Constitutional Challenges on Colorado Compulsory Pooling Statutes

Marie Zimmerman

 

I.   Introduction

Pooling is the consolidation of leased land with other adjoining tracts to create a “pool” or a drilling unit.[1] Pooling mainly benefits production (or drilling) companies so that these companies may unitize adjoining leases to drain one common underground geologic reservoir and then compensate all who own land in the pool.[2] Pooling helps solve issues when a geologic reservoir spans under multiple tracts owned by different property owners.[3]

Pooling was originally created to aid the basic goal of oil and gas production: retrieve the minerals under the ground at the highest efficiency possible. The Rule of Capture, a basic fundamental law of property, says that the first person to “capture” a resource has ownership rights in relation to that resource. In the oil and gas context, a landowner may take ownership of resources beneath another landowner’s adjacent tract by flowing those resources to a well.[4] The unintended result of this doctrine was that landowners were forced to rush to drill on their land in order to reap the benefits of the oil brought up from it. This “race to drill” resulted in a multitude of litigation issues as well as an excessive amount of economic and property waste as properties overcrowded with wells and rigs with no regulations to guide them.[5] In order to solve this problem of both waste and over productivity, drilling and spacing units[6] were created and soon after, forced pooling was installed.[7] The policy consideration behind forced pooling is the idea that as long as a property owner is compensated in some way, they will be overruled when the government grants a pooling order to another party to extract the minerals contained in that mineral owner’s property.[8]

Landowners can be subject to two types of pooling schemes: voluntary pooling or forced pooling.[9] Voluntary pooling allows for a landowner to negotiate their own pooling clauses in a lease, give free consent to pooling on their lands when they so choose, and reap the financial benefit of whichever pooling clause they choose to sign in to lease with an operator.[10] The landowner in a voluntary pooling scheme usually receives a lease signing bonus from that operator. Conversely, forced pooling does not allow for the individual landowner to have as much power. An operator applies for forced pooling to a regulated state agency, which then holds a hearing to issue an order for tracts of land to be force pooled together.[11] Then, the state and the operating company set the payment scheme for cost sharing between all interested parties in the pooled tracts.[12] Landowners generally have minimal input in this process or payment determination.[13]

Forced pooling serves many oil and gas production functions. First, it allows for prevention of drainage without compensation. If a neighbor on Blackacre decides to drill a well on his or her land, it may be geologically impossible to bring the mineral reservoir under Blackacre up to the surface without draining the minerals under the neighboring tract. Second, it allows for an interested party to receive financial benefit from the extraction of their oil and gas without drilling a well themselves and paying for operating costs. Third, forced pooling has solved some of the problems state commissions were originally created to fix. Unitization helps create the pressure necessary to retrieve the most product out of the ground, while also reducing the amount of surface property damage by eliminating excessive drilling.[14] Proponents of forced pooling argue that it helps increase efficiency, protect the environment, and ultimately inflate royalty payouts because fewer wells with better management will lead to more successful oil and gas wells drilled.[15]

On the other hand, critics of forced pooling argue that concept does not protect individual liberties or property rights. Forced pooling does not allow for parties to enter into leasing contracts themselves when forced to pool with neighboring tracts, and therefore those interested parties do not have the opportunity to reap the benefits of lease bonuses. Also, for those who are opposed to the production of oil and gas outright, this is a frustrating statutory scheme that forces parties to enter into agreements that are opposed to their individualized morals. Because of these contradicting views, statutory pooling can be utilized to raise arguments in litigation by both sides of the aisle to further an agenda in the oil and gas world.

II.   Colorado’s Statutory Pooling Law

In Colorado, the Colorado Oil and Gas Commission’s main duties are to prevent waste, which includes avoiding unnecessary drilling of wells, and protecting correlative rights.[16] These responsibilities align with the original purposes of pooling and oil and gas commissions nationwide.[17] The statute also tasks the commission with establishing one or more drilling units to be pooled for production.[18] In Section (6) of the statute, the commission is granted authority to force pool neighboring tracts of land.[19] It also mandates that all interested parties in the tracts of land receive their equitable share of production proceeds.[20] Another statute mandates that oil pools shall be regulated and restricted in a manner that protects the reasonable use of energy for oil production.[21] This language was created with the vision of promoting oil and gas production and not necessarily regulating it to hinder the industry’s functionality. This language has changed as political divisions have increased over the oil and gas space in Colorado.

III.   An Attack on Colorado’s Statute

The latest issue in Colorado’s oil and gas industry arises from a lawsuit recently filed in federal court challenging a pillar of well-established state mining law.[22] The anti-fracking group, Colorado Rising, helped Broomfield mineral owners file suit attacking Colorado’s forced pooling statute, “which allows an oil and gas operator to extract – for a price – minerals belonging to those unwilling to sell their deposits.”[23] The plaintiffs argue that forced pooling violates their rights to contract, as well as their equal protection and due process rights as plaintiffs are allegedly finding themselves signing leases under duress with operators and lease packagers. Liberal advocates are excited for this chance to bring justice to an unjust law that “create[s] an imbalanced system that allows the oil and gas industry to run roughshod over these communities and keep citizens from having a say.”[24] Those on the other side of the aisle will stand their ground that forced pooling is grounded in oil and gas production and that extraction of this minerals is what stands most important.   

