It took many years before industry and mineral owner advocacy groups could agree on unitization regulations. You may have heard this referred to as forced pooling. In the 2022 West Virginia Legislative session, a compromised bill was passed in Senate Bill 694. The legislation changed WV Code Chapter 22C, Article 9 related to Oil and Gas Conservation, and became effective June 7, 2022.
The West Virginia Oil and Gas Conservation Commission (OGCC) regulates the drilling of deep wells in the state. The OGCC approves drilling permits and conducts hearings on matters relating to the exploration for or production of oil and gas from deep wells. Hearings are held to determine the spacing of wells and to pool the interests of royalty owners and operators of a drilling unit.
Before this legislation, operators needed 100% of mineral tracts in a proposed unit under a lease to move forward to drill in the shale regions of WV. With the new legislation, holdouts or unfound or unlocatable interest holders do not prohibit the recovery of oil and natural gas from shale formations. In a proposed horizontal unit, the operator must have 75% of mineral tracts leased and 55% of mineral tracts with consent to pool or unitize before a unitization application can be submitted. Once the thresholds are met an application for unitization can be made to the OGCC. The operator will also submit an economic summary that includes the prevailing economic terms of the leases in the proposed horizontal unit relating to the target formation, which will be reviewed by an independent third party selected by the OGCC.
Based on the information contained in the economic summary, the independent third party will determine what terms the unleased mineral tracts and unmodified mineral tracts will receive.
The first unitization hearing was held on August 22, 2022. The OGCC selected Jeffrey Yourkovich CPA, CMM to be the independent third-party reviewer in the first-ever unitization in WV.
You can find unitization applications, statutes and rules, notices of upcoming meetings, and final unitization orders on the OGCC website.
What happens if my mineral interests are unleased and I am unitized? Unleased mineral tracts receive a weighted average lease bonus payment per net mineral acre in the unit, the highest royalty percentage in the unit within the 24 months preceding the application date, royalty payments free of post-production expenses and you will be considered leased for the target formation only. The unitization order does not grant or otherwise affect surface use rights.
The mineral owner does have the option to decline these terms and instead, elect to be a working interest owner and share in the pro rata portion of revenue and cost of the unit.
What happens if my mineral lease contains insufficient pooling or unitization language in a proposed unit and I am unitized? Unmodified mineral tracts receive 25% of the weighted average lease bonus per acre in the unit and 80% of the weighted average royalty percentage or the 12.5% statutory royalty minimum.
An example of an unmodified mineral lease owner is a mineral owner who has a flat rate or historic lease that does not allow pooling, lacks pooling language, or an operator wants a unit larger than allowed in your lease. When a landman inquiries about negotiating a modification to your existing lease for a pooling or unitization clause, this gives you a chance to renegotiate the terms of your current lease. Every line and every section can be renegotiated because they need to modify the lease to unitize. For example, if your current lease has a 12.5% royalty and lease modification negotiations cannot be agreed upon, then you will most likely get unitized. It is possible to end up with a higher royalty rate after being unitized. The review determines the weighted average royalty percentage in the proposed unit to be 17.5%, then you would receive a 14.0% royalty (17.5% times 80%). You will also receive a modification bonus payment on your net acreage based on 25% of the calculated weighted average lease bonus.
Let’s say you have unleased acreage and have been approached about signing a gas and oil lease. Landman is offering you a lease (usually a surface to the center of the earth lease) for a $3,000 per acre bonus and an 18% royalty. You do not like the terms and cannot agree upon an acceptable lease and you get unitized. It is possible to end up with a higher royalty percentage if a leased mineral owner has a higher royalty percentage in the proposed unit. If one mineral owner’s lease dated within the 24 months preceding the application date of the proposed unit has a 20% royalty then you will also get a 20% royalty. It is possible to receive a lower per-acre bonus than the current offer because the weighted average lease bonus in the unit was determined to be less after the third-party review. Your bonus amount will also be for the target formation only, all other formations will be considered unleased.
An operator must make good-faith negotiations with all adverse mineral owners in a proposed unit. Knowing your neighbors and talking to knowledgeable gas and oil professionals may be an advantage to the negotiating process of signing a lease or addendum. A landman may use unitization as a threat to make you believe that the current offer is the best you can receive. This may not always be the case and unitization can work in the favor of the mineral owner. The terms of the unitization may also be less than satisfactory to the mineral owner’s desires. Whether you like the unitization rules or not, this legislation fosters the exploration and development of gas and oil resources in WV.