CHAPTER 17 TITLE CURVE BALLS THROWN BY UNITS
| Jurisdiction | United States |
(Sep 2007)
TITLE CURVE BALLS THROWN BY UNITS
Attorney
Hinkle, Hensley, Shanor & Martin, L.L.P.
Roswell. New Mexico
Gregory J. Nibert was born in Roswell, New Mexico on January 3, 1958. He and his wife, Carolyn, have two sons, Gregory, age 21, and Jeff, age 19. He received a Bachelor of Arts degree from the University of New Mexico in 1980 and received a Juris Doctor degree, cum laude, from Pepperdine University in 1983. He was Editor in Chief of the Pepperdine Law Review for 1982-83. He is a partner in Hinkle, Hensley, Shanor & Martin, L.L.P. and is a New Mexico Board of Legal Specialization recognized specialist in Oil and Gas Law. He has been listed in The Best Lawyers in America since 1993, Chambers USA America's Leading Lawyers for Business since 2005, and Southwest Super Lawyers 2007.
Mr. Nibert is the annual update author of Chapter 18, "Unitization and Communitization," of the Law of Federal Oil and Gas Leases. He has participated in several Special Institutes of the Rocky Mountain Mineral Law Foundation and has presented papers and speeches to a number of organizations on oil and gas law topics, including the American Association of Professional Landmen ("AAPL"); the State Bar of New Mexico Section of Natural Resources, Energy and Environmental Law; The University of Texas School of Law Oil, Gas & Mineral Law Institute; New Mexico Landmen's Association; Tulsa Landmen's Association; National Association of Division Order Analysts; Southwestern Association of Division Order Analysts; and Houston Bar Association. Most recently, Mr. Nibert was the Co-Chair of the Federal Onshore Oil and Gas Pooling and Unitization 2006 special institute of the Rocky Mountain Mineral Law Foundation and presented a paper "The Impact of Unit Events on a Federal Oil and Gas Lease" and is a speaker at the RMMLF's Federal Oil and Gas Leasing Short Course. An article jointly prepared by Mr. Nibert, George Snell, Tim Dowd, Tom Daily, John McDavid and Richard Revels: "A Comparative Review of Oil and Gas Law in Texas, Oklahoma, Arkansas, New Mexico, Mississippi, and Louisiana" published in Landman, November/December 2002, by the AAPL, was selected as the Best AAPL Published Article at the AAPL annual meeting in June 2003. Other papers for special institutes of the Rocky Mountain Mineral Law Foundation include: "Communitization of Federal Lands: An Overview," "Final Decisions and Appeal Procedures in Drainage Cases," and "Non-Record Title Considerations." His paper for the Center for American and International Law (formerly the Southwest Legal Foundation) Annual Institute on Oil and Gas Law in 2002 was "Federal Unitization: Onshore Oil and Gas Unit Agreements for Unproven Areas" 53 Inst. Oil & Gas L. 10 (2002). He was the Oil and Gas Section Chair for the 46th Annual Rocky Mountain Mineral Law Institute in 2000 and served as the Landmen's Section Chair for the 38th Annual Institute in 1992.
Mr. Nibert is active in the Independent Petroleum Association of New Mexico and the New Mexico Oil and Gas Association. He is a Trustee of the Rocky Mountain Mineral Law Foundation and a Research Fellow of The Center for American and International Law. He served on the Board of Directors of the Section of Natural Resources, Energy and Environmental Law of the State Bar of New Mexico and was Chair of the Section for the year 1990-91. Professionally he is a member of the State Bar of New Mexico, Chaves County Bar Association, New Mexico Landmen's Association, and American Association of Professional Landmen.
Mr. Nibert was elected to serve as a Chaves County Commissioner in 2006, served on the Roswell Independent School District Board of Education, was Lt. Governor of the Southwest District of Kiwanis International, a Distinguished Past President of the Roswell Kiwanis Club, and Chairman of the Rio Hondo District of the Conquistador Council, Boy Scouts of America 1997-2003.
