Why is Forced Pooling of Minerals Allowed?

The United States is one of only a handful of countries that allows for the private ownership of minerals. It is also where oil was first discovered and produced for commercial purposes. In 1859, Edwin Drake “gave birth” to the American oil industry by striking oil near Titusville, PA. This set off a mad rush of like-minded prospectors to the Oil Regions of Pennsylvania looking to strike “black gold.”

The Rule of Capture

Scenes similar to the one above were commonplace in areas where oil was, or believed to be, present. It is the result of the prevailing theory of mineral ownership in the United States called the rule of capture. From Oil and Gas Law in a nutshell by John S. Lowe, 7th ed.,

“The rule of capture may be stated as follows: There is no liability for capturing oil and gas that drains from another’s lands to a well on one’s own land. The owner of mineral rights in a tract of land acquires title to the oil and gas produced from wells drilled on the land, through part of the oil and gas may have migrated from adjoining lands.“

In other words, if something is in or on my land, it’s mine.

The Rule of Capture & Wastefulness

The rule of capture is what lead to images like above. Imagine you own a farm and believe there is oil evenly distributed beneath it. Where should you drill? The economic answer is as close to your neighbors property line as possible because you would rather drain some of the oil from his lands than all of it from your own. This is perfectly allowable under the rule of capture doctrine. When your neighbor sees you doing this, however, he fears you are going to capture all the oil for yourself. So he races to drill his own well on his side of the property line to ensure he gets his share of the oil. You then drill another well 20 feet away to ensure you get more of the oil. Your neighbor follows suit. You see how this quickly gets out of hand.

Conservation Laws

The above tit-for-tat is obviously not the most efficient way to extract resources. It leads to economic and physical waste. Oil and gas conservation laws came into existence to negate this wastefulness.

The most important provision that oil and gas conservation laws established was that of well spacing. Well-spacing limits the number of wells that can be drilled in a given area. Additionally, it defines the proportion of each owner’s contribution to the wells. (Technically, this combination is the ‘pooling’ of the underlying lands. Spacing and pooling are used interchangeably within the oil and gas industry.).

For example, Landowner A owns a 40 acre tract within a 640-acre section. The state oil and gas commission approves 8 wells to drill on and drain the 640-acre section. Landowner A’s land is contributing 40/640 = 6.25% of the oil and gas to each of these wells. Therefore, Landowner A owns, or is otherwise entitled to, 6.25% of the oil and gas extracted from each of the wells.

Landowner A only receives 6.25% of production in the example above if she pays her equivalent 6.25% share of the costs. If instead, she leased her land to an oil company who drills it on her behalf in exchange for a 12.5% royalty, her entitlement is 6.25% x 12.5% = 0.78% of all production. She is willing to sign this lease because she does not have to come out of pocket for her share of the cost, and thus is incurring no risk. What if she did not want to sign a lease and also did not have the money, or desire, to pay her share of costs?

Force-Pooled

Cheap energy is considered a public good in the United States. It drives industry and economy. As such, it would be economically wasteful, and thus violate the conservation laws, to not produce oil and gas when parties are willing and able to engage in such an endeavor. As such, Landowner A cannot prevent her lands from being drilled. The state oil and gas commission has already determined drilling and draining her acreage as part of the larger 640 acre well spacing is the most efficient way to prevent physical and economic waste.

If she doesn’t pay her share and does not execute a lease, Landowner A’s lands are considered force-pooled. Rules vary by state, but this usually means she receives a statutory royalty until the wells pay out their cost, plus some sort of penalty to compensate the party that took on the additional risk and funded Landowner A’s share of the drilling costs.

It may seem un-American to allow your minerals to be extracted against your will, but courts have determined it is for the greater good that the country’s resources be developed efficiently and responsibly. This is why being forced-pooled is here to stay.