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OVERVIEW OF POOLING AND UNITIZATION

AFFECTING APPALACHIAN SHALE DEVELOPMENT Sharon O. Flanery Ryan J. Morgan1

Steptoe & Johnson PLLC

Charleston, WV

Synopsis

§ 01.01. What are Pooling and Unitization? ......................................................................... 2 [1] — Oil and Gas Title and the Rule of Capture ............................................................. 4 [2] — Traditional Concepts of Well Spacing .................................................................... 6 [3] — The Doctrines of Pooling and Unitization .............................................................. 8

§ 01.02. History and Development Pooling and Unitization .............................................. 10 [1] — A Brief History of Statutory Pooling .................................................................... 10 [2] — The Development of Spacing and Pooling Law – The Texas Example ............... 13 [3] — A Brief History of Statutory Unitization .............................................................. 15

§ 01.03. Current State of the Law – An Overview ............................................................. 17 [1] — Spacing Rules ....................................................................................................... 17 [2] — Pooling and Unitization ........................................................................................ 20

§ 01.04. Status of Pooling Statutes in Appalachian Shale States........................................ 27 [1] — Maryland ............................................................................................................... 28 [2] — New York .............................................................................................................. 29 [3] — Ohio ...................................................................................................................... 32 [4] — Pennsylvania ......................................................................................................... 35 [5] — West Virginia ........................................................................................................ 39

§ 01.05. Recommendations for Statutory Improvements ................................................... 48 [1] — Spacing Rules Tailored to Horizontal Wells ........................................................ 48 [2] — Notice and Approval Requirements ...................................................................... 50 [3] — Allocation of Costs and Election Rights ............................................................... 51 [4] — Surface Use ........................................................................................................... 52

§ 01.06. Conclusion ............................................................................................................ 52

1 The authors wish to acknowledge a number of individuals who provided invaluable assistance in the research and preparation of this article. Brian R. Hopkins recently joined our firm after 9 ½ years as in-house counsel at NiSource and provided extensive research on the history of pooling and spacing requirements. Alexandria D. Lay (3L at Washington & Lee University School of Law) and James M. Tartaglia (3L at T.C. Williams School of Law, University of Richmond) provided insightful comments and diligent quality review and revisions.

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Appendix § 02.01 Analysis of Alabama Regulatory Framework........................................................ 57 § 02.02 Types of Alabama Pooling Statutes. ....................................................................... 69 § 03.01 Analysis of Alaska Regulatory Framework. .......................................................... 76 § 03.02 Types of Alaska Pooling Statutes. ........................................................................... 87 § 04.01 Analysis of Arizona Regulatory Framework. ........................................................ 92 § 04.02 Types of Arizona Pooling Statutes. ......................................................................... 99 § 05.01 Analysis of Arkansas Regulatory Framework. .................................................... 105 § 05.02 Types of Arkansas Pooling Statutes. ..................................................................... 113 § 06.01 Analysis of California Regulatory Framework. ................................................... 118 § 06.02 Types of California Pooling Statutes. ................................................................... 124 § 07.01 Analysis of Colorado Regulatory Framework. .................................................... 129 § 07.02 Types of Colorado Pooling Statutes. ..................................................................... 138 § 08.01 Analysis of Connecticut Regulatory Framework. ............................................... 143 § 09.01 Analysis of Delaware Regulatory Framework. .................................................... 146 § 10.01 Analysis of Florida Regulatory Framework. ....................................................... 147 § 10.02 Types of Florida Pooling Statutes. ........................................................................ 162 § 11.01 Analysis of Georgia Regulatory Framework. ...................................................... 169 § 11.02 Types of Georgia Pooling Statutes. ....................................................................... 178 § 12.01 Analysis of Hawaii Regulatory Framework. ........................................................ 181 § 12.02 Types of Hawaii Pooling Statutes. ......................................................................... 185 § 13.01 Analysis of Idaho Regulatory Framework. .......................................................... 186 § 13.02 Types of Idaho Pooling Statutes. ........................................................................... 191 § 14.01 Analysis of Illinois Regulatory Framework. ........................................................ 199 § 14.02 Types of Illinois Pooling Statutes. ......................................................................... 209 § 15.01 Analysis of Indiana Regulatory Framework. ....................................................... 214 § 15.02 Types of Indiana Pooling Statutes. ........................................................................ 221 § 15.01 Analysis of Iowa Regulatory Framework. ............................................................ 224 § 16.02 Types of Iowa Pooling Statutes. ............................................................................. 231 § 17.01 Analysis of Kansas Regulatory Framework. ........................................................ 234 § 17.02 Types of Kansas Pooling Statutes. ......................................................................... 255 § 18.01 Analysis of Kentucky Regulatory Framework. ................................................... 262 § 18.02 Types of Kentucky Pooling Statutes. .................................................................... 276 § 18.03. Analysis of Kentucky Regulatory Framework—Coalbed Methane. ................. 285 § 18.04 Types of Kentucky Pooling Statutes—Coalbed Methane. .................................. 298 § 19.01 Analysis of Louisiana Regulatory Framework. ................................................... 302 § 19.02 Types of Louisiana Pooling Statutes. .................................................................... 325 § 20.01 Analysis of Maine Regulatory Framework. ......................................................... 337 § 21.01 Analysis of Maryland Regulatory Framework. ................................................... 343 § 22.01 Analysis of Massachusetts Regulatory Framework. ........................................... 350 § 23.01 Analysis of Michigan Framework. ........................................................................ 353 § 23.02 Types of Michigan Pooling Statutes. ..................................................................... 361 § 24.01 Analysis of Minnesota Regulatory Framework. .................................................. 365 § 25.01 Analysis of Mississippi Regulatory Framework. ................................................. 368 § 25.02 Types of Mississippi Pooling Statutes. .................................................................. 385 § 26.01 Analysis of Missouri Regulatory Framework. ..................................................... 392 § 26.02. Types of Missouri Pooling Statutes. ...................................................................... 400 § 27.01 Analysis of Montana Regulatory Framework...................................................... 404 § 27.02 Types of Montana Pooling Statutes. ..................................................................... 416

