The landman for Chesapeake Energy Corp. presented Mark Faut with a choice: sign a lease for his oil rights or have his 7 acres forced into the drilling plan by the state.

“That was it, no questions, no discussion,” said Faut, who owns a rental home in the Cross Diamond subdivision in Elbert County. “It was, ‘Sign or we’ll force pool.’ “

Across Elbert and Douglas counties, where energy companies are competing for leases, landmen are using the “forced pooling” card as leverage, property owners say.

“Everybody was told the alternative to a lease was forced pooling,” said Steve Budnack, president of the homeowners association for Centennial Ranch in Douglas County.

Under the state’s 1951 Oil and Gas Conservation Act, the mineral rights of a landowner who has not signed a lease, or refuses to sign one, can by state order be force pooled, meaning he or she can be included in an energy company’s drilling plan.

In 2010, the state oil and gas commission issued 136 orders for items such as variances and rule changes, and 48 of the orders were for forced pooling, according to agency data.

“It sounds like eminent domain, but it is really there to assure orderly oil and gas development,” said Lance Astrella, an attorney who represents landowners. “The problem is that it can be abused.”

Landmen for Oklahoma City-based Chesapeake are raising the prospect of forced pooling, according to homeowners in five developments in Elbert and Douglas counties. Landmen are outside brokers hired by energy companies to negotiate mineral leases.

“We’ve told landmen point-blank we don’t want to use that threat to close a deal,” said John Dill, Chesapeake’s director of corporate development in the Rockies.

“When we received reports earlier this year that some of those independent brokers might have been using tactics and strategies that did not comport with Chesapeake’s operating standards, we moved quickly to address such problems,” Dill said.

Property owners, however, say that the forced pooling is still being raised by landmen.

The competition among companies to win leases in the area — which sits atop the potentially oil-rich Niobrara formation — can be fierce, Dill said.

“Everyone is trying to close a deal,” he said. “This is an imperfect process.”

Whether forced pooling is employed as a prod, its use in the Denver area — parts of Boulder, Arapahoe and Adams counties also sit atop the Niobrara — is likely to grow.

The horizontal wells the industry is drilling to capture oil from the Niobrara’s shale can extend 5,000 feet or more, requiring larger drilling areas that will affect more landowners, Astrella said.

“It may start out as a threat,” said Debbie Trujillo, an Elbert County homeowner who began researching leasing after landmen knocked on her door. “But when an oil company decides to drill in an area, it becomes a very real possibility.”

Complex path to drilling

Pooling regulations were put in place around the country starting in the 1930s to prevent helter-skelter drilling. Colorado is one of 39 states — including Wyoming, New Mexico and Utah — that have rules enabling the pooling of oil and gas reserves.

In Colorado, an oil company first submits a request to the state oil and gas commission for a “spacing order,” which defines the exploration area and number of wells to be drilled.

The drilling company offers to purchase leases — usually for three to five years — which provide a signing bonus and a royalty based on the well’s production.

For parcels that don’t have leases, the driller returns to the oil and gas commission seeking a pooling order.

There are cases where as much as 40 percent of the land in the spacing order has been force pooled, according to the oil and gas commission staff.

“It really is there to protect landowners,” said Thom Kerr, the commission’s permit manager. “It is a way to make sure they benefit from the exploitation of the resource.”

Pennsylvania Gov. Tom Corbett, who supports drilling and whose state has a pooling rule, doesn’t see it that way.

“I do not believe in private eminent domain, and forced pooling would be exactly that,” Corbett told an oil and gas industry group in April.

The issue is complex, said Alan Ackerman, former chairman of the American Bar Association’s land-use section and author of the National Eminent Domain blog.

Over the years, there have been a variety of laws limiting individual property rights to promote development — as long as there is fair compensation, Ackerman said.

The culminating decision came in the 2005 U.S. Supreme Court case Kelo vs. City of New London, Conn., where the court ruled the city could condemn a home as part of a new development for Pfizer Corp.

The court said the benefits a community enjoyed from the economic growth was sufficient reason for taking property.

“In the Kelo case, the court said each state has the right to decide property issues within its borders,” Ackerman said.

State’s pooling equation

In Colorado the law does provide some economic and property protection, Astrella said.

“It isn’t all bad,” he said. “Sometimes I advise clients to just be force pooled.”

A forced-pooled landowner gets a royalty equal to 12.5 percent multiplied by the fraction of the drilling area owned.

For example, a property owner with 10 percent of the land in the spacing order gets a 1.25 percent royalty as soon as the well begins producing.

While some oil company leases deduct some well costs from the landowner’s royalty, there are no costs deducted from a pooling royalty.

When the well has produced oil and gas valued at roughly twice the cost of the well — $4 million if it costs $2 million to drill — the royalty for the pooled landowner is replaced with a working interest in the well.

If a landowner owns 10 percent of the land, that person gets a 10 percent share of the well’s production, less 10 percent of the cost of operating the well.

The question is whether Colorado’s formula represents a fair offer based on the market, Ackerman said.

“If the state’s rate is 12.5 percent and royalty rates are 17 percent, a pooling order could be challenged just on that,” he said.

James Fitzgerald, a rancher in Bayfield in southwestern Colorado, was unable to come to terms with a drilling company and was forced pooled in 1993. At the time, he heard that being force pooled would be “worse than death.”

“For us it turned out pretty well,” said Fitzgerald, estimating that he received $25,000 from royalties and a working interest.

To avoid liability issues, Fitzgerald said he set up his own company — Hostages of Gas Drilling LLC.

Property safeguards rebuffed

In dealing with landmen, property owners say their biggest concern is protecting their homes and property values.

When Jill Duvall received a letter from Edmond, Okla.-based RedSky Land — the firm handling leases for Chesapeake — it offered a $50-an- acre signing bonus and a 16 percent royalty for her 40-acre Elbert County ranchette and a standard lease.

“In the very first phone call, they raised force pooling,” Duvall said.

Duvall said she sought some added protections for her land — a surface-use agreement limiting drilling activity, some safeguards on property value — but was rebuffed.

Duvall said a landman told her: “You are just looking for a fight.”

Powell Davies, RedSky’s project manager, said, “It is our policy not to use any form of intimidation.

“We’ve had problems,” Davies said. “We have let people go.”

Getting stipulations in a lease can be a long process because it has to be vetted by Chesapeake — from its lawyers to its geologist, Davies said.

If a landowner hasn’t signed a lease, the oil company should have no access to the property — even if it is force pooled — absent a surface-use agreement, Astrella said.

“A landowner actually ends up with more protection, but the landmen, if they know it, don’t tell you that,” Astrella said.

Faut, the owner of the 7-acre rental property, was offered $450 an acre and an 18 percent royalty for a five- year lease but ran into similar problems when he sought some protection for his rental income.

“I couldn’t get a straight answer out of the landmen, who kept changing,” Faut said.

Eventually, he began talking to an official at Chesapeake’s Oklahoma headquarters.

Faut said so far he still hasn’t gotten any protections in the proposed lease. He received a notice in July that he was a party in Chesapeake’s application for a spacing order.

“It is overwhelming,” Faut said. “Who protects the small-property owner? I looked at the oil and gas commission website, and it’s pretty clear that they aren’t here for me.”

The oil and gas commission’s mission statement says its goal is “to foster the responsible development of Colorado’s oil and natural gas resources.”

It also lists protection of mineral owners’ rights as a goal.

“This is an evolving area,” said Dave Neslin, director of the oil and gas commission. “We will have to keep an eye on it to see what issues arise.”

Mark Jaffe: 303-954-1912 or mhaffe@denverpost.com