Marcellus Shale; Pooling and Property Rights

You know something is fishy when progressives claim to be taking positions on something out of concern for the property rights of individuals. Why do genuine concern for individual property rights and progressive not go together? Because the progressive agenda requires control of an ever increasing share of each individual’s property since (at least in their view) only they know best how to “redistribute” it for the good of society. Country folk aren’t smart enough to do the right thing with all that property and we surely aren’t smart enough to understand the difference between the concept of pooling and eminent domain as it applies to drilling for natural gas.

Actually we can understand pooling and eminent domain just as we can understand that a progressive’s claim to be concerned about property rights is bogus. Progressives are only likely to express concern for individual property rights as a means to some other end. Such as a means to dupe the unsuspecting into going along with the construction of subsidized wind farms, solar panel farms, and other “renewable” energy scams that can’t otherwise survive in a free market system. Basically they want you to buy into the “redistribution” of a dollar of your taxes for a dimes worth of energy. What a good deal. The eminent domain analogy being used is patently absurd and borders on criminal demagoguery.

This article deals with the nature of property rights as they apply to land and the recovery of natural gas beneath that land from a layman’s or common sense perspective. As citizens we need to understand these issues regardless of whether or not we have any direct interests that will be affected by Marcellus Shale drilling policy and regulation. Specifically citizens of the Commonwealth of Pennsylvania need to understand these things if for no other reason than to assess whether or not elected officials that are currently in office can be trusted to make and implement policy that is actually in the best interest of the citizens of the Commonwealth. In short the answer is that our elected officials cannot be trusted. Citizens had better take it upon themselves to take charge and provide some adult leadership rather than rely on these elected officials to do the right thing and implement rational natural gas policies.

Disclaimer: The author of this article has no vested interest in any property or other assets directly associated with or even remotely associated with the recovery and sale of natural gas. Other than a desire that citizens consider facts concerning natural gas recovery and its potential for positive economic benefits for the Commonwealth of Pennsylvania in particular and America in general the author has no dog in this hunt.

Note: This article is also available for download as a PDF document. Click to download PDF

Special update from the Pennsylvania Legislature; garnished with more than a dash of demagoguery

Read the following definition of demagogue

… to treat or manipulate (a political issue) in the manner of a demagogue; obscure or distort with emotionalism, prejudice, etc.

demagogue – Dictionary.com[1]

Now read the excerpts below from a “special” update from the chairman of the Pennsylvania House Environmental Resources and Energy Committee issued in May 2010. To read the entire two page document click on the link at the bottom of the excerpt.

I have little doubt that the House will pass a severance tax this session. But when it does, we should be ready for what will come back to us. It is almost certain that the Senate will amend any severance tax bill with a controversial, ugly provision top on the list of the natural gas industry: forced pooling.

Forced pooling is a government process by which the unwilling or unavailable mineral rights owner would be forced to lease his or her interest in exchange for a royalty share.

Issue: Economic Efficiency v. Eminent Domain

Proponents of forced pooling assert that, as a policy matter, pooling promotes economic drilling and limits the environmental footprint of drilling. They also assert that pooling protects the interests of the willing mineral rights owners in the drilling unit who want to maximize their financial benefits and also protects the unwilling owner by counteracting the Rule of Capture—which states that any gas migrating from an unleased property into a well drilled on a leased property is fair game for extraction.

However, critics of forced pooling call it an eminent domain for mineral rights for the pure benefit of private companies. According to a local newspaper article, a mineral rights owner in Fort Worth, Texas…

Property Rights Sentiment in Pennsylvania

Following the deeply unpopular U.S. Supreme Court decision in Kelo v. City of New London, in which the court validated a local municipality’s condemning of two private homes to turn them over to a private developer, Pennsylvania, along with 31 other states, condemned the decision and swiftly moved to toughen the requirements for condemnation.

