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Compulsory Pooling & Landowner Protections

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The document discusses compulsory pooling and unitization of mineral estates in North Carolina, emphasizing the state's authority under G.S. § 113-393 to combine leased and unleased properties into drilling units for shared production and costs. It analyzes the implications of 'tight gas' formations on pooling, the power of the state to compel access easements, and the rules governing drilling, production, and reclamation processes. The presentation highlights the effects on landowners, particularly regarding surface and subsurface rights and the governing standards for mineral operations.

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Compulsory Pooling &  Comp lsor Poolin & Landowner Protections Presentation to Compulsory Pooling Study Group of the North Caroling Mining & Energy Commission McSwain Agriculture Center Agriculture Center Sanford, NC January 11, 2013 John Humphrey John H mphre The Humphrey Law Firm 107 S. West St., PMB 325 Alexandria, VA 22314 Alexandria VA 22314 humphrey.law@earthlink.net 703‐599‐7919
Unitization and pooling  of leased mineral estates fl d i l Cox Homestead Kelly Farm 2
Unitization and pooling  of leased mineral estates fl d i l Cox Homestead Kelly Farm Leased mineral estate Leased mineral estate Leased mineral estate Leased mineral estate NC law authorizes the State to combine leased  estates like the Cox homestead and Kelly  farm here into a single drilling unit  (G.S. § 113‐393) (1945). ( )( ) 3
Unitization and pooling  of leased mineral estates fl d i l Cox Homestead Kelly Farm Leased mineral estate Leased mineral estate Leased mineral estate Leased mineral estate NC law authorizes the State to compel leased  mineral estates within a drilling unit into a  pool to share production and costs  (G.S. § 113‐393) (1945). ( )( ) 4
Unitization and pooling  of leased mineral estates fl d i l Cox Homestead Kelly Farm Leased mineral estate Leased mineral estate Leased mineral estate Leased mineral estate How drilling, production, and reclamation will  proceed will be determined by the operator’s  leases with the Cox family and with the Kelly  family, supplemented by State rules. 5
Unitization and pooling of leased with  unleased mineral estates l d i l Cox Homestead Kelly Farm Leased mineral estate Leased mineral estate Unleased mineral estate Unleased mineral estate 6
Unitization and pooling of leased with  unleased mineral estates l d i l Cox Homestead Kelly Farm Leased mineral estate Leased mineral estate Unleased mineral estate Unleased mineral estate NC law authorizes the State to combine leased  estates like the Cox land and unleased estates  like the Kelly farm into a single drilling unit  (G.S. § 113‐393) (1945). 7
Unitization and pooling of leased with  unleased mineral estates l d i l Cox Homestead Kelly Farm Leased mineral estate Leased mineral estate Unleased mineral estate Unleased mineral estate NC law authorizes the State to compel leased  mineral estates and unleased mineral estates  into a pool to share production and costs  (G.S. § 113‐393) (1945). ( )( ) 8
State power to compel granting access  easements to gas operators Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 9
State power to compel granting access  easements to gas operators Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate What are the effects on production of the  p Kellys’ gas resource if the State compels  p pooling?g 10
State power to compel granting access  easements to gas operators Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate In a “loose gas” formation, pooling would enable  g p g the Kellys’ gas to be produced from the Cox well  without surface or subsurface access because  “loose gas” migrates. He He 2 2 CH4 CH4 CH4 CH4 CH4 CH4 CH4 CH4 C2H8 CH4 C2H8 CH4 11
State power to compel granting access  easements to gas operators Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate A “loose gas” formation is the circumstance  g that the 1945 NC Oil & Gas Conservation Act  p contemplated. He2 He2 CH4 CH4 CH4 CH4 CH4 CH4 CH4 CH4 C2H8 CH4 C2H8 CH4 12
State power to compel granting access  easements to gas operators Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate But NC’s Triassic Basin is a “tight gas” formation.  g g Gas, locked in the shale, is unlikely to migrate to  y g q a nearby well in significant quantities, if at all. He2 He2 CH4 CH4 CH4 CH4 CH4 CH4 CH4 CH4 C2H8 CH4 C2H8 CH4 13
State power to compel granting access  easements to gas operators Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate “Tight gas” formations undercut the primary  g g p y consumer protection basis for pooling – p preventing gas in an adjacent estate from  gg j being produced without compensation. He 2 He 2 CH4 CH4 CH4 CH4 CH4 CH4 CH4 CH4 C2H8 CH4 C2H8 CH4 14
State power to compel granting access  easements to gas operators Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate However, the inability of tight gas to migrate  y g g g strengthens the economic rationale for pooling  p p g for operators and “orphaned” mineral rights  owners who need a larger pool to recover costs. He 2 He 2 CH4 CH4 CH4 CH4 CH4 CH4 CH4 CH4 C2H8 CH4 C2H8 CH4 15
State power to compel granting access  easements to gas operators Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate Which raises the question, if the State pools an  q p unleased property like the Kelly farm, can the  State also compel the Kellys to grant surface  p y g and subsurface easements? He 2 He 2 CH4 CH4 CH4 CH4 CH4 CH4 CH4 CH4 C2H8 CH4 C2H8 CH4 16
State power to compel granting access  easements to gas operators Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate Put differently, after the Kelly property is  y yp p y pooled, what rights will the gas operator  y y have on and under the Kelly family farm? He2 He2 CH4 CH4 CH4 CH4 CH4 CH4 CH4 CH4 C2H8 CH4 C2H8 CH4 17
State power to compel granting access  easements to gas operators Leased Cox  Pooled Kelly  Unified Estate Unified Estate No surface  Unified Estate Unified Estate access? Will the State’s authority be limited to  y compelling the Kelly family into a pool with  y the Cox family? He2 He2 CH4 CH4 CH4 CH4 CH4 CH4 CH4 CH4 No drilling or drill‐ C2H8 CH4 through access? CH4 C2H8 18
