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Introduced Version Senate Bill 578 History

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Senate Bill No. 578

(By Senators Kessler (Mr. President), Palumbo, Snyder, Edgell and Green)

____________

[Introduced February 14, 2014; referred to the

Committee on Energy, Industry and Mining;

and then to the Committee on the Judiciary.]

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A BILL to amend and reenact §22C-9-1, §22C-9-2, §22C-9-3 and §22C-9-5 of the Code of West Virginia, 1931, as amended; and to amend said code by adding thereto a new section, designated §22C-9-7a, all relating to oil and gas conservation; providing for the unitization of interests in drilling units in connection with horizontal oil and gas wells; making findings; declaring policy; setting forth application requirements; establishing the standard of review; providing for unit orders; requiring notice and timeliness; providing for hearings; providing a standard of review; addressing oil and gas produced from horizontal wells, vertical wells and unconventional reservoirs; providing for conflict resolution; adding new definitions; and modifying existing definitions.

Be it enacted by the Legislature of West Virginia:

    That §22C-9-1, §22C-9-2, §22C-9-3 and §22C-9-5 of the Code of West Virginia, 1931, as amended, be amended and reenacted; and that said code be amended by adding thereto a new section, designated §22C-9-7a, all to read as follows:

ARTICLE 9. OIL AND GAS CONSERVATION.

§22C-9-1. Declaration of public policy; legislative findings.

    (a) It is hereby declared to be the public policy of this state and in the public interest to:

    (1) Foster, encourage and promote exploration for and development, production, utilization and conservation of oil and gas resources;

    (2) Prohibit waste of oil and gas resources and unnecessary surface loss of oil and gas and their constituents;

    (3) Encourage the maximum recovery of oil and gas; and

    (4) Safeguard, protect and enforce the correlative rights of operators and royalty owners in a pool or unit of oil or gas to the end that each such operator and royalty owner may obtain his or her just and equitable share of production from such that pool, unit or unconventional reservoir of oil or gas.

    (b) The Legislature hereby determines and finds that oil and natural gas found in West Virginia in shallow sands or strata have been produced continuously for more than one hundred years; that oil and gas deposits in such shallow sands or strata have geological and other characteristics different than those found in deeper formations; and that in order to encourage the maximum recovery of oil and gas from all productive formations in this state, it is not in the public interest, with the exception of shallow wells utilized in a secondary recovery program and oil and gas produced from horizontal wells, to enact statutory provisions relating to the exploration for or production from oil and gas from vertical shallow wells, as defined in section two of this article, but that it is in the public interest to enact statutory provisions establishing regulatory procedures and principles to be applied to the exploration for or production of oil and gas from deep wells and horizontal wells, as defined in said that section. two

§22C-9-2. Definitions.

    (a) As used in this article:

    (1) “Commission” means the Oil and Gas Conservation Commission and “commissioner” means the Oil and Gas Conservation Commissioner as provided for in section four of this article;

    (2) “Director” means the Secretary of the Department of Environmental Protection and “chief” means the Chief of the Office of Oil and Gas;

    (3) “Person” means any natural person, corporation, partnership, receiver, trustee, executor, administrator, guardian, fiduciary or other representative of any kind, and includes any government or any political subdivision or any agency thereof;

    (4) “Operator” means any owner of the right to develop, operate and produce oil and gas from a pool, unit or unconventional reservoir and to appropriate the oil and gas produced therefrom, either for that person or for that person and others; in the event that there is no oil and gas lease in existence with respect to the tract in question, the owner of the oil and gas rights therein is the “operator” to the extent of seven-eighths of the oil and gas in that portion of the pool, unit or unconventional reservoir underlying the tract owned by such owner, and as “royalty owner” as to one-eighth interest in such oil and gas; and in the event the oil is owned separately from the gas, the owner of the substance being produced or sought to be produced from the pool, unit or unconventional reservoir is the “operator” as to that pool or acreage included in a unit. The term operator includes owners of working interests in a lease but does not include owners whose interests are limited to working interests in a wellbore only, overriding royalties or net profits interests;

    (5) “Royalty owner” means any owner of oil and gas in place, or oil and gas rights, to the extent that the owner is not an operator as defined in subdivision (4) of this section;

    (6) “Independent producer” means a producer of crude oil or natural gas whose allowance for depletion is determined under Section 613A of the federal Internal Revenue Code in effect on July 1, 1997;

    (7) “Oil” means natural crude oil or petroleum and other hydrocarbons, regardless of gravity, which are produced at the well in liquid form by ordinary production methods and which are not the result of condensation of gas after it leaves the underground reservoir;

    (8) “Gas” means all natural gas and all other fluid hydrocarbons not defined as oil in subdivision (7) of this section;

