CHAPTER 4 TIME FRAMES AND OPERATIONAL OBLIGATIONS

JurisdictionUnited States
Federal Onshore Oil & Gas Pooling & Unitization - part 1
(Oct 2014)

CHAPTER 4
TIME FRAMES AND OPERATIONAL OBLIGATIONS

Thomas F. Reese
William Reese
Beatty, Wozniak & Reese
Casper, Wyoming

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THOMAS F. REESE has focused his practice on oil and gas law for the past 33 years. However, as one might expect, Tom has also acquired broad knowledge and experience in all branches of energy law. He has significant experience in most regulatory aspects of energy law and has broad and varied experience as a trial attorney and in appellate advocacy. Prior to joining the Beatty & Wozniak legal team, Tom was a partner in Brown, Drew & Massey. During his years at Brown, Drew & Massey he was a member of its executive committee and served as chairman of same. Graduating with honors from the University of Wyoming College of Law in 1981, Tom immediately began practicing energy law with the firm of Sherman and Howard in Denver. Tom is licensed to practice law in Colorado and Wyoming. He is admitted to practice in the Wyoming and Colorado Federal District Court, the 10th Circuit Court of Appeals, and the Court of Claims. Tom is a member of the American, Wyoming, and Natrona County Bar Associations. He is also a member of the Outstanding Lawyers of America. Tom's works have been published by the Rocky Mountain Mineral Law Foundation (RMMLF). He has been a lecturer on matters relating to oil and gas law. In 2004 Tom published with Drake Hill, Wyoming's Powder River Basin: A Study in Federal Royalty Valuation, a symposium issue on coalbed methane natural gas development. This publication was also presented at RMMLF's Special Institute on Federal & Indian Oil and Gas Royalty Valuation & Management in Houston, Texas. Tom was also Chair of the Landman's section of the Foundation's 57th Annual Institute in 2011. Tom is active in civic, church, and community affairs. Over the years, he has been very active in the local United Way, where he has served in many capacities, including president, vice-president, campaign chairman, and chairman of the allocations and admissions committee. He has also served as president of the board of directors of D.A.R.E. of Natrona County, on the Natrona County Parks Board, and as a member of the board of directors of the Casper Area Community Foundation. Tom and his wife, Laurie, have two sons and he enjoys family activities and various sports.

WILLIAM REESE is an associate with Beatty & Wozniak, P.C. in its Casper, Wyoming office. Will focuses his practice primarily on the oil and gas industry with a special emphasis on title examination and representing clients in front of the Wyoming Oil and Gas Conservation Commission. Previously, Will worked at the Wyoming office of the United States Attorney's office and assisted in numerous prosecutions. During law school at the University of Wyoming, Will worked with Professor Dennis Stickley researching the economics of carbon sequestration as a graduate assistant, and also participated in numerous trial advocacy competitions, including the Pace Environmental Moot Court Competition. He recently updated the Rocky Mountain Mineral Law Foundation's Landman's Legal Handbook section on testate and intestate succession.

TABLE OF CONTENTS

I. INTRODUCTION

II. FIRST FIVE-YEAR DRILLING TERM

A. Dry Holes

B. Non-Paying Unit Well (Leasehold Well)

C. Unit Paying Well

D. Drilling to Discovery and Plan of Development

E. Multiple-Well Requirement

F. Diligent Drilling

G. Voluntary Termination

H. Invalidation

III. FIRST FIVE-YEAR TERM AFTER ESTABLISHMENT OF INITIAL PARTICIPATING AREA

IV. SECOND FIVE-YEAR TERM AFTER ESTABLISHMENT OF INITIAL PARTICIPATING AREA

V. ONE-TIME, TWO-YEAR EXTENSION OF SECOND FIVE-YEAR TERM AFTER ESTABLISHMENT OF INITIAL PARTICIPATING AREA

VI. CONTRACTED UNIT AREA

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I. INTRODUCTION

This paper will discuss timeframes established under the model form of exploratory unit agreement for unproven areas. It will highlight when diligent drilling must occur to prevent an automatic termination and/or contraction of the unit agreement.

Attached are several flowcharts which are illustrations of the drilling obligations a unit operator is subject to pursuant to section 9 of the model form unit agreement for unproven areas.

