Understanding Forced Pooling in Colorado
What does it mean to be “forced pooled?”
Developing oil and gas acreage can be a complicated process and requires the input of many stakeholders, both inside of companies and from landowners. With horizontal drilling allowing wells to reach for several miles in any direction away from where they are initially drilled, more and more people are becoming stakeholders in new wells.
As oil and gas operators look to drill their next wells, they send out lease agreements to everyone who owns the mineral rights where they hope to drill. In cases where a mineral rights owner does not accept the lease, or chooses not to reply to the inquiry for the lease of mineral rights, it is possible for a company to force pool their interests.
Once an operator has created a drilling unit, or the area of minerals it hopes to recover and the location of the well it plans to drill to achieve that end, it must acquire all remaining unleased mineral interest it intends to exploit. For the mineral interest held by landowners, the operator must make a reasonable offer on the mineral interest and let the state know that it plans to “pool” all the resources in its drilling unit for recovery from its well.
By submitting a pooling application with the Colorado Oil and Gas Conservation Committee (COGCC) an operator essentially forces mineral rights owners to make one of three decisions regarding how they would like to be involved in the development of a future well:
- Consent to voluntarily pool their mineral interest with others and participate financially in the well,
- Lease their mineral rights to the operator,
- Decide to become a non-consenting owner, which often prompts operators to force pool their interest
Mineral owners have 60 days to respond to the pooling application, after which time they are consider non-consenting as well, and an operator can force pool their interest. Once forced pooled, the company has the ability to produce from the minerals, even if the owner is non-consenting.
While this process does help to protect the economic interests of other mineral owners involved in the drilling unit, it does have downsides for owners of forced pooled minerals.
What happens if I’m forced pooled?
If a mineral owner is forced pool, they will receive just 1/8 (12.5%) of their royalty payment for their proportionate share of the unit until the cost of the well is payed off in addition to any penalties incurred. This includes the cost of operating the well, the cost of off-site equipment, and double the proportionate cost of drilling the well, which can be several millions of dollars.
Because it can take several years to pay off their proportionate share of the well, even with the majority of their royalties going toward covering costs, and because horizontal well production declines dramatically after it first goes online, royalty payments for a non-consenting mineral rights owner are often small over the lifetime of the well.
Ensuring you get the full value for your mineral rights depends on you
Unfortunately, many mineral owners do not receive full value for their mineral rights, particularly those that are forced pooled, because they don’t know how the system works. Operating companies and land brokers have a financial interest in collecting mineral interest at the lowest price in order to generate the greatest profits, and often pressure mineral rights owners with threats of forced pooling and a smaller proportion of the mineral owner’s royalty.
For help in understanding what your mineral interest is truly worth, please contact Ferrari Energy today. We can help you assess the real value of your mineral interests, and help you understand your options in monetizing your interests as well. Our team of experts can go over the tax benefits and possible value of your options so you can make an informed decision about your mineral interest.