CHAPTER 11 SINGLE WELL SPACING AND POOLING: STATE SPACING AND JURISDICTION OVER CONSERVATION

• Jurisdiction: United States

Federal Onshore Oil & Gas Pooling & Unitization - part 1
(Oct 2014)
CHAPTER 11
SINGLE WELL SPACING AND POOLING: STATE SPACING AND JURISDICTION OVER CONSERVATION
Keith B. Hall
Louisiana State University, Paul M. Hebert Law Center
Baton Rouge, Louisiana
Director of Mineral Law Institute
Campanile Charities Professor of Energy Law
LSU Law Center, Rm. 428
1 East Campus Drive
Baton Rouge, LA 70803-1000
Ph. 225-578-8709
keith.hall@law.lsu.edu

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KEITH B. HALL is the Director of the Mineral Law Institute and the Campanile Charities Professor of Energy Law at Louisiana State University Law School, where he teaches Mineral Rights, Advanced Mineral Law, International Petroleum Transactions, and an Energy Law Seminar that focuses on environmental issues relating to the oil and gas industry. Before joining LSU Law School, he was a member of Stone Pigman Walther Wittmann in New Orleans, where he practiced law for 16 years, focusing his practice on oil and gas law, environmental law, and toxic tort litigation. He is a member of the Board of Editors for the Oil & Gas Reporter, the Board of Trustees for the Rocky Mountain Mineral Law Foundation, the Advisory Council for the Institute for Energy Law, and the Board of Trustees for the Energy & Mineral Law Foundation. He previously served as Chair of the Louisiana State Bar Association's Environmental Law Section. Before attending law school, he earned a B.S. in Chemical Engineering from Louisiana State University and worked for eight years as a chemical engineer.

The opening section of this paper briefly reviews the rule of capture and some of the problems arising from it. The second section discusses conservation statutes designed to address some of those problems. The second section put a particular emphasis on state pooling and spacing statutes, noting the numerous similarities between the various jurisdictions' statutes, but also noting the significant differences, such the statutes' treatment of mineral interest owners who choose not to participate in the cost of a well. The third section examines state regulation of federal lands, including the circumstances in which state laws purporting to regulate federal lands are preempted. Finally, the fourth section reports on trends in selected states with respect to the application of spacing and pooling rules in shale plays.

I. Introduction - The Rule of Capture and Problems Arising From It

In the United States, the owner of land in fee simple absolute typically has the exclusive right to conduct oil and gas exploration and production activities on and below his land.¹ This follows from the common law's "ad ceolum" doctrine, which provides that the owner of land

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owns not just the surface, but the entire airspace above it and the entire subsurface below it.² The doctrine's name comes from the Latin phrase "cujus est solum ejus est usque ad caelum et ad inferos," which has been translated as "for whoever owns the soil, it is theirs up to Heaven and down to Hell."³

But unlike the soil itself, which is solid and typically remains in place beneath a particular tract of land, oil and natural gas generally exist in a fluid state - either liquid or gas - and can move in response to differences in pressure. This can make production of those substances easier because they will flow to a well from the surrounding subsurface, but such "drainage" of oil or gas from the surrounding subsurface can also lead to disputes between neighbors. For example, suppose that Black, the owner of Blackacre, drills a well on his land, near the border with Whiteacre, a tract owned by his neighbor, White. Black's well begins producing oil at a substantial rate, with much of the oil likely being drained from beneath Whiteacre. Is Black entitled to operate the well and keep all the proceeds, or is White entitled to some type of relief - perhaps either an injunction to prohibit Black from operating the well or a judgment requiring Black to share the proceeds with White?

