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Mississippi Force Pooling Rant and Changes Coming

Posted by bernell on September 17, 2014

I've got a sermon of sorts tonight on the subject of Mississippi’s Force Integration letter. 
I hope you are in the mood.

(For those of you 50+ years of age, this subject has nothing to do with children and K-12 education.)

A lot of you Mississippi mineral owners in the past have gotten force integration letters and another batch is now being sent out.

We’ve somewhat ignored the significance of these letters until recently when an individual leased to a non-operating company in a permitted unit only to have the lessee inform the owner/lessor a few months later that it was not possible to honor the lease due to the force integration provision in the law.  The facts of that particular situation are more complicated than I will attempt to deal with here, however, so this epistle is not specifically about that special circumstance.

Rather, that particular situation brought renewed focus on the force integration letter.

I posted a little about it a week or so ago, but my improved understanding of the subject, along with this new wave of force integration letters, merits touching on the subject again.

Please understand that I’m going to ramble a bit as a novice/layman/frustrated citizen of Mississippi, but if you will follow me to the end I think you will be better informed if you are a mineral owner and possibly embarrassed if you are an operating company.

And I hereby request anyone with a better understanding of the subject to feel free to chime in.

As background, the force integration provision of the Mississippi Oil and Gas Board’s rules is from MS Code Section 53-3-7 and can be found at this link:

The essence of this provision for purposes of our discussion is, as follows:
“(2)(a) In the event that one or more owners owning not less than thirty-three percent (33%) of the drilling rights in a drilling unit has voluntarily consented to the drilling of a unit well thereon, and the operator has made a good faith effort to (i) negotiate with each nonconsenting owner to have said owner's interest voluntarily integrated into the unit, (ii) notify each nonconsenting owner of the names of all owners of drilling rights who have agreed to integrate any interests in the unit, (iii) ascertain the address of each nonconsenting owner, (iv) give each nonconsenting owner written notice of the proposed operation, specifying the work to be performed, the location, proposed depth, objective formation, and the estimated cost of the proposed operation, and (v) offer each nonconsenting owner the opportunity to lease or farm out on reasonable terms, or to participate in the cost and risk of developing and operating the unit well involved, on reasonable terms, by agreeing in writing, then the operator may petition the board to allow it to charge alternate charges (alternate to and in lieu of the charges provided for in subsection (1)(b)of this section).”
First, the bold and underline shown has been added by me.  This portion of the law has been ignored by both the MS Oil and Gas Board and by operating companies.  By ignoring this portion of the law the entire process for the past three years is brought into question.

It appears the MS Oil and Gas Board has become aware of this embarrassment and has made plans to correct the problem IN THE FUTURE.  The question will remain for cases before the correction until courts deal with it.

As a little further background, we had a public presentation from a paid consultant a couple of years ago in Liberty, as well as in Pike and Wilkinson counties.  A representative from the MS Oil and Gas Board came to the Liberty meeting.  
At this time the force integration/pooling provision of the law was briefly brought up and the board member stated that the oil companies filed an affidavit stating they had “made a good faith effort to negotiate with each nonconsenting owner.”

At the meeting I laughed openly at the guy and simply asked him, “And y’all believe them?”

He didn’t respond. 
But, at least one board member has heard, in a public forum with at least two hundred people as witnesses, about this issue well over two years ago.
Thus, let the record show this is NOT a new issue and the MS Oil and Gas Board hasn't just recently been made aware of the problem.

So, what has gone on before and during the intervening time is these operating companies have focused on the “33%” portion of the rule. 

That is, they have targeted areas where they wanted to, and generally did, get enough of the area under lease so that other operating companies (with few exceptions) wouldn’t bother them.  If they have 68% of the mineral acreage in an area, obviously, they are in control.

Then, WITHOUT MAKING A GOOD FAITH EFFORT TO NEGOTIATE WITH EACH NONCONSENTING OWNER TO HAVE SAID OWNER’S INTEREST VOLUNTARILY INTEGRATED INTO THE UNIT, the operating companies apply for a permit to drill and send out a “force integration” letter.  I’ll explain what the force integration letter has meant, as I understand it, and what it may mean soon, as I understand it, after I ramble and rant a little more.

I have coached and I have umpired baseball and fast pitch softball.  As a coach, I certainly want to know the rules, but, more importantly, I want to know how the rules are going to be enforced.  If a pitch above the waist is a ball, then, fine.  We can play that way, though that isn’t the rule.  If I don’t coach the reality of the game, frankly, I’m putting my players in a position for failure.  No coach can do that in a game that isn’t reviewable.  Whatever the umpire is calling a strike is a strike, no matter whether the calls bear any resemblance to the written rules. Besides, everyone is playing by the same "rules" in that particular game.

So, if I’m an oil company out there trying to get as much acreage controlled as possible and I only need to get 50% or so of a section to control it, then these oil companies have taken the position that “I’m not going to waste time trying to find and negotiate with every 2 acre mineral owner in the section.”  ‘Everybody is doing it.’ means I’m playing by the ‘rules.’  Right? “

No, it doesn’t.  Especially not if the game can be “reviewed” after the fact by the courts.  But the fact is that the operating companies are given an unfair advantage in the negotiation game.  Unleased mineral owners are taking their turns at the plate without a bat while the oil companies mow'em down.  It isn't a fair game.

