COMMUNITIZATION, UNITIZATION AND THE EXTENSION OF LEASES
| Jurisdiction | United States |
(Jan 1990)
COMMUNITIZATION, UNITIZATION AND THE EXTENSION OF LEASES
Ray, Quinney & Nebeker
Salt Lake City, Utah
Table of Contents
1. Introduction
2. Differences Between Fee Leases and Federal Leases
2.1 Basic Fee Lease Provisions
2.1.1 Primary Term/Secondary Term
2.1.2 Shut-in Gas Well Clause
2.1.3 Pugh Clause
2.1.4 Pooling Clause
2.1.5 Unitization Clause
2.2 Comparison of Federal Leases to Fee Leases
2.2.1 Primary Term/Extended Term
2.2.2 Original Term
2.2.3 Shut-in Well Clause
2.2.4 Pugh Clause
2.2.5 Pooling Clause/Unitization Clause
3. Fee Leases in Federal Units and Communitized Areas
3.1 Communitized Fee Leases
3.1.1 Joinder of Lessor
3.1.2 Lease Segregation
3.1.3 Lease Extension
3.2 Unitized Fee Leases
3.2.1 Joinder of Lessor
3.2.2 Lease Segregation
3.2.3 Lease Extension
4. Communitized Federal Leases
5. Unitized Federal Leases
5.1 Conventional Lease Extensions in a Unit Setting
5.1.1 Payment of Annual Rentals
5.1.2 Production in Paying Quantities
5.1.3 Drilling Over End of Primary Term
5.2 Segregation and Extension on Commitment to Unit
5.2.1 Segregation of Nonunitized Lands
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5.2.2 Extension of Segregated, Nonunitized Lease
5.2.3 Horizontal Lease Segregation
5.2.4 Lease Extension on Elimination from Unit
5.3 Successive Elimination from and Commitment to Units
5.4 Leases Not Fully Committed to Unit
5.5 The Public Interest Requirement
6. Suspension of Unitized Leases
7. Unitization and Acreage Chargeability
8. Conclusion
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1. Introduction
The basic purpose underlying communitization (pooling) and unitization of oil and gas leases is to develop oil and gas resources efficiently by avoiding the drilling of unnecessary wells. Where a separate well might otherwise be required to hold every lease, regardless of tract configuration or resulting well spacing, through communitization and unitization a field may be developed with a small number of properly spaced wells. Furthermore, through unitization, an operator may develop a field through the drilling of wells in an orderly sequence where he might otherwise have been required to drill many wells concurrently to avoid loss of leases. An important benefit of communitization and unitization, therefore, is the extension and development of committed leases beyond their respective primary terms without the need to drill a well on every lease.
Under current federal law and regulations, lease extension is not only a beneficial result of unitization and communitization, it is also a tool, which is used to encourage cooperative development of federally-owned resources. Leases are not only extended through allocation of production in a unit or communitized area, portions of leases may also be extended upon commitment of other portions to a unit, and leases may be extended upon unit contraction or termination.
The purposes of this paper are to consider the different ways in which fee and federal leases are affected by communitization and unitization, to explore the various ways in which the life of a lease may be extended in connection with operations under a unit or communitization agreement, and to examine recent legal developments relating to lease extension in a unit setting.1
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2. Differences Between Fee Leases and Federal Leases
2.1 Basic Fee Lease Provisions
There is no standard form lease covering privately-owned lands, although there are several standard types of provisions which are found in most fee leases. Thus, any discussion of basic fee lease provisions must be qualified by a reminder carefully to review the actual terms of the lease involved in any given case. Subject to that caveat, the following common lease terms and clauses are germane to a discussion of fee leases involved in federal unitization and communitization.
2.1.1 Primary Term/Secondary Term
Fee leases are typically granted for a "primary term" of five or ten years, and so long thereafter as oil or gas is produced in paying quantities.2 The lease may be held in effect during the primary term through actual drilling operations or through the payment of delay rentals. A fee lease may be held in effect following the end of the primary term through actual production in paying quantities, through the timely resumption and successful completion of drilling or reworking operations following the cessation of production in paying quantities, or (for a limited time) by the payment of shut-in well royalties under a shut-in gas well clause. A fee lease which is extended by actual production is sometimes said to be in a "secondary term" or to be "held by production."
