The Marcellus Shale gas boom has been created in part because of advances in drilling technology.  Drillers can now reach the Marcellus Shale, which is 5,000 to 9,000 feet
below the surface, and then drill horizontally into the shale up to a mile or more from the well location.  Multiple wellheads are drilled at a single site with individual horizontal wells, known as “laterals,” being spaced roughly 1,000 feet apart and parallel to each other.   If viewed from a bird’s eye, a large drill site would look like a pitchfork with parallel laterals being the tines.  One of these large drilling units can easily cover more than a square mile.

In order for a drilling company to put together a large tract of gas rights for the purpose of horizontal drilling, the drilling company must form a “unit”.  This typically means that several adjoining tracts of gas rights under lease are “unitized,” and all developed together at the same time.  A unit can consist of one or two large parcels or a great many smaller parcels.  Typical units can consist of several hundred to more than 1,000 acres.

These large units are necessary to allow the drilling companies to justify the large capital expenditures required.  Unitization also reduces the disruption of the surface because fewer drill sites are needed.

The companies cannot drill through a gas owner’s land without permission; that is, without a negotiated lease in place.  All of the gas owners who have leased and are located within the unit will share in the royalty created by gas production within the unit.  It should be noted that the method of configuration of the unit by the drilling company is not regulated by law in Pennsylvania.  The unit can be any shape the company chooses.  It can follow property lines, or not, as the company may decide.

There is no requirement that the owner of gas in the Marcellusformation lease that gas.  If an owner of gas chooses not to lease it, then that gas would therefore remain undeveloped, with a number of negative consequences.  The owner of oil and gas
on the opposite side of the non-leasing gas owner would be “blocked” and the lateral could not reach the blocked gas owner.  That gas owner would end up in the very unhappy position of not being able to realize royalty income even though they wished to.  The non-leasing gas owner may also cause one or more laterals not to be developed at all because the companies cannot afford economically to drill laterals that are too short.  As a result of this “stranded” gas, a number of consequences flow:

1.  No local, state and federal income tax is paid because no royalty is paid;
2.  No gas is produced from the unleased land, thereby developing the remainder of the gas field in a very inefficient manner;
3.  A certain number of Marcellus related jobs will be lost; and
4.  Owners of “blocked” gas will not be able to profit from their valuable property right.

All geologists and engineers who study the energy industry agree that the development of gas in the Marcellus fairway should be “efficient”.  That means that where drilling takes place, as much gas as reasonably possible should be extracted, and pockets of unleased gas should not be left behind because they may not be recoverable in the future.

The failure to maximize development of the gas field is caused not only by reluctant gas owners to refuse to lease.  Sometimes the drilling companies have leased tracts of gas interspersed with each other, and they cannot agree on how units could or should be configured; they cannot agree on how leased parcels should be “swapped”.

Some states have reduced these problems somewhat by adopting laws requiring “compulsory integration,” sometimes referred to as “forced pooling”.  Compulsory integration simply means that under certain circumstances, a drilling company is permitted to develop the oil and gas owned by parties who have not leased.

Compulsory integration is not a new concept in Pennsylvania.  The Pennsylvania Oil and Gas Conservation Law presently provides for compulsory integration for certain other gas deposits, but does not include the Marcellus Shale by definition.  Compulsory integration is the law in certain other energy states including Texas.

A well-drafted compulsory integration statute can maximize the efficiency of gas production, and ensure minimal disruption of the surface.  Compulsory integration statutes typically have certain characteristics in common, such as:

1.  Absolutely no disturbance of the surface is permitted on unleased land;
2. The owner of the gas placed into a unit because of compulsory integration will receive royalties according to an agreed upon accepted formula;
3. Compulsory integration actually can protect the owners of smaller parcels during lease negotiations because it creates a royalty “floor,” which the company cannot go below;
4. The statute typically provides for notice and a hearing before gas rights can be placed into a unit by means of compulsory integration;
5. Most statutes require the drilling company to have leased already a certain amount of acreage surrounding the unleased parcel before compulsory integration can be imposed.  This number ranges from 51% to 95% depending on the jurisdiction;
6. Compulsory integration can eliminate “stranded gas” and provide that all owners of oil and gas who wish to be leased cannot be blocked;
7. Both gas owners, and the drilling companies can petition to have gas included in a unit by means of compulsory integration.

Compulsory integration is similar in the minds of some opponents to eminent domain.  They view it as the taking of private property by the government against the wishes of
the owner.  However, in every case, compulsory integration has no impact on the surface; all activities on the land in question are being done thousands of feet under the surface.  There are other common intrusions on private property rights about which people don’t complain.  For example, aircraft fly through our private air space on a daily basis.  We don’t object because the need for air transportation is something we all accept; these aircraft typically have no impact on us at all.  Compulsory integration involves a similar concept.  Most of us agree that the need to develop domestic energy resources in an efficient manner is very important.  This public policy consideration may  outweigh the technical trespass that occurs a mile under our feet.

The Governor’s Marcellus Shale Advisory Committee has recommended that the Pennsylvania Oil and Gas Conservation Law be updated to include the Marcellus Shale formation.  The National Association of Royalty Owners (NARO), an organization that represents the rights of land owners, is in favor of a reasonable compulsory integration law.  Compulsory integration of the Marcellus Shale may become a reality in the near future.
Visit our website at www.bmvlaw.com.

James H. McCune, Esquire

Partner at Bassi, McCune, & Vreeland, P.C.

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