Statutory Pooling in Colorado: Overview and Practical Tips. DODOA July 18, 2016

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1 Statutory Pooling in Colorado: Overview and Practical Tips DODOA July 18, 2016 PRESENTATION BY: NANCY I. MCDONALD, CPL, ANADARKO PETROLEUM CORPORATION JAMIE L. JOST, MANAGING SHAREHOLDER, JOST ENERGY LAW, P.C.

2 (GRAPHIC COMING.)

3 Statutory Pooling Topics for Discussion Why Statutory Pool and What Does It Do? Two Events of Statutory Pooling Statutory Pooling Statutory Requirements C.R.S COGCC Rule Requirements Rule 530 Statutory Pooling Process Internal: Company Land Department External: Practitioner and Commission

4 Two Events of Statutory Pooling 1 st Event Pool all interests in a unit Meaning, pool all of the owners underlying the spacing unit for orderly development of the hydrocarbons. Protects trespass claims IF you are NOT drilling through the unleased leasehold. Protects correlative rights. Provides for statutory allocation of operating expenses and revenues in the absence of private agreements. 2 nd Event Apply Cost Recovery Penalties Meaning, all non-consenting parties are penalized for not sharing in their proportionate risk in drilling a well. Must have a COGCC Order confirming that all statutory regulations have been met and the well will be pooled as prescribed by statute. DO NOT FORGET CAN ALWAYS TRY TO VOLUNTARY POOL

5 Statutory Pooling C.R.S (6) allows the COGCC to enter an order for pooling when: A drilling and spacing unit, an approved wellbore spacing unit, or a designated wellbore spacing unit under COGCC Rule 318A.a(4)(C), has been established by the COGCC for the subject lands; A proper COGCC Application for Pooling has been filed with the COGCC; and Notice and a hearing is provided to the proper interested parties.

6 Statutory Pooling C.R.S (7) allows an operator and the consenting parties to recover certain costs from nonconsenting owners in a subject well as follows: 100% of the non-consenting owner s share of the costs of surface equipment beyond the wellhead connections 100% of the non-consenting owner s share of the costs of operating the well commencing with first production and continuing until such costs are recovered 200% of the costs and expenses of drilling and completion costs which, effectively, covers all preparatory work for the wellsite (including rights-of-ways, initial staking and survey, and cost of equipment for the well)

7 Statutory Pooling C.R.S (7)(a) also: Allows the consenting owners in a well to recover their proportionate share of the costs from the non-consenting owners share of production until such costs are fully reimbursed States that, once the consenting owner s proportionate share of the costs are recovered, then the non-consenting owner is entitled to own and receive its proportionate share of production from the well and will be liable for future well costs as if it had originally participated

8 Statutory Pooling C.R.S (7)(c) and (d) addresses an operator s responsibility to a non-consenting, unleased mineral interest owner: Must make an offer to lease to the unleased mineral interest owner An unleased mineral interest owner is deemed to have a 12.5% landowner s proportionate royalty until the consenting parties recover their costs of the well (under the 100%/200% cost recovery provision) Once the consenting parties costs are recovered, the non-consenting owner owns its proportionate 8/8ths share of the well, surface facilities, and production and shall also be liable for future costs as if it had originally agreed to the well

9 COGCC Rule 530.a. A Pooling Application can be filed: Before or after the drilling of a well If applying after the well is drilled, Operator should ensure that the Application applies to the date earliest costs are associated with the well When an owner fails or refuses to bear its share of the costs and risks of drilling and operating the well or to lease its minerals Once filed and approved by the COGCC, the involuntary pooling order issued is retroactive to the date the application is filed with the COGCC, unless the payor agrees otherwise. The unless the payor agrees otherwise allows the operator to determine, at its discretion, when it chooses the involuntary pooling order to become effective.

10 COGCC Rule 530.b. Defines non-consenting owner If an owner does not elect in writing to participate in the costs of the well within 35 days of receiving the following information, then the COGCC deems that owner to be a nonconsenting owner. The following must be in the well proposal: The location and objective depth of the well The estimated drilling and completion cost of the well (authority for expenditure AFE is industry practice); and The estimated spud date for the well or range of time within which spudding is to occur.

