A new twist on property rights abuse was sent to me by an out of state colleague. At least I was not aware of this authority until today.
In this case property owners are “encouraged” to lease their mineral rights to drilling companies or lose them altogether. It reminds me of the bogus redevelopment argument of “blight” where Revelli Tire property in Oakland was not blighted, as admitted by Jerry Brown, yet they justified taking his private property that was not for sale as surrounding neighborhood property was neglected.
The following comes to us courtesy of the FW Business Press.
Not to be criticized for “selective” article editing, based on my opposition to eminent domain takings for private use, I am posting the entire report here while including the story link at the end of this post.
“Gas companies using new tool to pick up unwilling lessees
BY JOHN-LAURENT TRONCHE
Fort Worth attorney Jim Bradbury got a letter in the mail from XTO Energy Inc., informing him that he could lease his minerals to the gas exploration and production company or, if not, they’d take them anyway. The Fort Worth company, in the process of being purchased by Exxon Mobil Corp., could use a statute usually reserved for protecting mineral rights owners, but in the reverse, to snatch up unwilling or unavailable mineral rights owners. The company has sent out letters to Mistletoe Heights neighborhood mineral owners in an attempt to encourage them to sign an XTO Energy lease with a 25 percent royalty and $2,400-per-acre bonus. Should the mineral owner ignore the letters or decline to sign, as Bradbury will do, the company will request a force pool application from the Railroad Commission of Texas, which would, as the name implies, force those unavailable or unwilling parties into an agreement to produce.
“It’s compelled leasing,” Bradbury said. “It’s called pooling, and that’s a good term for them because there’s a long history of pooling law… but really it’s compelled leasing.”
The Mineral Interest Pooling Act, or MIPA for short, previously has been used to introduce unleased mineral rights owners – who wanted to lease – into a group of other leased mineral owners, so that both parties could have their minerals realized. But the Railroad Commission of Texas essentially executed the opposite when it reinterpreted MIPA in late 2008 to also allow the force pooling of unleased and unwilling mineral rights owners into a group of willing and leasing mineral rights owners. The pooling act is a section of the Texas Natural Resources Code, established by the Texas Legislative Council in 1963.
In Mistletoe Heights, leases have been acquired from the mineral owners of about 187.83 acres of the proposed 328.18-acre drilling unit, according to an XTO Energy-drafted document sent to neighborhood residents. At the end of November, there were at least 90 lots in the area that needed to be leased so that the drilling program could move forward.
XTO Energy has made similar efforts to force pool in north Fort Worth’s Rosen Heights area and off Hemphill Street at Page Street and near its North Texas Steel lease. Chesapeake Energy Corp. also has filed a request for an East Side drilling unit.
An XTO Energy representative said the company would not comment.
Setting a new precedent
Finley Resources Inc. worked since 2005 to secure leases in the Riverside area of Fort Worth, about one mile due east of Downtown. During that time, the Fort Worth-based company secured 82.9786 acres for a drilling unit, while fellow oil and natural gas firm Chesapeake Exploration LLC leased several lots containing 5.9904 acres. (Another 1.647 acres acquired belonged to Chesapeake, too.)
Two years into leasing, more than 25 lots containing a total of 5.704 acres remained unleased, either because the mineral owners were unwilling to lease or the mineral owners could not be found; In another event, those owners simply wouldn’t have their minerals realized, but the lots’ placement within the unit would have made producing the leased property while avoiding unleased property impossible, according to Finley Resources.
The total 96.32 acres comprised of more than 300 lots had to be treated as one entity, the company said.
Finley Resources sought the help of the Railroad Commission of Texas, which regulates all oil and natural gas activity within the state.
After a lengthy, one-year review process in which Chesapeake Exploration and others also threw their hats in the ring in support of the force pool, the commission’s examiners eventually recommended the commissioners adopt Finley’s application, but at the behest of Commissioners Elizabeth Ames Jones and Victor G. Carrillo, the current chairman.
Carrillo and Jones signed the order Aug. 25., making it the first time the Railroad Commission of Texas had interpreted MIPA to offer protection for drilling companies, and not just mineral owners. Fellow Commissioner and then-Chairman Michael L. Williams did not vote because he already had voted on the examiners’ June opinion, which recommended denying Finley’s application for a force pool.
“There’s almost an eminent domain essence to it,” Bradbury said, “where an operator can come in and say, ‘Through this Finley decision we are going to put you under a lease or get hold of your minerals by force of law.’”
Finley’s significance
“There’s no doubt that as soon as Finley came about a year ago, the landmen negotiating for these companies latched on to it as one more tool they can use, and are saying, ‘Well if you don’t sign a lease we’re going to force pool you anyway,’” said Bob West, an oil and gas attorney at Whitaker, Chalk, Swindle & Sawyer LLP.
The decision was significant because it was the first time the commission had viewed the MIPA in this way, and also because it represented an inconsistency in the opinions of the commissioners and the agency’s examiners, West said.
Commissioner Williams, who previously has said he was against the pro-Finley decision, declined to comment for this article because the issue is appearing in the Barnett Shale again.
Bradbury isn’t opposed to gas production, but doesn’t think gas drilling belongs in an urban setting. Still, he said he passes no judgment on his neighbors’ decision to sign a gas lease with an energy company.
“It’s not what I wanted to do, but that’s their house and those are their minerals. And I’m OK with that,” he said. “This is my house, these are my minerals and I want to be the one who makes those decisions.”
An XTO Energy representative asked Bradbury how much money it would take to get him to sign over his minerals.
“There’s no amount of money or Exxon stock you can give me to change, because it’s just a principle issue,” Bradbury said he told the representative.
