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Pooled Units and Unleased Mineral Interests

I have recently received several inquiries about the rights of unleased mineral owners whose tract is included in the boundaries of a pooled unit. There seems to be some general miss-perception about this issue. 

A typical oil and gas pooling clause allows the lessee to combine separate tracts covered by separate oil and gas leases into a single pooled unit for purposes of exploration and production. This allows the lessee to treat the pooled unit as a single lease. Wells drilled anywhere on the pooled unit are considered to have been drilled on the leased premises covered by each separate lease in the pooled unit, and production from the pooled unit will keep the lease in force beyond its primary term, just as if the production were from each tract in the pooled unit. Production from wells on the pooled unit is allocated among the tracts in the unit, for purposes of paying royalty, on an acreage basis. If a tract in the unit comprises 25% of the total acreage in the pooled unit, then 25% of the unit production is allocated to that tract for royalty purposes, and the mineral owners in that tract receive their royalty on production from the pooled unit just as if 25% of the unit production were produced from the tract.

What happens, then, if the lessee has acquired oil and gas leases on only a portion of the minerals in a tract? Can the lessee include that tract in a pooled unit? If so, how are royalties paid to the owners of unleased minerals in that tract? Do the unleased mineral owners have the right to share in production from the pooled unit?

First, the lessee has the right to include a tract in a pooled unit if the lessee has leased any mineral interest in the tract.  The lessee need not have under lease all of the minerals in the tract in order to include the tract in the pooled unit.

Second, unless the unit well is located on the tract, the unleased owners in the pooled tract have no right to share in production from wells on the pooled unit. The unleased mineral interests are not pooled into the unit.

Third, the unleased mineral owners still have the legal right to drill for and produce oil and gas from the tract in which they own an interest. The fact that the tract is pooled does not impair the unleased mineral owners’ rights as cotenants to produce their minerals. They have the obligation to account to the other mineral owners — in this case, the lessee who has a lease on the other mineral interests — for their share of production from the tract. As a practical matter, this legal right may not be a solution, unless the unleased interest is substantial and the tract is large enough to justify development.

Under Railroad Commission spacing rules, any well drilled by the lessee on a pooled unit containing unleased mineral interests must be located a legal distance away from the tract contataining unleased mineral interests — just as if the tract were not included in the pooled unit. Usually, this is 330 feet. For a horizontal well, the horizontal leg of the well must be located this distance from the boundary of the partially leased tract.

Finally, the owner of an unleased mineral interest in a tract included in a pooled unit may have the right to “muscle in” to the unit under Texas’ Mineral Interest Pooling Act. This involves filing an administrative proceeding at the Railroad Commission and is a time-consuming and expensive process. It may not be practical for small mineral interests.

It is my experience that most operators prefer to have leases on all mineral interests in a pooled unit and will lease unleased interests if the mineral owner is amenable. The unleased mineral owner may have little bargaining power to negotiate favorable terms. Moreover, because of the formula used to pay royalties on each tract within a pooled unit, the lessee benefits from having an unleased interest in the pooled unit; the lessee does not have to pay royalties to the owner of the unleased interest even though the lessee gets the benefit of including the tract in the pooled unit. Some operators will take advantage of this and intentionally leave unleased undivided interests in the pooled unit.

Other states, including Oklahoma and Louisiana, have statutes (known as forced-pooling statutes) providing that a lessee may, through a regulatory process, force unleased mineral owners into a proposed pooled unit. Oklahoma in effect imposes a lease on the unleased owners’ mineral interests, including their interests in the unit. In Louisiana, the statute requires the unit operator to account to the unleased interest owner for its share of unit production. Except for the limited regulatory pooling provided by Texas’ Mineral Interest Pooling Act, Texas does not have forced pooling. Mineral owners have opposed the adoption of forced pooling in Texas as an infringement of their right to negotiate their own leases, and in most cases the lack of a forced pooling statute in Texas does enhance the rights of mineral owners. But in some circumstances, such as that of an unleased partial mineral interest owner included in the boundary of a pooled unit, a forced pooling statute could benefit the mineral owner by requiring the lessee to include his/her interest in the unit.

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