CHAPTER 2 STATE CONSERVATION REGULATION -- SINGLE WELL SPACING AND POOLING -- VIS-À-VIS FEDERAL AND INDIAN LANDS1

JurisdictionUnited States
Federal Onshore Oil and Gas Pooling and Unitization
(Nov 2006)

CHAPTER 2
STATE CONSERVATION REGULATION -- SINGLE WELL SPACING AND POOLING -- VIS-À-VIS FEDERAL AND INDIAN LANDS1

Owen L. Anderson
Eugene Kuntz Chair in Oil, Gas & Natural Resources Law
University of Oklahoma College of Law
Norman, Oklahoma

OWEN L. ANDERSON

Owen L. Anderson is the Eugene Kuntz Chair in Law in Oil, Gas & Natural Resources at The University of Oklahoma. He is licensed to practice law in North Dakota, Oklahoma, and Texas.

He is co-editor of Cases and Materials on Oil & Gas Law, a leading casebook on United States oil and gas law, co-editor of International Petroleum Transactions, the only textbook on international petroleum transactions law, co-editor of the pocket parts to the treatise Kuntz on Oil and Gas Law, and co-editor of the treatise Waters and Water Rights. He has authored numerous articles on oil and gas law, and he is a frequent lecturer on oil and gas law and policy. He serves as an Editor of the Oil and Gas Reporter and as Editor-in-Chief of the Texas Title Standards. In 2002, Professor Anderson completed a project as Editor of a Model Well Service Contract, a Model Seismic Acquisition Contract, and accompanying Guidance Notes--a joint effort of the Association of International Petroleum Negotiators, the Petroleum Equipment & Suppliers Association, and the International Association of Geophysical Contractors.

Professor Anderson is a Trustee of RMMLF, a Trustee of the Energy & Mineral Law Foundation, an Advisory Board member of the International Oil and Gas Educational Center at the Center for American and International Law, a member of the Association of International Petroleum Negotiators, and a member of the Oklahoma legal committee to the Interstate Oil & Gas Compact Commission. He also serves as a Commissioner for the National Conference of Commissioners on Uniform State Laws.

His prior teaching experience includes Southern Methodist University, Texas Tech University, The University of Texas, The University of Calgary, The University of Oslo, Norway, the University of Dundee, Scotland, and his alma mater, The University of North Dakota. His energy law experience includes general counsel to the North Dakota Industrial (Oil and Gas Conservation) Commission and the North Dakota Board of University & School Lands, lawyer for Kerr-McGee Corporation, and a legal and policy consultant to the oil and gas industry.

I. Introduction

This paper addresses, and is limited to, the interplay between state spacing and pooling laws and practices with the communitization of federal and Indian lands. In general, spacing, pooling, and communitization all relate to the acreage needed to drill or that is attributable to the drilling of single well, although infill drilling--that is the drilling of additional wells within a previously established spaced, pooled or communitized area--may occur as development of a particular field or reservoir matures.

Readers beware that other forms of cooperative oil and gas agreements relating to federal or Indian lands, including exploratory units and enhanced recovery units, are beyond the scope of this paper. Likewise, voluntary and state-ordered compulsory unitizations are also beyond the scope of this paper.

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II. The Rule of Capture

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 or 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

This essay begins with a typical definition of the venerable rule of capture,3 which, although limited by modern oil and gas conservation law, continues to play an important role in promoting efficient and practical regulation. Without regulation, the rule of capture encouraged excessive drilling. Each owner overlying a common reservoir was inclined to drill as many wells as possible and to produce them as rapidly as possible to prevent drainage by neighbors. Excessive drilling was a reality, not mere behavioral theory, as is illustrated by the following picture of the Spindletop oil field in Texas in the 1903:

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SPINDLETOP, TEXAS

Spindletop's Boiler Avenue, 1903. Photograph courtesy of the American Petroleum Institute (Fred A. Schell).

Because the rule of capture encouraged excessive drilling and wasteful production,4 the rule served as a convenient whipping boy for New Deal politicians, federal officials, and others to advocate federal preemption of state regulation of oilfield development and production5 by passing a federal compulsory unitization act.6 In the end, this preemption effort did not succeed.

