This is a lengthy discussion of drilling units in Louisiana.  Included are details of the history and corruption of drilling units, and an explanation why a new type of compulsory unit is urgently needed in the regulation of the Haynesville Shale.   Property owners in North Louisiana are at risk of discrimination as this immense field is developed and the information herein could be of value to them. 

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North Louisiana Property Owners Beware!

 

For Whom the Well Tolls

 

OPINION by Tigner Walker and Andrew Walker (Shreveport)

Email:  fairdrilling@aol.com

 

Chapter 1:  Introduction

Chapter 2:  Geology

Chapter 3:  Conservation

Chapter 4:  Drilling Unit Definition

Chapter 5:  Corruption of Louisiana’s Drilling Unit Law

     -Violation
     -The First Drilling Units in Louisiana
     -Police Power
     -Act 157 of 1940
     -The Twisting of Drilling Unit Law
     -The Great Deception
     -Discriminations
     -The Victims
     -Recourse Procedures

Chapter 6:  The Haynesville Factor

Chapter 7:  Market Demand

Chapter 8:  The Solution

Chapter 9:  Conclusion

Chapter 1:  Introduction

 “No man is an island, entire of itself…” begins the poem “For Whom The Bell Tolls,”[1] but landowners atop the Haynesville Shale may not enjoy the discrimination they will soon find in drilling units.[2]  Every single landowner in northwest Louisiana should beware of the fact that, whether they like or not, their property is about to be “force-pooled” by the Commissioner of Conservation (Commissioner) into a compulsory drilling unit.  The promise of the Haynesville Shale discovery may be severely diminished by the fact that drilling units in Louisiana have recently become vulnerable to immense discriminations.  We contend the Commissioner is ignoring our state laws on drilling units and violating our United States Constitution.  Even when lawfully administered, this type of unitization is inadequate to regulate such an immense reservoir.  For property owners, exploration companies, and Louisiana to realize the Haynesville Shale’s full economic potential, it is critical the state take action immediately and enact a new type of compulsory unit specifically for the Haynesville Shale that will provide equal protection for property owners.

 

The Haynesville drilling units being created do not conform to state law, thereby rendering the legality of every valuable well uncertain.  In addition, landowners may be robbed of land and mineral rights in our state’s twisted system, and they may find themselves without recourse.  The Office of Conservation (Office) has tried to keep this issue buried for years, but as drilling begins on an unprecedented scale in and around Shreveport, it will soon become evident to everyone.    With the drilling of each well, more and more property rights will be affected, putting more and more business and personal investments at risk.  Billions of dollars in land value, drilling expense, and state revenue will be in peril. 

 Chapter 2:  Geology

A few basic facts of petroleum geology are important to appreciate our oil and gas law.  Underneath the surface of Louisiana are layers upon layers of sedimentary rock “formations.” Oil and gas are sometimes present in the rock’s porosity, accumulated in “pools” or “reservoirs” of varying sizes.  Oil and gas tend to be migratory and, if the rock is permeable, will flow to areas of reduced pressure (like a well bore).

 

Chapter 3:  Conservation

This mobility of reservoir fluids was recognized early in the history of development of oil and gas pools.  In the early 1900s wells were often drilled very close to the lease boundaries and very close together to prevent loss to neighbors.  This was known as the “law of capture,” and many unnecessary wells were drilled.  Property rights were abused, wasteful practices increased, and natural reservoir energies were prematurely exhausted, resulting in a reduced ultimate recovery from the reservoirs.  These led to conservation laws.  Conservation of petroleum has come to mean efficient and scientifically sound production or extraction of oil and gas.[3]  More specifically, the phrase embraces the interrelated objectives of prevention of waste in the production of oil and gas and the protection of property rights affected by that production and its regulation.[4]  In Louisiana an important conservation tool is the Commissioner’s authority to pool lease interests into drilling units.

 

Chapter 4:  Drilling Unit Definition

 

According to a publication by George W. Hardy, III, principal draftsman of the Louisiana Mineral Code, drilling units are geographic areas of a prescribed size “within which only one well may be drilled to the common source of supply.”[5] (emphasis supplied) The Haynesville units being created do not conform because they will require multiple wells.  The purpose of the unitization is to control the density of drilling, prevent waste, and protect the correlative rights of property owners over common pools of oil or gas.[6]  All mineral owners within a unit share in the unit’s production.  In Louisiana a drilling unit is defined by law as:  

the maximum area which may be efficiently and economically drained by one well.   This unit shall constitute a developed area as long as a well is located thereon which is capable of  producing oil or gas in paying quantities…the commissioner…shall provide for the unit well to be located at the optimum position in the drilling unit for the most efficient and economic drainage of such unit with such exceptions as may be necessary where topographical conditions exist that would make such a location of the unit well unduly burdensome…the commissioner shall fix the well location for each unit…[7]  (emphasis supplied)

 Note that references above to the unit well are all singular. 

