3Pooling in Resource Plays What is a Resource Play?To Land Professionals it is Shale PlaysBarnett Shale - North TexasHaynesville - East Texas and Northwest LouisianaWoodford – OklahomaMarcellus – Pennsylvania, Southern New YorkEagle Ford – South TexasBakken – Eastern Montana, North DakotaAmong others
4Pooling 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 wellsThere 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 acresPooling Clauses in HBP leases do not work for horizontal wellsThere are existing pooled units for vertical wellsPooled Units pooled as to all depthsPossibility of interference with existing vertical wellsCurrent mineral and/or working interest owners unwilling to amend HPB leases or existing units
5Pooling 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 MontanaBakken shale became major resource play with 2000 discovery of Elm Coulee Oil Field in Eastern Montana – now producing +/-53,000 bbls/day1950’s discovery of Edwards limestone as a major producing reservoir in South TexasEagle Ford shale play took off in South Texas with discovery well in LaSalle County that produced large amounts of condensate with gasHorizontal drilling and hydraulic fracturing technologies made exploitation of various shales economically viableHorizontal drainholes require larger tracts than vertical wells
6Pooling in Resource Plays How to Accomplish Pooling:Voluntary PoolingImplementing pooling provisions of oil and gas leasesAgreement among all owners of production in tracts to be pooledStatutory Forced PoolingMontana and North Dakota have Forced Pooling StatutesTexas has Mineral Interest Pooling Act, but it has limited applicationTo 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
7Pooling in Resource Plays Forced Pooling in Bakken Shale:Montana § Pooling of Interests In Spacing UnitMake attempt to voluntarily poolUpon 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 § Spacing UnitsSpacing Unit is area that can be drained by one wellOperator of a horizontal well may designate and obtain approval of optional drilling unit before drilling commences consisting of 2, 3 or 4 contiguous drilling units640 and 1280 acre drilling and/or spacing units common, but Operators are now seeking 2560 acre units
8Pooling in Resource Plays Forced Pooling in Bakken Shale:North Dakota § Integration of fractional tractsPooling may be voluntaryUpon 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 unitSee also NDC § regarding what must be included in a invitation to participate in drillingSee also NDC § regarding the size of drilling units in the absence of any order by the Commission1280 acre units seem to be common for undrilled Bakken shale, although some 2560 approved depending on lateral length
9Pooling in Resource Plays Forced Pooling in the Eagle Ford Shale:Mineral Interest Pooling Act Tex. Nat. Res Code §§ et seq.Applicant must make fair and reasonable offer to voluntarily poolField rules must exist establishing proration unit sizeMaximum size of force pooled unit for oil is 160 acresOnly around 100 granted since statute enacted & used by parties to force their way into existing producing proration unitsApplication of Finley Resources, Oil & Gas Docket NoFirst and only time Applicant requested to force pool unleased ownersOrder permitting forced pooling very favorable to unleased ownersAllocated production on surface acreage basisLimited to Finley, as Operator, to Barnett Shale
10Pooling in Resource Plays Railroad Commission of Texas Rules – Horizontal Drainholes:Rule 86 governs horizontal wells generallyZero between well spacing rule allows horizontal drainholes to be drilled close to together to maximize effect of hydraulic fracturing and to maximize recovery of hydrocarbonsTake point rule allows distances to nearest lease line to be measured from the nearest take point so that Rule 37 Exceptions are not necessaryBox 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.
