Allocation Wells and What Makes Them Different
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This document summarizes key information about oil and gas permitting and regulation in Texas, including: - The Texas Railroad Commission permits wells if the applicant has a good faith claim to the property, even if title is disputed. - Horizontal wells are permitted to drill across multiple tracts of land without clear pooling authority from lessors. - The rule of capture historically led to issues like excessive drilling that pooling requirements and Railroad Commission regulations were designed to address. - Browning Oil Co. v. Luecke established that for horizontal wells, each tract penetrated is considered a drillsite tract entitled to a share of production attributable to that tract.
![Solution: Pooling
Operator combines several adjoining tracts under separate leases in order to have the acreage
required to legally drill a well under the spacing and density rules
• Filing the P-12 with the Texas Railroad
Commission only allows the operator to pool
his interest (the leasehold interest), and to drill
the well.
• The Texas Supreme Court has held that,
“[a]bsent express authority, a lessee has no
power to pool interests in the estate retained
by the lessor with those of other lessors.
• What does that mean?
• It means that the Lessors can enforce the lease as
written:
• If a well is drilled on a tract, pooled with other tracts
only under the P-12, but without pooling authority,
the lessor on the drillsite tract (here Tract A) would be
entitled to its full royalty
• The other lessors (Tracts B, C and D) get no royalty
from the well, and no other well may be drilled on
their tracts, but their leases will not be held by
production
Tract A
10 acres
Tract C
10 acres
Tract B
10 acres
Tract D
10 acres](https://image.slidesharecdn.com/staplespresentation-150422093809-conversion-gate01/85/Allocation-Wells-and-What-Makes-Them-Different-9-320.jpg)
![Taking it to the Next Level
• In the 90s, horizontal well drilling exploded
• Definition:
• Texas law and courts have defined a horizontal well as "[a]ny well that is
developed with one or more horizontal drainholes having a horizontal
drainhole displacement of at least 100 feet." 16 TEX. ADMIN. CODE §
3.86(a)(4) (2013).
• Like vertical wells, horizontal wells are initially drilled vertically down to a
formation suspected of holding hydrocarbons. Browning Oil Co., Inc. v.
Luecke, 38 S.W.3d 625 (Tex. App.—Austin 2000, pet. denied) at 634. At a pre-
determined point, the drill stem proceeds horizontally into the formation. Id.
Horizontal wellbores can extend across several leased tracts each having
different owners and contain multiple production points along the drainhole.
Id. at 632.](https://image.slidesharecdn.com/staplespresentation-150422093809-conversion-gate01/85/Allocation-Wells-and-What-Makes-Them-Different-11-320.jpg)
![Spartan Texas Six Capital Partners, Ltd., et. al v.
EOG Resources, Inc.
• No pooling authorized.
• EOG filed pooled unit designations covering several tracts.
• Computed royalties “based upon a reasonable allocation of the
total production attributable to the lands covered by the […]
leases.”
• The Plaintiff mineral owners claim they should be paid royalties
based upon 100% of the production from the well.
• Settled.](https://image.slidesharecdn.com/staplespresentation-150422093809-conversion-gate01/85/Allocation-Wells-and-What-Makes-Them-Different-23-320.jpg)
Allocation Wells and What Makes Them Different
- 1. Midland Energy Expo April 14, 2015
- 2. Permitting in Texas • Texas Railroad Commission does not undertake to adjudicate questions of title or rights of possession. • Permit should be denied “if it does not reasonably appear to it that the applicant has a good-faith claim of ownership in the property. If the applicant makes a reasonably satisfactory good-faith claim of ownership in the property, the mere fact that another in good faith disputes his title is not alone sufficient to defeat his right to the permit.”
