POOLING AND UNITIZATION METHODS ACROSS SHALE BASINS (OR LACK THEREOF): TEXAS (EAGLE FORD AND BARNETT)

• Jurisdiction: United States

Development Issues in Major Shale Plays
(May 2014)
CHAPTER 8C
POOLING AND UNITIZATION METHODS ACROSS SHALE BASINS (OR LACK THEREOF): TEXAS (EAGLE FORD AND BARNETT)
John Hicks
Partner
Scott, Douglass & McConnico, LLP.
Austin, Texas

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JOHN HICKS is a partner at the law firm of Scott, Douglass & McConnico L.L.P. in Austin, Texas. His practice focuses on oil & gas litigation and regulation, and he is Board Certified in Oil, Gas & Mineral Law by the Texas Board of Legal Specialization. John graduated from the University of Texas School of Law and served as a judicial clerk to the Honorable Will Garwood on the U.S. Court of Appeals for the Fifth Circuit John also served as a submarine officer in the U.S. Navy, on active duty for over 10 years and as a reservist for another 12 years before retiring at the rank of commander. John has a BS in Petroleum Engineering from the University of Texas at Austin, an MS in Engineering-Economic Systems from Stanford University, and a Masters in Strategic Studies from the U.S. Army War College.

Table of Contents

I. BACKGROUND OF HORIZONTAL DRILLING AND SHALE DEVELOPMENT IN TEXAS

II. REGULATORY RESPONSE TO HORIZONTAL WELLS IN SHALE

A. Density Issues and Assignment of Additional Acreage for Horizontal Wells

1. Proration Units

2. Rule 86 and Special Field Rules

B. Spacing Considerations and Issues For Horizontal Wells

1. Application of Rules 37 and 86

2. Outstanding Interest in Drillsite Tract

3. Unknown/Unlocatable Non-Consenting Interests

4. Non-Participating Royalty Interests

C. Special Field Rules to Facilitate Horizontal Drilling

1. 0' Between Well Spacing Rule

2. Take Point Rule

3. Off-Lease Penetration Point Rule

4. Dual Property Line Rule

5. Stacked Lateral Rule

6. Box Rule

III. TRESPASS ISSUES WITH HORIZONTAL WELLS

A. Whose Consent Is Necessary to Drill From a Non-Participating Tract?

B. Whose Permission Is Necessary for Wells Drilled Within Pooled Units?

C. What Problems Arise If the Well Is Drilled Across Separate, Unpooled Tracts?

IV. VOLUNTARY POOLING OF TRACTS FOR HORIZONTAL DRILLING

A. Each Tract Is a Drillsite

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B. Governmental Authority Provisions in the Pooling Clause

C. Depth Interval to Be Pooled

D. Enlargement of Existing Units by Governmental Authority

E. Failure to Reach Intended Horizontal Length

V. COMPULSORY POOLING IN TEXAS - MINERAL INTEREST POOLING ACT

A. Background

B. Prerequisites for Invoking the Mineral Interest Pooling Act

1. Discovery Date of Field (§ 102.003)

2. Existence of a Field with Special Field Rules (§102.011)

3. No State Lands Unless Approval from the State (§ 102.004)

4. Two or More Tracts (§102.011)

5. Common Reservoir (§102.011)

6. Existing or Proposed Well (§102.011)

7. Size Limitations (§§102.011, 102.014)

8. Statutory Purposes (§102.011)

9. Fair and Reasonable Voluntary Offer to Pool (§102.013, §102.015)

C. Requirements for Notice of MIPA Hearings. § 102.016

D. Acreage Subject To Force Pooling (§102.018)

E. "Muscle-In" MIPA Application (§102.014)

1. Generally

2. Larger Allowable Authorized for a "Muscle In"

3. Definition of "Standard" Proration Unit

4. Undivided Interest Not Exempt

F. Recovery of Costs and Charge for Risk

G. Compulsory Pooling in the Urban Environment - The Barnett Shale MIPAs

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1. Background and Problems in Urban Areas of the Barnett Shale

2. Finley Resources, Inc.'s East Side MIPA Unit

3. Subsequent Barnett Shale MIPA Cases

H. Summary of Compulsory Pooling for Shale Development in Texas

VI. OBTAINING DRILLING PERMITS FROM THE RRC WITHOUT POOLING

A. Production Sharing Agreements

1. Types of PSAs

2. Permitting Wells At the RRC on a PSA Basis

B. Allocation Well Permits

C. Risk of Disputed Allocation

1. Browning Oil Co. v. Luecke

2. Springer Ranch Ltd. v. Jones

3. Louisiana Conservation Commission

VII. CONCLUSION

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The explosion in horizontal drilling activity in shale rock and other tight geologic formations in Texas is challenging landmen, lawyers, the courts and the Railroad Commission of Texas ("RRC") to apply and adapt traditional legal and regulatory concepts - developed over more than a century for vertical drilling and development - to horizontal wells. This article addresses the current regulatory scheme in Texas for horizontal wells and the methods for voluntary and compulsory pooling.¹

