Pooling In
Resource
Plays
Allen D.
Cummings
58th Annual Meeting - San Francisco
June 13-16, 2012
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Pooling in Resource Plays
What is a Resource Play?
 Society of Petroleum Evaluation Engineers has established technical
characteristics including the following, among others:
 Continuous hydrocarbons over large geographic area
 Show repeatable Statistical Distribution of EUR
 Hydrocarbons not found in a typical trapping mechanism such as a
structural or stratigraphic reservoir – Shale is both the source rock and the
reservoir
 Production requires hydraulic fracturing
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Pooling in Resource Plays
What is a Resource Play?
 To Land Professionals it is Shale Plays
 Barnett Shale - North Texas
 Haynesville - East Texas and Northwest Louisiana
 Woodford – Oklahoma
 Marcellus – Pennsylvania, Southern New York
 Eagle Ford – South Texas
 Bakken – Eastern Montana, North Dakota
 Among others
Pooling in Resource Plays
Why is Pooling an Issue in Resource Plays?
 Many current Shale Plays are in areas previously exploited for oil
and/or gas by vertical wells
 There are many existing leases held by production (HBP) from other
producing horizons (some from 1950’s)
 Pooling clauses in HPB leases limit pooling for oil to 40 or 80 acres
 Pooling Clauses in HBP leases do not work for horizontal wells
 There are existing pooled units for vertical wells
 Pooled Units pooled as to all depths
 Possibility of interference with existing vertical wells
 Current mineral and/or working interest owners unwilling to amend
HPB leases or existing units
Pooling in Resource Plays
Why is Pooling an Issue in Resource Plays?
 1950’s discovery of numerous oil reservoirs in the Williston Basin in
North Dakota and Eastern Montana
 Bakken shale became major resource play with 2000 discovery of Elm
Coulee Oil Field in Eastern Montana – now producing +/-53,000 bbls/day
 1950’s discovery of Edwards limestone as a major producing reservoir
in South Texas
 Eagle Ford shale play took off in South Texas with discovery well in
LaSalle County that produced large amounts of condensate with gas
 Horizontal drilling and hydraulic fracturing technologies made
exploitation of various shales economically viable
 Horizontal drainholes require larger tracts than vertical wells
Pooling in Resource Plays
How to Accomplish Pooling:
 Voluntary Pooling
 Implementing pooling provisions of oil and gas leases
 Agreement among all owners of production in tracts to be pooled
 Statutory Forced Pooling
 Montana and North Dakota have Forced Pooling Statutes
 Texas has Mineral Interest Pooling Act, but it has limited application
 To examine pooling issues in Resource Plays compare and contrast
pooling for oil in the Bakken shale with pooling for oil in the Eagle
Ford shale
Pooling in Resource Plays
Forced Pooling in Bakken Shale:
 Montana §82-11-202 Pooling of Interests In Spacing Unit
 Make attempt to voluntarily pool
 Upon application of person owning oil and gas interest that has drilled, or
proposes to drill, a well Montana Board of Oil & Gas Conservation, after
notice and hearing, may order pooling of all interests in a permanent
spacing unit and allocation of production in spacing unit.
 Montana ARM §36.22.703 Spacing Units
 Spacing Unit is area that can be drained by one well
 Operator of a horizontal well may designate and obtain approval of
optional drilling unit before drilling commences consisting of 2, 3 or 4
contiguous drilling units
 640 and 1280 acre drilling and/or spacing units common, but Operators are
now seeking 2560 acre units
Pooling in Resource Plays
Forced Pooling in Bakken Shale:
 North Dakota §38-08-08 Integration of fractional tracts
 Pooling may be voluntary
 Upon application or person owning oil and gas interest in spacing unit and
after notice and hearing the North Dakota Industrial Commission may
order the pooling of separately owned tracts or separately owned interests
in all or part of spacing unit
 See also NDC §43-02-03-16.3 regarding what must be included in a
invitation to participate in drilling
 See also NDC §43-02-03-15 regarding the size of drilling units in the
absence of any order by the Commission
 1280 acre units seem to be common for undrilled Bakken shale,
although some 2560 approved depending on lateral length
Pooling in Resource Plays
Forced Pooling in the Eagle Ford Shale:
 Mineral Interest Pooling Act Tex. Nat. Res Code §§102.001 et seq.
