OIL & GAS DEVELOPMENT AND UNITIZATION LAWS IN

VARIOUS STATES

MARCH 2010

INTRODUCTION

RULE OF CAPTURE VS CORRELATIVE RIGHTS

RULE OF CAPTURE

• LANDOWNER MAY PRODUCE OIL & GAS UNDER HIS PROPERTY WITHOUT REGARD WHETHER HE DRAINS HIS NEIGHBOR’S PROPERTY AS WELL

• NO LEGAL LIABILITY UNLESS WASTE RESOURCE OR DAMAGE RESERVOIR

CORRELATIVE RIGHTS

• EACH OWNER IN A COMMON OIL AND GAS POOL IS AFFORDED AN OPPORTUNITY TO RECOVER HIS JUST & EQUITABLE SHARE OF RESERVES

• GOAL IS TO LIMIT UNCOMPENSATED DRAINAGE, BUT NOT AN ABSOLUTE RIGHT – MUST EXERCISE RIGHT TO DRILL TO CLAIM CORRELATIVE RIGHT

PETROLEUM GEOLOGY, MINERAL INTERESTS AND

REGULATION

PETROLEUM TRAP ELEMENTS

• PETROLEUM SOURCE ROCK

• MIGRATIONAL PATHWAY

• POROUS FORMATION ROCK

• SEALING IMPERMEABLE CAPROCK OR BED

JURISDICTION OF CONSERVATION

AGENCIES TO REGULATE OIL AND GAS

DEVELOPMENT

COMMON OIL AND GAS REGULATORY TERMS

• MEANING OF “POOL” FOR REGULATORY PURPOSES

Underground reservoir containing an interconnected common accumulation of crude oil and/or natural gas in pressure communication

COMMON OIL AND GAS REGULATORY TERMS

• CONCEPT OF A “DRILLING UNIT”

Maximum area from which one well can efficiently and economically drain the recoverable oil and gas reserves in a given reservoir

EFFECT OF UNITIZATION ON MINERAL RIGHTS

• CREATES A LEGAL FICTION THAT OPERATIONS OR PRODUCTION ANYWHERE ON THE UNIT IS AS IF ON EACH AND EVERY LEASE IN THE UNIT

• NOT A CROSS ASSIGNMENT – EACH LESSEE STILL OWNS AND REMAINS RESPONSIBLE TO HIS OWN LESSOR

• MUST BE UNIT OPER’NS OR PROD’N

COMPARISON OF OIL AND GAS DEVELOPMENT

REGULATORY STRUCTURES IN FIVE

STATES

OKLAHOMA WELL SPACING AND POOLING LAW

• CREATE DRILLING & SPACING UNITS

• LOCATION EXCEPTIONS

• INCREASED DENSITY WELLS

• FORCED POOLINGS

OKLAHOMA WELL SPACING

GENERAL STATEWIDE RULE

OKLAHOMA WELL SPACING

DRILLING AND SPACING UNITS

DRILLING & SPACING UNIT GENERAL REQUIREMENTS

• APPROXIMATELY SQUARE OR RECTANGULAR AND USUALLY OF UNIFORM SIZE ACROSS SAME POOL

• COMBINATION RESERVOIRS MAY HAVE NON-UNIFORM SIZE UNITS

• < 40 ACRES FOR OIL WELLS < 4,000’

• < 80 ACRES FOR OIL WELLS BETWEEN 4,000’ AND 9,990’

OFF-CENTER S/B ACREAGE SIZE

165 10 or 20

330 40 or 80

660 160 or 320

1,320 640

OKLAHOMA OFF-CENTER SETBACK / ACREAGE SIZE RULE

FOR SPACING UNITS

DRILLING & SPACING UNIT GENERAL REQUIREMENTS

• > 160 ACRE UNIT HOLDS LEASE ACREAGE OUTSIDE OF UNIT FOR ONLY 90 DAYS AFTER END OF TERM

• TOTAL UNIT ACRES LIMITED TO 640 ACRES WITH 10% TOLERANCE

• NO REQUIREMENT UNIT BE SHOWN UNDERLAIN ENTIRELY BY PAY FOR FULL ALLOWABLE

OKLAHOMA

LOCATION EXCEPTION

OKLAHOMA

INCREASED DENSITY WELL

OKLAHOMA

FORCED POOLING IN DRILLING AND SPACING UNITS

OKLAHOMA

FIELD-WIDE POOLING

KANSAS WELL SPACING AND FIELD-WIDE POOLING LAW

• General Spacing and Oil Unit Rules

• Well Spacing and Basic Proration Orders –UNIT ACREAGE TO BE SHOWN REASONABLY PRODUCTIVE

