Land and Regulatory Issues Related to Horizontal Wells

Transcription

1 Land and Regulatory Issues Related to Horizontal Wells TEXAS MINERAL TITLE COURSE INSTITUTE FOR ENERGY LAW THE CENTER FOR AMERICAN AND INTERNATIONAL LAW H. PHILIP (FLIP) WHITWORTH MAY 2 3, 2013 HOUSTON, TEXAS SCOTT, DOUGLASS & MCCONNICO, L.L.P. ATTORNEYS AT LAW

2 Scope of Presentation RRC Regulation of Horizontal Wells o Introduction to horizontal wells o Statewide Rule 86 o Application of spacing rule (Rule 37) to horizontal wells o Special field rules created for horizontal wells Land/Legal Issues o Trespass Issues o Unpooled/Unleased Interests in wellbore path o Pooling Issues o Retained Acreage Clauses o Production Sharing Agreements 2

3 HISTORICAL BACKGROUND Originally Developed as Directional Slant Hole Wells o From a surface location to a different bottomhole location o East Texas field slant hole drillers Technology Improved to Allow Horizontal Drilling in Target Formation oopen hole no cement/casing in horizontal part of well o1 st utilized in naturally fractured Austin Chalk formation o Statewide Rule 86 enacted when horizontal wells were open hole Major Improvement from Casing, Cementing and Fracture Stimulating Horizontal Wells Within Productive Formation o Rule 86 not amended to address newer cased/cemented/fracked horizontal wells o Special field rules adopted to resolve this problem 3

4 TITLE EXAMINER ALERT! DIFFERENT TYPES OF "UNITS" Major Confusion Caused by Differences May Be Different Results with Different Units What Are These Different Units? Voluntary Pooled Units Force Pooled Units Drilling Units Proration Units Fieldwide/Enhanced Recovery Units Specially Defined Units in the Lease Instruments 4

5 A B C D E F G H I J K L Each separately labeled tract = separate lease Tract F = 40 acre drilling unit Tracts C and F = 80 acre proration unit Tracts B, C, E, F, G, H, J, K = 320 acre voluntary pooled unit Tracts C, F, 80 acre portion of Tract D = 160 acre force pooled unit All Tracts (A-L) = fieldwide/enhanced recovery unit 5

6 RRC Regulation of Horizontal Rules Statewide Rule for Horizontal Wells = Rule 86 opermits assignment of additional acreage to horizontal wells Longer drainhole=greater drainage area=larger proration unit=increased allowable. Some fields have alternative special rules that vary from Rule 86 oprovides that spacing rules apply to all points along a horizontal drainhole. Contemplated open hole horizontal wells; not cased/cemented horizontal wells; 6

7 Rule 86: Definitions Surface Penetration Point Top of Formation Correlative Interval Terminus Horizontal Drainhole Displacement Base of Formation 7

8 RRC Rule 86(d)(1) Maximum Acreage Allocable to Each Horizontal Well Drainhole measured from penetration point to terminus. Density rule for subject field determines which table applies. Acreage assigned under RRC rules is notnecessarily acreage held under applicable leases. 8

9 Rule 86 Add On Acreage Is Permissive, Not Mandatory Rule 86 doesn t require additional acreage assignment o BUT more acreage entitles well to greater allowable Application of Rule 86 is critical in interpreting lease provisions opooling how much acreage may be pooled oretained acreage how much non-pooled acreage may be maintained after expiration of lease s primary term 9

10 Rule 37 Spacing Issues Unique to Horizontal Wells Rule 37: No well may be drilled nearer than 467 from the nearest property line. Rule 86: Rule 37 applies to all points along a horizontal drainhole. 10

11 Spacing Rule Not Applicable to Surface Location PP SL T Wholly or partially unleased lot < minimum spacing distance from surface location (but > than minimum distance from penetration point). No spacing exception required 11

12 Spacing Rule Applies to Entire DrainholeBetween Penetration Point And Terminus Under Statewide Rules PP SL T Wholly or partially unleased lot < minimum spacing distance from drainhole requires spacing exception under statewide rules. 12

13 Take Point Rule and No PerfZones Eliminate Spacing Exception If All Take Points Are at Legal Distances from Property Lines Leaseline Spacing Rule: 330 PP SL 330 T 330 Wholly or partially unleased lot < minimum spacing distance from drainhole does not require spacing exception with no perf zone showing all perforations legal from property lines. 13

14 Other Rule 37 Spacing Issues: No Exception Required Tracts A, B, C, D included in pooled unit Undivided unpooled interest in Tract C only Horizontal drainhole limited to Tract C 14

15 Same Facts, Except Horizontal Well Extends Into and Perforated Under Tract D Perfs Rule 37 spacing exception required for that portion of drainhole on Tract D that is too close to Tract C. 15

16 Special Horizontal Field Rules to Facilitate Horizontal Drilling 0 BetweenWellSpacingRule TakePointRule Off Lease Penetration Point Rule Stacked Lateral Rule BoxRule 16