Chapter 5:  Corruption of Louisiana’s Drilling Unit Law

 Violation

It is a false assumption for property owners to believe that land forced into a drilling unit will be treated equally and fairly in Louisiana today.  Even though the United States Constitution requires that no state shall deprive any person of property without due process of law, nor deny any person the equal protection of the law,[8] Louisiana’s valid drilling unit law has been undermined by the Commissioner.  In recent history he has begun allowing units that are too large to be drained by one well, and he is allowing an unlimited number of improperly (and we believe illegally) spaced alternate wells within each “single well conservation unit.”[9]

 The First Drilling Units in Louisiana

In 1938 a new oil field was discovered on the northern outskirts of Shreveport, Louisiana.   Immediately spread the cry “another town lot drilling program,” referring to the chaotic drilling patterns so characteristic of the time.[10]  On March 1, 1939, however, Louisiana’s Department of Conservation promulgated Order No. 13 to regulate the field’s drilling operations.[11]  One well was allowed to each forty-acre drilling unit, and, as a consequence, the field was drilled in a very orderly fashion.  The Commissioner had a brand new tool – the authority to “pool” lease interests into drilling units had become part of his “police power.”[12]

 Police Power

The police power of the Commissioner to force pool an owner’s property into a drilling unit is a powerful tool and was challenged early on.  The courts, in the majority of instances, exhaustively explored the evidence to assure the landowner adequate protection against arbitrary administrative action.[13]  For the exercise of the police power to be “reasonable” and valid under the due process and equal protection clauses of the state and federal constitutions, it must have reasonable regard to the effect on private property rights.[14]  Any police regulation, which unduly interferes with correlative common-law property rights and causes discriminations unrelated to or unnecessary to accomplish public purposes, may be subject to attack as unreasonable.[15]  

In situations where one well is determined to be inadequate to drain a drilling unit, the correct solution under today’s law is cautious reunitization into smaller one-well units, based on geologic and engineering evidence.[16]  This is how the police power should be used.  Unfortunately, oil companies have found it more profitable to bypass the law.  Profitability of a unit, however, should always be secondary to prevention of waste, protection of correlative rights,[17] and abiding by state law.  When reunitizing into smaller units, portions of leases outside units may become subject to termination requiring new lease negotiations for additional wells.  To avoid this hassle companies have recently begun to ignore the law and are drilling multiple alternate wells within single units.  This practice is often discriminatory against both surface and mineral owners. 

The United States Supreme Court has found that the police power to establish uniform drilling units does not violate our Constitution,[18] but, to our knowledge, units allowing arbitrary or discriminatory alternate well locations have not been tested by that court. 

 

Act 157 of 1940

Oil and gas conservation laws vary from state to state and, to this day, none could be considered flawless.  Act 157 of 1940[19] provided Louisiana’s first definition of a drilling unit.  At that time, this was considered the best and most comprehensive conservation legislation of any state in the nation.  The Act was later adopted as Title 30 of the Revised Statutes of 1950.  Title 30 is our present conservation law and is where the Commissioner derives his broad but not limitless authority.  The Commissioner at that time, S.L. Digby, wrote:  

…a sound conservation program can be divided into three broad phases:  first, the prevention of waste; second, the economic appreciation; and third, the protection of the rights of each separately owned tract overlying a common source of supply…
 

Recognizing the necessity for legislation that would be flexible enough to permit the proper consideration of the factual data concerning each reservoir, available from engineering and geological appreciations, and the necessity for proper limitations concerning the three aforementioned phases of a sound conservation program, the members of the Legislature, endeavoring to properly understand and to insure that each phase of the problem was properly represented, worked long and diligently with members of the legal profession, engineers and geologists, all working in close harmony and cooperation, recorded Act 157 of 1940…
 

The diverse ownership of the surface of the earth posed one of the primary obstacles to be overcome in the development of a method that would afford the proper control of the well density within a common reservoir; however, the drilling unit method. . . has provided a successful answer for both the diversity of surface ownership and desired control of well density… 

 

In adopting drilling units for a reservoir, particular care must be exercised in determining the maximum area that one well can efficiently and economically drain through a proper interpretation by the engineering and geological appreciations of the factual data available concerning the characteristics of the reservoir.  The determination of the maximum area that one well can efficiently and economically drain will permit the delineation of an approximately uniform system of drilling units for the reservoir…In order to insure equity and give to each owner of any interest in the common pool or reservoir his just and equitable share of the reservoir content, it is necessary to establish drilling units.  These drilling units establish to the owners of the various tracts their participation of the production from a definite well.  In order that equity may be maintained as between two or more such drilling units, the well is located in the approximate center of said drilling unit…[20] (emphasis supplied)

Digby made it clear.  The one-well limitation on drilling units was clearly the intent of lawmakers, and it IS the proper limitation to protect the rights of each separately owned tract. 

It cannot be over emphasized how vigilant lawmakers were in protecting property rights when Louisiana’s drilling unit law was enacted.  It was simple yet brilliant:  it eliminated, as much as practical, the possibility of “waste” in locating wells while at the same time providing equal protection for property owners, as required by our state and federal constitutions.  A uniform pattern of one-well units promotes fairness and effectively reduces any chance of discrimination.