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Applicant must make fair and reasonable offer to voluntarily pool
Field rules must exist establishing proration unit size
Maximum size of force pooled unit for oil is 160 acres
Only around 100 granted since statute enacted & used by parties to force
their way into existing producing proration units
 Application of Finley Resources, Oil & Gas Docket No. 09-0252373
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First and only time Applicant requested to force pool unleased owners
Order permitting forced pooling very favorable to unleased owners
Allocated production on surface acreage basis
Limited to Finley, as Operator, to Barnett Shale
Pooling in Resource Plays
Railroad Commission of Texas Rules – Horizontal Drainholes:
 Rule 86 governs horizontal wells generally
 Zero between well spacing rule allows horizontal drainholes to be
drilled close to together to maximize effect of hydraulic fracturing and
to maximize recovery of hydrocarbons
 Take point rule allows distances to nearest lease line to be measured
from the nearest take point so that Rule 37 Exceptions are not
necessary
 Box Rule allows horizontal drainhole to be in compliance with well
permit so long as deviation is inside a box extending a stated number of
feet either side of drainhole.
 Rule 86 Additional Acreage sets forth acres that can be added to
standard proration unit for a field’s rules for vertical wells.
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Pooling in Resource Plays
Railroad Commission of Texas Special Field Rules:
 Texas Operators have requested special field rules for shale plays
 Most of those granted are for gas in Barnett and Haynesville
 Application of EOG Resources, Inc. Docket No. 02-0264101 for
Temporary Field Rules Eagleville (Eagle Ford) Field, Karnes County
Texas – Final Order March 2010
 EOG evidence that wells require 2500 to 3500 foot lateral with up to 30
stage fracture stimulation
 80-acre density for oil field
 330’ spacing to lease lines; 0 betw’n well spacing (wells 100 – 200’ apart)
 33’ box rule
 No proration plats (P-12); file P-15 Statement Productivity Acreage
 Field = correlative interval 10,294 to 10,580 continuous across area
Pooling in Resource Plays
Railroad Commission of Texas Policy – Not in Rules
 Approve Production Sharing Agreements for modified P-12 Proration
Plat if 65% of royalty and leasehold owners approve
 Drilling permits issued without production sharing agreement or
pooling authority if Applicant has a good faith claim of right to produce
from each of the tracts to be penetrated by horizontal drainhole
 Takes no position on whether leases permit the Applicant to drill across
lease lines in the absence of production sharing agreement or pooling
authority
 Requires no unleased interests intracts within field rule minimum lease
line distance – not apply to tracts penetrated
 Takes no position on allocation of production which is a contractual
matter under between lessor and lessee.
Pooling in Resource Plays
Texas Pooling Issues in Eagle Ford Shale Oil Zone:
 HBP Leases (1950’s) that limit units pooled for oil to 40 or 80 acres
precluding horizontal wells for oil
 Existing pooled units pooled as to all depths or from the surface to the
base of the Edwards limestone (which is below the Eagle Ford shale)
 Refusal of lessors of existing HBP Leases to amend oil pooling to
permit larger oil units on reasonable terms
 Refusal of royalty and leasehold owners to ratify dissolution of units as
to non-producing zones
 Refusal of non-participating royalty owners to ratify leases covering
tracts in which they own that will be penetrated by horizontal drainhole
 No statutory authority to force pool unleased owners.
Pooling in Resource Plays
Texas Pooling Issues in Eagle Ford Shale Oil Zone:
 In absence of statutory forced pooling, Operators must deal with
unleased undivided interests in tracts penetrated by drainhole according
to common law cotenant rules
 Unleased undivided cotenant owner must be carried by drilling cotenant(s)
who bear the entire financial risk of a dry hole or a marginal well that will
never payout
 Non-drilling cotenant not entitled to share in production until drilling
cotenant(s) recover 100% reasonable and necessary well costs
 Rule 86 not establish any exception to Statewide Rules 37 and 38 for
horizontal wells in the absence of special field rules
 467’ from lease lines
 1200’ between wells
 40 acre well density
Pooling in Resource Plays
Alternatives for Dealing with Existing Units:
 Amend or dissolve units pooled as to all depths so pooling is just as to
the producing interval
 Most standard form oil and gas leases do not expressly permit such
amendments or dissolution
 Without ratification by mineral, royalty and leasehold owners there is a
possibility for litigation
 Production Sharing Agreements
 Treat exiting pooled unit as a single tract in a larger pooled unit including
unpooled leases
 Without agreement of all parties there is possibility of litigation
 Ignore, drill and allocate production using “allocation yardstick” and
allocate to owners in pooled units based on unit participation factor
Pooling in Resource Plays
Browning Oil Co. v. Luecke, 38 S.W.3d 625 (Tex. App. – Austin
2000, pet. den’d)
 Browning Oil drilled horizontal well and pooled leases covering tracts
penetrated by drainhole in violation of lease restrictions on pooling
 Court held the leases not validly pooled and therefore production could
not be allocated under pooling clause based on surface acreage
 Issue: In absence of pooling, how to allocate production to the several
tracts penetrated by a horizontal drainhole.