17 Special Field Rules: Increasing DrainholeLength Application of Rule 86 unduly restricts drainhole exposure of cased and cemented wells to producing formation to avoid Rule 37 spacing exceptions Surface Lease Line 330 PP Top of Producing Formation st Perf Base of Producing Formation If PP is minimum legal distance to lease line (330 ) but 1 st perforation is 300 further away from the leaseline, an additional 300 is not exposed to the producing formation. 17

18 Special Field Rules: Take Point Rule Solution to this problem: Take Point Rule Take Point Rule Originated in Newark, East (Barnett Shale) Field oobjective to increase the length of horizontal well s exposure to producing formation without spacing exceptions oleaseline spacing distance measured from perforations along drainhole for cased and cemented wells, not entire drainhole length. Locations of penetration point or other unperforatedintervals along drainhole irrelevant Authorizes use of No Perf Zones to avoid triggering Rule 37 18

19 SpecialField Rule: Take Point Rule Lease Line Surface Lease Line Cement Top of Shale 100 Perforation Legal at 330 From Lease Line 330 Bottom of Shale

20 Special Field Rule: Off Lease Penetration Point Rule 86(d)(4) Proration Unit Must Include Acreage From Penetration Point to Terminus o May not penetrate field interval outside proration unit o May not include wholly unleased land in proration unit Problem: odrilling curve limitations mean wells drilled from a surface location on a lease cannot be turned to horizontal/completed until a significant distance past the minimum spacing distance from the leaseline. 20

21 Special Field Rule: Off Lease Penetration Point (cont.) Off Lease Penetration Allows Off Lease Penetration of Field Interval, But o No perforation on off-site tract orequires notice to off-site possessory (non-royalty) mineral interest owners oallows longer drainholein horizontal plane in producing formation ooperator must have authority from off lease owners to use their surface/subsurface to produce from a different tract courthouse trespass/interference issue, not RRC issue 21

22 Special Field Rule: Off Lease Penetration Point Offset Tract Lease Line Producing Lease Cement Top of Shale Perforation Legal at 330 From Lease Line 330 Bottom of Shale Regulatory Objective: Maximize exposure of drainhole to producing formation, thereby preventing waste of recoverable hydrocarbons, without requiring unnecessary and burdensome spacing exceptions. 22

23 The Stacked Lateral Rule: Allows Stacked Wells to Be Treated As One 23

24 Box Rule SL PP T Lease Line Horizontal well permitted 330 from north lease line. As long as wellbore between Penetration Point (PP) and Terminus (T) does not extend outside 50 box (---), the well is deemed in compliance with its permit. 24

25 Trespass Issues A B C Penetration Point Correlative Interval Terminus Operator X leases and pools Tracts B and C; Tract A is leased to Operator Y; Tract A s lessor owns surface; Y refuses to pool Tract A with Tracts B and C. 25

26 Whose Consent Is Required? Surface owner? oyes orobinson v. Robbins Petroleum surface of one tract cannot be used for oil and gas operations on another tract without surface owner s permission Mineral owner? o Perhaps not ohumble v. L & G Oil: only if drilling will interfere with right to produce from drillsite tract. oone court suggests yes, due to inevitable damage to subsurface. Chevron v. Howell. 26

27 Unpooled/Unleased Interests In Wellbore Path Issue Arises When Partial Interest is Not Pooled Unleasedor NPRIor Royalty Extremely Common Problem Each Producing Tract Is a Drillsite o Absent agreement, production allocated by mineral ownership of tract where production obtained. Japhet v. McCrae (Tex. Comm. App. 1925) o Problem: How to allocate production to unpooled/unleasedowners from horizontal well producing from several different tracts A B C If Royalty Owner X leases its undivided 50% interest in Tract B to Operator O but with no pooling authority in the lease, how does O account to X for production and royalties? 27

28 Does Confusion of Goods Apply? The doctrine: Party commingling goods must establish each owner s aliquot share with reasonable certainty. Humble v. West (Tex. 1974) Ifconfusion of goods applies to horizontal wells, operator who fails to validly pool interests along drainhole mayhave to pay double royalties if unable to prove to a reasonable probability the volume of production from non-pooled tract onot what is a fair or reasonable allocation but what is the actual amount of production, determined to a reasonable certainty or reasonable probability Courts could conclude this doctrine not applicable to horizontal wells public policy. 28

29 Does Confusion of Goods Apply? (cont.) Browning Oil Co. v. Luecke (Tex. App. Austin 2000) o Austin Chalk horizontal wells drilled within a pooled unit owells drilled on and/or across tracts in which plaintiff s undivided interests were not pooled ocourt: Plaintiff entitled to be paid royalty for hydrocarbons produced from his land. Did not explicitly address confusion of goods, but applied reasonable probability standard to allocation of production from un-pooled tracts. Didn t address confusion of goods argument. Voiced policy reasons against allowing recovery for royalties on all production, suggests doctrine should not apply. 29

