STATE REGULATORY IMPACTS UPON HORIZONTAL DRILLING IN URBAN AREAS

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STATE REGULATORY IMPACTS UPON HORIZONTAL DRILLING
IN URBAN AREAS

• Texas Journal of Oil, Gas and Energy Law
• 2009 Oil Gas and Energy Law Symposium
• Austin, Texas
• H. Philip (Flip) Whitworth
• Scott, Douglass McConnico, L.L.P.
• 600 Congress Avenue, Suite 1500
• Austin, Texas 78701
• [phone]

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INTRODUCTION

• Background
• More drilling in urban areas
• Surface and local regulatory obstructions
• These problems are particularly prevalent in
  Barnett Shale with horizontal drilling

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• Scope of Presentation
• State (RRC) regulatory impact upon permitting
  wells, formation of pooled units, retention of
  acreage
• Lease provisions tying RRC rules to pooling
  authority and acreage retained
• Will not address local regulation by cities,
  counties or municipalities
• Focus upon Newark, East (Barnett Shale) Field and
  its special rules

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• Standard Form Leases
• Lease controls specific wording critical
• Non-existence of standard lease

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• Importance of Barnett Shale and Newark, East
  (Barnett Shale) Field
• Energized Texas economy
• 2nd largest natural gas field in U.S.
• 17 of all Texas production in 2007
• Average production gt 3 BCF per day (January
  through July 2008)
• 200 operators, 19 counties from Oklahoma border
  almost to Waco

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• Limited Case Law for Guidance
• Traditional application of law for vertical wells
  may not be followed
• Browning Oil Co. v. Luecke recognized public
  policy benefits from horizontal drilling

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RRC REGULATION OF HORIZONTAL WELLS

• General Overview Necessary Statewide Rule 86 v.
  Special Field Rules
• Statewide Rule 86
• Applies to all horizontal wells not governed by
  special field rules
• Definitions
• Correlative Interval
• Penetration Point
• Terminus
• Horizontal Drainhole Displacement

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Figure 1
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• Spacing Drainhole must comply with applicable
  spacing distances for each point of well within
  correlative interval

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• Fundamental Regulatory Points
• Longer drainhole greater drainage larger
  proration unit greater allowable
• Rule 86 does not require additional acreage
  operator has discretion
• Permissiveness of Rule 86 is critical in applying
  lease language

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SPECIAL FIELD RULES OF NEWARK FIELD

• Understanding Special Rules Necessary to
  Interpret Lease Provisions
• Vertical Definition of the Field
• Spacing
• 330 to lease, unit, property lines
• 0 between wells on same lease/unit
• Special 1st perf/point of access rule

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Figure 2
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Figure 3
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• Density Rule
• Gas Wells 320 acre units plus 10 tolerance per
  well with optional 20 acre units
• Oil Wells 40 acre units plus 20 acre tolerance
  for last well on lease/unit

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• Penetration Point Off Lease

Figure 4
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• Allocation Formula
• 100 acreage
• Allocation suspended for gas
• No gas allowables currently impact upon lease
  pooling and retained acreage provisions

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Figure 5

• Stacked Laterals

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• Separate surface locations no more than 200
  apart
• 2 or more drainholes drilled essentially on top
  of each other (no point along drainhole more than
  200 apart in horizontal direction
• No distance limitations between drainholes in
  vertical direction
• Treated as if a single well

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SPACING CONSIDERATIONS (RULE 37)

• Surface Location Irrelevant
• Compliance Over Entire Drainhole Distance

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FIGURE 6

• Unleased Lot B lt lease line spacing distance
  makes Rule 37 spacing exception necessary

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• Outstanding Interest in Drillsite Tract
• No spacing exception necessary for drillsite
  interests
• Co-tenancy law protects such interest from
  co-tenancy law

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SIGNIFICANT FORCE POOLING CASE