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§ 28.01 Analysis of Nebraska Regulatory Framework. .................................................... 421 § 28.02 Types of Nebraska Pooling Statutes...................................................................... 432 § 29.01 Analysis of Nevada Regulatory Framework. ....................................................... 436 § 29.02 Types of Nevada Pooling Statutes. ........................................................................ 447 § 30.01 Analysis of New Hampshire Regulatory Framework. ........................................ 452 § 31.01 Analysis of New Jersey Regulatory Framework. ................................................. 453 § 32.01 Analysis of New Mexico Regulatory Framework. ............................................... 458 § 32.02 Types of New Mexico Pooling Statutes. ................................................................ 467 § 33.01 Analysis of New York Regulatory Framework. ................................................... 473 § 33.02 Types of New York Pooling Statutes..................................................................... 482 § 34.01 Analysis of North Carolina Regulatory Framework. .......................................... 488 § 34.02 Types of North Carolina Pooling Statutes. ........................................................... 493 § 35.01 Analysis of North Dakota Regulatory Framework. ............................................ 496 § 35.02 Types of North Dakota Pooling Statutes. ............................................................. 510 § 36.01 Analysis of Ohio Regulatory Framework. ............................................................ 517 § 36.02 Types of Ohio Pooling Statutes. ............................................................................. 529 § 37.01 Analysis of Oklahoma Regulatory Framework. .................................................. 534 § 37.02 Types of Pooling Statutes in Oklahoma. ............................................................... 545 § 38.01 Analysis of Oregon Regulatory Framework. ....................................................... 551 § 38.02 Types of Oregon Pooling Statutes. ........................................................................ 558 § 39.01 Analysis of Pennsylvania Regulatory Framework. ............................................. 563 § 39.02 Types of Pennsylvania Pooling Statutes. .............................................................. 572 § 40.01 Analysis of Rhode Island Regulatory Framework. ............................................. 580 § 41.01 Analysis of South Carolina Regulatory Framework. .......................................... 581 § 41.02 Types of South Carolina Pooling Statutes. ........................................................... 593 § 42.01 Analysis of South Dakota Regulatory Framework. ............................................. 597 § 42.02 Types of South Dakota Pooling Statutes............................................................... 611 § 43.01 Analysis of Tennessee Regulatory Framework. ................................................... 616 § 43.02 Types of Tennessee Pooling Statutes. .................................................................... 625 § 44.01 Analysis of Texas Regulatory Framework. .......................................................... 630 § 44.02 Types of Texas Pooling Statutes. ........................................................................... 647 § 45.01 Analysis of Utah Regulatory Framework. ............................................................ 652 § 45.02 Types of Utah Pooling Statutes. ............................................................................. 658 § 46.01 Analysis of Vermont Regulatory Framework. ..................................................... 662 § 46.02 Types of Vermont Pooling Statutes. ...................................................................... 672 § 47.01 Analysis of Virginia Regulatory Framework. ...................................................... 675 § 47.02 Types of Virginia Pooling Statutes. ....................................................................... 685 § 48.01 Analysis of Washington Regulatory Framework. ............................................... 694 § 48.02 Types of Washington Pooling Statutes. ................................................................ 703 § 49.01 Analysis of West Virginia Regulatory Framework. ............................................ 711 § 49.02 Types of Pooling Statutes in West Virginia. ......................................................... 739 § 50.01 Analysis of Wisconsin Regulatory Framework.................................................... 746 § 51.01 Analysis of Wyoming Regulatory Framework. ................................................... 748 § 51.02 Types of Wyoming Pooling Statutes. .................................................................... 752

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§ 01.01. What are Pooling and Unitization?

[1] — Oil and Gas Title and the Rule of Capture. From the initial developments of commercial oil and gas production, legislatures and

courts have faced significant challenges in developing a comprehensive legal framework to

address various questions regarding ownership of oil and gas. Commercial development of oil in

the United States began in 1859 with the first producing well drilled by Colonel E.L. Drake in

Titusville, Pennsylvania.2 By that time, the rules that determined ownership of coal and similar

hard-rock mineral deposits, which formed strata beneath the surface of the land, were relatively

well-evolved.3 However, both oil and gas possess characteristics inconsistent with the traditional

notions of “ownership in place” (or in situ ownership) applied to coal and other hard-rock

minerals.4 Oil and gas are fluid, and migrate from areas of high pressure to areas of lower

pressure within the reservoir, or pool, where they are found.5

The “pure” rule of capture

These natural characteristics led to

near-universal adoption of the “rule of capture” by courts of various producing states as the

standard to determine oil and gas ownership.

6 was elucidated by the Supreme Court of Pennsylvania in its

seminal 1889 decision, Westmoreland & Cambria Natural Gas Co. v. De Witt.7 In De Witt, the

court analogized oil and gas in their natural state to wild animals, or “animae ferae naturae,”

roaming beneath the surface of the earth.8 The court held that title to land does not necessarily

constitute ownership of the oil and gas beneath it.9

2 See Bruce M. Kramer & Owen L. Anderson, “The Rule of Capture - An Oil and Gas Perspective,” 35 Envtl. L. 899, 900 (2005) (citing J.E. Brantley, History of Oil Well Drilling 153 (1971)).

In theory, the oil and gas underlying a tract

3 See Brown v. Spilman, 155 U.S. 665, 669-70 (1895). 4 See Patrick H. Martin & Bruce M. Kramer, Williams & Meyers, Oil and Gas Law, § 203 (LexisNexis Matthew Bender 2010). 5 See id. 6 The rule as stated in this paragraph is described as the “pure rule of capture,” as distinct from the version of the rule that includes a “correlative rights” component, requiring due respect for the rights of others owning an interest in the common pool. This component was, in varying forms, incorporated into the jurisprudence of a number of producing states, including Indiana, Kentucky, and later, West Virginia and Texas. For a discussion of cases involving this component, and its evolution, see Bruce M. Kramer & Owen L. Anderson, “The Rule of Capture - An Oil and Gas Perspective,” 35 Envtl. L. 899, 911-25 (2005). 7 Westmoreland & Cambria Natural Gas Co. v. De Witt, 18 A. 724 (Pa. 1889). 8 See id. at 725. 9 Id.

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of land belong to the landowner.10 However, when they migrate to other areas and are captured

and reduced to possession by another owner, title vests in the captor and thereby extinguishes

that of the prior owner.11

Petroleum gas and oil are substances of a peculiar character, and decisions in ordinary cases of mining, for coal and other minerals which have a fixed situs, cannot be applied to contracts concerning them without some qualifications. They belong to the owner of the land, and are part of it, so long as they are on it or in it, or subject to his control, but when they escape or go into other land, or come under another’s control, the title of the former owner is gone. If an adjoining owner drills his own land and taps a deposit of oil or gas extending under his neighbor’s field, so that it comes into his well, it becomes his property.

This reasoning was endorsed by the U. S. Supreme Court in Brown v.

Spilman, wherein the Court stated:

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In essence, the rule of capture provides that “[t]he owner of a tract of land acquires title to the oil

and gas which he produces from wells drilled thereon, though it may be proved that part of such

oil or gas migrated from adjoining lands.”13

Once a producing well had been drilled, the rule of capture motivated landowners in the

area to protect their potential oil and gas assets by rushing to drill on their own land.

Therefore, it is largely a rule of self-help under

which landowners, suffering from potential drainage, were not awarded a share in neighboring

wells because they were deemed to have the ability to prevent drainage and protect their interest

by drilling their own well.

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10 Id.

Because

oil and gas naturally exist in underground reservoirs or pools that often underlie numerous

separately owned tracts, the rule of capture left a landowner with two options: he could either

drill on his own land to take possession of the oil and gas and thereby perfect ownership; or, he

could sit by while neighbors drilled wells that would likely drain those resources. As a practical

11 Id. 12 Spilman, 155 U.S. at 669-70 (citing Brown v. Vandergrift, 80 Pa. 142 (1875); Westmoreland & Cambria Natural Gas Co. v. De Witt, 18 A. 174 (Pa. 1889)). 13 See Robert E. Hardwicke, “The Rule of Capture and Its Implications as Applied to Oil and Gas,” 13 Tex. L. Rev. 391, 393 (1935) (quoting Eliff v. Texon Drilling Co., 210 S.W.2d 558, 562 (Tex. 1948)). 14 See Rance L. Craft, “Comment: Of Reservoir Hogs and Pelt Fiction: Defending the Ferae Naturae Analogy Between Petroleum and Wildlife,” 44 Emory L.J. 697, 700 (1995).

