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SB 244: Co-Tenancy and Joint Development Legislation Introduced in West Virginia

On February 10, 2017, Senate Bill 244 (SB 244) was introduced in the West Virginia Senate to address the oil and natural gas industry’s effort to efficiently develop production of natural resources. Sponsored by, among others, Senate President Mitch Carmichael, SB 244’s stated purpose is “encouraging and facilitating the efficient and economic development of oil and gas resources” by addressing two situations common in West Virginia: (1) fractured ownership of mineral interests where less than 100% of the mineral owners can be located, and (2) development through horizontal drilling of contiguous parcels of property that are already under production leases.

SB 244 amends W. Va. Code §37-7-7 by adding subsection (b), the “Co-Tenancy” provision, which states that “a majority of the ownership interest in the mineral property” may “consent to a lawful use of the mineral property[.]” If the majority of the ownership interest agrees to the use, then the use is “permissible” and the non-agreeing ownership interest cannot claim “waste” or “trespass” on the mineral property. In addition, payment of royalties to all ownership interests will be on a pro rata basis to all owners of the mineral property, with payments for an owner who cannot be located reserved by the producer. While intended to address West Virginia’s requirement that 100% of the mineral owners agree on the terms for development of the mineral property, there is no requirement in SB 244 that the minority owners be absent or otherwise not found.

SB 244 also adds subsection (c), the “Joint Development” provision, to §37-7-7. Under this subsection, “[w]here an operator or operators have the right to develop multiple contiguous oil and gas leases separately, the operator may develop these leases jointly by horizontal drilling unless the development is expressly prohibited by the terms of a lease.” Under this language, an operator may development contiguous parcels of property using horizontal drilling unless a lease expressly prohibits such joint development activity. Notably, under this proposed subsection, the “operator’s use of any surface tract overlying the jointly developed leases shall be permissible for that joint development.” Finally, absent an agreement by all affected royalty owners, production shall be allocated to each lease “in the net proportion that the net acreage of each lease bears to the total net acreage of the jointly developed tracts.”

While Legislative leadership and Governor Justice have each articulated strong support for the oil and natural gas industry, SB 244 faces significant resistance from surface owner organizations, which dislike the simple “majority rules” aspect of the Co-Tenancy provision. Likewise, those groups also object to the Joint Development provision as it opens the surface of an affected parcel to development using horizontal drilling, even if the lease for that property was entered long before horizontal drilling became a popular technology in oil and natural gas production.

Babst Calland will follow SB 244 during West Virginia’s Legislative Session, which is scheduled to end on April 8, 2017.