Recent applications by Kerr-McGee Oil & Gas Onshore, LP (“Kerr-McGee”) and related orders by the Colorado Oil and Gas Conservation Commission (the “Commission”) have brought a myriad of decisions by the Commission that they have the authority to essentially administratively amend oil and gas leases. Specifically, the Commission has ruled that the “Commission may enter an order pooling all interests in the unit and private contractual agreements, including existing oil and gas leases, may, as an indirect consequence, be amended,” and that the “Commission has the authority to enter a pooling order irrespective of any private contracts.” (emphasis added).
Kerr-McGee’s Amendment Requests
Cognizant of oil and gas leases that either permit pooling for gas only, not specifically allow pooling, or that have spacing acreage numbers lower than desired for horizontal drilling, Kerr-McGee has routinely been seeking amendments to oil and gas leases, specifically in Weld County, that will permit them to pursue larger spacing units for horizontal oil wells. The amendment is typically requested, as Kerr-McGee explains, in order for the royalty owner to receive a royalty for new horizontal wells to be drilled, suggesting that if the amendment is not signed that no royalties will be received or that the horizontal well will not be drilled. Letters typically request a thirty day return of the amendment, or if the amendment is not signed that relief will be sought with the Commission under CRS 34-60-116. No consideration, cash, or otherwise is typically offered with the amendment request raising issues of whether there has been any bargained for consideration to make such amendments effective.
Commission Rulings Amending Leases
For those royalty and mineral owners that do NOT sign Kerr-McGee’s request amendment, or perhaps even those that do albeit without consideration, an application to the Commission, pursuant to the provisions of C.R.S. § 34-60-116 (6) & (7) and Commission Rule 530, is sought by Kerr-McGee to pool all interests. As basis for its request, Kerr-McGee typically states:
That certain royalty owners whose oil and gas leases pre-date the widespread use of horizontal drilling and did not contemplate formation of horizontal wellbore spacing units under Rule 318A have not agreed to participate in the Wellbore Spacing Unit for purposes of royalty payments. Applicant has contacted each of these royalty owners, or has made diligent efforts to do so, to obtain their consent to participate in the Wellbore Spacing Unit for purposes of royalty payments. Applicant has not been able to contact some of these individuals, or has received no response from them.
Essentially, Kerr-McGee sets forth their ‘rationale’ for asking the Commission to administratively amend their lease for them. Additionally, their notions of “diligent efforts,” are questionable, especially when nothing has been offered in exchange for the requested amendment. For those owners that object or file a protest with the Commission—the cards are stacked against them right now with the Commission. The Commission will readily disclose their blanket response to this issue—namely that (1) operators like Kerr-McGee can avail themselves to relief under C.R.S. § 34-60-116 (6) and Commission Rule 530 even if there is a lease because the Commission has, “broad discretion in entering pooling orders,” but that (2) the Commission cannot hear contract disputes because pursuant to Chase v. Colorado Oil and Gas Conservation Commission any dispute regarding whether the underlying lease prohibits the requested pooling or whether the lease amendment demonstrates a lack of consent is “excluded from Commission jurisdiction,” and, finally, (3) no reasonable offer is required under CRS § 34-60-116(7) due to the existence of a valid lease between the parties, and as a leased party, the owner cannot be a nonconsenting owner under Colorado law. Creative—yes, correct—no way. First, relief under C.R.S. § 34-60-116 (6) and Commission Rule 530 should not be available if there is a lease, otherwise companies can simply “amend” their leases by seeking relief with the Commission—since when did the laws of contract become superseded by administrative authority of the Commission? Second, if the dispute underlying the lease is outside the jurisdiction of the Commission, then how can Kerr-McGee provide such resuscitate of its ‘out-dated’ leases as the basis for its application to start with? Finally, even all of the above are all incorrect—shouldn’t there be some remedy available to the owner rather than just whatever Kerr-McGee feels like paying you?
Take a look at the docket for the Commission - http://cogcc.state.co.us/ (Hearing / 2014 / Docket Link)- see all of the applications for “forced pooling,” by Kerr-McGee for “out of date leases” and be outraged by this “takings” by the Commission to “administratively amend” your lease, but don’t be surprised by the outcome – I have several copies of the same Commission response if you want to know your fate with the Commission when filing a protest.
Jenna H. Keller, Esq.
Attorney at Keller Law, LLC. (www.kellerlawllc.com)
Jenna H. Keller 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 in Nebraska and Colorado.
The information is for general information purposes only. This 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 does not constitute, an attorney-client relationship. You are encouraged to contact an attorney for legal advice concerning the information provided.