 Held:
 Each tract penetrated by horizontal drainhole is drill site
 Production in considered to take place only on the tract where production
actually occurs (rejecting “confusion of goods” doctrine asserted by
royalty owners of surface location tract)
Pooling in Resource Plays
Browning Oil Co. v. Luecke, 38 S.W.3d 625 (Tex. App. – Austin
2000, pet. den’d) [Continued]
 Held:
 Each owner is entitled to their tract share of production allocable to each
tract
 Each tract penetrated by the horizontal drainhole is allocated the share of
production attributed to each tract with “reasonable certainty”
 How much production the is attributable to each tract penetrated by a
horizontal drainhole is a fact question to be decided by the fact finder,
be it a judge or a jury
 Proof of how much production can be attributed to a particular tract along
horizontal drainhole with reasonable certainty will require expert geological
and/or engineering testimony
 Battle of expert testimony
Pooling in Resource Plays
Allocation “Yardsticks:”
 Surface acreage in tract compared to total surface acres in unit, which is
pooling clause allocation yardstick & is contractually agreed
 Percentage of the drainhole length under each tract compared to total
length of drainhole
 Need to show that formation geological characteristics, fracturing
techniques and take points make it reasonably certain that the amount of
production being obtained at any one point on the horizontal drainhole is
substantially the same as at any other point on the horizontal drainhole
 Take point to take point drainhole length
 Ratio of take points under each tract to total take points in drainhole
 Need evidence that production from each take point is substantially the
same at every take point on the drainhole
Pooling in Resource Plays
Allocation “Yardsticks:”
 How to deal with tracts penetrated with no actual production (e.g. no
take points/no perf zone) from the tract
 Absent pooling or agreement by all owners on allocation yardstick, use
of any allocation yardstick to determine production attributable to each
tract penetrated by horizontal drainhole may result in litigation
 Will any allocation yardstick chosen meet the burden of establish the
actual production attributable to each tract with reasonable certainty
 Take points and frac stages developed after Browning Oil decision, so
technology facts may be different today
Pooling in Resource Plays
Partial Pooling/Communitization:
 Can Operator pool some owners and allocate production as to these
owners on surface acreage basis and pay the remaining owners based
on an allocation yardstick; OR
 Can Operator obtain agreement of some owners to be paid on an
allocation yardstick basis, and pay the remaining owners on that basis
until they object
 What factors should Operator consider:
 If no one is paid Operator will be sued
 What threshold of pooling and/or agreement of owners must be achieved to
outweigh the risks of litigation to have the production attributable to each
tract determined with reasonable certainty by a jury?
Pooling in Resource Plays
Partial Pooling/Communitization:
 What factors should Operator consider [cont]:
 Will Operator end up with excess royalty to pay if Operator is paying
owners using two different yardsticks, e.g. surface acreage and length of
drainhole?
 Will paying every owner on the same yardstick until they object reduce the
risk of litigation
 If Operator has signed division orders that may not protect it on payments
made, because the issue is allocation of production not the ownership
interest in production
 Will Operator be protected by the rolling 4-year statute ol limitations for
improperly paid royalty
 Will full disclosure on allocation yardstick used protect Operator against
claims for fraudulent concealment or just invite litigation
Pooling in Resource Plays
Partial Pooling/Communitization:
 Damage control when owners object:
 Evaluate whether to continue to pay all pooled owners or owners who have
agreed to an allocation yardstick
 Evaluate risk that jury will find that production should have been allocated
differently based on expert testimony about production attributable to each
tract with reasonable certainty
 Evaluate whether to suspend payments to objecting owner(s) or to
interplead funds
 Beware of the risk of defensive interpleader
 Do you interplead only funds payable to objecting owner or all production
 Interpleader puts all allocation in controversy, because Operator is saying to
court it claims no interest in the funds interplead – court must determine how
funds should be paid
Pooling in Resource Plays
Partial Pooling/Communitization:
 Damage control when owners object[cont]:
 Evaluate monetary exposure if court determines that a different allocation
of production was appropriate
Pooling in Resource Plays
The NPRI problem:
 Vertical wells could be located to avoid drill site NPRIs
 NPRI owner’s fractional ownership in production from a tract can’t be
diluted by pooling without NPRI owner’s consent
 If Operator does not pool and allocates production using an allocation
yardstick, then NPRI owner will be paid on a “lease” basis
 If there is a community lease in which some of the tracts are burdened
by NPRI, and others are not, the lessors’ interests are pooled, but the
NPRI owner is not pooled
 If drainhole penetrates NPRI tract, the NPRI will be paid on an undiluted
basis based on production allocated to the tract
 Look for lease language that says “all royalty payable on the lands covered
by this lease will be paid from the royalty reserved in the lease”
Pooling in Resource Plays
QUESTIONS????
Pooling in Resource Plays
Pooling in Resource Plays
Pooling in Resource Plays
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