MIDDLEBOURNE — A West Virginia judge made a splash in April when he ruled that there is an implied right to pool oil and gas leases, giving oil and gas companies leverage to settle future disputes with landowners.
The decision reflects a departure from current state law and needs to be narrowed, according to Joshua Fershee, a West Virginia University College of Law professor who focuses on energy issues.
“I think the conclusion is incomplete, and in that sense is wrong. The most significant thing to me is that the decision seems to suggest that all oil and gas leases include an implied right of pooling,” Fershee
told The West Virginia Record.
In American Energy-Marcellus LLC v. Poling, et al., Tyler County Circuit Judge David Hummel sided with a company looking to pool an existing oil and gas lease with other leases, allowing it to drill a horizontal well.
According to court documents, American Energy took over an 1894 lease agreement between a landowner and South Penn Oil Co. that permitted the drilling of vertical wells to extract oil and gas. Now the land is owned by several people.
Those landowners claimed the old lease doesn’t permit American Energy to “pool” leases, a concept that refers to combining leases to form a unit for drilling a single gas well. Landowners share revenue from the well based on their share of the pooled land in use.
The court ruled that the original lease intended to grant the company access to gas, which now requires horizontal drilling, since that is a more efficient way to extract oil and gas.
“Although the lease is silent on the subject of pooling and unitization, plaintiff has an implied right to pool and unitize the lease with other leaseholds and mineral interests in order to exercise the explicit rights to develop the oil and gas in the subject premises,” the judge ruled.
There are a couple of ways to force a landowner into a pooled unit: laws and contracts.
“Many states, including West Virginia, have forced pooling laws, which is a great indicator that if pooling is not permitted under the lease, it cannot be compelled without a law allowing it to happen," Fershee said.
West Virginia's law only applies to wells that are deeper than Marcellus shale. Legislators have made several attempts to pass a law that includes shallow wells, but proposed bills failed.
In the absence of a forced pooling law, lease contracts usually include a pooling clause. That doesn’t mean an individual lease doesn’t include an implied right to pool, Fershee said, but it isn't a broad rule.
He added that he would have expected the judge to analyze the language of the original lease and discuss it in the opinion, but Hummel didn’t.
“I agree with the court that, in most leases, horizontal drilling and hydraulic fracturing are reasonable uses of the surface. It is not the process that is the problem. However, leases without pooling clauses or other permissions generally don’t allow you to use the surface of one parcel for purposes of gaining access to minerals from another parcel,” he said. “The fact that it is not economic to pull natural gas from the parcel without also pulling it from another parcel does not necessarily extend the mineral holder’s right to burden the surface for off-parcel minerals, too. We’d need to look at the specific lease.”
He said the court's opinion could motivate people to act in different ways. He expects this rationale will be used by other companies looking to pool leases. It also may convince lawmakers who oppose forced pooling to find “a law they can live with.” Or it could create enough of an uproar among voters to compel legislators to go the other direction.
“Before getting there, though, an appeal may modify this case. It is hard to predict, but I suspect a reviewing court would, at a minimum, send it back to the lower court asking it to narrow and more completely explain the decision,” Fershee said.