COMMUNITIZATION OF FEDERAL LANDS: AN OVERVIEW

• Jurisdiction: United States

Federal Onshore Oil and Gas Pooling and Unitization II
(Jan 1990)
CHAPTER 3A
COMMUNITIZATION OF FEDERAL LANDS: AN OVERVIEW
T. Calder Ezzell, Jr.
Gregory J. Nibert
Hinkle, Cox, Eaton, Coffield & Hensley
Roswell, New Mexico

TABLE OF CONTENTS

SYNOPSIS

Page

I. INTRODUCTION

II. PURPOSE

III. FORMAT AND CONTENT

A. Required Information

B. Standard Form of Communitization Agreement

IV. PROCEDURE AND EFFECT

A. Filing and Approval

B. Term and Extensions

C. Formations Communitized

D. Allocation of Production

V. COMMUNITIZATION AGREEMENTS ON INDIAN LANDS

VI. PECULIAR PROBLEMS INVOLVING COMMUNITIZATION

A. Changes in State Spacing

B. Communitization Within Unit Boundaries

C. Conforming to State Spacing Patterns

D. Miscellaneous Matters

VII. CONCLUSION

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I. INTRODUCTION

This paper briefly reviews the statutory history authorizing communitization of federal oil and gas leases; the purposes and rationale behind spacing regulations; the model form of communitization agreement appearing in the BLM Manual; the procedures leading up to final approval of a communitization agreement; communitization on Indian lands; and peculiar problems that may be encountered with respect to communitization agreements. This paper is limited to Communitization Agreements, which are one of the six types of agreements recognized by the regulations concerning Cooperative Conservation Provisions.¹

In connection with the preparation of this paper, and the papers to follow concerning unitization matters, the authors were asked to adhere to the following definitions:

Pooling: The voluntary or compulsory joining of leases for common development within state established drilling or spacing units.

Communitization: The pooling of federal or Indian leases with one another or with state or

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fee leases within a state established drilling or spacing unit.

Unitization: The joining for common development and unified operation of leases covering all or a part of the reservoir or structure as a geologic unit.

Within the scope of this paper, "Communitization" is a term applied to the joint development of federal and/or Indian oil and gas leases, but the reader should be mindful that many states also employ the term when state leases are pooled with other leases for the exploration and development of a single drilling or spacing unit. It is quite common to see the terms unitization, pooling and communitization used interchangeably,² which results in confusion and precipitates miscommunication between the parties.³

Although the above definitions are adequate, the authors favor the following explanations of unitization and communitization. Unitization has been defined as:

The agreement to jointly operate an entire producing reservoir or a prosectively producing 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 economical manner by one operator.⁴

Communitization has been defined as:

The agreement to combine small tracts for the purpose of committing enough acreage to form the

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spacing and proration unit necessary to comply with the applicable state conservation requirements....The objective of communitization is to provide for the development of separate tracts which could not be independently developed or operated in conformity with well spacing patterns established in the area or by order of the state regulatory agency.⁵

It is also common to see the terms "proration unit," "drilling unit," and "spacing unit" used synonymously, but there are distinct differences in the definition of these terms as used in various jurisdictions.⁶ Williams and Meyers defines proration unit as follows:

The area in a pool that can be efficiently and economically drained by one well, as determined by the Commission. The acreage assigned to an individual well for the purpose of allocating allowable production thereto.⁷

A spacing unit is "the area allocated to a well under a well spacing order" and a drilling unit is "the area prescribed by applicable well spacing regulations for the granting of a permit by the regulatory agency for the drilling of a well; the area assigned in the granting of a well permit."⁸ For purposes of this paper, the terms proration unit and spacing unit will be used interchangeably to define the area established by the state regulatory agency as the surface area which is dedicated to a single oil and/or gas well.

Although the Mineral Leasing Act was enacted in 1920,⁹ it was not until the passage of an amendment in 1946 that communitization agreements were authorized to enable federal lessees to conform development on federal lands to established well spacing and development programs.¹⁰ The Mineral Leasing Act Revision of 1960 further amended the act and incorporated the

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1946 provisions relating to communitization agreements.¹¹ In addition, the Mineral Leasing Act for Acquired Lands¹² and the regulations promulgated thereunder, permit the communitization of leases issued under that act on the same terms and under the same procedures as the regulations promulgated for implementation of the Mineral Leasing Act.¹³

II. PURPOSE

Virtually all oil and gas producing states have promulgated minimum acreage requirements for the drilling of oil or gas wells, and most of these states have further enacted compulsory pooling statutes which enable lessees to develop their leases when the voluntary joinder of the leases covering said minimum acreage requirements cannot be obtained.¹⁴ Compulsory pooling

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began as an effective means of zoning control within a municipality. "A number of such ordinances were enacted in the 1920's and 1930's, the first of these being an ordinance enacted in Winfield, Kansas, in 1927. This was followed in the same year by the enactment of similar ordinance in Oxford, Kansas; the latter ordinance was sustained as valid in Marrs v. City of Oxford.¹⁵ These ordinances spread to other producing states and limited drilling within the municipal boundaries to one well for each designated spacing unit and provided for nondrillsite owners to participate in production. These ordinances were deemed to be a valid exercise of the municipality's police power.

New Mexico and Oklahoma were the first states to enact state compulsory pooling statutes, each in the year 1935. The justification and rationale for a state compulsory pooling statute is to protect correlative rights, prevent the waste of oil and gas resources by depletion of the reservoir pressure, reduce economic waste caused by the drilling of unnecessary wells, and allow each owner to have a fair chance to recover the hydrocarbons in place beneath his land.

Communitization, under Federal regulations, is simply pooling where federal or Indian lands are involved. The Secretary's authority to approve a Communitization Agreement arises when a portion or all of a federal or Indian lease cannot be independently developed and operated in conformity with the well spacing requirements of the state in which the land is located. Congress has, in essence, recognized the importance of the state conservation statutes concerning spacing when it amended the Mineral Leasing Act to provide for communitization of federal leases with adjacent federal, fee or state leases. The Mineral Leasing Act presently provides:

When separate tracts cannot be independently developed and operated in conformity with an established well-spacing or development program, any lease, or a portion thereof, may be pooled

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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 the Secretary of the Interior to be in the public interest, and operations or production pursuant to such agreement shall be deemed to be operations or production as to each such lease committed thereto.¹⁶

This allows all mineral owners within the area comprising the state's spacing requirement to share in production from the well on the spacing or proration unit. Production is usually apportioned to and among the various tracts and leases on an acreage basis.

The common thread of all federal Communitization Agreements is that at least one federal or Indian lease or tract is involved. That federal or Indian lease is communitized with other leases that may be federal, Indian, state or fee. A Communitization Agreement requires the consent of all parties owning interests in the mineral estate underlying the area and in the formation that is to be communitized. These issues are discussed in more detail below.

III. FORMAT AND CONTENT

A. Required Information

There is no prescribed form for a federal communitization agreement in the regulations; however, the BLM Manual has a standard communitization agreement form which should be used whenever possible.¹⁷ The regulations do require that certain information be included within the communitization agreement. The agreement must describe the separate tracts comprising the drilling or spacing unit, the apportionment of production or royalties, the name of the operator, and shall contain adequate provisions for the protection of the interests of the United States.¹⁸ In addition, the agreement must be signed by or on behalf of all necessary parties.

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The necessary parties include all working interest owners, lessees of record and the royalty, overriding royalty, and production payment interest owners whose interests are not subject to...