    (9) “Pool” means an underground accumulation of petroleum or gas in a single and separate reservoir (ordinarily a porous sandstone or limestone). It is characterized by a single natural-pressure system so that production of petroleum or gas from one part of the pool affects the reservoir pressure throughout its extent. A pool is bounded by geologic barriers in all directions, such as geologic structural conditions, impermeable strata, and water in the formations, so that it is effectively separated from any other pools that may be presented in the same district or on the same geologic structure;

    (10) “Well” means any shaft or hole sunk, drilled, bored or dug into the earth or underground strata for the extraction of oil or gas;

    (11) “Shallow well” means any well other than a coalbed methane well, drilled no deeper than one hundred feet below the top of the “Onondaga Group”: Provided, That in no event may the “Onondaga Group” formation or any formation below the “Onondaga Group” be produced, perforated or stimulated in any manner;

    (12) “Deep well” means any well, other than a shallow well or coalbed methane well, drilled to a formation below the top of the uppermost member of the “Onondaga Group;”

    (13) “Drilling unit” means the acreage on which one well or more wells may be drilled;

    (14) “Waste” means and includes:

    (A) Physical waste, as that term is generally understood in the oil and gas industry;

    (B) The locating, drilling, equipping, operating or producing of any oil or gas well in a manner that causes, or tends to cause, a reduction in the quantity of oil or gas ultimately recoverable from a pool or unit under prudent and proper operations, or that causes or tends to cause unnecessary or excessive surface loss of oil or gas; or

    (C) The drilling of more horizontal wells or deep wells than are reasonably required to recover efficiently and economically the maximum amount of oil and gas from a pool, unit or unconventional reservoir. Waste does not include gas vented or released from any mine areas as defined in section two, article one, chapter twenty-two-a of this code or from adjacent coal seams which are the subject of a current permit issued under article two of chapter twenty-two-a of this code: Provided, That this exclusion does not address ownership of the gas;

    (15) “Correlative rights” means the reasonable opportunity of each person entitled thereto to recover and receive without waste the oil and gas in and under his or her tract or tracts, or the equivalent thereof; and

    (16) “Just and equitable share of production” means, as to each person, an amount of oil or gas or both substantially equal to the amount of recoverable oil and gas in that part of a pool, unit or unconventional reservoir underlying the person’s tract or tracts;

    (17) "Unconventional reservoir" means any geologic formation that contains or is otherwise productive of oil or natural gas that generally cannot be produced at economic flow rates or in economic volumes except by wells stimulated by multiple hydraulic fracture treatments, a horizontal wellbore, or by using multilateral wellbores or some other technique to expose more of the formation to the wellbore;

    (18) "Horizontal drilling" means a method of drilling a well for the production of oil and gas that is intended to maximize the length of wellbore that is exposed to the formation and in which the wellbore is initially vertical but is eventually curved to become horizontal, or nearly horizontal, to parallel a particular geologic formation; and

    (19) "Horizontal well" means an oil and gas well, other than a coalbed methane well, where the wellbore is initially drilled using a horizontal drilling method. A horizontal well may include multiple horizontal side laterals drilled into the same formation. A horizontal well may have completions into multiple formations from the same well. Multiple horizontal wells may be drilled from the same well pad.

    (b) Unless the context clearly indicates otherwise, the use of the word “and” and the word “or” are interchangeable, as, for example, “oil and gas” means oil or gas or both.

    (c) A person with an interest in oil and gas in a unit formed under this article who does not consent to the unit has no liability in connection with well site preparation, drilling, completion, maintenance, reclamation, plugging and other operations with respect to wells drilled in such unit.

§22C-9-3. Application of article; exclusions.

    (a) Except as provided in subsection (b) of this section, the provisions of this article shall apply to all lands located in this state, however owned, including any lands owned or administered by any government or any agency or subdivision thereof, over which the state has jurisdiction under its police power. The provisions of this article are in addition to and not in derogation of or substitution for the provisions of article six or six-a, chapter twenty-two of this code.

    (b) This article shall does not apply to or affect:

    (1) Shallow wells other than shallow horizontal wells and those utilized in secondary recovery programs as set forth in section eight of this article;

    (2) Any well commenced or completed prior to March 9, 1972, unless such well is, after completion (whether such completion is prior or subsequent to that date):

    (A) Deepened or drilled laterally subsequent to that date to produce from a formation at or below the top of the uppermost member of the “Onondaga Group”; or

    (B) Involved in secondary recovery operations for oil under an order of the commission entered pursuant to section eight of this article; or

    (C) Drilled laterally as a horizontal well at any depth.

    (3) Gas storage operations or any well employed to inject gas into or withdraw gas from a gas storage reservoir or any well employed for storage observation; or

    (4) Free gas rights; or

    (5) Coalbed methane wells.

    (c) The provisions of this article shall may not be construed to grant to the commissioner or the commission authority or power to:

    (1) Limit production or output, or prorate production of any oil or gas well, except as provided in subdivision (6), subsection (a), section seven of this article; or

    (2) Fix prices of oil or gas.

