Allocation Wells: Another Take[point]...• 16 TAC § 3.86: defines a horizontal well as “any well that is developed with one or more horizontal drainholes having a horizontal drainhole

Permian Basin Landman Association Spring Seminar, 2019

Allocation Wells: Another Take[point]

Travis L. Crawford and Jessica J. CrawfordJones Gill Porter Crawford & Crawford LLP

Acknowledging the Trend

• In the year 2000, 3,983 permits were filed for vertical wells, and 199 permits were filed for horizontal wells.

• In the year 2018, 2,397 permits were filed for vertical wells, and 8,022 permits were filed for horizontal wells.

• This is a swing from 5% to 77%.

• Clearly the trend across the state is moving toward horizontal wells.• While they tend to be more expensive per well, fewer may be drilled to

achieve greater production and with fewer surface locations and expenses.

• Many operators have not drilled allocation wells out of concern that it may be bad faith pooling. However, it appears that dealing with an allocation well is not a matter of if, but when.

Types of Horizontal Wells

1. Horizontal Wells Drilled on a Pooled Acreage Basis• Developed to meet well spacing requirements and allow for

drilling on tracts not previously developed due to space constraints.

• Benefits mineral owners, operators, the state and the environment by reducing the number of wells needed to maintain efficient production while protecting correlative rights.

• Allows operators to hold a larger number of tracts based on drilling fewer wells.

• Operations and production anywhere within the unit will be considered to have occurred upon all lands in the unit, creating a “cross-conveyance among the owners of minerals under the various tracts of royalty or minerals in a pool so that they all own undivided interests under the unitized tract in the proportion their contribution bears to the unitized tract.”


1. Horizontal Wells Drilled on a Pooled Acreage Basis

• Significant history and case law supporting pooling• Common ways to achieve pooling:

• Pooling provision in an oil and gas lease• Execution of Pooling Agreement creating a

pooled unit• Execution of a community lease


2. Production Sharing Agreement Wells

• Interest owners of land to be crossed by a horizontal well agree to the sharing of production from said well via contractual agreement.

• Operator must file a PSA-12 with the Railroad Commission stating that they have obtained agreements from 65% of the mineral owners.

• No case law regarding Production Sharing Agreement wells other than what governs contractual agreements.

• Railroad Commission website contains extensive information regarding PSA wells, the permitting process and the supporting documentation required for a proposed well.


3. Allocation Wells

• Drilled across several tracts without the formation of a pooledunit and without a production sharing formula between theowners.

• Operators are not allowed to include tracts of land which thewellbore does not cross.

• Well permits for allocation wells have been issued since 2010.• No controlling law, whether judicial, statutory or regulatory, on

the legality of allocation wells.• Typically, production is allocated on the proportion of

productive length of the lateral traversing a tract (from firsttake point to last take point) bears to the entire length of theproducing lateral (from first take point to last take point).

Current Guidance Regarding Allocation Wells

Administrative Code Provisions

• 16 TAC § 3.86: defines a horizontal well as “any well that is developed with one or more horizontal drainholes having a horizontal drainhole displacement of at least 100 feet.” Also defines many other terms, such as first and last take point, nonperforation zone and stacked lateral well.

• 16 TAC § 3.10: outlines the production of oil and gas from different strata, meaning “two or more different commission-designated fields, or one or more commission designated fields and any other hydrocarbon reservoir.”


Administrative Code Provisions

16 TAC § 3.37(a)(1): No well for oil, gas, or geothermal resource shall hereafter be drilled nearer than 1,200 feet to any well completed in or drilling to the same horizon on the same tract or farm, and no well shall be drilled nearer than 467 feet to any property line, lease line, or subdivision line; provided the commission, in order to prevent waste or to prevent the confiscation of property, may grant exceptions to permit drilling within shorter distances than prescribed in this paragraph when the commission shall determine that such exceptions are necessary either to prevent waste or to prevent the confiscation of property.

Browning Oil Co. v. Luecke38 S. W. 3d 625 (Tex. App. – Austin 2000, pet. denied)

Pooling, Anti-Dilution, and Paying Royalty

• Humble Oil purchased three leases from the Lueckes in 1979, which were subsequently assigned to Browning in 1994.

• Each lease contained a pooling provision and an anti-dilution provision restricting the amount of acreage that could be pooled with each lease.