• Location Exceptions -- YES

• NO General Compulsory Pooling Law

• Field-wide Pooling - YES

KANSAS BASIC PRORATION ORDER MODEL

LOCATION EXCEPTIONS METHODS

• STANDARD ADMINISTRATIVE APPLICATION • BPO “SLIDING SCALE” WITHOUT APPLICATION

BPO STANDARD GAS WELL SETBACK -> 1250’

WELL LOCATION TO W/IN 330’ OF UNIT LINE

DIVIDE DISTANCE FROM LINE BY 1250’,

THEN MULTIPLY QUOTIENT BY INITIAL RATE

TO DETERMINE PENALTY ON PRODUCTION

SUBJECT TO STATEWIDE OVERAGE RULE

LOCATION EXCEPTION METHODS

ALTERNATE TRACT UNITS

• Novel feature of large gas field BPOs in Kansas - ATUs• Combine adjoining tracts from existing units to form new

640-acre ATU – either 4 X 160 acres or 2 X 320 acres• One ATU well drilled as near center of ATU as practical• Existing units contributing tracts share in ATU production• Does not affect allocation from unit wells in existing units• Effort to drill in “corners” and along boundary lines not

drained by existing production• Fairer to competing interests than standard location

exceptions

ALTERNATE TRACT UNIT (4 X 160 ACRES)

ALTERNATE TRACT UNIT (2 X 320 ACRES)

LOUISIANA WELL SPACING AND POOLING LAW

• Unitization – Drilling and Production Units

• Field-wide “(Reservoirwide”) Units

• Unitization and Equity among Unit Interests

• Well Spacing

• Limited Location Exceptions

• Replacement (“Substitute Unit”) Wells

• Increased Density (“Alternate Unit”) Wells

LOUISIANA GENERAL SPACING RULE

TEXAS WELL SPACING AND POOLING LAW

• Well Spacing and Density (Acreage Requirement)

• Compulsory Pooling in Texas -- Rare

• Voluntary Field-wide Unitization Statute w/o Compulsory Pooling Provision by Vote or Otherwise

SPACING RULE (From Line-

Apart)

ACREAGE REQUIREMENT

150 – 300 2

200 – 400 4

330 – 660 10

330 – 933 20

467 – 933 20

467 – 1200 40

660 – 1320 40

TEXAS GENERAL SETBACK / ACREAGE SIZE RULE

Texas Compulsory Pooling

• Voluntary pooling strongly favored

• Forced pooling only after voluntary efforts prove futile and several prerequisites met

• Only allowed ~100 times since 1965

• Limited to < 160-acre oil units / < 640-acre gas units

• Voluntary unitization statute for EOR or gas recycling has no compulsory clause

COLORADO WELL SPACING & POOLING LAW

• Well Spacing – > 2500’ deep: 600’ from lease line / 1200’ from well in same pool; <2500’ deep: 200’ from line / 300’ apart

• Drilling Units by Order – drained by 1 well

• Location Exception – waiver>variance>hrg

• Density Drilling – no set unit size / “area”

• Forced Pooling and Field-wide Unitization

NOTICE REQUIREMENTS

• DIFFER FROM STATE TO STATE - TIME

• PERSONAL NOTICE TO INTERESTED PARTIES AND PUBLICATION NOTICE VIA NEWSPAPERS IN COUNTIES OF AGENCY AND LAND AT ISSUE

• MULANE STANDARD ESSENTIAL FOR CONSTITUTIONAL SUFFICIENCY AS TO OPPORTUNITY TO APPEAR & HR’G

NOTICE REQUIREMENTS

MULANE STANDARD –

THAT NOTICE REASONABLE UNDER THE CIRCUMSTANCES CALCULATED TO APPRISE A PROPERTY OWNER OF HIS RIGHT TO APPEAR AND BE HEARD AS TO POTENTIAL ADVERSE LEGAL EFFECT ON HIS PROPERY RIGHTS AS A MATTER OF DUE PROCESS

CONCLUDING COMMENTS

QUESTIONS?