- 3. Allocation Well •A horizontal well •Permitted by the Texas Railroad Commission •Allows an operator to drill across several tracts of land •No clear pooling authority or consent of the Lessors
- 4. Wait, wait… WHAT? • History of Pooling in Texas • The Rule of Capture: • Oil recovery in the United States began in Pennsylvania, 1859 • Rule of Capture was developed to protect operators and the growing industry • Westmoreland & Cambria Natural Gas Co. v. Dewitt, 18 A. 724, Pennsylvania Supreme Court: • “Water and oil, and still more strongly gas, may be classed by themselves, if the analogy be not too fanciful, as minerals ferae naturae. In common with animals, and unlike other minerals, they have the power and the tendency to escape without the volition of the owner. Their ‘fugitive and wandering existence within the limits of a particular tract was uncertain,’ as said by Chief Justice Agnew in Brown v. Vandegrift, 80 Pa. St. 147, 148. They belong to the owner of the land, and are part of it, so long as they are on or in it, and are subject to his control; but when they escape, and go into other land, or come under another’s control, the title of the former owner is gone. Possession of the land, therefore, is not necessarily possession of the gas. If an adjoining, or even a distant, owner, drills his own land, and taps your gas, so that it comes into his well and under his control, it is no longer yours, but his.”
- 5. Effect of Texas’Adoption of The Rule of Capture • Closely spaced wells • Dangerous conditions (fire hazards) • Excessive drilling (damage to reservoirs) • Excessive production • Price drops • Lessees drilled and sold for anything over cost, rather than allow neighbor to drain
- 6. Solution - Regulation • March 31, 1919 The Texas Legislature enacts a statute requiring the conservation of oil and gas, forbidding waste, and giving the Railroad Commission jurisdiction. Tex. Nat. Res. Code Ann. '81.051 (Vernon 1978) (original version at 1919 Tex. Gen. Laws, ch. 155, Tex. Gen. Civ. Stat. art. 6023) (Vernon 1962). • November 26, 1919 Railroad Commission adopts first Statewide Rule regulating the oil and gas industry. Texas is the first state to adopt a well spacing rule: Rule 37, which has a conservation basis, was promulgated primarily to reduce fire hazards, and to minimize the danger of water percolation into oil stratum from wells drilled in too great a number or in too close proximity. Railroad Commission v. Bass, l0 S.W.2d 586 (Tex. Civ. App.- Austin 1928) writ dism'd, 51 S.W.2d 1113 (Tex. Comm'n App. 1932).
- 7. Rules 37 and 38 • Regulate Spacing of Wells • At the time of enactment, wells were to be located no closer than 150 feet from a lease line, and no closer than 300 feet to the nearest well • Today, Statewide Rule sets the minimum distances at 467 feet from a lease line, and 1200 feet from the nearest well completed in the same horizon • Regulate Density of Wells • Statewide Rule requires a minimum of 40 acres in a drilling unit • There GENERALLY cannot be assignment of the same acreage to more than one drilling unit
- 8. Practical Problems for Operators with Spacing and Density Rules • Operators may not have enough acreage to create a legally drillable unit • Smaller operators suffered • Exceptions had to be granted Tract D 10 acres Tract C 10 acres Tract A 10 acres Tract B 10 acres
- 9. Solution: Pooling Operator combines several adjoining tracts under separate leases in order to have the acreage required to legally drill a well under the spacing and density rules • Filing the P-12 with the Texas Railroad Commission only allows the operator to pool his interest (the leasehold interest), and to drill the well. • The Texas Supreme Court has held that, “[a]bsent express authority, a lessee has no power to pool interests in the estate retained by the lessor with those of other lessors. • What does that mean? • It means that the Lessors can enforce the lease as written: • If a well is drilled on a tract, pooled with other tracts only under the P-12, but without pooling authority, the lessor on the drillsite tract (here Tract A) would be entitled to its full royalty • The other lessors (Tracts B, C and D) get no royalty from the well, and no other well may be drilled on their tracts, but their leases will not be held by production Tract A 10 acres Tract C 10 acres Tract B 10 acres Tract D 10 acres
- 10. Solution: Pooling Clauses Lessors grant Lessee the right to pool their lands with other lands in order to form a legally drillable unit. • If all owners grant pooling authority, they will all share in the production from the well on Tract A, proportionate to their acreage contributed to the unit • E.g. 10 ac/40ac • Drillsite Tract owner is necessarily proportionately reduced, but unless he grants pooling authority, would not likely get a well drilled Tract A 10 acres Tract C 10 acres Tract B 10 acres Tract D 10 acres
- 11. Taking it to the Next Level • In the 90s, horizontal well drilling exploded • Definition: • Texas law and courts have defined a horizontal well as "[a]ny well that is developed with one or more horizontal drainholes having a horizontal drainhole displacement of at least 100 feet." 16 TEX. ADMIN. CODE § 3.86(a)(4) (2013). • Like vertical wells, horizontal wells are initially drilled vertically down to a formation suspected of holding hydrocarbons. Browning Oil Co., Inc. v. Luecke, 38 S.W.3d 625 (Tex. App.—Austin 2000, pet. denied) at 634. At a pre- determined point, the drill stem proceeds horizontally into the formation. Id. Horizontal wellbores can extend across several leased tracts each having different owners and contain multiple production points along the drainhole. Id. at 632.
