CHAPTER 2 STATE CONSERVATION REGULATION AND OVERVIEW OF STANDARD SPACING AND POOLING
| Jurisdiction | United States |
(Nov 2012)
STATE CONSERVATION REGULATION AND OVERVIEW OF STANDARD SPACING AND POOLING
Attorney at Law
Clinton, LA
PATRICK H. MARTIN is Director of the Mineral Law Institute, Emeritus and the Campanile Professor of Mineral Law, Emeritus at the Louisiana State University (LSU) Law Center. Professor Martin taught at the LSU Law Center from 1977 to 2011, including courses in Jurisprudence, Contracts, and Mineral Law. From 1982 to 1984, he served as the Commissioner of Conservation for the State of Louisiana. Prior to joining the faculty at LSU, Professor Martin taught at the University of Tulsa Law School. Before entering teaching, he was a staff attorney with Gulf Oil Corporation in New Orleans. Professor Martin holds the B.A., M.A., and Ph. D. degrees from Louisiana State University and the J. D. degree from the Duke University Law School. His publications include Pooling and Unitization (with B. Kramer) and Williams & Meyers Oil and Gas Law (update and revision author with B. Kramer) and three casebooks, Jurisprudence: Text and Readings on the Philosophy of Law (with Christie), Oil and Gas Cases and Materials (with Maxwell and Kramer) and Economic Regulation: Energy, Transportation and Utilities (with Pierce and Allison, 1980) as well as numerous articles on oil and gas law and energy regulation. He is an Honorary Trustee of the Rocky Mountain Mineral Law Foundation and a member of the Board of Editors of the Oil & Gas Reporter. Professor Martin has also served as an arbitrator, mediator, and consultant in the oil and gas industry. He was a Commissioner, Amite River Basin Drainage and Water Conservation District.
Patrick H. Martin
Campanile Professor of Mineral Law, Emeritus Law Center, Louisiana State University
Rocky Mountain Mineral Law Foundation
Special Institute: Horizontal Oil & Gas Development
November 8, 2012
Synopsis: This general overview presentation addresses the interplay between state spacing and pooling laws and practices. The basics and a brief description of state pooling and spacing is included for less experienced lawyers and landmen. The paper is supplemented and expanded by a powerpoint presentation that identifies some of the conflicts between traditional regulation and the challenges of horizontal drilling and fracking in reservoirs of lower porosity/permeability, as well as exploring aspects of federal approaches to unitization.
I. Traditional State and Conservation Regulation
A. The Rule of Capture1
The rule stated:
"the owner of a tract of land acquires title to the oil or gas which he produces from wells on his land, though part of the oil or gas may have 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."
This rule is followed in all producing states, whether they have adopted an "ownership in place" theory such as Texas has or have adopted a "non-ownership" approach such as Louisiana and California. The defense to the rule of capture is: the rule of capture. Thus there is a great incentive to drill wells to prevent another party from draining your property and to produce from such wells as rapidly as possible.
1. The Effects of the Rule of Capture.
The rule of capture can lead to the drilling of wells that are unnecessary to drain a reservoir. It can lead to excessive rates of production of oil that may cause coning, fingering, and premature loss of reservoir energy as gas cap gas or solution gas is depleted. Surface effects may include production in excess of storage and marketing facilities.
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2. Improper Practices.
Apart from the incentives of the rule of capture, improper practices by operators can cause waste. Incorrect plugging of a well, for example, can lead to migration of oil out of a reservoir to pollute the surface or can lead to communication between formations thus damaging a productive formation. Putting a valuable resource to inferior uses might also be regarded as a wasteful practice.