The lawsuit challenges the constitutionality of CRS § 34-6-116(6), the forced pooling provision of the Colorado Oil and Gas Act.[25] These Broomfield residents have expressed their distaste for the statute that requires owners who may not want to pool to do so after a certain percentage of an intended pooled unit signs a lease.[26] The lawsuit states that this practice “constitutes a special law in violation of the privileges and immunities clause of the United States Constitution because it grants exclusive privileges to private gas and oil operators” and injures individual landowners.[27] Governor Jared Polis and regulatory agency, Colorado Oil and Gas Conservation Commission, have been listed as defendants.[28]

In the meantime, community groups across the state have requested Polis put a hold on all pending permit applications for drilled wells in the state and enact an indefinite moratorium on new drilling in Colorado until a new comprehensive study is conducted to further research the health and safety impacts of drilling and fracking.[29]  These efforts are just the beginning of large anti-fossil-fuel movements that our state is likely to see after the 2018 election results. If statutory pooling is struck down, many environmentalist landowners can refuse to participate in drilling to reach reservoirs that underlay most of the state of Colorado.

IV.  Nationwide Pooling Statutes and Policy Point Towards Upholding Colorado’s Pooling Statute

Despite these commendable efforts to combat oil and gas production, this case filed to eliminate Colorado’s forced pooling statute is likely to fail. Although the court has not answered these specific Constitutional challenges on forced pooling in Colorado, most courts nationwide have upheld a policy in support of pooling and the benefits of efficient oil and gas production. Most producing states have compulsory pooling laws, but there is widespread diversity in the procedures used to enforce pooling of mineral reservoirs across the United States.[30] A number of oil and gas producing states, including Oklahoma,[31] treat a spacing order as a type of pooling order that pools the royalty owners’ interests automatically within a given spacing unit.[32] Ohio allows for compulsory pooling; however, it limits the number of pooling orders a single operator can seek from the state’s commission.[33] Arkansas, another state that supports compulsory pooling, uses integration orders that effectively eliminate the need for pooling clauses in leaseholds or voluntary pooling by mineral owners.[34]

This practice of compulsory pooling has been legislatively recognized by states for almost a century.[35] While those forced into compulsory pooling feel their property rights and right to contract are being infringed, “[t[he constitutionality of compulsory pooling acts has been upheld as a proper exercise of the police power of a state.”[36] Also, although theses statutes may seem outdated as many of them have been in effect since the 1930s, the recent shale boom[37] and increase of horizontal wells and hydraulic fracturing have reemphasized these laws’ importance in regulating the oil and gas industry.[38]

Further, most courts in producing states have not only regularly upheld pooling statutes and other regulations that support compulsory pooling, but have gone even further to require interested parties in the pool to take part in drilling costs. Oklahoma is one of these states that uses compulsory pooling.[39] Like Colorado’s Commission, the Oklahoma Corporation Commission has exclusive jurisdiction to interpret, clarify, amend, and grant orders requested by oil and gas operators and to further regulate the drilling of oil and gas wells.[40] In a Tenth Circuit case, the court also stated that Oklahoma’s Commission has the power to determine whether parties have elected to participate in a force pooled order and whether the well-drilling costs on the surface may also be allocated to the participants of the force pooled unit.[41] This is an example of a state that not only supports forced pooling, but also requires those opposed to pooling to participate in the costs of drilling wells. Courts have also upheld that under pooling orders, operators may deduct post-production costs—transportation, treatment, and onsite compression after production to the surface— when calculating royalty payments that need to be payed to non-participating royalty owners.[42] Therefore, Colorado has shown to be a groundbreaking state in attempting to overturn what is normally allowed and customary when producing oil and gas in the United States. 

V. Conclusions

Pooling has been contested for decades, and by both sides of the aisle. For those in violent opposition of the industry, statutory pooling is a frustrating scheme that may force individuals to retrieve the fossil fuels that sit under their surface property. For those in extreme support of oil and gas production, pooling statutes do not allow an individual to develop their own minerals on their own timeline, and usually deprives many individuals in their pooled unit of their opportunity to contract. However, absent forced pooling statutes and state regulation, the industry would be a free-for-all and there would be no systematic way of geographically spreading oil and gas wells to eliminate surface property destruction and over expenditure of finances to drill wells.  

[1] Oil + Gas, Oil and Gas Pooling: How it Works and How Forced Pooling Affects the Owner, http://www.oil-gas-leases.com/oil-gas-pooling.html (last visited Mar. 25, 2019).

[2] Id.

[3] Id.

[4] Coastal Oil & Gas Corp. v. Garza Energy Tr., 268 S.W.3d 1, 13 (Tex. 2008).

[5] Kate Goodrich, Texas Takes a Different View Towards Compulsory Unitization Legislation, Texas Journal of Oil, Gas, and Energy Law (Mar. 24, 2017), http://tjogel.org/texas-takes-a-different-view-towards-compulsory-unitization-legislation/#_ftn4.

