CHAPTER 12 PARTICIPATING AREAS

• Jurisdiction: United States

Federal Onshore Oil and Gas Pooling and Unitization
(Nov 2006)
CHAPTER 12
PARTICIPATING AREAS
Laura Lindley
Presented at the Special Institute on Onshore Pooling and Unitization (RMMLF 1997)
Thomas S. Reese
P. Jaye Rippley
Rin Karns
Attorneys
Brown, Drew & Massey, LLP
Casper, Wyoming

THOMAS S. REESE

Tom Reese received his Bachelor of Arts degree from the University of Wyoming in 1975. In 1981, he graduated with honors from the University of Wyoming College of Law, where he was an editor of the Land and Water Law Review. From 1981-82, he practiced law with the Denver law firm of Sherman & Howard. He returned to Wyoming in 1982 and joined Brown & Drew. Since then, Tom has concentrated his practice in oil and gas law. He practices before various administrative agencies. He has developed experience as a trial attorney and in appellate advocacy in various areas of the law.

P. JAYE RIPPLEY

P. Jaye Rippley's practice focuses on oil and gas. She practices in all areas of oil and gas law, from appearing monthly in front of the Wyoming Oil & Gas Conservation Commission, to litigation, oil and gas related probate matters, title work and transactional work. P. Jaye also practices in the area of residential foreclosures, business law, adoptions, and civil litigation. P. Jaye became a partner of the firm on January 1, 1999. P. Jaye received her Bachelor of Arts degree with Honors in anthropology from the University of Wyoming and her Juris Doctor from the University of Wyoming College of Law. She is a member of Phi Beta Kappa, Phi Kappa Phi, and Delta Theta Phi. P. Jaye was a comment editor for the Land and Water Review and has published a case note comment and an article in that publication.

RIN KARNS

An associate with Brown, Drew & Massey, LLP, Rin Karns received her undergraduate degree in French Language and Literature from Baylor University. In 2006, Rin graduated with honors from the University of Wyoming College of Law and was nominated to the Order of the Coif. While in law school, she served as President of the Board of Advocates, advanced to the Regional level of the National Moot Court Competition and was awarded the Order of the Barrister. In addition to publishing a case note in the Wyoming Law Review, Rin worked as a Legal Writing Teaching Assistant. During her final semester in law school, as a prosecution assistance intern, Rin wrote appellate briefs as well as argued twice before the Wyoming Supreme Court.

TABLE OF CONTENTS

I. Acknowledgement

II. Introduction

III. Historical Background

IV. Formation of Initial Participating Areas

A. Wells Capable of Production in Paying Quantities

B. Method to Establish the Size of an Initial PA

C. State Spacing Regulations and the Formation of the PA

D. Application for PA Approval -- Requirements and Deadlines

E. Allocation of Production

F. Effective Date of Initial PA

G. Royalty Payments

V. Revision, Consolidation, and Termination of Participating Areas

A. Revisions

B. Circle Tangent

C. Standing to Appeal

D. Combining Participating Areas

E. Exclusion of Lands from Participating Areas

F. Lands Necessary for Unit Operations

G. Effective Date of Revision

H. Termination

VI. Allocation of Production

VII. Rentals, Minimum Royalties, and Production Royalties

VIII. Coalbed Gas (CBM) Unit Agreement

IX. Conclusion

XI. Figures

A. Figure 1

B. Figure 2

I. ACKNOWLEDGEMENT

This paper is an update of the paper written by Laura Lindley for the Rocky Mountain Mineral Law Foundation's Onshore Pooling and Unitization Special Institute in 1997.¹ The primary changes are the result of recent legal decisions and organizational changes. We are deeply indebted to Ms. Lindley for her excellent paper and saw no reason to try to improve on her work. So, with deep appreciation to Ms. Lindley and her knowledge, we updated her paper.

II. INTRODUCTION

The regulations define "participating area" as

That part of a unit area which is considered reasonably proven to be productive of unitized substances in paying quantities or which is necessary for unit operations and to which production is allocated in the manner prescribed in the unit agreement.²

The participating area (often simply called the "PA") is used in exploratory units as the means for allocating production of unitized substances, instead of the negotiated participation formula which is usually used in secondary recovery units.³

III. HISTORICAL BACKGROUND

The Mineral Leasing Act contains no definition of or reference to "participating areas." However, it appears that the concept of a participating area for allocating unit production was developed as early as the first federal unit agreement.

