Articles Posted in Pooling

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Landowners are often faced with a conundrum: can they accept a royalty check if they believe it is in the wrong amount?

Ms. Strickhausen owns a half interest in the minerals under a tract of land in La Salle County. Her minerals are subject to a lease owned by BPX (then Petrohawk, subsequently acquired by BPX). Her lease expressly prohibits pooling without her consent. The lease of the other half interest in her tract permits pooling. (Ms. Strickhausen’s lease also prohibits commingling of production: “Commingling of production from the Leased Premises with production from other lands or leases shall be prohibited prrior to such accurate metering, measuring and testing, unless commingling is consented to, in writing, by Lessor and each royalty owner.”) BPX filed a pooled unit designation for the WK Unit 4 No. 1H Well and drilled a horizontal well located partly under Ms. Strickhausen’s tract and partly under other tracts. It then asked Ms. Strickhausen to ratify the pooled unit.

Ms. Strickhausen’s lawyer then engaged in a series of communications with BPX seeking to negotiate terms under which Ms. Strickhausen would agree to ratify the pooled unit. The attorney asked BPX how it would propose to pay Ms. Strickhausen if she refused to ratify the unit. BPX replied that it would pay her “based on the length of productive wellbore on the subject tract over the total length of productive wellbore.” BPX claimed that Ms. Strickhausen would receive a larger royalty interest in the well by ratifying the pooled unit than she would if she were paid on a productive-wellbore basis. BPX concluded by saying that, if Ms. Strickausen did not ratify the unit “the royalties will require being placed in suspense.” Continue reading →

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A recent case from the Ohio Court of Appeals, Fifth Appellate District, raises some interesting questions about forced pooling. The case, American Energy – Utica, LLC v. Fuller, Case No. 17 CA 000028, involves an oil and gas lease covering 40 acres in Guernsey County, Ohio, dated in 1981. The lease was held by production from a single vertical oil well. In 2009 Enervest acquired the lease; it subsequently assigned the deep rights to American Energy.TexasBarToday_TopTen_Badge_Small

American Energy wanted to form pooled units to drill horizontal wells in the Utica formation. The lease contained a handwritten provision: “Unitization by written agreement only!” so American asked Fuller for consent to pool. The parties could not reach agreement on pooling Fuller’s lease, so in 2015 American Energy filed an application under Ohio law to force a portion of Fuller’s property into a pooled unit. Fuller then sued to prevent his tract from being force-pooled and for breach of the lease. The trial court granted American Energy’s motion for summary judgment, holding that American had the right to force-pool Fuller’s lease despite the lease language.  Continue reading →

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In a case of first impression, the Texas Supreme Court has held that the same land can be included in two pooled units, and that the lessee must pay royalties on the same well to the royalty owners in both pooled units. Samson Exploration v. T.S. Reed Properties, Inc., 2017 WL 2713047 June 23, 2017).

Samson created two pooled units, the Joyce DuJay No. 1 Gas Unit and the Joyce DuJay A No. 1 Gas Unit. The boundaries of the two units largely overlapped, but the A No. 1 Gas Unit also included a lease from T.S. Reed Properties, not included in the No. 1 Gas Unit. The two units also overlapped as to the designated depths pooled, and one of the wells located on the two units was located on lands included in both units and produced from the overlapping depth. Samson was thus faced with the possibility of paying royalties on production from that well to the royalty owners in both units. It refused to pay royalties to T.S. Reed Properties, contending that the second pooled unit was invalid.

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TexasBarToday_TopTen_Badge_SmallTwo recent appellate opinions illustrate why landowners and their counsel need to know the basic fundamentals of field rules and how they can affect provisions in oil and gas leases. I wrote about those cases in 2015. Both involve the interaction between field rules and lease provisions. ConocoPhillips Co. v. Vaquillas Unproven Minerals, Ltd., 2015 WL 4638272 (Tex.App.-San Antonio Aug. 5, 2015), was appealed to the Texas Supreme Court but settled before the court acted on ConocoPhillips’ petition. Endeavor Energy Resources, L.P. v. Discovery Operating, Inc., 448 S.W.3d 169 (Tex.App.-Eastland 2014), has been briefed on the merits and is awaiting the court’s decision on whether to grant review. You can read my summary of the two cases here.

The root of the issue is that oil and gas lease forms typically refer to and adopt field rules to regulate how large pooled units and earned acreage units can be. For example, a printed form oil and gas lease that has been commonly used in Texas for many years contains the following provision:

Lessee is hereby granted the right, at its option, to pool ur unitize any land covered by this lease with any other land covered by this lease, and/or with any other land, lease, or leases, as to any or all minerals or horizons, so as to establish units containing not more than 80 surface acres, plus 10% acreage tolerance; provided, however, units may be established  … so as to contain not more than 640 acres plus 10% acreage tolerance, if limited to … gas, other than casinghead gas…. If larger units than any of those herein permitted, either at the time established, or after enlargement, are required under any governmental rule or order, for the  drilling or operation of a well at a regular location, or for obtaining maximum allowable from any well to be drilled, drilling or already drilled any such unit may be established or enlarged to conform to the size required by such governmental order or rule.