B. State Efforts to Promote Conservation2
Conservation of oil and gas is a concern essentially local in character. Each state, that is, has its own program of conservation, and there can be considerable variation in policy and statutory authority from state to state. The influence of the Federal government has been limited, though in recent years the Federal agencies and the Congress have had more involvement with the state programs. While the states may differ, their common features stand out. This is not a matter of coincidence. States consciously borrowed from one another in the development of their programs and continue to do so, both because they wish to benefit from the experience of others, and because common problems often call for common solutions. The states cooperate with one another on conservation matters through the Interstate Oil Compact Commission which was established in 1935, now named Interstate Oil and Gas Compact Commission (IOGCC - http://www.iogcc.state.ok.us). It is possible to describe the development of conservation programs as falling into several fairly distinct phases.
1. Regulation up to 1909:
Early regulation of oil and gas production and use was concerned with prevention of subsurface and surface damage that could result from improper drilling techniques. Regulation of casing of wells and plugging of wells was for this purpose. There was restriction of venting of gas, and prohibition of certain uses of gas, such as for flambeau lights and carbon black.
2. Regulation to 1919:
In this period, states enacted a number of laws to prohibit discrimination in purchases of oil or gas by pipelines and to prohibit waste through a variety of practices.
3. Regulation since 1919:
The period since 1919 has seen the development of modern conservation regulation -- well-spacing, establishment of allowables, pooling and unitization.
4. New roles for conservation since 1976:
The state regulatory agencies responsible for conservation of oil and gas have assumed new responsibilities. These have primarily related to developments at the Federal level and increased concern for environmental protection at both the state and
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Federal levels. The agencies were charged with the duty of making well-status determinations for regulation of natural gas prices and reservoir determinations for purposes of price controls on oil (1976-1980) or Windfall Profit Tax implementation. The agencies have authority over underground injection of wastes and new responsibilities regarding transportation and disposal of oil field wastes and site remediation. A number of states also have given responsibility to the conservation agency for underground storage facilities for natural gas. Projects of this nature involve not only a sort of pooling but also expropriation.
C. The State Agencies3
In some states the conservation agency is established by the state constitution while in others the conservation agencies are wholly a creature of the legislature. Authority may be vested in a commission or board or in a single individual. A commissioner may be elected or appointed under state law, and the position may be full time employment or part-time service. In all significant oil producing states there will be a professional staff The legal character of the agency's establishment may have a bearing on the powers it may exercise and the manner in which it may exercise them. An appendix to this paper identifies the names and addresses of many of the state agencies.
D. Production Limitations4
1. Maximum efficient rate of recovery
Maximum efficient rate (MER) is the maximum rate at which oil can be produced without excessive decline or loss of reservoir energy. It is based on the engineering concept that each well has a rate of production that will maximize the amount of recoverable hydrocarbons by minimizing the loss of natural reservoir pressure. Because of the ever-changing nature of reservoir pressure, MER figures must change and reflect a range of options rather than a single number. MER regulation was stimulated by the federal effort to deal with wartime petroleum demand during World War II. In some states this federal effort remained after the war as a means of controlling production. MER also served as the only regulatory mechanism available to control production in those states where market demand prorationing was not authorized. Thus, MER regulation could serve either as an outer limit on production everywhere market demand prorationing existed, or as the only limit on production based on the general concept of waste prevention.
For example, in a water drive field the rate of withdrawals of oil may be limited to about 3 to 5 percent per year of the ultimate yield so as to coincide with the rate of movement of water into the structure. If this were not done, pressure would drop, gas would come out of solution in the oil rendering it more viscious and in part nonrecoverable, and water would "finger" through the producing structure, segregating
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pockets of unrecoverable oil. Factors considered in maximum efficient rate regulation: yardstick, depth-bracket allowables; gas-oil ratio; deliverability reports
2. Market Demand
The most controversial form of conservation legislation was the prorationing system. Prorationing had its greatest effect on the production of oil, rather than natural gas. Caused in part by the substantial imbalance between the demand and supply of oil, state prorationing systems attempted to stabilize the price of oil by limiting the production of oil at the wellhead. Prorationing is essentially a division of the production of hydrocarbons within a common source of supply or a specified geographic area. It normally involved a three-step...
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