CHAPTER 1 POOLING AND UNITIZATION: AN HISTORICAL PERSPECTIVE AND AN INTRODUCTION TO BASIC VOCABULARY

• Jurisdiction: United States

Federal Onshore Oil & Gas Pooling & Unitization - part 1
(Oct 2014)
CHAPTER 1
POOLING AND UNITIZATION: AN HISTORICAL PERSPECTIVE AND AN INTRODUCTION TO BASIC VOCABULARY
Bruce M. Kramer
Keystone, Colorado
McGinnis, Lochridge & Kilgore LLP
Houston, Texas ¹
Maddox Professor of Law Emeritus
Texas Tech Univ. School of Law
Thomson Visiting Professor of Law
Colorado University School of Law
Of Counsel

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BRUCE M. KRAMER received his B.A. in International Relations from UCLA in 1968, his J.D. from the UCLA School of Law in 1972, and an L.L.M. in Environmental and Natural Resources Law from the University of Illinois College of Law in 1975. From 1974 through his retirement at the end of 2006 he taught at the Texas Tech University School of Law. He is now the Maddox Professor of Law Emeritus. From 2007 through the present he is of counsel to the Texas-based law firm of McGinnis, Lochridge & Kilgore. He is also the Thompson Visiting Professor at the University of Colorado School of Law for the 2013-2014 academic year. He is the co-author of several treatises including The Law of Pooling and Unitization, Williams & Meyers Oil and Gas Law (since 1996), Cases and Materials on Oil and Gas Law, and International Petroleum Transactions. He is also the author of numerous law review articles in the field of oil and gas law. His works have been cited by state and federal courts over the past 25 years. He is an honorary trustee of the Rocky Mountain Mineral Law Foundation, a member of the Executive Committee of the Institute for Energy Law of the Center for American and International Law, and a trustee to the Energy and Mineral Law Foundation.

I INTRODUCTION

As both the oil and gas industry and governmental regulation of the industry enter into the latter half of 200 years of simultaneous development, it is appropriate to review the history of conservation regulation in general and the basic and related conservation concepts of pooling and unitization specifically.² This paper will present the historical context of modern conservation regulation, including pooling and unitization as it applies to federal, Indian and fee land mineral interests. It will serve as a primer for the papers that follow which will discuss in depth the modern application of pooling and unitization principles on both federal and private lands predominately in the western United States.³

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Today it is widely accepted that the public regulation of the oil and gas industry is based on three bedrock principles: the prevention of waste, the conservation of natural resources and the protection of correlative rights.⁴ Increasingly, however, surface impacts, including environmental issues such as air and water pollution, have become factors that oil and gas conservation agencies consider in their regulatory programs.⁵ Federal surface regulation has been a constant as well starting with provisions in the Mineral Leasing Act that reflect a concern for the impact of oil and gas leasing activities on such surface activities.

Early conservation regulation, however, was principally concerned with the prevention of waste in the physical sense of the term waste. For example, as early as 1879 states were regulating the plugging and casing of wells to avoid groundwater pollution.⁶ Such regulation was designed to prevent the physical loss of hydrocarbons as well as the prevention of the pollution of surface water and groundwater supplies that were often critical to the population in the semi-arid mid-continent area.⁷ The focus on physical waste which is apparent at the surface is reflected in a series of Indiana statutes that laid the groundwork for the upholding of such regulations against federal and state constitutional challenges.

It was an 1893 Indiana statute that prohibited allowing natural gas to escape into the open air for more than two days after discovery that led to the landmark Supreme Court of the United States opinion in Ohio OH Co. v. Indiana.⁸ The stated statutory purpose in prohibition the dissipation of natural gas was that it would cause injury to others with interests in the common source of supply. At this stage in American constitutional jurisprudence, there was only a limited "regulatory takings" doctrine because substantive due process principles dominated attacks on regulatory programs adopted by the states. In Ohio Oil, the Supreme Court rejected the substantive due process challenge because it found that the prevention of underground waste in the common source of supply was a valid police power objective.⁹ It also found that

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the states were the source of property rules relating to the ownership of oil and gas and as such they could define or refine their ownership definitions to deal with the somewhat unique circumstances of a common source of supply owned by different parties.¹⁰ Similar findings were made by the Indiana Supreme Court when it upheld a statute that forbade the burning of gas in flambeau lights,¹¹ and a statute prohibiting the use of vacuum pumps to induce a greater flow of oil.¹² These early attempts at regulating not only the production of oil and gas but what the owner could do with the oil and gas once produced laid the foundation for the much more invasive regulation that took place during the middle of the twentieth century. It also laid the groundwork for the more recent wave of regulatory actions taken with regard to the development of oil and gas resources from shale formations.