To understand how the italicized sentence in this lease form works, one must know what governmental rules govern the size of units for drilling wells at a “regular” location, and for “obtaining maximum allowable” from a well. These regulations are included in “field rules” adopted by the Texas Railroad Commission. (Warning: this post is longer than usual, so be prepared.) Continue reading →

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The Klotzman mineral owners have appealed the Texas Railroad Commission’s order granting EOG a permit to drill an “allocation well” on their land. A copy of the petition can be viewed here: Klotzman Petition.pdf. Our firm represents the Klotzmans.  For my previous posts about allocation wells and the Klotzman case, search for “allocation well” in the site’s search engine.

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The examiners who heard the Klotzmans’ protest of EOG Resources’ application for an allocation well permit have issued their Proposal for Decision in the case. A copy of the PFD can be viewed here:  2013-06-25 PFD EOG Klotzman (2).pdf  Our firm represents the protestants in the case. For my prior discussion of the case and allocation well permits, see here and here and here. The parties now have until July 10 to file exceptions to the proposal, and replies to exceptions are due within 10 days thereafter. After that, if no changes to the PFD are made, it will go before the Railroad Commissioners for their decision.

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Production allocation wells continue to be a simmering issue in Texas. Last Friday I attended the Ernest E. Smith Institute on Oil, Gas and Mineral Law sponsored by the University of Texas School of Law, and one of the topics presented was a paper titled “Drafting Production Sharing Agreements.” The paper included information about allocation wells.

I’ve written about allocation wells before, here and here. The Texas Railroad Commission uses that term to refer to a horizontal well that is drilled across the boundary line of two leases or units without pooling the two leases or units. Up until recently, it was assumed that the Commission would not grant a permit for such a well. Several years ago, operators began applying for permits to drill “production sharing agreement” wells. Those are wells drilled across the boundary line of two existing leases or pooled units, where the operator has obtained a “production sharing agreement” from some or all of the royalty owners to drill such a well. The production sharing agreement with the royalty owners provides that production from the well is allocated between or among the tracts crossed by the well lateral, for purposes of calculating royalties due, based on the number of feet of well lateral on each tract compared to the total lateral length of the well. In 2008, the Commissioners agreed that they would grant permits for production sharing agreement wells if at least 65% in interest of the royalty owners in all tracts on which the well would be located had signed production sharing agreements.

According to the paper submitted to the seminar, to date some 700 production sharing agreement – or “PSA” – well permits have been granted by the Commission. More than 600 of those were granted to Devon Energy.

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The Texas Supreme Court denied the LaSalle Pipeline’s petition for review in LaSalle Pipeline v. Donnell Lands, leaving the San Antonio Court of Appeals’ original opinion intact. See my discussion of the case here. The trial court awarded $468 per rod $28.36/foot) for an easement for a 16-inch pipeline. The Court of Appeals affirmed, finding sufficient evidence to support the award.

The Texas Railroad Commission denied the Texas Land and Mineral Owners’ Association’s petition for a rulemaking on the Commission’s policy regarding permits for “allocation wells.” See my prior posts here and here. In their discussion concerning the petition, the Commissioners agreed that allocation wells should be addressed by rule, but they concluded that there are presently too many pending rulemakings for the Commission staff to take on more at this time. The Klotzmans’ protest of EOG’s allocation well permit remains pending, awaiting a proposal for decision from the hearings examiners.

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In a prior post, I wrote about a new development at the Texas Railroad Commission: granting permits for “allocation wells” – horizontal wells drilled across lease lines without pooling the leases. Since I wrote that post, our firm was retained to represent the parties protesting EOG Resources’ application for a permit for an allocation well. A hearing on the application was held at the RRC on December 3. In addition to EOG and the protestants, Devon Energy appeared at the hearing supporting EOG, and the Texas General Land Office appeared opposing allocation wells on State-owned minerals. All parties have now submitted closing statements and responses, which can be viewed below:

Klotzman Closing Statement.pdf

EOG Closing Statement.pdf

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State Representative Van Taylor, R-Plano, and Senator Rodney Ellis, D-Houston, have introduced a bill to allow for forced pooling in Texas. The House bill, HB 100, may be viewed here.

The bill would allow an operator to force-pool mineral, royalty and leasehold interests into a unit if the operator obtains agreement from 70% of the leasehold owners and 70% of the royalty owners in the area to be unitized. Unleased mineral owners could be pooled, and would be treated as owning a 1/6 royalty interest and a 5/6 working interest. The unit operating agreement can provide for a “sit-out” penalty of no more than 300% for a working interest owner who elects not to pay its share of the well costs. The bill does not allow force-pooling of mineral or royalty interests owned by the State.

Here is just one interesting provision in the bill:

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John McFarland
 Graves, Dougherty, Hearon & Moody, P.C.
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