Uncategorized

How Are Federal Oil and Gas Leases Pooled and Unitized?

FAQs of Federal Oil and Gas Leases, Federal Lands, Oil and Gas Agreements, Oil and Gas Regulations, Uncategorized, , , , , , ,

In the context of federal oil and gas leases, the terms “communitization” and “unitization” are distinct concepts which are subject to different statutes, regulations, and procedures. As such, the method to “communitize” a federal oil and gas lease is different than the process used to “unitize” such leases. These respective differences are highlighted herein.

Communitization of Federal Oil and Gas Leases

Virtually all oil and gas producing states have promulgated minimum acreage requirements for the drilling of oil or gas wells.[1]  The United States recognized the importance of state conservation statutes, and accordingly passed an amendment to the Mineral Leasing Act which allowed federal lessees to conform to state well spacing orders through a communitization agreement.[2]  Communitization is the agreement to combine small tracts, of which one or more is federal or Indian lands, for the purpose of committing enough acreage to form the spacing/proration unit necessary to comply with the applicable state conservation requirement and to provide for the development of these separate tracts which cannot be independently developed in conformity with said conservation requirements.[3] In essence, communitization is the federal equivalent of pooling the lands in a spacing/proration unit under state law.  The common thread of all federal communitization agreements is that at least one federal or Indian lease or tract must be involved.[4]  That federal or Indian lease is communitized with other leases that may be federal, Indian, state, or fee.[5]

Although there is no prescribed form for a federal communitization agreement in the regulations, the regulations do require that certain information be included within the communitization agreement.  There are relatively few requirements for communitization agreements, but the applicant must usually provide sufficient information so the authorized officer can make a determination that it would be in the best interests of conservation and of the United States for the federal leasehold to be communitized.[6]  Specifically, the agreement must describe the separate tracts comprising the drilling or spacing unit, describe the apportionment of production or royalties to the parties, name the operator, contain adequate provisions for the protection of the interests of the United States, be filed prior to the expiration of the federal leases involved, and be signed by or on behalf of all necessary parties.[7]  The BLM Manual 3160-9-Communitization includes a standard or model communitization agreement form, one for federal leases and one for Indian leases, which should be used whenever possible.[8]

The necessary parties include all working interest owners and lessees of record. A communitization agreement may be approved without joinder by the royalty, overriding royalty, and production payment interest owners, but this will result in different payment scenarios depending upon the location of a successfully completed well.[9]

 If a state has them, the state’s compulsory pooling statutes may be utilized to commit a nonconsenting party’s interest to the communitization agreement; although, without the consent of the Secretary of the Interior, the state commission does not have jurisdiction to force pool unleased interests of the United States.[10]  Copies of any compulsory/force pooling order should be furnished with and be part of the communitization agreement if such interest owner does not execute the agreement.[11]  The authorized officer in the appropriate BLM office must approve, on behalf of the Secretary, the communitization agreement with respect to any included federal leases.[12]

Although not mandatory, the filing of a Preliminary Application for Approval to Communitize is recommended, particularly in instances where the model form of communitization agreement is not followed precisely.[13]  The BLM Manual provides that a request for preliminary approval to communitize may be filed at any time with the authorized officer. It is also recommended that preliminary approval be requested if there is some doubt as to whether the proposed tracts are logically subject to communitization, or if there is any doubt as to whether a communitization of multiple zones will be approved. The preliminary approval procedure will expedite final approval and may avoid the necessity of extensive revisions and re-execution of a finalized communitization agreement.[14]

The BLM will not approve an agreement that purports to communitize all horizons from the surface down to the center of the earth.[15] However, if it is anticipated that the well will be completed in multiple formations, it is important to include all formations and horizons that are producing or may produce hydrocarbons intended to be allocated pursuant to the terms of the communitization agreement.[16]  All communitized formations must be subject to the same spacing requirements and, where multiple and clearly distinct formations are covered by the same communitization agreement, the BLM Manual provides that Section 1 be amended to clearly state that the agreement shall apply separately to each formation as though a separate communitization agreement for each formation had been executed.[17]  In the event a proposed well is projected to test multiple formations that are subject to different spacing requirements, separate communitization agreements should be submitted to BLM for each formation or set of formations with the same spacing requirements.[18]

The communitization agreement must be filed prior to the expiration of the federal leases to be communitized.[19]  The regulations require that the communitization agreement be filed in triplicate with the proper BLM office.[20]  If state lands are involved one additional counterpart must be submitted.

