CHAPTER 14 CONTRACTIONS AND TERMINATION

• Jurisdiction: United States

Federal Onshore Oil and Gas Pooling and Unitization
(Nov 2006)
CHAPTER 14
CONTRACTIONS AND TERMINATION
Paul S. Conner
President
UnitSource Incorporated
Denver, Colorado

PAUL S. CONNER, CPL

Paul S. Conner is President and Owner of UnitSource Incorporated, located in Northglenn, Colorado. For over 28 years, Paul has specialized and performed oil, gas and geothermal unitization consulting in the Rocky Mountain Region as well Alaska, California, Florida, Louisiana, Mississippi, Nevada, Oklahoma, Oregon, Texas and Washington State.

Paul was a Program Committee Member for the February, 1990, Rocky Mountain Mineral Law Institute on Pooling and Unitization II. He has also been a guest speaker in the Ninth and Eleventh Annual Conferences of the National Association of Lease and Title Analysts (September, 1994, June, 1996), the Annual Conference of the National Association of Division Order Analysts (September, 2002) and also the 41st Institute of the Rocky Mountain Mineral Law Foundation (Sun Valley Idaho, July 1995).

Paul is a Certified Professional Landman (CPL) and is active member of the American Association of Professional Landmen (AAPL) and was the Public Lands Chairman of the AAPL in 2000. In addition to the AAPL, Paul is active in the Montana (MAPL), Wyoming (WAPL), and Denver (DAPL) Associations of Petroleum Landmen and was DAPL Landman of the Year in 2000.

Table of Contents

1. Introduction

2. Voluntary Contraction

2.1 Required Procedure for Voluntary Contraction

2.2 Affects Voluntary Contraction May have On a Unitized Federal Oil and Gas Lease

2.3 Affects Voluntary/Automatic Contraction May have on a Unitized Lease Other than a Federal Lease

3. Automatic Contraction

3.1 Affects Automatic Contraction May have On a Federal Oil and Gas Lease

4. Automatic Contraction and Participating Areas Established on Less than 40 Acre Subdivisions

5. Horizontal Contractions

5.1 Required Procedure of Horizontal Contraction

5.2 Affects Horizontal Contraction May have on a Federal Oil & Gas Lease

5.3 Affects Horizontal Contraction May have on a Unitized Lease Other than a Federal Oil and Gas Lease

6. Terminations -- Introduction

6.1 Automatic Terminations

6.1.1 Successor Unit Operator

6.1.2 Continuous Drilling Obligation

6.1.3 Initial Five Year Term

6.2 Voluntary Contraction

6.3 Affects Termination hay have on a Committed Lease

7. Termination Strategies

CONTRACTIONS

1. INTRODUCTION

The purpose of contracting a unit area is to provide a mechanism whereby lands subject to a unit area can be eliminated from the unit area if those lands are not capable of production at a defined time in the unit agreement's life or that have not been timely evaluated by unit drilling. Contraction of a unit area along with the process for obtaining contraction can be found in Section 2 of the Model Form¹ Unit Agreement. Section 2 actually sets out two types of contractions to the unit area, those being a voluntary contraction and an automatic contraction.

2. VOLUNTARY CONTRACTION

Section 2 of the Model Form Unit Agreement provides for voluntary contraction of the unit area and states in part "....when practicable be expanded to include therein any additional lands or shall be contracted to exclude lands whenever such expansion or contraction is deemed to be necessary or advisable to conform with the purposes of this agreement".

Reasons or circumstances that might warrant voluntary contraction might be due to 1) the depletion of oil and gas in unit lands as a result of diligent producing operations, 2) the parties to the unit agreement have no further plans to continue unit drilling or, 3) the geological prospect has been adequately defined by unit drilling and is smaller than the current unit area.

When advisable it is possible to voluntarily contract a unit area that has already been subject to a previous contraction whether the previous contraction was a voluntary or automatic contraction. A voluntary contraction can occur at any time in the life of the unit, prior to or subsequent to the discovery of production in paying quantities.²

2.1 REQUIRED PROCEDURE FOR VOLUNTARY CONTRACTION³

Once the unit operator has determined that a voluntary contraction of a unit area would be advisable or on demand of the Authorized Officer (AO), the unit operator should file with the appropriate AO an application for preliminary approval of the contraction of the unit area. The application should describe the lands to be eliminated from the unit area, the basis for requesting the contraction, and the proposed effective date of the contraction. It is commonly accepted by the AO to approve a request for an

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effective date which is the first day of the month following the submittal of the application requesting preliminary approval of the contraction of a unit area.

If the AO concurs with the application for contraction, the AO will deliver a letter to the unit operator granting preliminary approval of the contraction subject to completing the contraction process as set out in Section 2⁴ of the unit agreement.

Upon receipt of the AO's preliminary approval letter, the unit operator should mail a Notice to each working interest owner, lessee and lessor whose interests are affected. The Notice should describe the lands being eliminated from the unit area along with a statement that the committed parties to the unit agreement have a thirty (30) day period pursuant to Section 2 (b)⁵ of the unit agreement within which to submit to the unit operator any objections to the contraction of the unit area.

Upon expiration of the thirty (30) day objection period, the unit operator should then file with the AO a subsequent application requesting that the contraction be granted final approval. Objections timely submitted by a working interest owner, lessee or lessor should also be filed with the AO along with revised Exhibits "A"⁶ and "B"⁷ to the unit agreement. The revised exhibits should reflect the new boundaries of the contracted unit area. The AO will then consider the application and documents filed therewith.

Objections received and filed with the AO by the unit operator, will be evaluated and determined if the objections have merit. In any event the AO will direct a letter to the unit operator advising of the approval or denial of the proposed contraction. Evidence of the approval or denial of the contraction by the AO should be provided to all committed parties to the unit agreement.

It should be noted and emphasized that only the unit operator can apply for a voluntary contraction.

2.2 AFFECTS VOLUNTARY CONTRACTION MAY HAVE ON A UNITIZED FEDERAL OIL AND GAS LEASE

In cases where a unit area is voluntarily contracted prior to the establishment of a participating area,⁸ any Federal oil and gas lease that is committed in part, (a portion of the lease inside and outside the newly contracted unit) will be subject to a segregation.⁹ The portion of the lease outside the newly contracted unit area will be given a new lease number and a two year extension or the term of the lease whichever is the longer. However, the Federal oil and gas lease will segregate only if the lease is in effect at the

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time of unit contraction and either fully¹⁰ or effectively¹¹ committed to the unit agreement. That portion of the lease that continues to be a part of the contracted unit area will maintain its original expiration date and then be subject to the provisions of the unit agreement.

If a Federal oil and gas lease is eliminated in its entirety from a unit area as a result of a voluntary contraction, the Federal oil and gas lease will be eligible for a two year extension by elimination,¹² or the original term of the lease, whichever is the longer. Again the Federal oil and gas lease must be in effect at the time of unit contraction and either fully or effectively committed to the unit agreement.

2.3 AFFECTS VOLUNTARY/AUTOMATIC CONTRACTION MAY HAVE ON A UNITIZED LEASE OTHER THAN A FEDERAL OIL AND GAS LEASE

State oil and gas leases committed and eliminated from a unit area in their entirety or partially will be subject to the applicable State rules and regulations. The State agency having jurisdiction over...