POOLING AND UNITIZATION PRACTICES BEFORE THE TEXAS RAILROAD COMMISSION
| Jurisdiction | United States |
(Jan 1997)
POOLING AND UNITIZATION PRACTICES BEFORE THE TEXAS RAILROAD COMMISSION
Scott, Douglass, Luton & McConnico, L.L.P.
Austin, Texas
Table of Contents
I. INTRODUCTION
A. Statutes Involved.
B. Definitions.
1. Fieldwide Unitization.
2. Pooling.
C. Voluntary Pooling Distinguished.
D. Equitable Pooling.
II. FORCED POOLING IN TEXAS—THE MINERAL INTEREST POOLING ACT
A. Introduction.
B. Historical Background
C. Prerequisites For Invoking the Mineral Interest Pooling Act
1. Discovery Date Of Field
2. Existence Of Field-No Wildcat Field Forced Pooling
3. Special Field Rules
4. State Lands
5. Two Or More Tracts
6. Common Reservoirs
7. Existing Or Proposed Well
8. Size Limitations
9. Statutory Purposes
10. Voluntary Offer To Pool
D. Parties Authorized To Bring a Forced Pooling Action
1. Authorized Force Pooling Applicants
2. Statutory Construction Problem
3. Distinction Between Existing And Proposed Proration Units
4. School Land Board Standing To Force Pool Riverbeds And Channels
E. Notice of MIPA Hearing Requirements
1. Actual Notice Sufficient
2. Legal Description Not Required
F. Distinction Between Existing and Proposed Proration Units.
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G. Required Voluntary Pooling Offer
1. Unique Requirement
2. Jurisdictional Prerequisite
3. Elements
4. Recipients of Voluntary Offer
5. Timing of Voluntary Offer
6. Court Standard for Review of Voluntary Offer
H. Acreage Subject to Force Pooling.
1. Productive Acreage At Time Of Order
2. RRC Determination Of Productive Acreage
I. Productive Acreage Equal to Standard Proration Unit
1. Generally
2. Larger Allowable Authorized
3. Definition of "Standard" Proration Unit.
J. Prohibited Provisions in Operating Agreement
1. Generally.
2. Effect of Prohibited Provisions Upon MIPA Applications
K. Effective Date of Compulsory Pooling Orders
1. Importance of Effective Date
2. RRC's Historical Policy
3. Court Reversal of Retroactive RRC Orders
4. Interim Order Procedure
5. Court Review Of Interim Orders
L. Risk Penalties.
1. Generally
2. Insufficiency of Maximum Penalty
3. Standard For Risk Penalty Amount
M. Disputes Regarding Costs.
1. Generally.
2. Certain Costs Excluded
3. Procedure For Resolving Cost Disputes
N. Requisites of the Compulsory Pooling Order
1. General Requirements
2. Specific Requirements
O. Termination of Compulsory Units
1. Consent Of Owners
2. Automatic Dissolution
P. Appeals of Compulsory Pooling Orders.
1. Venue
2. Standard For Judicial Review Of Compulsory Pooling Orders.
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III. FIELDWIDE OR PARTIAL FIELDWIDE UNITIZATION IN TEXAS.
A. Introduction
B. The Texas Unitization Statute
1. Historical Background
2. Non-Compulsory Effect
C. The Effect of RRC Approval Upon Legality of Unit Agreement.
1. Necessity of RRC Approval
2. Advantages From RRC Approval
D. Procedures to Obtain RRC Approval of Unitization Project.
1. Background
2. Necessary Approval Prior To RRC Hearing
3. Unitization Application
4. Newspaper Publication
E. Statutory Requirements For RRC Approval
1. Conservation Purposes
2. Public Welfare
3. Protection of Signers and Non-Signers
4. Profitable Operation
5. Inadequacy of Existing Operations to Achieve Enhanced Recovery
6. Appropriate Size
7. Offer to Tract Owners Within Area Reasonably Defined by Development
8. Same Yardstick Basis Offer
9. State Acreage in Unit
F. RRC Decisions Addressing Conversion of Last Producing Wells on Tracts With Unsigned Interests
1. Background
2. RRC Decisions
3. Uncertain Precedent
IV. CONCLUSION
APPENDIX
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I. INTRODUCTION.
A. Statutes Involved.
There are only two (2) statutes involving pooling and unitization that directly involve the Texas conservation agency, the Texas Railroad Commission (RRC). These statues are the Mineral Interest Pooling Act (MIPA),1 which is the Texas version of a forced pooling law, and the unitization statute,2 which is the law providing the RRC with authority to approve fieldwide and partial fieldwide units for enhanced recovery.
B. Definitions.
The terms "unitization" and "pooling" are synonymous and have the same legal effect. These terms are referenced interchangeably by numerous Texas courts and are used synonymously in the Texas fieldwide unitization statute. To distinguish between the two statutes being discussed and to simplify this paper, fieldwide unitization and pooling will have separate and distinct meanings.
