Pennsylvania’s Act 66 of 2013
During its 2013 Session, the Pennsylvania legislature passed and Governor Tom Corbett signed into law Senate Bill 259, which has since become known as Act 66. Much of Act 66 deals with disclosure of deductions and other payment information to Pennsylvania royalty owners. However, Section 2.1, below, stands apart from the other provisions:
“Where an operator has the right to develop multiple contiguous leases separately, the operator may develop those leases jointly by horizontal drilling unless expressly prohibited by a lease. In determining the royalty where multiple contiguous leases are developed, in the absence of an agreement by all affected royalty owners, the production shall be allocated to each lease in such proportion as the operator reasonably determines to be attributable to each lease.”
Oil and Gas Lease Act, 58 Pa. Pub. Stat. § 34.1 (2013)
In plain language, Act 66 is a forced unitization statute. The purposes of forced unitization statutes are to increase production efficiency, protect against waste, and prevent landowners from strategically withholding consent to pool in order to negotiate the highest possible bonus.
Forced Unitization in Pennsylvania
The Act is not the first of its kind in Pennsylvania; the Pennsylvania Oil and Gas Conservation Law of 1961 also allowed lessees to unitize without a lessor’s consent. However, that law applied only to wells that penetrate the Onondaga formation, not to wells in the shallower Utica and Marcellus Shales.
Due to this limited application, forced unitization in Pennsylvania has historically been rare, and thus there are many existing leases that do not expressly forbid pooling. Under the old law, lessees wishing to unitize had to return to the lessor and renegotiate the terms of the original lease before commencing horizontal drilling operations across multiple leaseholds. This process often resulted in an additional and often significant by-the-acre bonus payment for the lessor.
The Effect of the Act
The enactment of Act 66 has rendered renewed negotiations unnecessary. The Pennsylvania Chapter of the National Association of Royalty Owners has voiced a concern that lessors will suffer financial loss and has additionally argued that the forced unitization provision of Act 66 should have been drafted and promoted separately from the rest of the Act. Nevertheless, Act 66 is currently binding law, and parties to existing leases in Pennsylvania would do well to understand its effects.
Application of Act 66
Act 66 only applies to leased tracts, so it does not allow forced pooling on tracts where no lease has been signed. The Act also does not appear to authorize forced unitization where an existing lease has a specified maximum unit size, or where its pooling clause has been properly crossed out. As such, parties to an existing Pennsylvania lease should review its terms for these provisions prior to acting in reliance on Act 66.