On July 9th, 2013 you could hear the outcry resounding throughout Pennsylvania from the numerous Oil and Gas owners (“owners”) when Governor Tom Corbett signed Senate Bill 259 into law. Senate Bill 259 amends a 1979 act that “regulates the terms and conditions of certain leases regarding natural gas and oil.” Many of the changes to SB 259 are landowner friendly, yet Section 2.1 has many Oil and Gasowners in an upheaval. Section 2.1 of the Bill reads as follows:
SECTION 2.1.APPORTIONMENT. WHERE AN OPERATOR HAS THE RIGHT TO DEVELOP MULTIPLE CONTIGUOUS LEASES SEPARATELY, THE OPERATOR MAY DEVELOP THOSE LEASES JOINTLY BY HORIZONTAL DRILLING UNLESS EXPRESSLY PROHIBITED BY A LEASE. IN DETERMINING THE ROYALTY WHERE MULTIPLE CONTIGUOUS LEASES ARE DEVELOPED, IN THE ABSENCE OF AN AGREEMENT BY ALL AFFECTED ROYALTY OWNERS, THE PRODUCTION SHALL BE ALLOCATED TO EACH LEASE IN SUCH PROPORTION AS THE OPERATOR REASONABLY DETERMINES TO BE ATTRIBUTABLE TO EACH LEASE.
Many people are under the impression that the addition of Section 2.1 is in essence, a form of forced pooling. In reality, the Guaranteed Minimum Royalty Act is an attempt at a fair compromise. Forced pooling, available in many other oil and gas producing states such as Ohio, Texas and Colorado, allows producers to extract the oil and gas from properties, regardless of whether they are under a valid lease for production. SB 259 Section 2.1 has a much different effect.
Section 2.1 only applies to leases without an express directive (or clause) regarding the pooling of oil and gas interests, thereby allowing producers to pool under existing leases without further negotiations or compensationfor the owners. New lessors still have the ability to negotiate the terms pertaining to pooling of their interests. Those owners without an existing lease retain the options to oppose signing a lease, expressly prohibit pooling in a new lease, or negotiate additional compensation for the grant of pooling rights. The amendment will affect lessors who inherited existing leases by removing the options available to owners without an existing lease.
Operators have kept leases active for many years by drilling vertical shallow wells or other operations on the leased premises. The majority of these leases are silent regarding pooling. The passing of SB 259 gives current oil and gas operators the opportunity to sign their operating rights to a producer seeking to drill a horizontal well under the terms of Section 2.1. In the event of an assignment, the existing lease will be pooled into a unit and provide the lessors the benefit of receiving a pro-rata share of the royalty payments allocated from the drilling of a horizontal well. The lessors who inherited existing leases feel the law takes away the right to do what they want with their property. In reality, the ability to manage their oil and gas interests is already diminished through their inclusion in an existing lease. Admittedly, the lessors are only disadvantaged should an operator choose to assign their leasehold interests or produce the Marcellusshale formation. Operators could choose to avoid the piece of land with an existing lease and the current owner will be left with even less opportunity to negotiate.
Although the loss of negotiating power is a valid concern, much of the outcry over SB 259 is exaggerated. Those in opposition to the amended law are failing to see the many benefits associated with its passing for: themselves, neighboring owners, and the state. These benefits, to name a few, include:
•Increased royalty payments for the lessors
•Increased development of the State’s Natural Resources
•Increased economic sustainability for the State and Country
•Decreased dependency on foreign resources for domestic energy
•Decreased operating footprint on the environment by requiring fewer well drill sites
Without the law, contiguous landowners willing to pool their lands, would be burdened because their interests would be excluded from a production unit due to the Federal and State requirements for well spacing. Not to mention the Bill provides greater economic benefit to the Commonwealth of Pennsylvania, along with furthering our Nation’s goals in becoming energy independent.
In short, SB 259 while surprising to many involved in Pennsylvania’s natural gas progression, it does not deserve the criticism it has received. While one can appreciate the concerns voiced by numerous landowners, overall the Bill will have a minimal effect on the majority of Pennsylvania landowners. The Bill achieves the goals of the Commonwealth to efficiently produce natural gas and does so without forcing owners to pool their land without an existing lease. When looking at SB 259 from an objective standpoint, is it really depriving landowners of their rights to deal with their property as they see fit, or is SB 259 providing a needed compromise and benefit for the greater good of the Commonwealth?