    (d) Nothing contained in either this chapter or chapter twenty-two of this code may be construed so as to require, prior to commencement of plugging operations, a lessee under a lease covering a well to give or sell the well to any person owning an interest in the well, including, but not limited to, a respective lessor, or agent of the lessor, nor shall the lessee be required to grant to a person owning an interest in the well, including, but not limited to, a respective lessor, or agent of a lessor, an opportunity to qualify under section twenty-six, article six, chapter twenty-two of this code to continue operation of the well.

§22C-9-5. Rules; notice requirements.

    (a) The commission may propose rules for legislative approval in accordance with the provisions of article three, chapter twenty-nine-a of this code, to implement and make effective the provisions of this article and the powers and authority conferred and the duties imposed upon the commission under the provisions of this article.

    (b) Notwithstanding the provisions of section two, article seven, chapter twenty-nine-a of this code, any notice required under the provisions of this article shall be given at the direction of the commission by personal or substituted service or by certified United States mail, addressed, postage prepaid, to the last-known mailing address, if any, of the person being served, with the direction that the same be delivered to addressee only, return receipt requested. In the case of providing notice upon the filing of an application with the commission, the commission shall cause notice to be published as a Class II legal advertisement in compliance with the provisions of article three, chapter fifty-nine of this code, and the publication area for such publication shall be the county or counties wherein any land which may be affected by such order is situate.

    In addition, the commission shall mail a copy of such notice to all other persons who have specified to the commission an address to which all such notices may be mailed. The notice shall issue in the name of the state, shall be signed by the one of the commission members, shall specify the style and number of the proceeding, the time and place of any hearing and shall briefly state the purpose of the proceeding. Each notice of a hearing must be provided no fewer than twenty days preceding the hearing date. Personal or substituted service and proof thereof may be made by an officer authorized to serve process or by an agent of the commission in the same manner as is now provided by the “West Virginia Rules of Civil Procedure for Trial Courts of Record” for service of process in civil actions in the various courts of this state.

    A certified copy of any pooling or unit order entered under the provisions of this article shall be presented by the commission to the clerk of the county commission of each county wherein all or any portion of the pooled or unit tract is located, for recordation in the record book of such county in which oil and gas leases are normally recorded. The recording of the order from the time noted thereon by such clerk shall be notice of the order to all persons.

§22C-9-7a. Unitization of interests in horizontal well drilling               units.

    (a) Declaration of public policy; legislative findings regarding unitization for all horizontal wells. -- The Legislature finds that horizontal drilling is a technique that effectively and efficiently recovers natural resources and should be encouraged as a means of production of oil and gas, and it is hereby declared to be the public policy of this state and in the public interest to:

    (1) Foster, encourage and promote exploration for and development, production, utilization and conservation of oil and gas resources by horizontal drilling in deep and shallow formations;

    (2) Prohibit waste of oil and gas resources and unnecessary surface loss of oil and gas and their constituents;

    (3) Encourage the maximum recovery of oil and gas; and

    (4) Safeguard, protect and enforce the correlative rights of operators and royalty owners of oil and gas in a horizontal well unit to the end that each such operator and royalty owner may obtain his or her just and equitable share of production from that pool, horizontal well unit or unconventional reservoir of oil or gas.

    (b) Definitions. -- Unless the context in which used clearly requires a different meaning, as used in this section:

    (1) "Bonded operator" means a person that: (A) Has posted a bond under article six or six-a, chapter twenty-two of this code. (B) is registered as an oil and gas well operator with the West Virginia Department of Environmental Protection, Office of Oil and Gas; and (C) operates eight or more oil and gas wells, as defined in articles six and six-a, chapter twenty-two of this code, in West Virginia that are active, producing oil and gas wells.

    (2) "Executive interest" and "executory interest" means the interest entitling the owner thereof to lease the oil and gas estate or amend an existing oil and gas lease. For purposes of this section, the owner of the executive interest shall be deemed to be the royalty owner and interested party for purposes of notice and participation in proceedings hereunder, and all horizontal well unit orders are binding on the owners of executive interests and nonexecutive interests in a horizontal well unit. The owners of the executive interest and the associated nonexecutive interest owners shall be considered to be the same interest for purposes of computing percentages pursuant to paragraph (A), subdivision two, subsection (c) of this section.

    (3) "Horizontal well unit" means an area in which horizontal drilling may occur, and that is designated for the allocation of production from one or more horizontal wells drilled in the unit to all oil and gas tracts, or portions thereof, included in the unit for production of oil and gas and payment of royalty and proceeds of production regardless of the tract or tracts in which the horizontal well is drilled or completed, and the corresponding authorization to drill and produce oil and gas from such area as a unit, notwithstanding the lack of adequate consensual rights allowing pooling or unitization of oil and gas or allowing drilling horizontally across tract lines. When a horizontal well unit is formed, that portion of the production allocated to each tract or portion thereof included in the horizontal well unit shall, when produced, be deemed for all purposes to have been actually produced from such tract by an oil and gas well drilled, completed and producing thereon.

