Horizontal Well Unitization is coming to West Virginia | Spilman Thomas & Battle, LLC
SB 694 was passed by the West Virginia Legislature during its 2022 regular session on March 9. The SB 694 represents a long-awaited step forward for West Virginia’s oil and gas industry. The bill authorizes the creation of drilling units without the consent of 100% of the owners of mineral interests in all formations and depths for horizontal wells and establishes uniform procedures for the application and approval of these units. The Governor of Justice signed SB 694 on March 30, 2022, and the law takes effect on June 7, 2022.
To get a sense of the history of SB 694 relating to oil and gas conservation and specifically the pooling or unification of horizontal well drilling units, one must go back to March 14, 2015. HB 2688 was a bill quite similar to SB 694 in that it was designed to allow the unification of horizontal wells in shallow formations without the consent of 100% of the mining interest holders when only the deep formations (under the top of the Onondaga formation) were eligible for such unification. HB 2688 passed the House of Delegates on a 60-40 vote and was immediately taken up by the Senate and passed on a 24-10 vote with an amendment to the title. But then, due to the Senate title amendment, HB 2688 returned to the House to seek approval for the title amendment. Late in the last day of the 2015 regular session, the House vote was 49 to 49 in final approval and the unification bill died.
Just days seven years later, the Legislature passed SB 694. The bill makes a number of changes to Section 9 “Oil and Gas Conservation” of Chapter 22C. This article discusses the most significant changes to Section 9, but a thorough review of SB 694 is required to understand the full scope and details of the bill.
The stated purpose of Section 9 is expanded to include “oil and gas produced from horizontal wells” and emphasizes that it is to “safeguard, protect and enforce the property rights and interests of surface owners and agricultural owners and users of other interests in the land.”
An important provision to garner support for the bill was to add two new positions to the Oil and Gas Conservation Commission (“OGCC” or “Commission”). A position must be “a person who has substantial experience in the agricultural industry, who is engaged in agricultural activity” and who is not engaged directly or through an immediate family member in the oil and gas business other than as a royalty owner. The other position must be “a resident owner of minerals” who is not affiliated with an oil and gas well operator. This change expands the OGCC to seven members and ensures representation of agricultural and mining owners on the Commission.
The Commission’s powers now include the power to “issue horizontal well unit orders”. It should be noted that the bill does not extend the unitization power to conventional shallow wells which remain excluded from section 9.
The bulk of the detail of the bill is included in a new section §7a, which sets out legislative findings favorable to horizontal drilling in deep and shallow formations and defines 11 new terms in addition to the definitions already contained in §2.
Section 7a explains the conditions under which a horizontal well unit application may be filed with the OGCC. With respect to royalty interests, the applicant must have the authority to develop oil and gas from enforceable royalty holders controlling 75% or more of the net area of the target formation proposed to be included in the horizontal well unit. Thus, up to 25% of the net area of the target formation may be controlled by unwilling enforceable royalty owners.
With respect to operator interests, the applicant must have the right to develop 55% or more of the net area in the target operator formation of the proposed unit. Thus, up to 45 percent of the net area may be controlled by operators other than the applicant and still be subject to a unification order by the Commission.
The applicant also has an obligation to make offers in good faith and to negotiate in good faith with non-consenting enforceable royalties and operators so that the applicant is qualified as the “person who controls the horizontal well unit”.
Section 7a also describes the many requirements to be included in the application for a horizontal well unit and the factors the Board must consider in evaluating the application. The specifications of a horizontal well unit order are described in detail, including target unit size and formation, unification consideration, and a finding regarding owners of unknown and untraceable interests.
Section 7a deals with compensation to royalty holders from leased interests that do not include the express right to pool or unify the lease, and compensation options for oil and gas interests that do not subject to any lease. These provisions represent the protection of non-consenting lessors without a pooling or unification clause in the lease and non-consenting enforceable royalty owners.
SB 694 establishes that the consideration for leased interest royalty holders without pooling/unitization rights is “an amount equal to 25% of the weighted average monetary bonus amount on a net mineral acre basis and a percentage production royalty equal to 80% of the average production royalty percentage.” The consideration must be paid by the participating operators to the extent of their interest in the horizontal well unit.
Consideration to be paid to owners of non-leased oil and gas interests is a little more complicated, as such owners have three options. The first option is to “transfer the oil and gas underlying the area to participating operators” for consideration, if not agreed, of “an amount equal to the weighted average amount paid, per net mineral acre , by the plaintiff to the executive interest holders in good faith transactions with third parties for the acquisition of the oil and gas mineral domain in the same target formation underlying the horizontal well unit. This option constitutes a purchase of the mining estate in lieu of any production-based premium or royalty payments.
The second option is to choose a unifying consideration consisting of (i) “a bonus payment per net mineral acre equal to the weighted average monetary bonus paid, per net mineral acre, . . . by the claimant under other leases in the same training target controlled by the applicant within the horizontal unit;” and (ii) “a production royalty…equal to the highest production royalty percentage in relation to other leases in the same target formation controlled by the applicant in the horizontal well unit and dated less than twenty-four months prior to the date of application.” Under this option, royalty payments are not reduced by post-production expenses If the Royalty Rights Owner omits or chooses not to select an option, such owner is deemed to have chosen that option.
The third option is to participate in the horizontal sink unit as an operator subject to appropriate sharing of costs and expenses as well as revenues associated with the horizontal sink unit. Alternatively, the non-consenting owner may choose to participate on a deferred basis, meaning that the non-consenting owner will be an operator in the horizontal well unit entitled to receive a share of the production after the net income attributable to the non-consenting owner consenting party is equal to twice the cost share. attributable to the non-consenting owner’s interest “as set forth in the accounting procedures included in the joint operating agreement” submitted by the plaintiff and approved by the Board.
SB 694 also includes detailed procedures for notice, timelines, hearings, and orders for resolution of any disagreement between interested parties that cannot be resolved. The bill also provides a process by which surface owners can acquire oil and gas rights from unknown and untraceable owners, but that is a subject for another article.
As noted above, SB 694 contains much more detail than is covered in this article, so please read it carefully before making any decisions regarding the use of its provisions after June 7, 2022.