Colorado § 34-60-116 - Drilling units - pooling interests - definition.

§ 34-60-116. Drilling units - pooling interests - definition.

(1) (a) To prevent or to assist in preventing waste, to avoid the drilling of unnecessary wells, or to protect correlative rights, the commission, upon its own motion or on a proper application of an interested party, but after notice and hearing as provided in this section, may establish one or more drilling units of specified size and shape covering any pool or portion of a pool.

(b) The application must include proof that either:

(I) The applicant has filed an application with the local government having jurisdiction to approve the siting of the proposed oil and gas location and the local government's disposition of the application; or

(II) The local government having jurisdiction does not regulate the siting of oil and gas locations.

(2) In establishing a drilling unit, the acreage to be embraced within each unit and the shape thereof shall be determined by the commission from the evidence introduced at the hearing; except that, when found to be necessary for any of the purposes mentioned in subsection (1) of this section, the commission is authorized to divide any pool into zones and establish drilling units for each zone, which units may differ in size and shape from those established in any other zone, so that the pool as a whole will be efficiently and economically developed, but no drilling unit shall be smaller than the maximum area that can be efficiently and economically drained by one well. If the commission is unable to determine, based on the evidence introduced at the hearing, the existence of a pool and the appropriate acreage to be embraced within a drilling unit and the shape thereof, the commission is authorized to establish exploratory drilling units for the purpose of obtaining evidence as to the existence of a pool and the appropriate size and shape of the drilling unit to be applied thereto. In establishing the size and shape of the exploratory drilling unit, the commission may consider, but is not limited to, the size and shape of drilling units previously established by the commission for the same formation in other areas of the same geologic basin. Any spacing regulation made by the commission shall apply to each individual pool separately and not to all units on a statewide basis.

(3) The order establishing a drilling unit:

(a) Is subject to section 34-60-106 (2.5); and

(b) May authorize one or more wells to be drilled and produced from the common source of supply on a drilling unit.

(4) The commission, upon application, notice, and hearing, may decrease or increase the size of the drilling units or permit additional wells to be drilled within the established units in order to prevent or assist in preventing waste or to avoid the drilling of unnecessary wells, or to protect correlative rights, and the commission may enlarge the area covered by the order fixing drilling units, if the commission determines that the common source of supply underlies an area not covered by the order.

(5) After an order fixing drilling units has been entered by the commission, the commencement of drilling of any well into any common source of supply for the purpose of producing oil or gas therefrom, at a location other than authorized by the order, is prohibited. The operation of any well drilled in violation of an order fixing drilling units is prohibited.

(6) (a) When two or more separately owned tracts are embraced within a drilling unit, or when there are separately owned interests in all or a part of the drilling unit, then persons owning the interests may pool their interests for the development and operation of the drilling unit.

(b) (I) In the absence of voluntary pooling, the commission, upon the application of a person that owns, or has secured the consent of the owners of, more than forty-five percent of the mineral interests to be pooled, may enter an order pooling all interests in the drilling unit for the development and operation of the drilling unit. The application must include an affidavit that declares that the applicant owns, or has secured the consent of the owners of, more than forty-five percent of the mineral interests to be pooled. The affidavit must identify:

(A) By recording or reception number, any recorded oil and gas lease, recorded memorandum of oil and gas lease, or recorded agreement that conveys rights to minerals or provides the consent of an applicable mineral interest owner or owners within the drilling unit and that the applicant is using to support the declaration in the affidavit; and

(B) The American Petroleum Institute unique identifier number assigned by the commission for any oil and gas well that is holding open a recorded oil and gas lease, recorded memorandum of oil and gas lease, or recorded agreement identified pursuant to subsection (6)(b)(I)(A) of this section.

(I.3) If the applicant is relying on an unrecorded oil and gas lease, unrecorded memorandum of oil and gas lease, or unrecorded agreement to support the declaration in the affidavit, the applicant must disclose that the applicant is relying on an unrecorded oil and gas lease, unrecorded memorandum of oil and gas lease, or unrecorded agreement in the affidavit.