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Instead, the Congress authorized the establishment of the Interstate Oil Compact Commission in 1935,7 under which the states cooperatively limited oil production based upon an assessment of "reasonable" market demand. In a sense, the IOCC was a harbinger of OPEC8 and was formed for similar reasons--to address falling oil prices.

III. The Correlative Rights Doctrine

Prior to the enactment of comprehensive state oil and gas conservation codes in the 1930s and 1940s, the principal common-law limitation on the rule of capture was the doctrine of correlative rights. This doctrine protects the opportunity of each common owner, through self-help, to secure a fair share of the oil and gas in a reservoir. In ownership-in-place states, like Texas, this doctrine might be more narrowly defined as the opportunity to secure the oil and gas in place beneath one's land. In either case, however, the key word is "opportunity." In other words, securing a fair share requires self-help. As initially applied, the doctrine of correlative rights served to protect common owners from negligent9 or egregiously wasteful10 operations that otherwise would have been protected by the rule of capture. This common-law doctrine, which also has constitutional underpinnings,11 is either expressly12 or implicitly13 included in state oil and gas conservation laws.

IV. Well Spacing and Density

One of the earliest forms of conservation regulation is well spacing and density restrictions that govern the development of a newly discovered reservoir. In addition, state-wide well-location or state-wide spacing rules govern the drilling of wildcat wells.

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Spacing and density regulation greatly limits the rule of capture by regulating the number of wells that can be drilled to develop a common reservoir of oil or gas.14 In theory, a spacing order for a given reservoir determines the area that one well will effectively and efficiently drain. The traditional goals of spacing are to prevent surface waste, underground waste, and economic waste. Within the last 30+ years, the details of spacing rules may also serve to prevent avoidable environmental waste by locating particular well sites to avoid environmentally sensitive areas or, at least, to mitigate potential adverse environmental impacts. In addition, a uniform pattern of consistently spaced wells, together with compulsory pooling where needed, serves to protect correlative rights.

Surface waste is the unnecessary proliferation of valves, pipes, and storage facilities used to handle produced oil when more wells are drilled than are necessary to effectively and efficiently drain the reservoir. This unnecessary proliferation creates a greater likelihood for leaks and spills of oil. Thus, the concern is the loss of oil.

More serious is underground waste, which refers to oil that is left in the reservoir due to the inefficient use of reservoir energy--e.g., gas or water--that drives oil into well bores. Excessive drilling can result in the inefficient dissipation of reservoir energy. Thus, again, the concern is the loss of oil by failing to recover reserves that, through efficient and prudent development, could be recovered.

Economic waste refers to the costs incurred in drilling unnecessary or uneconomic wells. Unnecessary wells are wells that are not necessary for the effective and efficient drainage of oil or gas from a reservoir. Uneconomic wells are wells that fail to make a sufficient rate of return to justify their drilling. Thus, the concern is the excessive, unnecessary, and perhaps unprofitable expenditure of money, not the direct loss of hydrocarbons. Historically, not all conservation acts authorized conservation agencies to consider economic waste,15 but today most conservation agencies may do so. For the reasons suggested, economic waste should be considered. Moreover, if spacing is set too dense for an adequate rate of return, a reservoir is not likely to be fully developed on that density, which then affects correlative rights. As a general rule, operators may be obliged to develop on behalf of their lessor-royalty owners, but only if it would be reasonable and prudent--that is reasonably profitable--to do so.16

Environmental waste, which involves balancing the utility of oil and gas development against the harm that development may cause to the overall environment, was not historically a consideration of conservation agencies. Nevertheless, fewer wells do lessen the environmental impact of development, and some conservation agencies may consider environmental impact when crafting the details of a spacing order. For example, historically, conservation agencies often required wells to be drilled in the center of a square drilling unit or in the center of one of

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the halves of a rectangular drilling unit. Today, spacing orders may allow wells to be located anywhere within a "window" within a drilling unit. This allows operators to avoid troublesome topography, to...

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