[6] Gabriel Bass, Oil and Gas Basics: Drilling and Spacing Units, Martindale Legal Library (June 23, 2012), https://www.martindale.com/natural-resources-law/article_Bass-Law_1537320.htm.

[7] Forced pooling and statutory pooling are often used interchangeably but for purposes of this note, I will refer to forced pooling throughout.

[8] This compensation is usually in the form of a share of the production costs after a well is drilled.

[9] Bass, supra note 6.

[10] Id.

[11] Id.

[12] Id.

[13] Id.

[14] Goodrich, supra note 5.

[15] Id.

[16] Colo. Rev. Stat. Ann. § 34-60-116(1) (West 2018).

[17] Goodrich, supra note 5. In the absence of voluntary pooling, the commission, upon the application of any interested person, may enter an order pooling interests in the drilling unit for the development and operation thereof. Colo. Rev. Stat. Ann. § 34-60-116(1) (West 2018).

[18] Id.

[19] Colo. Rev. Stat. Ann. § 34-60-116(6) (West 2018).

[20] Id.

[21] Paul, supra note 3.

[22] Id.

[23] Id.

[24] Sheryl Gay Stolberg & Catie Edmondson, House Poised to Pass First Gun Control Bills in a Generation, N.Y. Times (Feb. 27, 2019), https://www.nytimes.com/2019/02/26/us/politics/house-democrats-gun-control.html.

[25] See Paul, supra note 3; Stolberg & Edmondson, supra note 23.

[26] Paul, supra note 3.

[27] See Scott M. Karson, Mass Shooting and Domestic Violence, 90 N.Y. St. B.J. 8, 9–11 (2018) (discussing the similar features of numerous mass shootings).

[28] Id. at 9.

[29] Id.

[30] Id. at 10.

[21] Id.

[22] John Aguilar, Anti-fracking Activists Sue Colorado over “Forced Pooling”, Promise More Challenges, Denver Post (Jan. 23, 2019), https://www.denverpost.com/2019/01/23/colorado-lawsuit-forced-pooling-oil-gas/.

[23] Id.

[24] Id.

[25] Colo. Rev. Stat. Ann. § 34-60-116(6) (West 2018); Erin Prater, Colorado Rising Lawsuit Challenges ‘Forced Pooling’, Nine News (Jan. 24, 2019), https://www.9news.com/article/news/local/local-politics/colorado-rising-lawsuit-challenges-forced-pooling/73-897bd1e1-da27-4ade-a9bb-6e6a5b64c0ca.

[26] Grace Hood, Broomfield Activists Sue Colorado Over ‘Forced Pooling’ of Oil and Gas Rights, Colorado Public Radio (Jan. 23 2019), https://www.cpr.org/news/story/broomfield-activists-sue-colorado-over-forced-pooling-of-oil-and-gas-rights.

[27] Id.

[28] Id.

[29] John Aguilar, “This is a wake-up call”: Drilling Opponents Putting Full-Court Press on Jared Polis to Halt New Wells in Colorado, Denver Post (Jan. 3, 2019), https://www.denverpost.com/2019/01/03/oil-gas-drilling-moratorium-polis-fracking/.

[30] Bruce M. Kramer, Unitization: A Partial Solution to the Issues Raised by Horizontal Well Development in Shale Plays, 68 Ark. L. Rev. 295, 300 (2015).

[31] The Mid-Continent region is home to the SCOOP and STACK plays as well as the Anadarko Basin, all located in Oklahoma and heavy oil and gas producing areas of the country.

[32] Bruce M. Kramer, Unitization: A Partial Solution to the Issues Raised by Horizontal Well Development in Shale Plays, 68 Ark. L. Rev. 295, 300 (2015).

[33] Id.

[34] Id. at 301.

[35] Emeka Duruigbo, Small Tract Owners and Shale Gas Drilling in Texas: Sanctity of Property, Holdout Power or Compulsory Pooling?, 70 Baylor L. Rev. 527, 534 (2018).

[36] Id. at 535 (quoting John S. Lowe et al., Cases and Materials on Oil and Gas Law 715 (6th ed. 2013)).

[37] Robert Rapier, How the Shale Boom Turned the World Upside Down, Forbes (April 21, 2017), https://www.forbes.com/sites/rrapier/2017/04/21/how-the-shale-boom-turned-the-world-upside-down/#6e32868d77d2.

[38] Emeka Duruigbo, Small Tract Owners and Shale Gas Drilling in Texas: Sanctity of Property, Holdout Power or Compulsory Pooling?, 70 Baylor L. Rev. 527, 535 (2018).

[39] GHK Exploration Co. v. Tenneco Oil Co., 857 F.2d 1388, 1389 (10th Cir. 1988).

[40] Id. at 1389­–90.

[41] Id. at 1390.

[42] New Dominion, L.L.C. v. Parks Family Co., L.L.C., 216 P.3d 292, 296 (Okla. Civ. App. 2008).