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matter, this meant that in order to ensure recovery of his fair share of production from the

“common pool,” each owner needed to drill as many wells on his property as quickly as

possible.15 The resultant race to produce led to excessive well density, substantial over-drilling,

and waste, which included undue surface waste, waste of economic resources, and waste of oil

and gas reserves through premature depletion.16

While the consequences of this frenzied production were manifested in virtually every

producing state, they are perhaps best illustrated by the events surrounding the famed oil well at

Spindletop.

17 Captain Anthony F. Lucas and his drilling team struck oil in the Spindletop salt

dome near Beaumont, Texas, on January 10, 1901.18 The initial “black plume” that shot from

Spindletop soared to twice the height of the drilling derrick, and the well set a world record of

roughly 800,000 barrels of oil within the first nine days of production.19 A wave of speculators

soon followed, and by the end of 1901 there were 440 wells on the 125-acre hill where

Spindletop sat.20 New wells continued to be drilled as “close together as physically possible,”

and 1,000 wells had been drilled around Spindletop by 1904.21 However, only 100 of these

wells produced oil at a rate of more than 10,000 barrels a day.22 Captain Lucas lamented over

the consequences of this rush to produce, stating that “[t]he cow was milked too hard, and

moreover she was not milked intelligently.”23

[2] — Traditional Concepts of Well Spacing.

The rule of capture yielded results during the early days of oil and gas development that

were not contemplated or desired by its authors. In response, various producing states enacted

oil and gas conservation statutes near the turn of the Twentieth Century to curb excessive drilling 15 See Phillip E. Norvell, “Prelude to the Future of Shale Gas Development: Well Spacing and Integration for the Fayetteville Shale in Arkansas,” 49 Washburn L.J. 457, 459 (2010). 16 See id. at 459-60. 17 See Rance L. Craft, “Comment: Of Reservoir Hogs and Pelt Fiction: Defending the Ferae Naturae Analogy Between Petroleum and Wildlife,” 44 Emory L.J. 697, 701 (1995). 18 Id. 19 See id. (citing Walter Rundell, Jr., Early Texas Oil: A Photographic History 1866-1936 36-37 (1977)). 20 Id. 21 Id. (citing Richard O’Connor, The Oil Barons: Men of Greed and Grandeur 81 (1971)). 22 Id. (citing O’Connor, at 85). 23 Id.

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and protect correlative rights.24 A primary feature of many conservation laws was the imposition

of spacing requirements, which limited the number of wells that could be drilled within a

specified acreage.25 It is against this backdrop that the concept of pooling tracts together for

production first emerged.26

In general, spacing requirements govern the location of wells within a given pool or

common reservoir.

In order to appreciate this relationship, it is important to have a basic

understanding of well spacing. Once one grasps the fundamental concepts of well spacing, it can

readily be seen how pooling emerged as a natural next step in the evolution of this aspect of oil

and gas law.

27 There are two types of spacing rules. First, there are “lineal” rules that

prescribe setback distances between a well and other points.28 Typically, spacing rules will

establish a minimum distance between any two wells and from each well to the boundaries of the

unit or leasehold upon which it sits. In addition, some states impose setback requirements from

dwellings, public roads, or other features.29 The other principal type of spacing dictates the

standard acreage required for a single well and within which no other well may be located.30

This second type of spacing is often referred to as “density” spacing.31

24 See 1 Bruce M. Kramer & Patrick H. Martin, The Law of Pooling and Unitization § 2.02 (LexisNexis Matthew Bender 2010).

25 See Bruce M. Kramer, “Compulsory Pooling and Unitization: State Options in Dealing with Uncooperative Owners,” 7 J. Energy L. & Pol’y 255, 258 n.10 (1986) (citing R. Sullivan, Handbook of Oil and Gas Law 285 (1955)). This article identifies other principal methods of oil and gas conservation, including (1) Drilling Operations-The regulation of procedures used in drilling and completing wells; (2) Maximum Efficient Rate-Limiting production to the maximum efficient rate (MER) of the well based on its geological capabilities; and (3) Prorationing-Limiting the amount of oil and gas that can be sold from each well within a common source of supply or reservoir and allocating that amount between the various wells that are producing from that common source. 26 See id. at 258 (“The concepts of well spacing and pooling go hand in hand.”). 27 See 1 Bruce M. Kramer and Patrick H. Martin, The Law of Pooling and Unitization, § 5.02 (LexisNexis Matthew Bender 2010). 28 Id. 29 See text infra § 01.03. [1] for an exemplary spacing regulation; see also Sharon O. Flanery & Ryan J. Morgan, “A National Survey of Statutory Pooling and Unitization,” (Steptoe & Johnson PLLC, Working Paper), available at http://www.steptoe-johnson.com/know-how/docs/A_National_Survey_of_Statutory_Pooling_and_Unitization.pdf [hereinafter “National Survey”] for further discussion of each state’s spacing requirements. 30 These unit areas are commonly set as arbitrary tracts, e.g., 40 acres for oil wells and 640 acres for gas wells. See, e.g., Mo. Code Regs. Ann. tit. 10, § 50-2.070 (2011). Conversely, some statutes do not specify acreage, but allow the conservation agency to set spacing units as that area “that can be efficiently and economically drained by one well.” See, e.g., Neb. Rev. Stat. § 57-908(2) (2010). 31 See 1 Bruce M. Kramer and Patrick H. Martin, The Law of Pooling and Unitization, § 5.02 (LexisNexis Matthew Bender 2010).

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By limiting the number of wells that may be drilled in a given area, lineal and density

spacing rules seek to protect correlative rights and prevent waste. 32 In accomplishing these

objectives, the spacing rules can also create a situation in which a landowner is prevented from

being able to produce the oil or gas underlying the land. It is this situation that pooling is

intended to address.33

[3] — The Doctrines of Pooling and Unitization.

Most often, the impetus to pool mineral interests is driven by well spacing rules which

would otherwise prevent the owners of small tracts from producing the oil and gas underlying

their land, as each owns insufficient acreage to obtain a well permit.34 In simple terms, pooling

is merely the grouping together of small tracts or interests therein to form a conjoined production

unit in compliance with applicable spacing standards.35

In theory, two basic types of pooling exist. The first is voluntary pooling.

