Pooling in Texas - Part 3

If you have not done so, go back and read the two blogs posts that I penned earlier to set you up for this article.

 

The Rule of Capture

The Basics of Pooling in Texas

 

This blog will have to with voluntary pooled units in Texas.

 

First, remember that in order to have a pooling transaction (that is primary production and non-MIPA) in Texas, there must be a contract.  The oil and gas lease form that provides for pooling is by far the most common contract.

 

In the pooling transaction, a cross conveyance of minerals between the owners in the pool is accomplished so that the Operator can treat the pooled unit as a single lease for the purposes of drilling and development.  However, remember, if there is no contract, your interest cannot be pooled.

 

For an example,

Situation 1

 

Buddy  1/2 MI in 40 ac    = 20 net acres (unleased)

Sam 1/2 MI in 40 ac        = 20 net acres (leased)   20% lease royalty

Bill  1/1 MI in 160 ac        =160 net acres (leased) 25% lease royalty

Unit size        200 ac (only 180 leased and able to be pooled).

 

Net Revenue Interest for all owners

 

Buddy                                0%

Sam   20/200 x .2            2%

Bill  160/200 x .25          20%

Total Landowner Roy      22%

 

Operator 100 - 22% = 78% NRI

 

NOW, let us take the same situation with Buddy being leased at 20% royalty

 

Situation 2

 

Buddy  1/2 MI in 40 ac    = 20 net acres (leased)  20% lease royalty

Sam 1/2 MI in 40 ac        = 20 net acres (leased)   20% lease royalty

Bill  1/1 MI in 160 ac        =160 net acres (leased) 25% lease royalty

Unit size                               200 ac (gross and net mineral acres)

 

Net Revenue Interest for all owners

 

Buddy  20/200 x .2          2%

Sam   20/200 x .2            2%

Bill  160/200 x .25          20%

Total Landowner Roy      24%

 

Operator 100 - 24% = 76% NRI

 

WHERE IS THE RUB?

 

In Situation 1, the landowner's share of production is based on unit size, rather than net acres in the unit, as it SHOULD be.   Situation 2 is the perfect world, where all interests in the gross acreage of the unit are leased.

 

FOR IT TO BE FAIR, the landowner's royalty should be computed on net mineral acres in the unit, NOT gross acreage assigned to the unit, like this modification of Situation 1:

 

Situation 3:

 

Buddy  1/2 MI in 40 ac    = 20 net acres (unleased)

Sam 1/2 MI in 40 ac        = 20 net acres (leased)   20% lease royalty

Bill  1/1 MI in 160 ac        =160 net acres (leased) 25% lease royalty

Unit size        Gross 200 ac, 180 net acres in unit

 

Net Revenue Interest for all owners

 

Buddy                                0%

Sam   20/180x .2            2.222222%

Bill  160/180x .25          22.22222%

Total Landowner Roy      24.44444%

 

Operator 100 - 24.4444% = 75.5555% NRI

 

Therefore the Operator benefits by a gross share of production of 2.4444% by not leasing Buddy and cutting his interest out of the unit.

Sam and Bill's monthly revenue is only 90% of the revenue if the pooling allocation is not on net pooled acres.

 

HERE IS ANOTHER RUB:

 

And one not so easy to determine.  You would have to run title or see the complete title opinion to find out.  The same exact effect will happen when non-drillsite NPRI owners have not ratified the lease or unit agreement to allow pooling.

 

I have had varying degrees of success in getting language in my client's lease form to address this unfair pooling formula in the conventional lease forms.  To my knowledge, I am the only proponent of this equitable pooling formula. 

Talk to your oil and gas professional for lease form or clause suggestions.

 

Best,

Buddy Cotten

Mineral Management