Colorado Legislature Considers Limitations On “Force Pooling”

Rep. Mike Foote (D-Lafayette) and Rep. Dave Young (D-Greeley) introduced House Bill HB17-1336, legislation which would prevent a lessee representing less than a majority of the mineral royalty owners from obtaining a force pooling order. The authors of the legislation argue the intent of the bill is to prevent a mineral rights owner or lessee from forcing adjacent mineral interest owners to lease their minerals and to provide better information to affected parties. In addition, the legislation would provide mineral owners with additional time to decide whether to lease, participate in proposed well(s), or decide not to participate in the drilling of proposed well(s). Proponents of the legislation also argue that under current law, an oil and gas operator has too much of an advantage when it can tell an unleased mineral owner that if he or she does not sign a lease, then they will be force pooled.

The bill was introduced late in the session where rules allow expedited consideration, with the probable strategy being to prevent extended deliberation. The bill appears to conflict with Colorado property and constitutional law. Given significant departures from existing law, a longer time is necessary to fully appreciate how current law would be changed. Here are some of the problems:

Constitutional Violation. Under the bill COGCC could not approve a force pooling application unless a majority of royalty interest owners join in the application. Royalty interest owners would have a veto power over force pooling. This is true even if the royalty owners have leased their minerals and given lessees the right to pool the interest. The bill would take from the lessee its right to pool under the lease. Article II, Section 11 of the Colorado Constitution prohibits such ex post facto laws: “No . . . law impairing the obligation of contracts, or retrospective in its operation . . . shall be passed by the general assembly.”

Property Law Violation. The bill would give pooling authority to mineral owners who have already leased their minerals. If one makes the safe assumption that these existing leases contain pooling clauses, the bill would give pooling authority to a class of owners without executory property rights, while ignoring lessees, who own the executory rights under the lease and are the ones who must decide whether to pay for the proposed drilling.

There are other problems. It is not clear whether unleased mineral owners are included in the definition of “Royalty Owners,” which under the proposed legislation is the class which would decide whether or not force pooling will be allowed. If unleased mineral owners are not included, then the bill excludes the very people the bill’s supporters claim they want to protect, because unleased mineral owners would not get to vote on whether or not COGCC should enter a force pooling order.

The bill also glosses over the fact that the current statute requires an operator to offer each unleased party a lease with terms at least as good as the average lease in the area. This form of “favored nations” clause is built into the statute to address the problem of overzealous landmen using the force pooling option to threaten unleased owners.

The bill also requires the operator to file an electronic report providing the name and location of all non-consenting owners. This information would be posted in a searchable database on the COGCC website, allowing anyone to easily identify and attempt to lease these parties, providing the public with the benefit of the confidential title work done by the operator.

Anyone who has tried to obtain consent of a majority of any group of owners who have no stake in an action knows how difficult it is to obtain responses. In some areas, such as subdivisions, it may be impossible to obtain responses of any kind from a majority of royalty interest owners.

The bill would require notice to be given at least 90 days before the hearing. Even if approval of a majority of royalty interest owners were obtained instantaneously, this requirement would delay approval of applications by more than a month, creating more problems for operators trying to meet drilling deadlines.

The oil and gas industry opposed the bill in hearings last week before the House Committee on Transportation and Energy. After the hearings, the Committee eliminated the requirement that a majority of mineral royalty owners must consent to entry of a pooling order, and added a provision that proprietary information or trade secrets would be exempt from disclosure. The bill still contains a 90-day notice requirement and would require a prospective drilling unit operator to provide each affected interest owner a clearly stated, concise, neutral explanation of the laws governing forced pooling.

The bill, as amended, passed out of committee 8-5 on a party-line vote and is scheduled to be heard by the House Appropriations Committee. Several members of the legislature, including the HB17-1336’s sponsor, stated that interest in Colorado’s law on force pooling will continue even if this legislation is unsuccessful. More information on the bill can be found at http://leg.colorado.gov/bills/hb17-1336.

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