Spacing, Pooling & Unitization

Transcription

1 Spacing, Pooling & Unitization in Colorado Follow Steptoe & Johnson on Twitter: ALSO FIND US ON Steptoe & Johnson PLLC. All Rights Reserved.

2 Keynote Speaker John R. Chadd Denver, CO

3 Spacing, Pooling & Unitization in Colorado

4 Spindletop, 1903 Near Beaumont, TX

5 A Short History of Spacing Spacing is government regulation of the placement of wells, designed to further the typical oil and gas commission mandate to foster responsible oil and gas development and prevent waste of the resource, among other concerns.

6 A Short History of Spacing Before spacing statutes and rules: The rule of capture was predominant: each mineral owner acquires title to the minerals on his lands, and since oil and gas was thought to move across lands (like wild animals would), the mineral owner could capture any oil and gas that moved onto his property. Therefore drainage of adjacent property was permitted. Then, courts began to limit the rule of capture, such as finding that a mineral owner had an inherent right to be protected against drainage and damage to the resource on his lands.

7 A Short History of Spacing Spacing Laws Come into Being: In the mid 1900 s, states began to pass oil and gas conservation laws, which established the state oil and gas commissions, who had the police power to prevent waste and protect the correlative rights of mineral owners.

8 Spacing in Colorado Spacing is established in different ways: COGCC statewide rules (e.g. Rule 318 on well location) COGCC rules for a specific area (e.g. Rule 318A for the Greater Wattenberg) Field wide id COGCC orders (e.g. COGCC Order 139 1, 1 dated Dec. 10, 1959, establishing the initial spacing for the Rulison Field [640 acre spacing for the Mesaverde Formation, requires the pooling of all interests in the spaced unit]) COGCC orders specific to a particular drilling and spacing unit (e.g. COGCC Order establishing two 160 acre drilling and spacing units in 7S 96W Sec. 13)

9 Voluntary Pooling: Generally Bringing together separately owned interests of all parties having rights in a drilling unit for common development Variety of forms: Pooling clause Declaration of pooling Lease amendment Communitization agreement Joint operating agreement Other separate agreements

10 Voluntary Pooling: Authority When to pool? Two or more leases, covering two or more tracts C.R.S (6) When two or more separately owned tracts are embraced within a drilling unit, orwhen there are separately tl owned interests in all or a part of the drilling unit, then persons owning such interests may pool their interests for the development and operation of the drilling unit. Ignore lease lines Can you pool? Must be express No implied duty to pool

11 Colorado Follows General Rule Pooling: Reverses the effects of the Non Apportionment Rule Operations, production and payment of shut in royalties are deemed to occur on or benefit non drillsite tracts Perpetuation of the lease as to lands both inside and outside of the pooled unit Royalties are allocated among drillsite and non drillsite tracts Costs are allocated among drillsite and non drillsite tracts

12 Duty of Lessee: Implied Covenants Four Implied Covenants of Lessee To drill To reasonably develop after discovering of production in paying quantities To operate diligently and prudently To protect against drainage

13 Duty of Lessee: Implied Covenants Perpetuating Lease as to Non Pooled Tracts Clovis v. Pacific Northwest Pipeline (Colo. 1959) Implied covenants still apply as to lands outside pooled unit

14 Duty of Lessee: Implied Covenants Implied Covenant to Reasonably Develop North York Land v. Byron Oil (Colo. App. 1984) Cannot hold land for speculation Marginal production may not be sufficient to hold the lands outside the pooled unit

15 Lease Pooling Clause No implied right to pool, so need express pooling language either in lease or other written instrument Most lessee favorable clause: Unilateral right to pool, in lessee s discretion Older leases often have acreage limitations 40 for oil, 640 for gas 1280 for horizontal wells No larger than minimum state drilling and spacing unit size % of unit or % of lease limitations

16 Pooling Clause: Effect on Landowner Typical lease lessor is entitled to royalty payments on production obtained solely from the leasehold. Pooled lease lessor is now entitled to royalty payments on a pro rata share of production from all lands within thedrilling unit Royalty and other terms still governed by lease Will receive royalties, even if no well is ever completed on the leased land

17 Signors of the Pooling Agreement WI owners AAPL JOA does not authorize Operator to execute on behalf of non operators Royalty yowners If lease terms do not authorize pooling as contemplated ORRI and NPRI owners If instrument creating royalty ydoes not authorize pooling Best practice is to get ORRI and NPRI owners to execute or ratify

18 Important Pooling Agreement Terms Effective Date Invoke lessee authority under the leases Description of the lands (description of spacing unit and spacing order) Description of the leases Description of the pooled substances Limit to certain formations or wellbore only

19 Important Pooling Agreement Terms Pooled area deemed to be a single lease operations or production anywhere in the pooled area will hold all leases by production Allocation of production (surface acre basis) Reserve the right to correct, revise or amend Duration (so long as leases remain in force, unless sooner terminated by lessee) Binding upon successors and assigns (covenant running with the land)

20 Recording the Pooling Agreement Is recording a lease covenant or a condition precedent? Terms of the pooling clause control If a condition precedent, lease may terminate if fail to record (no Colorado decision on this point) Typical lease language: the forming of any unit shall be accomplished by Lessee executing and filing of record a declaration of such unitization, which declaration shall describe the unit. Best practice is to always record Provides notice to 3 rd parties

21 Pooling Involving State or Federal Leases State Leases Colorado StateLand Board Communitization Agreement Fd Federal lleases BLM Communitization Agreement See the BLM Communitization Manual: Public interest requirement

22 Statutory Pooling in Colorado 1. Assists the Colorado Oil and Gas Conservation Commission in its purpose: a. To foster responsible oil and gas development b. To protect public and private interests against waste in the production of oil and gas c. To safeguard the correlative rights of owners and producers in a common course of supply of oil and gas 2. Statutory pooling is also called force pooling or compulsory pooling 3. The COGCC establishes drilling and spacing units and rules to prevent waste and protect correlative rights

23 Colorado Statutory Pooling Steps 1. A drilling and spacing unit has been established by the COGCC, by either: a. Field wide or broadorderorder establishing unit sizes and designations i.e., stand up or lay down 80 s, quarter sections, N/2 S/2, W/2 E/2 b. Order establishing one unit c. COGCC rules establishing guidelines for selection of unit by mineralinterest interest holder 2. Voluntary pooling by interest owners has not been achieved 3. Interest owner who wants to drill in unit offers opportunity to other owners to participate in well 4. If compulsory pooling still required, notice to all mineral interest owners in unit and a COGCC hearing follows

24 Colorado Statutory Pooling Parameters 1. COGCC cannot initiate statutory pooling an application for pooling must be made by an interest owner 2. There is no minimum interest amount required for an owner to make an application for pooling (but applicant must be prepared to pay to 100% of drilling costs) 3. Unleased mineral owners in the unit must be offered a lease by applicant on then prevailing lease terms in the area 4. All interest owners must be offered a chance to participate in the well

25 Colorado Statutory Pooling Parameters 5. Colorado has a risk premium type of statutory pooling regime the participating owners are paid a premium if production is achieved, in order to compensate the participating owners for assuming the risk of drilling a dry hole or marginal well The other types of statutory pooling regimes are: free ride, surrender of working interests, or a combination thereof 6. Unpleased minerals owners who are non consenting are still paid a proportionate 1/8 royalty on production, from the time of first production, during the reimbursement period for the participating owners 7. Colorado s statutory pooling regime is codified at C.R.S and at COGCC Rule 530

26 Risk Premium Calculation The repayment paid to participating ii i owners out of the non consenting owners share of production is calculated as: a. 200% of the costs of staking, well site preparation, rights of way, rigging up, drilling, reworking, deepening or plugging back, testing and completing the well, and 200% of the cost of equipment in the well, including well headconnections b. 100% of the non consenting owners share of the cost of surface equipment beyond the well head connections (for example, tanks, separators, treaters, pumps, pipe), until the participating owners have recouped those costs c. 100% of the non consenting owners share of well operating costs, until the participating owners have recouped those costs d. The repayment in a,b,c for non consenting unleased mineral owners is payable out of the non consenting owners proportionate seven eighths share of production

27 Current Happenings in Colorado Statutory Pooling 1. Statutory pooling hearings are active on the COGCC docket a. January 2014 COGCC Hearings 1 contested force pooling; 27 out of 36 uncontested matters were force poolings b. March 2014 COGCC Hearings 54 out of 65 uncontested matters were force pooling c. April 2014 COGCC Hearings 2 out of 10 contested matters were force pooling; 18 of 46 uncontested matters were force pooling

28 Current Happenings in Colorado Statutory Pooling 2. Larger drilling and spacing units ( acres) make it more likely that statutory pooling actions will be needed 3. Older leases with more restrictive pooling provisions can cause conflict with pooling orders, although there is precedent in other states that a force pooling order controls and wipes out lease restrictions (no Colorado case law on point)

29 Colorado Unitization Trend over the last year of applying li for large drilling and spacing units of 2,000 acres or more, which can then be later force pooled: a. Applicants are using the term unconventional resource unit not a defined term rather than exploratory drilling unit (codified at C.R.S ) b. The orders approving such units will state that the unit is a drilling and spacing unit for the purposes of COGCC Rule 530.a (the rule governing force pooling) c. Possible authority: C.R.S (2) states that the COGCC is authorized to establish exploratory drilling units for the purpose of obtaining evidence as to the existence of a pool and the appropriate size and shape of the drilling unit to be applied thereto t d. These units are typically approved with the requirement of COGCC review after one year e. May also invoke elements of unitization provided in C.R.S

30 Points to Takeaway Spacing and pooling are not the same thing, but they are connected Pooling can be either voluntary or statutory (forced) Unconventional Resource Units are a new and evolving concept in Colorado

31 Thank You! John Chadd Denver, CO johnson.com h j h

32 Material Disclaimer These materials are public information and have been prepared solely for educational purposes to contribute to the understanding of energy and oil and gas law. These materials il reflect only the personal views of the authors and are not individualized legal advice. It is understood that each case is factspecific, and that the appropriate solution in any case will vary. Therefore, these materials may or may not be relevant to anyparticular situation. Thus, the authors and Steptoe & Johnson PLLC cannot be bound either philosophically or as representatives of their various present and future clients to the comments expressed in these materials. The presentation of these materials does not establish any form of attorney client relationship with the authors or Steptoe & Johnson PLLC. While every attempt was made to insure that these materials are accurate, errors or omissions may be contained therein, for which any liability is disclaimed.