This paper is intended to be a practical guide as to the obligations and timeframes to which a unit operator will be subject to when committing to a federal exploratory unit agreement.

This paper is substantially based upon the work of Bernie Dillon from the BLM office in Denver, Colorado and Michael L. Coulthard from the BLM office in Salt Lake City, Utah.

II. FIRST FIVE-YEAR DRILLING TERM

All federal exploratory unit agreements are effective as of the date the authorized officer actually approves the agreement and executes a certification-determination page. Exploratory unit agreements cannot be made effective as of some earlier or later date.1

During the first five-year term the unit operator must be pursuing a diligent drilling program; otherwise, the unit agreement will automatically terminate for failure to drill additional "subsequent test wells" in accordance with section 9. The BLM Unitization (Exploratory) H-3180-l Manual Handbook clearly describes the drilling requirements established pursuant to section 9 of the unit agreement:

Section 9 of the model form of the unit agreement for unproven areas (43 CFR 3186.1 ) contains the initial test well requirements for the unit. Generally, this section requires the unit operator to commence an adequate test well within 6 months of the effective date of the unit agreement and to diligently drill such well to test the target formation; to continue drilling one well at a time, allowing not more than 6 months between the completion of one such well and the commencement of the next such well; and to pursue such operations until a well capable of producing unitized substances in paying quantities is completed."2

The unit operator must continue drilling with no more than 6 months elapsing between the completion of one well and the start of the next well until he discovers unitized substances in paying quantities, as defined in section 9 of the model form of agreement, to prevent an automatic termination of the agreement. As the operator drills the required test wells pursuant to section 9 of the unit agreement, he may drill dry holes, marginally economical wells (leasehold well), or wells that are capable of producing unitized substances in paying quantities (unit paying well). Below is

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a full description of each of these scenarios and how they impact section 9 drilling requirements and the first five-year drilling term:

Section 20 of the form model agreement for unproven areas grants the unit operator up to five years from the effective date of the unit agreement in which to diligently explore for unitized substances in paying quantities. If a diligent drilling program is pursued during the first five-year period but unitized substances in paying quantities are not discovered, the unit agreement will automatically terminate at the end of the five-year term without an extension from the authorized officer pursuant to section 20 of the model form.

Up to 5 years will be allowed for the drilling of wells under section 9 unless, production is discovered in paying quantities or the unit agreement is terminated. The unit can be terminated due to a failure to maintain the agreed upon drilling program or the unit operator may seek voluntary termination. Additional time may be approved by the Authorized Officer.

A. DRY HOLES

If the unit operator drills a well to satisfy the drilling requirements of section 9 of the unit agreement and the well is determined to be a dry hole, the unit operator must commence the drilling of an additional well within six months after the date the dry hole is abandoned to prevent automatic termination of the unit agreement. For the purpose of section 9 of the unit agreement, a dry hole will be defined as any well which does not discover hydrocarbons in paying quantities on a lease or unit basis.

B. NON-PAYING UNIT WELL (LEASEHOLD WELL)

A "paying well" on a lease basis is defined at 43 C.F.R. 3160.0-5 as: "... a well that is capable of producing oil or gas of sufficient value to exceed direct operating costs and the costs of lease rentals or minimum royalty. The well is not capable of producing oil and gas in unit paying quantities to realize a profit if drilling and completion costs are included in the economic evaluation.

If the unit operator completes a leasehold well when attempting to satisfy section 9 drilling requirements, the operator is still required to drill an additional well within six months after the completion date of the leasehold well to prevent the automatic termination of the unit agreement. A leasehold well is not considered to be a discovery of unitized substances in paying quantities.

If a unit well is completed as a leasehold well, all production is to be handled on and reported to the lease which the well is producing from. A participating area will not be established for this well. In Wyoming horizontal leasehold wells are spaced in a spacing unit similar to the drilling block using the circle tangent method around the well bore.

It should be noted that a leasehold well will serve to extend, by production, any committed federal lease that might otherwise expire. The Interior Board of Land Appeals determined that, if production is discovered, but not in sufficient quantities to payout drilling and completion

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costs, the production from said well is considered "production of oil or gas in paying quantities under the plan"3 and said well will extend committed federal leases until a participating area is approved or the unit agreement is terminated, whichever occurs first.4

C. UNIT PAYING WELL

A unit well is simply a well that satisfies the "paying quantities"...

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