As Utica drilling in West Virginia becomes more and more prevalent (especially in Marshall, Wetzel, and Tyler Counties), oil and gas companies are increasingly seeking to lease mineral owners’ Utica rights. That’s great! Mineral owners in West Virginia have two plays in the Marcellus and the Utica. However, what these companies routinely offer for a Utica-only lease is below what it’s worth. And, when mineral owners stand their ground and demand a better price, the all-too-often force pooling threat comes out—“if you don’t sign our lease, we’ll just force pool you, and you’ll get less than what we’re offering.”
Unfortunately, those threats are made because they’re often successful in bullying mineral owners to lease their Utica. So, what’s the deal? Are these threats true? What happens in a force pool hearing? I had the opportunity to appear before the West Virginia Oil and Gas Conservation Commission (“WVOGCC”) in Charleston on behalf of a client who was being “force pooled,” and here’s what I learned.
Oil and Gas Companies Can Force Pool Utica Rights
There is no doubt about it. Pursuant to West Virginia Code § 22c-9-7, when a mineral owner refuses to sign a lease permitting Utica drilling, the oil and gas company can petition the WVOGCC to force pool that owners’ Utica interest (but not the Marcellus). That mineral owner can then elect to participate in the drilling of the Utica well or have the WVOGCC determine the price and other lease terms due to the mineral owner for leasing the Utica.
What Do Mineral Owners Get for their Utica when Force Pooled?
Most often, mineral owners who are force pooled elect to have the WVOGCC determine the price and terms they are to receive for their Utica rights. Here’s where things get interesting…. Recently, the WVOGCC has ordered Utica drillers to pay mineral owners $7,000/acre and 20% gross royalties for their Utica rights. Let me say that again—$7,000/acre and 20% gross royalties for a Utica-only lease! If you don’t believe me, take a look at this WVOGCC Order from September 18, 2018. Conceivably, a mineral owner who signed a Marcellus-only lease could receive over $10,000/acre in lease bonuses for both formations on separate leases.
My Force Pooling Experience
Earlier this year, I represented a client who had been contacted to lease his Utica. After months of negotiations and threats of force pooling, the oil and gas company attempting to lease his Utica rights gave us a take-it-or-leave-it offer of only $4,000/acre and 19% gross royalties. Knowing what the WVOGCC had ordered for Utica rights, I advised my client to refuse that offer and fight at the hearing. We left early one morning and arrived in Charleston 30 minutes before the hearing. Surprised that we were there, the oil and gas company immediately wanted to negotiate a settlement to avoid our involvement in the hearing. Not having been able to do so, I appeared on behalf of my client and argued that he was entitled to $7,000/acre and 20% gross royalties. After further settlement negotiations, we finally resolved the matter. While I cannot share the actual settlement terms, I can definitely say it was a big win for my client. The 6-hour round trip drive and 3 hours spent at the hearing was definitely worth the time. If companies don’t want to offer my clients a fair deal for their Utica rights, you can bet I’ll be down there again.
What Should Oil and Gas Lessors Do?
Mineral owners contemplating signing a Utica-only lease are in a very good but uncertain situation. While the WVOGCC has not signaled that it will set new price terms for force pooling, it may do so at any point in the future. Indeed, many oil and gas insiders I know have personally told me that these companies intend to challenge the WVOGCC’s awards of $7,000/acre and 20% gross royalties for Utica-only leases. Therefore, the decision to force an oil and gas company to force pool at a hearing is a risk that might not be worth taking depending upon the oil and gas company’s offer.
On the other hand, mineral owners who have both the Marcellus and Utica available to lease would be wise to consider signing a Marcellus-only lease. Oftentimes, oil and gas companies are seeking to drill only the Marcellus but want the option to drill the Utica in the future. If that’s the case, a mineral owner can sign a Marcellus-only lease for a good price and take advantage of the Utica force pooling issue down the road. This is especially true for mineral owners where Utica drilling is in its relative infancy—Wetzel, Tyler, Doddridge Counties.
There is no-one-size-fits-all game plan. What makes sense for one mineral owner may not make sense for another. If you have been contacted to sign an oil and gas lease, we can help put the pieces together to ensure that you are getting the highest price and best deal possible. Whether that’s a Marcellus-only, Utica-only lease, or something else, we can help you make the best decision for you and your family. If you have an oil and gas issue, you can contact me personally to set up a free, no-obligation consultation.
GKT offers a wide range of legal services to oil and gas land and mineral owners in Ohio, West Virginia, and Pennsylvania.