Who Determines What Constitutes a “Reasonable Offer to Lease” When it Comes to Involuntary Pooling? Another Example of Local Governments Attempting to Assert Control

One of the more loosely used terms from Colorado’s Conservation Act and Colorado Oil and Gas Conservation Commission (“COGCC”) Rules, and one of many lawyers’ favorite words to analyze, is the term “reasonable.” When filing for an involuntary pooling application in front before the COGCC, an applicant must comply with COGCC Rule 530, which requires the applicant to, among other things, provide an unleased owner with a “reasonable offer to lease.” In determining whether a lease offer is reasonable, the COGCC shall consider the: (1) date of the lease and primary term or offer with acreage in the lease, (2) annual rental per acre, (3) bonus payment or evidence of its non-availability, (4) mineral interest royalty, and (5) such other lease terms as may be relevant.

Despite the COGCC having been expressly tasked with determining what constitutes a reasonable offer to lease, protesting parties often try to assert themselves as the decider of what is reasonable. This issue recently came to a head. Weld County, as an unleased mineral owner, argued it was the ultimate decision-maker of what is “reasonable” when it comes to a lease offer subject to COGCC Rule 530. Section 30-11-303(1), C.R.S., grants the County the power to lease its oil and gas interests on terms as the County deems to be in its best interest. Accordingly, the County enacted Section 2-2-70, W.C.C., which established the minimum lease terms for tracts of County minerals larger than 40 acres, which are a 3-year primary term, $600 per-acre bonus, and a royalty of not less than 25%. The County therefore argued that any lease terms offered by an operator that are less than those provided in Section 2-2-70, W.C.C., are per se unreasonable because such terms would be contrary to the County’s determination of what is in its best interest. The County went so far as to argue that COGCC should defer to the terms and conditions of Section 2-2-70, W.C.C., as being dispositive as to the issue of whether or not a reasonable offer was made because the terms and conditions were “legislatively determined to be in the best interests of the citizens of Weld County”.

In a prehearing order, the COGCC rejected Weld County’s claim that it could determine whether there was a reasonable offer to lease. In denying the protest, the COGCC reasoned that

Weld County cites no legal authority for the proposition that it, and not the Commission, is the appropriate political subdivision of the State of Colorado to determine what terms are just and reasonable in the context of the issuance of an involuntary pooling order. Weld County’s position contradicts the plain language of §34-60-116(6), C.R.S., which authorizes the Commission to determine what terms and conditions are “just and reasonable,” and §34-60-105(1), C.R.S., which rescinds county authority over all oil and gas conservation and unqualifiedly confers this authority on the Commission. To conclude otherwise would leave to Colorado counties the task of determining reasonableness of terms and conditions of pooling orders. This the legislature did not intend to do, as explained in the discussion in the preceding part of this order, and therefore, Weld County’s legal argument is rejected.

Weld County’s protest and assertion that it, not the COGCC, should determine what constitutes a reasonable offer to lease under COGCC Rule 530 and the involuntary pooling statute, Section 34-60-116, C.R.S., are symptomatic of Colorado counties and municipalities desiring to assert more local control over oil and gas operations. As demonstrated by the COGCC’s recent rule making initiated by the Governor’s Oil and Gas Task Force, the counties and municipalities appear to be gaining an additional foothold on oil and gas regulation, which has been and should remain the exclusive jurisdiction of the COGCC. Indeed, allowing each county greater independent authority in regulating oil and gas development would lead to even greater unpredictability for operators, which is detrimental to efficient and economic development of the state’s oil and gas resources.