Horizontal Forced Pooling in the Vertical Universe
Guest Blog Post by Joe Warren – OEPA’s legislative Chairman, a Petroleum Landman, an attorney and a producer.
Forced Pooling procedures developed in Oklahoma over decades, when the oil and gas industry existed in a vertical world. Companies were drilling geological ideas that were almost always relatively small, with the first well being a true exploratory well, and much riskier than today’s horizontal wells. Forced Pooling actually worked pretty well then. Rules of evidence limited testimony as to values to the small area covering the prospect. It resulted in unleased mineral owners and small producers invariably receiving the highest and best compensation paid to anyone within the area of the geological idea. Back then, spacing units were limited in size to an area that could be expected to be drained by one well. Furthermore, I learned early on that Forced Pooling was there primarily to encourage the drilling of that initial exploratory well. It was never intended as a means to take “protection” acreage or development acreage, prior to the exploratory well being drilled.
Today, everything has changed. The horizontal drilling world has been set on top of our vertical regulatory system, with disastrous results. Consider: while a spacing unit used to be of the size that could be drained by one well, somehow, with no change in the law or Corporation Commission rules, companies have been allowed to now space (and pool) units that contain dozens of drill sites. Devon has reported that they expect to drill 220-30, or more, wells per spacing unit. So instead of making elections on a well- by- well basis, as it was done in the past, royalty owners and small producers have to elect-in-or out on dozens of wells at a time, costing tens of millions of dollars to drill, with no control over the timing of those expenditures, and without the benefit of seeing the results of the first well, which would reveal whether the future potential of their investment would be worth tens of millions of dollars, or in some cases hundreds of millions of dollars.
The old vertical Forced Poolings dealt with one high risk well, on a small geological prospect, with royalty owners and producers receiving the highest and best price paid within that prospect. Today’s horizontal plays cover multiple counties. The Horizontal Drillers trade large blocks of acreage across these plays at prices up to and exceeding $20,000 to $40,000 per acre. Evidence of these large trades is not even allowed to be introduced to show value in today’s Forced Pooling hearings. In fact, evidence is limited to trades in only a 9 section area, and a narrow window of time. Many horizontal drillers have agreed amongst themselves to not reveal the terms of their trades, further limiting the ability of the Commission to come up with fair market value.
The end result is that the average value determined by the Commission for the last year or so in the Stack and Scoop plays, has been about $1,000 per acre, give or take. By historic standards, this sounds like a lot of money to royalty owners, so they think they are getting a great deal. In fact, these values represent a 90-95% , or more, discount to the value being put on this acreage by the companies themselves. If you look at Texas, leases in the hot areas in the Permian Basin START at $30,000 + per acre which is closer to a 25%-30% discount to what the Big Guys pay each other. Standard royalty there is 25% , while in Oklahoma it is 18.75% -20%.
The net result of all of this is that literally Billions of dollars are being transferred from the pockets of Oklahoma Royalty Owners and small producers into the coffers of the large Horizontal Drillers and their out of state owners and investors.
This is a travesty. Oklahoma’s current Forced Pooling laws must be changed.