 

The Twisting of Drilling Unit Law

Commissioner W. H. Hodges wrote the first order under drilling unit law, as we now know it, in Louisiana.  Order No. 28-B (1941) of this Office states, in part:

Not more than one well on each unit shall be allowed . . . and so long as the well is located on a drilling unit. . . all tracts comprising such unit shall constitute a developed area. (emphasis supplied)

The one-well limitation on drilling units was heeded from 1940 to 1963.[21]  Unfortunately, individuals over the years began acting carelessly, unethically, and without authority, violating the statute and infringing upon correlative property rights and the meaning the lawmakers intended.  The twisting of the law began when the Office ran into the problem of establishing units in areas where wells already existed.  It published a statewide rule on February 13, 1963, entitled “Alternate and Substitute Unit Wells.”[22]  Existing wells were allowed to remain as “alternates” when units were formed.  The Office pointed out at the time, however, that alternate wells: 

should not be a necessary point for drainage, however, because, if it is, then the Commissioner’s authority to create the unit for the unit well alone does not exist, such unit well obviously cannot economically and efficiently drain the unit. (emphasis supplied)  

In other words the Office recognized that units too large for one well to drain were illegal.  Our law has not changed!   Many struggled to justify allowing even these pre-existing wells in a unit, with one author writing: 

The Conservation Act provides that a drilling unit is the maximum area which can be efficiently and economically drained by a single well.  However, for several years and under certain circumstances, the Commissioner of Conservation, while finding that a single well can drain a particular drilling unit, has designated one or more alternate unit wells to assist in producing the unit allowable.[23]  (emphasis supplied)

 

The Office’s twisting of the law continued on May 22, 1970, when it published a memorandum that allowed, for the first time, alternate wells to be drilled in established units.[24]  It allowed only one alternate well per unit and then only in “non-competitive” situations (where there were no adjoining units).  It also required the written approval of the owners and in doing so was essentially switching this from a “drilling unit” to an “Act 441 of 1960 Reservoirwide unit.”[25]  Act 441 units are also authorized by Title 30 but have a totally different system of “checks and balances.”

 

As time went on unauthorized alternate wells began popping up in “competitive” drilling units.  Apparently the mistake was realized and as the Office tried to hold on to some semblance of the law, total production from these units was limited to no more than what the original unit well could have produced on its own.[26]  Today the bottom has dropped out, and there are no longer any limits to the number of wells per unit, or any efforts to balance gas production between units, or efforts to ensure fair apportionment of surface usage.[27] 

 

The Great Deception

In our opinion, the Office has repeatedly shrugged its statutory limits and responsibilities, and deceived the state.  In 1999 it passed a new law, adding at the bottom: “nothing herein shall be construed as limiting the authority of the commissioner to approve the drilling of alternate unit wells on drilling units established pursuant to R.S. 30:9(B).”[28]  However, there is NO such authority!  Alternate wells are not even mentioned here.  Hardy’s publication warned that 30:9(B):  

contemplates that there will be only one unit well and makes NO provision for alternate unit wells.[29] (emphasis supplied)

 

Attorneys for our state Office and for the oil companies have argued that the Commissioner has the broad authority to make any reasonable rules,[30]  but violating a state law cannot, in our opinion, be considered reasonable.  This issue was studied by highly respected Tulane law professor, Luther McDougal.  He was described by colleagues as a leader, “the strong silent type, speaking only when he has something to say and only when something needs to be said.  His judgment and opinions are respected by his colleagues.  When Luther speaks, his colleagues listen.  We know he is a man of honor, integrity, high standards and common sense.  With Luther’s plain speaking, we know where he is coming from.  There is no hidden agenda.  There is no ‘what’s in it for me.’”[31]  In 1995 McDougal wrote:  

Once a producing well or a well capable of producing in paying quantities, that is, a shut-in well, is located on the unit, the unit is a developed area, and no other well can be drilled on the unit to the same pool.[32] (emphasis supplied)

 

In a case that confirmed the Commissioner’s authority to revise unit boundaries, former Louisiana Supreme Court Justice, J. Fournet, pointed out that the powers delegated to the Commissioner in regard to drilling units are not broad at all, but in fact:  

are very specific.  One of them is that he may fix the maximum area that can be efficiently and economically drained by one well.[33]  (emphasis supplied)

 

As if to prophesize and curb this transgression, the Louisiana Supreme Court once ruled: 

The only restriction on the authority of the commissioner to establish oil or gas and distillate drilling units is that such an order be reasonable and unit prescribed MUST NOT EXCEED the maximum area which ONE well can efficiently and economically drain.[34] (emphasis supplied) 

It should also be pointed out that those in the industry understood this law very well.  For example, in 1997 Amoco’s William Griffin stated: 

When you include more acreage than a particular well will effectively and efficiently drain…you’re including scenery acreage that the well is not draining…nowhere (in Title 30) is that type of action contemplated.[35]

The Office does not believe it should be held to the “rigidly defined” law of the infant industry.[36] Perhaps it is therefore acceptable for motorists to ignore the “rigidly defined” stop sign law of the infant road system?   After all, technology in brakes has so vastly improved there is really no need in today’s world to even slow down, right?

 

Another point to ponder is that the Commissioner has also shrugged his statutory responsibility to select a unit well’s location and has relinquished this authority to the companies themselves who now control this powerful, dangerous tool.  They have been given the discretion to move, after the application hearing, any approved location elsewhere within the unit![37]  Even the landowner himself may not be notified of the change.[38]  With the general rise in gas prices over the last several years, merciless “snipers-for-hire” have been constantly hunting for new alternate well surface locations within developed units.[39]  The Office admits rising prices have had a role in accelerating these wells.[40] With the uncertainty in gas prices, however, we believe price spikes should not be a reason to increase well density within an already developed unit.  These lasting surface scars, in our opinion, constitute “waste.”[41]

 

The snipers’ targets are random, at least as far as legitimate geological factors are concerned. They often aim for those with the misfortune to own land along unit boundaries, or the financially stressed, or defenseless surface-only owners.  If one has bought land, with the seller reserving the minerals, this land surface is now treated with less respect than the other land surface in the drilling unit.  It is fair game with no limits on surface use![42]  While mineral rights are generally considered superior to surface rights in many states, this in no way should allow arbitrary discrimination with compulsory unitization!