House Environmental Resources and Energy Committee

Chairman Camille “Bud” George’s May 2010 Update: SPECIAL UPDATE ON SEVERANCE TAX & FORCED POOLING & HB 2213[2]

In his short two page update Chairman George proceeds to:

Use and define the term forced pooling[3] in a way as to conjure up visions of Nightmare on Elm Street
Completely, and apparently intentionally, misstate the Rule of Capture[4]
Use the notion of eminent domain[5] as if it actually applied to the issues at hand when in fact it is nothing more than a very, very pathetic analogy at best
Get in a plug for the progressive’s favorite topic when it comes to Marcellus Shale – severance tax

Citizens of the Commonwealth of Pennsylvania should expect and demand better of these so called legislators. If Chairman George is going to spend tax dollars sending out a “special” update such a document should be factual and based a reasonable amount of research to confirm the “facts” of the matter at hand. Chairman George is using his position and tax dollars to advance a political agenda and “shape” public opinion rather than “inform” the public.

Reflection,… with information, is all which our countrymen need, to bring themselves and their affairs to rights. –Thomas Jefferson to James Lewis, Jr., 1798

Just give us the “facts” Chairman George and “We the People” will take it from there.

Pooling and capturing

Basically the concept of pooling[6] has to do with putting together an area where contiguous parcels of land with multiple owners is “pooled” into a single parcel for the purposes of recovering the natural resources beneath the surface of those parcels. Historically this has been done for several reasons. One is to create access to a deposit of gas or oil large enough to make it worthwhile to drill and recover it. It has also been done to reduce the number of drilling rigs required to extract the gas and oil. In some cases it has been done for both reasons.

A problem arises because that oil or gas isn’t situated in a discreet recoverable pool or reservoir within the boundaries of each individual parcel of land. If say one of the ten parcel owners decided they didn’t want their gas recovered it would seem that they could effectively prevent the other nine parcel owners from exercising their rights to get at the gas deposit and get paid for it.

However, in the absence of legislation addressing how pooling is to work the rule of capture[7] would apply and each parcel owner could allow drilling on their individual parcels. If they did that when those wells start sucking gas out of the reservoir the objecting owner’s gas gets sucked out along with the rest of it. Hence the need to for rational, equitable procedures for pooling to make sure each owner is compensated for their extracted property, where feasible and practical maybe just one drilling rig goes up instead of ten, and an unreasonable, irrational, and or spiteful parcel owner cannot deny the other nine owners access to their property.

Types of property

If you have more than a passing interest in the principals that the Founders relied on to shape the U.S. Constitution and get this country off on the right foot you no doubt are aware that property rights were at the center of many of their deliberations. If you need a refresher on how it is that an individual has both rights “to” property and rights “in” property and how that relates to freedom, Property[8] by James Madison makes it is as clear as it gets.

To better understand this we first we need to look at the nature of the type of properties we’re talking about here. There are differences between property in the form of land and structures erected on it and property in the form natural resources such as gas or oil that might be beneath that land. These differences need to be taken into account in this eminent domain, pooling, and property rights discussion.

Property on the surface, land, can be put to many uses. It can be used for one purpose for a period of time, for another purpose later on, or for a number of purposes simultaneously.

Let’s say you have a hundred acres of land that you are using primarily as a dairy farm. You also use some of the land to grow vegetables and you have put in an orchard that is doing quite well and producing more fruit than you need. So you decide to put up a roadside stand and sell some of your fruits and vegetables. After a while you begin to prefer the fruit and vegetable business to the dairy business so you decide to sell off your dairy herd and lease the buildings and equipment associated with that to someone that wants to concentrate on dairy farming. Eventually you start baking pies and canning jams and jellies to sell and then you decide to open up a café and bake shop along side your fruit and vegetable stand business. By now your children have grown up. Although they aren’t interested in either the diary business or the fruits/vegetables/bake shop/café business they do like the place where they grew up and would like to continue to live there. So you give or sell them a few acres and they build their own homes. We could go on with this but you should be getting the idea by now that you can exercise your property rights to do a lot of different things with this land and the structures you can erect on it.