State power to compel granting access  easements to gas operators Leased Cox  Pooled Kelly  Unified Estate Unified Estate Surface  Unified Estate Unified Estate access? Or will the State have the authority to compel  y p the Kellys to grant the operator access to the  yp p y surface and subsurface of the Kelly property? He2 He2 CH4 CH4 CH4 CH4 CH4 CH4 CH4 CH4 Subsurface drilling or  C2H8 CH4 C2H8 CH drill‐through access? 4 19
State power to compel granting access  easements to gas operators Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate Whether or not operators are granted surface  p g and subsurface access rights significantly  y affects estate owners beyond whether estate  owners’ mineral resources are produced. He 2 He 2 CH4 CH4 CH4 CH4 CH4 CH4 CH4 CH4 C2H8 CH4 C2H8 CH4 20
State power to compel granting access  easements to gas operators Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate Without surface and subsurface easements,  “tight gas” cannot be produced via wells on  j p p y p adjacent properties, but many other impacts  to adjacent land also are avoided. He 2 He 2 CH4 CH4 CH4 CH4 CH4 CH4 CH4 CH4 C2H8 CH4 C2H8 CH4 21
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 22
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate Another significant issue affecting landowners  g g is which rules govern drilling, production, and  p p p reclamation on pooled properties. 23
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate In an example like the one above where the  p Cox family has a lease and the Kelly family  g g does not, what rules govern how drilling,  production, and reclamation will proceed on  the pooled Cox and Kelly family properties? p y yp p 24
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate In this example, what rules govern how drilling,  p g g production, and reclamation will proceed on  p y yp p the pooled Cox and Kelly family properties? Cox Estate: Lease  and State rules  25
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate In this example, what rules govern how drilling,  p g g production, and reclamation will proceed on  p y yp p the pooled Cox and Kelly family properties? Cox Estate: Lease  Kelly Estate:  and State rules  State rules only 26
How easements and governing rules affect  landowners l d Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 27
How easements and governing rules affect  landowners l d Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate How surface and subsurface easements and  how the source of rules governing gas  p operations will affect landowners can be seen  by considering the lifecycle of a lease on the  p pooled Cox and Kelly family properties. y yp p 28
How easements and governing rules affect  landowners l d Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate Scene 1 After the pooling order is completed, a truck  arrives with a crew ready to begin surveying  arrives with a crew ready to begin surveying and conducting seismic tests. 29
How easements and governing rules affect  landowners l d Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 1.  Operator survey and seismic test Cox Lease Current State rules ‐ Notice: Notice prior to testing  ‐ No notice to enable landowner to secure  ‐ No limitations on testing fenced or gated areas or move  equipment or activities ‐ Testing Limits: Types, timing,  and manner of testing limited 30
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 1.  Operator survey and seismic test (cont.) Cox Lease Current State rules ‐ Vegetation: Minimize  ‐ No limitations on vegetation  vegetation impacts, prior  impacts, damages negotiated  written approval to destroy  after fact or determined in  vegetation, pay fair market  court value for damages, set valuation  l f d l method 31
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 1.  Operator survey and seismic test (cont.) Cox Lease Current State rules ‐ Structures: No impacts (gates,  ‐ Damages to structures  fences, buildings) without prior  negotiated after fact or  written approval & agreement  determined in court on compensation ‐ No limits on off‐road access,  ‐ Roads: Use existing access roads  damages negotiated after  except by written approval,  fact or determined in court 32 remediate grass and turf
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 1.  Operator survey and seismic test (cont.) Cox Lease Current State rules ‐ Holes drilled to be smallest bore  ‐ Note limits on bore holes or  possible, plugged & remediated remediation mandated ‐ Minimum buffer established for  ‐ No buffer between testing  testing activities from  and existing infrastructure,  structures, water sources,  water sources, or livestock underground pipes, livestock 33
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 1.  Operator survey and seismic test (cont.) Cox Lease Current State rules ‐ Sounds and vibrations from  ‐ No limits on sound and  seismic work to be muffled to  vibrations protect occupants and livestock ‐ No remediation required  ‐ Remediation: Operator agrees  from testing activities to return property to original  condition within set time 34
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 1.  Operator survey and seismic test (cont.) Cox Lease Current State rules ‐ Liability: Operator strictly liable  ‐ No shifting of risk to operator and agrees to indemnify  ‐ No dispute resolution  landowner against any claims or  methods agreed to regulatory enforcement actions ‐ Dispute resolution methods  agreed to 35
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 1.  Operator survey and seismic test (cont.) Cox Lease Current State rules ‐ Insurance: Operator to maintain  ‐ Minimal if any insurance  prescribed amount of worker’s  liability required for survey  comp, employer’s liability,  and seismic testing activities comprehensive general liability,  and business auto and vehicle  db d h l liability insurance 36
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate Scene 2: Environmental consultant arrives to begin  gathering of baseline data gathering of baseline data 37