An executed counterpart of the approved communitization agreement, duly acknowledged, should be filed of record in the county in which the land is located. When fee leases are involved, the operator should record either the communitization agreement or otherwise comply with the terms of the pooling provision of any fee lease.[21]

In order to approve a communitization agreement, the Mineral Leasing Act requires that the Secretary determine communitization is “in the public interest”[22]:

The public interest requirement for an approved communitization agreement shall be satisfied only if the well dedicated thereto has been completed for production in the communitized formation at the time the agreement is approved or, if not, that the operator thereafter commences and/or diligently continues drilling operations to a depth sufficient to test the communitized formation or establish to the satisfaction of the authorized officer that further drilling of the well would be unwarranted or impracticable.”[23]

Communitization agreements usually provide for a term of two years and so long thereafter as communitized substances are, or can be, produced from the communitized area in paying quantities.[24]  Assuming the public interest requirement is satisfied, any federal lease eliminated from an approved communitization agreement, or any federal lease in effect at the termination of the agreement, shall continue in effect for the original term of the federal lease or for two years after its elimination from the plan or termination of the agreement, whichever is longer, and for so long thereafter as oil or gas is produced in paying quantities.[25]  No lease shall be extended if the public interest requirement has not been satisfied.[26]

Unitization of Federal Oil and Gas Leases

Unitization is the agreement to jointly operate an entire producing reservoir or a prospectively productive area of oil and/or gas. The entire unit area is operated as a single entity, without regard to lease boundaries, and allows for the maximum recovery of production from the reservoir. Costs are reduced because the reservoir can be produced by utilizing the most efficient spacing pattern, separate tank batteries are not necessary, and there is no requirement to drill unnecessary offset wells. The objective of unitization is to provide for the unified development and operation of an entire geologic prospect or producing reservoir so that exploration, drilling, and production can proceed in the most efficient and economical manner by one operator.[27]

The Bureau of Land Management is the administering agency for federal onshore units and has established procedures that must be followed to unitize federal lands.[28] Although not required by the regulations, the BLM strongly encourages an informal discussion with the authorized officer of BLM office having jurisdiction over the area where the lands are located concerning the proposed area of the unit, the depth of the test well and formation to be tested, and the form of agreement.[29]  This should be done prior to filing of an application.[30] It is recommended that this is done in order to ensure the unit approval process moves smoothly.

BLM regulations provide that,  to initiate the formation of a federal unit, an application for designation of a proposed unit area be filed in duplicate.[31] The application must be accompanied by a map or diagram outlining the area sought to be designated and indicating the federal, state, privately owned, or Indian lands by symbols or colors.[32]  The plat must indicate the separate leasehold interests involved and identify them by serial number in the case of federal and Indian oil and gas leases.[33]  It is advisable to show the ownership and expiration dates of each lease involved. The application must also be accompanied by a geologic report and it must indicate the zones that are to be unitized (if all zones or formations are not to be included).[34]

The owners of any interest in the oil and gas deposits to be unitized are proper parties to the unit agreement. All such parties must be invited to join the agreement.[35] This includes royalty owners and holders of overriding royalty interests and any other non-cost bearing interests in production, as well as working interest owners. Prior to approval, notice of the proposed agreement must be given to all parties with a request to join the agreement.[36]  When state lands are to be unitized with federal lands, the unit agreement must be approved by the state prior to submission to the BLM for final approval.[37]

