Forced Pooling: Adam Ferrari, CEO of Ferrari Energy, Explains How You Can Lose Your Mineral Rights – Even When You Say, “NO!”

Dec 7, 2020 by

The following article by Adam Ferrari, CEO of Ferrari Energy, shares everything you need to know about forced pooling and losing your mineral rights, even when you disagree.

Adam Ferrari, CEO of Ferrari Energy

A confused mind says “no.” Ever heard that one? It’s true. People don’t like to agree to things they don’t understand. And when it comes to mineral rights and the legal jargon that goes with it? Yeah, there’s a LOT of confusion.

And as soon as forced pooling pops up…your “no” doesn’t count.

If you get a letter from a landman representing an oil company, letting you know your mineral rights will be forced pooled, we suggest you pay attention. You are about to lose a lot of your rights, and it’s all legal. You lose when you do nothing.

What is Forced Pooling?

Forced pooling is a legal way for oil and gas companies to tap into the mineral resources you own even if you haven’t given them permission. Essentially, they secure a lease to drill on a neighbor’s land, and by doing so, they can drain both you and your neighbor’s minerals at the same time with one wellbore.

A few hurdles have to be cleared first before a company can force pool your mineral rights. Of course, this varies from state to state, but the main points are generally the same:

  • The spacing unit or pool of land to be drained is typically a minimum of 640 acres.
  • The oil and gas company attempted to purchase or lease mineral rights from every owner whose land falls within the spacing unit (aka pooling unit).
  • The oil and gas company has secured leases for a minimum percentage of the land within the pooling unit. For instance:
    • Force pooling Colorado is 50% [1]
    • Force pooling North Dakota is 55% [2]
    • Force pooling Wyoming is 80% [3]
  • Mineral rights owners are notified by mail of a hearing. In some states, the notice is required to be mailed only 15 days before the hearing. (see footnote 3)

So, forced pooling is a legal way for oil and gas companies to tap into and extract your minerals without your agreement. And if you object? Well, they have a category for you.

How Oil and Gas Companies Legally Take Your Minerals Without Your Permission

When an oil company wants to drill a well, it must first propose a pooling unit and apply for a permit. Once approved by the respective state commission, the pooling unit is established and the oil and gas operating company drills the well. The pooling unit is the group of lands that are drained or “pooled” into the respective wellbore. It is critical to note that the wellbore does not have to physically cross a piece of land to pool into the wellbore.

Prior to applying for the permit above, the landman for the oil company provides lease offers to everyone who owns a mineral interest in the pooling unit. If the landman gets the threshold legal percentage of owners to execute oil and gas leases, then he can force the holdouts to participate by going to the land commission with a force pooling proposal. The land commission calls a hearing and all the mineral rights owners are notified. Typically, this notice period is 15–45 days.

The plan has to meet specific guidelines by the state’s governing body. It includes where the wells will be drilled, how many wells they intend to drill, and how much everything will cost. The plan must follow specific guidelines, typically, 40 acres around an oil well, 640 around a gas well, or 1280 acres around a horizontal well with a lateral wellbore length up to 15,000 ft in some cases. The plan involves your minerals being extracted, with or without your permission and is presented at the hearing.

If you own mineral rights in the area the plan covers, you should get a letter inviting you to the hearing. You can show up and protest and your objection will be noted, but the commission decides on approving the plan or not. To be fair, the commission has a tough job. They have to balance the wants, needs and desires of several competing interests. The reason forced pooling laws were invented in the first place was to try and make things fair to all involved. If you wanted to get royalties from your mineral deposits and a neighbor didn’t, you would probably be ok with there being a legal way to move forward.

However, not everyone is good with someone taking their mineral deposits if they haven’t agreed.

Three Options When Facing Forced Pooling:

  1. Join the party and agree to voluntarily pool your minerals and help pay your share of the costs of drilling and operating the well. This categorizes you as a non-operating working interest owner. You’ll take on liability for the project and participate in the losses if it goes bust. But you’ll also have a higher percentage of the profits if the well strikes black gold! However, most people aren’t thrilled with the idea of taking on all that risk and paying out of pocket a bunch of money on a speculative investment.
  2. Lease or sell your minerals. The landman who is putting the deal together is probably more than willing to lease or buy your minerals. A strategy often employed is he’ll pass along the lease to the Operator after he’s marked it up and made a tidy sum for himself. It is worth noting you can lease to anyone. You don’t have to lease your mineral interests to the contract landman working for that Operator or the oil company. You can also sell your minerals on the open market for a large upfront lump sum of cash.
  3. Be forced pooled. This is what happens if you do nothing or object, but the commission decides to move forward anyway. You get put into what they call a risk-averse category. The party goes on without you.

In some states, such as Wyoming, this is a very punitive proposition because the drilling company does not have to pay you any production royalties until the well has paid out multiple times. As opposed to Wyoming, Colorado allows for force pooled mineral owners to be paid a statutory royalty rate of 1/6 even though they are force pooled. This is much better than the rate of zero paid to force pooled mineral owners in Wyoming.

Generally speaking, once the operator has made 100% to 300% (depending on the state) of their operating costs back, then you are eligible to begin sharing in the profits from the well. After the various payout thresholds have been hit according to that state’s laws, the force pooled mineral owner will be paid 100% of the royalties accrued to their respective tract of land. Just so you know, those royalty checks sometimes come with participation in any liabilities.

How to Survive a Forced Pooling Order

The laws on forced pooling are often stacked in the oil and gas company’s favor. Many state governments like the cash they get from these endeavors. So, if you’re going to negotiate these waters, it’s best to get a solid understanding of your rights and options. Most likely, not everything the landman says is going to be in your best interest.

There are several laws with comprehensive steps that must be followed in order for forced pooling to work. If a landman or Operator takes shortcuts or the commission doesn’t notify everyone correctly, or a host of other specific duties are not followed correctly, that creates an opening to stop the forced pooling. Additionally, there are many changing market conditions, laws being updated, and even political forces that bring pressure on oil and gas companies, state governments, landmen, and Operators. Knowing the ins and outs of the current status of these influencing forces works in your favor.

There are professionals who keep abreast of all these dynamics who are happy to discuss your situation and offer tangible solutions. Hence, you get the full amount of what you deserve.

An engineer or landman with transactional market-based experience can help you know what your minerals are truly worth, what others are most likely being paid, and how to negotiate the best deal for yourself. We hope this clears up a bit of the confusion and opens a path forward.

About Adam Ferrari
Ferrari Energy CEO Adam Ferrari originally trained to become a chemical engineer, eventually completing his degree Magna Cum Laude. After gaining experience in both energy and finance, he decided to launch Ferrari Energy from the ground up. Ferrari was intent on educating mineral owners on how to manage their assets. With close ties to the community, Adam made it a priority to support various organizations, including Denver Rescue Mission and Next Steps of Chicago.

References:

[1] State of Colorado Revised Statutes Title 34 Mineral Resources § 34-60-116 Drilling units–pooling interests.

[2] State of North Dakota Ch 38-08 Control of Gas and Resources, 38-08-09.5, Ratification or Approval of Plan by Lessees and Owners.

[3] State of Wyoming 30-5-110, Section (f), Agreements for … operation as a unit of 1 or more pools or parts thereof and pooling of interests in oil and gas therein; amendment of orders and agreements.

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