    (4) "Lateral" means the portion of a well bore that deviates from approximate vertical orientation to approximate horizontal orientation and all well bore beyond such initial deviation to total depth or terminus thereof.

    (5) "Overriding royalty" means an interest carved out of the leasehold or out of the working interest and may not be included within the meaning of royalty.

    (6) "Royalty owner" means any owner of oil and gas in place or interest derived from the oil and gas in place. Royalty is not carved out of a leasehold interest. For example, if a fee owner of oil and gas leases property for oil and gas production and conveys to another the right to receive one half of the oil and gas when produced, both parties are royalty owners.

    (7) "Target formation" means the primary geologic formation from which oil or gas is intended to be produced from a horizontal drilling operation, and, where completions can reasonably be expected to produce from formations above or below the target formation, shall also include the formations from which production can reasonably be expected.

    (8) "Unitization" means the combination of two or more tracts of oil and gas, or portions thereof, for drilling of horizontal wells and production of oil and gas from the unit with allocation of production to the net acreage of each tract included in the unit to operate as a consolidated horizontal well unit.

    (9) "Unitization consideration" means consideration provided as set forth in subsection (f) of this section. Unitization consideration relates to the net acreage of the nonconsenting royalty owner included in a horizontal well unit and is as determined to be just and reasonable by the commission.

    (10) "Unknown and unlocatable interest owner" means a royalty owner, operator or other person vested with an interest in oil and gas in the target formation to be included in a horizontal well unit, whose present identity or location cannot be determined from:

    (A) A reasonable review of the records of the clerk of the county commission for the county or counties where the oil and gas is located;

    (B) Diligent inquiry to known interest owners in the same tract;

    (C) Inquiry to the sheriff's and assessor's offices of the county or counties in which the oil and gas interest is located; and

    (D) A mailing to the last known address, if available, of such person as reflected in the records of said sheriff's or assessor's office, and includes the unknown heirs, representatives, successors and assigns of such person.

    (c) Applicability. --

    (1) For all horizontal wells, including shallow and deep horizontal wells, the commission has the authority to unitize tracts, or portions thereof, in a horizontal well unit established under this section upon the filing of an application with the commission by a person that controls the horizontal well unit and upon the issuance of a horizontal well unit order pursuant to this section.

    (2) Before filing an application under this section, an applicant must have:

    (A) With respect to the royalty interest, obtained by ownership, lease, lease amendment, assignment, farmout, contract or other agreement, the right, consent or agreement to pool or unitize the acreage to be included in the horizontal well unit from executory interest royalty owners of sixty-seven percent or more of the net acreage proposed to be included in the horizontal well unit, as provided and determined in accordance with subdivision (3) of this subsection;

    (B) With respect to the operator interest, obtained by ownership, lease, lease amendment, assignment, farmout, contract, or other agreement, the right, consent or agreement to pool or unitize as to eighty-five percent or more of the net acreage proposed to be included in the horizontal well unit owned, leased, or operated by bonded operators and the applicant, collectively, by ownership, lease, farmout, assignment, contract or other agreement; and

    (C) (I) Made good faith offers to consent or agree to unitization to, and has negotiated in good faith with, all known and locatable royalty owners having executory interests in the oil and gas in the target formation within the acreage to be included in the proposed horizontal well unit who have not previously consented or agreed to the pooling or unitization of such interests; and

    (ii) Made good faith offers to participate or consent or agree to the proposed horizontal well unit to, and has negotiated in good faith with, all known and locatable operators who have not previously agreed to participate or consent or agree to pooling and unitization of the acreage to be included in a proposed horizontal well unit.

    A person who satisfies the conditions of paragraphs (A) through (C) of this subdivision is referred to in this section as a person that controls the horizontal well unit.

    (3) For purposes of determining whether a person has obtained the requisite control of the proposed horizontal well unit, the commission may not include overriding royalty owners, nonexecutive interest royalty owners, or acreage owned or otherwise held by unknown and unlocatable interest owners or acreage owned or otherwise held by operators who are not bonded operators. Furthermore, for purposes of determining whether a person has the requisite control of the proposed horizontal well unit, the identity and rights of royalty owners and bonded operators shall be determined as of the date on which the application for a horizontal well unit is filed.

    (4) If the applicant has not met all the provisions of this subsection, the application shall be dismissed without prejudice.

    (5) If the applicant meets all of the provisions of this subsection, the commission shall authorize unitization of tracts, or portions thereof, as to all interests in oil and gas in the target formation acreage proposed to be unitized for horizontal drilling, including interests of unknown and unlocatable owners, for production of oil and gas from the target formation as a horizontal well unit, and shall issue a horizontal well unit order in accordance with this section.

