ADAPTING FEDERAL UNITS AND UNIT OPERATING AGREEMENTS TO ACCOUNT FOR HORIZONTAL DEVELOPMENT

JurisdictionUnited States
Horizontal Oil & Gas Development
(Nov 2012)

CHAPTER 10B
ADAPTING FEDERAL UNITS AND UNIT OPERATING AGREEMENTS TO ACCOUNT FOR HORIZONTAL DEVELOPMENT

Gregory J. Nibert
Hinkle, Hensley, Shanor & Martin, L.L.P.
Roswell, NM
Jared A. Hembree
Hinkle, Hensley, Shanor & Martin, L.L.P.
Roswell, NM
Paul S. Conner
UnitSource Incorporated
Denver, CO
Casper, Wyoming

GREGORY J. NIBERT is a resident partner in the Roswell, New Mexico, office of Hinkle, Hensley, Shanor & Martin, L.L.P., and is assigned to the firm's Oil and Gas Department. Mr. Nibert's practice is primarily limited to oil and gas law, including title examination, financing, contract preparation, acquisitions and divestitures, division orders, oil and gas administrative agency matters and all other aspects of oil and gas law. He is a New Mexico Board of Legal Specialization recognized specialist in oil and gas law. Mr. Nibert is the annual update author of Chapter 18, "Unitization and Communitization," of the Law of Federal Oil and Gas Leases and has presented papers and speeches to a number of organizations on oil and gas law topics, including the Rocky Mountain Mineral Law Foundation ("RMMLF"); American Association of Professional Landmen (AAPL); the State Bar of New Mexico Section of Natural Resources, Energy and Environmental Law; The University of Texas School of Law Oil, Gas & Mineral Law Institute; New Mexico Landmen's Association; Tulsa Landmen's Association; National Association of Division Order Analysts; Southwestern Association of Division Order Analysts; and the Houston Bar Association. Mr. Nibert, T. Calder Ezzell, and Mona Binion prepared a paper titled "We Know What It says But How Does It Work, Practical Solutions to Tough Operational Questions Under the Form 2 Unit Operating Agreement" for the 54th Annual RMMLF Institute held in July, 2008. He recently spoke at the Mineral Title Examination special institute of RMMLF and presented a paper titled "Title Curve Balls Thrown by Units." Mr. Nibert was the Co-Chair of the Federal Onshore Oil and Gas Pooling and Unitization 2006 RMMLF special institute and presented a paper "The Impact of Unit Events on a Federal Oil and Gas Lease" and is a speaker at the RMMLF's Federal Oil and Gas Leasing Short Course. An article jointly prepared by Mr. Nibert, George Snell, Tim Dowd, Tom Daily, John McDavid, and Richard Revels: "A Comparative Review of Oil and Gas Law in Texas, Oklahoma, Arkansas, New Mexico, Mississippi, and Louisiana" published in Landman, November/December 2002 by the AAPL, was selected as the Best AAPL Published Article at the AAPL annual meeting in June 2003. Other papers for RMMLF special institutes include: "Communitization of Federal Lands: An Overview," "Final Decisions and Appeal Procedures in Drainage Cases," and "Non-Record Title Considerations." His paper for the Center for American and International Law (formerly the Southwest Legal Foundation) Annual Institute on Oil and Gas Law in 2002 was "Federal Unitization: Onshore Oil and Gas Unit Agreements for Unproven Areas" 53 Inst. Oil & Gas L. 10 (2002). Mr. Nibert is active in the Independent Petroleum Association of New Mexico and serves on its Board of Directors and is a past Vice President, and the New Mexico Oil and Gas Association. He is a Trustee of the Rocky Mountain Mineral Law Foundation, and served as Chair of the Oil and Gas Section of the 46th Annual Rocky Mountain Mineral Law Institute for 1999-2000, and Chair of the Landman's Section of the 38th Annual Rocky Mountain Mineral Law Institute for the year 1991-92. He also serves as a Research Fellow of the Southwestern Legal Foundation. Mr Nibert served on the Board of Directors of the Section of Natural Resources, Energy and Environmental Law of the State Bar of New Mexico from 1985 to 1992, and 1996 to 2004, and was Chair of the section for the year 1990-1991. He is a member of the State Bar of New Mexico, Chaves County Bar Association (current Treasurer), New Mexico Landman's Association, and American Association of Professional Landmen. Mr. Nibert is active in the community and serves as a Chaves County Commissioner, was President of the Roswell Chamber of Commerce for 2007-2008, currently serves on the Chaves County Economic Development Foundation Board of Directors and Executive Committee, and was Chairman of the Chaves County Republican Party for 2001-2003. He was also District Chairman of the Rio Hondo District, Conquistador Council, Boy Scouts of America from 1997 to 2004 and is an Assistant Scout Master for Troop 2 in Roswell. He is a past member of the Roswell Independent School District Board of Education. He is a member of the Roswell Kiwanis Club and is a past Lt. Governor and a Distinguished Past President. A native of Roswell, Mr. Nibert received a Bachelor of Arts degree from the University of New Mexico in 1980 and a Juris Doctor Degree, cum laude, from Pepperdine University in 1983, where he was Editor in Chief of the Pepperdine Law Review for 1982-83. Mr. Nibert has been associated with the Hinkle Law Firm since 1983, and has been a partner in the firm since 1988.