36 As the name

implies, voluntary pooling involves private arrangements to allow for joint development of the

separately owned oil and gas interests within a spacing unit.37 In modern practice, voluntary

pooling is accomplished through several mechanisms, such as (1) community leases that

embrace multiple, separately owned tracts or interests to effectuate joint development; (2) lease

provisions that authorize a lessee to pool the leased area with nearby tracts; and (3) contractual

pooling agreements.38

The second type, referred to as compulsory or statutory pooling, arises when applicable

spacing requirements necessitate the inclusion of adjacent tracts within the spacing unit that are

32 Notably, correlative rights protection and waste prevention are the stated policy goals of every state oil and gas conservation agency. See “National Survey,” for each state’s statutory definition of waste. 33 See Patrick H. Martin & Bruce M. Kramer, Williams & Meyers, Oil and Gas Law, § 901 (LexisNexis Matthew Bender 2010). 34 See 1 Bruce M. Kramer & Patrick H. Martin, The Law of Pooling and Unitization § 1.02 (LexisNexis Matthew Bender 2010). 35 See id. 36 See Patrick H. Martin & Bruce M. Kramer, Williams & Meyers, Oil and Gas Law, § 902 (LexisNexis Matthew Bender 2010) (“In some sense, perhaps, virtually all pooling is compulsory rather than voluntary, since it is motivated by the compulsion of economic factors or [by] zoning or spacing regulations.”). 37 See 1 Bruce M. Kramer & Patrick H. Martin, The Law of Pooling and Unitization §§ 7.03-7.05 (LexisNexis Matthew Bender 2010). 38 See id.

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not commonly owned.39 This fragmented ownership may be the result of an existing lease to a

party other than the proposed operator or unleased owners who fail to negotiate satisfactory

terms for voluntary inclusion in the unit. 40 In these circumstances, the vast majority of

producing states provide a statutory process by which, upon consent from a requisite proportion

of the owners or operators in the area to be pooled, an owner or operator may petition the

authorized state agency laws for a pooling order. 41 If granted, the order will mandate the

inclusion of the interests of non-consenting owners or operators in the pooled area and establish

the terms upon which all parties involved will be compensated.42

The rationale behind statutory pooling is that an owner or operator of a small tract who

cannot drill due to spacing requirements should remain entitled to recover the oil and gas

underlying his land. To deny him that right with no opportunity to realize the economic value of

his property amounts to the confiscation of his oil and gas interest without remedy or

compensation.

43

As a general concern, it is important to clarify the distinction between pooling and

unitization. Although the two concepts are doctrinally similar, there is substantial variation in

their treatment among the states.

On the other hand, to permit each owner or operator to drill on his small tract

results in inefficient land use akin to the degradation surrounding Spindletop. A statutory

pooling process provides a prudent and equitable solution to this dilemma.

44

39 See Bruce M. Kramer, “Compulsory Pooling and Unitization: State Options in Dealing with Uncooperative Owners,” 7 J. Energy L. & Pol’y 255, 257-59 (1986).

On many levels, the difference between pooling and

unitization is primarily one of procedure and is best understood by considering the relationship

of each to spacing requirements. As noted above, the term “pooling” most often refers to the

40 See id. at 258. 41 See text infra § 01.03. [2] for a national overview of the variety of pooling and unitization statutes. See also “National Survey,” for a further discussion of each state’s pooling and unitization laws; 1 Bruce M. Kramer & Patrick H. Martin, The Law of Pooling and Unitization § 10.01 (LexisNexis Matthew Bender 2010). 42 See 1 Bruce M. Kramer & Patrick H. Martin, The Law of Pooling and Unitization § 13.04 (LexisNexis Matthew Bender 2010). 43 See id. at § 10.01 (citing R.R. Comm’n v. Humble Oil & Refining Co., 245 S.W.2d 488 (Tex. 1952)). 44 See “National Survey,” for further discussion of each state’s pooling and unitization laws.

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integration of smaller tracts and interests therein to obtain a drilling permit in compliance with

spacing rules. Unitization, also commonly labeled “unit operations,” is “the consolidation of

mineral or leasehold interests covering all or part of a common source of supply.”45 The main

objective of unitization is to maximize production efficiency from a given reservoir and may be

sought in the context of drilling permit applications, as well as currently-producing wells and

proposed secondary recovery methods.46 Unitization may also be vital to ensure that correlative

rights of the various owners in the pool are protected.47

Like pooling, unitization is governed by state conservation laws that may address the

ability of private parties to voluntarily unitize their interests in all or part of a reservoir; or, a

statute may prescribe procedural rules under which an owner or operator may petition the agency

for a unitization order.

Thus, while pooling stems directly from

the relevant spacing requirements in an area, unitization exists outside of spacing rules to include

a broader scope of joint operations.

48

§ 01.02. History and Development Pooling and Unitization.

For the purposes of this article, the term “pooling” is used

interchangeably to signify the general concept of integrating separately owned interests that

includes both mechanisms. However, pooling and unitization are distinguished when necessary.

[1] — A Brief History of Statutory Pooling. The practice of statutory pooling dates back to 1920s municipal zoning ordinances

designed to limit drilling within the boundaries of the locality, the first of which was enacted in

Winfield, Kansas in 1927.49

45 1 Bruce M. Kramer & Patrick H. Martin, The Law of Pooling and Unitization § 1.02 (LexisNexis Matthew Bender 2010).

Soon after, the validity of a similar ordinance was challenged and

46 See id. 47 See generally Patrick H. Martin & Bruce M. Kramer, Williams & Meyers, Oil and Gas Law, § 901 (LexisNexis Matthew Bender 2010) (discussing the effect and purposes of pooling and unitization); see also, e.g., Colo. Rev. Stat. § 34-60-103(4) (2010) (defining “correlative rights” to mean “that each owner and producer in a common pool or source of supply of oil and gas shall have an equal opportunity to obtain and produce his just and equitable share of the oil and gas underlying such pool or source of supply”). 48 See “National Survey,” for further discussion of each state’s unitization laws. 49 See Patrick H. Martin and Bruce M. Kramer, Williams & Meyers, Oil and Gas Law § 905.1 (LexisNexis Matthew Bender 2010) (citing R. M. Williams, “Compulsory Pooling and Unitization (of Oil and Gas Rights),” S.W. Legal Found., 15 Ann. Inst. on Oil and Gas L. & Tax’n 223 (1964)).

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ultimately upheld in the landmark case of Marrs v. City of Oxford.50 Other municipal ordinances

followed throughout Texas,51 Oklahoma,52 and other states, which were substantially similar to

contemporary statutory pooling laws as they mandated single-well spacing units and the sharing

of production therefrom.53 These local rules were generally affirmed to be valid exercises of

police power under U.S. Supreme Court precedent established in Village of Euclid v. Ambler

Realty Co.54

State-wide statutory pooling statutes were first enacted in New Mexico and Oklahoma in

1935.

