Suburbanites reckon with arcane drilling law

On Colorado’s Front Range, companies can extract oil and gas from private land — without homeowners’ permission.

 

When Ann Marie Byers received a letter last June giving her 15 days to either accept an offer to lease the oil and gas rights underneath her suburban Colorado home or have the driller legally take the mineral rights anyway, she thought it was a scam.

“I didn’t even know we had mineral rights,” says Byers, a 42-year-old lawyer and mother of two, who lives in the Denver suburb of Broomfield. “The letter looked suspicious. There were errors and typos, and it asked for my Social Security Number. I thought, ‘They can’t just take your mineral rights.’”

But the letter was no con. Under an arcane 82-year-old statute, an oil and gas operator can legally extract oil and gas from underneath someone else’s land — even if that landowner refuses to lease. It’s called “forced pooling.”

The Lowell Pad, where Extraction Oil & Gas plans a 42-well site, between Wildgrass and Anthem developments in Broomfield, Colorado.
Ted Wood/The Story Group

“Pooling” is the term used to describe the aggregation of all the mineral rights in a designated drilling “unit.” It becomes “forced” when the mineral right of an unwilling owner in the unit is, in essence, condemned. As rising oil prices stimulate more drilling, hundreds of homeowners on Colorado’s bustling Front Range are receiving letters giving them the choice of receiving a lease at a set royalty rate or of facing forced-pooling. 

Now, those Colorado residents are scrambling to figure out how to respond, and legislators are taking another look at the old statute.

“To allow a corporation to take someone’s property by force — it sounds like something we could hear about in Russia or China or Azerbaijan,” says Kevin Kreeger, a Broomfield city councilman.

Pooling laws were instituted in the 1920s in response to the prevailing “rule of capture,” which held that whoever drilled first owned the resource. Daniel Plainview, the main character in the 2007 film There Will Be Blood, explained it thus: “If you have a milkshake and I have a milkshake, and I have a straw. … And my straw reaches across the room and I start to drink your milkshake. … I drink it up!” Forced pooling statutes ensure that real-life Daniel Plainviews have to pay for that milkshake.

State regulators and industry officials say that forced-pooling rules are necessary for the orderly development of oil and gas. Under rule of capture, drillers would sink as many wells as they could, with virtually no distance between them. That created a need for spacing rules. But spacing doesn’t work unless all the minerals underneath the checkerboard of wells are pooled. Pooling also ensures that all the mineral-rights owners involved are compensated. Thirty-three states — all the major oil-producing states save California — have pooling laws.

But not all forced-pooling laws are the same. Colorado, which boasts cutting-edge rules on drilling, fracking-fluid disclosure and methane-emissions control, has an “extremely permissive” pooling rule, says Matt Sura, an attorney representing three communities in forced-pooling disputes. “Forced pooling is giving corporations the power of condemnation,” Sura says. “Some operators use forced pooling as a gun to the head to force landowners to sign leases.”

The recent flurry of protests is in part caused by drilling expansion into more developed areas with more fragmented land ownership, says Matt Lepore, the executive director of the Colorado Oil and Gas Conservation Commission. “You are sending out a lot of letters to lots of property owners, many who don’t even know they own the mineral rights,” he says. New horizontal drilling and fracking techniques, which enable wells to extend two miles or more, can also scoop up more landowners in a single project.

When Byers realized that forced pooling was real, she began organizing her neighbors in Broomfield’s Wildgrass development, where homes with scenic mountain views sell for close to $1 million. The Wildgrass Oil and Gas Committee was born.

Only 12 of the 510 homes in the development signed leases, Byers says. But that is enough to allow the driller — Denver-based Extraction Oil & Gas Co. — to seek a forced-pooling order; in fact, a single lease is sufficient.

When it became clear that there was no way to stop the pooling, Byers says, “We thought we should negotiate the best deal we could.” In a lease agreement, a property owner negotiates a royalty rate and possibly other considerations, such as well location. The company had offered a 15 percent royalty and a $500 signing bonus.

Landowners who are forced to pool usually get a raw deal. There is no signing bonus, and the royalty rate is a flat 12.5 percent. In contrast, the going lease rate in Colorado is between 16 2/3 percent and 20 percent, says Lance Astrella, an attorney who represents landowners in lease agreements. That can add up to hundreds or even thousands of dollars per month more for the leaseholders, depending on how many rights are in the pool.

The force-pooled landowner gets only a fraction of the royalties until the costs of equipment and drilling are paid off, which can take years, since wells cost $5 million to $7 million apiece to drill. By the time the well has paid off, its production is likely to have dropped considerably.

About 310 Wildgrass homeowners and 40 others from the adjoining Anthem development hired Sura, to negotiate with Extraction, primarily in order to mitigate the drilling impacts. But when the city government found out that the number of wells Extraction planned to drill had jumped from 24 to 140, the possibility of a moratorium was raised.

In response, Extraction has agreed to delay the project while the city reviews its oil and gas rules. A spokesman for the company, Brian Cain, declined to comment.

Then, in December, letters from the Denver-based Great Western Oil & Gas Co. began landing in mailboxes at the Highland Meadows Golf Community and neighboring developments in Windsor, 50 miles north of Broomfield. Residents were offered a lease with a 16 percent royalty rate minus production costs. Four neighborhoods filed a protest with the oil and gas commission, arguing that the approaching holidays gave them insufficient time to respond. The deadline was extended, allowing the homeowners a chance to organize. They eventually signed with another operator, Horizon Resources, for a 20 percent royalty. Horizon will access the oil and gas from a mile away.

“The process worked the way it should,” says Hal Writer, land manager for Great Western. “When people asked for more time and had questions, we extended the deadline. We met with people in the neighborhoods and tried to answer their questions.”

In April, Rep. Mike Foote, D-Lafayette, and Rep. Dave Young, D-Greeley, two Democratic state legislators, representing Front Range districts facing drilling, filed a bill to update the forced pooling law.

The bill extends the time landowners have to respond to a forced pooling notices to 90 days from 35. It requires that forced pooling notices be in plain English and that the oil and gas commissions to keep public records on how many people are being forced pooled.

“This is about transparency and due process,” says Foote. Under pressure from industry lobbyists a provision requiring that an operator have leases for more than 50 percent of the drilling areas to be able to force pool was removed from the bill.

The bill passed the House 36-29 and went to the Republican-controlled Senate. All 28 Republicans in the House voted against it.

Broomfield homeowner Byers believes that reform deserves bipartisan support. “This isn’t an environment or climate-change issue,” she says. “This is a property-rights issue. Both sides of the aisle should get that.”

Note: This article has been updated with new developments.  

Mark Jaffe has covered environmental and energy issues for The Philadelphia Inquirer, Bloomberg News and The Denver Post. He was an environmental Nieman Fellow at Harvard.