After the unit area has been designated and the unit agreement has been fully executed by the parties desiring to commit their interests to the unit, a minimum of four signed counterparts must be filed for approval with the proper BLM office.[38]  These instruments should be accompanied by a request from the proponent for final approval of the unit, setting forth the acreage interests fully committed, effectively committed, partially committed, and not committed and show the percentage in each category.[39]  A showing must also be made that all parties owning not committed interests within the unit area have been extended an invitation to join in the unit agreement and that a reasonable effort has been made to obtain the joinder of all such parties.[40]  The request for final approval must include a list of the overriding royalty interest owners who have executed or ratified the unit agreement.[41] A tract will be considered “fully committed” if all interest owners have joined the unit and all working interest owners have also executed the applicable operating agreement.[42] A tract will be considered “effectively committed” to the unit without joinder by overriding royalty interest owners and will be treated identically as a “fully committed” tract, but, will result in different payment scenarios depending upon the location of the successfully completed unit well.[43] A tract will be considered “partially committed” if less than all of the lessors/royalty interest owners have joined, or all operating rights owners of a federal lease have joined but the record title holder has not.[44]  Such partially committed tracts may be considered to be under the effective control of the unit operator, however, no unit benefits will accrue to the tract in the absence of actual operations on the partially committed tract or an allocation of production to that tract either from a well on the tract or from another location.[45] Finally, if any working interest owner in a tract does not commit its interest, that tract is deemed “not committed.”[46]  BLM regulations provide that a unit agreement will not be approved “unless the parties signatory to the agreement hold sufficient interests in the unit area to provide reasonably effective control of operations.”[47] Generally, 85% of the tracts in the unit must be fully, effectively or partially committed to meet this “effective control” requirement.[48]

After four signed counterparts of the executed agreement are submitted, the authorized officer approves the unit agreement upon a determination that the agreement is necessary or advisable in the public interest and is for the purpose of more properly conserving natural resources.[49] A model federal onshore unit agreement for unproven areas (hereinafter “Model Form”) is included in the BLM regulations and promulgated to help implement these provisions.[50] Section 9 of the Model Form specifically provides for the commencement of an initial test well within six months after the effective date of the unit.[51] If a discovery is not made in the initial test well, provision is made for continuous drilling on unitized lands until a discovery is made provided that not more than six months elapse between the completion of one well and the commencement of the next.[52]  Paying quantities for purposes of meeting the drilling obligations in section 9 is defined as quantities of unitized substances sufficient to repay the costs of drilling, completing, and producing operations, with a reasonable profit.[53]

Upon approval, the unit agreement becomes effective.[54]  However, the public interest requirement is satisfied only if the unit operator commences actual drilling operations and diligently prosecutes such operations in accordance with the terms of the agreement.[55]  If this requirement is not satisfied, the approval of the agreement and lease segregations and extensions shall be invalid.[56]  Evidence of the approved unit should be recorded in the county records to impart notice.

Finally, it is important to understand the interplay between the unit agreement and the unit operating agreement because both agreements, taken together, constitute the unit arrangement and establish the contractual rights and obligations of the parties.

In addition to setting forth the terms and conditions for the unit, the unit agreement prescribes the method of allocating production for purposes of determining royalties, overriding royalties, production payments, and other non-cost bearing burdens, but does not dictate the working interest owners’ respective shares of production or the allocation of costs/royalty burdens associated therewith.[57] These, and other duties and obligations among the working interest owners, are matters covered by the unit operating agreement.[58]

The BLM does not prescribe any particular form of unit operating agreement and the working interest owners are generally free to use whatever form of unit operating agreement they prefer.[59] The unit operating agreement is entered into by the working interest owners who are committing their interests to the unit in conjunction with the execution of the unit agreement.[60] The interests of the royalty owners are not affected by the form of unit operating agreement chosen by the working interest owners.[61] Two copies of the unit operating agreement are required to be filed in the proper BLM office before the unit agreement will be approved.[62]

[1] Angela L. Franklin, Communitization Agreements in the 21st Century, Federal Onshore Oil and Gas Pooling and Communitization, Paper 3-4 (Rocky Mt. Min. L. Fdn. 2006) [hereinafter Communitization Agreements].

[2] See Mineral Leasing Act, Pub. L. No. 696, § 17(b), 60 Stat. 952 (1946).

[3] See 2 Lewis C. Cox, Jr., Law of Federal Oil and Gas Leases § 18.01 (2017).

[4] Communitization Agreements, supra note 2, at 3-5.

[5] Id.

[6] 1 Bruce M. Kramer & Patrick H. Martin, The Law of Pooling and Unitization § 16.04 (3rd ed. 2017).

[7] 43 C.F.R. § 3105.2-3(a) (2018).

[8] Communitization Agreements, supra note 2, at 3-5.

[9] Id.

[10] Id. at 3-6.

[11] Id.

[12] 43 C.F.R. § 3105.2-3 (2018).

[13] Communitization Agreements, supra note 2, at 3-7.

[14] See id.

[15] Id. at 3-8.

[16] Id.

