CHAPTER 12 COMMUNITIZATION AGREEMENTS IN THE 21ST CENTURY

• Jurisdiction: United States

Federal Onshore Oil & Gas Pooling & Unitization - part 1
(Oct 2014)
CHAPTER 12
COMMUNITIZATION AGREEMENTS IN THE 21ST CENTURY
Mark L. Burghardt
Holland & Hart LLP
Salt Lake City, Utah
Angela L. Franklin
Holland & Hart LLP
Salt Lake City, Utah

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MARK L. BURGHARDT is an attorney with Holland & Hart LLP in Salt Lake City, Utah. A member of the firm's Environmental, Energy, and Natural Resources group, his practice focuses on natural resource law, with an emphasis on oil and gas. Mr. Burghardt represents energy and natural resource clients in a wide range of areas, including complex mineral title examination, surface access, environmental compliance, federal and state permitting, administrative hearings, due diligence, and litigation involving public lands and title curative. His title experience includes rendering drilling, division order, financing, and acquisition title opinions on federal, state, Indian, and fee lands. He currently serves as the Oil and Gas Chair of the Utah State Bar's Energy, Natural Resources and Environmental Committee. Mr. Burghardt received his J.D. from the S. J. Quinney College of Law at the University of Utah.

ANGELA L. FRANKLIN is a Partner with Holland & Hart, LLP, in Salt Lake City, Utah. A Wyoming native from a multi-generational oil and gas family, she has over 23 years experience representing oil, gas, and mining clients in virtually all types of acquisition, divestiture, exploration, and production transactions. Angela counsels clients and prepares a variety of upstream agreements including farmout, exploration, joint operating, participation, pooling, and unitization. She has extensive knowledge of federal exploratory units and associated issues. She represents clients on matters involving well permits, spacing orders, force pooling, and field rules. Angela has extensive experience with title examination of private, federal, state, and Indian lands throughout the Rocky Mountain region and rendering drilling, division order, acquisition, and financing opinions. In addition, she advises clients in complex acquisition and divestiture transactions and prepares the transaction agreements. Angela is admitted to practice in Wyoming and Utah. She has received numerous recognitions, including Best Lawyer in America 2014 Salt Lake City Oil & Gas Law Lawyer of the Year; Best Lawyer in America in Oil and Gas Law (2007-2013); Mountain States Super Lawyer in the area of Energy and Natural Resources (2008-2012); and recipient of the "Best Published Article in an AAPL Publication" Award: American Association of Professional Landmen (2005). She is an active member of the Rocky Mountain Mineral Law Foundation, American Association of Professional Landmen (AAPL), and Utah Association of Professional Landmen. She has authored numerous papers and publications on behalf of the Foundation and AAPL on such topics as comparison of state laws on leasing, exploration, and production; curative documents and tools; pooling issues; and communitization agreements. Angela spends her free time with her family, and can always be found cheering at her teenage daughter's and son's games.

I. INTRODUCTION

This paper is limited to communitization agreements, which is one of the six types of agreements recognized by the regulations concerning Cooperative Conservation Provisions.¹ This paper briefly reviews the statutory history authorizing communitization of federal oil and gas leases; the purposes for a communitization agreement; the form of communitization agreement appearing in the Bureau of Land Management (BLM) Manual; the procedures leading up to final approval of a communitization agreement; communitization on Indian lands; and peculiar problems that may be encountered with respect to communitization agreements.

For purposes of this paper, the following definitions will be utilized:

Pooling:	The voluntary or compulsory joining of leases for common development within state established drilling or spacing units.
Communitization:	The agreement to combine small tracts which include at least one or more federal and/or Indian leases, for the purpose of committing enough acreage to form the spacing and proration unit necessary to comply with the applicable state conservation requirement and to provide for the development of separate tracts which could not be independently developed or operated in conformity with the well spacing pattern established in the area of by order of the state regulatory agency.2
Unitization:	The agreement to jointly operate an entire producing reservoir or a prospectively producing area of oil and/or gas. The entire unit area is operated as a single entity, without regard to lease boundaries, and allows for the maximum recovery of production from the reservoir and to provide for the unified development and operation of an entire geologic prospect or producing reservoir so that exploration, drilling and production can proceed in the most efficient and economical manner by one operator.3

