PARTICIPATING AREAS
| Jurisdiction | United States |
(Jan 1990)
PARTICIPATING AREAS
Poulson, Odell & Peterson
Denver, Colorado
TABLE OF CONTENTS
Page
I. INTRODUCTION
II. HISTORICAL BACKGROUND
III. FORMATION OF INITIAL PARTICIPATING AREA
IV. REVISION, CONSOLIDATION AND TERMINATION OF PARTICIPATING AREAS
A. Revisions
B. Circle-Tangent Method
C. Combining Participating Areas
D. Exclusion of Lands from Participating Area
E. Lands Necessary for Unit Operations
F. Effective Date of Revision
G. Termination of Participating Areas
V. ALLOCATION OF PRODUCTION
VI. RENTALS, MINIMUM ROYALTIES AND PRODUCTION ROYALTIES
VII. CONCLUSION
Figure 1
Figure 2
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I. INTRODUCTION
The regulations define "participating area" as,
That part of a unit area which is considered reasonably proven to be productive of unitized substances in paying quantities or which is necessary for unit operations and to which production is allocated in the manner prescribed in the unit agreement.1
The participating area (often simply called the "PA") is used in exploratory units as the means for allocating production of unitized substances. In secondary recovery units, where more reservoir data is available, the parties usually negotiate a participation formula for each tract, which serves as the basis for allocation, so that the participating area concept has no relevance to secondary recovery units.2 Consequently, this paper will focus on participating areas under federal exploratory units.
II. HISTORICAL BACKGROUND
The Mineral Leasing Act contains no definition of or reference to "participating areas." However, it appears that the concept of a participating area for allocating unit production was developed as early as the first federal unit agreement.
The first statute authorizing unitization of federal lands was enacted at the urging of the Secretary of the Interior and in response to conditions of extreme oversupply of oil existing in
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the late 1920"s.3 Even before statutory authority for unitization was enacted, the Director of the U.S. Geological Survey, Dr. George Otis Smith, began negotiations with lessees in the North Dome Kettleman Hills field in California to unitize their interests. A preliminary agreement was approved by the Secretary of the Interior on November 22, 1929 which provided for the suspension of further drilling in the North Dome Kettleman Hills field until July 1, 1931, and provided that the Secretary of the Interior would seek enabling legislation from Congress for unitization. The history of unitization legislation is outlined elsewhere,4 but it is interesting to note that the North Dome Kettleman Hills unit agreement — the very first unit agreement5 — contained provisions for the establishment of participating areas.6
Although the Mineral Leasing Act does not specifically refer to participating areas, it does allude to such a concept in the provision pertaining to extensions of unitized leases.7 The Act of August 8, 19468 amended the Mineral Leasing Act to provide that leases "committed to any such plan that contains a general provision for allocation of oil or gas" (emphasis added) shall remain in effect for as long as the lease is subject to the plan, provided oil or gas is discovered on the unit prior to the expiration of the primary term of the lease. The phrase, "that
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contains a general provision for allocation of oil or gas," had not been previously used in the statute and no explanation for its inclusion appears in the legislative history. Presumably, any unit plan of development would need to contain a provision for allocation of any production which might be obtained from the lands subject to the plan, so it may have been added to include communitization agreements in the extension provisions, while excluding cooperative agreements.
The Act of August 8, 1946 also added the following provision to the Mineral Leasing Act:
The minimum royalty or discovery rental under any lease that has become subject to any cooperative or unit plan of development or operation, or other plan that contains a general provision for allocation of oil or gas, shall be payable only with respect to the lands subject to such lease to which oil or gas shall be allocated under such plan.9
No discussion of this provision appears in the reports on the Act or in the floor debates. Nonetheless, the provision tacitly recognizes the concept of allocating unit production to participating lands, which may constitute less than all of the lands subject to the unit agreement.
Although the Mineral Leasing Act contains no specific reference to or authority for participating areas, it does authorize the Secretary of the Interior to prescribe the terms of the unit plan.10 After a lengthy hearing and the submission of many comments by the industry and individual states,11 the Department of the Interior published regulations governing unit agreements and a model form agreement in 1947.12 As in the current regulations, the original regulations provided that the model form agreement was not mandatory, but any revisions to it would require approval of the Department of the Interior. Sections 11 and 12 of that original model form unit agreement for unproven lands, titled "Participation after discovery" and "Allocation of production" respectively, are remarkably similar
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to Sections 11 and 12 in the current form. Their specific provisions will be discussed below, but two general observations are appropriate here. First, the published guidance on participating areas (in the regulations and the model form agreement) is general in nature and centers on the objective of defining those unitized lands "then regarded as reasonably proved to be productive of unitized substances in paying quantities."13 Second, the provisions of the regulations and the standard form agreement have been virtually unchanged in the more than 40 years since they were first adopted. It is likely that this second observation is a logical consequence of the first.
While the regulatory framework governing units in general and participating areas specifically has been fairly static over the years, the identity of the agency administering the regulations has changed significantly and a brief explanation of the changes in the agencies is necessary. Originally, unit agreements were administered by the Conservation Division of the U.S. Geological Survey ("USGS"). Therefore, regulations governing units were found in Title 30 of the Code of Federal Regulations, and appeals from decisions approving participating areas were taken to the Director of the Geological Survey. By Secretarial Order No. 3071,14 issued January 19, 1982, the Secretary of the Interior abolished the Conservation Division and transferred its functions to the newly created Minerals Management Service. However, on December 3, 1982, the Secretary transferred all onshore minerals management functions on non-Indian lands, except for royalty management matters, to the Bureau of Land Management ("BLM").15 Consequently, there are a few decisions pertaining to units which were rendered by the Director of the Minerals Management Service but currently, the Bureau of Land Management has jurisdiction over unit operations, including the formation and revision of participating areas, and the regulations are found in Title 43 of the Code of Federal Regulations.
The BLM Manual provides that the State Director is responsible for the establishment and revision of participating
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areas, unless that authority is further delegated.16 Therefore, in some states participating areas are approved by an official in the BLM State Office, while in others the authority has been delegated to the District Offices.
III. FORMATION OF INITIAL PARTICIPATING AREA
Once a well capable of producing unitized substances in paying quantities17 has been completed on the unit, Section 11 of the unit agreement requires the unit operator to submit to BLM for approval a schedule of all lands then regarded as reasonably proved to be productive of unitized substances in paying quantities.18 The lands so designated around the unit discovery well become the initial participating area. Obviously, in an exploratory unit, there will be no well control other than the data obtained from the discovery well on which to base a determination of what lands are reasonably proved to be productive in paying quantities. For that reason, the initial participating area is often formed by assuming radial drainage and estimating a drainage area for the well. For example, if the reservoir engineer calculates (based on an estimate of original hydrocarbons in place coupled with net pay thickness, porosity and other relevant factors) that the well will drain an area of 640 acres, then a 640 acre circle (radius of 2979 feet) is inscribed around the well and all 40-acre subdivisions 50% or more of which are within the drainage circle will be included within the participating area.19 See Figure 1 for an illustration of this example.
It is important to note that the procedure described above is not mandated by the regulations, the unit agreement or the BLM
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Manual. It is, however, a commonly accepted method20 for determining what lands are reasonably proved productive by a discovery well, which has a sound scientific basis where there is no evidence to contradict the assumption of radial drainage. However, the practice may vary from one BLM office to the next, and the reader is referred to Paper 13-B prepared by the BLM for a description of these differences. Since it is the responsibility of the unit operator to designate the lands in the participating area, subject to approval by the BLM, the unit operator has some latitude in the method used to determine which lands will be included in the participating area, provided there is sound...
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