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West Virginia’s oil & gas laws were last revised in 1981 when surface owners were given only 15 days’ notice before the drilling commences, but no options for input about what parts of their property will be taken by the operators, etc. The damage compensation enacted that year also was limited. The tripling of well permits issued in recent years has brought to a head the need to be further update our laws to enforce surface owners’ common law “fairly necessary” rights and otherwise level the playing field between the drillers and surface owners. Changes needed to ensure good stewardship of the land and more economic fairness in West Virginia's oil & gas fields include:
Myths and Facts About West Virginia Surface Owner's Bill of Rights
Proposed Rules Tighten Oil, Gas Drilling in State Forests (12/20, The State Journal) Additional Information and Background This initiative got started when the operator of gas wells in Kanawha State Forest abused the Forest by cutting a huge, hideous new road and in cutting it in the wrong place. The operator also scraped vegetation off a road instead of using proper maintenance; and made huge well sites like this one: (far left, left, middle, right). The West Virginia Legislature’s Rule-Making Review Committee has approved a new rule proposed by the Department of Natural Resources (DNR) to control oil & gas drilling in state forests. The rule was required by a bill passed during the 2007 legislative session and requires the driller provide earlier notice to state forest officials and the public about drilling and maintenance activities in our forests. The notices will be posted on the DNR website and e-mailed to those who have requested them. For a new well, the notices will also be published in a local newspaper. The public can then submit comments for DNR to consider when it responds to the driller’s plans and permit application. The rule requires the driller to consider recreational uses, natural resources, and endangered or rare species known to DNR or that are identified by the public. It prohibits cutting trees on the side of access roads, called “daylighting”, unless DNR specifically agrees. The steepness of roads is limited, and extra stabilization and erosion control structures are required. It allows DNR to suspend road building and other activities, other than actual ongoing drilling, during inclement weather. Re-vegetation of well sites and roads is improved by requiring seed mixtures that are friendlier to wildlife. DNR can require native seeds if they are effective and not too costly. Improved road maintenance practices are required and bulldozer “blading” of roads for maintenance is limited. The rule requires most roads to be gated and for the driller to compensate the state for damages if a gate is left unlocked. While we preferred to have a public hearing, not just written comments, and would have liked the driller to be required to do a full biological inventory of the surface they are proposing to disturb, we believe this is a huge step for our forests and forest users. The state’s rights as a surface owner, where the state does not own the minerals, will be better honored now, and the public, who really owns the forests, will have some real input once the rule is approved by the full legislature. The Rules passed the Legislature without further amendments or other problems. They will go into effect when they are “finally filed” by DNR, which should be soon after the legislative session ends. Many thanks to Senator Fanning for taking such strong leadership on this, and to Delegate Bonnie Brown, chair of the Rule Making REview Committee for helping see the Rule through. Also thanks to Senator Fannings legislative staff lawyer Noelle Starek, and Delegate Brown's lawyer, Brian Skinner, for hard work on this. The next step is for the Kanawha State Forest Coalition that got this done to sit down and meet and decide where to go from here. We need to read through the Rule again and think about how to be ready when the notices etc. Also we need to follow through on an earlier idea about how to help the Forest police the drillers and their treatment of roads etc.
The latest “play” in the oil and gas industry is to the Marcellus formation. Over two thousand gas wells are planned over most of the “gas patch” in West Virginia. We are getting many questions because landmen are blanketing West Virginia and approaching surface owners who are lucky enough to still own their minerals and not have leased them yet. Most of this increased activity is about leasing and drilling to the Marcellus formation. These landmen are trying to get surface owners to sign their "standard" lease that gives little surface use protections, gives less than $20 an acre up front money, and has clauses allowing things that are very bad for surface owners including storage, injection and secondary recovery. The bad clauses can be negotiated out of the lease, surface owner protections can be negotiated in, and we have heard of offers of $125 an acre in Preston County to up to $1,500 an acre in parts of Pennsylvania were the Marcellus is thicker. We have therefore started a whole new page for for surface owners who are being approached by landmen. Well spacing is good for surface owners because only the number of wells necessary to produce the gas will be drilled. Without well spacing, the “rule of capture” applies and the driller with the right to drill on every mineral tract included in a pool of gas, no matter how small, can drill his own well and legally steal the gas from his neighboring mineral owners. The result is extra, unnecessary wells racing to get the gas out first from the same pool. In fact, the extra unnecessary wells will result in less total gas getting produced out of the pool, leaving some of the resource in place, than if the smaller right number of wells were used. Well spacing is good for consumers because drilling fewer wells to get out more gas means less cost to get out the gas. It is good for everyone else in the process because it saves money and produces more gas than using the extra wells that get drilled with the “rule of capture” applies. (‘Royalty sharing” goes hand in hand with well spacing. It allows the sharing of royalties among all the mineral owners that each well drains. In the statutes this process is called “pooling and unitization”) Drillers can only be forced to do well spacing if the well is a statutory “deep well” (and those are unusual), or if it is a shallow well above a coal seam and the coal seam owner wants it, or if it is a coal bed methane well. Also, if the well is a “statutory “deep well’” the driller MAY have to get new consent form the surface owner to drill on the surface owner’s land! Unfortunately the State is interpreting that provision in a very narrow way. There is currently a dispute whether wells into the Marcellus formation are statutory “deep wells” requiring well spacing and royalty sharing, or whether they are statutory “shallow wells” allowing the rule of capture. WV SORO likes have the Marcellus formation wells being statutory “deep well”. The wells will be spaced properly so there are fewer wells. In addition more surface owners will get to consent to the well location. The State Oil and Gas Conservation Commission has ruled that Marcellus wells are statutory deep wells. Here are links to text and map of the legal advertisement for the Oil and Gas Conservation Commission's proceeding ruling on thousands of acres in Kanawha, Clay, Roane and Braxton Counties. Here is the Commission's order in the proceeding for Boone, Lincoln and Logan Counties. There were other proceedings and other orders for other areas. Here is a map of the areas that are the subject of these proceedings. At a special session of the Legislature the bad guys tried to get the Legislature to pass a statute overruling the Commission, but WV SORO and others were able to kill it. WV SORO is pleased that the Oil and Gas Conservation Commission also ruled that the Marcellus wells are deep wells, but does not like its ruling that the wells could be spaced within on 1000 feet of each other, instead of 3000 or at least 1500 feet of each other. The West Virginia Coal Association and some oil and gas drillers have now filed a Petition for a "Writ of Prohibition" in the West Virginia Supreme Court of Appeals to prevent the Oil and Gas Conservation Commission from declaring Marcellus wells to be "statutory" "deep wells". Here is a copy of the Petition and here are the exhibits that were attached to the Petition. Here is a copy of the Brief of the State agency defending
its position that the Marcellus wells are deep wells. Here are briefs of Chesapeake Appalachia and of Eastern American Energy Corporatoin also defending the agency decision. WV SORO has filed a "friend of the court brief" in the Supreme Court case. Attached is our Motion for leave to file the brief together with the Amicus Brief itself. The Supreme Court has now issued an order granting our motion to consider the amicus brief." The petitioners then filed a Reply Brief, to which WV SORO filed a second amicus response. Oral argument was March 12, 2007. WV SORO’s amicus brief was referred to. Justice Starcher seemed in our favor on the grounds that the petitioners were asking the Supreme Court to legislate. Justice Albright at first was leaning towards believing that the case should have started in the Circuit Court or in an administrative agency appeal, but may have been backed off of that. Justice Maynard seemed primarily concerned about how much coal would be sterilized, but allowed that getting gas out was important also. So it is hard to tell what will happen with the suit. It could be several months before a decision is made. More info on the Marcellus shale formation. Stay tuned. Coal Bed Methane Horizontal Drilling The State Department of Environmental Protection has not decided whether it will require pre-drilling water well testing withing 1000 feet of horizontal coal bed methane well bores, or just within 1000 feet of where the vertical portion of the well is drilled into the ground. First DEP said DEP would, then DEP said DEP would not, then the Legislature told DEP to study it, then DEP said DEP needed more information and would have the industry do testing to get it for them, now DEP say DEP will so the testing to get more information themselves, but DEP has not done it yet. WV SORO is still waiting for DEP to act. WV SORO also believes that a law suit could be brought against DEP to require the water well testing and that such a suit has a good chance of success. Click here for more information on Coal Bed Methane.
Mineral owners generally sign "leases" to operators/drillers. The leases almost always provide that the mineral owner gets paid a 1/8th "royalty", and the operator keeps 7/8ths of the value of the gas in order to, theoretically, reimburse the operator for the cost of drilling the well, getting the gas to market etc.-- plus a profit. Most leases provide that the value of the gas is determined "at the well head" etc. That was where the operator sold the gas to someone who owned the gathering lines, who sold it to someone that processed the gas, who sold it to interstate pipelines, who sold it to the utilities, who sold it to consumers and businesses. In the years after the leases were signed, this organization of the industry changed. Now the gas is only "sold" in an arms length transaction after it has been gathered and processed. The gas is worth more there because it has been gathered and processed. Operators did not want to pay mineral owners 1/8th of that value, since it was higher than the well head value. So without re-negotiating the leases, often in violation of the lease language, and sometimes without even notifying the mineral owners, the operators subtracted expenses from the post-processing value before calculating the mineral owner's 1/8th royalty. Mr. Tawney went to a lawyer because his royalty check was smaller than his neighbor's. It turns out that not only were subtractions frequently in violation of the lease language, but the operators were fudging their expenses and subtracting all kinds of indefensible expenses, and using prices negotiated with wholly owned subsidiaries. Their legitimate 7/8's was not enough. A class action was brought against some of the producers. In a preliminary ruling the West Virginia Supreme Court agreed with the plaintiffs. Then after a trial, the jury gave a verdict of more than $133 Million in actual damages and $270 Million in punitive damages. After the trial, the trial judge made a ruling (part 1, part 2) that the jury's finding of punitive damages was proper. During the case the Circuit Court also made a ruling on "flat rate royalties" that will be helpful to small surface owners. If you have such a royalty provision, we suggest contacting a lawyer. The oil and gas companies filed an appeal to the West Virginia Supreme Court on February 12, 2008. They alleged 64 errors by the Circuit Court in a monstrous145 page Petition for Appeal. WV SORO is considering filing an "amicus" (friend of the court) brief. No date has been set for argument. The producers have already tried to get the Legislature to pass a statute in a special session getting them out of this and future verdicts. (Other class actions are filed against other producers.) WV SORO helped educate legislators about this from the surface owner/small mineral owner point of view, and the bill died. It will be back in the regular session beginning in January 2008. If you think you are a member of one of the classes you should contact one of the lawyers representing the classes. Or contact a local lawyer who can help you figure out if you are a class member or if you need to bring your own suit.
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