• Browning and Marathon (JOA Partner) approached the Lueckes to amend the leases to allow for horizontal wells, which were not possible considering the anti-dilution provisions. Lueckes refused to sign.

• Browning and Marathon nevertheless drilled two horizontal wells, crossing multiple tracts including Luecke land. Browning and Marathon filed certificates of pooling authority for two purported units, one being 839.18 acres, including 268.68 acres owned by the Lueckes, and the second being 346.625 acres, including 114.86 of Luecke land.

Browning Oil Co. v. Luecke38 S. W. 3d 625 (Tex. App. – Austin 2000, pet. denied)

Pooling, Anti-Dilution, and Paying Royalty

• Lueckes filed suit claiming the units violated the pooling and anti-dilution provisions of the leases.

• Luecke argued commingling based on Humble Oil v. West, and that the should be entitled to royalty based on all production from the well. Trial court found for the Lueckes, Browning and Marathon appealed.

• Court of Appeals held that while the pooling provisions had been violated, Luecke was not entitled to all production from the well. The better remedy is to pay based on production from each tract as determined with reasonable probability.

• “We decline to apply legal principles appropriate to vertical wells that are so blatantly inappropriate to horizontal wells and would discourage the use of this promising technology.”


Texas Railroad Commission Matters: In Re Klotzman

• EOG filed an application to drill the Klotzman 1H across two tracts of land in DeWitt County, covered by two different oil and gas leases, neither of which contained pooling provisions.

• Mineral owners under the two leases filed a protest and sought a hearing with the RRC.

• Klotzman argued that EOG was effectively pooling without authority, no established law allowing this type of production, and with no means to measure production from each tract.

• EOG argued that it owned 100% of leases on both tracts, had the right to drill on each tract, and that the RRC was not empowered to determine contractual rights, RRC has duty to promote development.


Texas Railroad Commission Matters: In Re Klotzman

• At the hearing, RRC Examiner recommended that the EOG permit be denied because EOG did not have pooling authority, and EOG premise was essentially forced pooling.

• RRC overruled Examiner’s decision and unanimously approved EOG permit, stating that deciding whether or not the lease permitted the operator to drill without pooling was not within the jurisdiction of the RRC.

• Klotzman appealed to the Travis County District Court, seeking judicial review and declaratory relief, however, case settled before the courts were able to weigh in.

Springer Ranch v. Jones421 S. W. 3d 273 (Tex. App. – San Antonio 2013)

How Much to Pay to Whom?

• Issue wasn’t with the validity of an allocation well, but provides guidance as to royalty payments based on location of the “well.”

• 8,545 acre ranch in Webb and LaSalle Counties, HBP under one lease since 1956.

• Lessor, Burkholder, died leaving life estate to husband, and splitting the original acreage into three tracts.

• After death of husband, the remaindermen contractually agreed to split production from existing vertical wells according to the surface location of the well, without reference to production units.

Springer Ranch v. Jones421 S. W. 3d 273 (Tex. App. – San Antonio 2013)

How Much to Pay to Whom?

• 1993 horizontal well drilled from surface location on Springer Ranch tract, with bottom hole located on adjoining Sullivan tract.

• Question arose as to who gets paid.

• Springer Ranch argued since well was located on was on Springer Ranch tract, all royalties from production should go to Springer Ranch.

• Sullivan argued that production should be allocated based on length of productive lateral of the well within each tract; trial court agreed, court of appeals affirmed.

• In the appeal, Springer Ranch further argued that allocation should be based on entire length of lateral, not just productive length, which the court also disagreed with.


Texas Railroad Commission Matters: Monroe Properties, Inc.

• Devon applied for a permit to drill an allocation well which would cross multiple tracts, all of which Devon held leases on.

• Monroe Properties, Inc., SRO Land & Minerals, L.P. and the Lee M. Stratton Living Trust, and Mary Elizabeth Stratton, Trustee filed a complaint regarding the permit.

• Monroe et al. stated that Devon did not have a good faith claim to drill a well because they did not have pooling authority in the oil and gas lease and did not have a production sharing agreement.



• The Texas Railroad Commission issued an Order of Dismissal on November 9, 2017, wherein the Commission made the following findings of fact and conclusions of law:

• Heavily relied on the final order issued in the Klotzman Case, wherein the Commission rejected the argument that the applicant must show it has pooling authority or a production sharing agreement to establish it has a good faith claim to drill an allocation well.