JARED A. HEMBREE is partner in the Roswell, New Mexico office of Hinkle, Hensley, Shanor & Martin, L.L.P. His primary practice is in oil and gas law, including title examination, transactions, regulatory issues and litigation. Mr. Hembree received a J.D. from the Washington & Lee University School of Law in 2005. While at Washington & Lee, Mr. Hembree served as an Editor for the Harvard Journal of Law & Public Policy's 2005 Symposium Edition, Chairman of the Lewis F. Powell, Jr. Distinguished Lecture Series and President of the W&L Federalist Society Chapter. Mr. Hembree graduated with Honors, receiving a B.A. in History with a Minor in Museum Studies from Montana State University in Bozeman, Montana in 2000. Mr. Hembree is a member of the New Mexico State Bar, the Chaves County Bar Association, Rocky Mountain Mineral Law Foundation, Independent Petroleum Association of New Mexico, New Mexico Landman's Association and the Federalist Society. He is admitted to practice before the United States Court of Appeals for the Tenth Circuit, the United States District Court for the District of New Mexico and the New Mexico Supreme Court. Mr. Hembree is involved in a number of civic organizations. He serves on the boards of directors for the New Mexico Landman's Association and the Roswell Museum and Art Center Foundation, and is a Past President of the Roswell Sunrise Rotary.

PAUL S. CONNER is President and Owner of UnitSource Incorporated, located in Northglenn, Colorado. For over 28 years, Paul has specialized in and performed oil, gas and geothermal unitization consulting in the Rocky Mountain Region, as well Alaska, California, Florida, Louisiana, Mississippi, Nevada, Oklahoma, Oregon, Texas and Washington State. Paul was a Program Committee Member for the February, 1990, Rocky Mountain Mineral Law Institute on Pooling and Unitization II. He has also been a guest speaker in the Ninth and Eleventh Annual Conferences of the National Association of Lease and Title Analysts (September 1994 and June 1996), the Annual Conference of the National Association of Division Order Analysts (September 2002) and also the 41st Institute of the Rocky Mountain Mineral Law Foundation (Sun Valley Idaho, July 1995). Paul is a Certified Professional Landman (CPL) and is active member of the American Association of Professional Landmen (AAPL) and was the Public Lands Chairman of the AAPL in 2000. In addition to the AAPL, Paul is active in the Montana (MAPL), Wyoming (WAPL), and Denver (DAPL) Associations of Petroleum Landmen and was DAPL Landman of the Year in 2000.

I. INTRODUCTION

John Morrison's conclusion in his paper delivered at the Federal Onshore Oil & Gas Pooling & Unitization II Special Institute in 1990 has now come to fruition.1 Mr. Morrison stated that the concept of forming "federal exploratory units may, under certain circumstances, be an important consideration in horizontal drilling."2 Many of the concerns regarding traditional pooling and spacing are eliminated if all of the tracts of land are committed to a federal exploratory unit. Unitization has been defined as "the agreement to jointly operate an entire producing reservoir or prospectively productive area of oil and/or gas."3 Unitization provides for the exploration, development, and operation of a geologically defined area by a single operator so that drilling and production may proceed in the most efficient and economical manner.4 This paper does not set forth the procedures to form a federal exploratory unit or detail the numerous terms and provisions encompassed in a unit agreement and an associated unit

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operating agreement as those matters have been discussed in detail at prior Special Institutes of the Rocky Mountain Mineral Law Foundation and in a number of treatises and articles.5

Many of the concerns raised at this Special Institute may be avoided through the commitment of oil and gas leases to a federal exploratory unit agreement. Unitization would allow the entire reservoir to be drilled and developed without regard to lease lines, spacing, or other artificial barriers that may impact the most efficient means of maximizing production of oil and gas from the reservoir. Horizontal wells would simply be another tool for achieving the ultimate purpose of unitization. The legal concerns disappear if all of the leases and lands are committed to the unit. However, it is unusual to get 100% of the interests committed, so some not committed tracts may exist. Nonetheless, unitization is a practical tool to lessen any complications posed by horizontal development.

It is in this context that this paper highlights several changes that may or should be made to the unit agreement where horizontal wells are anticipated. It also addresses a number of changes that should be made to the unit operating agreement to...

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