GO-WV News
(By Mychal Schulz)
After many years of attempting to pass legislation to allow for efficient unitization of mineral interests for production purposes, the West Virginia Legislature passed Senate Bill 694 in the last week of the recent legislation session, which Governor Justice is expected to sign. The legislation represents a compromise between producers, mineral owners, and surface owners, including the agricultural sector.
As technology drove producers towards increased use of horizontal drilling, West Virginia struggled to modernize its code to allow the combination or “pooling” of mineral interests within a defined area (or “unit”) that would allow the efficient drilling for oil or natural gas through horizontal wells. Prior efforts in West Virginia usually foundered upon how to deal with mineral owners who either refused to agree to the “pooling” of their minerals into a larger “unit” or who could not be located. As a result, a single mineral owner could prevent the formation of a larger “unit” for drilling, which drove up costs and resulted in less efficient extraction of the minerals.
Many months of stakeholder negotiations resulted in SB 694, which passed with minimal changes or opposition in the Senate and House.
SB 694 adds a new article to the West Virginia Code beginning at §22C-9-1, which includes a description of the public policy addressed by the legislation. Not surprisingly, the statute declares that the Legislature “finds that horizontal drilling is a technique that effectively and efficiently recovers natural resources and should be encouraged as a means of production of oil and gas[.]” Notably, however, in addition to identifying the “development, production, utilization, and conservation of oil and gas resources by horizontal drilling in deep and shallow formations” as in the public interest, the statute also recognizes the desire to “[s]afeguard, protect, and enforce the property rights and interests of surface owners and the owners and agricultural users of other interests in the land.” See §22C-9-7a(a).
Per §22C-9-7a(c), to obtain a horizontal well unit order from the Oil and Gas Conservation Commission, a producer must meet three conditions related to (1) a benchmark of royalty interests, (2) a benchmark of operator interests; and (3) negotiations with all mineral owners within the proposed unit.
First, as to royalty interests, a producer may obtain a unit order upon getting consent from the mineral interest owners of 75% or more of the “net acreage in the target formation to be included in the horizontal well unit[.]” The mineral interest owners include traditional royalty owners, “executive interest” owners, and “unknown and unlocatable interest owners.” Under this formula, therefore, a producer may utilize §55-12A-1, et al., (unknown heirs) or §37B-1-1, et al. (co-tenancy), to add acreage to get to the 75% participation threshold. §22C-9-7a(c)(2)(A).
Second, as for operator interests, a producer must control, by ownership, lease, or otherwise, “55% or more of the net acreage in the target formation proposed to be included in the horizontal well unit,” which threshold applies to both shallow and deep horizontal wells. §22C-9-7a(c) (2)(B).
Finally, the statute requires that a producer make “good faith offers to consent or agree to pool or unitize” to mineral owners and negotiate “in good faith” with all “known and locatable royalty owners having executory interests in the oil and gas” within the proposed unit, even those whose interests are not subject to development under §37B-1-1, et seq. §22C-9-7a(c)(2)(C).
Notably, for purposes of determining if these conditions have been met, the Commission may not consider overriding royalty owners, nonexecutive interest royalty owners, or acreage owned or held by unleased, unknown, and unlocatable interest owners whose acreage is not subject to development per §37B-1-1, et seq. In addition, acreage held by other operators within the proposed unit may not be included in the calculation of the thresholds unless such operators have consented or otherwise agreed to develop their operator interest in the net acreage in the target formation proposed to be included in the horizontal well unit. §22C-9-7a(c)(3).
The statute specifies what must be included in a horizontal well unit order. See §22C-9-7a(f). Perhaps most notably, the statute specifies how non-consenting mineral owners whose minerals will be included in the order must be compensated by the operator. For example, an order must require that non-consenting mineral owners with valid leases, whose minerals are included within the horizontal well unit, must be paid an amount equal to (1) 25% of the weighted average monetary bonus on a net mineral acre basis of the bonuses, and (2) 80% of the weighted average production royalty percentage paid to other executive interest owners of leased tracts within the horizontal well unit. §22C-9-7a(f)(6).
On the other hand, non-consenting mineral owners without a valid lease must be given the choice to either (1) surrender their oil and gas within the tract in the unit in exchange for an amount equal to the weighted average amount paid, per net mineral acre, by the applicant to executive interest owners in the same target formation underlying the horizontal well unit; or (2) elect to participate in the unitization. §22C-9-7a(f)(7)(A) and (B). If the non-consenting mineral owner consents to participation in the unitization, the amounts paid must either be (1) on agreed upon terms, or (2) for a bonus payment equal to the average bonus paid to other mineral owners by the applicant within the unit, and a production royalty equal to the highest royalty rate in any lease to a mineral owner within the unit dated in the previous 24 months. §22C-9-7a(f)(7)(B)(i) and (ii). Notably, in lieu of this method of calculating a production royalty, non-consenting mineral owners without a valid lease may make a one-time election to be paid production royalties for natural gas based on either an index price as of the beginning of a month published in an independent publication or on the weighted average sale price. This election must be made before the Commission issues its unit order. §22C-9-7a(f)(7)(B)(ii). If this election is made, the non-consenting mineral owner without a valid lease must receive production royalties for natural gas liquids calculated, at the election of the applicant, based on either the index price or the weighted average sales price. Importantly, production royalties for natural gas liquids must be calculated “using the sum of the proceeds received at the tailgate of the processing facility for each natural gas liquid product during each month divided by the volume of such natural gas liquid product that was sold during such month and shall not be reduced by post-production expenses.” 22C-9-7a(f)(7)(B)(ii). Finally, any mineral owner who simply refuses to make an election under the statute will be considered to have elected to participate in the unit per §22C-9-7a(f)(7)(B).
The statute also contains provisions related to an operator whose interests are included within the proposed unit, including both consenting and non-consenting operators. §22C-9-7a(f)(9) and (10).
Notably, HB 694 received support from the West Virginia Surface Owners Rights Organization, in part, because it provides a mechanism by which surface owners may acquire the mineral interests of unknown and unlocatable interest owners in oil and gas underlying a horizontal well unit. Specifically, if an action under §55-12A-1, et seq., has not commenced, and the taxes are not delinquent, the applicant must inform the surface owner that the underlying interest of the unknown and unlocatable interest owners may obtained from the applicant pursuant to the process detailed in §22C-9-7a(o).
This article only highlights unique features of the new statute. Any operator or landowner affected by a potential unitization order is urged to carefully consult the statute for further details. For now, however, West Virginia finally has a unitization mechanism in place.
Click here, to view the article online in the April issue of GO-WV News.