Forcing the issue

A legal but controversial tool of oil and gas drillers across the nation is getting as severe a test as Gary Williams can give it.

Williams has single-handedly stalled a proposed 80-acre crude oil drilling project by one of the state's largest operators. Williams refuses to sign papers to allow drilling underneath or near his potentially oil-rich property.

Evansville-based CountryMark Energy Resources LLC, which proposes to sell the oil to the company's refinery in Mount Vernon, Ind. has responded by invoking a 64-year-old statute embodying what critics call eminent domain for drillers.

The technique, called "forced pooling," would allow CountryMark to send a remote access horizontal drill underneath or close to Williams' 0.83-acre property.

Thirty of his neighbors, in a 32-parcel drilling area, have already leased their acreage to the company. The other holdout did not sign a lease but is not resisting forced pooling.

Mostly, Williams makes a property rights case.

"It's our land, whether they're on top of it or below it," he said inside the Cape Cod house he shares with his wife, Elizabeth, and their four children in a rural enclave just off Middle Mount Vernon Road. "I couldn't just come up around your property and start — let's say I wanted to dig a cave to the other neighbors, I wanted a cool tunnel. I like tunnels.

"What would you say if I just started digging a tunnel underneath your property?" he asked.

Williams is appealing an Oct. 28 order from Indiana's Department of Natural Resources that "force pools" his property into the group of property owners who have signed off on the drilling. A hearing was held Friday before an administrative law judge in Jasonville, Ind. The judge hasn't made a ruling.

Williams, a 36-year-old chemist for a paint company, hopes a successful appeal establishes useful case law for other property owners inclined to fight oil exploration and production companies over their land.

"I'm thinking of all the other people this could happen to," he said.

Advocates say forced pooling — some form of which is legal in most states — allows companies to harvest valuable resources when a majority of property owners have agreed to participate.

Herschel McDivitt, director of Indiana's state Department of Natural Resources' Division of Oil and Gas, said forced pooling serves the greater good by preventing one property owner from blocking the efficient harvesting of oil and gas on contiguous leased parcels.

"There's oil and gas conservation waste if you're drilling too many vertical wells when one horizontal well alone would be sufficient to drain the productive section of a (rock) formation," said McDivitt, who issued the order allowing forced pooling of Williams' property.

Indiana's forced pooling statute, adopted in 1947, states unwilling property owners "shall" be integrated into a drilling unit — provided there is equitable financial compensation — "for the prevention of waste or to avoid the drilling of unnecessary wells."

McDivitt said without forced pooling there would be "five times the surface disturbance," since the operation would require multiple horizontal wells.

But Williams has several other objections, including what he calls CountryMark's inadequate offer of royalties and signing bonus. He says CountryMark's guarantee falls short of protecting his well water from contamination. He also doubts the company's assertion that it would not use a controversial drilling technique in the cypress sandstone rock formation under his property.

Compensation size

Oil exploration and production has been big business in Southwestern Indiana for decades, with millions spent every year.

CountryMark estimates the Midway Acres subdivision project will cost the company $750,000.

"The majority of oil production is in the southwestern part of the state. That's just the way God made things," McDivitt said with a chuckle.

CountryMark President Charlie Smith has called the Illinois Basin, a 53,000-square-mile depression underneath Southwestern Indiana, Southern Illinois and Western Kentucky, one of the best sources of domestic crude oil in the Midwest.

"Approximately 40,000 barrels of crude oil are produced daily from this region," Smith said in statement issued in 2008. "This is an extremely dependable, secure supply of energy for Indiana and surrounding states."

Indiana crude oil production has hovered at just under or over 2 million barrels annually since 2000. In 2010, the average price of oil per barrel was $73.46, higher than in all other years in the decade save 2008.

A Midway Acres resident who agrees to let CountryMark drill underneath his property can make some of the money for himself — a few thousand dollars — without bearing any of the financial risk.

Core Minerals Operating Co., the project operator before it sold part of its assets to CountryMark, told property owners in the subdivision that a well averaging 80 barrels of oil per day with oil priced at $65 per barrel could pay $5,931 in one year.

CountryMark has offered Williams the same $100 lease signing bonus that his neighbors got, plus the standard one-eighth of the total value of oil produced. That amount is proportionately divided among parcel owners according to the percentage of a drilling unit occupied by their properties.

The other seven-eighths goes to the operator, who in most cases assumes all of the costs and risks of the drilling. An unwilling property owner receives the same bonus plus royalties as his neighbors.

The state's forced pooling statute does not define the required "reasonable terms that give the owner of each tract an equitable share of oil and natural gas in the unit or pool."

The statute's seemingly definitive language appears to leave an unwilling property owner little room to negotiate in return for his cooperation.

"If the owners of separate tracts of land do not agree to integrate their interests, the commission shall, for the prevention of waste or to avoid the drilling of unnecessary wells, require the owners to integrate their interests and to develop the land as a drilling unit," it states.

Leslie Avakian, a leading activist against pending legislation to allow forced pooling in Pennsylvania's gas-rich Marcellus Shale, says that robs property owners of their negotiating power.

"If they're saying, 'Look, we're going to take your asset in court,' where's your negotiating power?" said Avakian, founder of ProtectMyRightsPA.org.

McDivitt says the statutory requirement to compensate an unwilling landowner after a forced pooling makes the procedure fair, given that oil would still be drained from underneath his property if the well path only traversed close to it.

"One of the fundamental principles in fairness with forced pooling is to make sure that somebody doesn't drill a well and unduly drain oil from somebody else's property and they don't get to share in it," he said.

But McDivitt acknowledged that the unwilling landowner's oil would not be flowing into a well in the first place unless someone were taking it.

"It's kind of like pulling the plug in the bathtub. Until you pull that plug and create that, we'll call a pressure sink, the water stays in your tub," he said. "But once you pull it, every drop of water that's in that tub, if the drain is constructed properly, is going to eventually drain."

'Quasi-DNR employee'

Indiana property owners who wish to contest being force pooled are subject to a procedure before McDivitt's division. The Division of Oil and Gas's informal hearing schedule shows 15 forced pooling cases since August 2008, with Williams' case being the only one unresolved.

None of the other 14 cases were successful in preventing a forced pooling.

McDivitt acknowledged that while his agency regulates the drilling, operation and abandonment of oil and gas production wells in Indiana, it is also an advocate for development.

"We're not just strictly a regulatory, permitting, environmental protection agency," he said. "We still look at that resource.

"In fact, our mission statement is to encourage responsible development of oil and gas, but in a manner that's protective of landowners' rights, human health and safety, doesn't waste the resource and certainly does not adversely affect the environment."

Operators pay a 1 percent severance tax on the value of all oil and gas that is produced. The money — more than $1.3 million in 2010 — is used to support operating expenses of the Division of Oil and Gas.

"We have no financial benefit or incentive, or I don't see how you can make that connection," McDivitt said. "We're just doing our job."

Hearing officer Sandra Jensen, who heard Williams' appeal of McDivitt's Oct. 28 order, is "a quasi-DNR employee," McDivitt said. "Well, officially she is a representative of the Natural Resources Commission."

McDivitt acknowledged that Williams or CountryMark can litigate Jensen's ruling in state court.