CHAPTER 9 TIMEFRAMES AND OPERATIONAL OBLIGATIONS

• Jurisdiction: United States

Federal Onshore Oil and Gas Pooling and Unitization
(Nov 2006)
CHAPTER 9
TIMEFRAMES AND OPERATIONAL OBLIGATIONS
Bernie Dillon ^*
Bureau of Land Management
Denver, Colorado
Michael L. Coulthard ^**
Petroleum Engineer
Bureau of Land Management
Utah State Office
Salt Lake City, Utah

MICHAEL L. COULTHARD

Michael L. Coulthard is a Petroleum Engineer with the Bureau of Land Management, Utah State Office, in Salt Lake City, Utah

TABLE OF CONTENTS

I. INTRODUCTION

II. FIRST FIVE-YEAR DRILLING TERM

A. Dry Hole

B. Leasehold Well

C. Unit Paying Well

D. Multiple-Well Requirement

E. Diligent Drilling

F. Voluntary Termination

G. 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

I. INTRODUCTION

This paper will discuss obligational 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 is a flowchart which is an illustration 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 not intended to represent official Bureau policy nor be a legal analysis. 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.

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

Section 20 of the model agreement form 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 first five-year term unless the authorized officer extends the five-year drilling term 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, the unit agreement is automatically terminated due to a

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delinquent drilling program, the unit operator seeks voluntary termination, the unit agreement is declared invalid or additional time is approved by the Authorized Officer.

During this 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). The following is a description of each of these scenarios and how they impact section 9 drilling requirements and the first five-year drilling term:

A. DRY HOLE

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.

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.

A "paying well" on a unit basis is defined in Section 9 of the model form of exploratory unit agreement for unproven areas as a well that is capable of producing oil or gas in "quantities

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sufficient to repay the costs of drilling, completing, and producing operations, with a reasonable profit."

Since a dry hole does not discover paying production on a leasehold or unit basis, federal leases committed to the unit agreement may be subject to termination. That is, a unit agreement by itself cannot extend a federal lease. Without paying production, a federal lease committed to a unit agreement can only be extended if unit drilling is occurring across the expiration of the primary term of federal lease(s).

B. LEASEHOLD WELL

As stated above, a leasehold well is defined 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.

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 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 paying well is defined as a well that is capable of producing unitized substances in quantities sufficient to repay the costs of drilling, completing and producing operations with a reasonable profit. If a unit well is completed, then unitized substances in paying quantities are discovered and a participating area is established pursuant to section 11 of the unit agreement.

The Unitization (Exploratory) H-3180-l Manual / Handbook defines producing costs as the cost of maintaining the lease, producing the well, and marketing the product. Marketing the product is further defined as the normal or usual handling, treating, measurement, and transportation costs which a responsible lessee could be expected to pay to market his production

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. Drilling and completion costs used to evaluate the well should be the actual costs involved. Extraordinary costs, such as drill string failure, extensive coring and testing programs, loss of well control, etc., normally should not be allowed.⁵

Once a participating area is established, the first five-year drilling term no longer applies and the...