PAPER TABLE OF CONTENTS
I. INTRODUCTION
II. TYPES OF UNIT
A. SPACING UNIT
1. State Spacing
(a) State Conservation Principles
(b) Spacing or Proration Unit
2. Pooling/Communitization
(a) Joinder of Interests
(b) Agreement
B. WORKING INTEREST UNIT
1. Creation
(a) Standard Working Interest Unit
(b) Beneficial Working Interest Unit
2. Allocation of Costs and Production
C. EXPLORATORY UNITS
1. Unitization
2. Federal Form
3. Non-Federal Form
4. Leases Conformed
5. Acreage Basis
D. PRESSURE MAINTENANCE, SECONDARY, AND TERTIARY RECOVERY UNITS
E. COALBED NATURAL GAS UNITS
III. EFFECT OF LEASE COMMITMENT TO THE UNIT
A. CROSS-CONVEYANCE OR CONTRACTUAL
B. SPACING UNIT
1. Operations
2. Allocation of Production
3. Formation
4. Use of Surface
(a) General Rule
(b) Communitized Operations
5. Permits
6. Recording
C. WORKING INTEREST UNITS
1. No Effect on Lease
2. Effect on Working Interest Owners
(a) Standard Form
(i) Allocation of Costs and Working Interest Production
(ii) Bearing Burdens
(iii) Excess Burdens
(b) Beneficial Working Interest Unit
D. EXPLORATORY UNITS
1. Definitions
2. Leases Conformed to Unit Agreement
(a) Lease Term
(b) Royalty
(c) Rentals
(d) Unit Area Treated as One Lease
3. Segregation
(a) Federal Leases Committed in Part
(i) Terminology
(ii) Extensions
(iii) Lease Term
(iv) Rental or Royalty Status
(b) Segregation of State and Fee Leases
4. Extension of Unitized Leases
(a) Federal Leases
(i) 20-Year Leases
(ii) Annual Leases
(iii) Minimum Royalties
(iv) Drilling Over the End of the Primary Term
(v) Production in Paying Quantities
(b) State and Fee Leases
5. Participating Areas
(a) Cessation of Production Prior to Unit Termination
(b) Revision of Participating Area
(c) Possible Rental Obligation
(d) Overlapping Participating Areas - Multiple Formations
(e) Rental Obligations Become a Covenant
6. Contraction of the Unit Area
(a) Participating Leases
(b) Nonparticipating Leases
(i) Federal Leases
(ii) State and Fee Leases
7. Termination of the Unit Agreement
(a) Federal Leases
(i) Public Interest Requirement
(ii) Equivalent to Contraction
(b) State and Fee Leases
(c) Effective Date of Termination
E. PRESSURE MAINTENANCE, SECONDARY, AND TERTIARY RECOVERY UNITS
1. Leases Conformed to Unit Agreement
2. Term
F. CNG UNITS
1. Complications with Traditional Agreements
(a) Drilling and Completion
(b) Lease Extension
IV. CONCLUSION
I. INTRODUCTION
The mechanics of title examination do not change simply because the lands to be examined are included within some type of unit. There may be some additional records that need to be examined. It is important for the title examiner to understand the basics of the various types of units that may exist in the records.
In baseball, the better hitters understand the different pitches. Good batters are able to recognize what pitch is thrown and how that pitch will affect the location of the ball as it crosses the plate. The curve thrown by a unit requires an understanding of what type of unit is involved. The ultimate question becomes: "What lands must be examined to appropriately allow the client to ascertain the risk of acquiring the lease, drilling the well, and/or disbursing proceeds of production?" This Paper is not designed to hone your mechanical skills as a title examiner. Rather, it is designed to help you understand the nature of the various "units" that may be thrown at you, and to help you assess the risk if something less than all "unit" lands are examined.
II. TYPES OF UNITS
The oil and gas industry has utilized the word "unit" to describe a number of events that consolidate, combine, and/or join together two or more leases covering separate tracts of land for purposes of drilling and/or producing one or more oil and gas wells. As discussed below, precise definitions will help distinguish the several types of "units" that may be encountered. This paper focuses on spacing units, working interest units, exploratory units, pressure maintenance, secondary and tertiary recovery units, and coalbed natural gas units.
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A. SPACING UNIT.
1. State Spacing. The purpose of forming a spacing unit or proration unit is to comply with state spacing statutes or regulations. State spacing has become the primary tool of the state to advance the public interest in prevention of waste, protection of correlative rights, and conservation of natural resources.1
(a) State Conservation Principles: Being a fluid, oil and gas migrate through a reservoir after wells have penetrated the formation to provide a conduit for the oil and gas to escape. Courts initially grappled with the question of the ownership of the oil and gas as it migrated through a reservoir, crossing from one tract of land onto another, where it was captured and produced. The Rule of Capture has been succinctly stated as follows:
The owner of a tract of land acquires title to the oil and gas which he produces from wells drilled thereon, though it may be proved that part of such oil and gas migrated from adjoining lands. He may thus appropriate the oil and gas that have flowed from adjacent lands without the consent of the owner of those lands, and without incurring liability to him for drainage. The nonliability is based upon the theory that after the drainage the title or property interest of the former owner is gone.2
The rule of capture led to tremendous problems which were highlighted by the Spindletop oil field development in eastern Texas in 1903. Excessive drilling occurred as each owner attempted to "capture" the oil and gas underneath his tract to prevent it from migrating to an adjoining landowner. It was soon realized that...
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