Many people are surprised to learn that Pennsylvania has had a form of statutory forced pooling since the enactment of its Oil and Gas Conservation Law in 1961. The scope and enforceability of that forced pooling statute is the proper subject of a separate discussion. However, the enactment of Act 66 of 2013 may make such a separate discussion moot.
On July 9, 2013 Governor Corbett signed into law a bill that was, on its face, royalty owner friendly. Act 66 sets forth statutory requirements regarding the minimum level of financial detail required to be provided to royalty interest owners by the oil and gas industry. The oil and gas company’s ”check stubs” must also accompany the payment of royalties and must be written in plain language.
However, amendments made to the bill after its introduction have negated any positive effect the Act may have had for Pennsylvania royalty owners. In a section entitled “Apportionment” the Act provides that “Where an operator has the right to develop multiple contiguous leases separately, the operator may develop may develop those leases jointly by horizontal drilling unless expressly prohibited by a lease.”
What does this mean? It means that Pennsylvania now has a new forced unitization statute! Who does this affect? Primarily, those royalty owners who have an old oil and gas lease, particularly those without unitization clauses. Before the passage of Act 66, the oil and gas company would have had to reopen lease negotiations with the royalty owner and specifically negotiate a unitization provision which would allow the lessee to unitize the subject property. Now, the oil and gas company may simply force those royalty owners into a unit and allocate production for each lease “in such proportion as the operator reasonably determines to be attributable to each lease.”
When will Act 66 not apply to an existing lease? In this author’s opinion, when the lease has a unitization clause which has been duly stricken (thus clearly prohibiting unitization)OR which specifies a maximum unit size. Modern leases typically specify a minimum 640 acre size for gas production units. Older leases may specify much smaller gas production unit sizes, however (e.g. 40, 60 or 80 acres). These old leases, which contain a limitation on gas production unit sizes which are smaller than that required by the lessee to produce unconventional (shale) gas formations, arguably expressly prohibit joint development of the property across lease lines except as specifically provided in the language of the lease.
If you have an old oil and gas lease that contains a unitization provision of less than 640 acres for a gas production unit, and you suspect that you may be forced into a unit by the oil and gas company under Act 66, talk to your lawyer about whether your existing lease expressly limits unitization of your property.
Act 66 of 2013 represents a significant net loss of rights for royalty owners in Pennsylvania. Consider contacting your state elected officials – Representative, Senator and Governor – and voicing your opinion!