[17] Bureau of Land Management, BLM Manual 3160-9-Communitization .11M (1988) [herein after BLM Manual].

[18] Communitization Agreements, supra note 2, at 3-8.

[19] 43 C.F.R. § 3105.2-3(a) (2018).

[20] Id. § 3105.2-1.

[21] Communitization Agreements, supra note 2, at 3-10.

[22] 30 U.S.C. § 226(m) (2018).

[23] 43 C.F.R. § 3105.2-3(c) (2018).

[24] See Section 10 of Model Form of a Federal Communitization Agreement in BLM Manual app.

[25] 43 C.F.R. § 3107.4 (2018). But see, R. E. Hibbert, 8 IBLA 379 (1972), GFS (O&G) 6 (1973).

[26] 43 C.F.R. § 3107.4 (2018).

[27] Kramer & Martin, supra, § 18.01[2].

[28] Id. § 18.04[1].

[29] Kramer & Martin, supra, § 18.04[2].

[30] See id.

[31] 43 C.F.R. § 3183.2 (2018)

[32] Kramer & Martin, supra, § 18.04[3] (citing 43 C.F.R. §§ 3181.2, 3183.2).

[33] See id. § 18.04[3].

[34] See 43 C.F.R. § 3181.2 (2018).

[35] 43 C.F.R. § 3181.3 (2018).

[36] See Kramer & Martin, supra, § 18.04[4].

[37] 43 C.F.R. § 3181.4(a) (2018).

[38] 43 C.F.R. § 3183.3 (2018).

[39] See Kramer & Martin, supra, § 18.04[6].

[40] Id. (citing 43 C.F.R. § 3181.3).

[41] See Kramer & Martin, supra, § 18.04[6].

[42] See Frederick M. MacDonald, Preparing and Finalizing the Unit Agreement: Making Sure Your Exploratory Ducks are in a Row, Federal Onshore Oil and Gas Pooling and Communitization, Paper 8-23 (Rocky Mt. Min. L. Fdn. 2006).

[43] Id. at 8-24.

[44] Id.

[45] Id.

[46] Id. at 8-25.

[47] 43 C.F.R. § 3183.4(a) (2018)

[48] MacDonald, supra, at 8-16.

[49] See Kramer & Martin, supra, § 18.04[6]. (citing 43 C.F.R. § 3183.4).

[50] See Thomas W. Clawson, Paying Well Determinations, Federal Onshore Oil and Gas Pooling and Communitization, Paper 11-3 (Rocky Mt. Min. L. Fdn. 2006).

[51] See Model Form, § 9, 43 C.F.R. § 3186.1.

[52] See Kramer & Martin, supra, § 18.03[2][b][iii].

[53] Model Form, § 9, 43 C.F.R. § 3186.1.

[54] Kramer & Martin, supra, § 18.04[6] (citing Lario Oil & Gas Co., 92 IBLA 46, GFS(O&G) 54 (1986)).

[55] Kramer & Martin, supra, § 18.04[7].

[56] 43 C.F.R. § 3183.4(b) (2018).

[57] See Steven B. Richardson and Lynn P. Hendrix, The Unit Operating Agreement for Federal Exploratory Units, Oil and Gas Agreements: Joint Operations, Paper 13-3 (Rocky Mt. Min. L. Fdn. 2008).

[58] Id.

[59] Id. at 13-1.

[60] Id. at 13-3.

[61] Id.

[62] Id.

Can a Terminated Lease Be Reinstated?

FAQs of Federal Oil and Gas Leases, Federal Lands, Uncategorized, , , ,

Federal leases can be terminated for a number of different reasons.  The question answered here is whether or not they can be reinstated.  The simple answer to that question is the same as all other legal questions: it depends. It depends on the reason the lease was terminated, how long the lease has been terminated, and what steps the lessee has taken to rectify the termination.

Three common ways that a federal lease will terminate are: (1) the expiration of the primary term, (2) the cessation of production in the extended term, or (3) the lessee’s failure to make proper rental payments.  All federal leases issued under the Mineral Leasing Act are granted for a specified period of time referred to as the primary term.  If there is no discovery of oil or gas in paying quantities, the lease will terminate automatically upon the expiration of the primary term.[1]  On the other hand, if there is a discovery, the lease will be extended past its primary term so long thereafter as there is a well capable of producing in paying quantities.  If production ceases and no reworking or drilling operations are commenced within 60 days of cessation of production, the lease will terminate automatically.  In both cases, the terminated leases may not be reinstated.