- 12. Do Vertical Well Pooling/Allocation Rules Apply to Horizontal Wells? • Non-Apportionment Rule – • Production is allocated according to the ownership of the minerals at the location from which the production is obtained. • Hard to show with reasonable certainty the production from each tract in horizontal wells • Owners refuse to authorize or consent to pooling • Owners demand their full share of production from the entire length of the horizontal wellbore • Without pooling agreements (or production sharing agreements) an operator could be made to pay the owners of each tract that the wellbore traverses royalty on 100% of the production from the well (the rule applied in vertical wells).
- 13. Browning Oil Co., Inc. v. Luecke • Rejected applying the rules related to allocation of royalty used for vertical wells, holding that found it was more appropriate to calculate the royalty share of production attributable to the interest holder's tract with reasonable certainty. Id. at 634.
- 14. The Changing Definition of “Drillsite Tract” • "Each tract traversed by the horizontal wellbore is a drillsite tract, and each production point on the wellbore is a drillsite." Id. at 634. • Today, any tract penetrated by a horizontal wellbore is considered a drillsite tract. Id. at 634. • A horizontal wellbore that penetrates multiple tracts creates the possibility of having multiple drillsite tracts within a horizontally pooled unit. See id. at 638 (discussing a horizontal well that crossed seven separate tracts of land each containing different royalty interest owners).
- 15. Browning Oil Co., Inc. v. Luecke • Facts: • In 1979, the Luecke’s executed 3 oil and gas leases covering about 420 acres. Browning Oil Company eventually acquired these leases. The leases allowed pooling, but limited to 80 acre proration units, and contained anti-dilution language that required that each pooled unit contain at least 60% of the Luecke’s acreage. In 1994, Browning asked the Luecke’s to amend the pooling language to allow for larger pooled units because Browning wanted to drill horizontal wells. The Luecke’s refused. Without pooling authority, Browning drilled two horizontal wells crossing Luecke’s tracts and several other tracts.
- 16. Browning Oil Co., Inc. v. Luecke • The Luecke’s sued, claiming violation of the leases’ pooling authority. • At the trial, the Luecke’s claimed royalty on 100% of the production from the wells even though only about 25% of the horizontal wellbore was located on acreage in which Luecke owned an interest. • The jury held for the Luecke’s.
- 17. Browning Oil Co., Inc. v. Luecke • On appeal, court agreed that the pooling provision had been violated, but reversed the damages. • The Court of Appeals noted that the jury charge and Luecke’s royalty calculations failed to take into account that substantial portions of producing wellbore were located on lands with which Luecke had not been pooled. • Luecke’s would be paid for production from tracts they did not own. • The Court ruled that Luecke’s royalty was limited to the production that can be attributed to their tracts with reasonable certainty. • Therefore, the Luecke’s were entitled to royalty on 25% of the total production from the well.
