Marcellus Fairway The Play Today

Pooling in Pa.

Pittsburgh

"Forced pooling," or the ability of an operator to require landowners to participate jointly in the development of mineral interests within a designated unit, has become a controversial issue in Pennsylvania since Marcellus Shale gas drilling became viable several years ago. The oil and gas industry is lobbying for pooling order legislation to curb the excesses resulting from the "rule of capture." In Pennsylvania, the "rule of capture" permits an operator to drill a well so as to capture the gas under a neighbor's property. In the absence of pooling orders, developers are incentivized to extract gas quickly before a rival developer exhausts a particular gas pool. Accordingly, over-drilling may occur, leading not only to greater surface disturbance, but also to the depletion of a field, making it difficult, if not impossible, to recover the resources. In short, it creates an atmosphere of haste, waste and inefficiency.

Pennsylvania law currently allows operators to obtain pooling orders with respect to any well that penetrates the Onondaga horizon, or that is more than 3,800 feet deep where the Onondaga horizon is within 3,800 feet of the surface. The Oil and Gas Conservation Law was limited to the Onondaga horizon and below because lawmakers wanted to encourage more deep drilling in the state, and because it was considered impractical to impose restrictions on shallow drilling since that kind of development "had been carried on exhaustively since the discovery of oil in the Drake Well in 1859 without regulatory restriction or control." Because Marcellus Shale is generally found on top of the Onondaga formation, it is presumed that the Law does not apply to Marcellus Shale.

Marcellus Shale drilling, however, is fundamentally different from drilling shallow wells. It is more expensive to drill a Marcellus Shale well than a conventional shallow well; surface operations can take up five or more acres; a typical well can drain hundreds of acres; and Marcellus Shale development often employs directional drilling. Such circumstances arguably exacerbate haste, waste and inefficiency, not to mention environmental degradation, which can result under the "rule of capture" regime in Pennsylvania.

The industry has proposed new legislation called the Pennsylvania Unconventional Oil and Gas Fair Pooling Act, which would permit operators developing Marcellus Shale and other unconventional oil and gas to obtain pooling orders. Under the Fair Pooling Act, operators who control 75% of the working interests in a proposed unit could apply for a pooling order after being unable to reach an agreement with all interest owners in the unit. If the order is granted, parties who have not leased their mineral rights can elect to be treated as a lessor under a standard lease associated with the unit, as a non-consenting party who would be entitled to a share of profits from the unit after being assessed a risk fee at the rate of 400% of their share of all costs incurred by the operator, or as a consenting party who would be required to contribute its share of the costs of drilling and operation with the right to receive a share of the profits. Parties who fail to make an election would be treated as lessors in accordance with the standard lease associated with the unit.

Whether the Fair Pooling Act will be passed by the Pennsylvania legislature remains to be seen, but some version of pooling order legislation for the Marcellus Shale will undoubtedly need to be enacted to promote responsible development of this valuable natural resource in Pennsylvania while continuing to provide reasonable compensation to non-consenting owners.