1. Pooling in West Virginia A Historical and Prospective Analysis

2. Overview – What is Pooling?
Pooling – the integration of tracts or fractional mineral interests to meet state spacing requirements—e.g. State XYZ requires a minimum of X feet between wells drilled to the ABC formation:
Lease A
Lease B
Well
Unit

3. What is Pooling?
Pooling is the assembly of leases and pieces of leases to create a drillable site under state spacing laws, rules and regulations
NOTE: WV has NO spacing laws, rules and regulations
THUS: There is NO “pooling” in West Virginia utilizing the standard, classical definition
BUT: Broadly used term anyway!

4. Unitization Unitization:
joint operations on large scale – e.g. “unit operation”
combines leases to develop entire reservoir or defined parts of a reservoir
Select Field Area – Operated as one unit B D G A C F E

5. Unitization
“. . . the joint operation of all or some portion of a producing reservoir.”
Unitization is important where there is
separate ownership of portions of the rights in a common producing pool
in order to make it economically feasible to develop minerals at considerable depths.
The best results in conservation can be attained only by unitization.
W&M Manual of Oil and Gas Terms

6. Types of Pooling and Unitization
Voluntary
Pure matter of contract between Lessor and Lessee (typically through lease provision or through lease modification)
Usually a right granted to Lessee subject to defined limitations
Usually triggered by the recording of a declaration of “pooling and unitization”

7. Policy Behind Pooling & Unitization
Encourages efficient land use
Ensures mineral development for owners of small tracts whose minerals would not otherwise be developed
Ensures that non-consenting owners cannot impede development of co- tenants’ or neighbors’ minerals

8. Pooling in West Virginia
Statutory Pooling
Shallow Wells
Deep Wells & Secondary Recovery
Coalbed Methane Wells

9. Pooling in West Virginia
Shallow Wells
W.Va
Defined as “any gas well, other than a coalbed methane well, drilled no deeper than one hundred feet below the top of the “Onondaga Group”: Provided, That in no event may the “Onondaga Group” formation or any formation below the “Onondaga Group” be produced, perforated or stimulated in any manner.”

10. Pooling in West Virginia
Shallow Wells – Pooling Process
** Not available generally **
Was included in WVDEP Regulatory Legislation in 2011 Regular Session, but was not passed
Marcellus “fatigue” prevented consideration in 2012

11. Pooling in West Virginia
Deep Wells
W.Va. 22C-9-1, et seq.
Defined as “any well, other than a shallow well, drilled and completed in a formation at or below the top of the uppermost member of the ‘Onondaga Group.’”

12. Pooling in West Virginia
Deep Wells – Pooling Process
Operator must drill “discovery well” to establish pool
Application then filed by operator of well or other operator affected by a well in the pool
Notice, including area to be covered by spacing order
O&G Conservation Commission enters order setting spacing and acreage for each drilling unit
Must have lease/agreement on tract where drilling operations will be located
Operator must have written consent and easement from surface owner of record identifying the well location

13. Analysis of 2010 – 2011 Proposal Senate Bill 424
Incorporated new pooling provisions for shallow horizontal wells into existing Deep Well statute
Provided for administrative pooling of leased and unleased tracts
Included a fix to legislatively reverse the Tawney decision by authorizing deduction of PPEs
Pooling provisions were included in comprehensive regulatory proposal addressing development of Marcellus Shale
Pooling quickly became known as “forced pooling,” and was labeled a taking by critics

14. Observations – Why Pooling Failed in 2011
Regulatory Portion of SB 424 overshadowed pooling provisions and Legislature had not yet reached consensus on regulatory provisions
Lack of unified position within industry
Coalition of diverse, vocal opponents to development had platform to oppose bill from environmental, surface owner and royalty owner points of view
Tawney fix portion of pooling provisions created additional challenges not squarely related to pooling concepts
Critics had defined public perception of industry leading up to 2011
Industry had not adequately educated Legislature on topic

15. Path Forward Two options: pooling or lease integration?
Expand Deep Well Conservation Law
Traditional pooling for shallow horizontal wells
Apply to leased and unleased tracts
Follow current procedure established by the WV Oil and Gas Conservation Commission
WV Code Section 22C-9-1 and 39 C.S.R 1 and 2
Create Lease Integration Statute
Authorize integration of leased tracts
Cannot integrate unleased tracts or tracts controlled by others
Limited version of existing Deep Well Conservation Law
Limit to shallow horizontal wells

16. WVONGA Decision Pursue Lease Integration legislation in 2013
Proposed legislation provides that Lessee:
Must own or control leases for 100% of mineral interests in tract.
Must use reasonable efforts to obtain lease modifications to authorize pooling.
Can seek order to integrate leases that do not have pooling clauses if
Mineral interests are unknown or unlocatable, or
Have obtained modifications authorizing pooling from majority (final percentage to be negotiated) of mineral interest owners.
Order will authorize the integration of the leases, which authorizes pooling of the gas in the unit.
Order will require the operator to pay the mineral interest owners a lease modification payment, the exact terms of which are still being negotiated.

17. Big 191H 62 acre lease tract Producer holds lease (lessee)
No pooling clause in lease
Thus, must modify lease to allow for pooling
21 interest owners
14 signed lease modification
6 unknown / unlocatable
1 refused to sign lease modification
Cannot drill two laterals on BIG 191H
Oil and gas will likely be left in ground
Lateral shortened on BIG 190H H9 well
Reserves will be left in ground

18. Oxford 152 Pad 200 acre lease tract Producer holds lease (lessee)
No pooling clause in lease
Need to modify lease
49 interest owners
47 signed lease modifications
2 refused to sign
0.0008% interest non-consent
Must shorten 8 laterals
Can’t drill 1 lateral
Acreage will be stranded and oil and gas will not be developed
The 2 parties that refused to sign lease modification wanted $50,000 each for the lease modification.

19. Successful Legislative Strategies
Horizontal Well Control Act (Marcellus Bill)
Special Session December 2011
Only 5 “No Votes” out of 134 Members
Provided first step toward regulatory certainty
Mine Safety Bill (Response to UBB Disaster)
Regular Session 2012
Unanimous Approval
Sufficient Compromise Achieved

20. Common Core Strategies
Build consensus within the industry first
Involve the interested parties early
Establish good rapport with Governor’s Office and legislative leadership in both Houses
Convene working sessions with interested parties
Work with Chairmen and key committee members
Maintain consistent message and outwork opponents

21. Points to Take Away
Lease integration is a good first step in an incremental legislative strategy
WVONGA and IOGA must work together
Enlist early support of Governor and legislative leadership
Reach agreement on as many issues as possible with other interested parties
Actively engage during legislative session, and remain agile in order to respond to unanticipated developments

22. Thank You! G. Kurt Dettinger Charleston, WV

23. Material Disclaimer
These materials are public information and have been prepared solely for educational purposes to contribute to the understanding of energy and oil and gas law. These materials reflect only the personal views of the author and are not individualized legal advice. It is understood that each case is fact-specific, and that the appropriate solution in any case will vary. Therefore, these materials may or may not be relevant to any particular situation.  Thus, the author and Steptoe & Johnson PLLC cannot be bound either philosophically or as representatives of their various present and future clients to the comments expressed in these materials. The presentation of these materials does not establish any form of attorney-client relationship with the author or Steptoe & Johnson PLLC. While every attempt was made to insure that these materials are accurate, errors or omissions may be contained therein, for which any liability is disclaimed.