Pooling. This word is on the lips of almost every operator working in the Marcellus Shale. Depending on where you stand on the issue, pooling is either a necessity to allow for the efficient recovery of the resource or a dastardly scheme meant to allow big operators to run roughshod over small operators and small mineral owners. To understand why there is such a divergent view of the practice – and why the opposition to it can be so vociferous – you need to understand the history of pooling in West Virginia and Pennsylvania.
At present, neither West Virginia nor Pennsylvania has a pooling statute that allows for efficient development of the Marcellus Shale. As each of these states consider bills that would establish pooling provisions for horizontal wells, it is an opportune time to take a step back and understand the history of pooling in both states and why neither have had pooling for horizontal shallow wells before now. This month, we will look at pooling in West Virginia and next month we will do the same for Pennsylvania.
As an initial matter, it should be noted that pooling is usually a shorthand way to refer to two related but distinct activities. Typically, a drilling unit must be created before a “pool” can be established in an unconventional reservoir like the Marcellus Shale. This drilling unit is the acreage that can be efficiently drained by one well. After a drilling unit is established, the various working and royalty interests in that drilling unit can be pooled to ensure that all persons receive their proportionate share of the proceeds from the well. When used properly, pooling serves to protect the interests of all parties by maximizing recovery of the resource and minimizing impact to the environment.
Although pooling is not without opposition, it is important to note that pooling is not a new concept in West Virginia. Pooling and unitization provisions have been applicable to deep wells in West Virginia for many years. Similarly, when the Coalbed Methane Act was enacted in the mid-1990s, the Legislature included pooling provisions. Of course, most operators and mineral owners are not necessarily aware of this fact because both CBM wells and deep wells have historically been small subsets of the overall drilling activity in West Virginia. Until the recent Marcellus Shale boom, oil and gas drilling activity in West Virginia had been dominated by conventional shallow well development. These shallow wells have been vertically drilled and drain limited areas of various sandstones and other horizons that make pooling unnecessary.
Opposition to pooling has traditionally come from two sources: small mineral owners and small leaseholders. These groups typically view pooling as removing the large operators’ incentive to negotiate with them for their mineral rights or working interest rights. As such, they argue that pooling forces terms and conditions upon them that they might otherwise reject.
In West Virginia, another layer of complexity is added to the pooling debate by the relationship between the coal and gas estates. Unlike other states where pooling was enacted to maximize recovery of oil and gas while minimizing surface disturbance, in West Virginia the goal of not rendering large portions of the coal estate unavailable for mining is a driving concern. Horizontal wells drilled in the Marcellus Shale are shallow wells, which are subject to a voluntary pooling procedure, under West Virginia law. Under this voluntary process for shallow wells, the owners of all coal underlying the drilling location well must consent to the proposed unit. As currently written, existing West Virginia law gives the coal owner what is in effect veto power over a proposed horizontal well unit in the Marcellus Shale. As a consequence, any pooling provision should take the coal estate into consideration in order to minimize opposition from the coal industry. However, horizontal pooling legislation could provide benefits to coal owners and operators. Pooling will allow gas producers to concentrate horizontal well bores on strategically placed well pads that will minimize the effect on surrounding coal reserves. The placement of such well pads within a pooling unit will allow the maximization of the natural gas resource while actually reducing the area of workable coal seams that are disturbed by the well bores. A fairly drafted pooling statute for horizontal wells in West Virginia would ensure the efficient and complete recovery of the Marcellus Shale gas resource, while minimizing the potential for conflicts between the development of natural gas and coal.