CHAPTER 10 TIMEFRAMES AND OPERATIONAL OBLIGATIONS
| Jurisdiction | United States |
(Jan 1990)
TIMEFRAMES AND OPERATIONAL OBLIGATIONS
Bureau of Land Management
Denver, Colorado
TABLE OF CONTENTS
Page
I. INTRODUCTION
II. FIRST FIVE-YEAR DRILLING TERM
A. Dry Hole
B. Leasehold Well
C. Unit Well
D. Multiple-Well Requirement
E. Diligent Drilling
F. Voluntary Termination
G. Invalidation
III. FIRST FIVE-YEAR TERM AFTER ESTABLISHMENT OF INITIAL PARTICIPATING AREA
IV. SECOND FIVE-YEAR TERM AFTER ESTABLISHMENT OF INITIAL PARTICIPATING AREA
V. ONE-TIME TWO-YEAR EXTENSION OF SECOND FIVE-YEAR TERM AFTER ESTABLISHMENT OF INITIAL PARTICIPATING AREA
VI. CONTRACTED UNIT AREA
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INTRODUCTION
This paper will discuss obligational timeframes established under the model form of the exploratory unit agreement. It will highlight when diligent drilling must occur to prevent an automatic termination and/or contraction of the unit agreement.
Attached is a flowchart which is an illustration of the drilling obligations a unit operator is subjected to pursuant to section 9 of the unit agreement.
This paper is not intended to represent official Bureau policy nor be a legal analysis. This paper is intended to be a practical guide as to the obligations and timeframes to which a unit operator will be subjected to when committing to a federal unit agreement.
FIRST FIVE-YEAR DRILLING TERM
All exploratory unit agreements are effective as of the date the authorized officer actually approves the agreement and executes a certification-determination page. Exploratory unit agreements cannot be made effective as of some earlier or later date.1
The unit agreement grants the unit operator five years from the effective date of the unit agreement in which to diligently explore for unitized substances in paying quantities. If a diligent drilling program is pursued during the first five-year period but unitized substances in paying quantities are not discovered, the unit agreement will automatically terminate at the end of the first five-year term. The authorized officer may extend the first five-year drilling term.
The first five-year drilling term will be considered terminated prior to the five years elapsing if production is discovered in paying quantities, the unit agreement is automatically terminated due to a delinquent drilling program, the unit operator seeks voluntary termination, or the unit agreement is declared invalid.2
During this first five-year term the unit operator must be
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pursuing a diligent drilling program; otherwise, the unit agreement will automatically terminate. The BLM Unitization (Exploratory) H-3180-1 Manual Handbook clearly describes the drilling requirements established pursuant to section 9 of the unit agreement:
Section 9 of the model form of the unit agreement for unproven areas (43 CFR 3186.1 ) contains the initial test well requirements for the unit. Generally, this section requires the unit operator to commence an adequate test well within 6 months of the effective date of the unit agreement and to diligently drill such well to completion; to continue drilling one well at a time, allowing not more than 6 months between the completion of one such well and the commencement of the next such well; and to pursue such operations until a well capable of producing unitized substances in paying quantities is completed.3
The unit operator must continue drilling every six months after the completion of a test well until he discovers unitized substances in paying quantities to prevent an automatic termination of the agreement. As the operator drills the required test wells pursuant to section 9 of the unit agreement, he may discover dry holes, marginally economical wells, or wells that are capable of producing unitized substances in paying quantities. The following is a description of how each of these possible discoveries can impact section 9 drilling requirements and the first five-year drilling term:
DRY HOLE
If the unit operator drills a well to satisfy the drilling requirements of section 9 of the unit agreement and the well is determined to be a dry hole, the unit operator must commence the drilling of an additional well within six months after the date the dry hole is plugged and abandoned to prevent an automatic termination of the unit agreement.
For the purpose of section 9 of the unit agreement, a dry hole will be defined as any well which does not discover hydrocarbons in sufficient quantities in any unitized formation to yield a reasonable profit above marketing and operating costs. As a dry hole does not discover paying production on a leasehold or unit basis, federal leases considered committed to the unit agreement are subject to termination. A unit agreement by itself cannot extend a federal lease. Without paying production, a federal
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lease committed to a unit agreement can only be extended if unit drilling is occurring across the expiration of the primary term of the lease, or the unit agreement is either voluntarily or automatically terminated prior to the lease expiration date.
LEASEHOLD WELL
A leasehold well is defined as a well that is only capable of producing hydrocarbon in sufficient quantities to yield a reasonable profit above marketing and operating costs. However, the well cannot produce sufficient quantities to realize a profit if drilling and completion costs are included in the economic evaluation.
If the unit operator completes a leasehold well when attempting to satisfy section 9 drilling requirements, the operator is required to drill an additional well within six months after the completion date of the leasehold well to prevent the automatic termination of the unit agreement. A leasehold well is not considered to be a discovery of unitized substances in paying quantities.
If a unit well is completed as a leasehold well, all production is to be reported under the lease number on which the well is completed. A participating area will not be established for this well. The well will only benefit the lease upon which it is completed.
It should be noted that a leasehold well will serve to extend any fully committed federal lease that might otherwise expire. The Interior Board of Land Appeals did determine that, if production is discovered but not in sufficient quantities to payout drilling and completion costs, the unit operator should not be penalized by having leases terminate as the unit operator prepares to drill a second well. A leasehold well will extend a federal lease until a participating area is approved or the unit agreement is terminated, whichever occurs first.4
UNIT WELL
A unit well is defined as a well that is capable of producing quantities sufficient to repay the costs of drilling, completing and producing operations with a reasonable profit.5 If a unit well is completed then unitized substances in paying quantities are discovered and a participating area is established pursuant to section 11 of the unit agreement.
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The Unitization (Exploratory) H-3180-1 Manual/Handbook defines producing costs as the cost of maintaining the lease, producing the well, and marketing the product. Marketing the product is further defined as the normal or usual handling, treating, measurement, and transportation costs which a responsible lessee could be expected to pay to market his production. Drilling and completion costs are to be considered the actual costs involved. Extraordinary costs, such as drill string failure, extensive coring and testing programs, loss of well control, etc., normally should not be allowed.6
Once a participating area is established, the first five-year drilling term is essentially terminated and the unit agreement enters the first five-year term after the establishment of the initial participating area. The unit operator is no longer required to drill another well six months after the completion date of the unit well. Section 9 drilling requirements are no longer applicable after unitized substances in paying quantities have been discovered. The exception to this would be if section 9 established a multiple-well requirement.
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