CHAPTER 7 COMPLICATIONS OF EXAMINING TITLE WITHIN A POOLED UNIT, WORKING INTEREST UNIT, EXPLORATORY UNIT, OR SECONDARY RECOVERY UNIT
| Jurisdiction | United States |
(Jan 2014)
COMPLICATIONS OF EXAMINING TITLE WITHIN A POOLED UNIT, WORKING INTEREST UNIT, EXPLORATORY UNIT, OR SECONDARY RECOVERY UNIT
Attorney Tjornehoj & Hack LLC
Longmont, Colorado
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JONATHAN D. TJORNEHOJ is managing member of Tjornehoj & Hack LLC, a natural resources law firm focusing on mineral title examination. After graduating from the University of Wyoming College of Law in 2002, Jon became an associate in the Natural Resources Department at the law firm of Davis Graham & Stubbs LLP. His work there initially focused on litigating environmental and public lands issues relating to natural resource development projects in the Rocky Mountain region. Jon's practice there later concentrated on oil and natural gas transactions and title examination. In 2007, Jon began a solo title practice which grew to become Tjornehoj & Hack LLC. Jon's new practice initially revolved heavily around providing title curative services--experience that helped inform his title examination work with a landman's perspective. While development activities in Colorado's Denver-Julesburg Basin continue to form the foundation of Jon's title practice, his title work ranges from simple undeveloped fee properties to complex producing federal exploratory units, throughout Colorado and Wyoming.
2013 Jan. (Advanced Mineral Title Examination)
Chapter ___
I. Introduction
Title attorneys today must wear many hats. In addition to their skills analyzing conveyances and researching legal issues, they must also be part geologist, part accountant, and part cartographer. Like the GIS mapping systems that many of us timorously attempt to use, oil and gas title itself can be conceptualized as a multi-layered system of ownership rights. The "base" layer can be thought of as common-law ownership rights--a basic infrastructure of mineral owners and leasehold interests. The next layers up are the state and federal regulatory regimes regarding spacing and unitization. These in essence re-draw the boundary lines of the ownership map from one focused on a single tract to one accounting for the interrelationships of neighboring owners within a spacing regime or a common source of supply. Finally, the working interest owners themselves can create a new set of boundary lines that co-exist with the lower layers by agreeing to a different set of ownership rights as between themselves. Understanding the interactions of these layers is essential to avoiding common traps that face the oil and gas title examiner.
II. The Common-Law Rule of Capture
The starting point for understanding the impact of pooling and unitization is with the so-called "rule of capture." In the late 19th and early 20th centuries, courts wrestled with the manner in which to characterize property interests in newly-developed oil and natural gas resources. The characterization of such property interests affected the rights associated with such ownership, and the remedies available for the violation of those rights. Some early cases analogized oil and gas to solid minerals such as coal because of their common classification as "minerals."1 At that time, few limitations existed on the extent to which an individual could extract the solid minerals situated beneath his property, so long as the mining operations did not create a nuisance to adjoining owners.
The analogy to solid minerals, however, failed to account for the significant fact that oil and gas can migrate across property boundaries. After all, poorly conducted operations or uncontrolled production on one tract can damage the reservoir underlying many adjoining tracts
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and directly impair the ability of adjoining owners to extract oil and gas from beneath their lands.2 The interconnected nature of the resources--and by extension, the rights of its owners--created a need for a better legal framework. As a consequence, courts soon shifted their analogies toward "fugitive" resources like water or wildlife.3 These early cases laid the foundation for two interrelated concepts that came to define the ownership of oil and gas interests: (i) the rule of capture, and (ii) correlative rights.4
The rule of capture states that "a landowner in a common source of supply is legally privileged to take oil and gas from his or her land, even though in doing so he or she may take some of the oil or gas from adjoining lands."5 The rule of capture recognizes the fugitive nature of the resource, and the practical limitations on attempting to quantify the oil and gas that might underlie a tract of land in the absence of drilling and production activities. It allows an owner to produce oil and gas from beneath his or her lands without liability simply because some amount of production may have migrated to the well from beneath a neighboring property. The typical defense against drainage of one's own resources was to drill a well to offset production from a neighboring well.6
The problem with the unfettered application of the rule of capture is that it tends to incentivize overdrilling--particularly wells that drain as much of the resource as possible from beneath the land of one's neighbors. Overdrilling prematurely diminishes reservoir energy, and may significantly reduce the overall quantity of resources recovered by all those owning interests in a reservoir.7 In other words, the disorganized rush to extract oil and gas that tends to result from the rule of capture alone ultimately wastes the resource by reducing the overall amount that can feasibly be produced by all owners within a common source of supply. In order to safeguard the common interest in producing oil and gas, it became necessary for the law to develop the means to reign in the adverse effects of the rule of capture.
