CHAPTER 5 STATUTORY SOLUTIONS TO OWNERSHIP DISPUTES

• Jurisdiction: United States

Coalbed Gas Development
(Apr 1992)
CHAPTER 5
STATUTORY SOLUTIONS TO OWNERSHIP DISPUTES
W.F. Mason, Jr. ¹
Attorney at Law
Roanoke, Virginia

TABLE OF CONTENTS

SYNOPSIS

Page

1. Introduction

A. Definitions

B. Brief History of Involuntary Pooling

C. Problems in the Appalachian Basin

D. Virginia Legislative History

E. Claims to Ownership of the Coalbed Methane

II. Purpose and Basis of Model Involuntary Act Provision

A. Reason for Drafting Provisions

B. Basis and Mechanics of Provisions

III. Model Coalbed Methane Involuntary Pooling Act

Section 101. Definitions

Section 102. Construction

Section 103. The Coalbed Methane Gas Board; Membership; Compensation

Section 104. Meeting of the Board; Notice; General Powers and Duties

Section 105. Additional Duties and Responsibilities of the Board

Section 106. Applicability

Section 107. Notice of Board Hearings

Section 108. Standard Form of Hearings

Section 109. Involuntary Pooling Requirements and Board Officers

Section 110. Deemed Lease.

Section 111. Contents of Involuntary Pooling Application

Section 112. Escrows

Section 113. Consent to Stimulate Coal Seam

Section 114. Appeals; Venue; Standing

Section 115. Guardian Ad Litem

Section 116. Recording and Mailing of Orders

III Federal Involuntary Pooling

A. The RaHall Bill

B. Suggested Amendments to RaHall Bill

C. Alternative Solutions to Western Disputes

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I. INTRODUCTION

This paper reviews the use of involuntary pooling as a means of resolving ownership issues. It focuses on model provisions for a coalbed methane involuntary pooling statute based upon the Virginia involuntary pooling law. It further discusses briefly federal involuntary pooling legislation and the use of involuntary pooling as a solution to western coalbed gas ownership disputes.

A. DEFINITIONS

Pooling has been defined by prior Institutes as follows:

"Pooling is the voluntary or compulsory joining of leases for common development within a state established drilling or spacing unit. It contemplates the invocation of pooling provisions in private land leases or forced pooling by the state oil and gas commission".

Authors, courts, and statutes refer variously to pooling mandated by a state oil and gas commission as forced pooling, compulsory pooling, and involuntary pooling. For this paper all such uses will be combined into and described as involuntary pooling.

B. BRIEF HISTORY OF INVOLUNTARY POOLING

The very nature of the resource forced the courts of the various states in the earliest days of oil and gas development to

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look to legal analogies in an attempt to determine the ownership of oil and gas.²

Applying traditional common law ownership principles, the "rule of capture" and the "rule of offset well" or "self help protection" became the generally accepted basis for determining oil and gas ownership. The "rule of capture" essentially provides that any owner of a tract of land acquires title to the oil and gas that he produces from wells drilled on such tract even though such oil and gas may have migrated or be drained from adjoining tracts. The "rule of offset well" provides that the owner of the adjacent tracts may drill offset wells in an attempt to intercept the oil and gas being drawn from under their tracts.³

These rules promoted the drilling of the most wells as quickly as possible. The owners who got to the oil and gas reservoir the quickest and produced it the hardest with the most wells could obtain the largest amount of oil and gas from the reservoir.

This race to drill and produce led to widespread chaos in the oil and gas fields resulting in the drilling of many more wells than necessary to drain the reservoirs. The rapid production depleted the reservoir energies needed to efficiently and effectively produce the reservoir and created waste through the non-recovery of the oil and gas in the reservoir.

This unbridled competition for oil and gas resources resulted in a public demand for regulatory action by the various producing states.

Virtually every state having oil and gas resources either directly by law or through their oil and gas regulatory agencies have adopted rules setting minimum acreage requirements for the drilling of each oil and gas well.⁴ All of the regulatory enactments were based upon the declared intent to prevent waste, to protect correlative rights, to prevent the unnecessary drilling of wells with the resulting excess cost and to prevent the non-recovery of oil and gas resources.

