Production Sharing Agreement

Recently I received by mail a Production Sharing Agreement with letter from an oil company representing Delaware Basin Resources LLC. The letter describes the need for horizontal wells to originate on one lease and terminate on a different lease to efficiently recover reserves. It further states that a sharing formula based on my mineral ownership will be multified by a factor based on the number of acres in my sub-tract divided by the total acreage within the Unit lease. This formula will be used for allocation and disbursement of royalties.

I own surface and minerals in Section 7 PSL. It appears that leaseholders in parts of Section 6 and 7 have been sent the same contract.

My current lease is due to expire in the spring of 2017. I have quite a few questions, since this contract, W-9, and Notary page arrived with no prior communication.

Any information about what this PSA actually represents will be appreciated. Is this a new type of agreement? Is it used often? Is there current or planned activity near this area of Reeves County? I will contact an attorney but want to acquire as much knowledge as I can from those who have experience with this type of agreement and what needs to be in the agreement. The allocation factor is described as a fraction with numerator being the number of acres in the sub-tract and the denominator being the total acreage with the Unit Lease for the Sharing Well.

Thank you,


Is this company your lessee? Generally when tracts are joined for a horizontal well, the operator will form a unit and the production will be allocated by acreage. In that case, the operator will file a Declaration of Pooled Unit. Most often a Production Sharing Agreement is used when there are already one or more units on some or all the acreage. It is too hard to take the unit(s) apart and form a new larger unit as royalty decimals will change in existing wells. If you have no production on your tract, then I would guess there is a unit and producing well on some of the other acreage. Most often a PSA allocates revenues by proportion of horizontal well bore between first and last take-points, rather than by acreage. If you have a small tract of 100 acres and your neighbor has 500 acres, then he will get 5/6 of revenues. If the horizontal wellbore is half on you and half on him, then this would be unfair to you. Beware of a PSA which amends the terms of your lease. Are existing wells being excluded? Best for PSA to be limited to one specific well. What if vertical well is drilled on your tract, will that be shared with the other acreage. Will the well hold all your acreage under lease even if only a portion of the acreage is in the well? When will well be drilled? Does this PSA extend the primary term of your lease? There are a lot of issues. You should post section and block involved for more advice.

What happens if you do not sign the production sharing agreement?

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TennisDaze: Thank you so much for sharing your knowledge. It makes more sense to me now and also alerts me to various scenarios involved. I have call into attorney. The property is SE/4 of Section 7, Block C-5, PSL owned by several family members. Delaware Basin Resources LLC is not my lessee nor theirs.

Good question. Thanks

You should contact your lessee and ask if it is participating in the PSA and, if so, for information on the proposed well, permitting, anticipates spud date, length of horizontal wellbore, etc. Also ask if all or any portion of your lease has been assigned to Delaware Basin Resources and/or any other company. Ask for copies of recorded assignments. You can also look at the TexasFile site and look through the deed records for your lease and assignments. It is important to keep track of this information. GIS viewer map on RRC site will help you locate permits and producing wells on your acreage and the other tracts.

LB, The basis for revenue sharing is established by the well permit and unit approved by the RRC in concert with the terms of your lease. To sign a document that may serve to confuse the established procedure for Division Order by well may not be in the best interest of the passive lessor. Texas mineral owners are especially vulnerable to the establishments of unfair distribution due to the multitude of surveys and abstracts in the state.

I understand the need for operators to maximize the efficiency in horizontal well development. That procedure helps the operator tremendously and conserves oil and gas. Let the RRC do its job in permitting Horizontal drilling units. It will learn quickly how to assess the effect of fracking in different areas. It shouldn't be up to the non-technical mineral owner to pre-approve what may be in a unit that has not been applied for.

Wait for a division order then determine your proper revenue sharing situation on a well by well basis.