Rant over…for now.

What a force integration letter does today, as I understand it, is that it gives the unleased mineral owner/secondary lessee of mineral rights in a unit notice that he/she must either:

a. Lease/farm out to the operating company (at, basically, whatever price and terms they want).

b. Pay your proportional part of the drilling/completion costs ( and agreed upon royalties if a lessee).

c. Do nothing and have 250-300% of the costs of drilling/completing the wells and 100% of the cost of operating the wells withheld from your portion of the well income until paid out.

Currently, at some defined point roughly a month and a half after your get the letter, you can’t reasonably expect to negotiate your mineral rights with anyone other than an operating company, which more or less means the operator applying for the drilling permit.  So, in essence, you have no negotiating ability whatsoever.  You are at the mercy of the operating company.

If you ignore the letter and don't act, then the 250-300% rule kicks in.

You may never have been contacted by anyone before the letter went out. 
In fact, in some cases, you may have attempted to lease your 5 acres of minerals to the same operating company as your 500 acres owning neighbors only to be ignored. 
Or, you may have been previously leased to the operating company, but the company chose not to renew the lease since it already controlled enough acreage without you.

Now, as I mentioned, the MS Oil and Gas Board has apparently heard enough complaints to finally become convinced that these oil companies have been filing false affidavits. 

(No, it wasn’t a mistake.  It was intentional.  Don’t even try to lie about it. And, “everybody is doing it” didn’t work when you were a kid and it doesn’t work today.)

So, the word is that, effective with the November applications, a mineral owner cannot be held to the force integration provisions until he has actually been contacted and a reasonable effort to negotiate has been made AND the owner has rejected the offer.

Now, I haven’t seen this in writing and I don’t know exactly how this will work.

But, it explains a lot of things.
(Sorry…a little more ranting.) 
It explains, for example, why we had nearly 40 unit permit applications in August and nearly 60 unit permit applications in September and why it looks like another big month is building for October.

You know, as an umpire I have had occasion to see where a game was simply a walkathon.  Neither team’s pitcher could throw in the same zip code as the strike zone.  I’d wait until a full inning ended (usually the bottom of the first) and walk over to each dugout and tell each coach.  “Deep and wide strike zone from here out, Coach.” 

The MS Oil and Gas Board apparently went to these operating companies and told them a few months ago, “Hey, guys, we’re going to start calling the game differently in a few innings…umm….months, so you might want to load up on these easy units.   In the future, you’re going to have to actually start following the rules.” 

No, I didn’t overhear the conversation, but I’m convinced it occurred.  And, there was no fair warning given to the mineral owners out there to be prepared for this onslaught of applications or to prepare for what was happening.  (You know, like, "Hey, Small Mineral Owners!  If you aren't leased under favorable terms today, we encourage you to actively seek lessees for your property.  Otherwise, you may get force integrated soon!" Nah...that would have been the right thing to do.  Or, actually, the right thing would have been to stop the force integration process cold turkey until things could be figured out.)

Instead, for several months now the motivation by these oil companies has been to hurry up and get as many mineral owners as possible force integrated....keep throwing strikes to batters without bats is the way I see it.  It has not been and remains an unfair situation.

But the question now is, what will this mean going forward when the mineral owners come to the plate WITH a bat?

What it will mean is that people who have been trying to lease their properties to a company that already has 75% of the leases in their section of land , BUT WHO HAVE NOT OBTAINED A PERMIT TO DRILL, will suddenly not be ignored when they call.  They won’t hear, “We’re not leasing in that area right now."

Also, if a mineral owner simply wants to wait and see what happens (something that appeared to be dumb to do under the current “playing rules”) can now do so or can shop around once he is aware the property is of imminent interest.

So, say an operating company calls up in December and says, "We’re interested in leasing from you, now."  Then, the mineral owner can say, “Yeah.  What is your offer?” And, after listening to what is offered, can respond, “Thanks!  I’ll get back with you in a few days."
Then, the mineral owner can see what others might offer him before making a decision. 

Sounds like a reasonable approach to me.

A mineral owner can’t hold up a drilling unit, but he has the right to actually shop a little rather than simply accepting whatever offer the operating company deemed “reasonable.”

Further, when the operating company applies for a permit the next month, a truthful affidavit would be that the applicant “has made a good faith effort to negotiate with each nonconsenting owner.” 

This is a fair game now.

And, everyone will be better off for actually playing the game fairly.

The mineral owner will have the ability to reasonably negotiate the terms of the lease for his minerals.

The operator won’t be unreasonably held up in exploring for oil and gas.

The public interest will have been met by allowing for the full development of the natural resources of the State of Mississippi.

Rule by reason and law is much better than rule by closed door, smoked-filled, back room, back slapping deals.

Sermon and rant is over.
And, they all said, "Amen!"

What do you think about it?