55 The Oklahoma Well-Spacing Act, sustained in Patterson v. Stanolind Oil & Gas Co.56

and Croxton v. State,57

In the event a producing well, or wells, is completed upon a unit where there are two or more separately owned tracts, any royalty owner, or group of royalty owners, holding the royalty interest under a separately owned tract, shall share in one-eighth of all of the production from the well or wells drilled within the unit in the proportion that the acreage of their separately owned tract bears to the entire acreage of the unit.

empowered the state’s Corporation Commission to establish drilling or

spacing units of a specified acreage and provided as follows:

58

The statute further required that a lessee holding a majority interest in the unit allow each

minority owner an opportunity to participate as a working interest owner in the development of

50 See generally Marrs v. City of Oxford, 24 F.2d 541 (D. Kan. 1928), aff’d, 32 F.2d 134 (8th. Cir. 1929) (denying that an ordinance requiring well spacing and shared production constituted a violation of local police power and the privileges and immunities clause of the Fourteenth Amendment). 51 See, e.g., Tysco Oil Co. v. R.R. Comm’n, 12 F. Supp. 195 (S.D. Tex. 1935). 52 See Patrick H. Martin and Bruce M. Kramer, Williams & Meyers, Oil and Gas Law § 905.1 (LexisNexis Matthew Bender 2010) (citing Am. Bar Ass’n, Conservation of Oil and Gas: A Legal History, 1948 391-397 (Murphy ed. 1949). 53 See id. 54 See id.; see also Vill. of Euclid v. Ambler Realty Co., 272 U.S. 365, 394 (1926)) (“We have nothing to do with the question of the wisdom or good policy of municipal ordinances. If they are not satisfying to a majority of citizens, their recourse is to the ballots – not the courts.”). 55 Id. (citing N.M. Laws 1935, Ch. 72, § 12; 1935 Okla. Sess. Laws art. 1, ch. 59). 56 Patterson v. Stanolind Oil & Gas Co., 77 P.2d 83 (Okla. 1939). 57 Croxton v. State, 97 P.2d 11 (Okla. 1939). 58 See Patterson, 77 P.2d at 87.

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common acreage to be pooled.59 This mandate, which laid the foundation for modern pooling

statutes, was expressly accepted by the court as within the legislature’s power.60

In reaching this determination, the Oklahoma court relied upon established U.S. Supreme

Court precedent in Ohio Oil Co. v. Indiana.

61 There, the Court considered the constitutional

validity of a state law which prohibited the flow of oil or gas from a well to escape into open air

as a practice constituting physical waste thereof. 62 In upholding the Act, the Court

acknowledged each state’s authority to prevent the waste of oil and gas and to protect correlative

rights of all owners through reasonable legislation. 63

As to gas and oil, the surface proprietors within the gas field all have the right to reduce to possession the gas and oil beneath. They could not be absolutely deprived of this right which belongs to them without a taking of private property. But there is a coequal right in them all to take from a common source of supply, the two substances which in the nature of things are united, though separate. It follows from the essence of their right and from the situation of the things, as to which it can be exerted, that the use by one of his power to seek to convert a part of the common fund to actual possession may result in an undue proportion being attributed to one of the possessors of the right, to the detriment of others, or by waste by one or more to the annihilation of the rights of the remainder. Hence, it is that the legislative power, from the peculiar nature of the right and the objects upon which it is to be exerted, can be manifested for the purpose of protecting all of the collective owners, by securing a just distribution to arise from the enjoyment by them, of their privilege to reduce to possession, and to reach the like end by preventing waste.

Justice White, writing for the Court,

offered the following explanation which supports the mechanisms of statutory pooling and

unitization today:

64

In the wake of cases such as Patterson and Croxton, most producing states enacted statutory

pooling statutes, which consistently have been sustained so that no reasonable debate over their

59 See id. at 87-88. 60 See id. at 88-90. 61 Ohio Oil Co. v. Indiana, 177 U.S. 190 (1899). 62 See id. at 200. 63 See id. at 210-12. 64 Id. at 209-10.

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constitutionality remains.65

[2] — The Development of Spacing and Pooling Law—The Texas Example.

However, the tension created by spacing and pooling statutes was

not merely a constitutional issue, but often created debate over the equitable principles

underlying state conservation laws. The following brief history of well spacing and pooling as

they developed in Texas illustrates this point and highlights the struggles which led that state to

adopt statutory pooling as a means of leveling the playing field between small and large tract

owners.

The Texas Railroad Commission adopted its first lineal spacing rules in 1919.66 By

1953, the Railroad Commission had adopted density spacing, 67 which effectively prevented

small tract owners from producing the oil and gas under their land unless they were able to

negotiate a pooling arrangement. 68 To account for the plight of these smaller owners, the

Railroad Commission began to treat each oil and gas owner as having the right to locate a well

on his tract regardless of its size and offering certain small tract owners an exception to spacing

rules.69 As no small owner would drill if his production was limited to his acreage, the Railroad

Commission also refused to limit small tract production.70

However, the freedom to produce for small owners unfairly prejudiced adjacent owners

in the pool; thus, the Railroad Commission adopted proration formulas to fairly allocate

production among wells with a common source of supply.

71 By the early 1960s, the Railroad

Commission was commonly using a proration formula for gas wells, known as the one-third to

two-third formula.72

65 See Patrick H. Martin and Bruce M. Kramer, Williams & Meyers, Oil and Gas Law § 905.1 (LexisNexis Matthew Bender 2010).

This method meant that “[one-third] of the total field allowable must be

66 See Ronnie Blackwell, “Forced Pooling Within the Barnett Shale: How Should the Texas Mineral Interest Pooling Act Apply to Units for Horizontal Wells?,” 17 Tex. Wesleyan L. Rev. 1, 2 (2010). 67 See id. at 3 (citing Tex. R.R. Comm’n, Oil and Gas Circular No. 11 (Nov. 26, 1919)). 68 See id. 69 See id. Mr. Blackwell notes that the Railroad Commission did not offer this exception to owners whose tract was voluntary subdivided after oil and gas was discovered, either by lease or by deed, to circumvent the spacing rules. 70 See id. 71 See Ernest E. Smith, “The Texas Compulsory Pooling Act,” 43 Tex. L. Rev. 1003, 1004 (1965). 72 See Atlantic Ref. Co. v. R.R. Comm’n, 346 S.W.2d 801, 802 (Tex. 1961). At that time, the Railroad Commission employed a “one-half to one-half” formula for oil wells. See Ronnie Blackwell, “Forced Pooling Within the Barnett

14

divided equally among all the wells in the field and that [two-thirds] of the total field allowable

will be divided among all the wells on a per acreage basis.”73

This practice continued until the methodology was challenged in Atlantic Refining Co. v.

Railroad Commission.

Since a substantial portion of the

allowable production was allocated on a per well basis, this formula inequitably favored the

small tract owner.

74 In that case, the appellee owned a 0.3-acre tract and obtained a drilling

permit in exception from the spacing rules.75 The appellants presented evidence to show that

under the ‘one-third to two-third formula,’ the appellee would be able to produce 200 times more

gas per acre than an owner of a 320-acre tract. 76 Appellants argued that in light of such

evidence, “the proration rule adopted by the Railroad Commission . . . [was] unreasonable,

arbitrary and confiscatory, and [did] not allow appellants to produce their fair share of the gas

from the reservoir.”77 The Texas Supreme Court held that the proration method as applied did

not “afford each producer in the field an opportunity to produce his fair share of the gas from the

reservoir,” as it allowed owners of small tracts excepted from spacing rules to drain well beyond

their equitable share.78 The court refrained from imposing any judicial standard beyond what

was before it, but maintained that the Railroad Commission had a statutory responsibility “to

devise some rule of proration which will conserve the gas in the field…and at the same time be

fair and just to all parties without depriving any of them of his property.”79

In the wake of Atlantic Refining, the Railroad Commission developed various methods to

fairly allocate allowable production and most often employed a formula based solely on

Shale: How Should the Texas Mineral Interest Pooling Act Apply to Units for Horizontal Wells?,” 17 Tex. Wesleyan L. Rev. 1, 4 (2010) (citing Robert E. Hardwicke & M. K. Woodward, “Fair Share and the Small Tract in Texas,” 41 Tex. L. Rev. 75, 81-82 (1962). 73 See Atlantic Ref., at 803. 74 See id. 75 See id. at 803. 76 See id. 77 Id. at 805. 78 Id. at 811. 79 Id. at 812.

