Production Sharing Agreement

Someone educate me on how these Production Sharing Agreements are even legal.  I am dealing with Anadarko and although I understand the PSA will allow them to cross over unit lines, this well will be drilled in one unit.  They have determined that the lateral will drain an area 660 feet by however long the lateral is, lets say 4500 feet, that equals about 68 acres, but instead of paying just the people that own minerals in the 68 acres they are going to divide those payments up between everyone in the original unit of 688 acres and if the lateral had of crossed into another unit everyone in that unit would get a piece.  So it is possible that if the lateral is in two units and the other unit is 688 acres also then Anadarko  in reality would be forming a new unit of 1376 acres, when this well is only draining 68 acres and this is suppose to be a good deal for me.  I understand there are some court cases involving Devon about this issue that have not been settled yet.  Has anyone else done any research into this, maybe I am just looking at it wrong?

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Permalink Reply by Andrew on May 9, 2013 at 14:30

Rodney,

The language of the particular PSA proposed to you may or may not be favorable. An attorney is the only one who can really advise you on that.

As to why it would benefit you to sign a PSA, in general, the main reason is that without PSA a horizontal well may never be drilled. Units in northeast Texas can be shaped in very odd, gerrymandered ways. In many of these units it would be impossible to drill a lateral fully inside the unit. 

Even if you have a more compact unit, potential for lateral length will only go so far. If the economics are not good enough for the company to drill a well with a short lateral, they won't drill the well.

In each scenario, no new well means no new royalty for you.

Permalink Reply by Skip Peel - Mineral Consultant on May 9, 2013 at 14:37

Mineral owners should engage the services an attorney or firm with extensive experience in oil & gas law.  Not just any attorney will do.

Permalink Reply by Two Dogs, Pirate on May 9, 2013 at 15:55

I have seen 30 year landmen that don't know squat, don't put your future revenew into the hands of a landman that you may be betting the farm on his advice just because you think he could be  a competent person because he is life long in the biz.

Permalink Reply by Krkyoldhag on May 13, 2013 at 5:38

After everybody (except me, with my 90 acres of minerals) have signed the PSA increasing size of the 630 unit a year ago..no drilling has occurred.  The one thing that the PSA did was that it assured the lease would stay active tho there is only tiny production, maybe $500 annually for whole unit.

I am hopeful that there will one day be drilling on this larger unit.

If didn't get one well on 630  doubt there would be 18 on the larger unit.

Just saying.

Permalink Reply by Andrew on May 9, 2013 at 3:08
I, for one, have a small interest inside such a cross-unit well such as this that was formed in Texas. I am elated the the company is drilling a lateral that is a half mile longer than they would otherwise be able to. However much my share of the revenue is being reduced to share with the other unit, I expect production to increase by AT LEAST that percent due to the longer lateral (plus a little more because 330' feet of my unit is now drillable that was formerly off limits). The effect would be the same if my unit was in Louisiana.
Permalink Reply by Andrew on May 9, 2013 at 3:17

As to your question about forced pooling: you were force pooled when the original unit was formed, if you are in Louisiana. 

However, your minerals appear to be in Texas, given the fact that your original unit was an irregular size (688 acres) and someone has apparently proposed an agreement of some sort to you. PSAs are being used more and more in Texas. I do not think this is forced pooling. As always, I think you are free to withhold your consent. There are some legal issues that still need to be ironed out with PSAs in Texas, but it is a net positive for the mineral owner in most circumstances.

Permalink Reply by Rodney Anderson on May 9, 2013 at 7:48

Theoretically the wells drilled in the original 688 acres would be pulling from the same pool, so you would be sharing the royalty with the other mineral owners of that pool, that is not the case with PSA.  I guess I could still be looking at this all wrong, but a land man I know well, who is dealing with a PSA of his own and an oil and gas attorney both advised me not to sign this agreement, so I am not alone in this thought process.

Permalink Reply by dbob on May 9, 2013 at 14:01

Rodney, The original unit sizes were developed largely with conventional reservoirs in mind.  Even without aggressive hydraulic fracturing, laterals in excess of 5000', in conventional reservoirs (e.g. travis peak) are not truly conventional.  In most instances, the long lateral needs to be oriented nearly north/south to have the greatest efficiency in developing the resources.  The PSA is one way to allow for this development.  

I've seen a lot of units in East Texas that are of poor geometry - e.g. one side of the unit is 7500' north/south and the other side is 3000' north south - it wasn't much of a problem with vertical wells, but unconventional development will not happen on the part of the unit that is overly "short" without the PSA.  

That said, I am not a mineral owner, so take my statement for what you think its worth.  if you have a large enough mineral block, you might try negotiating a favorable lease amendment in exchange for signing the PSA.  

Permalink Reply by Krkyoldhag on May 10, 2013 at 14:37

Nearly 4 years ago I posted on the site asking about PSA's..I also searched the web...only thing could find at the time was related to the agreements in mid East.

Now there has been one formed that affects me.  I am in a 630 acre unit...and a PSA presented to increase it to 1580 or so acres.

And there is not much hope that there would ever be 8 or 16 wells on this larger unit.

So..will keep reading your posts and see if you are able to find out anything more.

Oh..I am in Panola County too.

Permalink Reply by dbob on May 10, 2013 at 15:58

There are a few times when a mineral owner would clearly not want a PSA - 

When the same lateral could be drilled with simply a subsurface easement

When a PSA would allow 1 well to hold their minerals, e.g., say a nominal -5% of the production came from the second unit

When it would result in well geometries or locations that would limit the potential for future production in other parts of the unit.

Permalink Reply by Rodney Anderson on May 11, 2013 at 1:49

I thought the PSA was to allow energy companies to drill across unit boundaries, but according to the RRC map the wells Anadarko wants to drill are all in the same unit.  I can see if they drill enough wells to cover the unit and we share in all of them it all equals out, but so far in the other units they have done this in that is not the case.

Permalink Reply by dbob on May 11, 2013 at 3:16

can you share the rrc map?

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