Pooling in Texas - Part 3

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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.

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.

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Dear Buddy,

My cousins and are hiers to mineral rights in Harrison Co in Texas. We have good contact with each other and we've all been approached by the landman and been sent lease contracts with NFR out of Houston. I found a report from Devon Oil and in the field in question 99% of holes Devon drilled have hit gas. In an email to the landman I posed a couple of simple questions about the number of heirs and the calculation of royalties and he has polietly but securely avoided answering my questions. The royalties are set at 3/16 and I think that seems to be market but I read the contract and identified the problem you describe. I asked him to confirm that the 3/16ths on the entire property gets fully distributed proportionally to those heirs that have been found and that have signed the lease agreement. He hasn't answered my email so I'll do some homework and call him later this week. Any tips?

Best regards,

Peter Collins

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Dear Mr.Collins,

There are clauses which certainly solve the issue. I have personally had varying degrees of success in incorporating the language in a lease form.

Show a real good and trusted professional this blog. Chances are he has never considered the ramifications to pools being based on gross surface acreage.

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Mr. Cotton,

Thanks for your articles reference pooling. I have one question as to the situation 1 above. Does the mineral owner (Buddy) have to have been offered a lease and then he rejects the lease, therefor receive 0% royalty' or can an oil company knowingly lease only half the lands minerals and not offer Buddy a leases so they can keep the royalty from his acreage?

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Dear JBBR,

In situation 1, if (and this was my intention, though not stated), the 40 acres of Tract 1 is non-drillsite. Unleased owner Buddy is out of the gates, gnashing his teeth. He might have a MIPA action, but it would be very difficult to force his way into an unit.

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Buddy,

That is a good example, and I follow the mathematical formula based on these examples. However, consider the following. What if you don't know what the royalty interests are for Buddy and Sam and their property is across the fence from Bill's property and you don't share your royalty interests with them. 1) How they divide up their royalty interests does not effect your undivided interest and your interest is only diluted by that portion of the mineral acreage percentage which they own, thus not effecting the outcome of your royalties, except by reducing the unit percentage by the acres they own? or, 2) Is there still some intervening unknown variable that comes into play that will dilute the royalty interest percentage in the unit that you are entitled...once again, on their property, because your property royalty interest is undivided and is only reduced by the percentage of your mineral acreage percentage in the total pool?

Another question is can an e&p company sub-unitize or pool to a smaller acreage but still keep be bound by the pooling agreement as outlined above or can they discard the pooling agreement, should they sub-unitizing the 644 acres down to 121 acres?

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