    (d) Application requirements. --

    (1) An applicant who is a person that controls the horizontal well unit proposed for a horizontal well unit order and has drilled or plans to drill one or more horizontal wells in the proposed horizontal well unit may file an application with the commission for a horizontal well unit order. The application shall contain:

    (A) A description of the proposed horizontal well unit and identification of the target formation or formations;

    (B) A statement of the nature of the operations contemplated;

    (C) A plat that depicts the boundaries and acreage of the proposed horizontal well unit, the tracts in the horizontal well unit, the surface tax map and parcel numbers of the tracts to be included in the horizontal well unit in accordance with county assessor's records, and the district(s) and county or counties where the proposed horizontal well unit is located. The plat shall show the surface location of the vertical borehole of the horizontal well(s) to be included in the proposed horizontal well unit determined by survey, the courses and distances of such surface location from two permanent points or landmarks on those tracts, the deviation from vertical, and also the proposed horizontal lateral portion of each proposed horizontal well to be included in the proposed horizontal well unit. The plat shall show the proposed horizontal well unit name, the proposed horizontal well names, and if known, the well number of each horizontal well to be drilled in the horizontal well unit. The plat shall also show the location of each permitted, active oil and gas well located in the horizontal well unit, and the name of the operator of such well as shown by the records of the Department of Environmental Protection, Office of Oil and Gas: Provided, That the applicant may not be required to depict or identify any abandoned or plugged well;

    (D) A listing of all oil and gas tracts, or portions thereof, within the proposed horizontal well unit, the size of each tract, and the extent to which each tract is leased;

    (E) The names and last known addresses of royalty owners of the target formation of each tract within the proposed horizontal well unit, specifying:

    (I) Which, if any, of them are unknown and unlocatable;

    (ii) Which of them hold executive rights; and

    (iii) With respect to owners of an executory interest, whether they have consented to pooling or unitization of the acreage proposed to be included in the horizontal well unit;

    (F) The names and last known addresses of operators of proposed horizontal well unit target formation acreage whose interest is of record in the county where the property is located, specifying:

    (I) Which, if any, of them are unknown and unlocatable; and

    (ii) Which, if any of them, are bonded operators, and if a bonded operator, whether he or she has consented to pooling or unitization as to the acreage proposed to be included in the horizontal well unit;

    (G) Information regarding the applicant's actions to identify and locate unknown and unlocatable owners of target formation acreage to be included in the horizontal well unit;

    (H) The percentage of the net acreage in the proposed horizontal well unit owned by executory interest target formation royalty owners who have consented to pooling or unitization;

    (I) The percentage of the net acreage in the proposed horizontal well unit held by bonded operators and the applicant, collectively, as to which consent or agreement to pooling or unitization has been granted;

    (J) A percentage allocation to the separately owned tracts, or portions thereof, in the proposed horizontal well unit of the oil and gas that will be produced from the horizontal well unit as determined by the proportion that each tract's net acreage within the horizontal well unit bears to the total net acreage in the horizontal well unit;

    (K) A certification that the applicant meets the requirements of subsection (c) of this section with respect to the proposed horizontal well unit, a list of the instruments granting such control, and a certification that the applicant has mailed a copy of the application to all known and locatable interested parties by United States certified mail, return receipt requested, to their last known address and to the most current address filed with the West Virginia Department of Environmental Protection and the Office of Oil and Gas; and

    (L) A statement whether the applicant has submitted, either previously or contemporaneously with the application filed pursuant to this section, an application for a well work permit with the Department of Environmental Protection for one or more horizontal wells to be completed within the boundaries of the proposed horizontal well unit.

    (2) Upon the filing of an application for a horizontal well unit order, the commission shall provide notice of a hearing to all interested parties, as defined in this section, in accordance with section five of this article and subsection (c) of this section.

    (e) Standard of review. --

    (1) The commission shall evaluate the application and shall consider:

    (A) The ownership and control of the tracts, or portions thereof, in the proposed horizontal well unit;

    (B) Whether the tracts, or portions thereof, proposed to be made subject to a horizontal well unit order are owned in whole or in part by unknown or unlocatable owners;

    (C) Information regarding the applicant's actions to locate unknown and unlocatable interest owners for the tracts, or portions thereof, sought to be included in the horizontal well unit;

    (D) The percentage of executory interest royalty owner target formation acreage to be included in the horizontal well unit as to which consent or agreement for pooling or unitization has been granted;

    (E) The percentage of proposed horizontal well unit target formation acreage held, collectively, by the applicant and bonded operators who have consented or agreed to the unit in accordance with subsection (c) of this section;

    (F) Whether the applicant is a person that controls the horizontal well unit proposed for unitization;

    (G) The area to be drained by well(s) completed or to be completed in the horizontal well unit;

    (H) Correlative rights;

    (I) The extent to which the application will prevent waste;

    (J) Whether the applicant has complied with subsection (c) of this section; and

    (K) Whether notice has been provided in accordance with this section.