13Pooling in Resource Plays Railroad Commission of Texas Special Field Rules:Texas Operators have requested special field rules for shale playsMost of those granted are for gas in Barnett and HaynesvilleApplication of EOG Resources, Inc. Docket No for Temporary Field Rules Eagleville (Eagle Ford) Field, Karnes County Texas – Final Order March 2010EOG evidence that wells require 2500 to 3500 foot lateral with up to 30 stage fracture stimulation80-acre density for oil field330’ spacing to lease lines; 0 betw’n well spacing (wells 100 – 200’ apart)33’ box ruleNo proration plats (P-12); file P-15 Statement Productivity AcreageField = correlative interval 10,294 to 10,580 continuous across area
14Pooling in Resource Plays Railroad Commission of Texas Policy – Not in RulesApprove Production Sharing Agreements for modified P-12 Proration Plat if 65% of royalty and leasehold owners approveDrilling 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 drainholeTakes no position on whether leases permit the Applicant to drill across lease lines in the absence of production sharing agreement or pooling authorityRequires no unleased interests intracts within field rule minimum lease line distance – not apply to tracts penetratedTakes no position on allocation of production which is a contractual matter under between lessor and lessee.
15Pooling 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 oilExisting 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 termsRefusal of royalty and leasehold owners to ratify dissolution of units as to non-producing zonesRefusal of non-participating royalty owners to ratify leases covering tracts in which they own that will be penetrated by horizontal drainholeNo statutory authority to force pool unleased owners.
16Pooling 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 rulesUnleased 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 payoutNon-drilling cotenant not entitled to share in production until drilling cotenant(s) recover 100% reasonable and necessary well costsRule 86 not establish any exception to Statewide Rules 37 and 38 for horizontal wells in the absence of special field rules467’ from lease lines1200’ between wells40 acre well density
17Pooling 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 intervalMost standard form oil and gas leases do not expressly permit such amendments or dissolutionWithout ratification by mineral, royalty and leasehold owners there is a possibility for litigationProduction Sharing AgreementsTreat exiting pooled unit as a single tract in a larger pooled unit including unpooled leasesWithout agreement of all parties there is possibility of litigationIgnore, drill and allocate production using “allocation yardstick” and allocate to owners in pooled units based on unit participation factor
18Pooling 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 poolingCourt held the leases not validly pooled and therefore production could not be allocated under pooling clause based on surface acreageIssue: 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 siteProduction 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)
19Pooling 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 tractEach 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 juryProof of how much production can be attributed to a particular tract along horizontal drainhole with reasonable certainty will require expert geological and/or engineering testimonyBattle of expert testimony
20Pooling in Resource Plays Allocation “Yardsticks:”Surface acreage in tract compared to total surface acres in unit, which is pooling clause allocation yardstick & is contractually agreedPercentage of the drainhole length under each tract compared to total length of drainholeNeed 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 drainholeTake point to take point drainhole lengthRatio of take points under each tract to total take points in drainholeNeed evidence that production from each take point is substantially the same at every take point on the drainhole
21Pooling 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 tractAbsent 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 litigationWill any allocation yardstick chosen meet the burden of establish the actual production attributable to each tract with reasonable certaintyTake points and frac stages developed after Browning Oil decision, so technology facts may be different today
22Pooling 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; ORCan Operator obtain agreement of some owners to be paid on an allocation yardstick basis, and pay the remaining owners on that basis until they objectWhat factors should Operator consider:If no one is paid Operator will be suedWhat 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?
23Pooling 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 litigationIf 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 productionWill Operator be protected by the rolling 4-year statute ol limitations for improperly paid royaltyWill full disclosure on allocation yardstick used protect Operator against claims for fraudulent concealment or just invite litigation
24Pooling 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 yardstickEvaluate risk that jury will find that production should have been allocated differently based on expert testimony about production attributable to each tract with reasonable certaintyEvaluate whether to suspend payments to objecting owner(s) or to interplead fundsBeware of the risk of defensive interpleaderDo you interplead only funds payable to objecting owner or all productionInterpleader 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
25Pooling 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
26Pooling in Resource Plays The NPRI problem:Vertical wells could be located to avoid drill site NPRIsNPRI owner’s fractional ownership in production from a tract can’t be diluted by pooling without NPRI owner’s consentIf Operator does not pool and allocates production using an allocation yardstick, then NPRI owner will be paid on a “lease” basisIf 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 pooledIf drainhole penetrates NPRI tract, the NPRI will be paid on an undiluted basis based on production allocated to the tractLook 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”