Saturday, October 1, 2011

Compulsory Integration

I've seen a lot of articles popping up about the pros and cons of signing an oil and gas lease.  Articles such as the one in the Times Reporter make great points about the potential downside of signing a lease.  However, it's important to know that deciding not to sign a lease doesn't mean that the oil and gas companies won't be able to extract the valuable resources sitting under your land. 

Compulsory Integration is exactly what it sounds like.  When a group of landowners sign a lease, but someone in the middle refuses to, the Ohio Department of Natural Resources (usually known as the ODNR or the DNR) can force a lease on the holdout.  Cleveland Scene magazine reports that compulsory integration can take place with the approval of the ODNR's Oil and Gas Technical Advisory Council.  The committee consists of eight appointed members: six representing oil and gas producers, one representing landowner royalty interests and one representing the public.  Yes.  Of the eight appointed members 6 represent oil and gas producers.  If you decide not to sign a lease and the gas company wants to drill on your land, there seems to be a strong possibility that they will be able to do so without your consent. 

Take some solace in the fact that they can't quite steal the resources.  Compulsory Integration is a lot like eminent domain.  Eminent domain is what the government uses to get those few feet of land at the edge of your property to use to widen the road.  The court (or in this case the DNR) can order the transfer of the land, but it has to be for fair compensation.  If compulsory integration is exercised against your property you WILL get paid, but you won't have the advantage of negotiating.  The Ohio Code provides the full text of the law allowing the practice.

A quick search will yield many stories of people forced to participate in drilling pools.  While most of those forced to integrate have come from NY at this time, it's worth considering that it can happen in Ohio too.  While there are many issues to consider when you are deciding if you want to sign an oil and gas lease, you also need to consider that it may not matter.  If the company achieves that magical percentage of acreage your holdout won't stop them from drilling and you'll have lost the advantage of negotiating rates, returns, term, and location of wells.

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