CHAPTER 3 COMMUNITIZATION AGREEMENTS IN THE 21ST CENTURY1

• Jurisdiction: United States

Federal Onshore Oil and Gas Pooling and Unitization
(Nov 2006)
CHAPTER 3
COMMUNITIZATION AGREEMENTS IN THE 21ST CENTURY¹
Angela L. Franklin
Attorney
Pruitt Gushee, P.C.
Salt Lake City, Utah

ANGELA L. FRANKLIN

Angela L. Franklin is an attorney and a managing director of the Salt Lake City law firm of Pruitt Gushee, a professional corporation. She received her J.D. degree in 1990 from the University of Wyoming. She is licensed to practice law in both Utah and Wyoming. Angela's legal practice mainly involves oil and gas law, particularly title examination of fee (private), Federal, State and Indian lands located in Utah and Wyoming. She also assists clients in performing curative work and preparing transaction agreements.

Angela authored and presented the "Landmen's Update" at the 48th Annual Rocky Mountain Mineral Law Institute in Lake Tahoe. She is also the author of "Utah Oil and Gas Law, a Comparison with Texas," presented at Oil and Gas Law 2001: Nationwide Comparison of Laws on Leasing, Exploration and Production and at the American Association of Professional Landmen 47th Annual Conference in Salt Lake City.

Angela is actively involved in the Utah Association of Professional Landmen, serving twice as President (2004-05 and 1994-95), and as a perennial organizer of its continuing education seminars. She is also a member of the American Association of Professional Landmen, Rocky Mountain Mineral Law Foundation, and the Natural Resources Section of the Utah State Bar, previously serving as the Oil and Gas Committee chairman.

I. INTRODUCTION

This paper is limited to communitization agreements, which is one of the six types of agreements recognized by the regulations concerning Cooperative Conservation Provisions.² This paper briefly reviews the statutory history authorizing communitization of federal oil and gas leases; the purposes for a communitization agreement; the form of communitization agreement appearing in the Bureau of Land Management (BLM) Manual; the procedures leading up to final approval of a communitization agreement; communitization on Indian lands; and peculiar problems that may be encountered with respect to communitization agreements.

For purposes of this paper, the following definitions will be utilized:

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Pooling:	The voluntary or compulsory joining of leases for common development within state established drilling or spacing units.
Communitization:	The agreement to combine small tracts which include at least one or more federal and/or Indian leases, for the purpose of committing enough acreage to form the spacing and proration unit necessary to comply with the applicable state conservation requirement and to provide for the development of separate tracts which could not be independently developed or operated in conformity with the well spacing pattern established in the area or by order of the state regulatory agency.3
Unitization:	The agreement to jointly operate an entire producing reservoir or a prospectively producing area of oil and/or gas. The entire unit area is operated as a single entity, without regard to lease boundaries, and allows for the maximum recovery of production from the reservoir and to provide for the unified development and operation of an entire geologic prospect or producing reservoir so that exploration, drilling and production can proceed in the most efficient and economical manner by one operator.4

As used herein, "communitization" is a term applied to the joint development of federal and/or Indian oil and gas leases; however, the reader should be mindful that many states also employ the term when state leases are pooled with other leases for the exploration and development of a single drilling or spacing unit. It is quite common to see the terms unitization, pooling and communitization used interchangeably,⁵ which results in confusion and precipitates miscommunication between the parties.⁶

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It is also common to see the terms "proration unit," "drilling unit," and "spacing unit" used synonymously, but there are distinct differences in the definition of these terms as used in various jurisdictions.⁷ Williams and Meyers defines proration unit as follows:

(1) The area in a pool that can be efficiently and economically drained by one well, as determined by the Commission....

(2) The acreage assigned to an individual well for the purpose of allocating allowable production thereto.⁸

A spacing unit is defined as "the area allocated to a well under a well spacing order";⁹ and a drilling unit is defined as "the area prescribed by applicable well spacing regulations for the granting of a permit by the regulatory agency for the drilling of a well; the area assigned in the granting of a well permit."¹⁰ For purposes of this paper, the terms proration unit and spacing unit will be used interchangeably to define the area established by the state regulatory agency as the surface area which is dedicated to a single oil and/or gas well.

