REGULATION

Ready or not, Pa. confronts 'forced pooling'

Pennsylvania regulators abruptly postponed a hearing Friday on whether an oil and gas producer can compel property owners to allow drilling beneath their land, the latest twist in an eight-month saga over so-called forced pooling.

Pennsylvania legislators declined to include forced pooling in the 2010 state law regulating natural gas production from the Marcellus Shale field. The idea was too controversial; Gov. Tom Corbett (R) later referred to it as "private eminent domain" (EnergyWire, July 24).

Since July 2013, though, a Houston oil and gas producer has been pushing Pennsylvania to allow forced pooling in its portion of the Utica Shale, using a 53-year-old state law. It's the first time the law has been used in about 30 years, and the first time ever for an unconventional field, a state spokeswoman said.

The state was scheduled to hold a hearing on the request beginning tomorrow but canceled it at about 4:30 p.m. Friday. Notices hadn't been sent to six or eight property owners, including those who have held out against leasing, said Morgan Wagner, a spokeswoman for the state Department of Environmental Protection. The DEP published a legal notice announcing the hearing but decided to delay to make sure the unleased property owners have adequate notice, she said. A new date hasn't been set.

The case's tortured path and the issues it raises show that the state's laws need to be changed -- either by the courts or by the state Legislature, observers say.

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"We're behind the curve in terms of our laws in relationship with the industry," said Herbert Sudfeld, a partner in the law firm Curtin & Heefner who handles real estate law and oil and gas leasing. "I think the courts are going to act first and the Legislature second."

The state law allows pooling only in deep formations like the Utica, which is under parts of Western Pennsylvania. Activists like Karen Feridun, who runs the Berks Gas Truth blog in Kutztown, Pa., worry that the pending case could set a precedent that allows pooling in the Marcellus, which underlies a much bigger section of Pennsylvania.

The oil and gas industry has pushed to allow forced pooling throughout the state. A good forced pooling law would ensure that people's land isn't drained without compensation, said Yvonne Hennessey, an attorney at Hiscock & Barclay in Albany, N.Y., who has followed the Pennsylvania case.

"Oil and gas doesn't stop at the property line," Hennessey said.

Longer wells, bigger pools

Forced, or compulsory, pooling is common in oil and gas producing states. Typically, it happens when a driller already has leases with a group of property owners but can't contact or reach an agreement with a minority of owners. The state has the power to allow the driller to produce oil or gas from beneath the holdout's land, although there's typically a hearing to make sure that the owner's rights are protected and states generally have a mechanism to make sure the owner is paid.

Proponents argue that forced pooling allows for drilling to be done in the most efficient manner with the fewest well sites and the least disturbance to the surface. It also prevents a single landowner from holding up drilling on surrounding property.

As the shale boom brought drilling to new areas, the idea became more controversial. Shale drilling, with its long horizontal wells, requires larger units, so more owners face the prospect of pooling. Some fields, like Pennsylvania's Marcellus Shale, are in areas that don't have a history of drilling, and landowners sometimes object to it on moral and environmental grounds.

Those objections led Pennsylvania to drop the idea of forced pooling provision in Act 13, the law that governs production in the Marcellus Shale.

However, the state still had a forced pooling provision on the books. A section of the 1961 oil and gas act allowed the practice in for deep formations -- either below 3,800 feet or below the Onondonga horizon, a layer of limestone. Most of the state's oil production occurred above that depth, and the state didn't see a need to regulate shallow drilling.

Like a lot of drilling laws from that time period, the 1961 statute was intended to ensure efficient oil production and prevent overdrilling that could lead to a drop in underground pressure. If two or more owners had a claim to the same underground pool of oil, the forced pooling provision allowed the state Oil and Gas Conservation Commission to "integrate" the ownership, limiting the number of potential wells.

2-step solution

In July, Houston-based Hilcorp Energy Co. cited that provision when it asked the DEP to establish four drilling units on 3,200 acres in Lawrence and Mercer counties. It already had permission to drill on two of the units and asked the state to set up drilling units on two other units totaling about 2,400 acres.

"Due to the existence of unleased property at the center of each drilling unit, the possibility of overdrilling exists," the company wrote in its application. Hilcorp declined to comment for this story.

The DEP initially told Hilcorp to take its case to the state Environmental Hearing Board. A few months later, the hearing board told Hilcorp to take its application back to the DEP.

At the end of December, the DEP hired a private attorney to serve as a hearing officer, who will hold a proceeding that's similar to a civil trial. The DEP and Hilcorp argued in filings about the scope of the hearing with Hilcorp saying that only people who owned mineral rights in the vicinity of its project should be allowed to participate.

The DEP argued for more public input. The hearing officer approved a two-step process -- an initial hearing this week with testimony from Hilcorp, the state agency and people directly affected, followed by a public hearing to allow broader comments.

"They're just kind of making it up on the fly," said George Jugovic, an attorney at the environmental group PennFuture.

Landowner concerns

The DEP has taken steps to keep landowners informed, including publishing a second legal notice and sending letters to property owners, Wagner said. If Hilcorp wins the forced-pooling order, there will be a separate processing to determine how to compensate the property owners, Wagner said.

Suzanne Matteo, whose family lives on one of the unleased tracts in West Middlesex, Pa., said the process has been unfair to landowners. She found out about the case late in the summer from a friend but said she hadn't heard from the DEP or Hilcorp until late last week, days before the hearing was to start. The uncertainty about the hearing process hasn't helped.

"Attorneys are running from us," she said.

Matteo said her family refused to sign a lease because she wanted to keep gas drilling away from her rural home. She said she plans to fight Hilcorp's plan, although she realizes she's up against a formidable opponent. Hilcorp is the third-biggest privately held driller in the United States, and its owner, Jeffrey Hildebrand, is No. 256 on Forbes' list of the world' richest people.

"If they can get away with doing this to me, they can do it to the people down the road," Matteo said.

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