Mineral Interest Pooling Act 1 D OES T EXAS HAVE FORCED POOLING? 2 0 1 7 NA LTA NAT I O NAL CO N F E R E N C E S E P T E M B E R 2 7-2 9, 2 0 1 7 B RYA N D. L AU E R, S COT T D O U G L ASS M CC O N N I CO
OVERVIEW Force Pooling Is Based On The Mineral Interest Pooling Act ( MIPA ) Enacted In 1965 But Effective March 8, 1961 Purposes Of MIPA Is To Protect Correlative Rights, Prevent Waste Or Prevent Drilling Of Unnecessary Well Texas Statute Is Unique Designed To Encourage Voluntary Pooling Before Going To Commission Prerequisite For Force Pooling- Fair And Reasonable Voluntary Offer To Pool Which Has Not Been Accepted 2
INVOKING THE MINERAL INTEREST POOLING ACT Established Field No Wildcat Pooling Discovery Date of Field after 3/8/1961 Special Field Rules No State Lands Two or More Tracts With separate ownership A Common Reservoir or Consolidated Field Existing or Proposed Well Unit Size Limited 160 acres for oil well 640 acres +10% tolerance for gas well Horizontal wells not contemplated Statutory Purposes Avoid drilling of unnecessary wells Protect correlative rights Prevent waste Voluntary Offer to Pool 3
PARTIES WHO MAY SEEK TO FORCE POOL Authorized Force Pooling Applicants Existing Proration Unit-Any Owner including Royalty Owners Proposed Unit Only Possessory Mineral Owners School Land Board (GLO) Has Standing to Force Pool Unleased Riverbeds and Channels 4
VOLUNTARY POOLING OFFER A Requirement Unique to Texas Law Jurisdictional Prerequisite for Force Pooling Elements Carson v. RRC held that A fair and reasonable pooling offer takes into account relevant factors important to A reasonable person in the position of the offeree RRC Liberally Construes What Constitutes a Fair and Reasonable Offer 5
Unfair Offers All or none in a proposed 8 well development Attaching form JOA without blanks filled in to offer Pooling drillsite royalty on same yardstick basis as others in pooled unit after well drilled Carson v. RRC rejected MIPA standard Pooling for a reservoir from which existing well is not currently producing 6
ACREAGE SUBJECT TO FORCE POOLING MIPA Limits Pooling to Acreage that Is Productive at the Time of Final Order But Determination of Productive Acreage Based on the Evidence at the Hearing- Not Updated Applies Even for Water Drive Reservoirs with Changing Productive Limits 7
PRODUCTIVE ACREAGE EQUAL TO STANDARD PRORATION UNIT Cannot Force Pool Tracts with Productive Acreage Equal in Size or Larger Than the Standard Proration Unit Exception- Muscle-In Small adjacent tract that is less than the standard proration unit size may force pool into a standard size unit if such owner has not been given an opportunity to pool RRC Authorized to Force Pool Unit Larger Than Standard Size Larger allowable granted for larger unit 8
EFFECTIVE DATE OF THE FORCE POOLING ORDER Importance of Effective Date Sets date to determine payout of costs and participation in production RRC s Historical Policy Prospective from date of the final order 60 days after the date of the hearing retroactive Court Overruled Retroactive RRC Orders Effective Date Earlier than Final Order Only by Agreement 9
RISK PENALTY MIPA 100% Maximum = 200% Nonconsent Penalty Inadequate Compared with JOA Nonconsent Penalties of up to 500% 10
Traditional Application of MIPA Traditional Application of MIPA MIPA Clearly Applies to Both Existing and Proposed Wells. Even So, Virtually All Historical Applications = Applicant Seeking to Participate in Existing Production. 11
Figure 1 Pooled unit Lessee X of Tract A seeks to force pool X s productive acreage into force pooled unit with Operator Y s productive acreage and well.
Figure 2 Pooled Unit Boundary Tract with undivided 60% leased/pooled by Y, undivided 40% leased to X but not pooled Operator Y forms pooled unit of Y s leasehold in Tracts A, B and C that are productive in the reservoir. Lessee X has unpooled lease covering undivided interest in Tract B. Lessee X seeks to force pool X s interest into a force pooled proration unit of Tracts A, B and C.
Finley Resources Case Expands Traditional Application of MIPA Background Facts Finley leased and pooled 90.616 acres (300 + lots) in urban subdivision of Ft. Worth. Horizontal well needed to produce Barnett Shale hydrocarbons. Trespass issues caused by 5.704 acres (26 lots) of unfindable or non-responsive unleased owners prevent drilling of well. 14
Figure 3 Finley made voluntary offer to unleased owners lease, pool or farmout for 96.32 acre MIPA unit. No party appeared at hearing to protest.
Finley Resources Case Expands Traditional Application of MIPA Opposing Positions Finley: MIPA Unit necessary to drill well to prevent waste, protect correlative rights of working interests and 100 s of royalty owners and to prevent drilling unnecessary wells. Examiners: MIPA limited to protect small tracts, not to give large tract lessees more flexibility in development. RRC Granted MIPA Application Action 1+ years after Finley filed application. Granted force pooled parties 1/5 royalty and carried 4/5 working interest. 16
Finley Resources Case Expands Traditional Application of MIPA Significance of Finley Decision Remedy for operators to drill wells over objection of unleased/unfindable parties refusing to lease or pool. Threat of force pooling encourages good faith negotiations MIPA cases are burdensome for all parties. 17
ILLUSTRATIONS OF HOW MIPA MAY ASSIST IN DRILLING OTHERWISE UNDRILLABLE WELLS Unfindable /Uncooperative Owners In Drillsite Tracts Figure 4 18 Operator forms pooled unit of Tracts A-I, except Tract G. Tract G owner(s) are identifiable but unfindable or refuse to cooperate. Operator proposes an MIPA Unit of Tracts E- I. Operator must notify unfindable owners through newspaper publication. Finley decision should be precedent for MIPA order for proposed unit.
UNANSWERED QUESTIONS RRC Legal Staff Disfavors MIPA Commissioners have needed to overrule legal staff on numerous MIPA related issues. MIPA process is time consuming and complex. May a Finley Type MIPA Be Approved Only to Prevent Trespass? No trespass if a partial mineral interest is leased in producing tract. Finley and subsequent related applications = trespass if MIPA not approved 100% of minerals in force pooled tract were unleased/unpooled. May MIPA order be granted if only undivided partial interests is unpooled in drillsite tract (or can it include non-drillsite tract)? 19
Figure 6 Operator leases 100% of interests in Tracts A, C, D but only 25% in Tract B, 75% unleased. May operator force pool 75% undivided, unpooled interests in Tract B when trespass is not an issue?
May MIPA order be granted to avoid a Rule 37 spacing exception? Operator leases and pools Tracts A-F, but not all interests in Tract G. Horizontal well must be drilled < spacing distance from Tract G. May operator force pool outstanding interest in Tract G without 1st seeking Rule 37 exception?
CONCLUSIONS MIPA May Have Been Historically Effective To Promote Its Overriding Purpose To Encourage Voluntary Pooling. This Result Not Applicable For Unfindable/ Unidentifiable or Unresponsive Owners. Finley Decision Is An Antidote For This Problem. Threat of MIPA Action For Proposed Wells Should Encourage Non-responsive Owners To Negotiate. MIPA May be Used to Assist In Drilling Wells Previously Undrillable. 22