I. BACKGROUND OF HORIZONTAL DRILLING AND SHALE DEVELOPMENT IN TEXAS

Horizontal drilling began in earnest in the 1980's when improved downhole drilling motors and the invention of downhole telemetry equipment made the drilling of such wells commercially viable.² The first widespread horizontal drilling in Texas occurred in the Austin Chalk formation in the Pearsall Field located in Frio, Zavalla, Dimmit, and LaSalle Counties,³ In 1990, approximately 1,000 horizontal wells were drilled worldwide, 850 of them in the Austin Chalk formation.⁴ These first-generation horizontal wells were "open hole" wells. Rather than using the traditional method of completing a well by casing and cementing the wellbore and then perforating through the casing in the productive zone, these wells were open to the formation throughout the entire horizontal portion of the drainhole. While this method of drilling and completion worked well in naturally-fractured formations, it could not be used in hydrocarbon bearing reservoirs requiring extensive fracture stimulation in order to produce.

The first shale formation to be exploited by horizontal drilling was the Barnett Shale, which covers approximately 5,000 square miles in north and north central Texas.⁵ The initial Barnett Shale horizontal well was drilled in 1992.⁶ Advances in horizontal drilling technology and hydraulic fracturing techniques, along with an increase in natural gas prices, led to the rapid development of the Barnett Shale.⁷ Barnett Shale production increased from 41 billion cubic feet

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in 1999 to a peak of 2.09 trillion cubic feet in 2012 and 1.93 trillion cubic feet in 2013.⁸ Correspondingly, the well count in this field jumped from approximately 500 to 14,000 over this same period.⁹ Since 2006, the vast majority of Barnett Shale wells have been horizontal wells.¹⁰

Buoyed by the success encountered in the Barnett Shale, operators began looking for new shale plays to implement the drilling and fracture stimulation technology that was developed and refined there. The Haynesville Shale and the Eagle Ford Shale became the new frontiers of shale development in Texas.¹¹ Of the three major shale deposits in Texas, the newest to be developed is the Eagle Ford Shale. According to the RRC, only 26 drilling permits were issued in the Eagle Ford Shale in 2008, all of them for horizontal wells.¹² In 2013, the RRC issued 4,416 Eagle Ford drilling permits,¹³ almost all for horizontal wells. Many areas of the Eagle Ford Shale produce very high volumes of condensate or oil, which has made them particularly attractive for development during this current period of high prices for liquid hydrocarbons and low prices for natural gas.

II. REGULATORY RESPONSE TO HORIZONTAL WELLS IN SHALE

The RRC has promulgated statewide field rules which apply in all fields other than those in which special field rules have been obtained. Until 1990, the RRC's rules (both statewide and special) were drafted to regulate drilling and production from vertical or intentionally deviated directional wells.¹⁴ In many instances, these traditional rules cannot be neatly applied to horizontal wells. The RRC's application of these traditional rules to horizontal wells and the RRC's promulgation of special horizontal rules to address regulatory issues unique to horizontal drilling are discussed below.¹⁵

A. Density Issues and Assignment of Additional Acreage for Horizontal Wells.

1. Proration Units.

One critical aspect of RRC regulation concerns proration, which is the regulation of the daily rate of production from wells within a given field or reservoir.¹⁶ In fields with special rules

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where acreage is a factor in the allocation formula, the RRC requires operators to designate a "proration unit" for each well in the field, with the size of a well's proration unit affecting its production allowable. The RRC defines a proration unit as "the acreage assigned to a well for the purpose of assigning allowables and allocating allowable production to the well."¹⁷ The "prescribed" or "permitted" size of a well's proration unit is dictated by the density rule for the field in question.

Often, the prescribed or permitted size of a proration unit in a field will impact parties' rights and obligations under private agreements such as oil and gas leases and farmout agreements. For example, the number of acres the RRC's rules "prescribe" or "permit" often dictates the maximum permitted size of a pooled unit authorized under a lease. Similarly, such rules often dictate the number of acres a lessee retains under a lease's continuous development provision.

Additional acreage may be included in a proration unit for horizontal wells under (a) Statewide Rule 86,¹⁸ or (b) the special density field rule for horizontal wells (if one exists for the field in question). The concept embodied by both Rule 86 and special rules for proration units and allowables applicable to horizontal wells is that the longer the horizontal drainhole displacement, the greater the drainage area, the larger the proration unit earned, and the greater the assigned allowable. This concept is based upon the engineering assumption that each point along the producing interval will drain radially an area that is approximately the size of the applicable density rule for the field in question.

2. Rule 86 and Special Field Rules.

Rule 86, which became effective on June 1, 1990, is the RRC's statewide rule applicable to horizontal wells. This...