Generally, federal leases require the payment of an annual rental during the primary term and before discovery of oil and gas in paying quantities.  If the lessee fails to make proper and timely rental payments, the lease will automatically terminate. However, a federal lease terminated for failure to make proper rental payments can be reinstated under certain circumstances. The purpose of such reinstatements is to give lessees a second chance to pay the annual rental, but there are certain limitations.

Where a rental is timely paid, but the rental amount is insufficient by a nominal amount or by reliance on an incorrect bill, the lease will not automatically terminate.[2]  However, the nominal amount must be under $100 or 5% of the total rental amount, whichever is less, and must be paid within the period stated in a Notice of Deficiency issued by the supervising agency (usually 15 days).[3]  In all other cases, a lease terminated for failure to make proper and timely rental payments may only be reinstated under a Class I or Class II reinstatement.[4]

Class I Reinstatement: A lease may be reinstated as a Class I reinstatement if the following conditions are met:[5]

(1) The full rental amount must be paid within 20 days after the due date;

(2) The lessee must show that the failure to timely pay the rental amount was either justified or was not due to a lack of the lessee’s reasonable diligence;

(3) Within 60 days after receipt of a notice of termination, the lessee files a petition for reinstatement, together with a non-refundable filing fee (currently $80)[6] and the required rental, including any back rental or royalty accrued on the lease if the lease becomes productive prior to reinstatement; and

(4) The terminated lands cannot be subject to a newly-issued oil and gas lease or otherwise have been disposed of or become unavailable for leasing.

By regulation, “reasonable diligence” includes a rental payment postmarked by the U.S. Postal Service, common carrier, or their equivalent (but not by private postal meters) on or before the due date (or the next day if the agency is closed for a holiday).[7]  In most instances, where a Class I reinstatement is granted under reasonable diligence, the lessee is able to establish that the rental payment was lost in the mail or the lessee erroneously received notice from the BLM that the lease was in producing status.

Circumstances have been held “justifiable” where there are factors outside of the lessee’s control, such a death or illness of the lessee or member of his or her close family or a natural disaster occurring immediately prior to the due date cause a failure to exercise reasonable diligence.[8]  Generally, it is very difficult to demonstrate a “justifiable” cause.  For example, Class I reinstatement petitions have been denied where the lessee suffered from a chronic illness and where the lessee was in the middle of relocating offices.

If a Class I reinstatement is granted, the lease is restored as the lease existed prior to termination.  There is no change to the rental or royalty rates going forward or the primary term of the lease.

Class II Reinstatement: For leases that terminate after August 8, 2005, a lease may be reinstated as a Class II reinstatement if the following conditions are met:[9]

(1) The full rental amount is not paid within 20 days after the due date where the failure was either justified or not due to a lack of the lessee’s reasonable diligence or any time if the failure was inadvertent;

(2) On or before the earlier of 60 days after receipt of a notice of termination or 24 months after the termination of the lease, the lessee files a petition for reinstatement, together with a non-refundable filing fee of $500 and the required rental, including any back rental or royalty (at the increased rates, if applicable, see below) accrued on the lease if the lease becomes productive prior to reinstatement;

(3) Notice must be published in the Federal Register at least 30 days prior to the date of reinstatement, the cost of which shall be reimbursed by the lessee, and the authorized officer shall provide notice of the reinstatement to the Chairpersons of the Committee on Interior and Insular Affairs of the House of Representatives and of the Committee on Energy and Natural Resources of the Senate; and

(4) The terminated lands cannot be subject to a newly-issued oil and gas lease or otherwise have been disposed of or become unavailable for leasing.

Where the failure to timely pay is inadvertent generally means all circumstances where the lessee did not intentionally fail to make the rental payment.  It does not include, circumstances where the lessee was not financially able to pay or simply chose not to pay.[10]

If a Class II reinstatement is granted, the reinstatement is effective as of the date of termination.   However, for payments accruing after the termination date, the rental rate shall be increased by $5 per acre for non-competitive leases and $10 per acre for competitive leases and the royalty rate shall be increased to 16⅔% for non-competitive leases and by an additional 4% from the then-current rate for competitive leases.[11]  The increased rates are set forth in an agreement, which must be signed by all lessees.