1. Fieldwide Unitization. Fieldwide unitization, as used in this paper, shall mean the joint operation of separately owned tracts of land within an oil or gas reservoir for the purpose of conducting enhanced recovery operations through the injection of outside substances to increase the reservoir energy and thereby enhance the ultimate recovery of hydrocarbons from the injection zone.
2. Pooling. Pooling, as used in this paper, shall mean the joinder of separately owned interests under a lease pooling clause or other agreement of the parties. 1 B. Kramer & P. Martin, THE LAW OF POOLING AND UNITIZATION, § 1.02 (Matthew Bender 3rd Ed. 1996). Pooling is normally invoked to form a unit to determine (a) how
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production proceeds are to be distributed to the various mineral interest owners, and (b) which acreage and leases are to be maintained, because drilling or production on any portion of the pooled unit is considered drilling or production on each of the leases included in the unit. 1 E. Smith & J. Weaver, TEXAS LAW OF OIL & GAS, § 4.8 (Butterworth 1989). Units formed by pooling are generally created to achieve primary, as distinguished from secondary or tertiary, recovery of hydrocarbons.
C. Voluntary Pooling Distinguished.
Although a critical element of the Texas fieldwide unitization statute is its non-compulsory effect,3 the RRC and hence this paper are only concerned indirectly with the lessee's exercise of voluntary pooling rights acquired through leases or other private agreements to pool for non-enhanced recovery purposes. These voluntary pooled units are recognized by the RRC for purposes of (a) drilling units for drilling permit purposes, and (b) proration units for proration or allowable purposes. The RRC recognizes these voluntary units through the acceptance of a form4 by which the operator/lessee affirms its private authority to form the pooled unit in question.
D. Equitable Pooling.
The authority of the RRC to force pool or unitize is strictly limited. Indeed, the only power to compel a mineral interest into an existing or proposed proration unit is through the cumbersome and often ineffective MIPA. Equitable units,5 which have the legal effect of pooling land and mineral interests included within a drilling unit formed pursuant to applicable spacing regulations of the conservation agency, are specifically not recognized in Texas. Ryan Consolidated Petroleum Corp. v. Pickens, 155 Tex. 221, 285 S.W.2d 201 (1955). This authority means that undivided interests in a non-drillsite tract of a pooled unit that are either unleased or leased to a third party do not participate in production from the unit well merely because these interests are located within the geographic
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boundaries of a RRC drilling or proration unit. The fact that these non-pooled interest owners' acreage is being used for drilling permit and/or allowable purposes does not change this result in Texas absent forced pooling under the MIPA or the consent of the operator/working interest owners of the producing well. Brown v. Getty Reserve Oil, Inc., 626 S.W.2d 810 (Tex. Civ. App.—Amarillo 1982, writ dism'd); Waters v. Bruner, 355 S.W.2d 230 (Tex. Civ. App.—San Antonio 1962, writ ref'd n.r.e.).
II. FORCED POOLING IN TEXAS — THE MINERAL INTEREST POOLING ACT.
A. Introduction.
The Mineral Interest Pooling Act, which became effective on August 29, 1965,6 is a complicated statute to understand and even more difficult to apply. Undoubtedly because of the few times the MIPA has been invoked, many experienced landmen, geologists, engineers and lawyers assume that forced pooling is not an available remedy in Texas.7 Indeed RRC records reflect that a total of 214 applications have been filed with the agency since the MIPA became law, including only 6 in the last 3 years. See Exhibit A to Appendix showing the number of applications filed and their disposition since 1965. Of the 214 total applications, 95 have been granted by the RRC, but only 2 in the last 5 years. Id.
B. Historical Background.
Since the mid-1930's, noted commentators like Robert Hardwicke8 and A.W. Walker9 pointed out the abuses resulting from small tract drilling and the need for a compulsory pooling law in Texas.10 Forced pooling statutes were first adopted by
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Oklahoma and New Mexico in 1935 and became an integral part of the conservation law in those states.11
Texas, however, was the home of the wildcatter and small tract driller. With allocation formulae based upon 1/3 per well, 2/3 acreage in gas fields (1/3 — 2/3 formula) and 50% per well, 50% acreage for oil reservoirs (50/50 formula), small tract drilling was not only authorized but encouraged. See Stanolind Oil & Gas Co. v. Railroad Commission, 96 S.W.2d 664 (Tex. Civ. App.—Austin 1936, no writ), where a drilling permit was granted even though the value of the oil underlying the tract in question was $2,500 and the cost to drill the proposed well was $10,000; Halbouty v. Darsey, 326 S.W.2d 528 (Tex. Civ. App.—Austin 1959, writ ref'd n.r.e.), where another permit was issued and the gas and condensate reserves underlying the drillsite were valued at $20,000 compared to $250,000 to drill the permitted well; Atlantic Refining...
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