    (2) The commission may not issue a horizontal well unit order pursuant to this section unless it finds that the applicant has before the filing of the application met the requirements of subsection (c) of this section.

    (3) The commission may not change the operator of an existing well drilled in the proposed horizontal well unit, or a well actually being drilled within the proposed horizontal well unit as of the date the application is filed under this section, and shall consider and protect the interests of owners of such well when issuing a horizontal well unit order.

    (f) Horizontal Well Unit Orders. --

    (1) A horizontal well unit order under this section shall specify:

    (A) The size and boundaries of the horizontal well unit giving due regard for maximization of the amount of oil and gas produced to prevent waste and protect correlative rights: Provided, That a horizontal well unit's size may not exceed six hundred forty acres: Provided, however, That the commission may exceed the acreage limitation by ten percent if the applicant demonstrates that the proposed horizontal well unit area would be drained efficiently and economically by a larger horizontal well unit;

    (B) The horizontal wells which may be drilled in the horizontal well unit, and whether the horizontal wells to be drilled are shallow or deep;

    (C) In the event there are vertical wells completed in the target formation in the horizontal well unit, the area where a horizontal well may not be completed;

    (D) The target formation or target formations to which the horizontal well unit applies; and

    (E) Any unitization consideration due.

    (2) An order authorizing unitization of tracts with unknown or unlocatable owners shall contain a finding that identifies such persons as unknown or unlocatable.

    (3) An order shall specify that the allocation of the percentage of production of the horizontal wells drilled in the horizontal well unit to the separately owned tracts, or portions thereof, included within the horizontal well unit shall be in the proportion that each tract's net acreage within the horizontal well unit bears to the total net acreage within the horizontal well unit.

    (4) A horizontal well unit order shall authorize and perfect unitization of all interests in the target formation as to the tracts, or portions thereof, included in the horizontal well unit.

    (5) If the applicant is a person that controls the horizontal well unit proposed for a horizontal well unit order under this section, the commission shall form a horizontal well unit pursuant to this section and authorize the drilling and operation of one or more horizontal wells in the unit for the production of oil or gas from the target formation from any tract within the horizontal well unit.

    (6) With respect to royalty owners of leased tracts who have not consented to pooling or unitization, the commission may require that unitization consideration be provided to executive interest royalty owners equivalent to just and reasonable consideration for the modification of rights under a lease. Further, if an award of unitization consideration differs from the rights under a lease or other contract, the applicant, all royalty owners, and owners of leasehold, working interest, overriding royalty interest, and other interests in the oil and gas shall be bound by the order. Unitization consideration shall be provided by the participating operators, including the applicant, to the extent of their interest in the horizontal well unit.

    (7) With respect to interests in oil and gas as to which there is no lease in existence, the owner thereof is deemed a royalty owner to the extent of one-eighth and operator to the extent of seven eighths by virtue of subdivision four, subsection a, section two of this article and:

    (A) Any such owner may elect to surrender the oil and gas underlying such tract to the participating operators, including the applicant, to the extent of their interest in the horizontal well unit for consideration, which if not agreed upon, shall be just and reasonable as determined by the commission; or

    (B) Executive interest owners may make an election for unitization consideration, and if the executive interest owner elects unitization consideration, the interests of the executive interest owner and the associated nonexecutive interest owners shall be deemed leased to the participating operators, including the applicant, to the extent of their interest in the horizontal well unit on terms which, if not agreed upon, shall be just and reasonable as determined by the commission. Thereafter, the applicant and all royalty owners and owners of leasehold, working interest, overriding royalty interest, and other interests in the oil and gas shall be bound by the order, and the participating operators including the applicant, to the extent of their interest in the horizontal well unit, will be the operator of such oil and gas as to the deemed seven-eighths interest and the owner of the unleased oil and gas will be the executive interest royalty owner as to the deemed one-eighth interest.

    (C) Owners of oil and gas interests as to which there is no lease in existence who do not elect paragraph (A) or (B) of this subdivision shall be deemed to be a royalty owner with respect to one-eighth and an operator with respect to seven eighths of their ownership interest, and may not receive unitization consideration. With respect to such seven eighths, that owner may elect Option 1, Option 2 or Option 3 as provided by subdivision (9) of this subsection.

    (8) No unitization consideration may be required to be paid to any royalty owner who has consented or agreed to pooling or unitization by virtue of the terms contained in an oil and gas lease, pooling or unitization agreement, or other agreement which permits pooling or unitization.