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 2.  Baseline data collection and environmental monitoring Cox Lease Current State rules ‐ Requires specific schedule,  ‐ Baseline testing and monitoring  required but standards not  required but standards not locations, and disclosure of  established and may be less  monitoring groundwater,  rigorous that what landowner  surface water, soil, and air would negotiate [§2(c)] ‐ Original survey documents to be  ‐ No requirements to provide  provided to landowner survey documents 38
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 3.  Surface Use Agreement Standards – Construction Phase Scene 3: Sanford Herald has article about operator  transferring some leases.  Inquiries to  transferring some leases. Inquiries to operator yield no reply until letter from new  company arrives. company arrives. 39
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 3.  Limits on transfer of lease Cox Lease Current State rules ‐ Advance notice to mineral rights  ‐ Notice of lease assignment  owner of lease transfer or  required within 30 days [§4(d)] written consent of mineral  ‐ No restrictions on lease transfer rights owner prior to transfer 40
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 3.  Surface Use Agreement Standards – Construction Phase Scene 4: Three years pass.  41
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 4.  Renewal Terms Cox Lease Current State rules ‐ 3‐year lease not renewed unless  ‐ 10‐year lease term “drilling operations” have  ‐ No standard of “bit in ground”  commenced.  If no operations,  or “strata reached” provisions to  can negotiate new lease. trigger lease renewal ‐ Force majeure  clause  Force majeure clause ‐ No force majeure clause  operational for ten years  [§4(d)] renewal at 3 years 42
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 3.  Surface Use Agreement Standards – Construction Phase Scene 5: 3 years pass. Drilling finally begins. 43
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 5.  Surface Use Agreement Standards – Construction Phase Cox Lease Current State rules ‐ Written construction land‐use plan  ‐ No timeline or written plan for  containing setbacks from buildings  construction  provided t ti id d and water agreed to and provided  ‐ No agreement on mitigation of  to landowner light and noise from  construction phase construction phase ‐ Lights and noise impacts minimized ‐ No right of inspection ‐ Right of inspection of construction 44
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 5.  Surface Use Agreement Standards – Construction Phase (cont.) Cox Lease Current State rules ‐ Operator pays fair market value  ‐ No compensation schedule  or  for all timber, crops, and  valuation method for damage  l ti th d f d established structures (including fences and  gates) removed or damaged ‐ No temporary fencing set up  ‐ No erosion control measures  No erosion control measures ‐ Temporary fencing , drainage   agreed to and erosion control measures  45 agreed to and established
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 5.  Surface Use Agreement Standards – Construction Phase (cont.) 3.  Surface Use Agreement Standards – Construction Phase Cox Lease Current State rules ‐ Soil quality maintained through  ‐ No provisions for soil quality  double ditching to separate top  protection or avoiding soil  soil and subsoil compaction made ‐ Soil compaction avoided ‐ Rocks removed from surface  where unearthed 46
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 5.  Surface Use Agreement Standards – Construction Phase (cont.) Cox Lease Current State rules ‐ Lease must specify allowable  ‐ Lease must specify allowable  water use, not conflict with  water use, not conflict with  landowner water usage, and  landowner water usage, and  provide for fair market value for  provide for fair market value  water [§4(d)] [ (d)] for water [§4(d)] f [ (d)] 47
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 5.  Surface Use Agreement Standards – Construction Phase (cont.) 3.  Surface Use Agreement Standards – Construction Phase Cox Lease Current State rules ‐ Plans, timeline, and payment  ‐ No provisions for additional  schedule for infrastructure  infrastructure development development beyond well ‐ No limits on infrastructure  ‐ Specific easements for  development rights arising  appurtenant infrastructure  from pooling rights granted with geographic, height,  48 and depth limits
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 5.  Surface Use Agreement Standards – Construction Phase (cont.) 3.  Surface Use Agreement Standards – Construction Phase Cox Lease Current State rules ‐ Production phase land‐use plan  ‐ No written production phase  agreed to in writing land‐use plan prepared l d l d ‐ No written reclamation plan  ‐ Reclamation plan agreed to in  agreed to writing ‐ No drilling and construction  No drilling and construction ‐ Drilling and construction phase  damages measured and paid damages valued and paid 49
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 3.  Surface Use Agreement Standards – Construction Phase Scene 6: Check arrives in the mail from operator. 50
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 3.  Surface Use Agreement Standards – Construction Phase 6.  Receive a royalty check – is it for the right amount? Cox Lease Current State rules ‐ After bonus check for acreage,  ‐ No bonus payment ever  monthly royalty payments  received  above statutory minimum once  ‐ 12.5% statutory minimum  production starts royalty received ‐ Royalties paid without  deductions on greater of market  51 value or gross  proceeds
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 6.  Receive a royalty check – is it for the right amount? (cont.) 3.  Surface Use Agreement Standards – Construction Phase Cox Lease Current State rules ‐ Royalty statement includes lessor ‐ No details required on  name; lessor’s ID #; lease #; well  payments and property name; API #; month  and year of sale; oil, gas, and NGL  volumes; price per barrel or  l b l MMBtu; taxes; lessor’s interest,  share of sale, deductions & codes 52
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 6.  Receive a royalty check – is it for the right amount? (cont.) 3.  Surface Use Agreement Standards – Construction Phase Cox Lease Current State rules ‐ Right of royalty audit can be  ‐ No royalty payment audit rights exercised ‐ No rental payments for surface  ‐ Rents paid for use of lands use of land ‐ Lease terms supercede any  p y Division Order language 53