There are some basic terms that need to be defined when one speaks about conservation regulation. To be consistent, as used in this paper, the terms "unitization" or "unit operations" refer to the consolidation of mineral, leasehold or royalty interests covering all or a portion of a common source of supply.¹³ On the other hand, "pooling" or a "pooled unit" refers to the joining together of two or more tracts or portions of tracts for the purpose of having sufficient acreage to receive a well drilling permit under the relevant state or local spacing or drilling laws and regulations.¹⁴ The federal government has chosen to use the term "communitization" to describe what would be called pooling if only fee or private lands were involved.¹⁵ Pooling, as distinct from unitization, developed in large part due to the longstanding existence of state well spacing regulation. Well spacing regulation is implemented through either or both a lineal spacing rule or statute and a density spacing rule or statute.¹⁶ The lineal spacing system regulates well location based on distances from property lines or other wells. Louisiana Statewide Order 29-E is a good example of a lineal spacing regulation which prohibits wells from being closer than 300 feet from any property line nor closer than 900 feet from any well completed in the same common source of supply. Wyoming utilizes a density spacing rule requiring no more than 1 oil well on a 40-acre tract. Recently, both state oil and gas conservation agencies and local governments have been using "setbacks" as the principal tool

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in restricting the location of surface oil and gas facilities. These setbacks are obviously not concerned about drainage issues but about impacts on nearby incompatible surface uses.¹⁷

Pooling or unitization may be effectuated through voluntary actions or through a compulsory or statutory pooling procedure that involves the use of the state government's police power to compel non-consenting mineral owners, royalty owners and/or working interest owners.¹⁸ While most producing states have a compulsory pooling procedure, Kansas, the home of the first municipal pooling ordinance does not. There is, however, a widespread diversity in the type of pooling procedure utilized by the various states. A number of states, such as Oklahoma, treat the spacing order as constituting a pooling of the royalty owners' interests within the spacing unit. Ohio, places a limit of 5 on the number of statutory pooling orders that may be sought by a single operator. The Texas Mineral Interest Pooling Act, which was not enacted until 1965, was until recently rarely used. Arkansas, on the other hand, has integration orders that effectively eliminate the need for leasehold pooling clauses and voluntary pooling. Likewise, most producing states, except for Pennsylvania and Texas, have a compulsory unitization procedure. There is more uniformity for compulsory unitization procedure than there is for compulsory pooling procedures although there exists some discrepancy in setting forth the minimum voluntary consent requirement that must be achieved before the compulsory unitization order can be issued. The Mineral Leasing Act provides for the Secretary's approval of voluntary units but it does not contain a compulsory feature. The Federal Government does not have its own spacing regulation and therefore does not have a compulsory communitization process.

II THE RULE OF CAPTURE

The rule of capture ownership regime for oil and gas is the catalyst for well spacing, pooling and unitization regulation.¹⁹ The rule of capture was born of necessity and lack of understanding of the underground movement of oil and gas. One of the earliest judicial statements of the rule of capture was made by the Pennsylvania Supreme Court which analogized the ownership of oil and gas to the ownership of groundwater and, more importantly, ferae naturae.²⁰ The court stated:

Water and oil, and still more strongly gas, may be classed by themselves, if the analogy be not too fanciful, as minerals ferae naturae. In common with animals, and unlike other minerals, they have the power and the tendency to escape without the volition of the

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owner... They belong to the owner of the land, and are part of it, so long as they are on or in it, and are subject to his control; but when they escape, and go into other land, or come under another's control, the title of the former...