First Impression of the Forced Fieldwide Unitization Bill HB 3586
Just so nobody gets confused with my position on Fieldwide Unitization, I am fully in favor of Fieldwide Unitization. Let's just call it FWU for short. You would have to be nuts to not be in favor of Fieldwide Unitization. The potential exists to take a 100 mmbbl oil field and get another 20 mmbbl out of it. Maximum Economic Ultimate recovery is what we all want.
The normal course of events on oil fields is that wells are drilled and they hopefully flow naturally, with natural pressure pushing the oil up to the surface, put in tank batteries and sold.
After a while, the reservoir pressure is not high enough to bring the oil to the surface. There are several different ways reservoir pressure works, water drive, gas drive and combination drive mechanisms come to mind. But anyway, the oil wells are put on a pump jack. Oil is sucked out of the ground like you are sipping an Icee, put in the now rusting tank batteries and sold. This is called secondary recovery.
The wells are reworked over several times until they are just barely producing.
Here comes tertiary recovery. The is where FWU comes in. EXCEPT in this bill, I don't see where you must have secondary recovery prior to tertiary recovery. It may be addressed, but if it is not, that is a real problem for me.
New wells are drilled to inject CO2 or water into the reservoir to re-pressurize the formation so that the oil begins to flow again. There is an advantage to CO2. It is miscible with the oil (forms a homogeneous mixture). Remember, Oil and Water don't mix. There may be as many as 4 injection wells for every producing well (this is called a 5 spot pattern).
My first impression is that a supermajority of working interest owners and royalty owners and surface owners is NOT a requirement. They (Doonesbury Resources-I will get into that later) only have to buy leases, or acquire assignments or purchase production on 70% of the collective owners. That figure should be MUCH higher, if this bill should pass. It should be in the neighborhood of 85%. That figure is consistent with other states that have Forced Fieldwide Unitization (FFWU).
The bill is fair to unleased mineral interest owners. You pay 5/6 of the costs to receive 6/6 of the production. To give you an idea how good this is, if you wanted to drill your own well on your own minerals, you would pay 100% of the costs to receive 100% of the production. This bill allows an unleased mineral interest owner to actually promote the unit operator for a carried 1/6th. Pretty good deal. A carried 1/4 would be much better.
If the FWU is on an old oil field, it has old leases still in effect and those 1/8 royalties are still in place. This is what is going to make it super economic for the unit operator.
Shell Oil Company made a tremendous CO2 discovery on the Jackson Dome, near Jackson, Mississippi in the early 70's. There is not a huge market for CO2, other than to put fizz in cokes. So Shell decided to re-assemble the Little Creek, Mallilieu and McComb fields to use a miscible CO2 flood. I was working for Shell at the time and worked on the project.
Shell later sold everything to Denbury Resources. The CO2 and the fields.
So here we have a FFWU bill that starts talking about CO2 storage? It is almost as if Doonesbury helped write the bill. I am not going to pick on anybody, so I will create a mythical company called Doonesbury.
Doonesbury is an oil operator and also a producer of CO2. If Doonesbury acquired 70% of a field, then they could force everybody in and force them to purchase their CO2. This is where the fox is guarding the hen house. I think CO2 sells for about $1.20 a mcf. Imagine getting 30% of a field paying retail (or maybe a little more) and you are at cost. Makes me think that for the operator who owns the CO2 is going to get such an economic benefit, they could make money and other working interest owners lose money on the deal.
This is one of the things that bothers me. Different working interest owners may have different goals, motivations and thus they are unequally yolked. Smaller Operators are cash flow driven. Larger companies are reserve driven. They can withstand a cash drain to gain reserves. 70% is just way too low.
Where is a good prospect for FWU? The Permian Basin. Shallow oil. About produced out and importantly, lots of minerals owned by the Permanent University Fund and the General Land Office, which of course is exempted from the bill.
The section of the bill that deals with CO2 storage is in there just for Doonesbury Resources. This bill allows Doonsbury to store CO2 at no cost (which means that Doonsbury gets to park its car on your front yard without paying rent).
Philosophically, here is where I am.
1. Fieldwide Unitization is a super good idea.
2. Texas has a law for Voluntary Field Wide Unitization that requires a supermajority of WI and royalty owners. If the threshold is reached, then FWU can begin. BUT, anybody who does not agree with the FWU and does not sign off on the FWU, is NOT subject to the FWU. Seems fair to me.
3. I am a Texan. Therefore I have strong feelings concerning property rights. I do not want the state to tell me what I must do with my minerals. They are MY minerals. I should be able to do with them as I wish.
4. The State's minerals are exempted from this bill. Huh? Here we go again. It's a good idea for the citizens but not a good idea for the State minerals. AGAIN, why is the playing field not level?
5. The portion of the bill concerning CO2 smacks of "pork." It should NOT be in there. There is absolutely no reason for it to be there, other than to accommodate the owners of CO2 at the expense of the surface owner and the mineral owner. Wrong in so many ways.
6. To have the CO2 provider to also be the Unit Operator is just too much of a conflict of interest for me. This is not addressed in the bill.
7. I feel as if market forces should decide when the time is right for FWU. I do not want the State to help me. Fact is, I put my hand ON my knife when I hear is "I am from the government and I am here to help you."
8. The whole notion is counter-intuitive to the concept that (1) I am capable of making my own decisions concerning my assets and (2) I am capable of protecting my correlative rights.
Although I am philosophically in favor of FWU, I cannot support this bill as written. Texas already has a voluntary remedy already in place that requires a supermajority to become effective, but only to those who agree to it.
The real question to me is Why? Is this a problem? Are companies pressuring legislators for this legislation? Have the companies tried to acquire 85% consent and cannot? Do they not have competent landmen? Or is this all about Doonesbury having free storage basins for their CO2?
I will say one thing. A FWU Agreement takes forever to negotiate.
Now that I have called a spade a spade, this does not reflect the opinion of anybody but myself and I am exercising my right of free speech.
Everybody should draw their own conclusions and smile at some of my comments. If you draw the same conclusions as I do, then write, fax or e-mail through their website ALL members of the Energy Resources Committee to begin with. Then your Representative.