(I.5) If a protest is filed pursuant to subsection (6)(b.5)(I) of this section, the commission shall require the applicant to provide information about the unrecorded oil and gas lease, unrecorded memorandum of oil and gas lease, or unrecorded agreement in accordance with subsection (6)(b.5)(III) of this section and the commission's applicable confidentiality procedures.

(I.7) Mineral interests that are owned by a person that cannot be located through reasonable diligence are excluded from the calculation described in subsection (6)(b)(I) of this section.

(II) The pooling order must be made after notice and a hearing and must be upon terms and conditions that are just and reasonable and that afford to the owner of each tract or interest in the drilling unit the opportunity to recover or receive, without unnecessary expense, a just and equitable share.

(b.5) (I) At least sixty days before the first hearing date for which the commission has provided notice, an unleased mineral interest owner of mineral interests proposed to be pooled by an application may file a protest of the application with the commission disputing the declaration in the affidavit provided by the applicant pursuant to subsection (6)(b)(I) of this section.

(II) The commission shall resolve an unleased mineral interest owner's bona fide protest to an application disputing the declaration in the affidavit provided by the applicant pursuant to subsection (6)(b)(I) of this section prior to entering a pooling order. The resolution process must protect the interests of an unleased mineral interest owner that has articulated a bona fide factual dispute concerning the declaration in the affidavit provided by the applicant pursuant to subsection (6)(b)(I) of this section and may include a stay of the application pending a determination made by a court.

(III) The commission shall allow an unleased mineral interest owner that files a bona fide protest to review, in a manner that protects confidential information, any unrecorded oil and gas lease, unrecorded memorandum of oil and gas lease, or unrecorded agreement the applicant is using to support the declaration in the affidavit, including the names of the parties to the unrecorded oil and gas lease, unrecorded memorandum of oil and gas lease, or unrecorded agreement; the date of the unrecorded oil and gas lease, unrecorded memorandum of oil and gas lease, or unrecorded agreement; the mineral acres subject to the unrecorded oil and gas lease, unrecorded memorandum of oil and gas lease, or unrecorded agreement; and the duration of the unrecorded oil and gas lease, unrecorded memorandum of oil and gas lease, or unrecorded agreement.

(c) Operations incident to the drilling of a well upon any portion of a unit covered by a pooling order shall be deemed for all purposes to be the conduct of operations upon each separately owned tract in the unit by the several owners of each separately owned tract. That portion of the production allocated or applicable to each tract included in a unit covered by a pooling order shall, when produced, be deemed for all purposes to have been produced from the tract by a well drilled on it.

(7) (a) Each pooling order must:

(I) Make provision for the drilling of one or more wells on the drilling unit, if not already drilled, for the operation of the wells, and for the payment of the reasonable actual cost of the wells, including a reasonable charge for supervision and storage. Except as provided in subsection (7)(c) of this section, as to each nonconsenting owner who refuses to agree to bear a proportionate share of the costs and risks of drilling and operating the wells, the order must provide for reimbursement to the consenting owners who pay the costs of the nonconsenting owner's proportionate share of the costs and risks out of, and only out of, production from the unit representing the owner's interest, excluding royalty or other interest not obligated to pay any part of the cost thereof, if and to the extent that the royalty is consistent with the lease terms prevailing in the area and is not designed to avoid the recovery of costs provided for in subsection (7)(b) of this section. In the event of any dispute as to the costs, the commission shall determine the proper costs as specified in subsection (7)(b) of this section.

(II) Determine the interest of each owner in the unit and provide that each consenting owner is entitled to receive, subject to royalty or similar obligations, the share of the production from the wells applicable to the owner's interest in the wells and, unless the owner has agreed otherwise, a proportionate part of the nonconsenting owner's share of the production until costs are recovered and that each nonconsenting owner is entitled to own and to receive the share of the production applicable to the owner's interest in the unit after the consenting owners have recovered the nonconsenting owner's share of the costs out of production;

(III) Specify that a nonconsenting owner is immune from liability for costs arising from spills, releases, damage, or injury resulting from oil and gas operations on the drilling unit; and

(IV) Prohibit the operator from using the surface owned by a nonconsenting owner without permission from the nonconsenting owner.

