CHAPTER 1 CONSERVATION PRINCIPLES AND FEDERAL ONSHORE POOLING AND UNITIZATION: AN OVERVIEW
| Jurisdiction | United States |
(Jan 1990)
CONSERVATION PRINCIPLES AND FEDERAL ONSHORE POOLING AND UNITIZATION: AN OVERVIEW
Van Cott, Bagley, Cornwall & McCarthy
Salt Lake City, Utah
TABLE OF CONTENTS
Page
I. Introduction
II. Historical Evolution of Federal Onshore Cooperative Development
A. Nature of the Mineral
B. Reservoir Characteristics
C. The Rule of Capture
D. Federal Statutory Development
III. Definitions
Pooling
Communitization
Unitization
Well Location Rules
Well Spacing
Drilling Unit
Pool
Unit Agreement
Communitization Agreement
Cooperative Agreement
Development Contract
Drilling Contract
Operating Contract
Combination Agreement
Oil and Gas Storage Agreement
Lease Consolidation Agreement
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IV. Conservation Principles
A. Drilling
B. Surface Well and Location Siting
C. Hole Deviation Surveys
D. Unitization
E. Utilization of Gas
F. Well Completion
G. Limitation of Production
H. Allocation of Oil Production
I. Allocation of Gas and Gas Liquids
J. Multiple Mineral Development Conflicts
K. Underground Oil and Gas Storage
V. Conclusion
Appendix
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I. Introduction
This Institute was conceived seven years ago when continental oil and gas production was at its zenith. It was shelved for obvious reasons.
Although the industry has not rebounded to the prominence enjoyed during the early 1980's, interest in federal onshore pooling and unitization has rekindled, for several reasons. First, oil companies offered early retirement to senior mid-level managers in an effort to turn a profit on one-half the budget. These were the individuals who were experienced in the particulars of cooperative development on the federal public domain. Their replacements and the new hires frequently have had neither the exposure to nor the training in federal onshore pooling and unitization. Second, with operating budgets pared to the bone, managers were required to focus on development, not exploration. Known fields were infill-drilled. Many of the myriad units formed during the Sixties and Seventies have achieved their ultimate primary production, and the industry has now turned to secondary recovery. Third, vast lease holdings are soon due to expire for lack of production. The industry is now turning to the little used, but conceptually sound development contracts to hold large acreage by the limited exploration justified in tight economic times.
This Institute will present the basics of federal onshore pooling and unitization. As its name implies, it will not address cooperative development of the outer continental shelf. It is designed to provide a definitive analysis of legal and land management issues associated with the cooperative development of federal and Indian onshore oil and gas leases affecting six hundred million acres of public domain, Forest Service, and split-estate lands and a significant portion of the 52.5 million acres of Indian tribal and allotted lands. The format will be a combination of professional papers, workshops, and panel discussions provided by attorneys and professors of law, as well as by geologists, petroleum engineers, and adjudicators of the Bureau of Land Management.
This Institute is directed to corporate and outside counsel who represent their clients in forming, maintaining, and
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terminating units; landmen who are responsible for forming the units; geologists and petroleum engineers who provide the science supporting unitization; and employees of state, federal, and Indian agencies responsible for oil and gas conservation, spacing, communitization, and unitization.
II. Historical Evolution of Federal Onshore Cooperative Development
Federal onshore pooling and unitization have their origins in the oil and gas conservation movement of the 1930's. The golden age of oil dawned in the 1920's when new reservoirs were discovered, drilling methods and techniques developed, and new uses for petroleum1 products found.2 In 1920 crude sold for the staggering sum of $3.60 per barrel and then fell to $1.65 in 1925 when the market was flooded. The 1930's brought discovery of the East Texas Field with its highly fractionalized ownership and of vast reserves in California, New Mexico, and Wyoming on predominately federal lands.3 Production was controlled exclusively by the rule of capture and led to uncontrolled drilling, depletion of reservoir energies, and loss or recoverable reserves. Conservation concepts were spawned out of this complex historical cauldron, as federal and state governments sought ways to prevent waste. They were a calculated reaction to the excesses resulting from the rule of capture.