Lisa Vaughn, a partner at Shannon, Gracey, Ratliff & Miller LLP, said the Finley move is less an erosion of unwilling mineral owners’ rights and more a protection of willing mineral owners’ rights. In an urban setting where lots can be as small as a quarter of an acre, she said, frequently there can be many missing chunks that would make a drilling program impossible to execute without their inclusion – a checkerboard situation in which some are leased, and some aren’t.
“None of the people in this checkerboard holding would be able to maximize their minerals or access them at all without all of them,” said Vaughn, adding, “To say it’s an erosion of rights is to look only at the mineral owners who don’t want to drill for whatever reason.”
Mineral owners are well-protected by the Railroad Commission of Texas and its requirements that gas companies must meet before applying for a force pool situation.
“Like many statutes, the Mineral Interest Pooling Act is an attempt to balance the conflicting interests of everyone involved,” she said. “There needs to be some sort of mechanism to help them all move in the same direction, but obviously not all have precisely the same goals or desires.”
http://www.fwbusinesspress.com/display.php?id=11732
Okay, let’s not pass that law in California then.
Rogue.
Did you coin the term “drill, baby drill”?
All we need to do is pass eminent domain reform that protects rent control and it will win.
Matt.
It’s called supply and demand.
Some CA cities already have rent control such as Santa Monica and SF unless I am mistaken.
If you tie the hands of property owners, you might end up creating slums. What inducement would they have for improving their apartments if you tie their hands as it relates to how much rent they can charge?
If their rental prices are too high then they must cope with massive vacancies such as we see with all of the empty storefronts around OC The same impact wil be felt with rental apartments
I don’t know if the activity described in this post is a good idea or not; I am pretty confident that lumping unititization with Kelo, Community Redevelopment, and other blatant eminent domain abuses is not helpful.
Here is the problem: the minerals in question don’t respect property boundaries. Thus each lease-holder has an incentive to behave in a way that is destructive of the overall gas field. A “tragedy of the commons”. Unitization has proven historically to be one of the better ways to deal with this problem.
A bit of history: The original rule, from the 19th century, was the “rule of capture.” If the well was on your physical property and you owned the below ground mineral rights, anything you could suck up the well was yours. A a results, everyone who could built a well as quickly possible. Which was a complete disaster: the amount of oil or gas ultimately recovered from a well depends strongly on producing at the correct rate. There were cases were 99% of the hydrocarbons were left in the ground because the field’s “drive” was prematurely destroyed by indiscriminate production.
Over many decades, the concept of “unititazation” took hold: Identify the unit of production, and then force all lease holders to take a proportional stake in the output from the entire field. As you might imagine, this kind of law is very messy. But it’s now well established, if frequently litigated.
Here is the problem of the Barnett Shale: it requires a huge investment in expensive deep-gas wells plus large-scale fracturing before any gas can be produced. No one is going to make that kind of investment until the rights of all leaseholders are sorted out. This gives small leaseholders tremendous tremendous incentives to hold out as long as possible. Indeed, in economic theory this is known is the “hold-up problem” and the final leaseholder should be able to capture the entire remaining marginal value of the project. NOT GOOD.
So some sort of mechanism has to be in place to prevent these small-leaseholders from being able to scupper the entire project. I don’t know if the activity described in this post is a good idea or not; but I am pretty confident that lumping this with Kelo, Community Redevelopment, and other blatant eminent domain abuses is not helpful.
note: while I have a Chemical Engineering degree from U. Texas, have worked for two oil companies in Texas, and grew up over the Barnett Shale, I have never done Petroleum Land Lease management, so my comments here are thumbnail description of an amateur. I hope this helps.
one more note: thank you for including comments on both sides of the issue. Unitization is always a tough issue, and abuses do occur.
Tylerh.
Thank you for your in depth comment. The idea of providing blog posts is to create a dialogue representing all sides of the issues presented.
One could probably argue that this form of “taking” constitutes a “public good” even though I take offense to watering down the Fifth Amendment as demonstrated by the court in Kelo.
If you notice I did not argue for a bigger slice of the revenue pie as offered which might result in 100 percent acceptance by the impacted property owners.
Larry,
Notwithstanding your absurd insinuation, supporting oil drilling doesn’t equate with supporting eminent domain abuse – hysterical absurdity.
In some states I seem to recall that the mineral rights remain with the state, but that if they need to come on your property to access them then they have to pay for that right.
If a person owns land above an oil deposit would that be considered a roadblock to drilling under current California law I have no idea. It would be interesting to know however.
Folks. although I cannot say if CA law trumps any or all of the following Internet data, let me share it for your reading:
“1. Solid Mineral Rights.
A landowner owns all the solid minerals within the “inverted pyramid” under the surface of his or her property. These mineral are considered to be real property until they are extracted from the earth, at which point they become personal property.
2. Oil & gas rights
Ownership of oil and gas is not as straightforward as ownership of solid minerals. In their natural state, oil and gas lie trapped beneath the surface in porous layers of earth. However, once an oil or gas reservoir has been tapped, the oil and gas begin to flow toward the point where the reservoir has been pierced by the well. A well of one parcel of land can attract all the oil and gas from the surrounding properties.
Ownership of oil and gas is governed by the “rule of capture” that is, a landowner owns all of the gas and oil produced from wells on his or her property. The oil and gas becomes the personal property of the landowner once they are brought to the surface. The rule of capture has the effect of stimulating the oil and gas production, since the only way for a landowner to protect his or her interest in the underlying gas and oil is to drill an offset well to keep the oil and gas from migrating to the neighbors wells.”
Larry, I would only have rent control in cities that are built up. If a city is not built up meaning no spare parcels then it would be fair game. Maybe that would be a decent compromise. Prop 98 was going to kill off rent control and thats why it lost.