Replies to This Discussion

Permalink Reply by Dion Warr, CPL on July 20, 2013 at 3:55

Andrew:

Absolutely correct. Title 30 is actually "Minerals, Oil and Gas and Environmental Quality". Most of the unitization issues (as well as economic considerations and consequences) on point and contrasting with Texas pooling are contained within Title 30, and not Title 31.

Geez, Skip, why did you bring this Mineral Code thing up? Lol...

Permalink Reply by Skip Peel - Mineral Consultant on July 20, 2013 at 8:03

Can't think of a single reason, Dion.

Permalink Reply by Buddy Cotten on July 18, 2013 at 2:08

adubu,

There is no reason whatsoever for Operator B to invite Operator A to the dance.  I would not.

B does not need A's acreage (assuming B's lateral is at a legal location and B does not want the wellbore to penetrate the 24 acre tract)

Now, let's take another scenario.  The acreage configurations of A's unit and B's unit, when put together makes for a nice little block to drill laterals.  

At that point, A and B partner up to drill lateral well(s).  However, Operator A's unit is configured for a vertical well.  What companies are doing now is to create a new (relatively) agreement called a Production Sharing Agreement (PSA).  The PSA allows for horizontal wells to cut across both units and EVERYBODY agrees to the PSA and boom - the new cross unit lateral is able to be drilled.

Horizontal wells have changed the landscape of land strategy.  For example, an operator could drill right next to a leased or open 100 acre tract.  The owner of the 100 acre tract, or his lessee cannot do anything with it, unless they partner up with other lessee's in the area.  This is so totally foreign to vertical well strategy, it feels weird to me on general principal to not have a prospect totally leased.

Best,

Buddy Cotten

Permalink Reply by adubu on July 18, 2013 at 2:04

Buddy--thanks-- added follow up question -- would A have to request that the 24a be pooled into unit with B and if so could B just refuse and as result just take the production of these 24a or is B obligated to pool the 24 on request or just good business to accept request because later date the shoe could be on the others foot and need a deal?

Permalink Reply by adubu on July 18, 2013 at 2:46

Buddy--- if I understand unless A request a PSA for the 24a then B can just goes about his business because this 24 picks up about 100 a that B has leased on border south of this 24 of unit that the 24 with 100 makes a nice configured western border in a N/S rectangular unit that B is permitting to drill H well. Then even if A request B can reject so mineral owner is screwed. So the only way mineral owner in A's unit can get their R in the H shale is A to request and B to except. Is there a down side for A to request the PSA. Any reason B not accept if A offers other than both A and B just wants to be "A--holes"?

Permalink Reply by Buddy Cotten on July 18, 2013 at 3:25

I need a map.

As far as "holes" go, it's just business.  Unless the 24 acres is within 400 feet or so of the lateral, they are not being drained anyway.

Buddy Cotten

Permalink Reply by adubu on July 18, 2013 at 4:39

buddy-- operator B i think would need the 24a since it sticks out into the unit east to west so  south of the 24a there is  about 100a ( that B has leased that is in the unit)could be best utilized in wells. With 80 a spacing operator B can drill 6 wels estimate if has the 24 to make nice configured unit and without only 4 wells so I guess B will just take the 24a and nothing mineral owner can do other than call his Lessee operator A and tell him a PO would work out something with B. If about 500 a in unit and H well cost 8+Million to drill then A WI 24/500= 4.8% WI--- his cost $384,000 and if well as good as offset wells in area look to make 8-9 BCF + at todays $3.50 gas ---$28-32 Million gross and at 80% to A= 0.8X0.048X 30M= 1.152M or about 3 times return on investment. 300% over 20 years = 15% annual yield per well drilled . (of course B would get all the 24 a at 100% of gross or 1.44 Million production per well drilled. BUDDY-- am I calculating the numbers correctly? Looking at unit the most western well I guess well #6 lateral would go across the 24a. N/S

Permalink Reply by adubu on July 18, 2013 at 4:50

Buddy-- do not have map yet--there  are just in process of surveying the unit plat to then get permit to drill after doing Title run, however the 24 is no question about which operator is Lessee of the 24a which is operator A

Permalink Reply by Andrew on July 19, 2013 at 17:52

I'd like to comment on Adubu's situation in general by saying this: "Welcome to a world without forced pooling." 

Every time some form of forced pooling system is proposed in Texas (or other states without it), ordinary mineral owners come out in droves to fight it in the name of protecting private property rights. I have always found these efforts to be self-defeating, because Adubu's situation (which I think we would all agree is less than ideal), occurs precisely because Texas does not allow compulsory unitization or forced pooling (not counting the MIPA, which I consider to be practically unavailable to ordinary mineral owners). 

In most producing states including Louisiana, unitization and pooling are governed by a state regulator whose primary mandates are to ensure efficiency in mineral production and fairness to various stakeholders involved. Texas has no such regulation, and as a rule pooling and unitization are purely a matter of contract.

In theory, this may sound appealing to property-rights advocates who don't want an operator to be able to "force" them into a pool. However, in practice this system allows small mineral owners to be abused or excluded all-together (as Adubu has). Rather than protecting mineral owners from being "forced" into a pool, it prevents the mineral owner from forcing their way into a pool. This hurts the small mineral owner in a number of significant ways:

1. Operators can (and sometimes do) gerrymander unit boundaries purely to exclude some tracts and include others. To demonstrate how this can look, I've attached a map of an actual unit in Rusk County. Two things are immediately apparent from looking at the map. First, the Minden Gas Unit is in a shape that would best be described as bizarre, and obviously bears no rational relationship to drainage. Second, tracts A-D that are highlighted are entirely surrounded by either the Minden Unit or the Craig Unit. They are not in either unit. What can these mineral owners do in this situation? Drill their own well. The practical unavailability of this solution to the owner of a 5-acre residential lot is obvious. 

2. The purely voluntary nature of pooling means that a mineral owner can't force his way into a pool even if he is totally inside a unit. As long as the owner of any undivided interest in his tract's minerals consented to the pooling, the other mineral owners can't prevent their minerals being included. However, unless the tract is a drillsite, the other mineral owners aren't entitled to share in the unit production even though their tract is inside the unit. Justifying this result requires adopting the fantasy that the unit well is draining Owner A's minerals in Blackacre, but is magically not draining Owner B-G's minerals in the exact same Blackacre. What can these excluded owners do in this situation? Drill their own well.

3. As an obvious consequence of #1 & #2, small mineral owners are essentially without leverage in lease negotiations. If the small owner isn't willing to take exactly what is being offered him by a potential operator, the operator can draw his tract out of the unit. Far worse for the mineral owner, the operator can lease even the smallest undivided interest in the tract (e.g. 1/1,000th), pool the tract anyway, and keep the royalties on 999/1000ths of that tract's share of production for himself. What can the excluded owners do in this situation? Drill their own well.

None of these situations would occur in states like Louisiana, Oklahoma, Mississippi, and others that have regulations with some degree of sanity and fairness to the mineral owner. Some may differ with my opinion, but if I'm negotiating a lease, I'd much rather do so when the Operator knows he's going to have to deal with me one way or the other.

Attachments:

• Map of Rusk County XTO Minden Gas Unit #1.pdf, 386 KB

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