The law—originally written to protect a property owner’s mineral rights, known as the compulsory pooling law—has been revisited by a North Carolina mining and energy study group to make it applicable to more modern forms of energy drilling, most notably fracking. The group ultimately recommended a statute that, if passed, could force non-consenting landowners to allow fracking to occur underneath their land if their neighbors are in support of the drilling.
“We recommended that compulsory pooling should still be the authority of the state in the event that fracking occurs in order to achieve economic efficiency,” said Jim Womack, chairman of the Mining and Energy Commission. “We also recommended, however, that this not be a tool of first choice. We want it to rarely be used.”
The compulsory pooling law was first passed in the 1940s and was meant to protect the rights of mineral owners, preventing loss of value and compensation as a result of a neighbor’s drilling activity.
“If there was a pool of oil under you and your neighbor’s land, you wouldn’t want your neighbor to tap it and take your half of the pool,” Womack said.
When applied to fracking, however, modifications had to be made. Because fracking requires the use of high pressure fluid to extract the natural gas from layers of shale rock, there is no “pool” of gas that is shared across properties. Instead, the fracking process requires a network of underground pipes, known as a drilling unity, to be built. The unit can, in theory, be shaped to frack around, but not on, the property of a non-consenting landowner.
The modified statute would help energy companies determine how to build that drilling unit. Although it is possible to make all property owners happy by simply avoiding the land of all non-consenting landowners, there are often major costs associated with building a more accommodative drilling unit, Womack said.
Womack noted that the study group had structured the recommendation so that it would make it very difficult for energy companies to exercise a compulsory pooling order.
“Energy companies would have to petition and show both due diligence and documentation that they negotiated [with non-consenting landowners] in good faith and made a fair and reasonable offer," Womack said. “They’d also have to demonstrate, geologically and geographically, that no other [drilling unit] shape would be reasonably efficient. We want to make it something they don’t want to do unless they really need to.”
In addition, 90 percent of the drilling unit acreage in question would have to be in full support of fracking before the energy company could even try to exercise the statute.
“That ranks our rule as… more stringent than similar compulsory pooling laws in all but 12 states,” Womack said.
Therese Vick, the sustainable campaign coordinator for the Blue Ridge Environmental Defense League in North Carolina, however, does not buy it. She noted that although the statute is still subject to a lot of change, she does not expect those changes to be in the favor of property owners. Even if the recommendation were to stay the same and be made into law, the current arrangement has flaws, she said.
Although the 90 percent acreage consent rule seems favorable, Vick is worried about a scenario in which a small group of landowners own the vast majority of land, and the remaining amount is owned by the many.
“You might have 20 or 30 people in the [drilling unit] acreage that don’t want to give consent and maybe five or ten that do, but if those 10 people own 90 percent of the land, then the other 30 people don’t get a say,” Vick said. “You have the few controlling the many.”
Vick also noted that landowners who at first opposed fracking but were ultimately forced into selling their resources would be forced into accepting a 12 percent royalty payment, which might be lower than what consenting landowners were able to negotiate for. In addition, non-consenters might face a risk penalty that forces them to pay 200 percent of their share of the costs for well development. In other words, if they own 10 percent of the acreage and the cost to develop the well is 5 million, their costs would be 1 million— or 200 percent of their actual cost for developing that well, Vick said.
“[The statute] makes it convenient and cost effective for the industry, but it also gives it a big ol’ stick when they’re trying to negotiate,” Vick said. “It’s an unfair advantage for the industry and they’re scaring people.”
John Humphrey, a member of the study group, however, noted that mineral rights owners have certain options that they must evaluate carefully. He said that although there is a risk penalty for choosing not to sign a lease with an energy company, freedom from that contract means that they have access to opportunities where they stand to gain a much larger amount than those who sign.
Regarding the 90 percent acreage rule, Humphrey said that while the few may force the many to allow fracking, the opposite could be true as well. He does, however, acknowledge the threat of Vick’s proposed scenario.
“Establishing a minimum threshold would leave the Commission flexibility to require a higher percentage of acreage be under lease where only a minority of landowners in the proposed drilling unit had signed leases,” he said.
Although royalties and risk penalties are certainly big issues, most of the outrage still stems from the fact that a mineral owner can now potentially dictate what a neighbor does with his own land.
“Folks… are appalled that their decision with what they do with their land can force their neighbors to do something they don’t want to do,” Vick said.