    (9) An operator may elect to consent to and participate in a horizontal well unit after an application is filed. Subject to subdivision seven of this subsection, when the commission issues a horizontal well unit order pursuant to this section, the commission shall allow each nonconsenting operator, who does not elect to participate in the risk and cost of drilling in the horizontal well unit to choose from the following options:

    (A) Option 1. To surrender such interest or a portion thereof to the participating owners on a reasonable basis and for a just and reasonable consideration, which, if not agreed upon, shall be determined by the commission;

    (B) Option 2. To participate in the drilling in the horizontal well unit on a limited or carried basis on terms and conditions which, if not agreed upon, shall be determined by the commission to be just and reasonable; or

    (C) Option 3. To enter into a farm out agreement, sublease, or other contract to permit drilling, operation and unitization with respect to such interest for such consideration and on terms and conditions which, if not agreed upon, shall be determined by the commission to be just and reasonable.

    (10) In the event a nonconsenting operator elects Option 2, and an owner of any operating interest in any portion of the horizontal well unit shall drill and operate, or pay the costs of drilling, completing, equipping and operating a horizontal well for the benefit of such nonparticipating owner as provided in the horizontal well unit order, then such operating owner shall be entitled to the share of production from the tracts or portions thereof subject to the horizontal well unit order accruing to the interest of such nonparticipating owner, exclusive of any unitization consideration, and royalty and overriding royalty reserved in any leases, assignments thereof, or agreements relating thereto, of such tracts or portions thereof, until the market value of such nonparticipating owner's share of the production, exclusive of such unitization consideration, royalty and overriding royalty equals double the share of such costs payable by or charged to the interest of such nonparticipating owner. In the event an operator is an unknown or unlocatable owner, such operator shall be deemed to have elected Option 2.

    (11) If a dispute arises as to the costs of drilling, completing, equipping and operating a horizontal well in a horizontal well unit formed pursuant to this section, the commission shall determine and apportion the costs, within ninety days from the date of written notification to the commission of the existence of such dispute.

    (12) If the horizontal well unit approved by the commission is not fully developed as approved in the order, the applicant shall file a request to modify the horizontal well unit with the commission within sixty days from the later of: completion of all drilling activities within the horizontal well unit; or the date that is five years after the most recent drilling activity in the horizontal well unit occurs.

    (13) Any interested party may file an application to correct a clerical error in a horizontal well unit order at any time.

    (14) The applicant may file a request to modify a horizontal well unit order at any time.

    (15) If an operator has not drilled a well in a horizontal well unit formed by the commission within five years after the latter of either the drilling and completion of the initial horizontal well in the horizontal well unit or the drilling and completion of the most recent horizontal well within the horizontal well unit, as the case may be, an interested party may file a request to modify the horizontal well unit, and the commission may modify such horizontal well unit. Upon the modification of the horizontal well unit, the commission shall recalculate the allocation of production from the tracts in the modified horizontal well unit from and after the modification order date and the modification order shall be binding on the property subject to the horizontal well unit order, and all owners thereof, their heirs, representatives, successors and assigns for so long as the horizontal well unit order remains in effect. In the event the commission determines that any party has been overcompensated, the commission may authorize the applicant to withhold distributions to the overcompensated party and redistribute withheld moneys to the appropriate parties. The operator may set off against any amount overpaid.

    (16) All operations, including, but not limited to, the commencement, drilling, or operation of a horizontal well upon any portion of a horizontal well unit for which a unit order has been entered pursuant to this section, shall be deemed for all purposes the conduct of such operations upon each separate tract or portion thereof in the horizontal well unit. That portion of the production allocated to each tract or portion thereof included in a horizontal well unit shall, when produced, be deemed for all purposes to have been actually produced from such tract by an oil and gas well drilled, completed and producing thereon.

    (17) Where the commission finds that the interest of one or more unknown or unlocatable owners are included in the horizontal well unit, the horizontal well unit operator shall hold the moneys payable to such owner in an account for such interest owner. The money shall be held until the unknown or unlocatable owner is located, or the money held is deemed abandoned, and then shall be paid in accordance with the provisions of the West Virginia Uniform Unclaimed Property Act.

    (18) A horizontal well unit order under this section shall expire if a horizontal well has not been drilled in the horizontal well unit within three years of the date the order is final and nonappealable, unless the commission extends the order for good cause, and if such a well has been drilled within three years the horizontal well unit shall continue in force and effect until all the horizontal wells drilled in the horizontal well unit are plugged.

    (19) For purposes of this section, the commission shall determine what is "just and reasonable" based on relevant evidence adduced at a hearing regarding amounts paid or consideration given in arm's length transactions in the vicinity of the horizontal well unit and within a reasonable time prior to the hearing for transactions of the same nature and involving similar geologic conditions as that transaction being considered by the commission.

    (20) So long as the order remains in effect, a horizontal well unit order is binding on the property subject to the horizontal well order and all owners thereof, and their heirs, representatives, successors and assigns.

