By: James Godbold – Published in the BizWest Thought Leaders column in April 2019.
Senate Bill 19-181, the proposed comprehensive overhaul of oil and gas regulation in Colorado, has sparked widespread controversy and debate. The bill is now headed to Gov. Polis’ desk for signature. Industry groups strongly opposed the bill, while proponents say it is a logical step in ensuring the safety of Colorado’s communities and the environment. But what do the changes under SB-181 mean for mineral owners?
From the perspective of a mineral owner, the most significant change has to do with what is called “forced pooling.” In order to drill a well, oil and gas operators need to acquire the right to extract the oil and gas from that well. Operators can do this by purchasing the oil and gas rights or by leasing those rights. Under Colorado’s force pooling laws, operators can also force pool the interests of owners from whom it was not able to acquire a lease.
Colorado’s current force pooling laws allow the operator to force pool unleased interests even if it owns or has leased only a small percentage of the oil and gas interests. Landmen for the oil and gas operators will sometimes use the threat of forced pooling to persuade reluctant mineral owners to enter an oil and gas lease.
From the perspective of the mineral owner, SB 181 makes two significant changes to Colorado’s force pooling laws. First, operators will not be permitted to force pool interests unless they own, or have acquired leases from, more than 50% of the mineral interests to be pooled. Second, the royalty rate for mineral owners who are force pooled changes from 12.5% to 15%. These changes provide protections to mineral owners. The threat of being force pooled will be less effective against reluctant mineral owners and, where an owner is force pooled, they will be entitled to a higher percentage of the revenue from a well. Given the complexity of oil and gas leases and Colorado’s forced pooling, it is always best to seek the advice of an experienced oil and gas attorney in responding to proposed development of your mineral interests.
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