COMMUNITIZATION AGREEMENT SUPPLEMENT

• Jurisdiction: United States

Federal Onshore Oil and Gas Pooling and Unitization II
(Jan 1990)
CHAPTER 3B
COMMUNITIZATION AGREEMENT SUPPLEMENT
Bernie Dillon
Bureau of Land Management
Denver, Colorado

TABLE OF CONTENTS

SYNOPSIS

Page

I. INTRODUCTION

II. DEFINITION

III. POLICY

IV. STATE SPACING

V. DRAINAGE

A. Alternative Spacing

VI. WELL REQUIREMENTS

A. No Well Drilled

B. Dry Hole

C. Production

VII. MULTIPLE FORMATIONS

VIII. AMENDMENTS

A. Recompletions

B. Changes in Spacing

IX. OPERATOR 10

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INTRODUCTION

This paper will discuss the relationship between drainage and a communitization agreement. A communitization agreement can be utilized to protect a lease from drainage by an offset well.

This paper will discuss well requirements established under the terms of a federal communitization agreement. It will review circumstances that can occur which require a federal communitization agreement to either be amended or terminated.

This paper is not intended to represent official Bureau policy nor to be a legal analysis. The intent of this paper is to supplement the communitization agreement paper presented by the attorney. As a supplement, this paper should be utilized as a practical guide discussing circumstances that may warrant and/or alter the terms and conditions of a federal communitization agreement.

DEFINITION

A communitization agreement protects correlative rights by providing for an allocation of production to those lands that are being drained by an offset well but cannot be independently developed due to the restrictions of well spacing in the area.

POLICY

As extracted from the BLM 3160-9 Manual, the Bureau's policy for approval of a communitization agreement is:

A. Communitization agreements may be approved when a lease or a portion thereof cannot be independently developed and operated in conformity with an established well spacing or well development program.

B. The Bureau will not usually approve, or recommend approval of, in the case of Indian lands, agreements communitizing more than 640 acres for oil or gas production irrespective of well location and federal or Indian acreage within the drilling and spacing unit. Nor will the Bureau recommend approval of, in the case of Indian lands, agreements when the proposed area is not contiguous.

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C. The Bureau will require operators of federal and Indian leases to adhere to the well spacing and well location requirements established by the appropriate state regulatory bodies, while reserving the right to impose different requirements in those instances where adherence to a state's requirement is considered not to be in the public interest or in the interest of the Indian lessors.¹

STATE SPACING

State spacing orders prevent the unnecessary drilling of wells by protecting correlative rights. This is accomplished by establishing drilling patterns for a given field that limit the number of wells that can be drilled in a specific unit of land (i.e., 80 or 320 acres). If an offset well is drilled in a unit of land covered by a state spacing order, then any lessee contained in the state spacing unit is prohibited from drilling a well on his land to protect it from drainage. In lieu of drilling an offset well, the offended lessee can receive his fair share of production from the offset well contained in the spacing unit by having a forced pooling order approved under state statute. The forced pooling order provides for an allocation of production to all lands contained in the state spacing unit.

State spacing orders establish drilling patterns for a given formation based on generic reservoir characteristics for the entire field. Certainly, the specific reservoir characteristics encountered in a well may vary from the general reservoir parameters used for the entire field. For instance, when drilling in noncontiguous lenticular sands, the reservoir characteristics for each well varies throughout the entire field. The drainage area of such a well may not be equivalent to the spacing unit established under the spacing order.

DRAINAGE

As reflected by Bureau policy, most communitization agreements are equivalent to state spacing units established by the jurisdictional state regulatory body.² With the boundary of a communitization agreement being equivalent to a state spacing order, the drainage area for a communitization agreement well may not be equivalent to the boundary of the communitization agreement.

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If the BLM determines that a lease is being drained by an offset well, a communitization agreement may be approved in accordance with the established state spacing order in lieu of drilling a protective well or paying compensatory royalty. If the drainage area of the subject lease is greater than the area covered by the communitization agreement which is equivalent to a state spacing order, the lessee may be required to drill a protective well on the area outside the communitization agreement or pay compensatory royalty if it is economically and legally feasible to drill a protective well.

A communitization agreement is needed even if a forced pooling order is in effect, and the order provides for an allocation of production to the federal leases contained in the spacing unit. The communitization agreement allows federal leases to receive any benefits of lease extension as provided for in the statute.³ Operations or production under a communitization agreement may be deemed to be operations and production on each separate tract.⁴ A forced pooling order is not recognizable for the purpose of lease extension.

ALTERNATIVE SPACING

The Bureau is not bound by state spacing orders. If adequate engineering and/or...