Oil and Gas Lawyer Blog
Oil and gas leases that cover larger tracts — say 300 acres or more — should contain a retained acreage clause.
A retained acreage clause has two parts: defining how much acreage will be kept under lease by a well and requiring the lessee to designate that acreage; and defining when the retained acreage must be designated and lands outside the retained acreage tracts released. The idea is to allow the operator to retain the acreage, and only the acreage, being drained by each well.
The amount of acreage (and depths) retained by a well may depend on whether the well is vertical or horizontal; whether the well is classified as a gas well or an oil well; and the depth of the perforated interval. Before the development of horizontal well technology and the ability to produce from tight unconventional formations, retained acreage clauses generally allowed units for oil wells of 40 acres and units for gas wells of 160 acres. For deeper production, units could be 80 acres for oil and 320 acres or even 640 acres for gas. It was generally assumed that a gas well would drain a larger area in a conventional field than an oil well.
With horizontal wells in unconventional fields, the classification of the well as oil or gas generally is not relevant to how much area the well will drain. Unlike conventional reservoirs, unconventional formations have essentially no porosity or permeability; the well must be fracked, creating the fissures through which the oil and gas will migrate to the wellbore. In most such formations it is assumed that a horizontal well will drain only about 300 feet perpendicular to the wellbore. So a horizontal well with a productive lateral of 5,000 feet will drain only about 600 X 5,000 / 43,560 = 69 acres. Horizontal wells in most tight reservoirs are therefore spaced about 600 feet apart.
So for horizontal wells, the amount of acreage drained by a well depends on the length of its lateral, generally measured from the first “take point” (perforation) in the wellbore to the last take point. If we want the retained acreage clause to allow 80 acres for a 5,000-foot lateral, that is .016 of an acre (80/5,000) for each foot of productive lateral. So the acreage to be retained by a horizontal well can be expressed as a formula: A = .016 X L, where A is the maximum acreage in the designated unit for the well and L is the productive lateral length, in feet.
The size of retained acreage units is heavily negotiated between lessor and lessee. The bottom line, for a lease on which horizontal wells will be drilled: how many laterals should the lessee be required to drill to earn all of the acreage? The formula used by the Texas General Land Office for state lands is A = .032 X L. A 5,00-foot lateral would “earn” 160 acres under this formula; four 5,000-foot laterals would earn a full section. Obviously those four laterals would not be sufficient to fully develop the section in a typical unconventional reservoir.
Particularly in the Permian Basin, horizontal laterals may be completed in several different zones within the same Railroad Commission-designated reservoir. In such instances, the retained acreage clause may require separate retained acreage designations for each well in each zone.
The next issue in a retained acreage clause is when the lessee must designate the retained acreage tracts. Typically the clause allows the lessee to retain the entire leased premises as long as it continually drills wells after the end of the primary term. “Continuous drilling” is usually defined as drilling with no more than an agreed number of days between the completion of one well and the commencement of the next well. A better practice is to define the requirement as no more than an agreed number of days between cessation of drilling one well and commencement of drilling of the next well; or an agreed number of days between commencement of one well and commencement of the next well.
Once continuous drilling operations have ceased, the clause requires the lessee to designate a retained acreage unit for each completed well, by legal descriptions of each unit, and to release any part of the leased premises not within a retained acreage unit.
A good retained acreage clause will further provide that, after designation of retained acreage units, production from each unit will maintain the lease only as to the lands included in that unit. In effect, each retained acreage tract becomes a separate lease. Cases have arisen in which the retained acreage clause does not include this provision. Such a clause is referred to as a “snapshot” clause; the lessee is required to release any unearned acreage only once. Thereafter, production from any of the wells will keep the lease in effect as to all of the retained acreage units. Such a clause defeats an important goal of the retained acreage clause.
The pooling clause in the lease should be integrated with the retained acreage clause. The size of pooled units permitted should be the same as the size permitted for retained acreage units.
There is no “standard” retained acreage clause. There are many variations, and such clauses are usually heavily negotiated. It is important to draft the clause carefully so that disputes over its operation and intent are avoided.