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WHEN IT COMES TO MINERAL RIGHTS, “NO” MAY NOT MEAN “NO”

Natural-Gas-Drilling-Rig-37729588Can a property owner be forced to allow the removal of oil and gas from below the property?  In Michigan, the answer could be “yes”, regardless of whether the owner consents to it or not.  While this result seems against logic and the ability to freely determine what to do with ones’ mineral rights, Michigan law allows the State to impose an involuntary pooling of mineral rights.

Through the process of compulsory pooling, oil and gas interests in a given area can be pooled into one drilling unit, regardless of whether a property owner agrees.  Part 615 of the Natural Resources and Environmental Protection Act designates the Director of the Michigan Department of Environmental Quality as the “Supervisor of Wells” and provides the legal authority of the Supervisor of Wells pool properties to form drilling units for private developers.

The concept of compulsory pooling was originally, among other purposes, intended to protect property owners from having oil and gas drained from the underground portion of their property without being compensated for it.  However, it is also used by the MDEQ to combine the mineral rights of a property owner who refuses to lease their land with other property owners in a drilling unit.  It is typically applied to a situation where surrounding property owners have signed leases and there are a few holdouts who refuse.

As a result of this Michigan law, property owners who do not consent to sign an oil or gas lease may nevertheless be compelled to allow a private developer to remove oil and gas from beneath the property.  Also, compulsory pooling may allow the controversial process of “fracking”, regardless of the property owner’s desires.  Although the property owner will be compensated; usually, receiving 1/8th of the royalty from the well’s production, the idea of compulsory pooling seems contrary to long held common notions of private property rights.

Property owners are, therefore, in a conundrum:  whether it is better to negotiate a lease with a mineral rights developer or whether to risk the potential for compulsory pooling.  Although property owners can participate in a hearing before the MDEQ and provide input, the Supervisor of Wells has the power to establish a formula for sharing costs and revenues and takes the negotiation of any particular lease out of the hands of a property owner who refuses to sign a lease. The terms of a compulsory pooling order could be different from what was originally offered in a mineral lease.

Recently, this issue arose in a case in Saline Township, Michigan.  The property owner was surprised when it turned out that regardless of an adamant refusal to sign oil and gas leases, the oil and gas developer initiated a compulsory pooling process to do just that without the property owner’s consent.

Property owners who are approached by oil and gas developers should be aware of compulsory pooling and the potential ramifications of refusing to sign oil and gas leases under Michigan law, especially when they are the last holdout.  While saying “no” to a oil and gas company may be within the rights of a landowner, “no” may not always mean “no” when one considers the concept of compulsory pooling in Michigan.

About Tyler D. Tennent

Tyler D. Tennent is a Member of Dawda, Mann, Mulcahy & Sadler, PLC. He concentrates his practice in the areas of land use, environmental, tax incentives, sustainability, real estate, general corporate and related litigation. Mr. Tennent has significant litigation expertise representing parties in commercial, land use, and environmental litigation, including local, state and federal administrative appellate actions and regulatory proceedings.

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