• Background/Problem
• Horizontal wells in subdivisions with multitude
  of separate lots and mineral owner/lessors
• Numerous lot owners who cannot be found or who
  refuse to lease/pool regardless of terms create
  potential Rule 37 issues
• Non-consenting/unfindable owners could prevent
  drilling of wells because of trespass
  considerations

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• Finley Resources Force Pooling Application
• Finley sought to force pool 26 lots (5.704 acres)
  into a 96.32 acre pooled unit in subdivision with
  300 lots 1 mile from downtown Fort Worth
• Finley had leased 94 of acreage in unit

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Figure 7
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• Finley position
• Well could not be drilled absent force pooling
  path too circuitous, unintentional trespass
• Approval necessary to protect correlative rights
  of 94 of mineral owners and to prevent waste of
  recoverable gas
• Examiners original recommendation denial
• Statute not intended to force parties into
  participation, only to allow those left out to
  force their interests into producing unit to
  share in production

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• RRC granted application
• Limited to Newark Field
• Allocated production on surface acreage basis
• No risk penalty
• 1/5 royalty, 4/5 working interest
• Operator to escrow proceeds for unfindable
  parties

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• Significance of decision
• Force pooling is remedy to drill wells over
  objection or unleased owners not desiring to
  participate
• Encourages reluctant owners to negotiate
• Did not establish minimum sign-up within proposed
  unit

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SPECIAL PROBLEMS WITH DRILLING HORIZONTAL WELLS

• Unleased/Unpooled Interests In Well Path
• Each tract traversed by horizontal well is
  drillsite Japhet v. McCrea
• Many fragmented interests and small tracts in
  well path for horizontal wells in urban areas

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• Tract Where Rig Located But Not Producing Does
  Not Share in Production
• Trespass Considerations

Figure 8
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• Repercussions From Horizontal Well Drilled Across
  Tract With Unleased/Unpooled Interest
• Trespass if no consent/lease from any mineral
  rights owner
• How to allocate production to unleased/unpooled
  interest

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Figure 9

• Confusion of goods? Humble Oil Refin. v. West
• No Texas court has yet decided this issue
  Browning Oil Co. v. Luecke

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POOLING ISSUES WITH HORIZONTAL WELLS IN NEWARK
FIELD

• Lease Normally Provides Express Authority For
  Certain Unit Sizes
• Governmental Authority May Expand Size of Pooled
  Units To Be Formed
• Size of pooled unit to conform to RRC field rules

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• Different Governmental Authority Provisions
• Units substantially in size with those prescribed
  by governmental regulations
• Units required for regular location or maximum
  allowable
• Units prescribed or permitted by governmental
  regulation

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• Permissive Nature of RRCs Acreage Assignments
  For Horizontal Wells
• RRC rules do not require operator to assign
  additional acreage otherwise earned from
  horizontal drilling
• Failure To Reach Intended Horizontal Length
• Operator forms pooled unit based upon acreage to
  be assigned for 4000 lateral
• Drilling problems prevent reaching objective
  length
• What to do?

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APPLICATION OF RETAINED ACREAGE PROVISIONS TO
HORIZONTAL WELLS

• Definition of Retained Acreage Provision
• Specify amount of acreage retained beyond leases
  primary term or at end of continuous development
  period
• Many are tied to acreage authorized under
  applicable RRC rules
• Subtle Wording Changes Yield Significantly
  Different Acreages

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• Examples of Different Retained Acreage Provisions
• . . . amount of acreage prescribed or required by
  RRC rules
• . . . (maximum) amount of acreage permitted or
  allowed by RRC to be assigned to any well for
  spacing allocation or proration purposes
• . . . amount of acreage . . . required for
  obtaining maximum allowable pursuant to the rules
  of the RRC . . .

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• . . . amount required to obtain the maximum
  allowable for a well under the applicable RRC
  rules
• . . . the proration unit assigned to each
  producing well
• . . . the minimum acreage necessary to obtain a
  drilling permit under the well density rules of
  RRC

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• Avoidance of Conflicts With Pooling Clause
• Retained acreage clauses should not apply to
  pooled units