This discussion is intended to provide a general overview of Statewide Rule 37 Exceptions and the Mineral Interest Pooling Act in Texas, and is not a comment or opinion on any one particular set of facts. If you have questions or have received a notice of a Rule 37 Exception application or MIPA application affecting your land, you are encouraged to contact an attorney to receive advice specific to your situation.
Rule 37 Exceptions
In Texas, an operator is not required to include a non-drillsite tract unleased mineral owner (UMO) in a unit. If you are a UMO and are not the drillsite tract owner, you will not share in production from the unit even if you are in the middle of the unit. If you are the drillsite tract owner and are a UMO, you are entitled to your proportionate share of the well production as a "co-tenant" after the well has paid out (although the Texas Supreme Court has thrown a wrench into this rule in Wagner & Brown v. Sheppard (2008), but that is a topic for another day). If you are a UMO and are holding out for better lease terms, or are thinking that the operator will be forced to include you in a unit, be careful. The operator may apply for a Rule 37 exception and effectively cut you out of a well that may likely drain you.
Statewide Rule 37 governs how close a well can be to any property line, lease line, or other well. No well can be drilled closer than 1200 feet from another well completed in the same horizon on the same tract, and no well shall be drilled closer than 467 feet from a property line, unit line, or lease line. Field rules can be issued for each specific field that prescribe longer or shorter distances. For horizontal wells, the entire length of the horizontal drainhole (penetration to terminus point) must comply with the spacing requirements, unless the field rules prescribe otherwise. The Railroad Commission can grant exceptions to the spacing rule permitting wells to be drilled closer than prescribed.
With respect to horizontal wells, if there is a UMO that is holding up the spud date, and the UMO is a nondrillsite tract, an operator may decide to seek a Rule 37 exception. For example, under Rule 37, no portion of the horizontal drainhole can come within 467 feet of the UMO's property line. This presents a problem if the proposed wellsite or path of the horizontal drainhole is closer than 467 feet (or field rule spacing) of the UMO's property line. A Rule 37 exception will allow the operator to drill the well as close as possible to the UMO's tract and effectively drain the UMO's acreage without having to account to the UMO for his share. How can this be you ask? Under Rule 37, if the operator can prove there is a necessity for such an exception to prevent waste or confiscation, the RRC will likely grant the application, especially if the application is not contested (more on this below). To establish that the exception would prevent waste, the operator must show that its proposed well will recover oil or gas that wells in the field that would not otherwise be recoverable (i.e., the oil or gas under the unreasonable UMO's land), or that unusual geological conditions specific to the unit exist that require closer spacing to the UMO's tract. To establish an exception would prevent confiscation, the operator must show that absent the exception, it will be denied a reasonable opportunity to recover its fair share of hydrocarbons currently in place.
The operator is required to send notice to all affected UMOs of their application for an exception, and notify them of the date the RRC will hear the application. It is up to the UMO to appear and contest the application. The UMO will need to hire an attorney familiar with the RRC rules and administrative process. Typically, the UMO lacks the resources to contest the applications. If uncontested, the applications are usually granted.
Mineral Interest Pooling Act
There is no automatic right for a UMO to be included in a unit in Texas. A UMO or operator must apply to the RRC to include a UMO interest in a unit. Under the Mineral Interest Pooling Act, an operator can apply to the RRC to force pool a UMO into an existing unit if certain criteria are met. First, their must be an existing RRC designated common reservoir for the field in which the unit is located, and existing or temporary field rules. Second, the operator must show that it made a fair and reasonable offer to the UMO to voluntarily pool. What is considered fair and reasonable depends on the circumstances, however, typically an offer for the UMO to share on the same "yardstick" as others in the unit is usually considered fair and reasonable. Third, the MIPA unit is to be limited to 160 acres for an oil well and 640 acres for a gas well plus 10 percent tolerance, and must contain the "approximate acreage" of the proration units under the field rules. The operator must also show that the UMO's acreage reasonably appears to be within the productive limits of the reservoir. Fourth, the operator must propose the economic terms on which the UMO is to be paid if force pooled. In past cases, the RRC has determined that the UMO is to be paid (1) on the royalty share of their interest, the fair market royalty rate at the time of the order with no bonus, and (2) on the working interest share of their interest, the difference of 100% and the royalty interest being pooled. In other words, if the market royalty is 1/4, then the UMO would receive a 1/4th royalty and a 3/4ths carried working interest. The MIPA unit typically dissolves one year after its effective date if no production or drilling operations has taken place, six months after a dry hole is completed, or six months after cessation of production. As with the Rule 37 exception, the operator must file an application and give the UMO notice. The UMO can appear at the hearing to contest the application, and will likely need attorney representation.
Vice-versa, the UMO can apply to the RRC to "muscle into" an existing unit. The UMO is required to meet the same elements, and must provide notice to all interest owners (working, royalty, overriding royalty, etc..) in the unit.
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