Oil and Gas Lawyer Blog
We’ve recently seen several requests for royalty owners to sign a production sharing agreement for a unit-line or lease-line allocation well. Such a well would be drilled along the boundary of two existing leases or pooled units. So, unlike most allocation wells, production can’t be allocated based on the portion of the well’s productive lateral length on each lease or pooled unit. Instead, the production sharing agreement may propose to allocate production between the two leases or units in one of two ways – 50-50 to each unit, or based on acreage.
Allocating production between the two leases or units for such a well presents at least two problems: first, the actual drilled wellbore cannot actually be drilled exactly down the boundary line between the two leases or units. The wellbore will deviate, sometimes significantly, from a straight line. Second, the well may not actually be drilled down the unit line, but might be on one side or the other of the unit line, but too close to the unit line to avoid drainage or a special Rule 37 spacing permit. In addition, the wellbore might extend beyond the boundary into another lease or unit. Wellbores are getting longer and longer.
So I think the better practice is to allocate production for a unit-line allocation well based on acreage. In effect, it is the same allocation that would result if a pooled unit were created for the well.
To illustrate (click on image to enlarge):
In the above illustration, the green line is the as-drilled productive lateral of the wellbore. The production sharing agreement provides that production from the well will be allocated based on the acreage in the blue box. The Blue box contains 75.75 acres. The portion of the red unit in the blue box contains 22.5 acres. So 22.5/75.75 = 29.7% of the well’s production will be allocated to the red unit.
The agreement can provide that production from any horizontal well located parallel to a lease or unit line and within 330 feet of the boundary for any material part of its length will be allocated on this acreage basis.
If a lease contains a retained acreage clause, care should be taken to be sure the production sharing agreement addresses how much acreage will be retained by a lease-line allocation well.