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 3.  Surface Use Agreement Standards – Construction Phase Scene 7: Stranger drops in for coffee.  Tenders offer for  Cox Lease Current State rules gas and hunting lease above undeveloped  gas and hunting lease above undeveloped portion of mineral estate. 54
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 7. Who can lease out undeveloped portions of land? Cox Lease Current State rules ‐ Horizontal and vertical Pugh  ‐ No division of property  clauses limited depth and range  allowing leasing of unused  of minerals leased originally portion of land. ‐ Retained acreage and depth  clause frees from lease areas  and zones leased but not  55 developed
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 7. Who can lease out undeveloped portions of land? (cont.) Cox Lease Current State rules ‐ Specific contract terms retaining  ‐ No specific terms governing  right of alternate uses for  alternate uses or payment for  timber, crops, and hunting and  loss of alternate uses. preserving acreage for these  purposes.  ‐ Hunting rights near wellheads  56 leased to operator.
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 7. Who can lease out undeveloped portions of land? (cont.) Cox Lease Current State rules ‐ Mineral estate leased limited  ‐ No limits on mineral types  specifically to oil, gas, and  pooled specifically identified natural gas liquids 57
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate Scene 8: Scene 8: Is there supposed to be a pool of oil there? 58
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 8. Responding to accidents Cox Lease Current State rules ‐ Operator must indemnify surface  ‐ Operator must indemnify  owner against any claims related  surface owner against any  to operator’s activities on  claims related to operator’s  property [§4(c)] activities on property [§4(c)] ‐ Adequate operator bonding,  capitalization, and insurance  59 requirements
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 8. Responding to accidents (cont.) Cox Lease Current State rules ‐ Operator must have and inform  ‐ Operator must indemnify  surface owner of emergency  surface owner against any  f i t claims related to operator’s  response operation plans and  activities on property [§4(c)] disclose details of all accidents ‐ Disclosure of hazardous  Disclosure of hazardous ‐ Disclosure of hazardous chemicals  materials to emergency  used on or injected into land responders and regulators 60
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate Scene 9: Scene 9: Honey, they’re just not listening to what I’m  saying. saying 61
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 9. Dispute resolution process agreed upon Cox Lease Current State rules ‐ Operator agrees in writing to best  ‐ No dispute resolution  efforts to resolve dispute,  procedures identified mediation, then court proceedings  in county in which well located 62
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate Scene 10: Scene 10: Then one day, the pump stopped. 63
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 10. Payments and renewals when operations are suspended Cox Lease Current State rules ‐ Habendum (continuous  ‐ No lease provision protecting  operations) clause releases  shutting‐in of production mineral estate when production  stops. ‐ If well shut‐in or flow reduced  temporarily, shut‐in royalties paid. 64
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate Scene 11: Scene 11: When you were a little girl . . . . 65
Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 11. Reclaiming and restoring land Cox Lease Current State rules ‐ Detailed written reclamation and  ‐ No reclamation plan monitoring plan ‐ Requirement that operator   ‐ Warranty of adequate operator  provide financial assurance of  capitalization and operator  well closure, reclamation,  bonding to cover reclamation and  ongoing monitoring [§2(c)] ongoing monitoring 66
Protecting Landowners in the Law Protecting Landowners in the Law Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate Conclusions ‐ Under current NC law, landowners compelled into a pool have  . significantly fewer opportunities to protect themselves than  those who negotiate their leases. those who negotiate their leases ‐ Compelling the granting of surface and subsurface easements  affects a wider range of landowner rights than compulsory  pooling alone. 67
Protecting Landowners in the Law Protecting Landowners in the Law Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate Conclusions ‐ If a compulsory pooling rule that compels granting surface or  . subsurface easements is implemented, the State should  integrate into pooling orders the full array of measures  integrate into pooling orders the full array of measures generally available in oil and gas leases to protect owners of  any pooled mineral estate or appurtenant surface estate,  whether unified or severed. h th ifi d d 68
Cox Homestead Kelly Farm Compulsory Pooling & Landowner Protections p y g Presentation to Compulsory Pooling Study Group of the North Caroling Mining & Energy Commission John Humphrey McSwain Agriculture Center Sanford, NC The Humphrey Law Firm January 11, 2013 107 S. West St., PMB 325 Alexandria, VA 22314 Alexandria VA 22314 humphrey.law@earthlink.net 703‐599‐7919 69

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Compulsory Pooling & Landowner Protections

  • 1. Compulsory Pooling &  Comp lsor Poolin & Landowner Protections Presentation to Compulsory Pooling Study Group of the North Caroling Mining & Energy Commission McSwain Agriculture Center Agriculture Center Sanford, NC January 11, 2013 John Humphrey John H mphre The Humphrey Law Firm 107 S. West St., PMB 325 Alexandria, VA 22314 Alexandria VA 22314 humphrey.law@earthlink.net 703‐599‐7919
  • 3. Unitization and pooling  of leased mineral estates fl d i l Cox Homestead Kelly Farm Leased mineral estate Leased mineral estate Leased mineral estate Leased mineral estate NC law authorizes the State to combine leased  estates like the Cox homestead and Kelly  farm here into a single drilling unit  (G.S. § 113‐393) (1945). ( )( ) 3
