A company has applied to the Oklahoma Corporation Committee (OCC) for approval of spacing units for horizontal drilling that include mineral acres owned by my family. My understanding has been that once a spacing unit has been approved, the statutory regulations in Oklahoma require that in order for a company to commence drilling operations in the approved unit(s), if they are unable to obtain private lease agreements with some of the mineral owners (despite good faith efforts to do so) the company must apply for a forced pooling order to be issued which would provide the unleased owners with various election options that include some combinations of royalty + bonus. I spoke with the landman listed as the “contact” on the spacing unit applications in order to ask a few questions and at one point when I mentioned forced pooling the landman asserted that an operator can simply choose to skip forced pooling and unilaterally carry all of the unleased mineral owner’s interest until 100% payout. Is that true, or would the company instead need to submit an application to the OCC requesting issuance of a pooling order?
I do not agree with the description provided by the operator. Under Oklahoma law, 52 O.S. § 87.1(e), an operator cannot avoid forced pooling. Rather, a pooling order is the mechanism to “carry” a mineral rights owner.
The “Carry” Option (Non-Participation): Under a forced pooling order, an unleased owner who does not want to participate in the drilling costs (pay upfront) can choose not to participate. In this scenario, the operator “carries” that owner.
100% Payout / Risk Penalty: If the unleased owner is carried, the operator typically incurs all risks and costs. In return, the operator is allowed to charge a “risk penalty”—often 100% to 300% of the well costs—before that owner receives any revenue from production, besides the statutory royalty.
**Why Operators Use Forced Pooling:**Even if an operator is willing to carry an owner, they still need a pooling order to legally define the rights to the spacing unit, allow for the 100% (or more) penalty, and ensure that the “hold-out” owner cannot claim a share of revenue without having incurred the initial risks.
Avoiding the Process: If an operator does not use forced pooling, they risk not having legal authority to develop the unit or, if a well is drilled without one, potentially facing claims of conversion or having to pay a higher share of revenue to the unleased owner.
In summary, the “carry until payout” option is actually a result of the forced pooling order, not a way to avoid obtaining one.
I hope this helps!
Blessings,
David
I have worked as a landman in OK for over 40 years and we own over 200 mineral interests in OK. I have never seen a carried interest option in a forced pooling. The default option is almost always a bonus amount and a 1/8th royalty. On a technical basis, what the landman said is correct; however, the practical application is forced pooling is a SOP in OK due to multiple fractional owners.
James, Thank you for your comment. I assume you do not mean that in Oklahoma, “technically” an operator can skip applying for forced pooling in order to bring in unleased mineral owners, and instead carry all of those mineral owner’s interest until 100% payout. As you stated, even the default treatment for non-respondents to the election options that result from issuance by the OCC of a forced pooling order is not (in your experience) for the operator to carry those owners until 100% payout. Instead, those (non-respondent) owners would be deemed to have elected the option with the smallest royalty and largest bonus. Could you please clarify what you mean by “on a technical basis the landman is correct”?
There are many issues with the APO potential. This can even happen if a forced pooling is performed improperly and fails to state the general “all owners” catch all. I had this issue in 1983 with Estoril where they failed to name a respondent and did not include a catch all. They had expiring OGLs and drilled the well prior to pooling. They then had to amend the pooling for the missing respondent. If they had not amended, then there would have been an unleased cotenant. Today almost all poolings use catch all language to help protect against such an issue
My situation was somewhat different with Estoril. I leased the family, then presented the OGL to Estoril prior to the pooling.
The second issue occurred when I was performing a property review for a client in 1985. I discovered H&P drilled and was producing a well on one of the client’s fractional interests. The client had not been named in the pooling. It took some time to settle with H&P, but we did settle for 100% cost recovery for an unburdened working interest in the well.
Today in Oklahoma, I would never suggest a well be drilled without the protection of a forced pooling. So again, technically an operator could elect to carry, but why would they when they can have the protection benefit of the forced pooling. If they did proceed with the “Carry Position”, then the risk of a dryhole is 100% on them. I think the landman may have been playing a bit of hardball negotiations in an attempt to get out of a bad situation. Of course it could have been an economic issue with a very small fractional interest not warranting an amended pooling action.