(b) Upon the determination of the commission, proper costs recovered by the consenting owners of a drilling unit from the nonconsenting owner's share of production from such a unit shall be as follows:

(I) One hundred percent of the nonconsenting owner's share of the cost of surface equipment beyond the wellhead connections, including stock tanks, separators, treaters, pumping equipment, and piping, plus one hundred percent of the nonconsenting owner's share of the cost of operation of the well or wells commencing with first production and continuing until the consenting owners have recovered such costs. It is the intent that the nonconsenting owner's share of these costs of equipment and operation will be that interest that would have been chargeable to the nonconsenting owner had the owner initially agreed to pay the owner's share of the costs of the well or wells from the beginning of the operation.

(II) Two hundred percent of that portion of the costs and expenses of staking, well site preparation, obtaining rights-of-way, rigging up, drilling, reworking, deepening or plugging back, testing, and completing the well, after deducting any cash contributions received by the consenting owners, and two hundred percent of that portion of the cost of equipment in the well, including the wellhead connections.

(c) (I) A nonconsenting owner of a tract in a drilling unit that is not subject to any lease or other contract for oil and gas development shall be deemed to have a landowner's proportionate royalty of:

(A) For a gas well, thirteen percent until the consenting owners recover, only out of the nonconsenting owner's proportionate eighty-seven-percent share of production, the costs specified in subsection (7)(b) of this section; or

(B) For an oil well, sixteen percent until the consenting owners recover, only out of the nonconsenting owner's proportionate eighty-four-percent share of production, the costs specified in subsection (7)(b) of this section.

(II) After recovery of the costs, the nonconsenting owner then owns his or her full proportionate share of the wells, surface facilities, and production and then is liable for further costs as if the nonconsenting owner had originally agreed to drilling of the wells.

(d) (I) The commission shall not enter an order pooling an unleased nonconsenting mineral owner under subsection (6) of this section over protest of the owner unless the commission has received evidence that the unleased mineral owner has been tendered, no less than sixty days before the hearing, a reasonable offer, made in good faith, to lease upon terms no less favorable than those currently prevailing in the area at the time application for the order is made and that the unleased mineral owner has been furnished in writing the owner's share of the estimated drilling and completion cost of the wells, the location and objective depth of the wells, and the estimated spud date for the wells or range of time within which spudding is to occur. The offer must include a copy of or link to a brochure supplied by the commission that clearly and concisely describes the pooling procedures specified in this section and the mineral owner's options pursuant to those procedures.

(II) During the period of cost recovery provided in this subsection (7), the commission retains jurisdiction to determine the reasonableness of costs of operation of the wells attributable to the interest of the nonconsenting owner.

(e) On and after January 1, 2025, if a drilling unit contains the mineral interests of any unleased mineral interest owner that has rejected an offer to lease pursuant to subsection (7)(d)(I) of this section, an operator shall not drill or extract minerals from the drilling unit before a pooling order is entered by the commission.

(f) (I) Notwithstanding any provision in this section to the contrary, the commission shall not enter a pooling order that pools the mineral interests of an unleased mineral interest owner if:

(A) The unleased mineral interest owner is a local government and the local government has rejected an offer to lease pursuant to subsection (7)(d)(I) of this section; and

(B) The minerals subject to the local government's unleased mineral interests are located within the local government's geographic boundaries.

(II) If a pooling order application proposes to pool mineral interests described in subsection (7)(f)(I) of this section, the commission shall deny the application unless the applicant amends the application to no longer pool the mineral interests described in subsection (7)(f)(I) of this section.

(III) Nothing in this subsection (7)(f) affects, limits, or expands a local government's authority to lease, refuse to lease, voluntarily pool, or otherwise dispose of the local government's unleased mineral interests.

(8) The operator of wells under a pooling order in which there is a nonconsenting owner shall furnish the nonconsenting owner with a monthly statement of all costs incurred, together with the quantity of oil or gas produced, and the amount of proceeds realized from the sale of production during the preceding month. If the consenting owners recover the costs specified in subsection (7) of this section, the nonconsenting owner shall own the same interest in the wells and the production therefrom, and be liable for the further costs of the operation, as if the owner had participated in the initial drilling operations.

(9) As used in this section, unless the context otherwise requires, "local government" means a home rule or statutory county, city and county, or municipality.