30 Allocation of Production to Non-Participating Royalty Interests Issues arise when a small NPRI tract is within larger lease. o If crossed by a horizontal well, no agreed allocation method. oand: Whether crossed or not, NPRI owner may attempt to communitize (essentially pool ) his interest into the entire lease. Issues concerning enforceability of lease anti-communitization provisions. (London v. Merriman) Unanimity among all NPRI Owners? (Guaranty Bank v. May) The GLOhas recently begun aggressively pursuing its rights as a free royalty interest owner. 30

31 POOLING ISSUES: What Size Unit May Be Formed For Horizontal Well? Pooling Clause In Most Form Leases o Specifically authorized size o Governmental authority provision to form larger units Various Kinds of Governmental Authority Provisions o Subtle differences = different results. READ THE LEASE! Pooling Beyond the Scope of Lease s Contractual Authority Is Invalid 31

32 Examples of Governmental Authority Pooling Provisions Units may conform substantially in size with those prescribed by governmental regulations Units may conform substantially in size with those permitted by governmental regulations Units prescribed or permitted by governmental regulation for a regular location or maximum allowable 32

33 Gov t. Authority in Action: Prescribed or Permitted or Prescribed Example: Briscoe Ranch (Eagle Ford) Field Rules 80 acre density rule (vertical well) Operator drills Smith No. 1H 4,500 lateral displacement Proration Unit Size: 80 (Field Rule) (Rule 86 Table) = 320 acres = Pooled Unit size under pooling provision SL PP T 33

34 Same Well, But With Prescribed Gov t Authority Example: Briscoe Ranch (Eagle Ford) Field rules 80 acre density rule (vertical well) Operator drills Smith No. 1H 4,500 lateral displacement Proration Unit Size: 80 (Field Rule). Additional Rule 86 Acreage not allowed because not required ( prescribed ). 80-acre pooled unit SL PP T 34

35 Governmental Authority Depth Limitations Must Pooled Interval Be Limited If Lessee Using Governmental Pooling Authority? Remember: Reliance on governmental authority is based upon the right/obligation to assign additional acreage to a well for a particular field (depth). This expanded governmental authority may only apply to the depth interval for that field. May not have authority to form an expanded all depths pooled unit based upon governmental pooling authority applying only to the target field. 35

36 Overreliance on Governmental Authority: Failure to Reach Intended Horizontal Length Smith 1H permitted for 4,500 (320-acre unit authority) Mechanical difficulties; only drilled to 3,000. Rule 86: = 240 acres Pooled unit exceeds authority, is invalid. SL PP T 36

37 Problem: Smith No. 1H Fails to Reach Permitted Length Solutions: o All lessors ratify unit o Avoid the Problem: Form smaller unit and expand after drilling (if not prohibited by lease) Amend leases to allow lessee to make pooled units effective retroactively. Drill, then pool after lateral length known 37

38 Retained Acreage Clauses for Horizontal Wells Definition: Clause allowing lessee to retain only specified amount of acreage around each producing well in a lease after expiration of primary term or continuous development Distinguished from Pugh Clauses Applicable to Pooled Units Similar Issues to Pooled Units Formed Under Governmental Authority Provisions Critical Point: If possible, retained tract authority should be identical to pooling authority. 38

39 PRODUCTION SHARING AGREEMENTS 39

40 The Problem: Existing Unit/Tract Configurations Prevent Optimum Horizontal Well Locations Horizontal Wells Need To Be Drilled In A Certain Orientation/Azimuth And For Certain Lateral Distances To Be Economical Existing All Depths Pooled Units And Unpooled Tracts Are Not Configured To Accommodate Horizontal Wells Drilled In Proper Orientation And For Needed Lateral Distances On The Unit Or Tract 40

41 Illustrating the Problem Lease 2 Lease 2 Lease 3 Lease 1 Lease 4 Pooled Unit A Pooled Unit B Pooled Unit C Pooled Unit D 41

42 Solution Amend Existing All Depths Pooled Interval - Problematic Production Sharing Agreements (PSA s) opurpose: Obtain royalty and working interest owners consent to a basis for allocating production from a horizontal well that traverses more than one pooled unit and/or lease 42

43 Methods of Allocation in PSA s Length of Wellbore: o Surface to Terminus ofirst Take Point to Last Take Point Surface Acreage oallocate to all tracts/units crossed by wellbore. oallocate to all tracts in a super-unit Other Agreed Percentages, Factors or Bases 43

44 RRC Permitting of PSA Wells PSA Wells Necessarily Require Rule 37 Exceptions. o As wells cross the leaseline, they violate leaseline spacing rule. RRC Form PSA-12 Allows For Administrative Approval of These Permits Where Operator Owns/Controls In Each Drillsite Tract: o65% of royalty interest o 65% of working interest Alternative: Allocation Well Permit. o Must own/control 100% of working interest. o No (RRC) requirement that operator secure royalty owner approval. ocomplaints in pending Klotzmancase challenging validity of Allocation Well Permits. 44