• Cited the number of allocation wells which have been permitted since the Klotzman decision:– Fewer than 100 permits granted before the December 3, 2012

hearing.– From hearing date until November 9, 2017, 3,324 wells have

permitted as allocation wells.



• “It has been Commission practice to allow the drilling of allocation wells.”



• Addresses all of the forms created by the Railroad Commission for the permitting of an allocation well:– Form P-16, Page Two– W-1, Application for Permit to Drill, Recomplete

or Reenter – Drilling permit seminars and online publications– Electronic notices issued to the public regarding

allocation wells and other types of horizontal wells



• RRC relied on Klotzman being previously decided and that there has been no change in the law since that decision. “To relitigate this issue would be unnecessary duplication of proceedings.”

• Stated that Monroe et al.’s reliance on Browning v. Luecke is misplaced and cites Ernest E. Smith’s paper Applying Familiar Concepts to New Technology: Under the Traditional Oil and Gas lease, A Lessee Does Not Need Pooling Authority to Drill a Horizontal Well that Crosses Lease Lines.

• Reiterates that neither pooling authority nor a production sharing agreement is required to establish a good faith claim for a permit to drill an allocation well.


Past Litigation

• Monroe Properties, Inc. et al. v. Railroad Commission of Texas, 53rd Judicial District Court of Travis County, Texas– Permit withdrawn and nonsuit filed by Plaintiff

• Casey et al. v. MD America Energy, LLC et al.– Same firm as Klotzman and Monroe Properties– Case settled


Current Litigation: Elsie Opiela et al. v. EnerVest Operating, L.L.C.

• Filed in the 81st Judicial District Court of Karnes County, Texas• EnerVest Operating, Compass Oil & Gas, L.P. and other EnerVest

entities are the owners of the leasehold.• Around May 1, 2018, EnerVest filed for an application for an

allocation well.• Plaintiffs filed a protest letter with the Railroad Commission on May

2, 2018.• The Railroad Commission granted the permit on May 3, 2018• The well was spudded on May 7, 2018.



Causes of Action alleged by the Plaintiff:– Breach of Lease– Trespass

Damages sought:– Actual and exemplary damages– Seeking a permanent injunction against Defendants, barring

production from the Property through the well in question– Attorney’s fees and interest

Case appears to be in the early stages, very few filings.

Claims by LandownersExamining recent claims by landowners:

• Breach of lease terms• Unauthorized pooling• Trespass• Commingling• Request for injunctive relief

Claims by LandownersBreach of Lease Terms

• Examine lease language to determine what pooling language is or is not included. Your client may not have taken the lease in question; they may have received an assignment of the lease and are not aware of all of the lease provisions.

• Remember that typically oil and gas leases are construed against the lessee due to typically being lessee promulgated.

• We have seen language such as no pooling or allocation wells without the consent of the Lessor. It may also include the phrase “not to be unreasonably withheld.”

• As allocation wells have increased, lessors have become more sophisticated, including provisions that state that Lessor will be entitled to royalty on 100% of production of a well that is drilled with take points on and off of the leased premises unless the Lessor previously agreed in writing to a pooled unit or production allocation.

Claims by LandownersBreach of Lease Terms: GLO Language

10. POOLING; ALLOCATION: (a) Lessee is hereby expressly prohibited from pooling or unitizing the Leased Premises or any interests therein with any other leasehold or mineral interest for the exploration, development and production of Oil or Gas or either of them without the express consent of the School Land Board and the Commissioner. A well, whether or not classified as an allocation well, that traverses multiple leases or units including the Leased Premises hereunder, one or more of which leases or units contains Oil and Gas owned by the state, and which well is not associated with an agreement approved by the GLO and owner of the soil specifying the allocation of the production of state-owned Oil and Gas, is hereby expressly not permitted and may not operate on or under this lease or a unit containing state-owned Oil and Gas without the prior written consent of the Commissioner or his authorized designee, which consent may be granted or withheld in the Commissioner’s sole discretion. GLO, Relinquishment Act Lease § 10(a) (rev. ed. July 2016).

Claims by LandownersUnauthorized Pooling

• Lessors have brought causes of action claiming that by drilling a horizontal well, the operator has committed unauthorized pooling.

• Both sides of this argument have appeared in recent law review journal articles, with the most recent one by Ernest E. Smith.

• Pooling involves a cross-conveyance of interests in the various tracts. However, Smith argues that by drilling an allocation well, there is no cross-conveyance of royalties:“…the inquiry whether the lessee is violating the lease should begin and end with recognizing that the lease authorizes the lessee to drill a horizontal well that begins at one side of the lessor's tract and ends on the other side of that tract. The fact that the horizontal well may also extend into an adjacent tract is irrelevant under the traditional oil and gas lease that does not specify whether the lessee may drill vertically or horizontally. As the court noted in Browning: ‘Each tract traversed by the horizontal well is a drillsite tract, and each production point on the wellbore is a drillsite.’ “

Claims by LandownersTrespass

Specific arguments made in Opiela v. EnerVest• Trespass to real property is an unauthorized entry

upon the land “of another, and may occur when one enters- or causes something to enter- another’s property.” Barnes v. Mathis, 353 S.W.3d 760, 764 (Tex. 2011).

• “[E]very unauthorized entry upon land of another is a trespass even if no damage is done or injury is slight, and gives a cause of action to the injured party.” Coastal Oil & Gas Corp. v. Garza Energy Trust, 268 S.W.3d 1, 12 n. 36 (Tex. 2008).

• Additionally, Opiela claims that the trespass was in bad faith because the lessee did not have authority to enter the lease and therefore lacks a good faith basis for its actions.


• However, these arguments fail to recognize that when a lessor grants an oil and gas lease to a lessee, an implied easement is granted.

• Said easement is granted to the lessee to use the surface estate of the tract as reasonably necessary to develop the mineral estate.

• What are the factors for determining what is reasonably necessary?

• An argument has been made that by using the surface of one tract to benefit the development of minerals from another tract, the lessee is excessively burdening the surface estate and exceeding the scope of the easement. However, this is very fact intensive.– If you determine that there was an excessive burden on

the surface, what is the measure of damages?


5,000 Foot Lateral

7,500 Foot Lateral

10,000 Foot Lateral

Section A Section B

If all pads for longer laterals are larger, an excess burden can be shown.


5,000 Foot Lateral

7,500 Foot Lateral

10,000 Foot Lateral

Section A Section B

However, if all pads for laterals are the same size, no matter whatthe length of the lateral is, how do you show an excessiveburden?

Claims by LandownersCommingling

• The commingling argument is brought to us by Humble Oil and Refining Company v. West, 508 S.W.2d 812 (Tex. 1974).

• Established the rule that the one who is responsible for the intermingling and confusion of the property so as to render it impossible to identify the goods of each party is under the burden establishing with reasonable certainty what each party is entitled to.

• The Court held that Humble was not under the obligation to pay West for all gas produced from the reservoir so long as Humble could establish with reasonable certainty the volume of gas that the Wests would be entitled to.

• Methods of determining with reasonable certainty, which was later established by Browning v. Luecke to be reasonable probability:

• Metering oil or gas produced from each portion of the wellbore

• Expert testimony

Claims by LandownersInjunctive Relief

• Plaintiffs in Opiela v. EnerVest requested an injunction to cease production from the well in dispute.

• This is the most damaging of all relief sought.

• We have seen both applications for temporary injunctions, which would enjoin the operator from using their land to produce from any other tract, in conjunction with the request for a permanent injunction after trial to enjoin the operator from using the wellbore to produce from other lands.

Practical Considerations

Equal Length of Productive Lateral, Equal distribution of takepoints


Equal Length of Productive Lateral, Unequal distribution of takepoints


Off Tract Surface Location, unequal productive lateral lengths, unequal distribution of takepoints


• Existing Unit is composed of 10 tracts, totaling 80 acres, 40 of which lay within the proposed horizontal unit, 40 outside the unit.

• Proposed horizontal unit is 320 acres, including the 40 acres in the existing unit. Total productive interval is 9,900 feet, with 1,320 feet traversing the existing unit.

• Due to the cross conveyance created by pooling the tracts in the vertical unit, the division of interest for the new well must account for off unit owners lying with the vertical unit, but outside the proposed horizontal unit.

Traversing an Existing Unit


• Tract 1 is a 2.5 acre tract lying outside the new unit, but within the existing unit.

• The Owner of tract one is entitled to 2.5/80 of the royalty for its proportionate share of production from the vertical unit.

• Under Browning and Springer Ranch, this interest is entitled to royalty from production from the new unit.

• Further reduce the 2.5/80 by 1,320/9,900 to account for its proportionate share of the productive interval of the horizontal well.

• Assuming a 1/5 royalty, the owner of Tract 1 would receive:

• 2.5/80 of 1,320/9,900 of 1/5 RI, being 0.00083333

Traversing an Existing Unit

Protecting the Operator

• Pool or get a production sharing agreement (avoiding an allocation well altogether)

• Obtain signed division orders from all parties.

• If an owner does not execute a division order, place them in suspense (pursuant to the division order statute and your title opinion).

If you want to feel better about it all…RRC Disclaimer Language

Commission Staff expresses no opinion as to whether a 100% ownership interest in each of the leases alone or in combination with a "production sharing agreement" confers the right to drill across lease/unit lines or whether a pooling agreement is also required. However, until that issue is directly addressed and ruled upon by a Texas court of competent jurisdiction it appears that a 100% interest in each of the leases and a production sharing agreement constitute a sufficient colorable claim to the right to drill a horizontal well as proposed to authorize the removal of the regulatory bar and the issuance of a drilling permit by the Commission, assuming the proposed well is in compliance with all other relevant Commission requirements. Issuance of the permit is not an endorsement or approval of the applicant's stated method of allocating production proceeds among component leases or units. All production must be reported to the Commission as production from the lease or pooled unit on which the wellhead is located and reported production volume must be determined by actual measurement of hydrocarbon volumes prior to leaving that tract and may not be based on allocation or estimation. Payment of royalties is a contractual matter between the lessor and lessee. Interpreting the leases and determining whether the proposed proceeds allocation comports with the relevant leases is not a matter within Commission jurisdiction but a matter for the parties to the lease and, if necessary, a Texas court of competent jurisdiction. The foregoing statements are not, and should not be construed as, a final opinion or decision of the Railroad Commission.

ConclusionUntil a case makes it past settlement, we do not know how a Texas court of competent jurisdiction will rule on the legality of allocation wells.

Travis L. Crawford & Jessica J. CrawfordJones Gill Porter Crawford & Crawford LLP

6363 Woodway Drive, Suite 1100Houston, Texas 77057

(713) [email protected]@jonesgill.com

Slide Number 1Acknowledging the TrendTypes of Horizontal WellsTypes of Horizontal WellsTypes of Horizontal WellsTypes of Horizontal WellsCurrent Guidance Regarding Allocation WellsCurrent Guidance Regarding Allocation WellsBrowning Oil Co. v. Luecke�38 S. W. 3d 625 (Tex. App. – Austin 2000, pet. denied)Browning Oil Co. v. Luecke�38 S. W. 3d 625 (Tex. App. – Austin 2000, pet. denied)Current Guidance Regarding Allocation WellsCurrent Guidance Regarding Allocation WellsSpringer Ranch v. Jones�421 S. W. 3d 273 (Tex. App. – San Antonio 2013)Springer Ranch v. Jones�421 S. W. 3d 273 (Tex. App. – San Antonio 2013)Current Guidance Regarding Allocation WellsCurrent Guidance Regarding Allocation WellsCurrent Guidance Regarding Allocation WellsCurrent Guidance Regarding Allocation WellsCurrent Guidance Regarding Allocation WellsCurrent Guidance Regarding Allocation WellsCurrent Guidance Regarding Allocation WellsCurrent Guidance Regarding Allocation WellsCurrent Guidance Regarding Allocation WellsCurrent Guidance Regarding Allocation WellsCurrent Guidance Regarding Allocation WellsCurrent Guidance Regarding Allocation WellsCurrent Guidance Regarding Allocation WellsCurrent Guidance Regarding Allocation WellsCurrent Guidance Regarding Allocation WellsClaims by LandownersClaims by LandownersClaims by LandownersClaims by LandownersClaims by LandownersClaims by LandownersClaims by LandownersClaims by LandownersClaims by LandownersClaims by LandownersPractical ConsiderationsPractical ConsiderationsPractical ConsiderationsPractical ConsiderationsPractical ConsiderationsProtecting the OperatorIf you want to feel better about it all…ConclusionSlide Number 48

Documents

Allocation Wells: Another Take[point]...• 16 TAC § 3.86: defines a horizontal well as “any well that is developed with one or more horizontal drainholes having a horizontal drainhole