  • 4. Unitization and pooling  of leased mineral estates fl d i l Cox Homestead Kelly Farm Leased mineral estate Leased mineral estate Leased mineral estate Leased mineral estate NC law authorizes the State to compel leased  mineral estates within a drilling unit into a  pool to share production and costs  (G.S. § 113‐393) (1945). ( )( ) 4
  • 5. Unitization and pooling  of leased mineral estates fl d i l Cox Homestead Kelly Farm Leased mineral estate Leased mineral estate Leased mineral estate Leased mineral estate How drilling, production, and reclamation will  proceed will be determined by the operator’s  leases with the Cox family and with the Kelly  family, supplemented by State rules. 5
  • 6. Unitization and pooling of leased with  unleased mineral estates l d i l Cox Homestead Kelly Farm Leased mineral estate Leased mineral estate Unleased mineral estate Unleased mineral estate 6
  • 7. Unitization and pooling of leased with  unleased mineral estates l d i l Cox Homestead Kelly Farm Leased mineral estate Leased mineral estate Unleased mineral estate Unleased mineral estate NC law authorizes the State to combine leased  estates like the Cox land and unleased estates  like the Kelly farm into a single drilling unit  (G.S. § 113‐393) (1945). 7
  • 8. Unitization and pooling of leased with  unleased mineral estates l d i l Cox Homestead Kelly Farm Leased mineral estate Leased mineral estate Unleased mineral estate Unleased mineral estate NC law authorizes the State to compel leased  mineral estates and unleased mineral estates  into a pool to share production and costs  (G.S. § 113‐393) (1945). ( )( ) 8
  • 9. State power to compel granting access  easements to gas operators Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 9
  • 10. State power to compel granting access  easements to gas operators Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate What are the effects on production of the  p Kellys’ gas resource if the State compels  p pooling?g 10
  • 11. State power to compel granting access  easements to gas operators Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate In a “loose gas” formation, pooling would enable  g p g the Kellys’ gas to be produced from the Cox well  without surface or subsurface access because  “loose gas” migrates. He He 2 2 CH4 CH4 CH4 CH4 CH4 CH4 CH4 CH4 C2H8 CH4 C2H8 CH4 11
  • 12. State power to compel granting access  easements to gas operators Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate A “loose gas” formation is the circumstance  g that the 1945 NC Oil & Gas Conservation Act  p contemplated. He2 He2 CH4 CH4 CH4 CH4 CH4 CH4 CH4 CH4 C2H8 CH4 C2H8 CH4 12
  • 13. State power to compel granting access  easements to gas operators Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate But NC’s Triassic Basin is a “tight gas” formation.  g g Gas, locked in the shale, is unlikely to migrate to  y g q a nearby well in significant quantities, if at all. He2 He2 CH4 CH4 CH4 CH4 CH4 CH4 CH4 CH4 C2H8 CH4 C2H8 CH4 13
  • 14. State power to compel granting access  easements to gas operators Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate “Tight gas” formations undercut the primary  g g p y consumer protection basis for pooling – p preventing gas in an adjacent estate from  gg j being produced without compensation. He 2 He 2 CH4 CH4 CH4 CH4 CH4 CH4 CH4 CH4 C2H8 CH4 C2H8 CH4 14
  • 15. State power to compel granting access  easements to gas operators Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate However, the inability of tight gas to migrate  y g g g strengthens the economic rationale for pooling  p p g for operators and “orphaned” mineral rights  owners who need a larger pool to recover costs. He 2 He 2 CH4 CH4 CH4 CH4 CH4 CH4 CH4 CH4 C2H8 CH4 C2H8 CH4 15
  • 16. State power to compel granting access  easements to gas operators Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate Which raises the question, if the State pools an  q p unleased property like the Kelly farm, can the  State also compel the Kellys to grant surface  p y g and subsurface easements? He 2 He 2 CH4 CH4 CH4 CH4 CH4 CH4 CH4 CH4 C2H8 CH4 C2H8 CH4 16
  • 17. State power to compel granting access  easements to gas operators Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate Put differently, after the Kelly property is  y yp p y pooled, what rights will the gas operator  y y have on and under the Kelly family farm? He2 He2 CH4 CH4 CH4 CH4 CH4 CH4 CH4 CH4 C2H8 CH4 C2H8 CH4 17
  • 18. State power to compel granting access  easements to gas operators Leased Cox  Pooled Kelly  Unified Estate Unified Estate No surface  Unified Estate Unified Estate access? Will the State’s authority be limited to  y compelling the Kelly family into a pool with  y the Cox family? He2 He2 CH4 CH4 CH4 CH4 CH4 CH4 CH4 CH4 No drilling or drill‐ C2H8 CH4 through access? CH4 C2H8 18
  • 19. State power to compel granting access  easements to gas operators Leased Cox  Pooled Kelly  Unified Estate Unified Estate Surface  Unified Estate Unified Estate access? Or will the State have the authority to compel  y p the Kellys to grant the operator access to the  yp p y surface and subsurface of the Kelly property? He2 He2 CH4 CH4 CH4 CH4 CH4 CH4 CH4 CH4 Subsurface drilling or  C2H8 CH4 C2H8 CH drill‐through access? 4 19
  • 20. State power to compel granting access  easements to gas operators Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate Whether or not operators are granted surface  p g and subsurface access rights significantly  y affects estate owners beyond whether estate  owners’ mineral resources are produced. He 2 He 2 CH4 CH4 CH4 CH4 CH4 CH4 CH4 CH4 C2H8 CH4 C2H8 CH4 20
  • 21. State power to compel granting access  easements to gas operators Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate Without surface and subsurface easements,  “tight gas” cannot be produced via wells on  j p p y p adjacent properties, but many other impacts  to adjacent land also are avoided. He 2 He 2 CH4 CH4 CH4 CH4 CH4 CH4 CH4 CH4 C2H8 CH4 C2H8 CH4 21
  • 22. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 22
  • 23. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate Another significant issue affecting landowners  g g is which rules govern drilling, production, and  p p p reclamation on pooled properties. 23
