FORMING THE UNIT - WHY UNITIZE? THE INDUSTRY PERSPECTIVE
| Jurisdiction | United States |
(Nov 2006)
FORMING THE UNIT - WHY UNITIZE? THE INDUSTRY PERSPECTIVE*
EnCana Oil & Gas (USA) Inc.
Denver, Colorado
RICHARD CHAMPION
Richard Champion is Land Negotiator for EnCana Oil & Gas (USA) Inc. He is a federal lands and unit specialist for EnCana's South Business Unit. Prior to working for EnCana, Richard was a co-owner of Champion Resources, Inc. where he bought and sold more than two million acres of leases, drilled more than 80 wells, formed units, appraised property and qualified in both U.S. Tax Court and District Court as mineral title expert and an undeveloped oil and gas mineral appraiser. Prior to Champion Resources, Richard was a partner with Edmundson Champion, Inc. where he constructed more than 500 federal exploratory and secondary oil and gas units, communitization agreements, and pooling agreements.
Richard has been active in the Rocky Mountain Mineral Law Foundation. He was Chairman for the Landman's Section for the 1988 Seattle Institute, Past President of the DAPL, Chairman of the AAPL National Certification Committee, National Environmental Committee and the National Public Lands Committee. He has received many honors, two of which were the AAPL's 1989 Special Award and was awarded Landman of the Year from the DAPL in 1993.
Why should we go to the time and expense to form a federal unit; to deal with all the additional rules and regulations and thereby create another level of federal paperwork!
To unitize or not is a question that should be asked and definitively answered prior to the drilling of any exploratory well. The answer will largely be determined by the type of lease (either fee, state or federal) and the rules and regulations of the state in which the well is to be drilled. This paper does not cover the effect of unitization in each state but deals only with federal exploratory units involving areas where an operator holds predominantly federal leases.
I. STATE REGULATORY POWERS
Oil and gas operations in the Rocky Mountain states are primarily governed by each state's oil and gas conservation act, and the rules and regulations promulgated by the designated regulatory agency. Each conservation act empowers the designated regulatory agency to regulate the spacing of wells. Other purposes of the agency's mission are (1) to protect the correlative rights of the owners in a common source of supply of oil and gas - to the end that each may obtain a fair share of production, (2) to encourage the efficient development of natural resources, (3) to protect public and private interests against both physical and economic waste, (4) to provide for the development of an oil and gas pool in such a manner as to maximize ultimate recovery, and (5) to encourage voluntary agreements for assisted recovery operations for the benefit of the public as well as for the owners of the oil and gas rights. Spacing, pooling and unitization are also measures addressed in the laws and regulations of the states and are intended to assist in accomplishing these purposes.
As a part of its rules and regulations, the regulatory agency of each state has adopted a rule regulating the location of wells. The rule usually will prohibit the drilling of a well closer than a stated distance to a lease line, a property line, or a surveyed governmental subdivision line. In addition, the rule will establish a minimum distance between wells drilled to a common source of supply.
II. POOLING OR COMMUNITIZATION
After an operator determines the legal location of the proposed exploration well, it may find that there are undivided or divided lessor or lessee interests within the spacing
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pattern. If such is the case, it will then be necessary to pool those interests to provide for the sharing of production and possibly the costs for the permitted well.
Pooling may be accomplished either voluntarily by agreement of the parties or involuntarily by order of the state regulatory agency after application, notice and hearing. The majority of fee leases contain a pooling provision, and ordinarily, pooling may be accomplished by the lessee filing for record in the appropriate county records a declaration of pooling pursuant to the provision in the oil and gas lease. If one or more of the leases involved does not permit pooling by declaration, a pooling agreement may be entered into between the parties concerned.
Although most fee lease forms in use in the Rocky Mountains contain a pooling clause, particular attention should be paid to the form to be used in areas where fee lands are interspersed with federal lands. It is important that such form contain a unitization provision.
Some of the forms in general circulation in the Rocky Mountains use a clause similar to that upheld in the lessee's favor in Phillips Petroleum Co. v. Peterson,1 a Utah case. In that case, the U.S. Court of Appeals held that the unitization clause in question did not effect cross-transfers of royalty interests and even had it done so, did not violate the Rule Against Perpetuities. The Court also upheld the validity of the principal-agent relationship that established Phillips had the right and power to commit the lessor's interest to a unit approved by the United States Geological Survey and the State of Utah.
Many times the landowner will insist that the unitization clause be stricken, but if possible, it is strongly recommended that a version of the clause similar to the court-tested version be used. The clause at issue in Phillips Petroleum reads as follows:
Lessee shall have the right to unitize all or any part of the above described lands with other lands in the same general area by entering into a Unit Agreement setting forth a plan of development or operation approved by the Secretary of the Interior, or other officer or representative of the United States having authority to approve such Unit Agreements, and, from time to time, with like approval, to modify, change or terminate any such agreement. In any of such events, the terms, conditions and provisions of this lease shall be deemed modified to conform to the terms, conditions and provisions of such approved Unit Agreement, and all drilling and development requirements of this lease, express or implied, shall be satisfied by compliance with the drilling and development requirements of such agreement, and this lease shall not terminate or expire during the life of such agreement except as may be otherwise provided in said agreement. In the event that said above described lands, or any part thereof, shall hereafter be operated under any such Unit Agreement whereby the production thereunder is allocated to different portions of the land covered by said agreement, then the production allocated to any particular tract of land pursuant to such agreement shall, for the purpose of computing royalties, be regarded as having been produced from the particular tract of land to which it is allocated and not from any other tract of land and any royalty payments on such production to be made hereunder shall be based solely upon the production so allocated. Nothing herein
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contained shall authorize or affect any transfer of any title to any leasehold, royalty or other interest unitized pursuant hereto. Lessee's execution of such Unit Agreement shall be binding as to both lessor and lessee and their respective interests. Lessee, following such execution, shall furnish lessor with a copy of such Unit Agreement by mail to lessor's last known address as shown by lessee's records and shall give lessor written notice of approval of the same in the same manner within a reasonable time after lessee is notified of such approval.
If federal leases are involved, pooling must be accomplished by means of a communitization agreement. Communitization agreements are authorized by federal regulation:
When a lease or a portion thereof cannot be independently developed and operated in conformity with an established well-spacing or well-development program, the authorized officer may approve communitization or drilling agreements for such lands with other lands, whether or not owned by the United States, upon a determination that it is in the public interest. Operations or production under such an agreement shall be deemed to be operations or production as to each lease committed thereto.2
While pooling or communitizing leasehold of up to 640 acres is a common practice, the explorationist should...
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