Source: L. 51: p. 653, § 6. CSA: C. 118, § 68(6). L. 52: p. 130, §§ 2, 3. L. 53: p. 443, §§ 1, 2. CRS 53: § 100-6-4. L. 55: p. 651, § 4. C.R.S. 1963: § 100-6-4. L. 77: (7) and (8) amended, p. 1568, § 1, effective June 1. L. 81: (7)(c) R&RE, p. 1691, § 1, effective July 1. L. 88: (7)(d) added, p. 1216, § 1, effective April 4. L. 91: (2) amended, p. 1414, § 1, effective April 19. L. 2018: (1), (3), (7), and (8) amended, (SB 18-230), ch. 361, p. 2155, § 1, effective July 1. L. 2019: (1), (3), (6), (7)(a)(II), (7)(a)(III), (7)(c), and (7)(d)(I) amended and (7)(a)(IV) added, (SB 19-181), ch. 120, p. 517, § 14, effective April 16. L. 2024: (6)(b) amended and (6)(b.5), (7)(e), (7)(f), and (9) added, (SB 24-185), ch. 229, p. 1407, § 2, effective August 7.

Cross references: For the legislative declaration in SB 24-185, see section 1 of chapter 229, Session Laws of Colorado 2024.

ANNOTATION

Law reviews. For note, "Production from Compulsory Pooled Unit Extends Lease on Outside Acreage?", see 33 Rocky Mt. L. Rev. 184 (1961). For article, "Forced Pooling in the Rockies: Penalizing the Hold-out", see 13 Colo. Law. 634 (1984).

Forced pooling does not require non-consenting mineral owners to "associate" with oil and gas companies in violation of the first amendment to the federal constitution. This statute does not exist as a mechanism for funding speech. Wildgrass Oil & Gas Comm. v. Colo., 447 F. Supp. 3d 1051 (D. Colo. 2020).

Forced pooling does not compel non-consenting mineral owners to "subsidize private speech" of oil and gas companies in violation of the first amendment to the federal constitution. Wildgrass Oil & Gas Comm. v. Colo., 447 F. Supp. 3d 1051 (D. Colo. 2020).

This statute does not require non-consenting mineral owners to associate for the advancement of oil and gas operators' political beliefs. Though forced pooling does require non-consenting mineral owners to interact on some level with oil and gas operators, it does not require them to associate with those operators for the advancement of either party's political beliefs. Wildgrass Oil & Gas Comm. v. Colo., 447 F. Supp. 3d 1051 (D. Colo. 2020).

This statute is not vague even though it does not define what constitutes a "reasonable offer" under subsection (7)(d)(I). The statute does not authorize or encourage arbitrary or discriminatory enforcement. Instead it provides guidance for enforcement and allows the commission to further define reasonableness. Wildgrass Oil & Gas Comm. v. Colo., 447 F. Supp. 3d 1051 (D. Colo. 2020).

Forced pooling allows the government to take non-consenting owners' private property for a public purpose rather than a private benefit and therefore does not violate the takings clause of the federal constitution. Wildgrass Oil & Gas Comm. v. Colo., 447 F. Supp. 3d 1051 (D. Colo. 2020).

This statute does not violate the contract clause of the federal constitution. There is no clear indication of intent to create a contract between operators and non-consenting owners. Wildgrass Oil & Gas Comm. v. Colo., 447 F. Supp. 3d 1051 (D. Colo. 2020).

Neither the cost nor the benefit of taxes should be taken into account when determining payout. San Juan Basin Consortium, Ltd. v. EnerVest San Juan Acquisition Ltd. P'ship, 67 F. Supp. 2d 1213 (D. Colo. 1999).

The rule of capture applies on a tract with split ownership that has not been pooled. A nonoperating owner has no right to damages for or an injunction against mineral trespass but may drill an offset well or seek a pooling order when the commission had issued an order establishing an 80-acre drilling unit and the order allowed operators to drill another well on an undrilled 40-acre tract if the 80-acre tract is not sufficient to drain the formation. INB Land & Cattle, LLC v. Kerr-McGee Rocky Mtn. Corp., 190 P.3d 806 (Colo. App. 2008).