III. Regulatory Regimes
In light of the inefficiencies that resulted from the common law rule of capture, states began implementing oil and gas conservation statutes beginning in the 1930s.8 Conservation statutes emphasize the prevention of waste of the resource and the protection of correlative rights. Waste is most commonly understood to encompass physical aspects, but may also include economic elements as well.9 Physical waste includes obvious instances such as the venting of natural gas or allowing hydrocarbons to escape from one formation to another, as well as damage to the reservoir which results in the resource remaining trapped below ground. Economic waste is often viewed as the drilling of more wells than is necessary to drain a reservoir, and may include sales of oil or gas at unreasonably low rates or for specific purposes deemed wasteful.10
The notion of correlative rights stems from the fact that oil and gas are "fugitive" resources, and operations by one party in one part of a reservoir can directly impact the ability of
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other parties to produce from other parts of the reservoir. A representative definition of "correlative rights" under a state conservation statute is that of Wyoming, which defines it as "the opportunity afforded to the owner of each property in a pool to produce, so far as it is reasonably practicable to do so without waste, his just and equitable share of the oil or gas, or both, in the pool."11 It is important to note that the notion of correlative rights is only intended to provide the opportunity to develop one's resources--the rule of capture still applies if one has the opportunity to develop oil and gas but neglects to do so and is drained by a neighboring well as a result.
The twin goals of prevention of waste and protection of correlative rights are the drivers behind two important regulatory tools with which title examiners should be familiar: (i) spacing (and the related compulsory pooling power), and (ii) unitization. These regulatory powers form an important lens through which traditional common-law ownership principles must be viewed.
A. Spacing Rules
Among the tools created to prevent waste and protect correlative rights under state oil and gas conservation regulations is the well spacing system. At its core, state agencies regulate the spacing of wells by determining the minimum allowable distances between wells, and/or the minimum allowable distances between wells and property boundary lines. Provisions are typically made for acquiring exceptions to the spacing rules on a case-by-case basis. This system helps to alleviate the problem arising under the rule of capture in which property owners tend to be motivated to disproportionately locate wells along property lines, resulting in the inefficient development of reservoirs. Ideally, the spacing between wells represents the most efficient means of producing hydrocarbons from a reservoir and the greatest preservation of reservoir pressure.
In most oil and gas producing states, the conservation agency is also authorized to establish well spacing units, and to provide for the mandatory pooling of separate tracts within spacing units.12 In designating spacing units,13 the conservation agency "establishes parcels of land of approximately uniform size throughout an oil or gas field, on each of which only a single well may be drilled."14 Spacing rules may provide for the drilling of additional wells within the same spacing unit where necessary to effectively drain the reservoir underlying the unit. Spacing orders commonly designate a unit based upon governmental survey nomenclature, such as a 640-acre section, or a 160-acre quarter section, and often vary in size according to the particular characteristics of the target formation.
As a consequence of the development of spacing regulation, it became necessary for operators to combine or "pool" multiple tracts where such constituent parcels alone were of insufficient size to constitute a spacing unit. This enables owners of smaller tracts the "opportunity" to realize the benefits of production called for...
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