May 9th, 2014
Are You In the Pool Or Are You Just Getting Soaked?: Bad Faith Pooling Techniques and How They Could Impact Your Lease
You have signed your oil and gas lease, and maybe you are happy with the terms of your lease, but maybe you are not. Maybe you decided you could put up with a little noise or the extra traffic in your community while the drilling is going on. What you have been waiting for is for production to start and for the royalties to start pouring in. Just let the royalty payments start and it will all be worth it. Unfortunately, there are a myriad of ways the oil and gas company has misled you as to the amount of money you might ultimately receive from the production. Drawing inaccurate and improper unit production boundaries is one of them.
An oil and gas producer's application of the "pooling" or "unitization" language in your lease might severely limit the royalties you expected to receive. Horizontal wells reaching the Marcellus and/or Utica Shales are large and expensive operations. It is not cost effective to drill one such well for individual tracts of land. Instead, the oil and gas companies need to combine many tracts of land into "production units." These units are often as large as 640 acres or more in total size. These units will typically have one drilling pad with multiple wells drilled thereon. The individual wells are drilled vertically downward then out horizontally to stretch across and through the unit. The horizontal legs permit the driller to drain the oil and gas from large areas of land. The "pooling" or "unitization" language in an oil and gas lease permits the oil and gas producer to combine your land with your neighbor's land to make production possible. "Pooling" really is necessary for the majority of landowners to get production from their oil and gas rights. However, landowners need to understand the other consequences of "pooling." "Pooling" and/or "unitization" clauses typically provide that once a production unit is created, oil and gas production from any part of that unit will hold by production all the lands which are a part of that unit. Land is held by production once certain production operations begin under a lease. If at the end of the primary term of a lease such production operations are ongoing, a lease will remain in effect typically until production ceases.
Just because part of your land is in a unit does not mean that you will get paid royalties for all of your property. Imagine you have 100 acres of property and you signed a lease. The gas company has decided on a well site nearby and will begin drilling and ultimately producing oil and gas. The gas company creates its production unit of 600 acres. When the unit is created, the gas company mails a notice to the land owners in that unit. It also records a "Declaration of Pooling" or similarly named document in the land records office at the local Courthouse. The declaration shows the boundaries of the pooling unit and identifies all the landowners and amount of property each landowner actually has in the unit. As you review the pooling notice you see that although you have 100 total acres, only 2 of your acres are actually in the production unit. What does that mean? Unfortunately, it means that when production starts you will only get paid royalties for 2 of your acres. You will not get royalties for the remaining 98 acres! You might think, big deal, they are only paying me for 2 acres, I will just go get a new lease on the 98 acres not in production. WRONG! Even though you are not getting production from those 98 acres, the "pooling" language in your lease provides that the gas company still controls all of your property. This could have been prevented by asserting the need for a Pugh Clause in your lease. Very generally, a Pugh Clause is a contractual statement that an oil and gas company cannot hold by production those lands which are not part of the production. If you don't have such a clause what other options do you have?
You might very well have a suit against the oil and gas company for something called "bad faith pooling." As you would likely expect, an oil and gas company will often draw its production units not to maximize profit for itself AND for its royalty owners (which is a duty that it owes under the law and under your lease), but to hold as much land as they can by production to avoid competition and give them additional time to delay further operations. The gas company does not want to pay you at the end of your 5 year term to extend your lease and it doesn't want to have to sign you to a new lease now that you know what everyone else is actually getting paid. So what does it do? It "includes" a small portion of your property in its production unit so that it retains control over all your land. By drawing a line across your property the gas company may have prevented you from obtaining hundreds of thousands of dollars in potential rental or bonus fees. Frankly, it may also be a fraud against the other land owners in the unit as well. The gas company may be paying you royalties on 2 acres when, in reality, they are not even pulling gas from your property. That reduces every other land owner's share of the total production pie.
If this has happened to you, what are your options? Bordas & Bordas, PLLC is actively investigating and preparing to file bad faith pooling lawsuits. These suits ask courts to declare that property that is not within the production unit is free and clear so that you may seek new lease options for that property. Bordas & Bordas, PLLC has a long history of taking on large companies and defending the rights of individuals who might not be able to fight for themselves. The oil and gas industry has brought an immense amount of money into our area, but much more money is going right back out with these out of state companies. Don't let the oil and gas companies find new ways to deceive you and to avoid paying you. If you are concerned that you are not being treated fairly and/or not being paid properly contact us immediately for a free consultation.
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