Oil and Gas Lawyer Blog
Mike McElroy of the Austin firm McElroy, Sullivan, Miller, Weber & Olmstead, has written an article in the Section Report of the Oil, Gas & Energy Resources Law (Spring 2014), titled “Production Allocation: Looking for a Basis for Discrimination,” defending the practice of oil and gas operators’ drilling of “allocation wells.” The term “allocation well” has come to be used by staff at the Texas Railroad Commission and by the industry to refer to a horizontal well that is drilled across lease lines without pooling the tracts on which the well is located. Mike argues that the RRC has authority to issue allocation well permits and that a standard oil and gas lease, with or without a pooling clause, authorizes the lessee to drill allocation wells.
This firm represented the complaining party in the Klotzman case, in which we argued that the RRC has no authority to issue allocation well permits and that the drilling of an allocation well violates the terms of a typical oil and gas lease unless the lease expressly grants such authority. So, below is a rebuttal to some of the points made by Mike McElroy in his article.
Mike says that “Lessors and their lawyers see horizontal drilling and production allocation as opportunities to amend (re-trade) old leases.” The question that must be asked is, does the lease authorize the lessee to drill an allocation well? If the answer is no, then the lessee must obtain an amendment of the lease to drill the well. The lessor may bargain for consideration in exchange for granting the lessee the right to drill the well. If the answer is yes, as Mike argues, then the lessee needs no agreement from the lessor to drill the well.