Oil Gas and Minerals

A mineral right is a right to extract a mineral from the earth or to receive payment, in the form of royalty, for the extraction of minerals. “Mineral” may be different meanings depending on the context, and there is no universal definition. However, “mineral” generally includes:

• Fossil fuels – oil, natural gas, and coal
• Metals and metal-bearing ores – gold, copper, iron, nickel, zinc, etc.
• Nonmetallic minerals and mineable rock products – limestone, gypsum, building stone, salt

“Mineral” may also include sand and gravel, peat, marl, etc.

A mineral right is a property right and may be sold, transferred, or leased similar to other property rights. Mineral rights are distinct from “surface rights,” or the right to the use of the surface of the land for residential, agricultural, recreational, commercial, or other purposes.

Mineral rights may be sold or retained separately from the surface rights; in which case the mineral rights are said to be “severed.” A person may own all the mineral rights for a parcel or any fraction of the rights. A person may also own rights to only one kind of mineral, such as oil and gas, or to only one formation or depth interval. The ownership of the mineral rights in a parcel can usually be determined by examining the deed abstract for the property. 

A mineral owner may develop his or her own mineral deposit. Alternatively, a mineral owner may lease his or her mineral rights to a mineral development company. By executing a lease, the mineral owner (the lessor) grants to the person or company who receives the lease (the lessee) the right to develop and produce minerals in the leased parcel. A lease is a private contract between the two parties and can take a variety of forms. However, leases usually have certain common elements. The mineral owner is paid an amount of money, called a “bonus,” when the lease is signed. The lease generally provides for payment of a royalty to the mineral owner on any minerals produced from the parcel, and the manner in which royalty payments are to be made. Leases generally have a specific term, or duration. A lease may provide for a periodic rental payment to the mineral owner if no minerals are produced and no royalty payments are being made.

The owner or lessee of the mineral rights, whether severed or not, has the right to reasonable use of the land to extract minerals from the property. However, the owner of the surface rights to a parcel may be entitled to compensation for loss of crops or timber

Under Michigan law (Act 42 of 1963, Termination of Oil or Gas Interests in Land), severed oil or gas rights revert to the surface owner after twenty years unless one of the following actions have occurred within the 20-year period:

• A drilling permit is issued.
• Oil or gas is actually produced or withdrawn from the severed holdings.
• The interest is utilized for underground gas storage operations.
• The severed interest is sold, leased, mortgaged, or transferred by recorded instrument.
• A written notice is filed with the county Register of Deeds. Act 42 of 1963 applies only to oil or gas rights and not to other mineral rights.

The Act exempts interests owned by a governmental body.

Michigan law has provisions to protect the rights of owners or lessees of minerals in cases where not all owners of minerals in a tract agree on terms for development. Where minerals other than oil and gas are owned by more than one person or company, the owner or owners of more than 75 percent of the mineral interests may request a court decree authorizing them to explore for and produce the minerals.

For oil and gas, Michigan law provides for the establishment of drilling units - a tract of land with a specified size and shape that can be efficiently drained by one well. When not all owners in a drilling unit agree on oil and gas development, the owner who wishes to drill may petition the Department of Environment, Great Lakes, and Energy for an Order to pool the interests of the non-consenting owner or owners.

Such Orders provide for a development plan and for allocation of costs and proceeds (see our fact sheet entitled “Pooling of Properties for Oil and Gas Production”). In the case of either oil and gas or other minerals, the law provides for fair compensation to the non-consenting owner for their share of the minerals produced.

In the early days of oil and gas production, developers often drilled as many wells as they could on the properties they owned or leased. Each developer was in competition with his or her neighbors and wanted to pump as much oil as possible, as quickly as possible. This often resulted in many more wells than were necessary and in waste of oil and gas resources.

Oil and gas producing states soon took action to address this and other wasteful practices in the oil and gas industry. Michigan enacted what is now Part 615 of the Natural Resources and Environmental Protection Act. Part 615 designates the Director of the Department of Environment, Great Lakes, and Energy as the “Supervisor of Wells,” and charges the Department with providing for the orderly and efficient development of Michigan’s oil and gas resources, while preventing damage to other resources, the environment, and public health and safety. Among other things, Part 615 provides for pooling of properties to form drilling units.

What is pooling?

Pooling is the combining of all oil and gas interests in a drilling unit. In most cases, the owners of oil and gas rights in a unit sign a lease with a developer that allows for pooling. If there is more than one developer in a unit, they voluntarily agree on a development plan. Each owner and developer receives his or her agreed upon share of proceeds from oil and gas produced from the unit. However, if an owner refuses to lease, or when two or more developers cannot agree on a plan, Part 615 provides for the Supervisor of Wells to pool the properties of those parties. This is termed “statutory pooling.”

What is a drilling unit?

A drilling unit is a tract of land with a specified size and shape upon which one well may be drilled into a designated oil or gas reservoir. The purpose of drilling units is to set the optimum spacing and placement of wells, and to give each mineral owner a fair chance to benefit from development of oil and gas under his or her property.

What is the purpose of pooling?

The purpose of pooling is to provide for equitable and efficient development of oil and gas while preventing the drilling of unnecessary wells. Typical Michigan Oil Well Pooling prevents the proliferation of wells that would occur if each owner of a separate small tract were allowed to drill a well on that tract. At the same time, it protects an owner from having his or her oil and gas drained without compensation.

How is statutory pooling done?

Statutory pooling can only be done by holding a hearing before the Supervisor of Wells. Any owner of a mineral interest in the area proposed to be pooled may participate in the hearing. Based on the hearing testimony, an order may be issued that sets the formula for sharing costs and revenues from a well or wells in the pooled area.

Who can be pooled?

Statutory pooling may affect the following persons:

Mineral owners who do not agree to lease. A statutory pooling order will set the terms for sharing of costs and revenues from the well. The mineral owner may choose to pay in advance his or her share of costs of the well, or to have those costs deducted from his or her share of revenues. If the mineral owner chooses the latter, he or she is not required to pay any out-of-pocket expenses. However, an additional cost (typically 100 to 300 percent of drilling costs) may be assessed against his or her revenue to compensate the driller for the risk of an uneconomic well. The mineral owner will receive 1/8 of his or her revenue share as a cost-free royalty. The costs of drilling and production are deducted from the remaining 7/8 interest.

Oil and gas developers who have leased mineral rights in the unit but do not voluntarily agree to share the costs of drilling and producing a well. If pooled, an oil and gas developer will be subject to the same provisions for revenue sharing and choices for participation in costs as a mineral owner.

Mineral owners who have leased but do not consent to voluntarily pool their interests with others to form a full drilling unit. A statutory pooling order may pool the interests of such an owner, but does not impose costs or affect his or her royalties.

Can a company drill a well or construct a pipeline on my land if I do not sign a lease and I am pooled?

A statutory pooling order does not give a developer the right to drill on or otherwise utilize the land of an unleased owner. However, the developer may have certain rights of access under other legal provisions.

REGULATION AND JURISDICTION OF H2S ACTIVITIES

Activities that do or could produce hydrogen sulfide (H2S) as a result of oil and gas production or exploration, are regulated by the Michigan Department of Environment, Great Lakes, and Energy (EGLE) and the Michigan Public Service Commission (MPSC) as follows:

The Oil, Gas, and Minerals Division (OGMD) of the EGLE regulates the drilling, production and transportation through flow lines from the well to surface facilities.

The Air Quality Division (AQD) of the EGLE issues permits on some of the equipment associated with wells and processing facilities such as storage tanks, flares and other fuel burning equipment, depending on the amount of emissions expected to be discharged.

The Michigan Public Service Commission (MPSC) regulates common carrier pipelines which transport gas and oil from several wells of diverse ownership.

 1. What is H2S?

Hydrogen Sulfide is a colorless, transparent gas with a characteristic of a rotten-egg odor at low concentrations and not detectable by odor at high concentrations.

Chemical symbol: H2S

Specific Gravity: 1.192 (heavier than air)

Explosive limits: Lower: 4% , Upper: 44% volume in air

Ignition Temperature: 500^o F

Solubility in water: 2.9 volumes of gas , per volume of water at 20^o C

2. What are the effects?

This information excerpted from the American National Standards Institute standard: Z37.2-1972 Acceptable Concentrations of Hydrogen Sulfide.

Hydrogen Sulfide is an extremely toxic and irritating gas. Free hydrogen sulfide in the blood reduces its oxygen-carrying capacity, thereby depressing the nervous system. Hydrogen sulfide is oxidized quite rapidly to sulfates in the body, therefore no permanent aftereffects occur in cases of recovery from acute exposures unless oxygen deprivation of the nervous system is prolonged. There is no evidence that repeated exposures to hydrogen sulfide result in accumulative or systemic poisoning. Effects such as eye irritation, respiratory tract irritation, slow pulse rate, lassitude, digestive disturbances, and cold sweats may occur but these symptoms disappear in a relatively short time after removal from the exposure.

