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Industry's view

Northeast Natural Energy president and CEO Mike John was among the West Virginia oil and gas industry leaders who lobbied lawmakers to pass a bill that would set requirements for applicants seeking to unitize, or combine two or more oil and gas tracts or tract portions, to form a consolidated horizontal well unit. Some landowners spoke in opposition of the bill under consideration in the House of Delegates, arguing that it would reduce royalties and give too much power to oil and gas companies in dealing with landowners.

A public hearing that West Virginia lawmakers held Monday pitted oil and gas industry heads and landowner interest groups against landowners themselves on the question of whether a sweeping horizontal gas drilling bill goes too far in infringing on royalty owners’ rights.

The House of Delegates Energy and Manufacturing Committee held the morning hearing in the House chamber on Senate Bill 694, which would set application requirements for horizontal well unit controllers seeking to combine oil and gas tracts to drill wells, expand the state body that regulates deep well drilling, and give options for compensation to owners entitled to lease an oil and gas estate.

Much of SB 694 sets requirements for applicants seeking to unitize, or combine two or more oil and gas tracts or tract portions, to form a consolidated horizontal well unit. The West Virginia Department of Environmental Protection defines a horizontal well as any well site forged through horizontal drilling that disturbs three acres or more of surface or uses more than 210,000 gallons of water in a 30-day period.

The House delayed taking action on SB 694 following the hearing. The House was previously scheduled to entertain any amendments to the bill Monday with a vote slated for Tuesday.

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.

SB 694’s backers hailed it as a long-awaited legislative accomplishment bringing together interest groups that have long fought over provisions to establish unitization in West Virginia, killing similar bills in the past.

“Getting unitization in statute in West Virginia, whether imperfect or not, is indeed a step that makes West Virginia more competitive with other states and provides a clear pathway for future investment,” Gas and Oil Association of West Virginia Executive Director Charlie Burd said.

But SB 694’s landowner opponents said the bill’s negotiators failed to represent their concerns about the bill, which the Senate overwhelmingly approved last month.

“[G]as companies are going to just come in and run rampant across us,” Scott Sonda, a Northern Panhandle owner of 500 acres, predicted if SB 694 is allowed to pass in its current form.

“What I’d really like to see in this bill that hasn’t been put in this bill is transparency,” John Leonetti, owner of 192 acres in Brooke County, said.

Seven of the hearing’s 11 speakers voiced support for SB 694, consisting mainly of oil and gas industry leaders. 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 said the bill is a compromise that would promote economic development while adequately protecting landowners.

West Virginia Royalty Owners Association and West Virginia Farm Bureau representatives also spoke in favor of the bill. Royalty Owners Association President Tom Huber said the bill would compensate royalty owners fairly.

Maribeth Anderson, director of government affairs for Antero Resources, said the bill would result in more property tax revenue for counties.

Northeast Natural Energy President and CEO Mike John noted that gas wells his company drills mainly in Monongalia and Marion counties are “long-reach” horizontal wells 16,000 to 18,000 feet in length, resulting in well bores that intersect a significant number of properties draining a large area.

“This problem of putting long mineral tracts together has plagued development in West Virginia since horizontal development began 15 years ago,” Anderson said.

Anderson noted that longer laterals — the horizontal portion of a well — enabled by technological improvements have made it harder to get to 100% agreement on every piece of property targeted for drilling.

“So, of course we support a solution to that problem,” Anderson said.

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.

The bill also would expand the number of members of the state 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 DEP, 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 would 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.

“We believe that gives folks out in the countryside a voice at the table,” Farm Bureau director of government affairs Dwayne O’Dell said.

SB 694 would authorize the commission to issue horizontal well unit orders and require applicants seeking unitization tracts in a unit to make good-faith offers to all known and locatable royalty owners and operators.

When seeking a horizontal unit well order, applicants would have to describe the proposed unit and nature of the proposed operations, identify target formations, and map unit boundaries and acreage. The map must show the location of each permitted and active oil and gas well in the unit, as well as the name of the operator as shown by DEP records.

SB 694 would hold that a horizontal well unit must not exceed 640 acres, unless the applicant shows that the proposed horizontal well unit area would be drained “efficiently and economically” by a larger horizontal well unit. Under the bill, a horizontal well unit containing one or more horizontal wells would be restricted from containing more than 128 net acres controlled by nonconsenting royalty owners as of the unit application date.

For royalty owners of leased tracts who have not consented to unitization, the 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.

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 equal 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.

Such owners could choose to be considered for unitization, in which case their interests would be considered leased to participating operators, including the applicant, proportionate to their interest in the horizontal well unit. They also could opt to participate in a horizontal well unit as an operator.

Mike Tony covers energy and the environment. He can be reached at 304-348-1236 or mtony@hdmediallc

.com. Follow @Mike__Tony on Twitter.

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