Although the Mineral Leasing Act was enacted in 1920,¹¹ it was not until the passage of an amendment in 1946 that communitization agreements were authorized to enable federal lessees to conform development on federal lands to established well spacing and development programs.¹² The Mineral Leasing Act Revision of 1960 further amended the act and incorporated the 1946 provisions relating to communitization agreements.¹³ In addition, the Mineral Leasing Act for Acquired Lands¹⁴ and the

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regulations promulgated thereunder, permit the communitization of leases issued under that act on the same terms and under the same procedures as the regulations promulgated for implementation of the Mineral Leasing Act.¹⁵

II. PURPOSE

Virtually all oil and gas producing states have promulgated minimum acreage requirements for the drilling of oil or gas wells. Communitization, under the federal regulations, is simply pooling where federal or Indian lands are involved. The Secretary of Interior's (Secretary) authority to approve a communitization agreement arises when a portion or all of a federal or Indian lease cannot be independently developed and operated in conformity with the well spacing requirements of the state in which the land is located. Congress has, in essence, recognized the importance of the state conservation statutes concerning spacing when it amended the Mineral Leasing Act to provide for communitization of federal leases with adjacent federal, fee or state leases. The Mineral Leasing Act presently provides:

When separate tracts cannot be independently developed and operated in conformity with an established well-spacing or development program, any lease, or a portion thereof, may be pooled with other lands, whether or not owned by the United States, under a communitization or drilling agreement providing for an apportionment of production or royalties among the separate tracts of land comprising the drilling or spacing unit when determined by the Secretary of the Interior to be in the public interest, and operations or production pursuant to such agreement shall be deemed to be operations or production as to each such lease committed thereto.¹⁶

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This allows all mineral owners within the area comprising the state's spacing requirement to share in production from the well on the spacing or proration unit. Production is usually apportioned to and among the various tracts and leases on an acreage basis.

The common thread of all federal communitization agreements is that at least one federal or Indian lease or tract is involved and that federal or Indian lease is communitized with other leases that may be federal, Indian, state or fee. A communitization agreement requires the consent of all parties owning interests in the mineral estate underlying the area and in the formation that is to be communitized. These issues are discussed in more detail below.

III. FORMAT AND CONTENT

A. Required Information

Although there is no prescribed form for a federal communitization agreement in the regulations, the BLM Manual 3160-9-Communitization¹⁷ (hereinafter BLM Manual) includes a standard or model communitization agreement form, one for federal leases and one for Indian leases (but see Part V below) which should be used whenever possible.¹⁸ The regulations, however, do require that certain information be included within the communitization agreement. Specifically, the agreement must: describe the separate tracts comprising the drilling or spacing unit; describe the apportionment of production or royalties to the parties; name the operator; contain adequate provisions for the protection of the interests of the United States; be filed prior to the expiration of the federal leases involved; and be signed by or on behalf of all necessary parties.¹⁹

The necessary parties include all working interest owners, lessees of record, and the royalty, overriding royalty and production payment interest owners whose interests are not subject to commitment by the lessee. Where fee leases are concerned, the lessee may commit his lessor's interest if there is an appropriate pooling provision contained in the fee lease. Likewise, overriding royalty interest owners must join in the communitization agreement or the lessee may act on their behalf, if an appropriate

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pooling provision is contained in the instrument creating the overriding royalty interest.²⁰ If a royalty or overriding royalty interest owner fails to commit its interest to the communitization agreement (and the interest is not otherwise pooled, see below), said owner is entitled to its proportionate share of 8/8ths of any production from a well located on its lands; however, if the well is located on lands not covered by its lease, it is not entitled to any production from that well.

Rather than circulating the communitization agreement for execution by all the necessary parties, it is quite common to...