EOG Resources Proposes Temporary Consolidated Field Rules for Eagle Ford Shale

June 10, 2010

EOG Resources has filed an application with the Texas Railroad Commission proposing the adoption of temporary field rules for wells drilled in the Eagle Ford Shale in South Texas that could have a significant impact on thousands of oil and gas leases in the field. The application proposes to consolidate 27 designated fields that produce from the Eagle Ford Shale formation, and the proposed rules will replace any field rules previously adopted for those fields. The consolidated rules would apply to Eagle Ford Shale wells drilled in Railroad Commission of Texas Districts 1, 2 and 4. A copy of the notice of the Railroad Commission hearing for the adoption of the proposed rules may be found here:  eagle ford field rules.pdf. The hearing is scheduled for June 25, 2010, at 9 am in the William B. Travis Sate Office Building, 1701 Congress Avenue, Austin. Persons wishing to participate in the hearing must file a notice of intent to appear at least five working days in advance of the hearing date and serve a copy of the notice on the applicant and any other parties of record. More information can be obtained by calling the Office of General Counsel of the Railroad Commission at 512-463-6848.

Field rules are adopted by the Railroad Commission to govern the spacing of wells in a field. They specify how far wells must be from each other, how far wells must be from the nearest lease line, and how much acreage must be assigned to a well in order to obtain a permit to drill a well. The acreage assigned to a proposed well is known as a "proration unit." Well spacing and density rules were developed by the Commission after it was given jurisdiction over oil and gas operations in Texas in the early days of the oil industry, principally because of unregulated drilling in the East Texas Field. Because of unregulated drilling in that field, wells were being drilled that were not necessary for the efficient development of the field, and oil prices plummeted. The Commission was also given authority to "prorate" production from a field -- that is, to limit production, and to allocate or "prorate" the specified limit of production from a field among the wells in a field. The stated purposes of spacing and density rules are to avoid waste and protect the correlative rights of producers in the field. Theoretically, field rules should designate a size for proration units that approximates the amount of acreage in the field that can be efficiently drained by a single well.

The field rules proposed by EOG would provide:

No well may be drilled nearer than 330 feet to any property or lease line.

The "standard" proration unit for an oil well shall be 80 acres.

The "standard" proraton unit for a gas well shall be 320 acres. An operator is permitted to form optional drilling units for gas wells of 80 acres.

Proration units for horizontal gas wells may contain additional acreage, determined by the following formula: A= (L x 0.16249) + 320 acres, where L = the horizontal drainhole distance measured between the first take point and the last take point.

Proration units for horizontal oil wells may contain additional acreage, determined by a separate rule previously adopted by the Commission, Statewide Rule 86. Under that rule, an operator is allowed to assign additional acreage to a well, depending on the length of the lateral. For the proposed new Eagle Ford field rules, for example, operators would be able to assign an additional 160 acres to the proration unit if the horizontal drainhole displacement is between 2,482 feet and 3,308 feet; an additional 200 acres if the horizontal displacement is from 3,309 to 4,135 feet; and 240 acres if the horizontal displacement is from 4,136 to 4,962 feet.

So how would these proposed rules work? Suppose an operator drills a horizontal gas well in the Eagle Ford, with a horizontal displacement (the horizontal portion of the well, from the first "take point" to the last "take point" in the well) of 4,000 feet. Under these proposed rules, the operator could assign to the well a proration unit of up to 997 acres (A = (4,000 x .16429) + 320). For an oil well with a 4,000-foot horizontal displacement, the operator could assign to the well a proration unit of up to 320 acres (the "standard" 80 acres for an oil well plus 240 acres allowed by Rule 86). But the field rules would also allow the operator to assign a proration unit of only 80 acres to such a well, whether classified as an oil well or a gas well. The proposed rule would therefore give the operator huge leeway in how much acreage to assign to a proration unit: for a gas well with a 4,000-foot lateral, between 80 and 997 acres; for an oil well, between 80 and 320 acres.

How would these proposed rules affect mineral owners in the field? The effect on mineral owners depends on the interplay between the field rules and the pooling clause in the mineral owner's oil and gas lease. Most oil and gas leases allow for pooling of the leased premises with other lands, and the pooling clause usually specifies a maximum size for pooled units. A typical pooling clause will say that the maximum size for pooled units for an oil well is 40 acres, "plus 10% tolerance," and for gas wells, 640 acres "plus 10% tolerance." These maximum sizes for pooled units may be negotiated between the mineral owner and his lessee. But almost all pooling clauses contain language similar to the following:

"Should governmental authority having jurisdiction prescribe or permit the creation of units larger than those specified, for the drilling or operation of a well at a regular location or for obtaining miximum allowable from any well to be drilled, drilling or already drilled, units thereafter created may conform substantially in size with those prescribed or permitted by government regulations."

In other words, if the field rules adopted by the Railroad Commission "prescribe or permit" proration units for wells in the field greater than the pooled unit size limits provided in the lease, the lessee may create pooled units up to the size permitted by the Railroad Commission for proration units. Therefore, one effect of the field rules proposed by EOG will be to greatly increase the size of pooled units allowed under many oil and gas leases in the field.

While development of the Eagle Ford Shale is in its early stages, I do not believe that any operator in the field believes that a 4,000-foot horizontal well is capable of draining 997 acres. Most drilling plans I have seen contemplate much more dense development. Assume that an operator creates a pooled unit of 160 acres for a 4,000-foot lateral well. Each end of the lateral would have to be 330 feet from the unit boundary, so the dimensions of the pooled unit could be 4,660 feet by 1,496 feet. If the wellbore is located in the middle of the unit, then the wellbore would have to drain an area 748 feet from the wellbore in order to fully drain the oil or gas within the area of the unit. I believe it is doubtful that wells in the Eagle Ford will drain an area that distance from the wellbore. If the same well were included in a 997-acre pooled unit, and the end points of the lateral were located 330 feet from the edge of the pooled unit, the unit would have to be 9,320 feet in width, and the well would have to drain a distance of 4,660 feet to fully drain the unit.

In truth, the operators in the Eagle Ford want the flexibility to form large proration units in order to be able to consolidate leases into large pooled units, and to hold those leases by drilling only one well on the pooled unit. The operators would later be able to drill additional wells on the pooled unit to fully develop the acreage. This allows operators to retain more acreage with fewer wells, reducing the need to renew expiring leases.

Few landowners understand the import of the language in their pooling clauses and how that language is affected by special field rules. It is very unusual for any party to oppose field rules proposed by operators for a field, and it is even more unusual for the Railroad Commission to refuse to adopt the rules proposed by operators. But in adopting such large "optional" units for horizontal wells in the Eagle Ford field (and for other shale fields in Texas), I believe that the Railroad Commission is failing to follow the original purpose and intent for which field rules are intended. The Commission should require operators to prove that the proration unit sizes they propose have some relationship to the amount of acreage that can reasonably be drained by a single well in the field.