Courts began facing this issue in the late 1800s.⁴ Across the United States, courts resolved such disputes by adopting what became known as the "rule of capture."⁵ The rule of capture provides that the owner of land acquires title to all of the oil and gas produced from a well drilled on his land, even if the well causes drainage of oil and gas from beneath a neighbor's land, and that the neighbor is not entitled to compensation for such drainage.⁶ Courts justified

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the rule of capture of three grounds: (1) it was impossible to determine how much oil or gas drained from beneath a neighbor's land; (2) it would interfere with private property rights and development for a court to prohibit a landowner from drilling a well where he chose on his land; and (3) the neighbor had a self-help remedy - he could drill his own offset wells to "protect his lines."⁷

The rule of capture might have been the most practical rule that courts could develop on their own, but it also created certain problems. It created incentives for neighboring landowners to produce oil and gas as quickly as they could, before the neighbor did so. This often promoted individuals to drill more wells than were need to efficiently drain an area.⁸ This led to economic waste in the form of excessive spending on drilling. Further, too rapid a rate of production can result in inefficient use of the reservoir energy that can help transport oil up to the surface.⁹ The inefficient use of such energy could result in less oil being produced from a field than could be produced if the reservoir energy was more efficiently used. Thus, more oil might be left in the ground, a form of physical waste. Finally, although a landowner always has the self-help remedy drilling his own well, some people might question the fairness of the rule of capture.¹⁰

II. State Conservation Statutes and Single Well Pooling

Starting in the early 1900s, states and the federal government began taking steps to avoid wasteful use of a wide variety of natural resources. The enactment of conservation statutes and regulations directed toward avoiding waste of oil and natural gas resources started to become common by the 1930s and 1940s.¹¹ Common types of regulation included creation of allowables (maximum allowable rates of production from wells) and "spacing" rules that placed limitations on well density. The spacing rules included minimum distances between a well and the nearest property line, minimum distances between wells, and in some cases, a maximum number of wells in a specified area (for example, no more than one well for a given number of acres).

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But the spacing rules could create a problem. Suppose, for example, that a spacing rule prohibited drilling a well any closer than 330 feet from the nearest property line. Strict enforcement of such a rule would prohibit drilling altogether on small tracts. That could be unfair to the owner of small tracts. Further, given that the right to explore for and develop minerals is a property right, strict enforcement of such spacing rules could result in a taking of private property that might be unconstitutional in the absence of some compensation.¹² One response to this problem is "pooling." In pooling, two or more separately-owned tracts are figuratively "combined" for the purposes of creating an area large enough to obtain a well permit under applicable spacing regulations.¹³

A. Drilling and Spacing Units

Numerous states have statutes that authorize conservation agencies to issue orders creating drilling or spacing units - areas of land where the only well or wells allowed will be those authorized by the agency.¹⁴ The statutes typically provide that the agency may create drilling or spacing units that will apply with respect to a common source of supply,¹⁵ after notice and a hearing,¹⁶ if the agency determines that such a unit is necessary to prevent waste,¹⁷ avoid the drilling of unnecessary wells,¹⁸ and protect correlative rights¹⁹ (correlative rights are the rights of owners in a common pool to have the opportunity to produce their fair share of oil or gas from the pool²⁰ ). The statutes often state that either that a drilling unit should be the

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maximum size that can be efficiently drained by one well,²¹ or that a drilling unit must be no smaller than that size.²²

B. Statutory Pooling

The language of statutes authorizing state conservation agencies to issue orders pooling interests and creating drilling units varies from state to state, but there are several features that are common.²³ The language of pooling statutes typically suggest that the statutes apply only if two or more separately-owned tracts or separately-owned mineral interests exist within a drilling unit.²⁴ This makes sense because, unless there are separately-owned interests, there is no need for a pooling of interests.

Pooling statutes typically state that:

• in the absence of voluntary pooling, the conservation agency can pool interests ²⁵

• an application for statutory pooling must be made by someone with an interest in the drilling unit ²⁶

• notice must be given and a public hearing must be held prior to the conservation agency issuing a pooling order ²⁷

• pooling orders must be on terms that are just and reasonable ²⁸

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• pooling orders must allow each owner of a tract or interest in the drilling unit the opportunity to recover or receive, without unnecessary expense, his just and reasonable share of production from the common pool ²⁹

• operations incident to the drilling of a well are deemed to be operations on each separately owned tract in the unit ³⁰

• the share of production allocated to each tract in the drilling unit will be deemed as having been produced from that tract. ³¹

C. Allocation of Production Under Pooling Statutes

The regulator has authority to allocate production to the various tracts...