Meddlesome governments and eminent domain

All of the preceding of course assumes that no over bearing meddlesome government entities have interfered with your ingenuity and entrepreneurial spirit as you exercised your rights to do these things with your property. What might happen if an over bearing meddlesome government entity, with the authority to do so, decides that your property is absolutely needed to build a new sports complex? They could do an eminent domain land grab, pay you some amount of money, and lay claim to your property. You can take that money and go elsewhere and do ingenious entrepreneurial things but you will never have that orchard again and your children will be deprived to the enjoyment of the place where they grew up. In short, no matter how you slice it, being on the wrong end of eminent domain is usually a lousy deal.

Got gas?

Let’s rewind and say that sports complex eminent domain thing never happened and you just found out that your land is sitting on top of the Marcellus Shale. There is recoverable natural gas under your property. There are basically two things you can do about it. You can sit on it and do nothing. In that case your “property” in the form a natural gas deposit isn’t worth anything but you can continue to enjoy your orchard and other enterprises and watch your grandchildren grow up. Or you could decide to allow the gas to be recovered and be paid for it.

In order to get that gas out from under your property someone has to drill for it. If the entire reservoir is under your property you are going to have to put up with one or more drilling rigs to get the gas out of the ground. Given today’s technology and the ability to drill horizontally you may or may not have to deal with the inconvenience of multiple drilling platforms on your property while they recover the gas that you are being paid for. Even if you do, once the drilling is finished the rigs can be removed, the land can be restored and used for its original purpose or some other purpose. You still have your surface property to enjoy.

There are two important distinctions between property in the form of Marcellus Shale gas and the land property above it.

For the most part land sitting atop the Marcellus Shale formation would have been acquired originally without knowledge of the extent of or in most cases even the existence of the natural gas potential beneath it.
Gas is a once and done deal; it gets pumped out and you get cash in return and that’s that.

As recently as 2005 there was very little interest in leasing properties for Marcellus Shale gas production. The Marcellus was not considered to be an important gas resource and a technology for tapping it had not been demonstrated.

geology.com :: Marcellus Shale – Appalachian Basin Natural Gas Play :: Gas Leases & Signing Bonuses[9]

Property can be divided into two categories: Real property (land and fixtures to the land) and personal property (anything that can be easily transported from one area to another). Water, like oil, gas and minerals, is a part of the soil underlying any piece of real estate. But once severed, it can be transported through pipelines, trucks or bottles.

The Future of the Rule of Capture – The nature of the property[10]

You can continue to do to your ingenious entrepreneurial thing with property in the form land and structures once the gas has been pumped. You can invest the money from the recovered gas as you wish but the gas is gone for good. Some of it may effectively remain as your property in the form of saved/invested money and or any other real property that you purchased with the proceeds.

Unwilling property owners

Why would someone not want to allow the gas under their property to be recovered? Some reasons might include:

A property owner is filthy stinking rich and just doesn’t want anymore money
- … doesn’t seem all that likely and one would expect that such a property owner would be willing to participate and donate the money to charity if nothing else.
A property owner thinks the price of gas will skyrocket at some point and they will make a real killing if they wait
- … a real possibility but that is essentially gambling with your property as well as that of the other parcel owners. Depending on how a pooling law is structured, the parcel owner that wants to hold off and wait for higher prices should have an opportunity to make the case to the other parcel owners. Even if a good case is made that prices are likely to increase the other property owners may see a greater advantage in or have a greater need for the money right now.
A property owner has been duped by environmentalists and various other demagogues into believing that by foregoing their right to convert the once and done gas deposit beneath their land into cash and other usable assets they are saving the environment – and polar bears can fly.
- … if that’s how you feel donate your royalties to your favorite environmental cause if that makes you feel better but that is hardly sufficient reason to deny the other parcel owners the opportunity to fully exercise their property rights.
A property owner honestly believes that a potential loss of or reduction in the value/usability of their land and other surface property assets will be greater than the value to be derived from the royalty payments for recovered gas.
- … would seem to be the one that presents a potentially thorny dilemma for implementing a fair and reasonable pooling law. This situation could arise in the case where a parcel owner had previously planned to sell a property but believes the presence of drilling rigs and right aways would make the value of the surface property significantly less attractive to potential buyers. The royalty values notwithstanding, such an owner might be placed in a position where their real property value stands to be damaged by the possibility of drilling.

