Oct 2 2012
Eminent Domain as Compulsory Integration:
Property Owners Treated Differently –
Face $$$ Penalties When Forced into Drilling Unit
Law Written By/For Gas Industry
The shale gas/oil “gold rush” in the U.S. brings with it the power to take surface and/or subsurface property rights from private citizens – by several means.
Today, the United States is effectively approaching the status of many countries in Europe where the nation owns the mineral rights, not private property owners.
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So far, in the U.S., nearly 40 states have compulsory integration (or forced pooling or unitization) laws on the books.1 These laws are largely written by the energy industry; and they are often punitive toward property owners who are forced into a drilling unit.
In New York State, for example, property owners who willingly sign shale gas drilling leases are treated differently from property owners who prefer not to lease, but are forced by state law into a drilling unit.
This different treatment ranges from a 300% risk penalty to the denial of a signing bonus to being assigned a lower royalty rate. All under a law written by the energy industry.
‘Landowner Options’ – State Law
The first sense of disparate treatment can be found in the “Landowner Option Guide” on the Department of Environmental Conservation’s (DEC) website. It warns property owners in the fourth paragraph (emphasis added):
“Each option presents different risks and potential rewards. The option you select may subject you to certain costs and obligations, and there is no guarantee that a well will make money. You should carefully consider all the implications of your decision.” Link: http://www.dec.ny.gov/energy/1590.html
For example, if you elect (are forced?) to be integrated as a “participating or non-participating owner,” DEC states, “You will be held liable for your share of the additional costs,” according to the DEC.
What additional costs? According to the DEC:
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Actual well costs – your share of “The actual cost to drill or plug the well….”
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Completion and operating costs – “If the well is successful, it will cost money to complete and operate ….”
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Gathering line costs – “If the well is a producer, the well operator will provide you with the estimated costs to install a gathering line to bring the gas to market.”
The potential dollar penalty of compulsory integration to a private property owner is staggering, according to Christopher Denton, an attorney who practices oil and gas law in New York State.
$1-6 Million ‘Risk/Benefit’ Penalty
By Denton’s published reckoning, a landowner who “elects” (?) to become an integrated participating owner might have 30 days after the compulsory integration hearing notice to raise an estimated one-to-six million dollars (or more), depending on his percentage in the unit, the well and the formation to which it will be drilled.5
As Denton’s analysis suggests, the various punitive wedges likely push a landowner into the “Integrated Royalty Owner” category.
Ohio offers a preview of what faces landowners in New York and other Northeast states. As The Columbus Dispatch reports:
“When a Chesapeake Energy land man approached [Landowner Steve Neeley] months ago with an offer to lease the Utica shale mineral rights beneath his meticulously landscaped 9.5-acre property in eastern Ohio, Neeley declined. That’s when, Neeley says, the land man told him, ‘We’ll just take it.’
“Neeley and 23 of his neighbors are the first group of Ohio landowners forced to take part in Utica-shale drilling under a seldom-used state law.” 2
Controversy Over Forced Integration
Even Pennsylvania Governor Tom Corbett, otherwise a huge supporter of the energy industry, has consistently rejected forced pooling (aka, compulsory integration, unitization) and calls it, “private eminent domain.” 3
In addition to compulsory integration, drill sites bring gathering lines, transmission pipelines, compressor stations and huge underground storage reservoirs for natural gas. All of this requires more “taking” of property via eminent domain plus more environmental & social risks.
“Involuntary compulsory integration represents the most controversial method drilling companies use to access gas,” writes Attorney Elisabeth N. Radow in the New York State Bar Association Journal. 4
In New York State, the 2005 compulsory integration law was passed unanimously in both the Assembly and Senate. Is it possible not a single voice was raised on behalf of property rights?
Energy Industry Writes Law
Major industry players in drafting the law included the Independent Oil & Gas Association (IOGA) of New York, Chesapeake Energy and Thomas S. West, Founder of The West Firm in Albany, according to Attorney Christopher Denton, who estimated potential costs to landowners forced to be integrated.
In response to my query, Attorney Mike Fallon, speaking on behalf of IOGA, said, “I cannot confirm that … I did not represent IOGA at the time.” He acknowledged that industry often writes its own laws, “But I don’t believe the initial proposal came from IOGA.”
A prime mover on behalf of the energy industry is Thomas S. West, Founder and Managing Partner of The West Firm, a law firm based in Albany, NY. The firm’s website states:
“Tom West is well known as a leading authority on New York’s oil and gas well siting program. He played a key role in the 2005 amendments of Environmental Conservation Law Article 23 that overhauled New York’s compulsory integration program ….” Link: http://www.westfirmlaw.com/practice-areas/oil-gas-law.cfm
Anti-Property Rights Emotion
In response to my query on compulsory integration, Mr. West replied (emphasis added):
“Since the New York law is focused on maximizing the development of the resource, it does not allow people to opt out, which only serves to hurt their neighbors and preclude the orderly drainage of the resource.”
So if landowners are allowed to opt out of drilling, it will “hurt their neighbors.”
This is a theme sounded repeatedly by supporters of compulsory integration who use language that refers to property owners who would prefer not to lease as “hard-nosed folks” who get a “free ride” without “taking any risk.”
No mention is made of the fact that an asset that doesn’t belong to the gas industry or the government is taken from citizens who don’t want to lease.
On top of this insult comes punitive treatment justified under a law written by the industry for the industry – after the industry gets what it wants, the mineral rights.
Energy/Government Entitlement
Those of us who speak from experience (including this former gas leaseholder) know that such “taking” of private property rights amounts to a government entitlement for energy companies.
The industry cannot take property rights without government support.
It is not stretching a point to say that eminent domain puts landowners in a face-off with the equivalent of a cartel comprised of energy companies and government.
The power of eminent domain in all its variations allows corporations – backed by government – to control pricing and competition (i.e., “just compensation” and what constitutes “public interest”). By definition, that is a cartel.
As we see in New York, that cartel has the power to penalize property owners, even while taking what it wants.
More To Come
Our next post will take a closer look at the energy industry’s entitlement to private property rights. We will seek the perspective of supporters and opponents of compulsory integration, including legislators, individuals who are looking closely at the law, and institutions that support “responsible drilling” but object to the disparate treatment of landowners.
Links & Resources
1 State Laws Can Compel Landowners to Accept Gas and Oil Drilling, by Marie C. Baca, ProPublica, May 19, 2011 – List of states with forced pooling/compulsory integration/unitization laws: http://projects.propublica.org/tables/forced-pooling
4 Homeowners and Gas Drilling Leases: Boon or Bust? By Elisabeth N. Radow, New York State Bar Association Journal, November/December 2011 – Pdf file: NYSBA Journal nov-dec2011 lead article with reprint info
5 Compulsory Integration in a Changing Energy World – Energy in Depth – Northeast Marcellus Initiative, August 20, 2012, by Guest Blogger Attorney Chris Denton, Oil and gas lease attorney, Elmira, New York http://eidmarcellus.org/marcellus-shale/compulsory-integration-in-a-changing-energy-world/12157/
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