Member Article

As discussed in Part I, the North Carolina Mining and Energy Commission (“N.C. MEC”) will present its report on hydraulic fracturing to the Joint Legislative Commission on Energy Policy and the Environmental Review Commission by October 1, 2013.  One of the many issues up for debate is whether the state will permit forced pooling and if so, what approach the state will adopt for nonconsenting landowners.

During its meeting in March 2013, the N.C. MEC heard a presentation on proposed forced pooling regulations in Pennsylvania.  The presentation provided the N.C. MEC with background on forced pooling and an overview of three general approaches used by many states across the country.  The three general approaches to forced pooling include: (i) “free ride” statutes, (ii) the risk-penalty approach, and (iii) the surrender of working interest approach. 

First, in a “free ride” statute state, the pooled interest owners do not incur any of the risk associated with the drilling of a well.  Instead, the operator bears all of the risk for drilling in a pooled unit.  Nonconsenting landowners who are pooled are not forced to share in the costs of production unless a drilled well is successful.  If the well is successful, the nonconsenting landowner is only responsible for his or her proportionate share of the pooled unit’s costs.

Second, in a risk-penalty state, the nonconsenting landowner will face a risk penalty if he or she is unable to negotiate a deal with the operator.  If the nonconsenting landowner cannot work out a deal, the operator may withhold the nonconsenting landowner’s portion of the costs as well as an additional fee provided for by the risk penalty statute.  This type of statute seeks to prevent the “free-ride” for holdout landowners as discussed above.

Finally, in a surrender of working interest state, the nonconsenting landowner may choose to “surrender” his or her working interest to the operator in lieu of a risk penalty or in lieu of paying other costs to the operator.  Much like the typical oil and gas lease, the nonconsenting landowner assigns its mineral interest to the operator.  However, under a surrender statute, the regulatory authority charged with oversight is given the power to govern the terms of the assignment.

Currently, North Carolina is a “free ride” state according to the 1945 statute which governs drilling and exploration of oil and gas in the state.  The statute is outdated, however, because it does not account for or consider the horizontal drilling involved in fracking.  Therefore, if the N.C. MEC decides to recommend forced pooling for hydraulic fracturing, it must also decide which approach North Carolina should adopt.  Although North Carolina is free to develop its own approach, the Joint Legislative Commission on Energy Policy and the Environmental Review Commission continue to look to other states for guidance in fracking issues and legislators will likely adopt some version of the three approaches described above.