Other property owners

Property owners other than those sitting atop a recoverable gas reservoir will be affected by the need to construct pipelines. To get the gas from remote areas to major distribution pipelines new connecting pipeline will need to be constructed involving right of way agreements with property owners between well heads and major pipelines. As noted below some of the properties to be crossed by the additional pipeline will not be part of the recovery lease parcels. Policy and regulations may need to address this if it is not covered adequately under current law and/or if something specific to Marcellus Shale development needs to be addressed.

Hundreds of thousands of acres above the Marcellus Shale have been leased with the intent of drilling wells for natural gas. However, most of the leased properties are not adjacent to a natural gas pipeline. The total natural gas pipeline capacity currently available is a tiny fraction of what will be needed.

Several new pipelines must be built to transport millions of cubic feet of natural gas per day to major markets. In addition, thousands of miles of natural gas gathering systems must be built to connect individual wells to the major pipelines.

Many property owners will be asked to sign right-of-way agreements that will allow natural gas pipelines and gathering systems to be built across their land. It the property owner is not associated with the gas production there could be compensation for granting the right-of-way. Payments could be as low as a few dollars per linear foot in rural areas to over $100 per foot in urban areas.

geology.com :: Marcellus Shale – Appalachian Basin Natural Gas Play :: Pipelines and Right-of-Ways[11]

Some property owners may feel they are being impacted in a negative way due to their proximity to gas recovery operations. Others may notice increased property values or other economic benefits resulting from a generally robust economy or an increase in business that affects them directly.

How much and what type of pooling will be required?

There are those that are generally opposed to Marcellus Shale development for various reasons. The most vocal being a coalition of environmental fear mongers and cap and tax advocates that want to see us puttering around in battery powered cars that we have to plug into windmills or solar panels to recharge. These groups and progressive politicians seem to prefer to talk in terms of “forced” pooling combined with a misapplication of the concept of eminent domain as previously discussed. On the gas and oil industry side of the issue the term “fair” pooling seems to be preferred. Perhaps the thinking is that fair pooling[12] has a kinder, gentler connotation than forced pooling. And finally there’s the term “voluntary” pooling which applies to the situation where all parties agree to terms without interference or regulatory coercion.

The questions are:

How much “forced” or “fair” pooling will be necessary to maximize the development of Marcellus Shale gas deposits to the benefit of the Commonwealth and the country as a whole?
Assuming some amount and type of pooling other than voluntary will be required, when will it become an obstacle to the development of Marcellus Shale?

According to the map below the highest production potential is in the northeastern part of Pennsylvania. How large is a typical parcel of land in the northeastern region where the thickest, potentially most productive gas deposits are located? Is some sort of regulated/commission approved poling policy needed right away or do we have the luxury of a little more time to think this through? Is the legislature rushing to get some sort of pooling regulations in place rather than taking there time and getting it right before the any further laws are passed on the subject.

Source: http://geology.com/articles/marcellus-shale.shtml

Summary

Once you get beyond the heated rhetoric and emotion about pooling and the non issue of eminent domain it becomes a matter of sorting out the property rights issues that are unique to drilling for gas in the Marcellus Shale deposit. Property rights when it comes to natural gas are not as clear cut as they are for real property such as land and structures but rational policies can be developed. All citizens should take an interest in this as it will affect their lives in some way regardless of whether on not they have direct interests in a drilling operation.

End Notes

[1] http://dictionary.reference.com/browse/demagogue

[2]http://www.pahouse.com/EnvResources/documents/Forced_pooling_Severnace_tax_ERE_Committee_May_Update.pdf

[3] http://www.occ.state.ok.us/ap/pooling.html

See Oklahoma Corporation Comission – Adminstrative Proceeding Division information at the above link for an explanation of a forced pooling process.

