Originally published by John McFarland.
A recent case from the Ohio Court of Appeals, Fifth Appellate District, raises some interesting questions about forced pooling. The case, American Energy – Utica, LLC v. Fuller, Case No. 17 CA 000028, involves an oil and gas lease covering 40 acres in Guernsey County, Ohio, dated in 1981. The lease was held by production from a single vertical oil well. In 2009 Enervest acquired the lease; it subsequently assigned the deep rights to American Energy.
American Energy wanted to form pooled units to drill horizontal wells in the Utica formationl The lease contained a handwritten provision: “Unitization by written agreement only!” so American asked Fuller for consent to pool. The parties could not reach agreement on pooling Fuller’s lease, so in 2015 American Energy filed an application under Ohio law to force a portion of Fuller’s property into a pooled unit. Fuller then sued to prevent his tract from being force-pooled and for breach of the lease. The trial court granted American Energy’s motion for summary judgment, holding that American had the right to force-pool Fuller’s lease despite the lease language.
The Court of Appeals reversed. It held that, “while we do not disagree that [Ohio’s force-pooling statute] permits unitization of the lease, we do find that in this case, doing so without Fuller’s written agreement was a breach of the lease agreement.” It remanded the case to the trial court “to make a determination of the appropriate remedy.”
The court cited a 1992 Ohio Supreme Court case in support of its conclusion, Burtner-Morgan-Stephens Co. v. Wilson, 5865 N.E.2d 1062 (1992). In that case a landowner challenged the right of his lessee to force-pool his lease on the ground that his lease pre-dated the statute authorizing forced pooling, and thus violated the Ohio Constitution’s prohibition against laws impairing the obligations of contracts. “While the state’s police powers permit the General Assembly to enact legislation governing pooling arrangements, spacing, unitization and other oil and gas drilling regulations, a provision such as that found in [the forced pooling statute] cannot, under the specific facts of this case, be used to retroactively impair the obligation of the contract set forth in the 1949 lease.”
It’s not clear to me that the result in Burtner mandates the result in American Energy. Fuller’s lease did not predate the forced pooling statute. The court held that the Fuller lease was force-pooled. But the lessee breached the lease by doing so. The only remaining issue is what remedy the lessor is entitled to for that breach.
The problem is with the remedy. If American had filed a designation of pooled unit including Fuller’s tract, presumably that act would be ineffective under Fuller’s lease – his lease would not be pooled. Why would Fuller’s attempt to pool by statute be different? If Fuller is force-pooled, how can he prove that he was harmed? What are his damages? What if Fuller’s lease had provided that pooling without his consent results in termination of the lease? Would the court be required to enforce that remedy despite the forced pooling statute? Would Fuller’s mineral interest, now unleased, still be part of the forced-pooled unit?
The Texas Constitution also has a provision prohibiting laws “impairing the obligation of contracts.” Art. 1, Sec. 16. So if the Texas legislature were to adopt a forced-pooling statute, could that statute apply to oil and gas leases entered into before adoption of the statute? For the lessee to argue that application of the statute impaired his lease contract, would the oil and gas lease have to expressly prohibit forced pooling, or would it be enough that the lease prohibited pooling without consent? What if the lease permitted pooling, but with restrictions, so that the lessee could not form the unit it wanted without invoking the forced pooling statute? Would force-pooling the tract be an unconstitutional impairment of the contract?
Or suppose that a standard oil and gas lease is construed to not authorize the drilling of allocation wells, and the legislature adopts a statute authorizing allocation wells? Would application of that statute to leases entered into prior to adoption of the statute violate the Texas Constitution’s prohibition against laws impairing the obligation of contracts?
Issues surrounding pooling are fascinating and never-ending.
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