CHAPTER 3 PREPARING AND FINALIZING THE UNIT AGREEMENT: MAKING SURE YOUR EXPLORATORY DUCKS ARE IN A ROW

• Jurisdiction: United States

Federal Onshore Oil & Gas Pooling & Unitization - part 1
(Oct 2014)
CHAPTER 3
PREPARING AND FINALIZING THE UNIT AGREEMENT: MAKING SURE YOUR EXPLORATORY DUCKS ARE IN A ROW^*
Frederick M. MacDonald ¹
MacDonald & Miller Mineral Legal Services, PLLC
Salt Lake City, Utah

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FREDERICK M. MACDONALD is a founding member of the Salt Lake area law firm of MacDonald & Miller Mineral Legal Services, PLLC. He focuses on oil and gas law, including title examination of federal, fee, State of Utah, and Indian lands; farmout, joint operating agreement, and other contract drafting and interpretation; unit formation and operation, and administrative practice before the Utah Board of Oil, Gas and Mining and U.S. Interior Board of Land Appeals. He received his B.S. in engineering from Purdue University in 1983 and his J.D. from the Valparaiso University School of Law in 1986, and is a member of both the Utah and Tenth Circuit Court of Appeals Bar Associations. He is an active member of both the Utah and American Association of Professional Landmen (AAPL). He currently serves as chairman of the AAPL's Form 610 Operating Agreement Revision Task Force. In addition, Fred is actively involved with the Rocky Mountain Mineral Law Foundation. He served on the faculty of the biennial federal oil and gas leasing short course for nearly 20 years and as a trustee at large for the Foundation. Fred has authored many articles and papers, and lectures frequently on various oil and gas topics throughout the country. He has been listed in the Best Lawyers in America and in Super Lawyers in the area of oil and gas law every year since 2007 and 2008, respectively. Fred was named Best Lawyers in America's 2012 Salt Lake City Oil and Gas Lawyer of the Year.

I. Introduction

So you have now had a fruitful "area and depth" meeting with the Bureau of Land Management ("BLM"), and presumably met with other relevant governmental agencies (for example, when state leases are involved) and the other working interest owners in your proposed exploratory unit area and (most) everyone is on board. What's next? As unit proponent, you are responsible for drafting and filing the documents which will govern unit development and operation; namely, the unit agreement and unit operating agreement. The latter will be addressed later in a presentation and paper delivered by Steven Richardson. This presentation and paper will address the former.

What is a unit agreement? According to the BLM's manual on unitization:

A unit agreement is an agreement approved by the authorized officer of the BLM, submitted by an operator on behalf of the owners of oil and gas interests over a potential oil or gas reservoir who wish to unite with each other to facilitate the orderly and timely development of the oil and gas resources within the unit area. This consolidation of separate leasehold interests eliminates the need to drill protective wells along common boundaries between unitized leases and serves to maximize benefits through a continuing exploration and development program. The agreement designates one party as the operator to conduct all activities in the unit area and commits that party to diligently pursue an exploration program to develop the oil and gas potential of the area on behalf of all committed interests.... Unitization serves the public interest in that it promotes the exploration of unproven

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acreage, and permits the BLM to exercise more effective control over drilling activity in a large area.²

Others have defined it in the following manner:

A unit agreement memorializes the cooperative operation of an entire structure or producing reservoir or a prospectively productive area for oil and gas. The entire area is operated as a single entity, without regard to lease boundaries, and allows for the maximum recovery of production from the reservoir. ³

By necessity, I will limit the discussion herein to Federal onshore exploratory unit agreements. Secondary and enhanced recovery unit agreements will be addressed in another special institute sponsored by the Foundation in May, 2015.

II. The Model Form

A. Preliminary Comments

The template for all Federal onshore exploratory unit agreements is set forth in regulation found at 43 CFR 3186.1 , a copy of which is attached hereto as Attachment "1," hereinafter referred to as the "Model Form." Use of the Model Form is encouraged and, as a practical matter, will in large part be mandated by the BLM before approval will be given. Notwithstanding, the BLM does recognize the need for flexibility and modification of the Model Form terms under certain circumstances. Good examples of this are the modifications required for coal bed methane ("CBM") and horizontal operations. Throughout this paper, I will also identify certain modifications I have advocated for clients to clarify and rectify some inconsistencies I believe exist in the Model Form. However, any proposed special provisions or modifications to the Model Form must be clearly identified (marked) and explained, and must be approved by the BLM prior to execution of the final unit agreement.⁴ Furthermore, if Federal and/or Indian lands constitute less than 10% of the total unit area, a non-model form of agreement may be utilized and submitted; albeit, BLM and, additionally as to Indian lands, Bureau of Indian Affairs ("BIA") and Tribal, approval of any such non-model form agreement would be required before the Federal or Indian lands would be deemed

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committed thereto.⁵ Most provisions of the Model Form are self-explanatory, do not require revision and/or will be addressed in detail by other presenters, and therefore will not be addressed in detail in this paper.

