Part 1 – Pooling Introduction and Types of Units
Over the past six to twelve months, I have seen a marked increase in the number (and complexity) of pooling, communitization, and unitization problems encountered by our clients.
Horizontal development is now ubiquitous, and the resource plays have become mature, which is pulling the rug back from some long-dormant legal issues.
This is the first of a multi-part series examining these issues and current developments. Operators, their counsel, and the courts are going to need to achieve some combination of consensus and case law. Navigating this new landscape will require an understanding of the foundations of pooling, communitization, and units for the development of oil and gas. We examine these issues mostly through the lens of Texas law due to its influence on the law of other jurisdictions and its relevance for much current resource development.
There are numerous types of units one may encounter. Each type is a different reflection of the basic problem: the English law of property evolved in a time when oil and gas had no value and land could be divided by boundary lines on the ground rather than by subsurface formation or reservoir. These types of units can be divided into two broad groups. First, those created by statute or regulation and, second, those created by contract. Confusion between the various types can lead to serious problems in contract drafting, in extreme cases causing failure of legal descriptions and contract unenforceability.
The industry sometimes broadly refers to all regulatory units as “proration units”, but this not technically accurate. The Texas Railroad Commission (“RRC”) uses both drilling/spacing units and proration units. Drilling or spacing units are (intended to be) the area of land around a well that can be drained by that well. They exist because Statewide Rules 37 and 38, and their counterparts in the Field Rules, require minimum distances between wells and from wells (or take points) to lease lines.[1] These rules, in turn, exist because of the drilling excesses and waste that occurred during the oil boom in the early 20th century.[2] Proration units (a separate concept) are based on the RRC’s determination of how much oil an entire field can efficiently produce, taking into account the volume of production that the market will bear. This amount is then distributed to individual wells – the well’s allowables – within the field based on various formulae. Some, but not all, of these formulae use acreage to allocate field production. Note that virtually all gas allowables are suspended, so likely “proration units” will not exist for gas. Statewide rules do not allocate acreage to oil wells based on acreage, only certain field rules do so. The only time a “proration unit”, as acreage on the ground, is likely to exist is when (i) the well is an oil well, (ii) field rules are in place, (iii) those rules use acreage to allocate allowable production, and (iv) the operator files a plat of the allocated acreage to define the allowable.[3]
If an operator’s lease is too small to support either the drilling unit or the desired proration unit, the RRC allows it to form a pooled unit. An operator must certify its right to pool the tracts on Form P-12, but beyond that initial showing and once the permit is granted, the RRC does not have jurisdiction over lease maintenance, royalty payment, pooled units, or any other private property ownership matter. A pooled unit at the RRC is not a pooled unit under any lease (unless the lease says it is).
Pooling and the formation of units under oil and gas leases is contractual, not regulatory, even though it attacks the same problem of exploring for and developing fugacious minerals across fixed property boundaries. The vast majority of oil and gas leases permit the lessee to combine the leased premises with other leases and/or lands and develop them in concert, and will contain an express agreement of the parties as to how production royalties are shared, and the leases are maintained, by these operations. Being creatures of contract, these units can only be formed in strict compliance with the lease, which usually requires filing declarations in the county courthouse.[4] Sometimes where a lease has insufficient pooling authorization, pooled units can be formed by a separate contract, but the result will be much the same.
“Production units” are another type of contractual unit that are created under the terms of the oil and gas lease. Many larger leases expire as to undeveloped acreage after the expiration of the primary term when the operator stops drilling.[5] Each well will hold a designated sub-tract of land out of the leased premises around that well, usually called the production unit. These production units are also usually formed by filing a legally sufficient description in the public records, and the permissible size of the retained production units is usually a major deal point in lease negotiation.
Still yet, there are secondary recovery units, which are similar to pooled units, but are larger, more complex, and usually created in order to carry out a water flood, gas or air injection, or other large-scale project over a wide area. These are formed under authority granted by certain leases, agreements and ratifications by the lessors of other leases or mineral owners, agreement by the affected working interest owners, and approval by the RRC. They share characteristics of pooled
units and of joint operating agreement contract areas.
Finally, there are force-pooled units, which are common in Oklahoma, North Dakota, and other producing states, and are capable of collapsing many or all of the thorny legal issues arising out of lease pooling into a single regulatory order. However, this tactic is unavailable to Texas operators in any practical way.[6] Operators need to take care to clearly describe which type of unit they are referring to in their agreements and leases, or ambiguity and confusion can result.
Lucas LaVoy -- Thompson & Knight LLP
[1]
These are, for example, the unit plats attached to W-1 application to obtain a permit to drill a well.
[4]
See Southeastern Pipeline Company, Inc. v. Tichacek, 997 S.W.2d 166, 394 (Tex. 1999).
[5]
Or falls behind a pre-determined schedule.
[6]
The Texas Mineral Interest Pooling Act, Tex.Rev.Civ.Stat. art. 6008c, is primarily useful for royalty and other small interest owners seeking access to adjacent unit production; although operators have met with limited success in using it to create units in the Barnett Shale, where urban drilling presents unique land issues.