15

proportional acreage.80 Although the small tract owners continued to receive spacing exceptions,

drilling on those parcels became unprofitable without an agreement to pool with the owners of

surrounding tracts.81 Thus, the plight of the small tract owner returned, as larger owners could

refuse to pool and drain the oil and gas from the reservoir without compensating the small

owners, who were unable to economically drill alone.82 The legislature responded to this unjust

scenario in enacting the Mineral Interest Pooling Act in 1965 to provide a procedure by which

the Railroad Commission could compulsorily pool interests under certain conditions.83

[3] — A Brief History of Statutory Unitization.

While the concepts of pooling and unitization are similar, the broader scope of unitized

operations is mirrored in its initial development at the federal level. The engineering industry

was accustomed to the idea of unitized operation by the early 1920s; however, many credit the

work of independent oil man Henry L. Doherty as the pre-eminent advocate of its benefits.84

Despite initial opposition from much of the oil industry, Doherty diligently urged producers and

lawmakers to embrace governmental involvement in oil conservation at a national scale.85 The

crux of his arguments targeted the rule of capture as a product of judicial rhetoric that

incentivized inefficiency and devastated the industry and rights of owners. Doherty lamented

that “[p]ractically every evil of the oil business, and everything about which the public complain,

is due to the fact that oil does not follow the usual law of property rights but belongs to the man

who can capture it.”86

In response to such efforts, groups began to investigate the potential for unitization,

which eventually became a well-accepted alternative to the inefficient practices Doherty

80 See Ronnie Blackwell, “Forced Pooling Within the Barnett Shale: How Should the Texas Mineral Interest Pooling Act Apply to Units for Horizontal Wells?,” 17 Tex. Wesleyan L. Rev. 1, 4 (2010); see also Ernest E. Smith, “The Texas Compulsory Pooling Act,” 43 Tex. L. Rev. 1003, 1004 (1965). 81 See id. at 4-5. 82 See id. at 5. 83 See id.; see also 1965 Tex. Gen. Laws 24 (current version at Tex. Nat. Res. Code Ann. §§ 102.001, et seq. (West 2011)). 84 See 1 Bruce M. Kramer & Patrick H. Martin, The Law of Pooling and Unitization, § 3.02 (LexisNexis Matthew Bender 2010) (citing R. Hardwicke, Antitrust Laws, et al. v. Unit Operation of Oil and Gas Pools 1-13 (1961)). 85 See id. 86 See id. at n.35 (citing Hardwicke at 179-90).

16

criticized.87 By 1926, the Federal Oil Conservation Board issued a statement, prophesying that

“[t]he unit idea in producing oil is bound to win out because the natural unit is the oil pool…[and

unitization] means both efficiency in development and operation and the determination of

equities among the owners.”88 These remarks, as well as the American Bar Association’s 1929

policy statement, which offered a model unitization statute and the support of the newly-formed

Interstate Oil Compact Commission, prompted broader support of the concept and increased

conservation regulation of the industry. 89 However, much of this state intervention initially

focused on prorated production rather than statutory unitization, until Oklahoma enacted the first

statute of its kind in 1945.90 The Oklahoma Act withstood prompt challenge in the courts, as the

facial constitutionality was upheld in Palmer Oil Corp. v. Phillips Petroleum Corp. 91 Soon

thereafter, many oil-producing states followed suit and passed conservation statutes which

provided for statutory unitization.92

As this brief historical discussion suggests, pooling and unitization, both in their

voluntary and statutory forms, are long-standing doctrines that have been adopted by an

overwhelming majority of oil and gas producing jurisdictions. Today, the constitutional validity

of these regulatory mechanisms is beyond dispute. Further, the public interests of waste

prevention and correlative rights protection are best pursued through a comprehensive regulatory

scheme that incorporates both statutory pooling and unitization.

93

87 See id. (citing Hardwicke at 35-75). Such studies were conducted in 1920s and 1930s by the Federal Oil Conservation Board, the American Petroleum Board, and the ABA’s Mineral Law Section, among others.

As the remainder of this

88 See id. 89 See 1 Bruce M. Kramer & Patrick H. Martin, The Law of Pooling and Unitization, § 3.02 (LexisNexis Matthew Bender 2010). 90 See id. The Oklahoma statute originally codified at Okla. Stat. Ann. tit. 52, §§ 286.1, et seq. (1945), authorized the Corporation Commission to unitize all or part of a common reservoir upon petition from lessees owning at least 50 percent of the interests therein. 91 See generally Palmer Oil Corp. v. Phillips Petroleum Corp., 231 P.2d 997, 1003–07 (Okla. 1951), app. denied, 343 U.S. 390 (1952) (upholding the statute’s validity against an array of constitutional challenges). 92 See 1 Bruce M. Kramer & Patrick H. Martin, The Law of Pooling and Unitization, § 3.02 (LexisNexis Matthew Bender 2010); see, e.g., 1951 Ark. Acts § 134 (current version at Ark. Code Ann. § 15-72-310, et seq. (2010)). 93 See Patrick H. Martin & Bruce M. Kramer, Williams & Meyers, Oil and Gas Law, Oil and Gas Terms: “Unitization” (LexisNexis Matthew Bender 2010) (“The best results in conservation can be attained only by unitization.”).

17

article will show, while these goals are common among the states, there is substantial variation in

how each state addresses pooling and unitization and the procedural requirements each employs

to effectuate a pooling or unitization order.

§ 01.03. Current State of the Law—An Overview.

[1] — Spacing Rules.

Spacing rules exist in nearly every state with codified law relating to oil and gas

production. Today, there are 34 states which have default spacing rules of some kind written

into the law.94 Each one of these affords the controlling agency some, if not total, discretion to

reconfigure spacing on a case-by-case basis. This authority is typically exercised through the

creation of special rules applicable to a particular pool or field or by a process by which the

agency may grant exceptions for certain wells upon application. In addition, seven states do not

offer default spacing by statute, but expressly grant full authority to an administrative entity to

set unit size and setback requirements for each pool.95

Whether controlled by statute or agency regulation, most current spacing schemes include

lineal and density spacing requirements. In the modern regulatory framework, the minimum

distance required by lineal spacing rules and the minimum area required by density spacing rules

will often vary depending upon the mineral produced and depth to which the well will be drilled

and completed. Of the 34 states with codified spacing, 30 states specify different lineal or

density spacing rules based on the mineral produced from the pool.

96

94 While application varies significantly, the states which provide some level of general spacing requirements are Alabama, Alaska, Arizona, Arkansas, California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Mississippi, Missouri, Nevada, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, and West Virginia. See “National Survey,” for further discussion of each state’s spacing rules.