2.1.2 Shut-in Gas Well Clause
A "shut-in gas well clause" permits a lessee to extend a lease beyond its primary term in the absence of actual production if there is a well on the lease capable of producing gas in paying quantities, provided that shut-in gas royalties are timely paid.3 Such clauses are typically designed to permit a lessee to hold a lease containing one or more shut-in gas wells pending sufficient development of the field to justify the construction of a pipeline to the field.
2.1.3 Pugh Clause
A "Pugh clause" is a lease provision which typically severs a lease upon commitment of only a portion of the leased lands to a pooled unit, thereby permitting only that portion of the lease which is within the unit to be extended beyond its primary term by operations on or production from the unit.4
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2.1.4 Pooling Clause
A "pooling clause" grants the lessee unilateral authority to pool all or part of the leased lands with other lands in order to form a single-well pooling unit under applicable state well-spacing rules.5
2.1.5 Unitization Clause
Some lease forms in use in the Rocky Mountain area include, in addition to or in lieu of a conventional pooling clause, a "unitization clause." Where a typical pooling clause permits the lessee to pool leased acreage with other lands for purposes of aggregating the acreage necessary to permit a single well, a unitization clause (as used herein) is a pooling clause which permits the lessee unilaterally to commit all or part of the leased acreage to a unit approved by appropriate regulatory authorities without regard to the size of or number of well locations in the unit.
2.2 Comparison of Federal Leases to Fee Leases
A primary difference between leases covering privately-owned lands and those covering federal lands is that, while the rights of the fee lessee are almost exclusively contained within the lease itself, most of the rights of a federal lessee emanate from statutes and regulations. Where fee leases can be lengthy contracts between lessor and lessee, current federal lease forms are comparatively short, simply incorporating the terms of both present and consistent future regulations by reference. In addition, where a private lessor becomes a relatively passive royalty owner upon granting the lease, the federal government is both landowner and regulator. Thus a comparison of the rights typically held by fee lessees with the corresponding rights of federal lessees requires not only consideration of the express terms of federal leases, but also of the underlying federal laws and regulations.
2.2.1 Primary Term/Extended Term
Federal leases are currently granted for a five-year (competitive) or ten-year (noncompetitive) primary term, and so long thereafter as oil or gas is produced in paying quantities.6 When a federal lease is held by actual production beyond its primary term or is extended for reasons other than production (e.g., drilling over the end of the primary term or commitment of only a portion of the leased lands to a unit), it is said to be in an "extended term."7 For purposes hereof, the expression "indefinite extended term" will be used to denote the period of lease extension because of production, and the phrase "fixed extended term" will be used to indicate the period of a lease extension for reasons other than production. When applying lease
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extension rules, it is important to be aware that, if production is obtained during the period of the primary term or during a fixed extended term, although the lease changes from a rental to a minimum royalty status, the lease remains in its primary term or fixed extended term, and does not enter an indefinite extended term unless and until the full period of the primary or other fixed term has elapsed (and then only if production continues thereafter).
2.2.2 Original Term
In addition to "primary term" and "extended term," the expression "original term" is also used to describe the term of a federal oil and gas lease in the context of exclusion of the lease from a unit upon unit contraction or termination.8 In that situation, "original term" means the primary term or some other fixed term of the lease at or prior to the time of commitment to the unit, regardless of whether the lease was in an indefinite extended term because of production on the lease at time of commitment.9
2.2.3 Shut-in Well Clause
Unlike most leases covering privately-owned lands, federal oil and gas leases do not contain shut-in well clauses. However, a similar result is provided by statute and regulation.10 Under the federal rule, no lease which has a well capable of production of either oil or gas in paying quantities may be cancelled without giving the lessee at least 60 days to commence actual production.
2.2.4 Pugh Clause
The federal counterpart of the conventional Pugh clause is also found in the underlying statute and regulations.11 A federal lease which is committed in part to a unit or other cooperative plan of development (other than a communitization agreement) is segregated into...
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