A few months ago I wrote on the Texas Railroad Commission’s issuance of permits for “Allocation Wells.” Specifically, I noted that EOG Resources, Inc., in 2012, applied for a permit to drill an Allocation Well that crossed leases in which it did not have the right to pool. The mineral owners protested the issuance of the permit, and a hearing was held in November 2012. The following is a recap of the development of the process:
Since 1998, the Railroad Commission has issued permits based upon Production Sharing Agreements. These are Agreements signed by the interest owners, combined units or unpooled tracts. The purpose of these Agreements is to allocate production of the horizontal well based upon the length of the lateral under the tract. The Railroad Commission has issued such permits based upon the operator’s representation that at least 65% of the interest owners of each tract agreed.
The theory behind such permitting is that since the operator is Lessee on the tracts involved, Rule 37 notice and hearing requirements when the wellbore is within 467 feet of the lease line are waived, and the operator may obtain a permit to drill without pooling. The Railroad Commission permits these wells because Lessors on the tracts are adequately protected from drainage. If there are unsigned owners on the tracts, the operator must show that “(1) production is attributed with reasonable probability to each unit traversed by the well’s productive drainhole and (2) such production is paid to the lessors in compliance with the lessors’ royalty and pooling clauses.” Drafting Production Sharing Agreements, 39th Annual Ernest E. Smith Oil, Gas and Mineral Law Institute, March 22, 2013, Robert D. Jowers and Mickey R. Olmstead.
Later, in 2010, Colin K. Lineberry (a representative of the Railroad Commission) issued a letter to Devon Energy approving Devon Energy’s application for an Allocation Well, despite no representation by Devon Energy that it had the agreement of at least 65% of the interest owners. Allocation Well permits have been issued since that letter, and the Railroad Commission has not required the previous minimum amount of interest owners’ execution of Production Sharing Agreements.
As for EOG’s application for an Allocation Well Permit, the Railroad Commission examiners issued a Proposal for Decision on June 25, 2013. The recommendation was for a denial of EOG’s application to drill its Allocation Well. The reasoning was that the separate oil and gas leases, which covered two unpooled tracts, did not give EOG the right to pool. The examiners reasoned that this resulted in EOG not having a good faith claim to drill.
On September 10, 2013, the Railroad Commission held its open meeting. At the meeting, the Commissioners voted to reject the examiners’ Proposal for Decision, and approve EOG’s permit to drill the allocation well. The Commissioners found that EOG had satisfied the requirements for the permit, and the provisions as to pooling in the oil and gas leases were not consequential to the issuance of the permit. Specifically, the Commissioners noted that those issues were for the parties, or the courts, to decide, and were outside the Railroad Commission’s jurisdiction. In other words, as Commissioner Craddick noted, “It’s not our job really to look at the lease.”
Mineral owners will likely take their fight to the courts, to argue that this is forced pooling. Until there is a definitive Court decision, Operators are still advised to lessen their risk of exposure to litigation initiated by interest owners by obtaining Production Sharing Agreements from as many of the interest owners as possible. This matter is still far from settled, and no Operator wants to be caught in the middle of such an exhaustive battle.