CHAPTER 15 THE MAKING AND IMPLEMENTATION OF PAYING WELL DETERMINATIONS IN FEDERAL UNITS
| Jurisdiction | United States |
(Jan 1997)
THE MAKING AND IMPLEMENTATION OF PAYING WELL DETERMINATIONS IN FEDERAL UNITS
Zarlengo & Kimmell, LLC
Denver, Colorado
The subject of this paper was substantially addressed in "Paying Well Determinations in Federal Units: Capturing a Moving Target", submitted by this author at the initial special institute on unitization in 1990.1 This paper will restate current law on paying well determinations, but will not repeat in detail the discussion and analysis contained there. As did the previous paper, this paper will address only those issues concerning unitization which are directly related to paying well determinations. It is beyond the scope of this paper to address in any detail the bases for unitization, and the legal and technical implications of unit operations in general. The reader is referred to other sources and papers presented at this institute and in the 1990 institute on unitization for in depth analysis of issues other than paying well determinations pertaining to federal units.2
I. APPLICABLE PROVISIONS OF THE UNIT AGREEMENT
A. STATUTORY INTENT AND EXPECTATIONS OF THE PARTIES
The provisions of the Unit Agreement must be construed to the extent possible so as to implement the intent of the parties, and to fulfill their reasonable expectations.3 In addition, and more to the point, Congressional intent in authorizing the formation of units must be honored.4
[Page 15-2]
It is beyond the scope of this paper to discuss in detail the statutory history of the federal unitization statute, or the economic and technical changes which brought it about.5 For purposes of this discussion, suffice it to say that Congress intended to allow oil and gas operators seeking to explore for and produce oil and gas on federal lands, the opportunity to do so in a way that made more economic and technical sense than practices in use at that time. Specifically, Congress intended to encourage exploration of the vast tracts of federal minerals in an orderly fashion, and to avoid unnecessary and destructive competition between producers for development of the same field.6
The intent of the parties in proposing, and ratifying a unit agreement is, of course, to make a discovery and then to develop the unit acreage. Exploration and development of a unit can only occur if it is profitable to do so. Therefore, only acreage which is susceptible to further development on an economic basis is to participate in the unit, and to remain in the unit after it contracts. A corollary to that concept is the notion that only acreage which is contributing to unit production in an economically viable manner should be allowed to share in unit production.
A scheme was thus created whereby wells would be drilled in the most advantageous location within a unit containing previously unexplored, and in most cases speculative, acreage until a discovery is made, or until it becomes apparent that no discovery will be made. Once a discovery is made, further development of the unit would occur in accordance with an approved plan. As further wells are drilled, the area within the unit proven productive will increase and expand. Due to the fact that exploration of a large tract of land under this scheme is speculative in nature, only acreage actually proven to be productive participates in unit production and in unit costs and expenses. After a five year exploratory period, acreage not proven productive is contracted from the unit.7
B. EXPANSION AND CONTRACTION OF PARTICIPATING AREAS
As mentioned in the previous paper, paying well determinations are an important part of the mechanism whereby the purposes of unitization and the expectations of the parties to unitization are implemented. The decision that a particular oil and gas well is a "paying well" may dictate the establishment and expansion or contraction of unit participating areas.
[Page 15-3]
Article 11 of the Unit Agreement addresses this point:
"Upon completion of a well capable of producing unitized substances in paying quantities, or as soon thereafter as required by the AO, the Unit Operator shall submit for approval by the AO, a schedule, based on subdivisions of the public-land survey or aliquot parts thereof, of all land then regarded as reasonably proved to be producing of unitized substances in paying quantities."
Article 11 further states:
"The participating area or areas so established shall be revised from time to time, subject to like approval, to include additional land then regarded as reasonably proved to be productive in paying quantities, or necessary for unit operations, or to exclude land then regarded as reasonably proved not to be productive in paying quantities, and the schedule of allocation percentages shall be revised accordingly."
Article 9 of the unit agreement defines paying quantities as "quantities sufficient to repay the costs of drilling, completing, and producing operations, with a reasonable profit."8
Thus, acreage determined to be reasonably capable of commercial production as a result of activities with respect to a paying well is included in a unit participating area. Acreage not found to be susceptible to economic development may in certain circumstances be excluded from a participating area, and no longer considered in unit allocations. As such, a paying well determination directly affects allocation of unit production and unit expenses.9
Even so, it should be noted that once a paying well determination is made and a participating area established based upon that determination, the participating area will not necessarily be retroactively contracted if the same well is subsequently found not to be productive. This is the holding in Davis Oil Co. 10 In that case, a well was successfully completed and a participating area expanded based upon that completion. Less than one
[Page...
To continue reading
Request your trial