B. Recitals

(1) Statutory Authority

The second recital of the Model Form addresses the statutory authority for unitization. The Model Form already includes a citation to the Mineral Leasing Act of 1920⁶ (the "MLA"), the Federal statute under which unitization of Federal oil and gas leases is expressly authorized. However, if Indian or State lands are also to be unitized, the appropriate statutory citations must be included in this, or a new similar, recital. BLM guidelines contain the following example provision for Indian lands, but expressly provide that it "is not intended to represent a standard format":

Whereas, the rules and regulations governing the leasing of restricted allotted and tribal Indian lands for oil and gas promulgated by the Secretary of the Interior (25 CFR Part 211 and 212) under and pursuant to the Allotted Land Mineral Leasing Act of March 3. 1909, 35 Stat. 783, 25 U.S.C. 396, and the Tribal Land Mineral Leasing Act of May 11, 1938, 52 Stat 347, 25 U.S.C. 396a et seq., and the oil and gas leases covering said allotted and tribal Indian lands provide for the commitment of such leases to a cooperative or unit plan of development or operations. ⁷

The Federal and state statutory cites allowing for Indian lease and the Rocky Mountain state lease unitization are as follows:

Indian Tribal Leases:	25 U.S.C. § 396a et seq. (Indian Mineral Leasing Act of 1938 ("IMLA"))
Indian Allotted Leases:	25 U.S.C. § 396 (Act of March 3, 1909 ("1909 Act")) and 25 U.S.C. §§ 396(d) and (e) (IMLA)
Indian Tribal E&D Agreements:	25 U.S.C. § 2101 et seq. (Indian Mineral Development Act of 1982) ("IMDA")
Arizona:	Ariz. Rev. Stat. § 27-557
Colorado:	Colo. Rev. Stat. § 36-1-115
Montana:	Mont. Code Ann. § 82-10-202
Nevada:	Nev. Rev. Stat. §§ 322.010, 322.040, 522.0824(1) and 522.140
New Mexico:	N.M. Stat. Ann. § 19-10-45
North Dakota:	N.D. Cent. Code § 38-09-18
South Dakota:	S.D. Codified Laws § 5-7-32
Utah (Trust Lands):	Utah Code Ann. § 53C-2-411
(Non-Trust Lands):	Utah Code Ann. § 65A-6-10
Wyoming:	Wyo. Stat. Ann. § 36-6-101(d)

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Please note, if the unit agreement is for secondary recovery or other types of units involving compulsory unitization or requiring state conservation commission approval, a new recital addressing the requisite statutory authorization should be included. A complete listing of all such state statutory citations may be found in Appendix A of Bill Carr's excellent paper on compulsory unitization.⁸

(2) Unit Name

The third recital of the Model Form is where the name of the unit is to be inserted. There are no known guidelines or restrictions on what name may be utilized (other than as dictated by common decency). Many units are named based on topographic features (e.g., Peter's Point, Drunkard's Wash), others based on nearby towns or regions (e.g., Salina (a Utah city)), and still others are named after the unit proponent (or perhaps its favorite football team) (e.g., Wolverine). Many units, if strictly targeted for one or two formations, will contain a parenthetical notation of such in the name (e.g., Pariette Draw

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(Green River) Unit). No matter what name is ultimately chosen, it must be included in this agreement and recital submitted for approval.

C. Main Body

(1) Section 1 - Enabling Act and Regulations. This section is self-explanatory and merely states that unit operations will be governed by the terms of the MLA and regulations promulgated pursuant thereto, which are incorporated by reference. As to non-Federal lands, the operational regulations of the state where located will also govern and are incorporated by reference so long as they are not inconsistent with the Federal laws and regulations. If Indian lands are included, BLM guidelines provide the following example provision (but again which is expressly stated as not being "intended to represent a standard format"):

The Indian Tribal and Allotted Leasing Acts, supra, and all valid pertinent regulations, including operating and unit plan regulations, heretofore issued thereunder or valid pertinent and reasonable regulations hereafter issued thereunder are

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