The first statute authorizing unitization of federal lands was enacted at the urging of the Secretary of the Interior and in response to conditions of extreme oversupply of oil existing in the late 1920's.⁴ Even before statutory authority for unitization was enacted, the

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Director of the U.S. Geological Survey, Dr. George Otis Smith, began negotiations with lessees in the North Dome Kettleman Hills field in California to unitize their interests. A preliminary agreement was approved by the Secretary of the Interior on November 22, 1929, which provided for the suspension of further drilling in the North Dome Kettleman Hills field until July 1, 1931, and provided that the Secretary of the Interior would seek enabling legislation from Congress for unitization. The history of unitization legislation is outlined elsewhere,⁵ but it is interesting to note that the North Dome Kettleman Hills unit agreement⁶ -- the very first unit agreement -- contained provisions for the establishment of participating areas.⁷

Although the Mineral Leasing Act does not specifically refer to participating areas, it does allude to such a concept in the provision pertaining to extensions of unitized leases.⁸ The Act of August 8, 1946 amended the Mineral Leasing Act to provide that leases "committed to any such plan that contains a general provision for allocation of oil or gas" shall remain in effect for as long as the lease is subject to the plan, provided oil or gas is discovered on the unit prior to the expiration of the primary term of the lease.⁹ The phrase, "that contains a general provision for allocation of oil or gas," had not been previously used in the statute and no explanation for its inclusion appears in the legislative history. Presumably, any unit plan of development would need to contain a provision for allocation of any production which might be obtained from the lands subject to the plan, so, it may have been added to include communitization agreements in the extension provisions, while excluding cooperative agreements.

The Act of August 8, 1946, also added the following provision to the Mineral Leasing Act:

The minimum royalty or discovery rental under any lease that has become subject to any cooperative or unit plan of development or operation, or other plan that contains a general provision for allocation of oil and gas, shall be payable only with respect to the lands subject to such lease to which oil or gas shall be allocated under such plan.¹⁰

No discussion of this provision appears in the reports on the Act or in the floor debates. Nonetheless, the provision tacitly recognizes the concept of allocating unit production to participating lands, which may constitute less than all of the lands subject to the unit agreement.

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Although the Mineral Leasing Act contains no specific reference to or authority for participating areas, it does authorize the Secretary of the Interior to prescribe the terms of the unit plan.¹¹ After a lengthy hearing and the submission of many comments by the industry and individual states,¹² the Department of the Interior published regulations governing unit agreements and a model form agreement in 1947.¹³ As in the current regulations, the original regulations provided that the model form agreement was not mandatory, but any revisions to it would require approval of the Department of the Interior. Sections 11 and 12 of that original model form unit agreement for unproven lands, titled "Participation after discovery" and "Allocation of production" respectively, are remarkably similar to Sections 11 and 12 in the current form. Their specific provisions will be discussed below, but two general observations are appropriate here. First, the published guidance on participating areas (in the regulations and the model form agreement) is general in nature and centers on the objective of defining those unitized lands "then regarded as reasonably proved to be productive of unitized substances in paying quantities."¹⁴ Second, the provisions of the regulations and the standard form agreement insofar as they pertain to participating areas have been virtually unchanged in the almost 60 years since they were first adopted. It is likely that this second observation is a logical consequence of the first.

The Draft BLM Manual provides that the State Director is responsible for the establishment and revision of participating areas, unless that authority is further delegated.¹⁵ Therefore, in some states, participating areas are approved by an official in the BLM State Office, while in others, the authority has been delegated to District Offices.

IV. FORMATION OF INITIAL PARTICIPATING AREA

Once a well capable of producing unitized substances in paying quantities has been completed on the unit, Section 11 of the model form requires the unit operator to submit to BLM for approval a schedule of all lands then regarded as reasonably proved to be productive of unitized substances in paying quantities.¹⁶ The lands so designated around the unit discovery well become the initial participating area. This section of the paper will explore the practical aspects of forming the initial PA as well as the legal developments.

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A. Wells capable of production in

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