  • 24. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate In an example like the one above where the  p Cox family has a lease and the Kelly family  g g does not, what rules govern how drilling,  production, and reclamation will proceed on  the pooled Cox and Kelly family properties? p y yp p 24
  • 25. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate In this example, what rules govern how drilling,  p g g production, and reclamation will proceed on  p y yp p the pooled Cox and Kelly family properties? Cox Estate: Lease  and State rules  25
  • 26. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate In this example, what rules govern how drilling,  p g g production, and reclamation will proceed on  p y yp p the pooled Cox and Kelly family properties? Cox Estate: Lease  Kelly Estate:  and State rules  State rules only 26
  • 27. How easements and governing rules affect  landowners l d Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 27
  • 28. How easements and governing rules affect  landowners l d Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate How surface and subsurface easements and  how the source of rules governing gas  p operations will affect landowners can be seen  by considering the lifecycle of a lease on the  p pooled Cox and Kelly family properties. y yp p 28
  • 29. How easements and governing rules affect  landowners l d Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate Scene 1 After the pooling order is completed, a truck  arrives with a crew ready to begin surveying  arrives with a crew ready to begin surveying and conducting seismic tests. 29
  • 30. How easements and governing rules affect  landowners l d Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 1.  Operator survey and seismic test Cox Lease Current State rules ‐ Notice: Notice prior to testing  ‐ No notice to enable landowner to secure  ‐ No limitations on testing fenced or gated areas or move  equipment or activities ‐ Testing Limits: Types, timing,  and manner of testing limited 30
  • 31. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 1.  Operator survey and seismic test (cont.) Cox Lease Current State rules ‐ Vegetation: Minimize  ‐ No limitations on vegetation  vegetation impacts, prior  impacts, damages negotiated  written approval to destroy  after fact or determined in  vegetation, pay fair market  court value for damages, set valuation  l f d l method 31
  • 32. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 1.  Operator survey and seismic test (cont.) Cox Lease Current State rules ‐ Structures: No impacts (gates,  ‐ Damages to structures  fences, buildings) without prior  negotiated after fact or  written approval & agreement  determined in court on compensation ‐ No limits on off‐road access,  ‐ Roads: Use existing access roads  damages negotiated after  except by written approval,  fact or determined in court 32 remediate grass and turf
  • 33. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 1.  Operator survey and seismic test (cont.) Cox Lease Current State rules ‐ Holes drilled to be smallest bore  ‐ Note limits on bore holes or  possible, plugged & remediated remediation mandated ‐ Minimum buffer established for  ‐ No buffer between testing  testing activities from  and existing infrastructure,  structures, water sources,  water sources, or livestock underground pipes, livestock 33
  • 34. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 1.  Operator survey and seismic test (cont.) Cox Lease Current State rules ‐ Sounds and vibrations from  ‐ No limits on sound and  seismic work to be muffled to  vibrations protect occupants and livestock ‐ No remediation required  ‐ Remediation: Operator agrees  from testing activities to return property to original  condition within set time 34
  • 35. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 1.  Operator survey and seismic test (cont.) Cox Lease Current State rules ‐ Liability: Operator strictly liable  ‐ No shifting of risk to operator and agrees to indemnify  ‐ No dispute resolution  landowner against any claims or  methods agreed to regulatory enforcement actions ‐ Dispute resolution methods  agreed to 35
  • 36. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 1.  Operator survey and seismic test (cont.) Cox Lease Current State rules ‐ Insurance: Operator to maintain  ‐ Minimal if any insurance  prescribed amount of worker’s  liability required for survey  comp, employer’s liability,  and seismic testing activities comprehensive general liability,  and business auto and vehicle  db d h l liability insurance 36
  • 37. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate Scene 2: Environmental consultant arrives to begin  gathering of baseline data gathering of baseline data 37
  • 38. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 2.  Baseline data collection and environmental monitoring Cox Lease Current State rules ‐ Requires specific schedule,  ‐ Baseline testing and monitoring  required but standards not  required but standards not locations, and disclosure of  established and may be less  monitoring groundwater,  rigorous that what landowner  surface water, soil, and air would negotiate [§2(c)] ‐ Original survey documents to be  ‐ No requirements to provide  provided to landowner survey documents 38
  • 39. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 3.  Surface Use Agreement Standards – Construction Phase Scene 3: Sanford Herald has article about operator  transferring some leases.  Inquiries to  transferring some leases. Inquiries to operator yield no reply until letter from new  company arrives. company arrives. 39
  • 40. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 3.  Limits on transfer of lease Cox Lease Current State rules ‐ Advance notice to mineral rights  ‐ Notice of lease assignment  owner of lease transfer or  required within 30 days [§4(d)] written consent of mineral  ‐ No restrictions on lease transfer rights owner prior to transfer 40
  • 41. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 3.  Surface Use Agreement Standards – Construction Phase Scene 4: Three years pass.  41
