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Marcellus Region Needs Forced Pooling, Lawyer Says

Forced pooling is critical to ensuring that the Marcellus Shale is developed to its fullest, but crafting those laws will be difficult because of the unique nature of shale and the slim legal history of pooling in Appalachia, a natural resources legal expert told a Pittsburgh audience Tuesday.

"I am so sick and tired of listening to politicians and reading articles about this being about greedy companies stealing people's resources," Russ Schetroma, a lawyer with Steptoe & Johnson LLP, said at the "Emerging Issues in the Law of Marcellus Shale" seminar hosted by LexisNexis. "Our own governor in Pennsylvania has decided that statutory pooling is granting private eminent domain and therefore cannot be. I'm sorry; it's about conservation. What do we mean by conservation? We're talking about conserving reservoir pressure and total recoverable resources for all of us, and the preservation of those resources from waste. All as a tonic against the consequences of the Law of Capture."

In the 1800s the Law of Capture treated oil and natural gas like wild animals, making whoever "captured" the resources into the owner, Schetroma said, leading to high-density drilling as landowners rushed to produce before their neighbors could drain their resources. In the short term, that development strategy caused significant surface damage by cramming dozens of drilling rigs into a relatively small area, but over the long term it can strand large amounts of oil and natural gas by destroying the inherent pressure in reservoirs, Schetroma said.

In 1941 Pennsylvania joined the Interstate Compact to Conserve Oil and Gas, an agency created to move states away from the Law of Capture and toward correlative rights -- the idea that landowners owned a portion of the resources under their property -- but Pennsylvania did not actually draft laws defining correlative rights until 1961 and even then only created a process for parties to handle the matter voluntarily, Schetroma said.

Unlike a single vertical well draining a vast traditional reservoir, a horizontal well can only produce from the relatively small section of shale cracked open through fracturing. A producer can't "drain" shale gas away from a neighbor without actually running a well through the property.

"This activity is far more like mining than traditional oil and gas production," Schetroma said.

While that geologic fact naturally protects landowners from having their resources sucked out from under them, it also means that one relatively small landowner can prevent much larger landowners all around it from developing their resources, economically stranding that natural gas.

"This is not a company versus landowner issue," Schetroma said. "This is a conservation issue."

In Texas, Oklahoma and Louisiana, the long history of pooling created a detailed system of laws, rules and regulations that made it easier to translate the issue as shale plays emerged over the past decade, but the existing case law on pooling in Appalachia is slim, Schetroma said. Only four cases in Pennsylvania history involve pooling, and the former Pennsylvania Oil and Gas Conservation Commission only heard 15 cases on pooling, the last more than 30 years ago. "I was able to read all of them in one day. Frankly, in under three hours," Schetroma said.

So while landowners can pool voluntarily in Pennsylvania through a private contract, no mechanism currently exists to force pooling among landowners without leases. Forced pooling is controversial in Pennsylvania. Polls find widespread public opposition to the practice and Gov. Tom Corbett opposes forced pooling in Pennsylvania, saying it would amount to private eminent domain (see Shale Daily, April 27).

Should Pennsylvania ultimately decide to craft those laws, though, it will need to rework those laws from the 1960s. For instance, the terms "discovery well" and "pool" are easier to define for traditional reservoirs than for shale, where gas saturates several million acres of rock.

The Pennsylvania General Assembly is aiming to address some of those issues with Senate Bill 447, but Corbett's opposition poses a major hurdle. West Virginia came close to passing forced pooling legislation in the past year, but the measure ultimately failed (see Shale Daily, March 15; Feb. 1). Ohio is slightly further ahead because of some existing rules on well spacing that form the basis of pooling debates.

While the debate continues, so does the boom of development in the Marcellus Shale. Currently there are 108 horizontal rigs active in the state of Pennsylvania, led by Bradford County with 25. The largest horizontal driller in the state is Chesapeake, which operates 22 rigs, followed by Range Resources and Talisman with 10 apiece, Chief Oil & Gas with nine and Anadarko with eight.

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