Mega units?

Does anybody know what the field rules are for the EFS and how some of these companies are making these 1,000 acre) mega units? I thought it was 640 acres + 10% tolerance but apparently not. Does anybody know the answer to this???

Dear Mr. Chevalier,

The first place to look for an answer is in the pooling provision of your lease form. I suspect that for gas, the lessee may pool the lands covered hereby with other lands, not to exceed 640 acres, plus a tolerance of 10%. If any governmental authority requires or permits larger units than those described to obtain a full allowable, the unit size can be increased to the unit size that the appropriate governmental authority requires of permits.

Here is the problem. The RRC commission my REQUIRE units be of a certain size (in horizontal wells, it is based on a formula based on lateral length plus acreage times a fraction), but the may ALLOW units to be of a size LARGER than those required to obtain a full allowable.

In decent lease forms, the lessor agrees to allow to pool their acreage of XX acres, or larger units if REQUIRED to obtain a full allowable.

Read your lease form and tell me what it says. (Probably paragraph 4).

The industry is just beginning to drill ultra-long laterals and has proven it works up in the Bakken Shale where 1280-acre spacing is common. We're now beginning to see that mindset shift to the gas plays and other liquids-rich plays (Niobrara, Eagle Ford, Woodford, Cana-Woodford, and the Haynesville)

While you are diluted early on with larger units remember that you are getting a piece of a bigger pie as well. That allows you to have ownership in a larger number of wells over the long-term instead of having all your eggs in one basket.

Regards,

R.T.

Mr. Dukes, sorry but I have to disagree on this. If you are actually in the producing zone and they are paying others with proceeds from your well who are not, it looks alot different. The follow on wells may not be drilled for 20 years, or ever. This is how I described it elsewhere. I will take 80% of your personal paycheck for ten years. In ten years, when the second well is drilled, you get to keep the proper amount you should have been paid all along. Ten years later, if and I say if, they drill a third well, you begin to get back the money you should have been paid for the first ten years. If this sounds good to you I will set up an account and you can start sending 80% of your earnings. Note that I do not promise you will get anything back. Just as I have no promise that I will ever see money from a second or third wells in my spacing that is draining someone elses minerals. I will have had the use of your money interest free for 20 years. But you are getting a slice of a bigger pie? Each person only has so many acres. Unless they discover your neighbor has more oil than you did there will be no increase. I personally have a couple of wells on 1280’s that are over 4 years old in ND. From looking at operators own numbers for lease expirations, they barely have enough rigs to keep ahead of lease expirations for the next 2 years. With a cost of up to a million dollars or more to lease a spacing and worse yet the climb in royalty rates, operators will not stop trying to hold by production the acres they have leased which are about to expire, to backtrack and drill a second well in my spacings. Operators are also scrambling to lease yet more acres. Operators are competing to get as much leased and held by production as they can because if they don’t, someone else will, and an oil co is nothing without acres to drill. I am certainly not thrilled with the fact that my money has been taken to pay others and I may be lucky to see my money’s return within 20 years with no interest. Before anyone says, you agreed to the pooling in the lease, I’d like to inform you I am unleased and signed no such agreement. If what is happening to me is not theft I should be able to walk into a bank vault and help myself, without asking. I’m good for it. I’ll bring it back in a decade or two. Will they be understanding? Or will I be in prison?

R.W.

so what is the remedy to this money draining problem, i have been trying for sliding royalty's. but the answers are always NO. larger royalty's above 3/16 are yust about as tough to get to. so what is the soulution to this dilema. thanks in advance for any ideas.