In addition to each

imposing separate default rules for oil and gas wells, a number of states have created spacing

95 These seven states are Michigan, Montana, Nebraska, North Carolina, Vermont, Wisconsin, and Wyoming. 96 The four states which do not differentiate general spacing rules based on the mineral produced are Arkansas, California, Ohio, and Utah.

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laws particular to coalbed methane wells.97

The general spacing rules in Kentucky exemplify an encompassing framework that shows

all levels of distinction:

These rules will often be further differentiated based

on the depth of the producing formation.

Except as provided [by exception or special order], no permits shall be issued for the drilling, deepening, or reopening of any shallow well for the production of oil, unless the proposed location of the well shall be at least [330] feet from the nearest mineral boundary of the premises upon which the well is to be drilled, deepened or reopened; and, the proposed location must be at least [660] feet from the nearest oil producing well. This subsection shall not be construed to regulate the distance between wells which do not produce oil from the same pool. Except as provided [by exception or special order], no permit shall be issued for the drilling, deepening or reopening of any shallow well for the production of gas unless the proposed location of the well shall be at least [500] feet from the nearest mineral boundary of the premises upon which such well is to be drilled, deepened or reopened; and, the proposed location must be at least [1,000] feet from the nearest gas producing well. This subsection shall not be construed to regulate the distance between wells which do not produce gas from the same pool.98

The Kentucky conservation statute sets these differing lineal, shallow well spacing requirements

based on the mineral produced and directs the Oil and Gas Conservation Commission to create

spacing rules applicable to deep wells via its permitting process. These regulations provide for

density spacing of deep wells based on the depth of the target formation. First, a permit

applicant must supply a plat aligned with the Commission’s default density rules:

If a permit is requested for a deep gas well . . . the application shall include a plat showing a proposed unit comprising a square with sides of 3,500 feet if the well is to be drilled to a depth less than 7,000 feet and with sides of 5,000 feet if the well is to be drilled to a depth of 7,000 feet or more.

97 Statutory spacing for coalbed methane wells exists in the following states: Alabama, Colorado, Illinois, Indiana, Kentucky, Maryland, Pennsylvania, Virginia, and West Virginia. 98 See Ky. Rev. Stat. Ann. § 353.610 (LexisNexis 2011) (emphasis added); see also id. § 353.510(15) (defining “shallow well” as “any well drilled and completed at a depth less than [4,000] feet except, in the case of any well drilled and completed east of longitude line 84 degrees 30’, shallow well means any well drilled and completed at a depth less than [4,000] feet or above the base of the lowest member of the Devonian Brown Shale, whichever is the deeper in depth.”).

19

If the permit is for a deep oil well, the proposed unit plat shall comprise a square with sides of 1,750 feet if the well is to be drilled to a depth of less than 7,000 feet and 2,500 feet if the well is to be drilled to a depth of 7,000 feet or more.99

In addition, the regulations provide lineal spacing rules in requiring that “no deep gas well drilled

to a depth less than 7,000 feet shall be located within 1,072 feet of the boundary of the proposed

unit, and no deep gas well drilled to a depth of 7,000 feet or more shall be drilled within 1,532 feet

of the boundary of the proposed unit.”100 Further, “no deep oil well drilled to a depth less than

7,000 feet shall be located within 536 feet of the boundary of the proposed unit, and no deep oil

well drilled to a depth of 7,000 feet or more shall be drilled within 766 feet of the boundary of the

proposed unit.”101

Rather unique to Kentucky law is the caveat that the Commission may grant exceptions to

spacing only to a certain extent. If an exception is necessary due to topographical or geological

conditions, the well location remains subject to the following absolute set-back spacing limitations:

(1) A deep oil well at a depth less than 7,000 feet may be located no closer than 438 feet to the boundary of the proposed unit. (2) A deep oil well at a depth of 7,000 feet or more may be located no closer than 625 feet to the boundary of the proposed unit. (3) A deep gas well at a depth of less than 7,000 feet may be located no closer than 875 feet to the boundary of the proposed unit. (4) A deep gas well at a depth of 7,000 feet or more may be located no closer than 1,250 feet to the boundary of the proposed unit.102

Kentucky does not provide distinct distance requirements for horizontal oil and gas wells.

However, Commission regulations state that if a permit is issued by the Commission to allow

deviated drilling, the “bottom hole location or objective shall comply with all minimum distances

from unit lines as prescribed by all statewide orders or special field rules.”103

99 805 Ky. Admin. Regs. 1:100 (2011) (emphasis added).

100 Id. 101 Id. 102 Id. 103 Id.

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Yet another wrinkle in Kentucky spacing laws are specific lineal requirements for coalbed

methane wells. Unless the proposed well is granted an exception or pursuant to a voluntary

pooling order, “no permit shall be issued for a coalbed methane well unless the proposed location

of a vertical well shall be at least [750] feet horizontally from the nearest mineral boundary upon

which the well is to be drilled and the proposed location shall be at least [1,500] feet horizontally

from the nearest coalbed methane well.”104 For horizontal coalbed methane wells, a permit

applicant must provide a survey which shows “a dashed line . . . drawn around the intersection

length with regard to the spacing requirements” shown above.105

Well spacing is done on a state-wide basis by statute or by agency rule or order. For

example, the foregoing well spacing standards from Kentucky are referred to as state-wide

spacing rules. Also, spacing can be done on a field- or reservoir-wide basis via these same

means, although field- and reservoir-wide rules are frequently left to the technical expertise of

administering state agencies and are determined in the agencies’ discretion. Additionally, these

agencies often have the discretion to grant exceptions to the general spacing rules. Exceptions to

lineal and density spacing requirements can, under certain conditions, be granted on a well-by-

well basis. The spacing laws in Kentucky are more detailed than most in the region, and offer a

good example of the various conditions upon which states may allow for alteration or deviation

from the standard spacing requirements. These spacing rules are particularly important in shale

drilling regions which also have substantial coal production.

[2] — Pooling and Unitization.

In addition to spacing provisions, many states contain laws allowing pooling or

unitization of tracts and interests for the development of oil and gas. Pooling and unitization are

often discussed interchangeably, and almost all states that have statutes providing for one have

104 Ky. Rev. Stat. Ann. § 349.075 (LexisNexis 2011). 105 805 Ky. Admin. Regs. 9:070 (2011).

21

statutes that provide for both.106

Most modern statutory pooling statutes usually have five major elements. First, they

have provisions which lay out the prerequisites that must be met before statutory pooling can be

invoked, such as formation of a spacing or drilling unit that contains two or more separately

owned tracts or interests. Second, statutes often contain provisions identifying or establishing

the parties who are authorized, and who have standing, to apply for a statutory pooling order.

Third, as previously mentioned, they set out a procedure to apply to the state conservation

agency for the desired order. Fourth, they outline the procedure to give notice to the other

interested parties and to hold a hearing on the application for statutory pooling. Finally, such

statutes provide for issuance of an administrative order, which either denies the application or

sets out the terms upon which statutory pooling is granted. In many states, those terms are

established, or at least guided, by statute or rule. In other states, they are left largely to the

discretion of the conservation agency.