11 COGCC Rule 530.c. Defines unleased mineral interest owners as non-consenting owners If an unleased mineral interest owner has failed or refused to accept an offer to lease made by the operator within 35 days of receiving an offer to lease, then the COGCC will deem the unleased owner a non-consenting owner. The COGCC will look at the following lease terms to determine if the lease is reasonable : Date of lease and primary term Annual rental per acre Bonus payment Mineral interest royalty Such other lease terms as may be relevant.

12 COGCC Rule 507.b.(2) Rule 507.b(2) sets forth the notice requirements for Pooling Applications. In any Pooling action, the operator MUST notify: Working interest owners Unleased mineral interest owners Royalty interest owners ONLY notify those with any interest in the mineral estate in the pooled spacing unit It is not required to notify overriding royalty interest owners

13 Summary of Pooling Pre-Requisites Approved drilling and spacing unit or a designated wellbore spacing unit (only under 318A.e.) Compliance with Rule 530.b. Mailing of proposal to drill a well or wells within the designated spacing unit with appropriate elections including an AFE setting out costs to drill and complete, and the required well information. Compliance with Rule 530.c. Mailing of offer to lease (and/or purchase to any unleased mineral interest owner in spacing unit) Timing of mailings must occur, at a minimum, 35 days prior to the protest date for any applications set forth by the COGCC.

14 Statutory Pooling Timing Pre-Filing Tasks: Internal Operator gathering of title to prepare applications Application Preparation: Typically 1-2 days with drafting, review and approval Once filed, 6 weeks 2 months If unprotested, then should not be continued and will be heard on the intended hearing date If protested, then may be continued to next COGCC date COGCC Hearings are approximately 6-7 weeks apart

15 COGCC Hearing Schedule Balance of 2016 Deadlines

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17 The Landman at work.

18 What initiates the need for a Statutory Pooling? Company perspective Summary Leases that have insufficient pooling provisions to allow for voluntary pooling Unleased Mineral Owners Unlocateable Working Interests Owners Non Consenting working interest owners that refuse to sign/make an election Timing of Company activities & paperwork

19 Leases that need an Amendment to the Pooling clause Review all leases in the spacing unit of each well Determine if the language allows for the pooling of oil and natural gas to the size required for the anticipated spacing unit. Look for governmental authority language Each lease needs to be examined thoroughly for limitations (examples) Pooling for natural gas only at 640 acres; no mention of oil pooing and limited acreage allowed. Old 1970 leases have unit pooling language as if a Federal Unit; GWA does not have federal units Basin to basin may change

20 Documents needed to Amend the Lease Letter to the Lessor explaining the reason for the Amendment Amendment to the Lease replacing the pooling clause (refer to the old clause # and replace it or delete and give it a new # i.e. 13.A.) Amendment to the Lease inserting a sufficient pooling clause if there is no pooling provision. All royalty owners under the lease must sign the amendment or the lease is NOT fully amended. Make sure the Amendments are recorded in the county once the signatures are obtained. **Upon approval of a COGCC pooling order, there is still a risk to an operator of a breach of contract claim. COGCC cannot amend a lease; the pooling order allows the operator to pull in the party s lease; that is it.

21 Lease Pooling Provision

22 Lease Pooling Amendment

23 Cannot obtain a Lease Amendment? Voluntary Pooling A Voluntary Pooling Agreement (VPA) is a contract between the Operator and the specific lessor or working interest owner. It is done on a spacing unit or well basis. It does NOT amend the lease so you need to obtain a VPA for every spacing unit where the lease is pooled. Make sure the VPA is recorded in the county. **If a lease cannot be amended or the parties will not sign a VPA, you must go the statutory pooling avenue. If not, you risk a claim by the royalty owners of a disproportionate revenue allocation of the spacing unit.

24 Recorded Voluntary Pooling

25 Unlocateable/Unresponsive Working Interest Owners Once the working interest owners are determined, you may find you have parties who are unlocateable (defunct company, no chain of title). You may run a grantor/grantee search and find possible heirs but without probate, no marketable title. You must send your 35 day well notification, your well proposal and AFE. At this point you may decide to NOT send the JOA and AFE. It is not required by the COGCC (example: <1% working interest) If unlocateable, the documentation will come back. Keep it for your records for statutory pooling. These parties will be statutorily pooled at 100%/200%. **If you can find these folks and have cleared title by the time you drill and/or complete the well (revenue stream starts), do so. Otherwise, $$ will be put into suspense and must be escheated to the State. Try to avoid this.