Odors become detectable in concentrations as low as .008 parts per million (ppm)
(California studies) but the sense of smell is lost after 2-15 minutes at 100 ppm.

Physiological response:

To avoid discomfort, the (8 hour) time weighted average concentration of hydrogen sulfide shall not exceed 10 ppm.

3. How does H2S occur in oil and gas wells?

Hydrogen Sulfide is a naturally occurring gas mixed with natural gas or dissolved in the oil or brine and released upon exposure to atmospheric conditions. Of the 10,652 producible oil wells in Michigan; 1,360 wells had H2S levels exceeding 300 ppm.

4. What is being done to protect citizens in the locating of H2S oil and gas wells?

Permits are reviewed for the probability of encountering H2S gas based on knowledge of the rock formations from other wells.

Wells may be no closer than 300 feet to existing occupied structures or public recreation areas.

Surface facilities (vessels for treating and storage of oil and gas, with associated piping and flares) must be at least 600 feet from existing occupied structures or public recreation areas.

When a well contains 300 ppm or more of hydrogen sulfide, surface facilities or associated flare stacks may not be located in areas which have been zoned residential before
January 8, 1993.

The permittee must under all circumstances notify the local emergency preparedness coordinator, by certified letter not less than 24 hour before commencing to drill an H2S well.

Prior to issuance of the permit to drill and operate, a contingency plan must be prepared by the applicant which provides an organized plan of action for alerting and protecting personnel at an H2S well site and the public. This plan identifies:

• Circumstances that activate the plan.
• Initial procedures to be followed to account for all staff, restrict access and notify the general public, public authorities and safety agencies.
• Procedures for evacuating the public.
• Procedures for burning any gas released from the well.
• A map showing within 1300 feet of the well the following information:
  • All occupied structures, public recreation areas, roads and railroads
  • Names, telephone numbers and address for residents, businesses, schools, churches, hospitals, offices and public camping or gathering areas.
  • Emergency telephone numbers including permittee, drilling contractor, emergency preparedness coordinator, ambulance, hospital, fire department, EGLE Staff, and the Pollution Emergency Alert System (PEAS).

5. What is being done to protect citizens when drilling the H2S well?

The following safety features are required:

• The drilling rig must contain wind direction indicators, hydrogen sulfide detection monitors (with an audible alarm at 20 ppm), emergency escape breathing apparatus.
• All free gas separated from the drilling fluid must be flared and tested for H2S.
• Proper drilling fluids must be used to prevent formation fluids or gases from escaping from the well.
• Blowout preventers must be in place and tested, and be capable of immediately closing in the well even if drilling pipe is in the well.
• Multiple, concentric strings of casing must be cemented in place to protect fresh waters and confine fluids or gases to within the well bore.

6. What is being done to protect citizens when producing the H2S well?

The following safety features are required:

• Warning signs must be posted at the well and markers placed along the flow line.
• Any vents to the atmosphere must be at least 10 feet above the tank top or 20 feet above the ground. Venting may be prohibited if it results in a verified chronic nuisance odor. When storage vessels release more than 5000 cubic feet of vapors in 24 hours, they must be equipped to convey those gasses to an incinerator, flare or vapor recovery system, the site must be fenced and warning signs posted. Emergency relief valves on these wells must be routed to an incinerator or flare.
• Incinerators or flares must be designed and equipped to prevent the release of unburned gas to the atmosphere.
• Wells which produce unattended with pressures greater than 100 psig must be equipped with high-low pressure shut-in systems.
• Vapor return lines are required on truck loading facilities.
• All flow lines to first point of sale are required to be marked to denote the presence of a buried line containing hydrogen sulfide, the owner's name and emergency number.
• Flow lines or facility piping for wells permitted after Sept. 20, 1996 are to be pressure tested every twelve months or visually inspected every three months.
• Above ground lines are to be protected from accidental damage.
• OGMD staff inspect production facilities two to four times per year. Facilities known to have a history of problems are inspected more frequently.

7. What is being done to protect citizens when servicing the H2S well?

The same safety equipment as required for drilling, must be installed whenever servicing requires removing the seal on the innermost well casing.

A revised contingency plan may be required. Field staff can require updating of contingency plans whenever significant changes are noted or a significant action such as well servicing is proposed.

