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West Virginia Shale Producers Try For Co-Tenancy/Joint Development

After several years of failing to pass forced pooling legislation in West Virginia, the oil and gas industry is hoping a rebranding of sorts that more closely considers the rights of majority and minority landowners will finally modernize the state's laws on the matter.

SB 244 was introduced last month with strong support from the governor and legislative leadership. It's being billed by the West Virginia Oil and Natural Gas Association (WVONGA) as a "job creator" that would lead to increased investment and revenue for local and state governments. Pooling, the organization stresses on its website, is not part of the bill.

In order to better gather landowners in a large tract of land and block-up acreage positions for today's far-reaching laterals, SB 244 would enable co-tenancy and joint development. Under co-tenancy, a producer would need a simple majority agreement from mineral rights owners to access natural gas on adjoining properties rather than the current 100%. Joint development would allow gas from nearby properties where mineral rights owners have already agreed to drilling to be accessed.

WVONGA says that on a single piece of property "there can be dozens or even hundreds of heirs and owners." Co-tenancy would essentially enable majority rules that would stop a minority from preventing production. Joint development would allow gas from adjoining leases to be combined. WVONGA claims that forced pooling is different because it looks at larger units in which majority owners can be unitized against their will. Under both proposals, landowners would share royalties proportionately based on what they own.

West Virginia is one of only three producing states without some kind of pooling law. Nearby Pennsylvania has co-tenancy and joint development, while Ohio has unitization, which gives state regulators the authority to force unleased landowners to participate in a drilling unit at the request of an operator that has leased at least 65% of the land in a proposed unit.

“[SB 244] is a tract-by-tract basis and not a unit basis,” said WVONGA Executive Director Anne Blankenship. “Pooling looks at the entire unit. That’s the main difference. You’re looking at a whole different universe of interest owners. A unit is made up of multiple tracts. Co-tenancy is based on individual tracts, not the entire unit.” Co-tenancy looks at the individual pieces of property and the majority rules rather than how much land has been leased in a whole unit.

Forced pooling legislation has failed five times in the last seven years in West Virginia. Lawmakers have rejected the legislation over concerns about property rights. Under current law, forced pooling is allowed in the state for deep wells below the Marcellus, such as the Utica, as well as shallow secondary oil recovery and coalbed methane wells, but not those targeting shallow formations, such as the Marcellus. SB 244 would authorize co-tenancy and joint development for all horizontal drilling, regardless of the formation.

The bill is being sponsored by Republican Senate President Mitch Carmichael, along with Republican Sens. Sue Cline and Jeff Mullins. Democratic Gov. Jim Justice expressed his support for the legislation in February during his first address to lawmakers since taking office.

Laws that allow producers to gather landowners into large tracts in which they share royalties and costs have been around for decades. While they're aimed at reducing surface disruption and maximizing oil and gas volumes, landowners sometimes take issue with the way revenues are shared.

"SB 244 faces significant resistance from surface owner organizations, which dislike the simple 'majority rules' aspect of the co-tenancy provision," Babst Calland recently wrote on its Shale Energy Law Blog. "Likewise, those groups also object to the joint development provision as it opens the surface of an affected parcel to development using horizontal drilling, even if the lease for that property was entered long before horizontal drilling became a popular technology in oil and natural gas production."

The industry, however, has maintained that the state's laws are outdated and inefficient, arguing that they must be modernized to better aid shale development in the state. Without some sort of pooling legislation, the industry says, a minority of landowners can prevent or stymie production.

“We’re trying to give everybody their fair share and look at everything,” Blankenship said when asked if she believes the new legislation has a better chance of passing. “The pooling bill didn’t pass. This is certainly an issue that has gone through the legislative session multiple years in a row, and we need some sort of mechanism in place to address this issue. So we’re very hopeful that it will pass, but it’s still early in the session and we’re still in our first committee.”

SB 244 was introduced Feb. 10 and  referred to the Judiciary Committee. The legislature's 60-day session adjourns on April 8.

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