26 Working Interest Owners who won t sign paperwork A. No response to elections Once the working interest owners are determined, you may find you have parties who will not sign paperwork (AFE and election). They are in title; may even be in older wells. Theses parties will be statutorily pooled at 100%/200%. B. Unleased working interests owners Try to lease these folks up. Some do not realize they have the minerals and have never leased (small parcels, usually in subdivisions) Try to buy their interest. If they won t lease, won t sell their interest and/or won t sign paperwork they should be statutorily pooled at100%/200%. They will receive a 12.5% Lessor Royalty until payout. Be careful: you will be trespassing if you drill through their minerals without a lease and without a pooling order.

27 What is needed to provide to the Commission Counsel preparing the Filings? Landman Researches and Obtains the following information: Legal Description and Size of unit Surface Hole Location/Bottom Hole Location Target Formation(s) Notice List: Working Interest Owners Unleased Mineral Interest Owners Royalty Interest Owners Documents: In GWA 318A 30-day designation letters Election Letter & AFE 35-day letters List of parties who may be subject to cost recovery penalties (*) Offer to Lease (if UMIO) and/or purchase

28 Commission Counsel gathers information to file with COGCC

29 What is needed to provide to the Commission Counsel preparing the Filings? Application Preparation Process Operator sends request for application to Commission counsel (i.e. Jost Energy Law, PC) Commission counsel prepares application (Companies utilize external commission counsel to assist with this process as it requires expertise and time.) Draft Pooling Application and Notice of Hearing provided to Operator for review and approval Pooling Application and Notice of Hearing Includes: Applicable COGCC Orders Legal Description and Size of unit Target Formation(s) Request for Application of Non-consent Penalties Notice List (WIO, UMIO, RIO)

30 Pooling Application Procedures Submit Final Pooling Application and Draft Notice of Hearing to COGCC Obtain Final Notice of Hearing from COGCC for Mailing and Publication Mail Notice of Hearing to all parties on Notice List (20 days prior to hearing) Publish Notice of Hearing in Denver Daily Journal and Local Paper (10 days prior to hearing) Determine if any protests are filed (~ 10 days prior to hearing)

31 Pooling Application Procedures Unprotested Applications If no protests, then prepare Rule 511 Motion, Testimony and Exhibits to submit to COGCC Rule 511 Motion for Approval without a Hearing Written Testimony and Exhibits from Land Witness (i.e. Landman) Commission counsel drafts Landman Testimony and prepares exhibit packet Exhibits: Well Location Certificate List of Parties Pooled List denotes parties subject to non-consent penalties Election Letter sent to WIO and UMIO AFE sent to WIO and UMIO Statement that all UMIO received an offer to lease prior to hearing Draft Pooling Order Submit to COGCC approximately days prior to hearing COGCC Hearing Staff Reviews Application and Nine-Member Commission approves unanimously on Consent Agenda

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33 Pooling Application Procedures Protested Applications If protested, then prepare for full Commission hearing: Attempt to resolve Protest Determine if Pooling Application can be continued to allow parties and staff additional time to resolve protest Attend Pre-Hearing Conference with COGCC Hearing Staff Determine if any Pre-Hearing Motions are Necessary If so, prepare and file any pre-hearing motions Prepare and File Pre-Hearing Statement and Proposed Draft Order Prepare Witnesses for Hearing: Land Witness Live Testimony and Exhibits Hold Hearing on Pooling Application and obtain decision from COGCC

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36 Questions?

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38 Thank You! Nancy McDonald CPL MBA Staff Landman, DJ Basin Anadarko Petroleum Corporation Kerr-McGee Oil & Gas Onshore LLC th Street, Suite 1800 Denver, CO Direct: Jamie L. Jost Managing Shareholder Jost Energy Law, P.C th Street, Suite 370 Denver, CO Main: