Thursday, December 9, 2010

NY's Compulsory Integration Law:
Progressively Conservationist

[This was written as a comment upon an article by Peter Mantius appearing on a website from DC Bureau, which touts itself to be some kind of citadel of investigative journalism, but which turns out to be a very slanted bunch (that miraculously always seems to slant in a consistently similar direction).  At the time of my cross-posting here, my comment is still showing with Mantius' article, but I decided to preserve my text in hopes it would find more readers, and a longer shelf life.  In the meantime, I have noticed that Mantius' screed which, in a reply, he mentioned having actually gotten paid to write has gotten recycled on at least one additional crucadingly one-sided website.  Looks like I'm going to have to recycle my comments!]


Let's start with this: It's fundamentally incorrect to blame New York's (or any state's) compulsory integration law for the underlying legal principal of someone's rights to mobile property (in this case, natural gas) getting taken away by an extractive enterprise situated upon a neighbor. That's the rule of capture, which goes back to English common law, and to disputes over hunting game. And it’s still out there, this rule of capture, as an underlying legal principle, everywhere in America. The rule of capture came long before compulsory integration, long before IOGA-NY, and long before our modern-day showdown over hydraulic fracturing. All compulsory integration statutes are modern-day tweakings and softenings to the underlying rule of capture.

Though shocking to the uninitiated, most rational people can eventually recognize that the rule of capture is a necessary rule for fossil fuels extraction in a capitalist society (unless you decide to federalize mineral ownership, which many countries have chosen to do). Without this rule, you can't have much of any oil and gas industry within the checker-boarded American system of private land ownership. And that's what American courts long ago recognized when they applied the rule to the nascent oil industry. We’re talking, like, the 1800s here. Without the rule of capture, someone can always say, "Hey, that's my oil!" — and how you gonna prove it one way or the other? It's just endless litigation.

The well-spacing laws soften this rule of capture by — on one level, restraining neighbors from drilling needless additional wells — while on another level calling for them instead to share in the proceeds of a single well, even if it was drilled next door.

Next, there's this: You say, in 2005, in New York, "opposition never had a chance to mobilize" to fight modifications to the state's pre-existing well-spacing rules because it was all done without hearings or controversy. That's provably incorrect. The changes were accomplished in full public view — and right in the midst of a fairly heated and wide-ranging public controversy — especially in the Southern Tier of NY, where most booming natural gas production was then concentrated. It's true that there was fairly little environmentally minded opposition or involvement during the 2005 change. But it’s important to factually note that drilling wasn't a red-hot environmental issue at the time. And that the change wasn't about environmental impact. It was about property rights and proceeds.

The main difference between the 2005 controversy and the 2010 controversy is that the hottest issue, back then, was not killing drilling. Instead, it was the desire for everybody to get fairly paid (already) from past and future Trenton-Black River drilling and resource extraction, mostly in the Southern Tier. Millions of dollars in landowner-owned royalty income were getting locked up in escrow — under state government orders, for months or even years at a time — while New York State's environmental regulators were kerflummoxed over one primary, thorny question: How should we treat the holdouts?

The law then on the books was ripe for endless litigation — from opportunistic parties who had done nothing, signed nothing, invested nothing, and risked nothing — but who, unaccountably, threatened to hold their hands out, after natural gas was successfully found, for *all* the value presumed to flow from under their share of the production unit. New York faced a classic case of useless gridlock, in which all were being hurt, and nobody was being helped. For all its faults, the 2005 revision put an end to all this endlessness, and let ordinary people finally get paid, and let industry do the work that it does to pay its bills, to make its investors happy, to keep its workers employed (and to feed the fossil-fuels monkey maintained by our silent consumer majority).

Another thing — factually, the default royalty option for unsigned parties in New York is not 12.5 percent, and there is no deduction for 300 percent of drilling costs. You made two mistakes here. You got the “default” terms wrong, and you confused the "default" with the "carry" option. The current default rule for unsigned owners is they get the lowest royalty contracted for by anybody inside the unit who actually took a chance and signed on the dotted line — but no less than 12.5 percent. (The legislature could change that, in the future, and there have been proposals for that.) And, like customary royalty, there's no deduction for drilling costs. (There may be deductions for post-production processing and transportation costs — an obscure but very key, fine-print consideration for anybody who happens to own oil and gas in New York State.)

The way things are going in New York (I hope), there is unlikely to be many future leases at 12.5 percent royalty. In the future (I hope), New York State will finally get its regulatory act together, and will set the stage for large, widely-producing (but low-surface-impact) shale gas units where all of the included leases were actually worked on by knowledgeable professionals.

Another error — you said all spacing units in New York are 640 acres. To me, that means you didn't even read the 2005 changes, or the 2008 changes, or even the NYS DEC's very helpful explanatory web-posted materials about either. In 2005, New York State's legislature — in the interest of getting stuff done — actually effectively took the radical step of politically defining and simplifying geology, including the thorny question of oil and gas flowage through various layers of rock. Rather than allowing specialists to dither over the size and shape of every unit on a customized basis, they simply prescribed a whole table of unit sizes — for various rock layers, at various depths. In general, the deeper the rock, and the more flowing the rock, the bigger the desired unit, and the more widely spaced the drilling, per the public interest. (This is based on a principle of achieving maximum resource return for minimal surface impact, a rule that an increasingly small fraction of modern-day environmentalists still recognizes as part of their underlying philosophical worldview.)

There were also places where you misled your readers by leaving stuff out.

You say compulsory integration strikes some as "an outrageous violation of basic private property rights." (Again, it's the underlying rule of capture.) But let me ask you this — wouldn't it be more outrageous for a holdout, owning only 1 percent of the unit's natural gas, to assert that his subterranean private property rights are so touchy and inviolate that he's entitled to veto all drilling in the neighborhood — rendering useless the rights of the remaining 99 percent to produce their resource (including, incidentally, the guy who was ready, willing, and eager to host the drilling rig on his surface)?

You make the 2008 changes sound sneaky — paving the way for shale gas. But, really, they had more to do with this: The prior, 2005 changes completely failed to recognize what turned out to be already on the horizon. Believe it or not, the 2005 changes still envisioned shale gas units at a preposterously close spacing of 40 acres per well, vertically drilled, no matter what the depth, because of the known denseness of the shale. It’s clear that the brightest oil and gas minds in New York, in 2005, did not see coming the future of full-frack, 600-acre Marcellus shale units with six horizontal legs, radiating like pitchforks in either direction (or even a 1200-acre unit with 12 horizontal legs, which I’m reading is now technologically possible). In 2008, those guys were scrambling to fix their prior, short-sighted mistake.

You hold up PA as an example of a state which, by contrast, couldn't politically handle adopting an integration law similar to NY's. But you decline to actually explain how PA is effectively different from NY — right now, in real life, on the merits, on the status quo. In PA, the well gets drilled, whether the nearby holdouts like it or not, same as in NY. In PA, the gas gets captured, from the holdouts, whether they like it or not, same as in NY. But in PA, the holdouts are not compensated! In NY, they are — and, some might say, generously so.

Like virtually all modern-day critics, you completely fail to appreciate that PA's statute actually encourages resource waste, while NY's is truly, honestly, fundamentally, and progressively conservationist. And I mean “conservationist” in the oldest and most hallowed sense of the word.

Let’s get it straight. In PA — until those citizens understand the full ramifications and work to change their law — a horizontal drilling leg must stop the moment it has no choice but to directly strike the boundary of an unleased party, even if it's just a sliver of overlying land. Those oil and gas drillers are down there, right now, in PA — willy-nilly, all over the countryside — making all kinds of odd-shaped units and drill paths, driven largely by the pattern of who at present has signed, and who at present cannot be found or has refused, a mile or more overhead.

Make no mistake about it: In PA, significant, odd-shaped chunks of precious fossil fuels are simply being orphaned forever in the underlying shale! In PA, the horizontal leg must stop, and the private sector can never be expected to return to get that gas, sitting beyond the stoppage. Even when gas hits $50 a MMBTU, it won't make any financial sense to go back and get it, in most cases. There is only one realistic chance to produce this gas cost-effectively, and — drillsite by drillsite, unit by unit, acre for acre — that chance is while the private sector has its drill bit running on the horizontal, and while its completion contractor is ready to follow through with the frack.

Bottom line: Yes, PA's political sensibility and its policy currently produces way more natural resources, way more money, and way more jobs — compared to NY. But PA is also set up to waste lots in the long-run. NY's policy is technically ready to produce natural resources in a highly rational, highly rectangular, non-wasteful way. But NY has been politically restrained so far from getting started, because of the deference we grant to people who incorrectly claim the exclusive mantle of environmental concern.

Anti-drilling activists are always limited in their usefulness because they ask only certain questions. Mostly it’s: "How can we beat this?" Local law? Zoning law? Or maybe we need a study? Environmental impact review? Or what if we got federal regulation involved? Or a state or local moratorium? What about drainage basin commissions? Can they stop this? Or property rights lawsuits? How about nuisance lawsuits?

The point is that anti-drilling activists filter reality through these kind of persistently single-minded questions. It’s not a full picture of the necessary inquisitiveness, as measured journalistically, or by the public interest. On the compulsory integration question — the few times New York's situation has been examined — I consistently find that media people have been very much naively locked into just the questions posed by activists.

But there is a much wider array of questions out there — questions that are crucial to the full, ultimate public interest in people surviving in this world, with fairness and respect to this world, and with fairness and respect to each other.


Anonymous said...

Compulsory integration may be appropriate in the case of "mobile," disassociated gas that has collected in a pool overlain by multiple properties on the surface. But shale gas is not "mobile," does not migrate naturally, and therefore is not subject to the rule of capture. To extract the shale gas trapped under my property from a neighboring property you must physically trespass under my land with drill bits, steel casing, cement, sand, and chemicals.
The compulsory integration law is not about preventing holdouts owning only 1 % in a spacing unit from vetoing the drilling wishes of land owners who own 99% of the acreage in a neighborhood. It is about the government forcibly handing over gratis the mineral rights of 40% of the land in a spacing unit to the drilling operator -often a foreign company. Yes, they pay you a minimum royalty for the gas they extract by trespassing under your property, but they don't pay you for the risk they are taking with your property values, your health, and the quiet enjoyment of your property.
By the way, 40% of a 640 acre spacing unit is a whopping 256 acres that compulsory integrations makes vulnerable to seizure by Norway or China. Are you honestly endorsing government redistribution of American private property to foreign interests?

Anonymous said...
This comment has been removed by a blog administrator.
Andy Leahy said...
This comment has been removed by the author.