- 18. Production Sharing Agreements • Browning Oil Co. v. Luecke court noted that “punitive damages for a lessee’s failure to comply with applicable pooling provisions could result in the curtailment of horizontal drilling.” Id. at 646-47. • Pooling authority unnecessary for horizontal wells? • Using the logic in the Luecke case, Devon Energy asked the Railroad Commission to issue permits if a majority of the Mineral and Working interest owners had entered into Production Sharing Agreements. • Agreements, signed by the interest owners, combine units or unpooled tracts and allocate production of the horizontal well based upon the length of the lateral under the tract. • Since late 2007, the Railroad Commission has issued such permits based upon the operator’s representation that at least 65 percent of the interest owners of each tract agreed.
- 19. A Step Further • 2010, Devon submitted an application for a permit to drill a horizontal well in which they did NOT have either pooling authority or a PSA, calling it an Allocation Well. • Colin K. Lineberry (a representative of the Railroad Commission) issued a letter to Devon Energy approving Devon Energy’s application for an Allocation Well. • “… it appears that a 100 percent interest in each of the leases is a sufficient colorable claim to the right to drill a horizontal well as proposed to authorize the removal of the regulatory bar and the issuance of a drilling permit by the Commission, assuming the proposed well is in compliance with all other relevant requirements.”
- 20. Post Lineberry Letter • Devon’s representation that it held leases covering 100% of the minerals met the minimum good faith claim to title threshold showing merit to process the application. • The Commission also noted that the permit did not endorse the proposed allocation, leaving that issue to the Courts. • Railroad Commission has issued many Allocation Well permits, and has not required the previous minimum amount of interest owners’ execution of Production Sharing Agreements. •
- 21. RRC Disclaimer • Commission Staff expresses no opinion as to whether a 100% ownership interest in each of the leases alone or in combination with a “production sharing agreement” confers the right to drill across lease/unit lines or whether a pooling agreement is also required. However, until that issue is directly addressed and ruled upon by a Texas court of competent jurisdiction it appears that a 100% interest in each of the leases and a production sharing agreement constitute a sufficient colorable claim to the right to drill a horizontal well as proposed to authorize the removal of the regulatory bar and the issuance of a drilling permit by the Commission, assuming the proposed well is in compliance with all other relevant Commission requirements. Issuance of the permit is not an endorsement or approval of the applicant’s stated method of allocating production proceeds among component leases or units. All production must be reported to the Commission as production from the lease or pooled unit on which the wellhead is located and reported production volume must be determined by actual measurement of hydrocarbon volumes prior to leaving that tract and may not be based on allocation or estimation. Payment of royalties is a contractual matter between the lessor and lessee. Interpreting the leases and determining whether the proposed proceeds allocation comports with the relevant leases is not a matter within Commission jurisdiction but a matter for the parties to the lease and, if necessary, a Texas court of competent jurisdiction. The foregoing statements are not, and should not be construed as, a final opinion or decision of the Railroad Commission.
- 22. EOG Resources v. Klotzman • 2012 - EOG application for Klotzman (Allocation) Well No. 1H • No pooling authority in leases • Klotzman’s refused to consent to pooling for horizontal development • Klotzman’s protested permit • Permit issued
- 23. Spartan Texas Six Capital Partners, Ltd., et. al v. EOG Resources, Inc. • No pooling authorized. • EOG filed pooled unit designations covering several tracts. • Computed royalties “based upon a reasonable allocation of the total production attributable to the lands covered by the […] leases.” • The Plaintiff mineral owners claim they should be paid royalties based upon 100% of the production from the well. • Settled.
- 24. Legislative Resolution? • SECTION 1. Section 85.046, Natural Resources Code, is amended by adding Subsection (d) to read as follows: • (d) In order to prevent waste, promote conservation, or protect correlative rights, the commission may issue a permit to an operator or lessee to drill an oil or gas well that traverses multiple tracts. If there is not an agreement with one or more owners of royalty or mineral interests in the tracts traversed by the well regarding the manner in which production from the well shall be allocated among the tracts, the operator or lessee shall allocate to each of those tracts its share of the aggregated production from the well as determined by the operator or lessee with reasonable probability.
- 25. Tweet your takeaway from this educational session. @MidlandEnrgExpo #MEEpbpa