I believe the OCC should amend their rules so that they require a public advocate be present to argue for the default option since it is typically so heavily in favor of the Applicant.
This answer applies to Oklahoma only. I have been running the multi families minerals for 60 years, and will give my take on the above post. There are individuals on this website that know far more than me, so please jump in if I am on the wrong path. For many years after I took over in the late 1950’s, Production Companies could not even start to drill until every single mineral acre had been accounted for. Period. Then all these fractional shares started to show up. The last I talked Camino in Denver, they had over 2,500 Royalty owners on just one well. That is a nightmare. Instead of keeping minerals together, family members either lost them, or could not see the wisdom of keeping the mineral acres together. So, with production companies spending hundreds of thousands of dollars on Landsmen trying to find lost mineral acre owners, and then a dry hole, the Corporation Commission installed two things. One is Forced Pooling, never heard of that in early years, and the other is a huge change, letting production companies drill, BUT NOT MAKE ANY PAYMENT, untill all the Division Orders were completed. The result of that, huge checks arrive maybe a year after a well is producing on line. As a side effect of that, production companies were in no hurry to start paying as they got to keep huge amounts of money, millions of dollars on these new Horiziontal Laterals. So the law suits started and now we get interest checks on the delays. It is my take, the OCC has corrected a mistake they allowed, trying to fix a problem that families caused by loosing or not combining Mineral Acres. We have one of the best Oil and Gas Attorneys in Oklahoma that advice us on all of this and he says that depth clauses are usually not allowed in early leases, and they are standard on Pooling Orders, and unless the lease is very favorable, and if the mineral owner does not need a lot of up front money, over the long run, for long term mineral owners, I mean over generations, particularly for small fractional mineral share owners, it is better to be Pooled, then sign a bad lease. I feel so sorry for so many people on this wonderful forum, that write in asking for what is a lease going for? Any more it is the Amendments ((Transportation, Dehyrdration, Tax, Administration, Etc, Etc)) and depth clause that is far more important than exact amount of Lease Payment. Not wanting to be rude, but I have taught my children these folks are what I call “Check Cashers.” These are folks that do not want to spend the hours and hours learning the wonderful information that is on the Oklahoma Corportation Web Site, that is very often no mentioned on this site. So they get a bad lease and do not even know it. Pooling stops this. Mrs. Barnes, if you would, please critique what I have written, as I am only one northern individual and my experience could be far from average, but we have ownership in 24 sections in four counties, and have been hood winked so many times, we know we need legal advice on how to procee and know how to use Paralegals, Know this got long. Thomas Arthur.
If your lawyer is saying that depth clauses are usually not allowed I would highly suggest sitting down with someone and reviewing all options for an oil and gas attorney. I could not picture an instance where one of the best oil and gas attorneys is saying depth clauses aren’t allowed in a lease. Signing a lease without a depth clause is a no go. I really hope there was some kind of disconnect or I interpreted something wrong here.
Thank you for this post. I probably stated it incorrectly. My advice was to nubees that get leases from Landsmen early on. Our attorney states that most of those early lease offers do not include depth clauses. Thank you for helping me make that point clearer. Most early leases, particularly from third parties that are “Resellers” those leases should almost always be treated as suspect.
Thank you for the clarity I about had a heart attack initially reading that. To elaborate more on the point for anyone else, If you are not familiar with oil and gas leases always have it reviewed by someone you trust. This forum is an incredible resource for mineral owners, whether experienced or not. If someone is trying to lease you and you sign the first version of the lease they offer it is most likely very unfriendly to mineral owners. Minerals owners should have depth clauses and not be responsible for any marketing/transportation costs.
Perhaps a better way to state it is that the older leases from the pre-2000s didn’t usually have depth clauses. They just weren’t “a thing” back then.
Lease offers from third parties can actually be quite good as you can often get better lease terms out of them than the operator would be willing to give. Just depends upon the area and the competition.