An interesting case has recently been filed in Louisiana challenging the authority of the Louisiana Department of Conservation to approve pooled units containing multiple wells. In Gatti et al. vs. State of Louisiana, et al., Number 589350, Division 23, filed in the 19th Judicial District Court in East Baton Rouge Parish, the plaintiffs sued the State Department of Conservation and several operators in the Haynesville field, including Chesapake, Encana, Exco, Conoco Phillips, Petrohawk, SWEPI, EOG, Questar, Forest and XTO, claiming that the Department of Conservation was routinely allowing the drilling of "alternate unit wells" on previously established units, in violation of Louisiana law. A copy of the petition may be found here.  Gatti v. St of Louisiana.pdf.

Louisiana has a forced-pooling statute that allows an operator to propose to the Department of Conservation a unit for a well which, if approved, forces all mineral owners in the unit to pool their interests for the drilling and production of that well. According to the plaintiffs, this statute only authorizes the Department to approve units large enough to cover an area drained by one well. The practice in Lousiana for the Cotton Valley and Haynesville fields is to obtain orders for 640-acre units, and later obtain approval to drill additoinal "alternate unit wells" on those units. The suit contends that this practice is unfair to the owners of minerals and royalties in the unit, and violates state law. The suit seeks certification of a class action on behalf of all owners of mineral rights in Haynesville Zone in Louisiana. It seeks a declaration that the Department has no authority to establish a unit having an area in excess of the area drainable by one well, and that any such unit is "null and void." The suit also seeks unspecified damages against the defendant companies.

An interesting article describing the history of forced pooling in Louisiana and arguing that multiple-well units are illegal may be found at fairdrilling.com.

I have written previously about the proceeding before the Texas Railroad Commission for adoption of field rules for the Carthage (Haynesville Shale) Field. In that proceeding, the applicants sought and obtained field rules establishing a standard proration unit of 640 acres for wells in the field, with "optional" 40-acre units. The examiners who heard the evidence opined that Devon had produced no evidence that a well in the field could drain 640 acres, and they recommended a 320-acre standard unit, but the Commissioners overruled them and agreed to Devon's request for 640-acre units.

It appears that in both Lousiana and Texas the regulators are going along with the fiction advocated by operators that wells in the Haynesville should be developed with 640-acre units, despite the fact that everyone knows the wells will in fact be drilled with 160 or 80-acre spacing. Everyone understands that this fiction is intended to accommodate the desires of the operators to construct larger units in order to (i) have more flexibility in how they space their wells and (ii) hold more acreage with a single well. I have sympathy with the first objective, but not with the second. It is impossible to drill wells with horizontal legs of 5,000 feet or more unless fairly large units are created. Conversely, it is unfair to the mineral owners in a large unit for their leases to be held by production from a single well in the unit where several wells are necessary to fully develop the reservoir under their lands.

In a previous post I reported on the application of Devon Energy asking the Texas Railroad Commission to include in the new Field Rules for the Carthage (Haynesville Shale) Field a provision allowing it to drill horizontal wells across lease or pooled unit boundaries.  These new rules apply to wells drilled in the Haynesville and Bossier formations in Harrison, Nacogdoches, Panola, Shelby and Rusk Counties in East Texas. Devon asked that the rules provide what it calls a "default allocation method" for horizontal wells drilled across unit boundaries.The rule proposed by Devon reads as follows:

"Operators shall be permitted to drill and complete horizontal wells that traverse one or more units and/or leases as long as that operator has a lease or other mineral ownership right to produce from each such unit or lease. If such a well is not already subject to an agreement regarding the allocation of production, the following allocation formula will be presumed to constitute a fair and reasonable allocation of production from a well in this field and shall be utilized by the Commission in assigning acreage attributable to the separate units/leases traversed by the horizontal drainhole: an allocation of acreage and production to each of the units and/or leases traversed by and completed in the horizontal well based on the percent of said horizontal well from first take point to last take point that lies under each unit or lease."

The Commission concluded that it had no authority to adopt such a rule, because pooling is a contractual issue between private parties, and (except as provided in the Mineral Interest Pooling Act) the Commission has no right to impose allocations of production among different tracts penetrated by a horizontal well.

In its appeal, Devon argues that the Commission's refusal to adopt its proposed "allocation rule" is arbitrary and an abuse of its discretion, without a rational basis, discriminates against producers in the Carthage Field, and will result in the waste of oil and gas.

I believe that Devon has little chance of forcing the Commission to adopt its proposed "allocation rule." But if it is successful, it is certain that operators in the Barnett Shale and other shale fields now being developed in Texas will ask for a similar rule. Such a rule would have significant impacts on royalty owners and their rights to consent to pooling of their royalty interests.

On December 15, the Railroad Commission adopted new field rules for a newly designated field, the Carthage (Haynesville Shale) Field, in East Texas. It also consolidated several previously designated fields in East Texas that produce from the Haynesville and Bossier formations into this single RRC-designated field. These rules will govern the development of the Haynesville and Bossier formations in Harrison, Nacogdoches, Panola, Rusk and Shelby Counties in East Texas. These new rules are important to landowners principally because they will give operators a basis to form pooled units of up to 640 acres or more for development of the field.

A little backrgound is in order: Large portions of the land in East Texas within the Haynesville and Bossier play were previously drilled to develop the shallower Travis Peak and Cotton Valley formations. The field rules originally adopted for the Cotton Valley fields provided that only one well could be drilled for each 640 acres of land. Over time, the field rules were amended to allow operators to drill wells in the Cotton Valley with a density of as little as 40 acres per well. Operators initially formed pooled units of up to 704 acres, a size allowed by most lease standard pooling clauses. Cotton Valley wells drilled on these pooled units are still producing, thus keeping in force the leases included in the pooled units. Generally, the pooled unit designations filed by operators for the Cotton Valley wells pooled all depths under the units, including the Haynesville and Bossier formations, which lie immediately below the Cotton Valley formation. Companies now desire to develop the deeper Haynesville and Bossier formations under these Cotton Valley units.

Field rules are special rules adopted by the Railroad Commission governing the spacing of wells in a designated field. Once special field rules are adopted for a field, they govern how wells must be spaced in that field and how much acreage an operator must have to drill a well in the field. Special field rules are adopted in response to an application made by an operator of wells in the field. The operator presents evidence to hearings examiners at the RRC as to the characteristics of the formation and how much area will be drained by a well in that field, and the operator proposes rules to be adopted by the RRC. The hearing examiners review the evidence and may or may not adopt the rules requested by the applicant. The hearing examiners make a recommendation to the three RRC commissioners, and the commissioners may either adopt the recommendations of the examiners or make changes in those recommendations.

Devon Energy Production Co., LP made application to the RRC for new field rules for development of the Haynesville and Bossier formations in East Texas, and it requested that several fields previously designated by the RRC be consolidated into a single "field" for purposes of the new rules. The new rules proposed by Devon would govern wells completed in the Haynesville and Bossier formations in Harrison, Nacogdoches, Panola, Rusk and Shelby Counties. In effect, Devon proposed that the Haynesville and Bossier formations be treated as a single formation for RRC regulatory purposes. Devon identified the Haynesville-Bossier formation as the formation found at depths between 9,568 feet and 11,089 feet in the Devon-Hull Unit A Lease, Well No. 102 (API No. 42-365-36749), in Panola County. This interval is more than 1,500 feet in thickness.

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