  • 42. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 4.  Renewal Terms Cox Lease Current State rules ‐ 3‐year lease not renewed unless  ‐ 10‐year lease term “drilling operations” have  ‐ No standard of “bit in ground”  commenced.  If no operations,  or “strata reached” provisions to  can negotiate new lease. trigger lease renewal ‐ Force majeure  clause  Force majeure clause ‐ No force majeure clause  operational for ten years  [§4(d)] renewal at 3 years 42
  • 43. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 3.  Surface Use Agreement Standards – Construction Phase Scene 5: 3 years pass. Drilling finally begins. 43
  • 44. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 5.  Surface Use Agreement Standards – Construction Phase Cox Lease Current State rules ‐ Written construction land‐use plan  ‐ No timeline or written plan for  containing setbacks from buildings  construction  provided t ti id d and water agreed to and provided  ‐ No agreement on mitigation of  to landowner light and noise from  construction phase construction phase ‐ Lights and noise impacts minimized ‐ No right of inspection ‐ Right of inspection of construction 44
  • 45. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 5.  Surface Use Agreement Standards – Construction Phase (cont.) Cox Lease Current State rules ‐ Operator pays fair market value  ‐ No compensation schedule  or  for all timber, crops, and  valuation method for damage  l ti th d f d established structures (including fences and  gates) removed or damaged ‐ No temporary fencing set up  ‐ No erosion control measures  No erosion control measures ‐ Temporary fencing , drainage   agreed to and erosion control measures  45 agreed to and established
  • 46. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 5.  Surface Use Agreement Standards – Construction Phase (cont.) 3.  Surface Use Agreement Standards – Construction Phase Cox Lease Current State rules ‐ Soil quality maintained through  ‐ No provisions for soil quality  double ditching to separate top  protection or avoiding soil  soil and subsoil compaction made ‐ Soil compaction avoided ‐ Rocks removed from surface  where unearthed 46
  • 47. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 5.  Surface Use Agreement Standards – Construction Phase (cont.) Cox Lease Current State rules ‐ Lease must specify allowable  ‐ Lease must specify allowable  water use, not conflict with  water use, not conflict with  landowner water usage, and  landowner water usage, and  provide for fair market value for  provide for fair market value  water [§4(d)] [ (d)] for water [§4(d)] f [ (d)] 47
  • 48. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 5.  Surface Use Agreement Standards – Construction Phase (cont.) 3.  Surface Use Agreement Standards – Construction Phase Cox Lease Current State rules ‐ Plans, timeline, and payment  ‐ No provisions for additional  schedule for infrastructure  infrastructure development development beyond well ‐ No limits on infrastructure  ‐ Specific easements for  development rights arising  appurtenant infrastructure  from pooling rights granted with geographic, height,  48 and depth limits
  • 49. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 5.  Surface Use Agreement Standards – Construction Phase (cont.) 3.  Surface Use Agreement Standards – Construction Phase Cox Lease Current State rules ‐ Production phase land‐use plan  ‐ No written production phase  agreed to in writing land‐use plan prepared l d l d ‐ No written reclamation plan  ‐ Reclamation plan agreed to in  agreed to writing ‐ No drilling and construction  No drilling and construction ‐ Drilling and construction phase  damages measured and paid damages valued and paid 49
  • 50. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 3.  Surface Use Agreement Standards – Construction Phase Scene 6: Check arrives in the mail from operator. 50
  • 51. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 3.  Surface Use Agreement Standards – Construction Phase 6.  Receive a royalty check – is it for the right amount? Cox Lease Current State rules ‐ After bonus check for acreage,  ‐ No bonus payment ever  monthly royalty payments  received  above statutory minimum once  ‐ 12.5% statutory minimum  production starts royalty received ‐ Royalties paid without  deductions on greater of market  51 value or gross  proceeds
  • 52. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 6.  Receive a royalty check – is it for the right amount? (cont.) 3.  Surface Use Agreement Standards – Construction Phase Cox Lease Current State rules ‐ Royalty statement includes lessor ‐ No details required on  name; lessor’s ID #; lease #; well  payments and property name; API #; month  and year of sale; oil, gas, and NGL  volumes; price per barrel or  l b l MMBtu; taxes; lessor’s interest,  share of sale, deductions & codes 52
  • 53. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 6.  Receive a royalty check – is it for the right amount? (cont.) 3.  Surface Use Agreement Standards – Construction Phase Cox Lease Current State rules ‐ Right of royalty audit can be  ‐ No royalty payment audit rights exercised ‐ No rental payments for surface  ‐ Rents paid for use of lands use of land ‐ Lease terms supercede any  p y Division Order language 53
  • 54. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 3.  Surface Use Agreement Standards – Construction Phase Scene 7: Stranger drops in for coffee.  Tenders offer for  Cox Lease Current State rules gas and hunting lease above undeveloped  gas and hunting lease above undeveloped portion of mineral estate. 54
  • 55. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 7. Who can lease out undeveloped portions of land? Cox Lease Current State rules ‐ Horizontal and vertical Pugh  ‐ No division of property  clauses limited depth and range  allowing leasing of unused  of minerals leased originally portion of land. ‐ Retained acreage and depth  clause frees from lease areas  and zones leased but not  55 developed
  • 56. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 7. Who can lease out undeveloped portions of land? (cont.) Cox Lease Current State rules ‐ Specific contract terms retaining  ‐ No specific terms governing  right of alternate uses for  alternate uses or payment for  timber, crops, and hunting and  loss of alternate uses. preserving acreage for these  purposes.  ‐ Hunting rights near wellheads  56 leased to operator.
