the percentage of ownership would be 12.5%. While there are no firm or set percentages as to who can be forced pooling, a few benchmarks would be 100%, over 50%, over 25%, and over 12.5%. The higher your percentage of ownership, then the less likely you are to be forced pooled and the better your bargaining position or leverage in lease negotiations.
The forced pooling card has been an effective strategy for many companies in Colorado in securing leases and just how many leases have been secured this way is really unknown. If you are thinking about signing a lease due to being “forced pooling,” make sure you understand what your risks are and evaluate whether forced pooling is really a reason that you should sign the lease offer.
Jenna H. Keller, Esq.
Attorney at Keller Law, LLC. (www.kellerlawllc.com)
Jenna H. Keller defends property rights and provides legal services to farmers, ranchers, rural property owners, and severed mineral interest owners in the areas of estate planning, natural resources (oil, gas, wind), real estate, and water.
Attorney Gary W. Davis of Eads also contributed to this article.
The information in this article is for general information purposes only. This article should not be substituted for legal advice and should not be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or reading this article does not constitute, an attorney-client relationship. You are encouraged to contact an attorney for legal advice concerning the information provided in this article