Friday, May 17, 2013

Integration (Force Pooling) in Arkansas: What Happens to Unleased Mineral Interests?

If you've ever received notice from the Arkansas Oil and Gas Commission that your mineral interest was subject to an integration application, you may have wondered what "integration" actually is.  Most states refer to it integration as "force pooling" or "compulsory pooling" of non-consenting mineral interests.  In essence, after notice and a hearing, the Arkansas Oil and Gas Commission will enter an integration order that pools all of the unleased mineral interests with the consenting mineral owners located in a particular drilling unit.  The pooled owners share in the unit's production, pro rata, based on their ownership percentages, and other factors.

Once an unleased mineral interest becomes subject to an integration order, the mineral owner has the opportunity to elect from four distinct consideration options.  First, the mineral owner can execute a lease at terms satisfactory between the mineral owner and the chosen lessee.  Second, the mineral owner can elect to participate in the costs of drilling the well, and thus become an owner of the well.  The mineral owner who elects to participate is responsible to pay his proportionate share of the costs of drilling and completing the well, and will receive all of the production for his ownership share.  Third, the mineral owner can elect to "go non-consent."  A party who elects non-consent will receive no lease bonus, and will receive a 1/8 royalty until the well pays out at 3-4 times the well's drilling costs.  Once the well pays out at a certain percentage (also known as a risk factor penalty that is usually 300%-400%), the mineral owner is considered a participant.

Finally, the mineral owner, as often times is the case, will chose to do nothing.  This last option is often misunderstood.  Doing nothing does not mean that the mineral owner can "hold out" and command a higher price.  It also does not mean that the mineral owner will be excluded from the unit or will lose his mineral interest.  Rather, a party who elects to do nothing is deemed to be leased, and subject to the Commission's approved lease form.  The bonus and royalty terms are determined by the Commission based on the the testimony it receives from the interested parties at the hearing.

The integration process is important for everyone involved.  Without it, mineral owners who elect to do nothing would never receive a dime in proceeds for production.  Their sole remedy would be to drill their own well--something most people can not afford.  Also, integration and unitization allows a single operator to drill, produce, and account to the mineral owners for their share of production.  Without this process, every tract would require its own well, which is highly inefficient, and not very environmentally friendly.