 

Our state Supreme Court has always ruled against arbitrary discrimination:  

The state has constitutional power to secure equitable apportionment among landholders of the migratory gas and oil underlying their land, fairly distributing among them the costs of production and of the apportionment.[43]

 

The state can prescribe such regulations in regard to spacing of oil wells and manner of drilling as are reasonably necessary to distribute equitably among surface proprietors the right to produce oil and gas from a given source.[44] (emphasis supplied) 

The Office will also deny its responsibility to prevent excessive surface loss.  Its statutes prohibit “waste” which by definition includes the location or spacing of wells in a manner causing excessive surface loss,[45] yet one has little chance to defend his surface in a unit against such loss.  The Office will surely reject that attempt and has even misled a judge with their attorney stating: 

Let me just correct a couple of things…First, this idea that waste has anything to do with excessive use of the surface…the definition of waste set forth in Title 30, which guides the Commissioner of Conservation, had nothing to do with surface.[46]   

We must correct this Office.  The idea that our Office of Conservation has lost interest in conserving our state’s land surface is beyond imagination.   

Discriminations

The result of these transgressions is a twisted system that encourages discriminations against property owners.  The following are a few examples of what is occurring:  

(a)  If the property owner holds mineral rights in a drilling unit:

 

-The property may experience 100% of the drilling and 100% of the gas drainage in a unit yet his royalty payments may be drastically and unfairly reduced and divided with owners whose gas bearing land will never be drained.

 

-The owner may possess enough property within a unit to justify the drilling of a single well but if an exploration company is unable to lease other tracts in the unit, the Commissioner does not have the specific authority to demand the drilling of those tracts.[47]  Therefore, it is uneconomical to develop the subject unit.  The Commissioner’s unit, or even the threat alone of unitization, has thus deprived the owner of his rights.

 

-The lessee may own leases in other units where his “terms” are better.  As a consequence, one’s neighbor may prosper with multiple wells in his unit while the owner is stuck with minimal production from the one required well in the subject unit.[48] 

 

(b)  If the property owner has land surface rights only in a drilling unit:

 

-The owner has no voice before the Commissioner in selecting well locations on his own property.  Even if the land is a small minority tract in the drilling unit, the owner could suffer a higher concentration (or even ALL) of the alternate well locations and all other related surface damage in a unit!  The Commissioner does not require fair apportionment of these well locations.[49]   

 

-The property owner will receive NO notices from the Commissioner for hearings and drilling plans for the subject property.  Only “interested parties” are notified.  The Commissioner doesn’t consider surface owners as “interested parties.”[50]  The property owner may awaken one day surprised to find bulldozers on his property, clearing trees for a well location.  In addition, the Commissioner has no requirement for the owner to receive ANY compensation for his land taken.  

The Victims

The following are actual stories of some of the victims.  Here is an example of a single, discriminatory, drilling unit with vertical wells (2007 map of Cotton Valley Formation unit):[51]

 

 

Instead of dividing this 600+ acre unit into a uniform pattern of smaller one-well units, the Commissioner is allowing discriminations.  Experts have testified that multiple wells are needed to drain this unit.[52]  Landowner “A” owns 1/3 of the unit but had suffered 100% of the surface damage.  It appears his farm is becoming an agricultural desert with well locations, access roads, pipelines, etc.  He receives only 1/3 of the royalty payments from the gas produced from his land because these are divided with everyone in the unit.  Landowner “B” has not leased and will therefore receive a monstrous ½ of the total gas sales as the wells pay out!  The operator is not allowed to drill on or under “B,” so “B” will claim ½ of the unit’s gas sales without any surface loss or significant gas drainage (according to those experts).   Our family is landowner “C”.  We leased and have received payments for Cotton Valley wells evidently incapable of draining the gas under our property.   The situation is grossly unfair to “A,” and it is our contention that royalty payments from Title 30:9 drilling units should not be divided with owners whose gas bearing lands are not and may never be drained.

As an aside, we missed out on the big bonuses in the Haynesville leasing frenzy.  According to various companies’ representatives, this was because “B” had not leased.[53]  The threat existed that the Commissioner would force pool our property into a compulsory Haynesville unit, and it would then be uneconomical for the company to drill.   We own enough acreage to drill and produce a Haynesville well, but the threat of unitization deprived us of our opportunity to lease and right to explore and develop our property.[54] 

There are new developments here.  Our family has allowed a surface location on our property and on February 2, 2009, seven additional wells on “B” were applied for,[55] although “B” is not signed.[56] 

  

 

“B” has the constitutional right not to enter a lease, and the wells on his property cannot be drilled until and unless he does. Experts have testified that the section 30 unit has similar reservoir characteristics of nearby units bearing more wells[57], but, as you can see, it is not being developed to the extent of section 29.  One may suggest that this is simply honest American capitalism with a more aggressive operator in section 29 taking every possible advantage of unitization and the benefits of his lease contract.  The Louisiana Supreme Court has ruled, however, that private contractual rights must yield to a proper exercise of the police power.[58]  We believe this is not a “proper exercise” and that every owner force pooled into fieldwide unitization under Title 30:9 be treated with equal dignity and respect.  Take what is occurring to landowner “E” in section 30, for instance.  In 1996 Landowner “E” and his wife were concerned about their situation.  They traveled to Baton Rouge and spoke before the state Office:   

Mr. Commissioner, my wife and I own land which is in the units affected…The Cotton Valley and Hosston governmental units for section 30 have been in existence and undrilled for over 20 years.  We have watched the recent drilling activity going on all around Section 30, hoping that one day a well would be drilled in Section 30 in which we could share. …Without going into any great detail…we are extremely skeptical that we would be treated fairly if any well…were ever drilled in this area…obviously with (“B’s”) interest being as large as it is he would be able to dictate when and probably if any well would ever be drilled…[59] 

Today, 33 years after drilling commenced in this area, “B” still dictates the drilling, and “E” is still not being treated fairly!  In those early years “E” was justifiably opposed to reunitization of units and there was no geologic or engineering evidence to support revision.[60]  Recently, section 30’s gas production averaged (approximately) a meager 6,500 mcf per month in 2008 while section 29 finished the year with production approaching 100,000 mcf in December,[61] and with more wells to be drilled.  This situation appears to be in violation of the Commissioner’s statutory mandate to fix well locations so that a producer may not produce more than his just and equitable share of the oil and gas in the pool.[62]  Section 30’s “just and equitable” share apparently is defined as the proportion of its developed area (640 acres) to the total developed area of the pool.[63]  Sections 30’s “just and equitable share” would therefore be equal to section 29’s.  With the uncertainties of market demand and limitations on pipeline capacity, the Commissioner’s allowance of such an enormous imbalance in the number of wells between these units can only be detrimental to the rights of “E.”  This is a rather ironic situation, and “E” is much more than a letter on a map.  This World War II veteran served on a B-24 crew in the 15^th Air Force that participated in bombing attacks on Hitler’s oil reserves in Germany.  Back in America his own oil and gas bearing lands are discriminated against.  He is now 92 years old.  With the disproportionate drilling allowed by the Commissioner, it is unlikely “E” will see the fairness he sought in his lifetime.  This is not capitalism, but nothing more than discrimination.    It is unfortunate we cannot turn back the clock and wash away those fears from this man’s memories, but regrettably, the clock ticks away.[64]

It should also be pointed out that if the proposed wells on “B” are ever drilled, this will create incredible traffic along “B’s” private access road.  To add insult to injury, “E” claims that this access road crosses his property and is an illegal confiscation (see map).  At any rate, his property would be subjected to oilfield traffic serving another unit, when it would appear to be his unit’s rightful turn for development.  Shouldn’t orders by the Commissioner assure equal development as the drilling unit law was designed, instead of leaving property owners at the mercy of wandering operators?  The attorney for the operator in section 30 might disagree.  He has suggested everything is in perfect health with this system, claiming the drilling of these wells is somehow “self-regulating.”[65] Self-regulating?  Don’t tell this to that old soldier.  

It is the Commissioner’s, not the landowner’s, responsibility to maintain equal protection and, by failing to do so, the Commissioner is violating the Constitution of the United States of America (in our opinion).  We must ensure “equal protection” and prevent inequities such as this from occurring with development of the Haynesville Shale. 

Landowner “D” is also discriminated against.  This couple restored a beautiful old plantation home on this tract in 1995.  It is on a bluff overlooking the Red River Valley.  The alleged illegal, private access road described above is just in front their home, at the “dead end” of a public road.  At present only a handful of vehicles travel it each week.  If the applied for wells are approved and drilled, this couple will be subjected to constant, 24 hour per day, 18-wheeler traffic for the rest of their lives.   The quiet valley below them will become a noisy industrial zone.  How is this fair apportionment when so many other units in the field have relatively deficient production?   It is our opinion that the Commissioner should require uniform development across the field. 

The application hearing for these wells is set for 9:00 A.M., Tuesday March 3, 2009.  It will be held in the First Floor Hearing Room, LaSalle Building, 617 North 3^rd Street, Baton Rouge, Louisiana.   Anyone interested is encouraged to attend and voice their opinion, whether in agreement with us or not. 

As mentioned previously, we believe the single remedy for the above situation, under our current state law, is reunitization into smaller one-well units.  Each unit would then have fair opportunity to produce its just and equitable share from the reservoir.  If a unit well became deficient for some reason, the operator can rework the well and he also has the legal option of replacing this well with a substitute well.[66] 

Following is another map of modern Cotton Valley drilling units, indicating present and proposed wells (all vertical).[67]  This is reminiscent of the early days, before conservation laws, when wells lined property boundaries to protect against drainage from neighbors.   We have now drifted full circle.

 

All of the above unjust circumstances are examples of what our drilling unit law was meant to prevent.  Similar discriminations are occurring over north Louisiana, often obliterating land investments, mineral rights, hopes, and dreams.   

We have received letters and emails from dozens of victims of this type of discrimination.  Some are angry, some are sad, and some are very suspicious of how this could happen in the United States of America.  Here are letters from just a few: 

An Elm Grove couple owning surface rights on 23 acres sent us a copy of their letter to Governor Jindal, “It was our dream to build a pond, house and recreation area for our families.  Thirty thousand dollars of improvements and I had a long driveway, a stocked fishing pond, beautiful trees behind the pond, and a built pad to build a house on.  Then came the greedy oil man.  They drilled behind us, beside us on the south, beside us on the north, and after pleading with them not to drill close to my pond that is where they drilled.  The land man said it was theirs so they could drill where they wanted…THIS IS UNETHICAL.  I voted for you because I am a proud republican and wanted a leader that main focus is to bring back ethics to Louisiana…May God be with you and Louisiana.”[68]  

 

A Frierson area resident writes, “…I am not against drilling for gas but allowing these wells every twenty acres is a tragedy…”[69]

 

A lady wrote about her family’s Grand Cane property that is experiencing a higher concentration of wells than other tracts in the unit (they own their minerals).  They traveled to Baton Rouge in 2008 and attended an application hearing.  She writes, “My mother-in-law spoke for the family, and she was not comfortable with a lot of the technical words/phrases.  It sounds like an attempt to perpetuate a fraud on the land owner/mineral holder.  I suppose I am naïve as I had this bazaar notion in my head that once a law was passed it had to be followed or there would be consequences… Is this a result of lobbyists or pay outs to the commissioner?  Or has it not been formally challenged?  How can an individual compete with this mega-industry?  Shouldn’t some attorney take this on as a class action suit on a contingent fee basis, settle the law, and make a chunk of change in the process?”[70]

 

A Frierson resident with one well on his property states, “At the time I moved in there was only one well allowed per 640 acres and I thought that would always be the case… now they want to drill multiple wells on my property and when I ask them to drill off one pad directionally they tell me it is too expensive…”[71]

 

A couple owning surface rights in Frierson wrote about an alternate well explosion that ran them out of their home on Christmas 2007. The company turned right around and drilled another unauthorized well just 200 feet from their home.  The wife wrote the Commissioner, “Mr. Welsh, I imagine, like every citizen of this state, when you write out your mortgage payment each month you feel a sense of entitlement as to what might possibly affect your home.  Well, I promise you, right now we are feeling very much entitled!!  WE ARE TOTALLY AND COMPLETELY INTERESTED in the fact that one well just blew up 1400 feet from our home and now they have moved into our backyard!!!!”[72]  In another letter she wrote, “This is the United States of America, someone please explain to me how you can buy property in this state and without any notification a drilling company can, by law, drive onto your property and destroy it…Even us simple folk can see that this is just a basic wrong and I have yet to find a local politician who cares.  I am beginning to think that they all either own property and are receiving a big check each month or the drilling companies made large donations to their campaigns to keep them quiet.  I am so angry I feel like the State should be sued.  I was reading our Louisiana Constitution…this little excerpt below tells me that we are supposed to have few unalienable rights:  Louisiana Constitution, Article 1, Declaration of Rights, Sec. 1., ‘All government, of right, originates with the people, is founded on their will alone, and is instituted to protect the rights of the individual and for the good of the whole.  Its only legitimate ends are to secure justice for all, preserve peace, protect the rights, and promote the happiness and general welfare of the people.  The rights enumerated in this Article are inalienable by the state and shall be preserved inviolate by the state.’  When is the state going to protect us?  Uphold the Constitution?  We have no rights but the drilling companies have every right?  Explain this to me?  Someone?  Please!!  Where is Cheek?  Where is Burford?  They need to publicly weigh in and let us know where they stand on this issue.  Protect the drilling company or protect the landowners?”[73]  Although one cannot see the face of this writer, they can certainly sense the fire in her eyes as she weighs the scales of justice, yielding her pen like a sword.

 

A lady in Elm Grove bought 10 acres in 1990.  This precious, old rose writes, “They saided we had the Minerals Rights and the oil well saided we didn’t have those rights. They saided all we had are the Top Soil Rights.”  The company drilled an unauthorized alternate well in her backyard.  The well pad and reserve pit claimed her little vegetable garden.  They bulldozed her shade trees and fig trees.  Her husband is on oxygen and irritated by the dust from the constant traffic.   She asks, “If any way you can help me please help.”[74] 

One by one these people have risen up and fallen back against insurmountable walls.  We are concerned for the rights of these people, for our own rights, and for the rights of every property owner atop the Haynesville Shale, most of whom are clueless as to what is about to hit them.  “Each is a piece of the continent, a part of the main, and if a clod be washed away from the sea America is the less.”[75]  Our challenge is motivating everyone to put the flames out when most in this state do not realize her Shreveport water home is on fire.  There is now limitless uncertainty and rampant discriminations in our once fair system.  If the Haynesville Shale is developed in this twisted scheme, it will become critical for almost every landowner in northwest Louisiana to retain geologists, engineers, and attorneys on their payroll month after month, year after year to ensure that their properties in these now immeasurably uncertain, compulsory drilling units are treated fairly.  The average Louisiana property owner cannot afford these enormous expenditures.  We are setting the stage for a catastrophe and, if not corrected, our Haynesville Shale dreams may all die together.   

Our family has objected to, and battled against, alternate well applications affecting our property.  These applications sometimes included proposed wells on other properties, in other units.   We have learned a lot about recourse opportunities, or rather the lack thereof.  It is our desire that others learn from our experience.

 Recourse Procedures

Louisiana’s drilling unit law is not enforced as other laws.  One cannot simply telephone authorities to have the violation corrected and the offenders prosecuted.  If one disputes the authority of the Commissioner to approve a discriminatory alternate well or unit, the complainant is required to first exhaust all administrative remedies.[76] 

The first step in this lengthy legal procedure is to attend the application hearing before the Office of Conservation (Office).  (This is quite a hurdle for surface owners who receive no notice of the hearing!)  One may find this Office to be less noble than the name sounds.  From our perspective state officials and oil companies team up with the companies’ interests paramount.   The Office is teasingly described by many as “rubber stamps,” and from their impenetrable stone throne in Baton Rouge, alternate well applications are approved, even when their need is unsubstantiated.  (The Commissioner has even approved alternate wells based on the testimony of an “expert” who was admittedly unfamiliar with the unit, and in the face of evidence the wells were not necessary![77])  Any evidence produced by the property owner against the Commissioner’s authority to approve alternate wells will not be allowed or admitted into the court’s record.[78] 

The second required step is to appeal the Commissioner’s order.  One will have to wait months for another Baton Rouge hearing.  In a brief, juryless, trial before an overloaded judge, it is over before it has begun.  One can present arguments of law to the appeal’s court judge, but the trial is limited to “the record” so even this judge cannot consider the owner’s evidence.[79]   

One can try to submit the matter directly to another court.  The complainant will be forced to “join” the Commissioner, so this hearing must also take place in Baton Rouge.[80]  We have found that the opposition’s attorneys will use every possible means to delay the proceedings indefinitely and run up the costs.  They will try to use judgments in the previous charades as a precedent to dismiss the case.  They will file “exceptions” requiring an unlimited number of preliminary hearings.  They will ask the judge to enjoin in the lawsuit masses of individuals with interests in alternate wells.  Attorneys will argue that plaintiffs are in the wrong court as the complainants are protected by the “correlative rights” doctrine of the mineral code.[81]  This article states, “The owner of land burdened by a mineral right or rights and the owner of a mineral right must exercise their respective rights with reasonable regard for those of the other.”[82]  (The problem with this is that, in most cases, this is unenforceable because no one seems to know what “reasonable regard” is!)   The process will require immense time, effort, and expense.  The complainant may never see his day in a court that will allow and study his evidence.  We haven’t.     

It is ludicrous that a landowner’s only recourse against this clear violation of state law is to go to court in an attempt to prove that the law is what it has already been confirmed to be!

If frustrated with the impasse one may write state senators and representatives. We did and received only one minimal response from the bunch: “Thank you for the information.  Please keep me abreast.”[83]  We also wrote then-Governor Blanco who replied, “It is my wish that all parties can work together to amicably resolve their differences.”[84]  After a few more years we wrote new Governor Jindal, who’s Director of Constituent Services replied that the Governor will “certainly keep these concerns in mind as we move forward with building a better Louisiana!”[85]  But, alas, no resolution or relief for our plight has been found.

 

Chapter 6:  The Haynesville Factor

The Haynesville play is unlike anything Louisiana has ever seen.  It is shale with very low permeability.  It is usually produced from horizontal, not vertical wells, utilizing hydraulic fracturing stimulation.  It is enormous.  Masses of people are dreaming about tomorrow and what this could mean for their lives and the lives of their children.  They are hoping for their properties to enter the gas market as soon as possible, but there is limited rig availability, pipeline capacity, and market demand.  For the first time since Act 157 of 1940 was ratified, existing laws are inadequate to provide proper regulation while satisfying public interest.  The Haynesville units being created are illegal under current drilling unit law.  If these units were correctly reduced to a size that can be drained by one well, the majority of landowners would be cut out of the gas market for many years.   Louisiana has established different types of units over the years for different situations.[86] We now must craft a new type of compulsory unit specifically designed for the Haynesville Shale that will allow multi-well, 640 acre units, while providing equal protection for property owners.

Our area owes Chesapeake Energy a tremendous amount of gratitude for bringing its exploration to this area.  We (property owners and the state) owe it to them, and Petrohawk, and the other companies involved in the Haynesville play to get our act together.  It is unconscionable to ask these companies to play guessing games with our bungling state Office on the legality of these enormously expensive wells.  A new type of compulsory shale unit is needed NOW!   In order to turn this area into an economic oasis and maximize gas production, we must first provide a firm legislative foundation for future drilling. 

 

Chapter 7:  Market Demand

It is the responsibility of the Commissioner to balance gas production from the various reservoirs across the state.  He uses information from gas purchasing companies and gas market information otherwise available to him to determine the reasonable market demand for gas.[87]  Allocations termed “allowables” are set for each pool.  In the previous example of sections 29 and 30, each unit would have its own allowable.  For decades this amount was set harmoniously with Title 30:9, and units were not allowed to produce more than the capability of one well.  To the surprise of many landowners, the Office strayed from this policy in 1996 and allowed each of these units to produce at the combined rate that any number of wells was capable of producing![88]  As explained earlier, Title 30 prohibits allowing units more than their “just and equitable” share of production and we therefore consider this a violation of state law.

This misdeed can lead to a very dangerous set of circumstances.  In the upcoming hearing on March 3, 2009, the Commissioner will likely approve the application for additional wells, allowing a total of 21 wells in section 29.  He will therefore be obligated to allow every other operator in every other unit in this large field the same number of wells. Combine this type of alleged illegal and unlimited overproduction of various units across the state with Haynesville Shale development, and there will be gas production far in excess of market demand.  The result will be excessive surface loss, gross overproduction, and sharply declining natural gas prices.  It is our opinion that the Commissioner should re-implement the previous and correct “one-well allowable” restraints on Title 30:9 units to allow room in the gas market for Haynesville production where the most people will see the most benefit.

