Has a Landman Contacted You?
Has a landman contacted you and is now threatening to force pool your minerals if you don’t sign his lease? What are your options? Is he offering you a fair deal for your mineral rights? What does a fair deal look like? Who can you talk to? First, let’s talk about Forced Pooling.
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What is Forced Pooling?
Forced Pooling (sometimes called Statutory or Compulsory Pooling) is a legal mechanism that allows oil and gas operators to drill wells when they are unable to get 100% of the mineral interests to commit to support the drilling of a well. Certainly the operator would like to acquire leases, farmouts or working interest partners covering 100% of the minerals within the drilling spacing unit allocated to the well to form a voluntary unit. But that’s not always possible.
Drilling Spacing Units
Regulatory agencies within each state require drilling operators to allocate a certain number of acres around an oil and gas well prior to approving a permit to drill. Some states may require that a pooling agreement identifying all leases within the unit be filed of record in the county courthouse, while others might just require the operator to adhere to existing field rules such as 40 acres around an oil well, 640 around a gas well or perhaps 1280 acres around a horizontal well with an extended reach lateral of 9,000’.
Oil and Gas Operators
Drilling Operators prefer to have all the minerals within the unit committed by lease or other contracts. But in many instances, that’s not possible. In some cases, it might be difficult to locate a mineral owner. Or perhaps a mineral owner does not need the lease bonus or royalty, but instead just wants to prevent drilling. In support of all the other mineral owners within the unit who have granted leases, the operator should be permitted to drill. Forced Pooling will allow the well to be drilled.
Can a Drilling Operator Force Pool Instead of Leasing Your Minerals?
There is a good chance that the landman who knocked on your door has threatened to force pool your minerals if you don’t sign his lease. Perhaps you are okay with granting an oil and gas lease, but how do you know if he is offering a fair deal? Did the other mineral owners receive a $500 per acre lease bonus, and he is offering you $100 per acre lease bonus? Did the other mineral owners retain a 20% royalty, and he is offering you a 12.5% royalty?
If you want to know what other mineral owners received for their lease, you could hire someone to run the oil and gas records in the courthouse to locate the leases executed by other mineral owners. However, the courthouse records will likely only identify the primary term and the royalty reserved. The lease bonus will not be identified, as the consideration will be shown as “$10 and other valuable consideration.” Or if the lessee filed a Memorandum of Lease, in the alternative to the actual oil and gas lease, then there is a chance you will not know about the bonus or royalty.
If you agree to sign an oil and gas lease, it is important that you lease to the company that will be operating the well. There is a good chance that the landman wanting to lease your minerals intends to assign your lease to the operator for more money than he paid you and retain an overriding royalty interest.
What are your options?
Thirty-nine states have regulations providing for forced pooling, and the regulations will vary from state to state. Below you will find links to individual state sites for further information. As for what your options might be, consider the following and keep in mind that in many states you may only have 30 days max in which to make a decision before your minerals are force pooled:
Grant a Lease to the Landman Representing the Operator
You may not get the best deal from the drilling operator, but probably better than being force pooled.
Grant a Lease to Another Company Who Wants to Participate in Drilling the Well
This could be the best option. Leasing should be competitive. Find another oil company that wants to participate in the drilling of the proposed well. Grant a lease to that company for a higher lease bonus and/or higher royalty.
Sell your Minerals
If you can find a mineral buyer, you should receive a much higher cash offer to sell your minerals as compared to leasing them. The downside is that you will not get any royalties if the well is successful. The upside is that if they drill a dry hole, you may be very happy you chose to sell instead of lease your minerals.
Agree to Voluntarily Pool your Minerals and Participate in the Drilling of the Well
Not many mineral owners want to take the risk of paying for a portion of the cost to drill, complete and equip a well. This would make you a non-operating working interest owner. This could also expose you to liabilities associated with owning a working interest in a producing property as well as obligate you to pay for any additional costs associated with the well to include re-working operations, plugging, and property restoration.
Be Force Pooled
If you are force pooled, you will probably receive a 12.5% royalty (depending on the state). The remaining 87.5% interest associated with your minerals will be retained by the oil and gas operator until the operator recovers anywhere from 100%-300% (depending on the state) of the cost associated with drilling, equipping and operating the well. After which time your full interest will revert to you, and you will become a non-operating working interest owner. But again, this could expose you to the same liabilities as shown above, if you agree to voluntarily pool your minerals. IF YOU ARE FORCE POOLED, PLEASE SEEK LEGAL ADVICE.
How can mineral owners profit the most?
If you want to sell or lease your minerals, you should strive to expose your property to as many buyers as possible. LandGate is an online marketplace for land resources and will expose your oil and gas minerals to many potential buyers and lessees. Mineral owners can list their oil & gas rights for lease or for sale for free- LandGate does not charge any fees or commissions! It starts by generating your free property report with lease and sale estimates on our map: