Michigan Land Use Institute

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Threats and Intimidation: This is Called "Negotiation"?

Force pooling an affront

May 1, 1997 | By Hans Voss
Great Lakes Bulletin News Service

About a dozen property owners actually are force pooled each year. But the state's authority to force holdouts to lease strongly affects oil and gas policy across Michigan.

Leasing agents frequently mention force pooling during negotiations with property owners who have questions or reservations, as a tool to pressure them into signing a company's contract. In addition to threats of forced pooling, property owners report that common tactics include constant badgering, misinformation, and inflated estimates of royalties.

The Michigan Energy Reform Coalition often hears stories like these:

• Property owners in Manistee County's Filer Township were pressured into authorizing a natural gas well in their neighborhood. The well contains dangerous levels of poisonous hydrogen sulfide, but residents were not told of the health risks.

Here is part of a description of one couple's conversation with a leasing agent:

"When my husband asked what would happen if we did not sign the lease, I remember Mr. -- indicating that we would be taken to court and that there would be a lot of money involved and that we would have our mineral rights force pooled to form a drilling unit and in the end we would gain nothing and lose in court. So with the perceived threat of a lawsuit we felt we had no choice and signed the lease."

• A couple in northern Manistee County was told by a leasing agent that all the neighbors had already signed. The agent went on to say that if the couple didn't sign the lease he was presenting, the company would just draw the gas from under their land without paying any royalties. The couple then invited several of their neighbors over for coffee, and found out that most of them also were taking a wait-and-see approach, and had not leased.

• An Antrim County couple was coerced into leasing with promises for royalties of up to $10 per acre per month. Actual royalties turned out to be about 50 cents an acre. G

Under current Michigan law, landowners who do not wish to lease their mineral rights for oil and gas development can be forced by the state not only to accept a lease, but also to pay penalties.

The law is called "compulsory pooling." It was developed as part of the original Oil and Gas Act of 1939 to promote development by ensuring that mineral owners who want to lease have "...the opportunity to receive his or her just and equitable share of the oil and gas." In the 1930s other oil producing states across the country adopted similar laws. Legislators of this post-Depression industrial era viewed leaving the oil and gas in the ground as "waste," and enacted laws like compulsory pooling to make sure the resources were developed.

Today, state regulators are required by law to prevent waste of the environment, but the overriding pro-development intent of the 1939 act still drives Michigan's oil and gas program.

Compulsory pooling, also called forced pooling, typically is used when a small minority of landowners, usually no more than 5% of a unit, refuse to lease their minerals. However, the law does not specify an appropriate percentage, or even that the pooled interests should be a minority. It merely requires that the decisions of the Department of Environmental Quality are "just and reasonable."

Once a petition to compulsory pool is submitted by an oil company, the "holdouts" are given 15 days in which to respond. If a landowner or group of landowners protests, a formal DEQ administrative hearing is scheduled in Lansing. The hearings are formal, courtroom-like proceedings. To work through the rigid guidelines, most holdouts need to hire attorneys.

The DEQ, which reportedly receives about a dozen oil company petitions for compulsory pooling a year, rarely denies them. It is unclear if the state has ever denied a company's attempt to force pool.

Once a "holdout" is compulsory pooled, he or she is given two options:

1). Pay to the company the proportionate share of the cost of drilling, completing, and equipping the well, whether it is a producer or a dry hole; or,

2). Await the outcome of the drilling of the well, and if it is a producer, pay to the company the proportionate share of the cost of drilling, completing, and equipping the well, plus an additional percent determined by the DEQ's Supervisor of Wells.

Both options make the holdout a full working party in the well. The landowner receives a 1/8 royalty, but unlike the voluntary lessors, the holdout must pay a portion of the drilling and operating costs. In Option 1 the costs are paid up front, and in Option 2 the landowner pays only if the well proves successful. In Option 2, however, there is an additional charge of usually 200% of the proportionate costs of drilling the well. When the unleased mineral owners do not choose one of the options, the DEQ automatically assigns the terms of Option 2.

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