Since these spacing laws and regulations require a minimum size unit for drilling each well, whether by the adoption of units or statewide spacing rules, all owners within the unit or statewide spacing must enter a pool for the development of that acreage. The necessity of obtaining consent by each and every oil and gas owner

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within the unit causes enormous difficulties and allows even the owner of the smallest proportion of such unit to extract a large bonus payment or even block development of that acreage entirely. This effect is even worse when there are multiple owners, or there are unknown owners or both.

The regulatory response to this problem is involuntary pooling. Involuntary pooling originated as a form of zoning control over city lot drilling. The problems with the "rule of capture" were even worse within towns and cities because of the density of streets and buildings. The city of Oxford, Kansas adopted a zoning ordinance in 1927 which provided that only one well could be drilled on each city lot regardless of the number of owners and restricted the position of the well with regard to streets and buildings. The ordinance further provided that each owner of a lot would be paid his proportionate share of the production from the well even if the well was not drilled on his portion of the lot. This ordinance was determined to be valid by the Kansas Federal District Court, and the United States Eighth Circuit Court of Appeals. The petition to the United States Supreme Court was denied.⁵

The courts in Oxford and similarly reasoned cases relied upon the migratory nature of the oil and gas resource as the basis for concluding that it was a valid exercise of the police power of the state to regulate oil and gas by involuntary pooling. They held that such regulations did not constitute a taking of property of any owner affected by the involuntary pooling since the oil and gas did not become the property of the owner until it was produced by him.⁶

In the years that followed most oil and gas producing states adopted involuntary pooling statutes. These statutes adopted the rationale of the courts in cases like Oxford, declaring that involuntary pooling was needed to protect correlative rights, prevent the waste of oil and gas by depletion of reservoir energy, reduce waste caused by unnecessary costs and allow each owner a fair and equitable opportunity to receive his share of the oil and gas resources beneath his property.

C. PROBLEMS IN THE APPALACHIAN BASIN

Oil and gas development in the Appalachian basin has been rendered more difficult because the region is primarily owned in small tracts. There are very few large tracts as are commonly found in the west. Further, the coal development in the region in the late 19th and early 20th century resulted in the minerals being severed from the surface ownership for large portions of the region. Many of these deeds severed both coal and oil and gas. In

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addition, there has been oil and gas development in the region for many years and there are often conventional oil and gas leases as well as coal leases or deeds for the same tracts.

Many of these conveyances were to corporations and partnerships which have long since gone out of existence leaving no record of ownership. Further, many of the individual owners of these interests did not leave wills, and had estates for which no list of heirs were filed. Each generation adds geometrically to the problem. Similarly, the surface ownership has much the same history and many of the same difficulties. Many surface and mineral tracts have multiple owners who are unknown and untraceable. In addition, because of the language used in the deeds and leases, there have evolved a multiplicity of disputes over the validity and the interpretation of the terms of these deeds and leases.

As a result, the development of oil and gas in the Appalachian basin has been difficult, expensive, and often risky for the developer.

The issue of the ownership of coalbed methane gas inherited all of these problems as well as those peculiar to this resource.

D. VIRGINIA LEGISLATIVE HISTORY

In an effort to resolve the coalbed methane gas issue, the Virginia General Assembly in 1977 adopted the Virginia Migratory Gas Act, which legislatively awarded ownership of the coalbed methane gas to the surface owner. This act, however, created considerable controversy and was repealed in 1990.⁷

In a further attempt to resolve the coalbed methane gas ownership dispute, the Virginia General Assembly adopted the Virginia Gas and Oil Act, which became effective on July 1, 1990. A copy of this Act is attached. This act was designed to create a mechanism for allowing the development of coalbed methane gas without resolving the conflicting claims to ownership. The Act utilizes escrows and notice provisions and allows a claimant to the coalbed methane gas to apply for an involuntary pooling order. The pooling order escrows the royalties of unknown and conflicting mineral owners, and allows conflicting claimants to elect to participate or not.⁸ The applicant is required to diligently search to determine all owners and claimants. The Act further provides a mechanism for escrowing participation payments by claimants until ownership is determined.⁹

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E. CLAIMS TO OWNERSHIP OF THE COALBED METHANE

Historically, coal mining operations have vented the...