Texas Statewide Rule 37 Exceptions and the Mineral Interest Pooling Act

 

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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Tags: 37, MIPA, exception, forced, pooling, spacing, unleased

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Comment by Ben Elmore on September 19, 2011 at 11:48
That is an interesting situation.  Under Texas law, EOG and Grenadier would be viewed as co-tenants, just like the lessors under their respective leases are co-tenants.  As such, any co-tenant can produce the minerals with the only requirement that they account to their co-tenant for the co-tenant's share of the minerals.  Using the EOG/Grenadier as an example, it sounds like EOG included its lease on the 50 acre tract in a unit and did not make it a drillsite tract.  As a result, Grenadier would not be entitled as co-tenant to any share of the unit well without ratifying the unit.  Grenadier would need to use MIPA most likely if EOG is not willing to cut a deal to include its lease in the unit.  As for EOG's right to a well Grenadier would drill on its lease, first Grenadier has a right to drill a well on its lease even though the tract is within the bounds of the unit, subject to spacing rules, etc...  If Grenadier drilled a well, EOG would share in its production as a co-tenant because again, they are co-owners of 50% undivided interest in the tract.  That is my initial gut reaction to the situation you describe.
Comment by Doob on September 19, 2011 at 10:16
The unit operator has drilled a well on the east edge of a ~600 acre unit. There is a ~50 acre tract inside the unit and the operator has a non-drillsite lease an undivided ~25 acres of that lease which is included in the unit but the other half interest in the tract is not included. If the lessee of the tract that is not included in the unit drills a well to capture their portion of the minerals not included in the unit, what happens to the mineral interest of the operator that is in the ~600 acre unit? I would assume they can't claim that their minerals are in both the 600 acre unit and the 50 acre unit.  I am interested in a Haynesville situation, but the same thing is at issue in the example of RRC Oil & Gas docket No 09-0262864 between EOG and Grenadier. If Grenadier drilled their interest on the "Bower Lease" would EOG have any interest in that well? It seems to me their portion of the undivided interest is included in the Whiteside unit.
Comment by Ben Elmore on September 19, 2011 at 9:28

Are you leased?  If I understand you correctly, a portion fo your tract is included in a pooled unit and is a non drillsite tract in that unit.  As to the non-pooled portion, yes, you can drill a well on that portion (or your lessee can).  I  don't quite understand your question about a non-pooled interest getting in the way of development.  Is it an unleased interest?  In general, operators can change the unit configuration, but they risk getting sued.  Most operators will get written consent from the pooled participants.

Comment by Doob on September 18, 2011 at 18:56

Concerning (not) pooling an undivided interest in a non-drill site tract…

The Haynesville units are being formed in anticipation of multiple horizontals. A
unit can be held together with a single well frequently on the edge of a unit,
and cost and revenues shared among pooled participants. If in the future an
operator deems that a tract with non-pooled interest is in the way of optimal
development can they change the unit, and what would happen to historic revenue
and expense with changed participation?

The RRC contends that a non-pooled undivided interest can protect their minerals by
drilling their own well. But how can that work if the pooled portion of the
undivided interest is receiving revenue from their portion of the tract? If we
as non-pooled undivided interest in a non-drill site tract decide to drill in
that tract, how are the other undivided interests treated in that tract if they
are already in a unit? They can't get paid for their share of oil and gas twice
can they?

 

Comment by Ben Elmore on February 17, 2011 at 20:25
The umo can drill his own well, sign a lease or ratify the unit, or seek protection under MIPA. That's the status of Texas law.
Comment by Nacman on February 17, 2011 at 12:25
As a follow-up, how does the UMO under the rule of capture protect its interest?
Comment by Ben Elmore on February 12, 2011 at 8:14
Rule 37 only applies to the physical location of the wellbore, not the distance the proppant travels via the frac.  In fact, our Texas Supreme Court recently held that a frac that extends across lease lines underneath acreage not included in a unit or leased by the operator is not a trespass.  See Coastal Oil & Gas v. Garza Energy Trust.  They held it was simply an application of the rule of capture.  They departed from 100 years of case law on the subject.  So yes, an operator who does not apply for or fails to obtain a Rule 37 exception, can place its horizontal drainhole in a legal location within the spacing requirements, but frac close to the UMO  lease line and draw hydrocarbons from underneath the UMO land.  The Supreme Court simply says it is up to the UMO under the rule of capture to protect its interest.
Comment by Sarah on February 12, 2011 at 2:34
Wow. Thank you for writing this!  I think this is happening to me. (the being drained part without getting paid.)  I appreciate all that you said here.
Comment by Skip Peel - Mineral Consultant on February 7, 2011 at 17:14
Thank you, Ben.  I commend your ability to convey the meaning of the statutes in such a way as to be understood by a layman.  I find the Texas mineral code to be arbitrary and punitive in it's regard to the rights of mineral interests affected by these two statutes.  And although the LA. Mineral Code is considerably more favorable in it's treatment of UMO's, both states need to to perform a thorough review of the applicability of mineral codes as they relate to horizontal drilling and hydraulic fracture stimulation.  The Haynesville Shale being the first major play in an age of wide spread Internet participation by private mineral owners can, and should, have the effect of bringing regulatory and legislative scrutiny to these issues.

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