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As used herein, "communitization" is a term applied to the joint development of federal and/or Indian oil and gas leases; however, the reader should be mindful that many states also employ the term when state leases are pooled with other leases for the exploration and development of a single drilling or spacing unit. It is quite common to see the terms unitization, pooling and communitization used interchangeably,⁴ resulting in confusion and precipitates miscommunication between the parties.⁵

It is also common to see the terms "proration unit," "drilling unit," and "spacing unit" used synonymously, but there are distinct differences in the definition of these terms as used in various jurisdictions.⁶ Williams and Meyers defines proration unit as follows:

(1) The area in a pool that can be efficiently and economically drained by one well, as determined by the Commission....

(2) The acreage assigned to an individual well for the purpose of allocating allowable production thereto.⁷

A spacing unit is defined as "the area allocated to a well under a well spacing order";⁸ and a drilling unit is defined as "the area prescribed by applicable well spacing regulations for the granting of a permit by the regulatory agency for the drilling of a well; the area assigned in the granting of a well permit."⁹ For purposes of this paper, the terms proration unit and spacing unit

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will be used interchangeably to define the area established by the state regulatory agency as the surface area which is dedicated to a single well.

Although the Mineral Leasing Act was enacted in 1920,¹⁰ it was not until the passage of an amendment in 1946 that communitization agreements were authorized to enable federal lessees to conform development of federal lands to established well spacing and development programs.¹¹ The Mineral Leasing Act Revision of 1960 further amended the act and incorporated the 1946 provisions relating to communitization agreements.¹² In addition, the Mineral Leasing Act for Acquired Lands¹³ and. the regulations promulgated thereunder permit the communitization of leases issued under that act on the same terms and under the same procedures as the regulations promulgated for implementation for the Mineral Leasing Act.¹⁴

II. PURPOSE

Virtually all oil and gas producing states have promulgated minimum acreage requirements for the drilling of oil or gas wells. Communitization, under the federal regulations, is simply pooling where federal or Indian lands are involved. The Secretary of Interior's (Secretary) authority to approve a communitization agreement arises when a portion or all of a federal or Indian lease cannot be independently developed and operated in conformity with the well spacing requirements of the state in which the land is located. Congress has, in essence, recognized the importance of the state conservation statutes concerning spacing when it amended the Mineral Leasing Act to provide for communitization of federal leases with adjacent federal, fee or state leases. The Mineral Leasing Act presently provides:

When separate tracts cannot be independently developed and operated in conformity with an established well-spacing or development program, any lease, or a portion thereof, may be pooled with other lands, whether or not owned by the United States, under a communitization or drilling agreement providing for an appointment of production or royalties among the separate tracts of land comprising the drilling or spacing unit when determined by the Secretary of the Interior to be in the public interest, and operations or production pursuant to such agreement

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shall be deemed to be operations or production as to each such lease committed thereto.¹⁵

This allows all mineral owners within the area comprising the state's spacing requirement to share in production from the well on the spacing or proration unit. Production is usually apportioned to and among the various tracts and leases on an acreage basis.

The common thread of all federal communitization agreements is that at least one federal or Indian lease or tract is involved and that the federal or Indian lease is communitized with other leases that may be federal, Indian, state or fee. A communitization agreement requires the consent of all necessary parties owning interests in the mineral estate underlying the area and in the formation that is to be communitized. These issues are discussed in more detail below.

III. FORMAT AND CONTENT

A. Required Information

Although there is no prescribed form for a federal communitization agreement in the regulations, the BLM Manual 3160-9-Communitization¹⁶ (hereinafter BLM Manual) includes a standard or model communitization agreement form, one for federal leases and one for Indian leases (but see Part V below) which should be used whenever possible.¹⁷ The regulations, however, do require that certain information...