CHAPTER 10 SPACING, FORCED POOLING, AND EXCEPTION LOCATIONS
| Jurisdiction | United States |
(Sep 1985)
SPACING, FORCED POOLING, AND EXCEPTION LOCATIONS
Mayer, Brown & Platt
Denver, Colorado
TABLE OF CONTENTS
Page
I. INTRODUCTION
II. SPACING
Origin and Purpose of Spacing
Types of Spacing Regulation
Drilling and Spacing Units
Size of Spaced Area
Size of Drilling Units
Shape of Drilling Units
Location of Permitted Well
III. EXCEPTION LOCATIONS
The Need for Flexibility: Uncooperative Terrain and Other Problems
Protection of Offsetting Owners
Spacing and the Problems of the Small Tract
Forced Pooling as a Solution
Exception Wells as a "Solution"
The Texas Spacing System: A Study of Exceptions
Exception to Prevent Waste
Exception to Prevent Confiscation
Right to Exception Is Personal
Voluntary Subdivision Rule
The Century Doctrine
IV. FORCED POOLING
Purpose of Forced Pooling
Practical Reasons to Force Pool
Undivided Interests
Prerequisites to a Pooling Order
Spacing Order
Absence of Voluntary Pooling Agreement
Who May Force Pool?
General Fairness Standard for Pooling Plan
Method of Apportioning Production to Tracts
Allocation of Production Among Owners of a Tract
Nonconsent Options
Varying Nonoperating Interests Burdening Separate Tracts
Excessive Nonoperating Burdens
Who Pays Royalties and Other Burdens During the Carry Period?
Transfer of Nonparticipating Owner's Interest
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The Unleased Mineral Interest
V. SPECIAL ISSUES OF SPACING AND FORCED POOLING
Effective Date for Allocating Production and Costs
Multiple Reservoirs: Multiple Options?
Effect of Forced Pooling Upon Title
Changes in Spacing Orders: Upspacing, Downspacing, and Infill Drilling
VI. CONCLUSION
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I. INTRODUCTION
Spacing, forced pooling, and exception locations are among the most common subjects of hearings conducted by state oil and gas conservation agencies. The orders issued in these proceedings constitute the basic regulatory tools with which the work of conservation is accomplished. They determine how many wells may be drilled in a given area, where each well may be located, and, in the absence of private agreement, how the production, costs, and risks associated with each well are to be allocated among different owners.
This paper first will introduce the reader to these subjects by describing the fundamental purposes, concepts, and interrelationship of spacing, forced pooling, and exception locations. Then, after identifying certain alternative regulatory approaches used by different states, it will examine the principal substantive issues and discuss the effect of rulings in these matters on the owners of various kinds of oil and gas interests.
II. SPACING
Origin and Purpose of Spacing
The term "well spacing" refers to the "regulation of the number and location of wells over an oil and gas reservoir as a conservation measure."1 Where spacing is conducted by cities or other levels of local government, as, for example, through zoning ordinances, it is directed chiefly at surface activities as a measure to protect the community's safety and welfare. Spacing by the state, on the other hand, is directed at the prevention of waste and the protection of correlative rights.
Spacing essentially is a legislative response to the problems that arose from the untrammeled sway of the rule of
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capture.2 Under that rule each landowner was entitled to the oil produced from a well on his land even if the oil was drained from beneath his neighbor's land.3 The only means for a landowner to prevent his neighbor from draining the oil beneath his tract was to hasten to drill offsetting wells on his own tract and produce as much oil as possible and as quickly as possible. One predictable consequence of such drilling races was to dissipate prematurely and inefficiently the reservoir's natural energy and reduce the amount of hydrocarbons that could ultimately be recovered from the reservoir, thereby causing physical waste and injuring landowners' correlative rights in the common reservoir beneath their tracts. Likewise, economic waste resulted from squandering huge sums of capital on drilling excessive wells. By preventing the drilling of unnecessary wells, state spacing regulation is intended to avoid physical and economic waste and to protect the correlative rights of landowners.
