Forced fracking proposed

by John Murawski, News and Observer, August 27, 2013.

Luke Cranford has been active in organized opposition to fracking in Lee County for more than a year, concerned about chemical spills and disruptions to the area’s bucolic landscape.

But a proposal under consideration could force Cranford and other area property owners to give up control of the natural gas under their land and sell it to energy companies whether they want to or not.

Known as compulsory pooling, or forced pooling, the policy allows drillers to tap local natural gas, even if property owners don’t want drillers probing under their homes and farms. Critics compare it to a government’s right to seize private property for the public good, except in this case the parties claiming rights to the land would be for-profit businesses.

“That’s just unfair,” said Therese Vick, a community organizer for the Blue Ridge Environmental Defense League. “They’re taking control of your property – your neighbors, the government and a commercial interest – and making you sell your resource.”

Forced pooling has been on the books in North Carolina since 1945 but is infrequently cited and has remained obscure. Now, it’s about to be put to a major test as the N.C. Mining and Energy Commission grapples with creating fracking regulations to protect the public and safeguard the environment.

Without a forced pooling provision to clear the way for energy companies, it’s not clear whether fracking has much of a future in North Carolina. For that reason alone, forced pooling is one of the most controversial aspects of fracking here, even though it’s a common practice in many states where shale gas exploration is underway.

“It’s like saying there’s three people in the room who want a tattoo, and we’re going to hold you down and tattoo your face, also,” Cranford said.

The state’s Compulsory Pooling Study Group is set to debate forced pooling Wednesday in Raleigh with the intent of making recommendations to the N.C. Department of Environment and Natural Resources. The study group’s conclusions will be reported to the Mining and Energy Commission, but the commission will not hold hearings on it or take a vote.

Wednesday’s discussion by the study group is likely to be the last public discussion of the issue before it gets to the legislature, said the group’s chairman Ray Covington, who is also a Mining and Energy commissioner.

The study group’s members include four Mining and Energy commissioners as well as representatives from the N.C. Bankers Association, N.C. Real Estate Commission, N.C. Department of Insurance, State Employees Credit Union and N.C. Conservation Network, among other organizations and agencies.

“At every stage of this process, the goal has been, ‘How do you protect the people of North Carolina?’?” said Covington, whose family owns more than 1,000 acres of timberland in Lee County. “What we’re recommending is much more landowner-friendly than some other states.”

Triggering forced pooling

North Carolina’s forced pooling law was originally designed to protect property owners from having their minerals or resources sucked out by a neighbor’s well. Such laws nationwide also enforce a sense of orderliness by creating drilling units that share the financial proceeds from a single well, rather than every neighbor investing in his or her own well.

Because forced pooling is legal in this state, the study group’s primary task is to decide how it should be administered and which state should serve as a model. Kentucky’s forced pooling law is triggered when 51 percent of a drilling area has signed leases, but only 25 percent have to sign in Virginia to force everyone else in, while the standard in Ohio is 90 percent, according to the North Carolina study group’s draft report.

However, Pennsylvania does not have a forced pooling law for the Marcellus Shale basin. That means that a holdout property owner can unilaterally veto a fracking operation if the energy company can’t reconfigure the drilling unit to bypass the boycotting landowner.

‘Free rides’

Another thorny issue here is what to do about the holdouts. Landowners who voluntarily sign leases typically get royalties valued at 12.5 percent to 25 percent of the value of the natural gas that’s produced in their drilling units, prorated for the size of their land relative to the drilling unit.

North Carolina’s current forced pooling law entitles property owners who did not sign a lease to collect 100 percent of the value of gas under their land, even though they contributed nothing to the expense of getting the gas out. This is known as the “free ride” statute, and many see it as an incentive not to sign a lease and hold out for a much better royalty. But it also means that energy companies have no incentive to drill in those areas.

One proposed solution: repeal the “free ride” provision to make such a landowner pay his or her share of the drilling cost, and then some. The typical fee in other states is 100 percent to 200 percent, which is roughly $10,000 to $20,000 an acre, for people in compulsory pools. The money would be taken out of royalty proceeds and not charged up front.

“It’s actually a good thing,” Covington said. “They’re not going to have to pay anything, ever. That money comes out of the proceeds of the gas that comes out of the ground.”