We have recently issued a clarification to the existing rules which requires all gas produced or discharged during any servicing operation is flared or otherwise properly controlled. 

8. What training is provided for the people who work on H2S wells?

A permittee of a well is required by law to ensure that all employees, including drilling contractors or other independent contractors, who are involved in drilling, completing, testing, producing, repair, workover or servicing on an H2S well have been trained regarding:

• The properties and effects of H2S.
• Effects of H2S on materials.
• Emergency escape procedures.
• Location and use of safety equipment, briefing areas, detection and warning systems.
• Corrective actions, shut-in procedures, well ignition procedures and how to notify off-site public authorities identified in the contingency plan.

9. What should I do if I smell H2S?

Never enter an area to see where the smell is coming from or to rescue downed personnel. H2S is extremely toxic in high concentrations.

Notify personnel who can address the problem as follows.

Emergencies:

• If the problem appears that it may be more than just odors such as burning in your eyes or nose, immediately contact your local 911, fire or police department. Move away from any well or facilities near you by going perpendicular to the wind direction.

Odor complaints:

• If it appears only to be an odor problem, either notify the company at the number posted on the well sign, the appropriate EGLE OGMD Area Geologist or the Pollution Emergency Alert System (PEAS) at telephone 800-292-4706.

10. Can odors be completely eliminated?

Hydrogen Sulfide can be detected by smell at concentrations as low as a few parts per billion. For this reason it is extremely difficult to totally eliminate all odors all the time. Upon receiving complaints, the Supervisor of Wells may require the permittee to calculate the predicted concentration of H2S in the air at the closest occupied structure or public recreation area and may then require appropriate emission control measures.

11. How much odor is allowed?

No odor threshold has been legally established in Michigan. The Supervisor of Wells may find, after the permittee has provided calculations and any other testing, that a "nuisance odor" exists. A nuisance odor is defined as an emission of any gas, vapor, fume, or mist, or combination thereof, from a well or its associated surface facilities, in whatever quantities, that causes, either alone or in reaction with other air contaminants, injurious effects to human health or safety; unreasonable injurious effects to animal life, plant life of significant value, or property; or unreasonable interference with the comfortable enjoyment of life or property. Nuisance odors are prohibited and the Supervisor of Wells may take action consistent with the rules to prevent activities causing them or require changes be made to prevent them.

12. What value does H2S gas have?

Large volumes of gas with high concentrations in sufficient quantities of H2S can be processed to produce elemental sulfur.

13. How is waste H2S gas disposed of?

Low concentrations of H2S can be removed from the gas stream at the well site.

Low volumes of free gas can be burned.

The Michigan Public Service Commission has jurisdiction over natural gas production rates and transmission pipelines.

14. How are gas transmission pipelines regulated?

Pipeline operators are regulated under the Michigan Gas Safety Code, 1969 PA 165, and its rules to ensure that the public safety is protected to the extent possible in the transportation of gas by pipeline. The statute specifically exempts the gathering of gas in rural locations that lie outside the limits of an incorporated or unincorporated city, town, or village. However, gathering lines located in or occupying the property of schools, hospitals, churches, parks, or similar public places are subject to the code. Also, the commission may define other designated residential or commercial area such as a subdivision, business or shopping center, community development, or similar populated area as a non-rural area subject to the code.

Natural gas transmission pipelines are regulated under Act 9 of Public Acts of 1929, and require the issuance of a Certificate of Public Convenience and Necessity by the Commission prior to construction. However, there are certain circumstances where pipelines are exempt from Commission jurisdiction. If the pipeline is a common carrier (transporting gas from two or more owners), the Commission also has jurisdiction over its rates, charges and conditions of service.

In addition, under this statute, the Public Service Commission has the authority to regulate production rates of natural gas from gas wells through the issuance of Well Connection Permits, Allowable Withdrawal Orders and Proration Orders.

15. Who regulates air emissions:

The Air Quality Division does not issue permits for wells, but may permit some of the equipment associated with wells. Air Quality regulations prohibit release of harmful quantities of H2S in any instance. All sweetening facilities must be permitted by the Air Quality Division. A "sweetening facility" treats sour gas to remove sulfur compounds from the gas. After the company has been issued a permit, and the plant has been constructed, Air Quality District staff are involved in inspecting the plant to determine compliance with its air use permit. District staff also respond to citizen complains regarding gas sweetening plants.