Pooling and Unitization
Presented by:
Ryan J. Morgan
MLBC AAPL
June 16, 2011
Bridgeport Conference Center
Bridgeport, WV
Material Disclaimer
These materials are public information and have been prepared solely
for educational purposes to contribute to the understanding of energy
and oil and gas law. These materials reflect only the personal views of
the author and are not individualized legal advice. It is understood that
each case is fact-specific, and that the appropriate solution in any case
will vary. Therefore, these materials may or may not be relevant to any
particular situation. Thus, the author and Steptoe & Johnson PLLC
cannot be bound either philosophically or as representatives of their
various present and future clients to the comments expressed in these
materials. The presentation of these materials does not establish any
form of attorney-client relationship with the author or Steptoe &
Johnson PLLC. While every attempt was made to insure that these
materials are accurate, errors or omissions may be contained therein,
for which any liability is disclaimed.
What motivates this presentation
topic?
#1 Understand background of pooling concepts
#2 Understand uses of pooling clause in lease
and importance of language and terms
What We Are Going to Cover
• Review of pooling
• Current pooling laws in OH, PA , and WV
• Discussion of issues with use of pooling/
unitization in the development of horizontal
wells
• Review of lease provisions
5
An Overview – Origins and
Evolution of Pooling
The key to understanding oil & gas
law….
Origins of Pooling
In the beginning…
The Rule of Capture
ferae naturae
Origins of Pooling
The Rule of Capture
THE DECISION:
YOU PRODUCE IT…
YOU OWN IT !
Origins of Pooling
The Rule of Capture
THE RESPONSE:
DRILL YOUR OWN
DARN WELL !
Origins of Pooling
The Rule of Capture
THE RESULT:
Origins of Pooling
The Rule of Capture
THE AFTERMATH:
GOVERNMENT ACTION
& THE EXERCISE OF
“POLICE POWERS”
Origins of Pooling
Emergence of the concepts (pooling and
unitization)
Surely there is
a better way
to do things…
Origins of Pooling
Distinguishing contractual/voluntary integration
from statutory unitization or pooling
History & Development of Pooling
Review of development in the states
Current Pooling Laws
Ohio
Statutory Pooling in Ohio
General statewide spacing and unit size is authorized in 1509.24
to be set by rule
Current general rule is:
0-1000 feet in depth
200 feet from any well in the same pool
100 feet from a tract or unit boundary
1000-2000 feet
10 acre tract
2000-4000 feet
20 acre tract
4000 feet or deeper
40 acre tract
Statutory Pooling in Ohio
• No distinction between shallow and deep wells
as in WV or PA
• Section 1509.27 authorizes mandatory pooling
orders
• Section 1509.28 permits unitized operations
• Section 1509.29 permits exception tracts
subject to production allowable where
statewide or special rules would otherwise
preclude development
Mandatory Pooling Applications
Application submitted to the Director with information
required by statute or rule including:
a) description of the unit boundaries
b) identification of drill site
c) ownership of tracts
d) explanation of need for mandatory pooling
e) evidence of attempts to form voluntary unit
f) estimated costs
g) limit of 5 pooling applications per person per year
h) no surface operations are permitted on tracts which
are force pooled
Review by Technical Advisory Council
• The Technical Advisory Council on Oil and Gas was
created under Section 1509.38 of the Ohio Revised
Code. The T.A.C. consists of eight members
appointed by the Governor and meets once a
calendar quarter.
• The applicant must submit all the information
required to the Division at least forty days prior to
a scheduled T.A.C. meeting to ensure scheduling of
their request on the T.A.C. agenda.
• The Division provides T.A.C. members with the
documentation provided by the applicant at least
two weeks prior to the hearing.
Pennsylvania
Pooling in Pennsylvania
58 P.S. § 403 – applies to all wells except those that are less than
3,800 ft. or do not penetrate the Onondaga (Marcellus wells do
not qualify as Conservation well)
58 P.S. § 405(c)(1)(iv) – gives Oil & Gas Conservation
Commission specific authority, upon proper application, to enter
spacing and pooling orders and provide for the integration or
communitization of interests within a drilling unit
58 P.S. § 408 provides that two or more separately owned tracts
can be voluntarily integrated to create a pool
23
Recent Attempts at Legislation
SB 447 (Yaw, White, Mensch, Fontana 2/11/2010)
– Places statutory integration in the PUC
– 65% ownership threshold to invoke the act
– Horizontal wells and unconventional formations
– A “shade” of the industry consensus bill of 2010
West Virginia
Spacing in West Virginia
Spacing Rules in WV
• Shallow Wells
• < 3000 ft.- Min. distance of 1000 ft. from nearest existing well
• >3000 ft.
