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STATE REGULATORY IMPACTS UPON HORIZONTAL DRILLING IN URBAN AREAS

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 (512) 495-6300.

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STATE REGULATORY IMPACTS UPON HORIZONTAL DRILLING IN URBAN AREAS

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  1. 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 (512) 495-6300

  2. INTRODUCTION • Background • More drilling in urban areas • Surface and local regulatory obstructions • These problems are particularly prevalent in Barnett Shale with horizontal drilling Scott, Douglass & McConnico, L.L.P.

  3. 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 Scott, Douglass & McConnico, L.L.P.

  4. Standard Form Leases • Lease controls – specific wording critical • Non-existence of “standard” lease Scott, Douglass & McConnico, L.L.P.

  5. 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 > 3 BCF per day (January through July 2008) • 200 + operators, 19 counties from Oklahoma border almost to Waco Scott, Douglass & McConnico, L.L.P.

  6. 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 Scott, Douglass & McConnico, L.L.P.

  7. 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 Scott, Douglass & McConnico, L.L.P.

  8. Figure 1 Scott, Douglass & McConnico, L.L.P.

  9. Spacing: Drainhole must comply with applicable spacing distances for each point of well within correlative interval Scott, Douglass & McConnico, L.L.P.

  10. 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 Scott, Douglass & McConnico, L.L.P.

  11. 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 Scott, Douglass & McConnico, L.L.P.

  12. Figure 2 Scott, Douglass & McConnico, L.L.P.

  13. Figure 3 Scott, Douglass & McConnico, L.L.P.

  14. 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 Scott, Douglass & McConnico, L.L.P.

  15. Penetration Point Off Lease Figure 4 Scott, Douglass & McConnico, L.L.P.

  16. Allocation Formula • 100% acreage • Allocation suspended for gas • No gas allowables currently – impact upon lease pooling and retained acreage provisions Scott, Douglass & McConnico, L.L.P.

  17. Figure 5 • Stacked Laterals Scott, Douglass & McConnico, L.L.P.

  18. 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 Scott, Douglass & McConnico, L.L.P.

  19. SPACING CONSIDERATIONS (RULE 37) • Surface Location Irrelevant • Compliance Over Entire Drainhole Distance Scott, Douglass & McConnico, L.L.P.

  20. FIGURE 6 Unleased Lot B < lease line spacing distance makes Rule 37 spacing exception necessary Scott, Douglass & McConnico, L.L.P.

  21. Outstanding Interest in Drillsite Tract • No spacing exception necessary for drillsite interests • Co-tenancy law protects such interest from co-tenancy law Scott, Douglass & McConnico, L.L.P.

  22. 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 Scott, Douglass & McConnico, L.L.P.

  23. 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 Scott, Douglass & McConnico, L.L.P.

  24. Figure 7 Scott, Douglass & McConnico, L.L.P.

  25. 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 Scott, Douglass & McConnico, L.L.P.

  26. 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 Scott, Douglass & McConnico, L.L.P.

  27. 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 Scott, Douglass & McConnico, L.L.P.

  28. 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 Scott, Douglass & McConnico, L.L.P.

  29. Figure 8 • Tract Where Rig Located But Not Producing Does Not Share in Production • Trespass Considerations Scott, Douglass & McConnico, L.L.P.

  30. 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 Scott, Douglass & McConnico, L.L.P.

  31. Figure 9 • Confusion of goods? Humble Oil & Refin. v. West • No Texas court has yet decided this issue – Browning Oil Co. v. Luecke Scott, Douglass & McConnico, L.L.P.

  32. 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 Scott, Douglass & McConnico, L.L.P.

  33. 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 Scott, Douglass & McConnico, L.L.P.

  34. Permissive Nature of RRC’s 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? Scott, Douglass & McConnico, L.L.P.

  35. APPLICATION OF RETAINED ACREAGE PROVISIONS TO HORIZONTAL WELLS • Definition of Retained Acreage Provision • Specify amount of acreage retained beyond lease’s 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 Scott, Douglass & McConnico, L.L.P.

  36. 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 . . . Scott, Douglass & McConnico, L.L.P.

  37. . . . 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 Scott, Douglass & McConnico, L.L.P.

  38. Avoidance of Conflicts With Pooling Clause • Retained acreage clauses should not apply to pooled units Scott, Douglass & McConnico, L.L.P.

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