    (g) Notice, timelines, hearings and orders. --

    (1) (A) For purposes of this section and the West Virginia Administrative Procedures Act, "interested parties" and "parties" means owners of the executive interest in the oil and gas in the target formation within the horizontal well unit, including the unknown or unlocatable executive interest royalty owners in the tracts, or portions thereof, to be included in the horizontal well unit subject to an application for a horizontal well unit order; owners of unleased oil and gas to be included in the horizontal well unit; operators of all target formation acreage in the horizontal well unit; and operators of all oil and gas wells located in the unit that have been drilled to or through the target formation.

    (B) Bonded operators of wells drilled to or through the target formation that are not within the horizontal well unit but are located within five hundred feet of a proposed horizontal well unit boundary has the right to submit written comments regarding the horizontal well unit application at any time before the start of any hearing regarding the application, but are not interested parties and may not participate in the hearing nor have the right to appeal the commission's decision regarding the application.

    (2) Each notice issued in accordance with this section shall describe the area for which a horizontal well unit order is proposed in recognizable, narrative terms and contain such other information as is essential to the giving of proper notice, including the time and date and place of a hearing. As soon as practicable the commission shall establish a web site. Within three business days of the filing of an application under this section, the commission shall publish on its website a copy of: (A) The horizontal well unit application notice required to be published pursuant to this section and section five of this article; and (B) the proposed horizontal well unit plat filed with the application, both identified as a horizontal well unit application and indexed by county and district where the majority of the acreage to be included in the proposed horizontal well unit is located, so that the plat and notice of the application are readily accessible. Timely publication on said web-site for a period of ten business days shall be notice to all operators.

    (3) Upon request of any interested party or the commission, the commission shall conduct a hearing and receive evidence regarding the application. All interested parties may participate in any hearing. If a hearing has been held regarding an application, the order shall be a final order. If no hearing has been requested by the commission or an interested party within fifteen days after notice of the application is posted on the commission website in accordance with subdivision two of this subsection, the commission may issue a proposed order and provide a copy of the proposed order, together with notice of the right to appeal to the commission and request a hearing, to all interested parties. Any interested party aggrieved by the proposed order may appeal the proposed order to the commission and request a hearing. Notice of appeal and request for hearing shall be made within fifteen days of entry of the proposed order. If no appeal and request for hearing has been received within fifteen days, the proposed order shall become final. If a hearing is requested, the hearing shall commence within forty five days of issuance of the initial notice. The commission may, upon written request, extend the date for the hearing: Provided, That the hearing must be convened within forty-five days of the initial notice issued by the commission. The commission shall, within twenty days of the hearing, enter an order authorizing the unit, dismiss the application, or for good cause, continue the process.

    (4) An order establishing a horizontal well drilling unit or dismissing an application is a final order. Any interested party aggrieved by the order may seek judicial review pursuant to section eleven of this article. Notice of appeal shall be made in accordance with section eleven of this article within fifteen days of entry of the order. If no appeal has been received within fifteen days, the order shall become final.

    (h) Unit order does not grant surface rights. -- A horizontal well unit order under this section does not grant or otherwise affect surface use rights.

    (I) Commission approval required for certain additional drilling. -- After the filing of an application for a horizontal well unit order, no well may be drilled or completed to or through the target formation of the proposed horizontal well unit unless authorized by the commission.

    (j) Contemporaneous permit applications authorized. -- Notwithstanding anything to the contrary in article six-a, chapter twenty-two of this code, upon the filing of an application for a horizontal well unit order pursuant to this section, an applicant shall be entitled to file an application for a well work permit under article six-a, chapter twenty-two of this code for any proposed development within the horizontal well unit for which the unit order is sought.

    (k) A party may appear in person. -- At any hearing an interested party may represent themselves or be represented by an attorney.

    (l) Conflict resolution. -- After the effective date of this section, all applications requesting unitization for horizontal wells shall be filed pursuant to this section. Deep well horizontal unit applications filed before the effective date of this section shall continue to proceed under and be governed by the provisions of section seven of this article. With respect to horizontal well unit applications filed after the effective date of this section, if this section conflicts with section seven of this article, the provisions of this section shall prevail. When considering an application pursuant to this section, rules regarding deep wells promulgated before the effective date of this section does not apply. The commission may modify any special field rules, spacing orders, and deep well units in connection with horizontal well unit orders under this section to protect correlative rights, prevent waste, or ensure that operators and royalty owners receive their just and equitable share of production.



    NOTE: The purpose of this bill is to provide for the unitization of interests in drilling units in connection with horizontal oil and gas wells. The bill makes findings. The bill declares policy. The bill sets forth application requirements. The bill establishes the standard of review. The bill provides for unit orders. The bill requires notice and timeliness. The bill provides for hearings. The bill provides a standard of review. The bill addressing oil and gas produced from horizontal wells, vertical wells and unconventional reservoirs. The bill provides for conflict resolution. The bill adds new definitions and modifies existing definitions.


    Strike-throughs indicate language that would be stricken from the present law, and underscoring indicates new language that would be added.


    §22C-9-7a is new; therefore, strike-throughs and underscoring have been omitted.

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