There is no change to the primary term of the lease.  However, if the reinstatement of a lease either: (1) occurs after the expiration of the primary term or any extension thereof, or (2) will not afford the lessee a reasonable opportunity to continue operations under the lease, the authorized officer may extend the term of the reinstated lease for such period as determined reasonable, but in no event for more than 2 years from the date of the reinstatement and so long thereafter as oil or gas is produced in paying quantities.[12]

The benefit of Class II reinstatements is that, unlike Class I reinstatements, they do not require the lessee to justify when it failed to make proper rental payments.  Instead, the lessee only needs to show that the lessee did not deliberately fail to make the payment.  However, they are subject to increased rental and royalty rates.

[1] See Trent Maxwell, The Habendum Clause – ‘Til Production Ceases Do Us Part, The Oil & Gas Report, available at: https://www.theoilandgasreport.com/2015/02/05/the-habendum-clause-til-production-ceases-do-us-part-2 (explaining what it means to have a well producing in paying quantities).

[2] See PRM Exploration Co., 91 IBLA 165, GFS (O&G) 33 (1986).

[3] 43 C.F.R. § 3108.2-1(b).

[4] There is also a Class III reinstatement that deals with terminated leases stemming from a specific set of facts involving an unpatented oil placer mining claim. Although this will not be discussed at length, it is worth noting that a terminated oil placer mining claim can be converted/reinstated if it meets the necessary requirements set forth in 43 C.F.R. § 3108.2-4.

[5] 43 C.F.R. § 3108.2-2.

[6] See 43 C.F.R. § 3000.12 for up-to-date filing fees.

[7] 43 C.F.R. § 3108.2-2.

[8] See Torao Neishi, 102 IBLA 49, GFS (O&G) 41 (1988), citing Louis Samuel, 8 IBLA 268, GFS *O&G) 72 (1972), but see also William H. Siegfried, 135 IBLA 155, GFS (O&G) 11 (1996) (finding that a chronic illness is not justifiable).

[9] 43 C.F.R. § 3108.2-3.  The term for leases that terminate on or after August 8, 2005 is 15 months after the termination of the lease instead of 24 months.

[10] See Torao Neishi, 102 IBLA 49, GFS (O&G) 41 (1988).

[11] 43 C.F.R. §§ 3103.2-2(d) and (e) and 43 C.F.R. § 3103.3-1(a).

[12] 43 C.F.R. § 3108.2-3(e).

White House Announces Regulation of Methane Emissions from Existing Oil and Gas Sources

Oil and Gas Regulations, Uncategorized, ,

The White House announced yesterday that the Environmental Protection Agency (EPA) will begin to “immediately” develop “regulations for methane emissions from existing oil and gas sources.” Although no set timeline was provided, the White House stated the EPA “will move as expeditiously as possible to complete this process.” Moreover, next month the EPA “will start a formal process to require companies operating existing sources to provide information to assist in development of comprehensive standards to decrease methane emissions.”

The statement was made in connection with Canadian Prime Minister Justin Trudeau’s visit to the White House on Thursday and was included in a statement issued by President Obama and Prime Minister Trudeau entitled “U.S.-Canada Joint Statement on Climate, Energy, and Artic Leadership.”

This announcement follows the rule announced by the EPA last year regulating methane emissions from new and modified oil and gas sources, and a rule issued earlier this year regulating methane emissions from oil and gas drilling on federal land.

Read the U.S.-Canada joint statement at https://www.whitehouse.gov/the-press-office/2016/03/10/us-canada-joint-statement-climate-energy-and-arctic-leadership.

Practical Advice Regarding Pooling Clauses

Fee Lease 101 Series, Lease Provisions, Title Issues/Curative, Uncategorized, , , , ,

Pooling is a fundamental concept within oil and gas law, but one that is often misunderstood. Pooling is most commonly defined as “the combining of two or more tracts of land into one unit for drilling purposes … accomplished voluntarily, or through compulsion.”1 In other words, it is how a lessee is able to extend a lease without physically drilling on the lease. For private (fee) oil and gas leases, the ability of the lessee to pool the lease is typically addressed in the lease provisions. These provisions are known as the pooling clause. This article provides some practical tips in dealing with the issues that arise from pooling clauses.

The first question that should be asked is if there is an existing spacing order in place for the lands and formation(s) involved. Many pooling clauses provide that the lease can only be pooled in conformity with a spacing order from the applicable state regulatory agency. If you encounter such a clause, you will need to check for a state spacing order, and if an order is not already in place, you will need to initiate the required steps to obtain an order. There may also be an order in place that does not match your proposed operation. If so, a new order would need to be obtained modifying the existing order. If spacing is governed by statewide spacing, you will want to double check the language in the pooling clause to confirm that statewide spacing is sufficient.

If the proposed well will be a horizontal well, there are special considerations that need to be addressed. Some lease provisions specifically address horizontal spacing. Many states have special statewide rules that are in place for horizontal wells. Particular attention should be paid to any total acreage limitation included in the pooling clause of the lease, for example, the lease cannot be included in a pooled unit for oil greater than 160 acres. If the lease has this limitation, an amendment to the lease may be the best option to eliminate this conflict.

The next question when reading a pooling clause is what role, if any, the lessor will have in the pooling process. The most common oil and gas lease terms allow the lessee to pool the lease without obtaining any additional consent from the lessor. In some cases, if the lessor desires to retain this right, they will strike out the pooling provision in the entirety, or add a specific lease provision requiring their consent. If the lease does not have a pooling clause, or if the pooling clause is stricken, the lease can only be pooled with the express consent of the lessor. This consent would be expressed by having the lessor execute a pooling agreement. The pooling agreement should be recorded to provide third parties with notice of the terms of the agreement. If obtaining consent is not an option, compulsory pooling by the governing state agency would be the alternative.

Some leases require that notice of the pooling be provided to the lessor in order for the pooling to be effective. If the pooling clause requires that notice be mailed to the lessor, an effort should be made to locate both the last address of record and a current address, utilizing online resources. If a more recent address is discovered, the notice should be mailed to both the address of record and the new address that was located. More commonly, the lease requires that for it to be properly pooled, a proper declaration of pooling needs to be executed and recorded by the lessee in the applicable county. Care should be taken in drafting the declaration of pooling. It should be signed by all parties owning a working interest in the lease. In order to be recorded, the signatures will need to be originals and it will need to be notarized. It should describe the specific lease(s) being pooled, including the recording information (Book/Page, Entry No.) for each lease. It should cite the authority to pool contained in the lease, for example: “Pursuant to Paragraph 10 of the lease.” It should define the pool, the total lands included and the formation(s) covered. If the lease covers more lands than what is being pooled, the declaration should describe all of the lands covered by the lease. This is particularly important in states that utilize a tract index recording system. If the pooling is in conformity with a state spacing order, it should be noted. If the party executing the declaration was not the original lessee, a statement as to the succession (Book/Page, Entry No. of the document transferring the interest in the lease) should be included. If the operator is drilling the well to earn an interest in the lease from another party, for example under a farmout agreement, it is recommended that the declaration be executed by both the record title owner and the party that is to earn the interest. Doing this would avoid any dispute as to the correct party to execute the declaration. Once executed, confirmation should be made that the declaration of pooling is properly recorded and, if it is a tract index state, that it is has been properly indexed against the lands.

Confirmation should be made that the effective date of the pooling is either the date of, or prior to the date, of first production. The effective date should also be prior to the termination date of the lease. Most lease provisions provide that the declaration of pooling must be prior to lease expiration. In the event the well was drilled prior to lease expiration, but the declaration of pooling was not timely recorded in order to avoid any issue, the lessor should execute a pooling declaration which includes a statement that the lease was properly pooled prior to the expiration date of the lease.

Finally, after reading the specific pooling provisions in the leases to be pooled, a broader examination of some additional issues raised by pooling the lease should be conducted. Confirmation should be made that all of the leases to be pooled are private leases. If the pool includes either federal, Indian, or state leases, additional steps will be needed to pool these leases. As to state leases, various state agencies have adopted different rules and procedures regarding private pooling agreements. As to federal and Indian leases, there are two ways to pool them: a federally approved unit or communitization agreement. The nuances of federal unitization and communitization will be further explored in a subsequent article in this series.

1 Patrick H. Martin and Bruce M. Kramer, Williams & Meyers, Oil and Gas Law § P Terms. (LexisNexis Matthew Bender 2016).