  • 57. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 7. Who can lease out undeveloped portions of land? (cont.) Cox Lease Current State rules ‐ Mineral estate leased limited  ‐ No limits on mineral types  specifically to oil, gas, and  pooled specifically identified natural gas liquids 57
  • 58. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate Scene 8: Scene 8: Is there supposed to be a pool of oil there? 58
  • 59. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 8. Responding to accidents Cox Lease Current State rules ‐ Operator must indemnify surface  ‐ Operator must indemnify  owner against any claims related  surface owner against any  to operator’s activities on  claims related to operator’s  property [§4(c)] activities on property [§4(c)] ‐ Adequate operator bonding,  capitalization, and insurance  59 requirements
  • 60. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 8. Responding to accidents (cont.) Cox Lease Current State rules ‐ Operator must have and inform  ‐ Operator must indemnify  surface owner of emergency  surface owner against any  f i t claims related to operator’s  response operation plans and  activities on property [§4(c)] disclose details of all accidents ‐ Disclosure of hazardous  Disclosure of hazardous ‐ Disclosure of hazardous chemicals  materials to emergency  used on or injected into land responders and regulators 60
  • 61. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate Scene 9: Scene 9: Honey, they’re just not listening to what I’m  saying. saying 61
  • 62. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 9. Dispute resolution process agreed upon Cox Lease Current State rules ‐ Operator agrees in writing to best  ‐ No dispute resolution  efforts to resolve dispute,  procedures identified mediation, then court proceedings  in county in which well located 62
  • 63. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate Scene 10: Scene 10: Then one day, the pump stopped. 63
  • 64. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 10. Payments and renewals when operations are suspended Cox Lease Current State rules ‐ Habendum (continuous  ‐ No lease provision protecting  operations) clause releases  shutting‐in of production mineral estate when production  stops. ‐ If well shut‐in or flow reduced  temporarily, shut‐in royalties paid. 64
  • 65. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate Scene 11: Scene 11: When you were a little girl . . . . 65
  • 66. Rules governing development and  production of pools d i f l Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate 11. Reclaiming and restoring land Cox Lease Current State rules ‐ Detailed written reclamation and  ‐ No reclamation plan monitoring plan ‐ Requirement that operator   ‐ Warranty of adequate operator  provide financial assurance of  capitalization and operator  well closure, reclamation,  bonding to cover reclamation and  ongoing monitoring [§2(c)] ongoing monitoring 66
  • 67. Protecting Landowners in the Law Protecting Landowners in the Law Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate Conclusions ‐ Under current NC law, landowners compelled into a pool have  . significantly fewer opportunities to protect themselves than  those who negotiate their leases. those who negotiate their leases ‐ Compelling the granting of surface and subsurface easements  affects a wider range of landowner rights than compulsory  pooling alone. 67
  • 68. Protecting Landowners in the Law Protecting Landowners in the Law Leased Cox  Pooled Kelly  Unified Estate Unified Estate Unified Estate Unified Estate Conclusions ‐ If a compulsory pooling rule that compels granting surface or  . subsurface easements is implemented, the State should  integrate into pooling orders the full array of measures  integrate into pooling orders the full array of measures generally available in oil and gas leases to protect owners of  any pooled mineral estate or appurtenant surface estate,  whether unified or severed. h th ifi d d 68
  • 69. Cox Homestead Kelly Farm Compulsory Pooling & Landowner Protections p y g Presentation to Compulsory Pooling Study Group of the North Caroling Mining & Energy Commission John Humphrey McSwain Agriculture Center Sanford, NC The Humphrey Law Firm January 11, 2013 107 S. West St., PMB 325 Alexandria, VA 22314 Alexandria VA 22314 humphrey.law@earthlink.net 703‐599‐7919 69