Types of Spacing Regulation
There are several different types of spacing rules or, in other words, rules limiting the density of drilling.4 One type, which is found in all producing states, prescribes a minimum distance that each well must be drilled from other wells and from boundary lines. This type of rule is commonly called a statewide spacing rule, for it applies to the entire state unless superseded by special rules established for particular fields. Thus, for example, Rule 318 of the Colorado Oil and Gas Conservation Commission provides generally that all wells drilled to a common source of supply deeper than 2,500 feet shall be located not less than 1,200 feet from any other well drilled to the same common source of supply and not less than 600 feet from any lease line.
This type of regulation — statewide spacing — does not serve to pool, or aggregate, the interests in the area affected.5 Instead, the rule of capture is left intact, whereby all the production from the well drilled on a particular tract in
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accordance with the statewide spacing rule belongs to the owner of that tract. Owners of other tracts are not entitled to share in the production even though the spacing rule has the effect of precluding their drilling a well on their tracts.6
Upon the discovery of a new oil or gas field, a hearing is held to consider the promulgation of a second, different type of well density regulation. This type of hearing, commonly called a spacing hearing, results in the issuance of field rules designed to regulate the newly discovered reservoir. Pursuant to provisions of the state's oil and gas conservation statute, the order creating the field rules will designate the surface area under which the reservoir is believed to extend and then divide the area into blocks, called drilling units or spacing units.7 Only a single well may be drilled in each drilling unit to the specified pool or formation, and the order will prescribe the location in each unit for the permitted well.8
In addition to direct control of drilling density through statewide spacing rules and through fieldwide drilling and spacing units, well density may be regulated indirectly through the establishment of production or proration units.9 This latter type of regulation does not expressly prescribe the number or location of wells in a unit, but it discourages the drilling of more than one well in a unit by allocating a certain, limited amount of production to the unit, the unit's "allowable."
Drilling and Spacing Units
An order by a regulatory commission establishing drilling and spacing units for a field typically specifies at least the following: (1) the boundaries of the entire surface area included in the field, (2) the size and shape of the individual drilling units in the field, and (3) the location of the permitted well on each unit.10 Each of these variables presents a potential substantive issue for the spacing hearing that the
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commission conducts in response to an application, or, in some instances, upon its own motion.11
The boundaries of the spaced area typically are intended to identify the surface area underlain by the common source of supply.12 A separate spacing area and different drilling units may be established for each productive zone or formation underlying one area,13 and multiple zones may be designated and spaced by a single order.14 If communication exists between different zones, then they are to be regarded as one common source of supply.15
Size of Spaced Area
While conservation statutes make it clear that the size of the spaced area should be determined with reference to the boundaries of the pool, it can be extremely difficult to delineate these boundaries on the basis of a solitary discovery well. Thus, the temptation may exist to defer spacing until further wells yield more information about the pool or to make the spaced area initially very small and expand it as data are obtained from additional wells. However, if the requirement that the spaced area overlie a common source of supply were interpreted so literally as to limit the initial spaced area to the area that can definitely be shown to satisfy this test, then drilling conducted only subject to the statewide spacing rules might follow what is later shown to be an excessively dense pattern. Thus, a delay in establishing initial field spacing rules or a requirement that the initial spaced area be limited to the area that can be definitely shown to overlie the pool may result in unnecessary drilling.
Consistent with the purpose of the conservation statutes to prevent waste, it has been suggested that the proper approach is
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to include at the outset the entire area on which one may reasonably expect wells may be drilled in an effort to encounter production in the same pool as the discovery well.16 The evidence should support, even if it cannot conclusively prove, a determination that, if drilling is conducted and production is encountered in the same formation as that from which the discovery well is producing, the production will be attributable to the same pool.
Size of Drilling Units
As to the size of the individual drilling units within a spaced area, the conservation acts of different states vary considerably in the degree of detail devoted to that subject and the explicit standards prescribed. North Dakota's statute merely provides that "[t]he size and shape of spacing units are to be such as will result in the efficient and economic development of the pool as...
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