January 23, 2013 - In December, Supervisor Pat Kittle said Independence Township could be caught in a catch-22 with oil and gas exploration because of compulsory pooling. To find out more, The Clarkston News talked with the Michigan Department of Environmental Quality's (DEQ) Assistant Supervisor of Wells, Hal Fitch.
What is the potential impact of oil and gas drilling?
"People are always concerned about impacts of oil and gas drilling, but we've got a pretty good, thorough and comprehensive body of regulations here in Michigan to protect the environment and to protect public health," Fitch said.
"That doesn't mean there's not going to be some impact to people," he pointed out. "There's some noise during the drilling operation; there's truck traffic, there's things like that, that are just an essential part of the development that are unavoidable."
Should oil and gas companies discuss compulsory pooling with landowners when asking about lease agreements?
"I don't think it ought to be used as a threat. But on the other hand, I guess people should know if they don't sign a lease, the operator does have some other recourse," he said.
If residents have questions, they should retain a knowledgeable attorney, he added.
What is compulsory pooling?
"For every well that's proposed to be drilled, [the DEQ] requires the [oil and gas producer] to designate a drilling unit, a certain tract of land that can be efficiently and effectively drained by one well," Fitch explained.
Drilling units vary in sizes ranging from 40 to 640 acres. An oil and gas developer must have all the mineral rights in a drilling unit under their control before the operation to install a well can begin.
With such large swathes of land in a drilling unit, there are often multiple property owners. While some may be willing to sign lease agreements, others may not.
"In those instances, we have to have a mechanism where the remainder of people who have leased have a means to develop or benefit from their production of oil and gas and also to protect the people who have not leased from drainage of their oil and gas without compensation," said Fitch.
"By not leasing, people are not going to prevent a well from being drilled necessarily. If [the oil and gas developer] can get the majority of the mineral owners in one of these drilling units to negotiate a lease, the company's going to drill it one way or another. Compulsory pooling just ensures the people that haven't leased will get their fair share," he added.
The only way property can be compulsory pooled is through a hearing, which is a judicial proceeding presided over by the assistant Supervisor of Wells.
What happens at a compulsory pooling hearing?
Hearings are initiated through a petition from the oil and gas company that owns the mineral rights and intends to drill the well. Since 2011, Jordan Exploration and West Bay Exploration have initiated two compulsory pooling hearings each.
"The petitioner has to show they've made a diligent effort to obtain a lease from the mineral owners; they have to show us the anticipated cost of drilling a well and completing it. They will propose a plan for pooling," Fitch stated.
Before the hearing, individual landowners will receive a copy of the petition. If they respond and state their wish to participate in the hearing, "they can provide testimony; they can cross examine witnesses; they can present their own witnesses," he explained.
If a property owner doesn't respond to the petition, "they can still come and make a statement, but it won't carry evidentiary weight."
Once all the testimony has been heard, the assistant supervisor of wells will make a ruling.
"Not every [proposal] is granted, but most of them are," said Fitch.
Of the four compulsory pooling hearings petitioned by Jordan Exploration and West Bay Exploration over the past two years, three petitions were granted. One hearing was dismissed because Jordan Exploration came to an agreement with the landowner who didn't want to lease.
What happens once the assistant supervisor of wells rules in favor of compulsory pooling?
If the petitioner's proposal is granted, the assistant supervisor of wells will issue a pooling order. Landowners who are pooled will pay a part of the cost of drilling and completing the well. The estimated price to drill a well is based on the oil and gas company's estimate. Pooled property owners will not collect an up front bonus, and they will receive 1/8 of the revenue from any oil and gas produced.
According to Fitch, the landowner's share of the drilling costs can be paid up front. "I can't recall any case where anybody has put their money up front," said Fitch.
Usually, pooled property owners choose the second option, which is to pay their share of the well installation with money they receive from any oil and gas found. In addition, "there's usually a penalty assessed also because of risk," Fitch explained. "If they've not put up any money ahead of time, they don't have any risk. So, there's a percentage assigned to compensate for that risk, and that might be 200 or 300 percent of the actual cost."
What if the oil and gas company drills, but doesn't find anything?
"If it's a dry hole (non-productive), there's no cost to the pooled owner," said Fitch.
But, if the landowner chose to pay their share of the well installation costs up front, they won't be reimbursed.
Even after the ruling has been made, a property owner can negotiate a lease agreement with the oil and gas company. Those who entered into an agreement with the petitioner before the hearing will see "no effect on their lease," Fitch noted.
What options do landowners have if they wish to challenge a pooling order?
As the assistant supervisor of wells, Fitch presides over the hearings and makes the ruling, but a landowner can share their objection with the DEQ Director.
Fitch said, "That has been done once or twice, but my decision has never been overruled. Their next step would be to appeal it to the court."
Is compulsory pooling common?
"Most drilling units and operators are able to get leases from everybody in the unit, but we probably hold eight to ten compulsory pooling hearings a year," said Fitch.
While a local government could be subject to pooling, Fitch could not recall a case of a municipality refusing to lease their mineral rights.
"It's pretty rare that we have a governmental unit that is subject to compulsory pooling," Fitch said.
For more information, call 517-241-1548 or check www.michigan.gov/deq.
Clarkston News reporter