BJ

Mr. DeWitt, If you can’t band together with others in your spacing/s to create leverage, or have enough acres of your own to constitute leverage, there is very little to be done. In one case my operator told me several lies repeatedly and annoyed me to the point I didn’t want to do business with him, period. I told them so. I told them that my default position was being carried interest, which I would not recommend outside of ND and may not be a good idea if production in your area is marginal. As I have said before, operators hate carrying someones interest in ND. It caps the amount of money they can make off your oil if they make a good well to the 50% risk penalty for your portion of the well assessed against your production only. After the well and penalty are paid off you get 100% royalty less the cost of production. Being carried in ND you get a royalty of the weighted average of whatever everyone else leased for in the spacing or a cost free royalty of 16% whichever the operator elects, FROM THE FIRST BARREL ! 16% cost free is better than a lease I had for 19% with costs. I know this because my brother has exactly the same interest as I, we have the same taxes taken out, his check at 16% cost free is larger than mine for 19% with costs. What this means to me is that in ND you do not have to worry about being shut out and can negotiate to the bitter end. If you get a bad well that barely pays for itself, being leased will not make it a good deal. Yes you will have lost out on the bonus money. Yes they could attach a lien to your minerals production if the well doesn’t recover 150% of drilling cost, but if they don’t recover 150% of the drilling cost, I doubt anyone will be drilling another well there in our lifetimes, and the minerals are still yours, they just have a lien attached to their production. I’m not recommending anyone go carried interest, as I’m sure it will involve more work than the average person would want to do, but you can use it as a safety net, knowing that whatever happens you will not lose out totally except in the case of a dry well, which isn’t very likely in the Bakken. If you get a decent well you could stand to make alot more money that would have gone to the operator, being carried. If nothing else carried interest can be a lever. The better the production in the area the better it will work. You have to educate yourself about it if you want it to work for you. I have heard the most outrageous lies from landmen and operators about carried interest, “that you get nothing until the well and penalty are paid for”, " the penalty will be 300%" ad nauseum. I think the whole point is the operator knew I was dealing with other lease agents and considering being carried, so they made me an offer of $3,000 per acre and 20% royalty, because they knew my acres were lost to them if they didn’t do something! In the end I went carried anyway. I like money as much or more than the next person, but I decided I didn’t need the 28,600 enough to go into business with people who continuously lie to me. I think the wells will do ok. I and my brother each have 0.595% of each of the 3 wells they drilled off of 2 eco pads in the half section with supposedly a 4th on the way. I may not sign another lease. Being carried has it’s advantages, they can’t slip any nasty little clauses in if there is no lease. This is what I did and why. It worked for me because I believed in it. Someone who wasn’t as stubborn as I would have had an okay lease out of it. I hope this helps you. If not I think it is at least food for thought. Good luck with your minerals and prospective lease and well.

RW

Thanks for the reply, i will bang it around some more and think about it. they are drilling 2 sections to the east of me, and most is leased, and drilling to the west, north, and south, i am right smack in the middle of it all.

Later BJ

Dear Mr. Chevalier,

The discussion has drifted away from Texas field rules on horizontal wells.

I almost hate to post a portion of the pooling provision for my Texas Lease Form, but I will so that you and other Texas landowners can be informed on what other sophisticated landowners are able to negotiate with the operator. The reason that I hesitate to post a portion of the provision, is that this is not a clause that can just be dropped into a lease form. It has been designed to harmonize with every other provision of the Lease Form.

The following is for informational purposes only and is not to be construed as legal advice. Always seek the council of qualified professionals that are well experienced in oil and gas matters. Having said that,

5.3 Earned Acreage Unit. A "Earned Acreage Unit," for purposes of this Lease, is a designated area of land around a well having the minimum amount of acreage necessary to obtain a regular permit for the drilling of a well, as required by the field rules of the Railroad Commission of Texas applicable to the field from which such well is producing. Each Earned Acreage Unit shall be limited in depth to one hundred (100) feet below the deepest perforation in any well on such Earned Acreage Unit.

5.4 Maximum Sizes of Earned Acreage Unit. Notwithstanding any density rules applicable to any well, however, no Earned Acreage Unit assigned to any well shall exceed the following sizes:

(i) If the well is classified as a vertical oil well under the Rules and Regulations of the Railroad Commission then in effect, the maximum size of the Earned Acreage Unit shall be forty (40) acres.

(ii) If the well is classified as a vertical gas well under the Rules and Regulations of the Railroad Commission of Texas then in effect, the maximum size of the Earned Acreage Unit shall be one hundred sixty (160) acres.