“Oklahoma’s forced pooling process benefits operators, working interest partners, and mineral interest owners. It stimulates a competitive market for development of oil and gas, which results in revenues for investors and royalty owners.”

[4] http://www.mccombs.utexas.edu/faculty/David.Spence/Rule-of-capture.doc

4.2 The law of capture applied

The law of capture is capable of being stated simply, but in application it becomes complex. By simple statement, under the law of capture a landowner has the right to use reasonable means to extract oil or gas from under his tract of land and to reduce the substances to absolute ownership without violating the rights of other landowners even though the oil or gas so produced is drained from beneath the land of another. An analysis of the cases which apply and describe the law of capture reveals that there are two broad aspects included within such statement. One aspect relates to the matter of ownership of the extracted substances, whereas the other aspect relates to the matter of permitted conduct in the extractive process as against the rights of owners of other land over the common source of supply.

As to the matter of ownership of the extracted substances, it is uniformly recognized or assumed by the courts that the landowner who extracts the oil or gas from beneath his land acquires absolute ownership of the substances extracted, without regard to the manner of extraction. Where, however, his well is bottomed under another’s tract, he has committed a trespass, and the oil produced becomes the property of the owner of the land under which the well is bottomed. For purposes of justifying this result, it may be reasoned that oil or gas is captured when it enters the confinement of the cut hold or casing of a well and consequently belongs to the owner under whose land it is captured. It may likewise be reasoned that any rewards of enterprise of the one capturing the oil should be lost if he violates the boundaries of another.

Law of Oil and Gas

Eugene Kuntz

CHAPTER 4. RIGHTS OF OWNERS OF OIL AND GAS AMONG THEMSELVES

[5] http://www.nolo.com/dictionary/eminent-domain-term.html;jsessionid=77CA1CC71E139F84B5C7DB5772B23D79

eminent domain

The power of the federal or state government to take private property for a public purpose, even if the property owner objects. The Fifth Amendment to the United States Constitution allows the government to take private property if the taking is for a public use and the owner is “justly compensated” (usually, paid fair market value) for his or her loss. A public use is virtually anything that is sanctioned by a federal or state legislative body, but such uses may include roads, parks, reservoirs, schools, hospitals, or other public buildings. Sometimes called condemnation, taking, or expropriation.

Nolo’s Plain-English Law Dictionary

[6] http://marcelluscoalition.org/wp-content/uploads/2010/07/Conservation-of-Oil-and-Gas.pdf

Harvard Law Review 1952 Conservation of Oil and Gas

The terms “pooling” and “unitization” are frequently used interchangeably, but here “pooling” is used to denominate the bringing together of small tracts sufficient for the granting of a well permit under applicable spacing rules, and “unitization” is used to describe the joint operation of all or some portion of a producing reservoir.

[7] http://marcelluscoalition.org/wp-content/uploads/2010/07/Conservation-of-Oil-and-Gas.pdf

Harvard Law Review 1952 Conservation of Oil and Gas

Basically the rule of capture, which applies in the absence of legislation, provides that each mineral owner may drill on his land where and in such density as he may choose. However small the tract, or wherever located on the producing structure, the mineral owner (or his lessee) has a right to produce the minerals underlying the land in which his interest lies. E.g., Barnard v. Monongahela Natural Gas Co., 216 Pa. 362, 65 Atl. 801 (1907).

[8] http://www.ourfounderscompass.com/archives/537

[9] http://geology.com/articles/marcellus-shale.shtml

[10]http://www.twdb.state.tx.us/publications/reports/GroundWaterReports/GWReports/Report%20361/7%20CH%20Ellis.pdf

[11] http://geology.com/articles/marcellus-shale.shtml

[12] http://marcelluscoalition.org/2010/07/all-wet-on-fair-pooling/

Marcellus Shale Coalition Press Release July 6, 2010 All Wet on Fair Pooling

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Marcellus Shale; Pooling and Property Rights