CHAPTER 8 UNITIZATION AND COMMUNITIZATION ISSUES
| Jurisdiction | United States |
(Mar 1994)
UNITIZATION AND COMMUNITIZATION ISSUES
Crowley, Haughey, Hanson, Toole & Dietrich
Billings, Montana
§ 8.01 INTRODUCTION
On the hill, wells were drilled so close to one another that a man could walk from one rig floor to another without ever touching the ground.... By the year's end, there were 440 gushers on the hill and the oil was pouring out as though through a sieve. Nobody knew that the field was being badly damaged so that millions of barrels would be irrecoverable.1
Federal onshore pooling and unitization have their genesis in the oil and gas conservation movement of the 1930's. Although the golden age of oil dawned in the early 1920's, the end of that decade found the price of oil seriously depressed, primarily due to massive over-production. The advent of the 1930's brought discovery of the East Texas Field with its highly fractionalized ownership, and of vast petroleum reserves in California, New Mexico, and Wyoming on predominately federal lands.2 Production was controlled exclusively by the rule of capture,3 the natural consequence of which was the rapid drilling of excessive numbers of wells side by side in a common reservoir, resulting in a decreased overall recovery of oil and gas due to rapid and uncontrolled dissipation of reservoir energy.4 Out of this oil patch maelstrom arose federal and state conservation concepts
[Page 8-2]
calculated to rein in the oil and gas production disasters occasioned by the rule of capture. Among these concepts are unitization and pooling of federal (and state or fee) lands for purposes of controlling production rates and maintaining reservoir pressures.5
The purpose of this paper is to briefly review the historical underpinnings of federal unitization and communitization, the rationale behind state regulatory schemes governing well spacing and compulsory pooling, and the interface between federal and state jurisdiction over oil and gas conservation. With that foundation, this paper will then address selected issues involving drainage to federal lands, including the impact of inclusion of unleased federal minerals or excluded lands within a federal exploratory unit or communitized area, the effect and availability of state spacing or compulsory pooling orders with respect to federal lands, and other procedures which may be available to minimize liability for drainage of federal lands or leases.
§ 8.02 HISTORICAL PERSPECTIVE
[A] Federal Unitization and Communitization
Federal statutory development can be traced to unitization of the North Kettleman Hills Field in California. The Mineral Leasing Act of 1920 did not contain any provision relating to unitization.6 However, in 1930 Congress amended the 1920 Act to authorize the Secretary of the Interior to approve cooperative and unit plans, which resulted in
[Page 8-3]
approval by the Secretary of two federal units.7 The temporary authorization was supplanted by 1931 amendments which expanded the Secretary's authority to approve operating, drilling, or development contracts.8 The Secretary's authority under the 1931 amendments to the 1920 Act have remained in effect until the present, although the cooperative and unit provisions have been amended on several different occasions.9 The statute in its present form provides in part:
226(m) Cooperative or unit plans;...
For the purpose of more properly conserving the natural resources of any oil or gas pool, field, or like area, or any part thereof (whether or not any part of said oil or gas pool, field, or like area, is then subject to any cooperative or unit plan of development or operation), lessees thereof and their representatives may unit with each other, or jointly or separately with others, in collectively adopting and operating under a cooperative or unit plan of development or operation of such pool, field, or like area, or any part thereof, whenever determined and certified by the Secretary of the Interior to be necessary or advisable in the public interest. The Secretary is thereunto authorized, in his discretion, with the consent of the holders of leases involved, to establish, alter, change, or revoke drilling, producing, rental, minimum royalty, and royalty requirements of such leases and to make such regulations ... as he may deem necessary or proper to secure the proper protection of the public interest....
...
When separate tracts cannot be independently developed and operated in conformity with an established well-spacing or development program, any lease, or 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
[Page 8-4]
the Secretary of the Interior to be in the public interest, and operations or production pursuant to such an agreement shall be deemed to be operations or production as to each such lease committed thereto....
....10
Detailed regulations have been adopted by the Secretary of the Interior for communitization agreements11 and onshore oil and gas exploratory unit agreements.12 As part of the regulations governing federal exploratory units for undeveloped areas, the Secretary has also promulgated a model unit agreement which was most recently amended effective December 2, 1993.13
[1] Unitization
Unitization has been defined as:
The agreement to jointly operate an entire producing reservoir or prospectively productive 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. ... The objective of unitization is 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 economic manner by one operator.14
[Page 8-5]
Unitization in its broadest sense includes unitization for purposes of pressure maintenance, repressuring, cycling, water-flooding and other fluid-injection operations intended to provide an effective method of achieving optimum conservation of oil and gas resources, particularly in secondary or tertiary recovery operations. Nevertheless, for purposes of this Institute, unitization will be limited to the context of federal onshore exploratory units and certain issues arising due to inclusion of unleased (or unleasable) federal minerals located therein.
On November 2, 1993, the Department of the Interior, Bureau of Land Management, published its final rule amending 43 C.F.R. Part 3180 to require all federal onshore oil and gas exploratory unit agreements to provide for payment to the federal government of royalties on production from any participating area ("PA") within such a unit containing unleased federal lands.15 This recent amendment to the regulations, which became effective December 2, 1993, was calculated to avoid the result obtaining in Coors Energy Co.,16 wherein the Interior Board of Land Appeals (IBLA) determined the United States was precluded from recovering royalties for production of oil and gas from a PA containing unleased federal minerals.17
Coors Energy Company ("Coors") was the unit operator for the Hamilton Unit Agreement, an oil and gas unitization agreement entered into by various interest owners for the joint operation of a prospectively productive oil and gas field located on leased federal, state, and patented lands in San Miguel County, Colorado. The Hamilton Unit Agreement became effective September 1, 1983. On June 4, 1984, Coors submitted an application for approval of an initial PA as a result of the January 25, 1984 completion of an initial unit
[Page 8-6]
well capable of production.18 That application, as amended, was approved by the Bureau of Land Management ("BLM") on July 9, 1984, effective January 25, 1984. The initial PA encompassed 640 acres within the Unit, including certain unleased federal minerals.
Following completion of a second Unit well,19 Coors proposed to revise, and BLM approved, the PA to include additional lands encompassing 1,481.69 acres, including 200 acres of unleased federal minerals. In the course of making its application to enlarge the initial PA, Coors inquired of BLM concerning the distribution of revenues attributable to the unleased federal tract. In connection with the application, Coors submitted three exhibits: Exhibit B-1 allocated participation to the federal tract as "unleased"; Exhibit B-2 allocated participation to the federal tract reflecting Hrubetz Oil Company as lessee;20 Exhibit B-3 allocated no participation to the federal tract, treating it as unleased and uncommitted.21
On April 10, 1985, BLM advised Coors that the proper method of handling distribution of revenues from the unleased federal tract included in the revised PA was to place 100% of its allocable revenues in an interest-bearing escrow account pending resolution of Hrubetz Oil Company's appeal regarding leasing of the federal minerals. Revenues attributable to the federal tract were placed in escrow by Coors in conformity with its Exhibit B-1. On November 10, 1986, after the IBLA determined that Hrubetz's noncompetitive offer to lease the federal tract had been properly rejected by BLM, Coors applied to BLM requesting that its Exhibit B-3 be approved treating the federal tract as uncommitted to the Hamilton Unit and not entitled to an allocation of production. Coors' application for approval of its Exhibit B-3 was denied by BLM on February 18, 1987, with Coors appealing from that denial.22
[Page 8-7]
The BLM's denial was based, in part, on its requirement that any future lessee of the federal tract would be required to join the Unit and would be...
To continue reading
Request your trial