(iii) If the well is classified as a horizontal oil well under the Rules and Regulations of the Railroad Commission then in effect, then the maximum size of the Earned Acreage Unit shall be determined by the following formula: 40 + .024 X L, where L = the length of the horizontal lateral component of the drainhole of the well, from the first take point to the last take point.

(iv) If the well is classified as a horizontal gas well under the Rules and Regulations of the Railroad Commission then in effect, then the maximum size of the Earned Acreage Unit shall be determined by the following formula: 160 + .024 X L, where L = the length of the horizontal lateral component of the drainhole of the well, from the first take point to the last take point.

Couple this clause with other sophisticated clauses, such as continuous drilling and development - even within the primary term - and you have a form that allows the operator to operate and the mineral owner to have his minerals exploited as quickly as possible, with the goal to only have productive acreage maintained by production.

RT,

They may call them spacing units, but they are not. They are production or economic zones created by the Industrial Commission for the sole benefit of the oil industry.

In Texas (by the Grace of God), the spacing unit is what can reasonably be drained by ONE well (in theory). Having economic zones created by act of idiocy allows the Operator to drill one well every two square miles of leases and maintains that acreage by production until he comes in to infill the economic zone. (I will not even call them a spacing unit).

This allows an operator with 3 rigs running to HBP (with 45 day average drill, transport, rig up and rig down time) 372,480 acres of acreage - IN ONE YEAR. And then come back in at their pleasure to drill out the production zones.

How about you get to hold what is proven productive by wellbore? Is that so unreasonable? But the state is so backward, they still have 1/6th on the state lease form, so what do you expect?

Ultra long laterals are great! But have the spacing related to what the lateral wellbore drains. 1280 acres is not what one lateral drains. If the oil company has treated the mineral owners right and needs a new lease or extension to the existing one, let them buy a new lease from the mineral owner, or the state. All this does is add MORE money to the local economy. Somebody tell me where I am off-base.

Somebody in North Dakota print this out and send it to your local newspaper and the state newspaper and the TV stations. I will give interviews.

Reagan "R.T." Dukes said:

The industry is just beginning to drill ultra-long laterals and has proven it works up in the Bakken Shale where 1280-acre spacing is common. We're now beginning to see that mindset shift to the gas plays and other liquids-rich plays (Niobrara, Eagle Ford, Woodford, Cana-Woodford, and the Haynesville)

While you are diluted early on with larger units remember that you are getting a piece of a bigger pie as well. That allows you to have ownership in a larger number of wells over the long-term instead of having all your eggs in one basket.

Regards,

R.T.

Thanks guys,

I'd love to hear your thoughts on how the industry/states could remedy this in areas where a long lateral is needed to get an economic well. Many of the Bakken wells would not have been economic over the past several years without the long laterals and it looks like several of the gas plays will need them too. Oklahoma recently passed a law that will allow operators to form larger units in shale plays like the Woodford.

Also, what if the stress of the formation requires the wells to be drilled in a direction other than north to south. How would you construct reasonable units when you already have some producing wells in most of these areas?

RT.

That is the problem. Oil and gas does not follow section lines. My point was that the economic unit created was in contravention to drainage patterns.

What you will see in North Dakota someday (if not already) is what is called Band-Aid Units. I might draw a picture of one and upload it some day. The Band Aid Unit shows the senselessness of economic units.

Mr. Dukes, from what I have read operators in ND can already straddle section lines to create a new overlapping spacing that may include some mineral interests and exclude others in affected sections. You have to be able to drill on the line to avoid waste, and it seems ND would let you do anything if you could claim it reduces waste.

Bob, That is the Band Aid Unit.

Crazy.

They must follow Oklahoma thinking.

ND is an Operator's paradise.

Thank you, for the proper term Buddy. I also omitted that these ( band aids ) could be stand up N/S or lay flat E/W. I also agree that it isn’t logical and short sighted policy will probably benefit nobody, not even the operators a few years down the road.