-Min. distance of 1500 ft. from nearest existing well
•
(If coal owner objects, gas operator has burden to establish
need if nearest existing well is between 1500-2000 feet)
• Deep Wells
•
Completed below Onondaga formation
•
Oil & Gas Conservation Commission determines spacing
Pooling in West Virginia
Statutory Pooling
1. Shallow Wells
2. Deep Wells & Secondary Recovery
3. Coalbed Methane Wells
Pooling in West Virginia
Deep Wells – Pooling Process
1. Operator must drill “discovery well” to establish pool
2. Application then filed by operator of well or other
operator affected by a well in the pool
3. Notice, including area to be covered by spacing order
4. O&G Conservation Commission enters order setting
spacing and acreage for each drilling unit
5. Must have lease/agreement on tract where drilling
operations will be located
6. Operator must have written consent and easement from
surface owner of record identifying the well location
Development Issues
Pooling vs. Unitization
Often used interchangeably, these words
have traditionally had unique meanings
Example of a Modern Unit
»
»
»
»
»
Chesapeake Durig Unit
603 Acres
20 Tracts
Largest tract 109 ac.
Smallest tract 0.08 ac.
How is pooling accomplished?
Voluntary
• Pooling clause in lease or subsequent agreement needed
to bind lessor’s interest
• Amends lease habendum (term) clause – unit operations
maintain lease beyond primary term
• Amends royalty clause – pay fractional part
Issue - Apportionment
Apportionment Rule – all owners of subdivided
tracts under one lease entitled to royalty
– Followed in PA, CA, MS
– Example: A, B, C each get 1/3
Subdivided Tracts
(one lease)
A
Unit Well
B
C
Issue - Apportionment
Non-Apportionment Rule – owner of subdivided
tract where well is located is entitled to all
royalties
– Followed in AR, CO, IL, IN, KS, KY, LA, NE,
NM, OH, OK, TX, WV
Subdivided Tracts
– Example: A gets all royalties
(one lease)
A
Unit Well
B
C
Issue - Apportionment
Non-Apportionment Rule can be avoided by
Entireties Clause
– Example: “If the leased premises shall hereafter be owned
severally or in separate tracts, the premises nevertheless
shall be developed and operated as one lease and all
royalties accruing hereunder shall be treated as an entirety
and shall be divided among and paid to such separate
owners in the proportion that the acreage owned by each
such separate owner bears to the entire leased acreage.”
How is pooling accomplished?
Involuntary = Statutory Integration
(“Force Pooling”)
• Exercise of police power by state
• Ordered to prevent waste, increase ultimate recovery, avoid
drilling of unnecessary wells, protect correlative rights
• Widespread in producing states
Issue – Use of Premises
Can regulatory commission permit unit well to be located on
unleased premises over objection of owner?
Some courts permit owner to maintain action for surface
damages against unit operator (see Cormack v. WIL-MC Corp.,
661 P.2d 525 (Okla. 1983))
A
B
Leased
Tract
Unleased Tract –
Can drill well on B?
Well
Lease Provisions
Sample Lease Term
Unitization/Pooling Clause
Lessor hereby grants to the Lessee the right at any time to consolidate the
leased premises or any part thereof or strata therein with other lands to form
an oil and gas development unit of not more than 640 acres, or such larger
unit as may be required by state law or regulation for the purpose of drilling a
well thereon, but the Lessee shall in no event be required to drill more than
one well on such unit. Any well drilled on said development unit whether or
not located on the leased premises, shall nevertheless be deemed to be
located upon the leased premises within the meaning and for the provisions
and covenants of this lease to the same effect as if all the lands comprising
said unit were described in and subject to this lease.
Key Provisions
• Lease Must Allow Pooling
– Grant Lessee Authority to Form Pool/Unit (i.e., you do not have to come
back to the lessor)
– Avoid restrictions (e.g., well must be on/off lessor’s land, lease must
contribute minimum % to the unit, etc.)
• Spell out calculation/division of Royalties
– Should be consistent from lease to lease
– Should be clear and based on engineering/geology
• Pooling of any acreage construed as “Operations” on the
leasehold
– Hold acreage without need to drill on each leasehold
Issue - Allocation & Payment
Royalties may be based on surface acreage
Royalties may be based on formula (e.g. acre feet, net reservoir
pay, material balance, determination of remaining reserves,
present production, cumulative production, surface acres
underlined by productive reservoir, number of usable wells
bores)
Method should be clearly expressed in leases and administrative
orders
Issue – Development Obligations
Set out the basis for unit size and shape
Replace implied covenants with express obligations
THANK YOU !