Chapter 8:  The Solution

The solution, as we see it, is for Governor Jindal’s office to investigate and take charge of the situation as soon as possible.  If our position is determined to be correct, we request that he:

     1)      Make a formal declaration that the state has made a serious error in allowing the drilling of
              “alternate wells” within drilling units.

2)      Reset the “allowable” for each drilling unit as the production capability of one well.

3)      Require in writing immediate plugging and abandonment of alternate wells unless they are
   approved in writing by the affected surface owners and the mineral owners within a
   particular unit.  Mineral leases and surface use agreements would be subject, in some cases,
   to renegotiation.

4)      If no agreement is reached and the above plugging occurs, declare those units invalid at that
   point in time when the first alternate well was approved.

5)      Prosecute/penalize the operating companies who have violated this law.

6)      Enact a new type of compulsory unit specifically for the Haynesville Shale that will:

a)      Provide equal protection for all property owners.

b)      Provide for 640 acre units corresponding to sections.

c)      Require a unit development plan from the operating company assuring that the unit
   be fully developed within a  reasonable time frame with multiple wells (and as market
   demand allows).  Operators would be able to amend the plan in subsequent hearings
   as additional geologic evidence from well histories, seismic, etc. became available.

d)      Set minimum and maximum gas “allowables” for each unit to assure mineral owners
   fair and balanced production over time amongst the various units. Inept operators
   would be subject to removal[89] with undeveloped portions of units possibly
   released to a new operator. (the “developed” portion of a shale unit would be
  defined as that portion actually being drained by an existing well or wells)

e)      Encourage drilling of multiple wells from a single surface “pad.”

f)      Require written approval from the affected surface owners for the design and
  location of every specific surface pad serving a compulsory Haynesville Shale unit.

 And also request he:

     7)      Require surface owners affected by well locations to be considered “interested parties” and
              be notified in writing of applications and hearings for units and wells; and, if not otherwise and
              specifically contractually agreed to, compensated with fair market value of land taken by oil
              and gas exploration.   Oklahoma has a similar law.[90]

8)      Require all tracts “force pooled” into compulsory units, whether leased or not, be
   automatically subjected to a sub-surface servitude that may be exploited by the operator of
   the unit with the drilling of directional or horizontal wells to produce the unitized zone.

9)      Allow any mineral owner owning the maximum area which may be efficiently and
   economically drained by one well in a conventional, non-shale field the opportunity to drill
   this tract under Title 30:9 without threat of unitization with other tracts (that could make it
   uneconomical for him to develop his tract).

10)    Ensure that no drilling unit under Title 30:9 be allowed to produce more than its “just and
   equitable”[91] share of the pool.

11)    Enforce the Office’s statutory obligation to prevent excessive surface loss[92] by setting
   guidelines which limit well pad densities in unspoiled natural areas and in areas already
   suffering from high well densities.

The primary goal of this article is to bring awareness to the present injustices and to motivate Louisiana citizens to demand a solid path for future drilling.   It is our aspiration that our opinions here not be the end of the discussion, but rather the beginning.  Others will have their own valid suggestions.   New rules and laws should be hammered out, not through closed door meetings between our Office and prejudiced oil companies, but through an open forum.  It should be orchestrated by the Governor’s office with members of the legal profession to ensure exactly that which we have drifted away from – constitutionality and protection of all facets of property rights.

Chapter 9:  Conclusion

Fairness, equality, and JUSTICE should be tenets we all aspire to and should not be obstacles to quick riches – for ourselves as landowners or as a state.  Louisiana law limiting drilling units to one-well-in-the-optimum-position-of-each-unit has been corrupted into any-number-of-wells-anywhere-in-any-unit. The drilling of alternate wells has been discriminatory.  Some surface owners who purchased their property expecting one well per unit are now facing not double, not triple, but over 50X the amount of surface loss they anticipated, while their neighbors’ unit lands are untouched.  Some mineral owners’ valuable and proven gas bearing lands have been neglected for decades while surrounding units prosper.  It is not reasonable for the Commissioner to issue orders in direct violation his statutory mandates.  It is not ethical for oil companies to bypass any state law.  It is not ethical that families be required to go to such great lengths to prove that a law is what the Louisiana Supreme Court has already confirmed it to be.  The rights of the many are being violated by a few and “the day is forthcoming when accounting is due.”[93]  If this mountain of errors continues to build, it will expose oil companies and the State of Louisiana to relentless damage lawsuits. 

We must correct past wrongs, penalize the violators, and lay a solid path for exploration of the Haynesville Shale.  A new type of compulsory unit is needed that will allow multi-well 640 acre shale units, and there must be equal protection under “Old Glory.”  The time for inaction is over.  The clock is ticking.   So, property owners, exploration companies, and the State of Louisiana, do not ask for whom the well tolls.  It tolls for all of us.

If you are concerned about unfair drilling, please submit your opinions to The Honorable Governor Bobby Jindal, P.O. Box 94004, Baton Rouge, LA 70804-9004.  If you have any questions and/or comments about this article, please email us at:  fairdrilling@aol.com.