A new precedent that impacts our property rights

A new twist on property rights abuse was sent to me by an out of state colleague. At least I was not aware of this authority until today.

In this case property owners are “encouraged” to lease their mineral rights to drilling companies or lose them altogether. It reminds me of the bogus redevelopment argument of “blight” where Revelli Tire property in Oakland was not blighted, as admitted by Jerry Brown, yet they justified taking his private property that was not for sale as surrounding neighborhood property was neglected.

The following comes to us courtesy of the FW Business Press.

Not to be criticized for “selective” article editing, based on my opposition to eminent domain takings for private use,  I am posting the entire report here while including the story link at the end of this post.

“Gas companies using new tool to pick up unwilling lessees

Fort Worth attorney Jim Bradbury got a letter in the mail from XTO Energy Inc., informing him that he could lease his minerals to the gas exploration and production company or, if not, they’d take them anyway. The Fort Worth company, in the process of being purchased by Exxon Mobil Corp., could use a statute usually reserved for protecting mineral rights owners, but in the reverse, to snatch up unwilling or unavailable mineral rights owners. The company has sent out letters to Mistletoe Heights neighborhood mineral owners in an attempt to encourage them to sign an XTO Energy lease with a 25 percent royalty and $2,400-per-acre bonus. Should the mineral owner ignore the letters or decline to sign, as Bradbury will do, the company will request a force pool application from the Railroad Commission of Texas, which would, as the name implies, force those unavailable or unwilling parties into an agreement to produce.

“It’s compelled leasing,” Bradbury said. “It’s called pooling, and that’s a good term for them because there’s a long history of pooling law… but really it’s compelled leasing.”

The Mineral Interest Pooling Act, or MIPA for short, previously has been used to introduce unleased mineral rights owners – who wanted to lease – into a group of other leased mineral owners, so that both parties could have their minerals realized. But the Railroad Commission of Texas essentially executed the opposite when it reinterpreted MIPA in late 2008 to also allow the force pooling of unleased and unwilling mineral rights owners into a group of willing and leasing mineral rights owners. The pooling act is a section of the Texas Natural Resources Code, established by the Texas Legislative Council in 1963.

In Mistletoe Heights, leases have been acquired from the mineral owners of about 187.83 acres of the proposed 328.18-acre drilling unit, according to an XTO Energy-drafted document sent to neighborhood residents. At the end of November, there were at least 90 lots in the area that needed to be leased so that the drilling program could move forward.

XTO Energy has made similar efforts to force pool in north Fort Worth’s Rosen Heights area and off Hemphill Street at Page Street and near its North Texas Steel lease. Chesapeake Energy Corp. also has filed a request for an East Side drilling unit.

An XTO Energy representative said the company would not comment.

Setting a new precedent

Finley Resources Inc. worked since 2005 to secure leases in the Riverside area of Fort Worth, about one mile due east of Downtown. During that time, the Fort Worth-based company secured 82.9786 acres for a drilling unit, while fellow oil and natural gas firm Chesapeake Exploration LLC leased several lots containing 5.9904 acres. (Another 1.647 acres acquired belonged to Chesapeake, too.)

Two years into leasing, more than 25 lots containing a total of 5.704 acres remained unleased, either because the mineral owners were unwilling to lease or the mineral owners could not be found; In another event, those owners simply wouldn’t have their minerals realized, but the lots’ placement within the unit would have made producing the leased property while avoiding unleased property impossible, according to Finley Resources.

The total 96.32 acres comprised of more than 300 lots had to be treated as one entity, the company said.

Finley Resources sought the help of the Railroad Commission of Texas, which regulates all oil and natural gas activity within the state.

After a lengthy, one-year review process in which Chesapeake Exploration and others also threw their hats in the ring in support of the force pool, the commission’s examiners eventually recommended the commissioners adopt Finley’s application, but at the behest of Commissioners Elizabeth Ames Jones and Victor G. Carrillo, the current chairman.

Carrillo and Jones signed the order Aug. 25., making it the first time the Railroad Commission of Texas had interpreted MIPA to offer protection for drilling companies, and not just mineral owners. Fellow Commissioner and then-Chairman Michael L. Williams did not vote because he already had voted on the examiners’ June opinion, which recommended denying Finley’s application for a force pool.

“There’s almost an eminent domain essence to it,” Bradbury said, “where an operator can come in and say, ‘Through this Finley decision we are going to put you under a lease or get hold of your minerals by force of law.’”

Finley’s significance

“There’s no doubt that as soon as Finley came about a year ago, the landmen negotiating for these companies latched on to it as one more tool they can use, and are saying, ‘Well if you don’t sign a lease we’re going to force pool you anyway,’” said Bob West, an oil and gas attorney at Whitaker, Chalk, Swindle & Sawyer LLP.

The decision was significant because it was the first time the commission had viewed the MIPA in this way, and also because it represented an inconsistency in the opinions of the commissioners and the agency’s examiners, West said.

Commissioner Williams, who previously has said he was against the pro-Finley decision, declined to comment for this article because the issue is appearing in the Barnett Shale again.

Bradbury isn’t opposed to gas production, but doesn’t think gas drilling belongs in an urban setting. Still, he said he passes no judgment on his neighbors’ decision to sign a gas lease with an energy company.

“It’s not what I wanted to do, but that’s their house and those are their minerals. And I’m OK with that,” he said. “This is my house, these are my minerals and I want to be the one who makes those decisions.”

An XTO Energy representative asked Bradbury how much money it would take to get him to sign over his minerals.

“There’s no amount of money or Exxon stock you can give me to change, because it’s just a principle issue,” Bradbury said he told the representative.

Lisa Vaughn, a partner at Shannon, Gracey, Ratliff & Miller LLP, said the Finley move is less an erosion of unwilling mineral owners’ rights and more a protection of willing mineral owners’ rights. In an urban setting where lots can be as small as a quarter of an acre, she said, frequently there can be many missing chunks that would make a drilling program impossible to execute without their inclusion – a checkerboard situation in which some are leased, and some aren’t.

“None of the people in this checkerboard holding would be able to maximize their minerals or access them at all without all of them,” said Vaughn, adding, “To say it’s an erosion of rights is to look only at the mineral owners who don’t want to drill for whatever reason.”

Mineral owners are well-protected by the Railroad Commission of Texas and its requirements that gas companies must meet before applying for a force pool situation.

“Like many statutes, the Mineral Interest Pooling Act is an attempt to balance the conflicting interests of everyone involved,” she said. “There needs to be some sort of mechanism to help them all move in the same direction, but obviously not all have precisely the same goals or desires.”

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