The Basics of Pooling and Unitization in Oil and Gas Leases

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As with wild animals, the rule of capture with respect to oil and gas actually discourages conservation. To prevent such waste, the common law rule of capture has been modified by state conservation statutes and regulations so that individual actions otherwise allowed under a rule of capture regime are now prohibited by law.

In both ownership in place (i.e. Texas) and nonownership states (i.e. Louisiana), the courts have held that oil and gas conservation statutes trump the common law ownership theories. While oil and gas in situ (i.e. in place), and the right to explore and produce oil and gas, are both regarded as private property, the production of oil and gas has always been treated as being affected by public interest. This public interest is based on the fact that these minerals are non-renewable, that they are immensely beneficial, even necessary, to private and public welfare, and that they constitute an important source of revenue for the state.

Pooling and Unitization in Texas

In Texas, there are five (5) types of oil and gas units:

1. Drilling Unit : The acreage area shown on the Form W-1 application for the permit to drill (i.e. the drilling permit). It is the area shown to establish that the applicant has sufficient unassigned acreage to satisfy the density requirement. The designation of a drilling unit has no title significance;

2. Proration Unit : The acreage designated on a Form P-15 and the attached plat to show the acreage assigned to the well for proration purposes where field rules provide for the setting of allowables on an acreage basis, in whole or in part. The proration unit is designated after the well is drilled and completed, and only productive acreage can be assigned to a proration unit. The designation of a proration unit can be changed at any time. A proration unit has no title significance.

3. Voluntary Pooled Unit : The most common unit in Texas, is a unit formed by the voluntary joiner of separate ownership interests. A voluntary pooled unit is created by one of three mechanisms:

  • The community lease;
  • Pooling under a lease pooling clause;
  • Pooling by agreement of the interest owners in the property to be pooled. Any amount of acreage can be pooled by such agreement.

4. Pooling and Cooperative Agreements : These are Commission (Texas Railroad Commission) approved units necessary to effect secondary recovery operations for oil or gas including recycling, repressuring, water flooding, and gas repressurizing. These pooled units do not bind a landowner, royalty owner, lessor, lessee, overriding royalty owner, or any other person who does not execute the cooperative agreement.

5. Forced Pooling under the Mineral Interest Pooling Act (MIPA) : Under this act, the Railroad Commission may force pool certain tracts under limited circumstances.

Inasmuch as the voluntary pooled unit is by FAR the most commonly seen mechanism for the combining of lands to promote conservation and prevent the drilling of unnecessary wells, that is where we are going to spend the balance of our talk.

Voluntary pooling by the lessee became very important during WWII to prevent the drilling of unnecessary wells in order to conserve steel and other materials for the war effort.

THE BASICS

Pooling is the bringing together of two or more tracts to form a drillsite in connection with a program of uniform well spacing in order to develop the lands as if they were under a single lease.

There is no equitable pooling in Texas. A tract or interest not in the drillsite, but within the drilling or proration unit, is not entitled to share in the production as a matter of equity pursuant to judicial decree, even if these lands are used for allowable purposes.

By inclusion of a pooling clause in the oil and gas lease, the lessor constitutes the lessee agent with limited authority to effect a cross conveyance of the interests among other owners in a pooled unit upon the terms stated in the pooling clause. By the lessee being the agent of the lessor, the lessee standards in his pooling are measured by the standard of good faith.

Section 3 to follow....The Pooling Transaction
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Mr. Cotton, as a 26.167 net mineral acre owner on a 78.5 tract, is it in my best interest to “pool?” And, if it is, what paragraph langugage should I ensure is contained within the lease?

Thank you,

Kenny Love

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We were recently contacted by a landman who wanted us to ratify the lease underwhich we only own a small NPRI. Dad didnt recall ever being asked for a ratification before and the lease looks fine to us. I’ve heard the company must have every NPRI ratified or they cannot pool or unitize the lease. If an NPRI now holds this degree of power shouldnt an NPRI expect to be compensated? Or should the company first have to disclose to the NPRI what it intends to pool. I never thought the NPRI’s had any say so at all - whats going on?

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Ed,

Give me a call and I will give you some advice.

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I have been contacted by an oil and gas company to participate in a natural gas well pooling. This pooling consist of 700 acres. I only own 14 acres of this pooling. Apparently everyone else has consented to this pooling and the well has been drilled. I never signed the oil and gas lease. What are my rights? What can I do?

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Buddy, I’ve got a question I’ll bet you can answer. Our lease says that a pooled unit, for a gas well or an oil well with a horizontal drainhole, shall be no greater than 640 acres (plus or minus 10%), unless state regs authorize a larger pooled unit. I figure that this means if the operator pools our small tract with others, to make a 640 acre pooled unit, a single producing well within that 640 acre unit will perpetuate the lease beyond the primary term. My confusion is with the term “proration unit”, which I have read is 80 acres in some nearby counties (we are in Fayette). If the proration unit is 80 acres, does that mean that royalties are paid only to the owners of 80 acres in the unit? Or, rather, does a proration unit only have bearing on how closely wells can be placed without a Rule 37 exception (i.e., no closer than 80 acres unless an exception is granted). Thanks very much for any insight you may offer. JL

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I have a question a little different than the others. We were contacted by a landman who said we owned some mineral rights. Nice surprise:) They had already drilled a well and were pumping oil out of it. That seems a bit strange, but now we are trying to figure out how to calculate what possible proceeds may be so we can make intelligent decisions about how to move forward. My great grandmother had 120 acres. She sold the land but retained 50% of the mineral rights, then handed that down to her heirs. I now have 2.5 net mineral acres. They have taken 40 acres of our 120 and made an 80 acre drill unit. How are we to calculate that? Also, if they increase the number of acres, which I believe they are about to do, won't that diminish the amount of money we receive? I have been trying to figure this out for a month, and I am past frustration. I am so glad to find someone that seems to know what they are talking about.

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Pooling Clause Question

Mr. Cotton,

Regarding an oil and gas lease offer with several signed and unsigned interest owners of two tracts. (Community lease!?) Tract (1) 110 acres, Tract (2) 40 acres, Cass County Texas

Can landman/lessee pool individual (signed majority and unsigned few) interest owners into a Pooling Clause?

Is there (A) pooling of interest owners in the property to be pooled as well as (B) pooling of separate property owned by others? Is there a likelihood of interest owners split into signed and unsigned property divisions and then pooled?

Will it be necessary to have an amendment in my lease agreement to (A) prevent landman/lessee pooling by agreement of majority interest owners in the property to be pooled or (B) to prevent pooling of my owner interest? If so, what amendments should be included? Thank you in advance for replie.

D.Alexander