The rule of capture resulted from the application of common law property principles to an unusual mineral. Therefore, an understanding of the nature of oil and gas as a fugacious substance and the rule of capture are critical to making federal oil and gas conservation procedures useful tools to the lawyer and landman.
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A. Nature of the Mineral
Professor Phil Dufford4 introduced this topic, and coincidentally the Foundation's first Institute on pooling and unitization, with these words:
Three of the physical characteristics of petroleum are fundamental for an understanding of oil and gas production. Primarily, it should be realized that petroleum occurs in the nature of either gaseous, liquid or solid states. When it occurs in liquid forms, there is almost always some gas present in solution and the gas normally has the capability of expansion when pressure within the formation is reduced. The second important aspect of petroleum is its specific gravity, weight or density. In the case of solids and liquids specific gravity expresses the ratio between the weights of equal volumes of water and another substance measured at a standard temperature. Liquid petroleum normally has a lighter or lesser specific gravity than water. The final aspect of the mineral which is significant from the standpoint of production concerns is its viscosity which is an inverse measure of the ability of the fluid [to] flow. The less viscous [the] fluid, the greater its mobility. The specific gravity of the mineral bears a relationship to its viscosity as does the amount of pressure that is present in the formation.5
B. Reservoir Characteristics
Professor Dufford continues:
Normally oil, gas and water are found in a typical oil and gas reservoir. If each is present then because of the various specific gravities involved the water will be at the bottom, the oil next, and the free gas on
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top. The lines separating these fluids are referred to as the oil-water and gas-oil contact lines.
During the primary recovery period natural energy is normally utilized to propel the petroleum to the well bore at which point it is pumped or lifted to the surface if necessary. The natural sources of reservoir energy are the expansion of the gas within the formation, water encroachment and gravity flow. Gas expansion occurs when a well is drilled into a formation allowing the gas to expand which in turn forces the oil toward the well bore. Where the pressure within a field occurs as a result of gas expansion maximum ultimate recovery depends on conserving the gas pressure. Where the reservoir derives its pressure primarily from the encroachment of water the drive is not efficient when the water table is allowed to rise on a uniform basis within the reservoir. Whether a field is gas-driven it is significant from a conservation standpoint that the source of the drive pressure not greatly exceed the oil to be produced and accordingly, as a conservation technique an effort is usually made to regulate production whether the gas-oil ratio is high or where the oil-water ratio is high.
When primary production declines within a field it may often be restored by artificial reservoir repressuring operations, or by pressure maintenance operations.
Because of these reservoir characteristics and because of the nature of the mineral itself, unitization or pooling are vital concepts from the standpoint of controlling production rates and reservoir pressures and from the standpoint of increasing the legal feasibility of secondary recovery operations.6
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Two other reservoir characteristics are critical to an understanding of the development of pooling and unitization. One is porosity. Porosity is the measure of microscopic voids or pore spaces in the reservoir rock.7 Porous rocks such as coarse-grained sandstones and carbonates contain voids or
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intergranular (pore) spaces in which the oil, gas, and water collect. The other is permeability. Permeability is the measure of the resistance the reservoir rock offers to the flow of oil, gas, and water through it.8
Oil and gas are found almost exclusively in sedimentary rocks. Over geologic time, compaction and cementation of certain types of sedimentary layers such as shales eliminated pore spaces and the connecting channels. These rocks were rendered impermeable to fluids. Petroleum, formed deep in subterranean layers, attempted to migrate (upward) via these microscopic channels to zones of lesser pressure. Eventually they became trapped by some impermeable layer and formed concentrated deposits under hydrostatic pressure. These accumulations in the host rocks are known as reservoirs.9
C. The Rule of Capture
Early courts had no jurisprudence to apply to this unusual mineral. Furthermore, they were ignorant of the true nature of oil and gas. But the common law was dynamic, and judges soon found analogies to concepts with which they were familiar.
One jurist found an apt analogy of the ownership of oil and gas to that of wild animals, ferae naturae.10 Wild animals could be reduced to possession (ownership) by capture, as with fish in nets, beaver in traps, and mustangs in box canyons or...
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