When Brian Corwin first skimmed West Virginia Senate Bill 694 over breakfast, stomaching the bill still seemed possible.
Then, the seventh-generation farmer took a closer look.
“The devil is truly in the details of this bill,” Corwin, 45, said.
Corwin is one of two Brooke County farmland owners who sued Gov. Jim Justice in federal court this week alleging the bill he signed into law in March is unconstitutional.
SB 694 is sweeping legislation that takes effect June 7, 90 days from its passage. Over 40 pages, the new law sets application requirements for horizontal well unit controllers seeking to combine oil and gas tracts to drill wells, expands the state body that regulates deep well drilling and gives options for compensation to nonconsenting owners entitled to lease an oil and gas estate.
SB 694 changes the share of oil and gas production to which a royalty owner is entitled.
State code had held that royalty owners and well operators each should obtain their “just and equitable share of production” from a pool of oil and gas. SB 694 defines a pool as an underground accumulation of gas or petroleum in a reservoir.
The new law changes state code to hold that royalty owners may get their share of production from a unit or unconventional oil or gas reservoir, in addition to a pool.
SB 694 defines a unit as the acreage on which wells may be drilled and an unconventional reservoir as any geologic formation that yields oil or gas that can’t be produced economically except by horizontal or multilateral well-boring or hydraulic fracturing, also known as fracking.
Corwin and fellow plaintiff Scott Sonda, 50, say that’s a crucial change that will result in gas companies taking gas from mineral owner tracts and never paying for it without running afoul of the new law.
The bill establishes a mechanism for unitizing wells without 100% support from mineral interest owners in a given formation. Unitization is the combination of two or more oil and gas tracts or tract portions to form a consolidated well unit.
The bill requires applicants who control a horizontal well unit seeking to unitize tracts to have agreement from royalty owners of 75% or more of net acreage in the target formation proposed to be included in the horizontal well unit with respect to the royalty interest.
For oil and gas interests with no lease, owners entitled to lease an oil and gas estate could surrender the oil and gas underlying the tract to participating operators, including the applicant, proportionate to their interest in the horizontal well unit.
If not agreed upon, that total would be the weighted average amount paid, per net mineral acre, by the applicant to the owners in third-party transactions for acquiring the oil and gas mineral estate in the same target formation underlying the horizontal well unit.
For royalty owners of leased tracts who have not consented to unitization, the West Virginia Oil and Gas Conservation Commission would require that unitization consideration be paid to royalty interest owners totaling 25% of a weighted average monetary bonus amount on a net mineral acre basis, and a production royalty percentage of 80% of the weighted average production royalty percentage paid to other owners of leased unit tracts in the same target formation.
Regarding operator interest, applicants must have an agreement among royalty owners of 55% or more of the net acreage in a target formation proposed to be included in a shallow horizontal well unit owned, leased or operated by the operators and the applicant. For deep horizontal wells, an applicant must have agreement from royalty owners of 55% or more of the net acreage in the target formation to be included in the horizontal well unit.
But the lawsuit argues that horizontal well unit applicants determine whether their own applications meet the criteria for approval under SB 694, leaving the commission no choice but to sign off on them.
The lawsuit cites SB 694’s language that the commission “shall” approve unitization of tracts or portions of tracts and requirement that an applicant make “good-faith offers” with royalty owners who haven’t previously consented to contend that nonconsenting royalty owners and operators have no way to avoid their property being taken without just compensation.
Corwin said the SB 694 makes the Oil and Gas Conservation Commission an “absolutely nutless” rubber stamp.
“There’s no recourse for the landowner,” Corwin said.
The new law expands the number of members of the Oil and Gas Conservation Commission from five to seven.
That commission regulates the drilling of deep wells. It must be chaired by a governor-appointed registered professional engineer with oil and gas industry experience. It also consists of the head of the Department of Environmental Protection, the chief of the DEP’s Office of Oil and Gas, and two other governor appointees that include one independent producer.
The two new members will be a person with experience in the agricultural industry, but not the oil and gas industry other than as a royalty recipient, and a mineral owner who has never been affiliated with an oil or gas well operator.
The West Virginia Farm Bureau cited those requirements for the two new members in its support for SB 694, arguing that it provides for a greater diversity of viewpoints on the commission.
The Farm Bureau and West Virginia Royalty Owners Association backed the bill, praising it, in part, for its 75% threshold and provision of production royalties for natural gas liquids.
The bill drew endorsements from representatives of the Gas and Oil Association of West Virginia, Appalachian oil and gas mineral interest buyer Bounty Minerals, and oil and gas producers Antero Resources and Northeast Natural Energy at a public hearing the House Energy and Manufacturing Committee held on the bill in March.
Charlie Burd, executive director of Gas and Oil Association, said he views SB 694 as a stimulus for job-creating investments in the state’s energy sector.
“Minority interest shouldn’t rob land and surface owners of their right to realizing the benefits associated with natural gas and oil production,” Burd said in a statement Wednesday.
Sonda and Corwin were among the speakers against SB 694 and said they sent Justice a 29-page document outlining their concerns with the bill in an unsuccessful attempt to convince him to veto it.
The Governor’s Office did not respond to a request for comment.
The lawsuit, filed in the U.S. District Court for the Northern District of West Virginia, asks the court to keep SB 694 from becoming effective on June 7 and declare it unconstitutional and in violation of U.S. antitrust laws.
Sonda and Corwin predict that SB 694 will discourage multiple operators from attempting to lease within the same area, resulting in one operator per area, to avoid driving up compensation for mineral owners.
“These operators are not going to compete with one another,” Corwin said.
Sonda and Corwin foresee a corrosive trickle-down effect for communities with a heavy oil and gas well presence from SB 694. Many of the most vocal opponents of the bill — which followed years of failed attempts at codifying forced unitization in the West Virginia Legislature — represented large oil- and gas-producing districts, including Assistant Minority Whip Lisa Zukoff, D-Marshall, and Minority Whip Shawn Fluharty, D-Ohio.
“[W]hen royalties start getting cut to people, local businesses are going to be hurting from it,” Sonda said.
Sonda and Corwin said they hope that federal court puts the stop to SB 694 that didn’t come from the Legislature or the Governor’s Office. If it doesn’t, they fear producers will trump property rights.
“It’s all geared toward everything for the gas company, and absolutely no protection for any landowners,” Sonda said.