Most states have regulatory bodies (herein generically referred

to as the “board” or “boards”) which may compulsorily pool interests in a drilling unit, although

owners or operators may also pool their interest by way of voluntary pooling agreements. The

procedural mechanisms for setting up such group development is generally the same—i.e., in the

absence of a voluntary agreement, the owners or operators must file an application with the

board containing a plan including the information required by statute along with appropriate

bond and often a degree of approval among interest holders.

Pooling orders issued by state boards are generally the result of a petition filed either by

an interested party or upon a board’s own motion.107

106 Among states that have both statutory pooling and unitization are Alabama, Arkansas, Florida, Kentucky, Louisiana, North Dakota, Ohio, Oklahoma, and South Dakota; see “National Survey,” for further discussion of each state’s pooling and unitization laws.

While voluntary agreements have issues of

their own—e.g., must the agreement be ratified by 100 percent of the unit’s ownership?—

107 See, e.g., Ala. Code § 9-17-81 (2010); see also “National Survey,” for further discussion of each state’s procedural requirements for statutory pooling and unitization.

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statutes allowing for statutory pooling orders contain many provisions, which naturally provide

some variety among states.

Statutory pooling orders generally must be approved by the state board. A few states also

contain minimum operator or owner controls for pooling orders—that is, a provision requiring

the operators or owners of a minimum percentage of interests responsible for costs and of a

minimum percentage of all interests entitled to royalty payments to ratify or approve in writing

the order promulgated by the board. Far more states only contain these minimum operator or

owner controls with regard to unitization orders, discussed below. The relevant percentage, if

any, varies by state.

For states with statutory unitization statutes, the minimum operator control provision

often dictates that unless a requisite percentage of operators or owners authorize or ratify in

writing the unitization order, that order will not become effective.108

Of the 33 states that have statutory unitization, 29 require some form of written

authorization by holders of certain types of interest in the unit to satisfy the minimum control

requirements.

In most cases, this written

authorization must take place within a set number of months from the date the order was issued

or the order will be automatically revoked unless that time allowance is extended.

109

108 See “National Survey,” for further discussion of each state’s minimum control requirements.

The vast majority of these, 25 states, require authorization by both owners of a

percentage of working interest or by those responsible for costs (both groups herein collectively

referred to as the “working interest group”), as well as approval by owners entitled to royalties or

by owners of similar proceeds from production free of costs (both groups herein collectively

referred to as the “royalty group”). The percentage varies between states, but usually it is the

same percentage within a particular state as to both the working interest group and the royalty

109 These states are Alabama, Arizona, Arkansas, California, Colorado, Florida, Georgia, Illinois, Kansas, Kentucky, Louisiana, Michigan, Mississippi, Montana, Missouri, Nebraska, Nevada, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, South Carolina, Tennessee, Utah, Vermont, Washington, and West Virginia. West Virginia’s approval requirements pertain only to unitization of secondary recovery oil wells, see W. Va. Code § 22C-9-8(a)(4) (2011).

23

group; it ranges from as low as 51 percent110 to as high as 80 percent.111 Sixteen states contain

75 percent approval requirements for at least one group,112 while 11 states provide numbers

between 60 percent and 66.67 percent.113

A handful of regulatory unitization structures are unique in that, although they require a

certain percentage of approval, they also dictate that if one interest holder has enough interest to

approve the order, yet holds less than 100 percent of the interest, at least one other interest holder

must vote in favor of the order for it to become effective.

114 The statute may or may not specify

that the other interest holder must be unaffiliated with the majority holder. Similarly, one state,

New Mexico, requires that if one interest holder has enough interest to defeat the order, yet holds

less than 50 percent of the interest, at least one other interest holder must also vote to disapprove

the order.115

Kansas has a noteworthy structure, which allows for “voluntary” unitization so long as all

mineral and royalty owners and not less than 90 percent of the working interest holders approve

the voluntary unitization agreement.

116

110 E.g., Illinois and Kentucky.

In the absence of such approval, the state board may

issue an order for unit operations. The percent of approval required then depends upon the

reason for the order—i.e., it may be due to low production and imminent abandonment of wells

in the unit area (in which case only 63 percent of both groups must authorize), or it may be that

111 E.g., Colorado. 112 These states are Arkansas, California, Florida, Georgia, Kansas, Kentucky, Louisiana, Michigan, Montana, Missouri, Nebraska, New Mexico, Oregon, South Carolina, Washington, and West Virginia. West Virginia’s approval requirement pertains only to unitization of secondary recovery oil wells, see W. Va. Code § 22C-9-8(a)(4) (2011). Kentucky’s approval requirement appears to pertain only to deep wells, see Ky. Rev. Stat. Ann. § 353.652(1)(d) (LexisNexis 2011). 113 Four have 60 percent requirements (Montana, New York, North Dakota, and South Dakota), one has 62.5 percent (Nevada), three have 63 percent (Arizona, Kansas, and Oklahoma), two have 65 percent (Nebraska and Ohio), and one has 66.67 percent (Alabama). 114 Those states are Montana, New Mexico, and North Dakota. 115 N.M. Stat. Ann. § 70-7-8 (2011). 116 Kan. Stat. Ann. § 55-1317(b) (2010).

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unitization is merely feasible and would increase ultimate recovery of oil and gas (in which case

63 percent of the working interest group and 75 percent of the royalty group must authorize).117

Of the states with minimum operator controls, 21 states specify by statute when the

requisite authorization must be secured.

118 Almost unanimously, states give six months to obtain

approval of the order to satisfy the minimum operator control requirement. Three states,

however, require approval to be shown at the time the application for unitization is submitted to

the board,119 and one state provides 12 months.120

Many states provide statutory options by which unleased, non-consenting interests may

participate in unit development. The options available vary by states—some statutory schemes

provide multiple avenues of participation,

121 while others offer little guidance on how to treat

non-consenting interests.122

117 Id. §§ 55-1304, -1305.

Sometimes, a non-consenting owner is given the statutory right to

lease or otherwise relinquish its interest, opting instead to receive a one-time per-acre bonus and

a fair royalty payment, which is generally a one-eighth percentage of the owner’s share of

production. Another common royalty level is a one-eighth percentage or the lowest royalty

provided by contract in the pool, whichever percentage is greater. The states that provide for

transfer of the non-consenting party’s working interest vary as to whether the surrender of that

interest is permanent or only until the owner’s share of costs, or share of costs plus a penalty fee

as discussed below, have been recovered out of production.

118 These states are Alabama, Arizona, Arkansas, Colorado, Florida, Georgia, Illinois, Kansas, Kentucky, Michigan, Mississippi, Nevada, New York, North Dakota, Ohio, Oklahoma, Oregon, South Carolina, South Dakota, Tennessee, and West Virginia. 119 These states are Kentucky, Tennessee, and West Virginia. For example, West Virginia requires that approval be shown prior to the issuance of any unitization order for secondary recovery oil wells, see W. Va. Code § 22C-9-8(a)(4) (2011). 120 Mississippi provides 12 months to show the requisite approval. 121 States that give the non-consenting owner several statutorily-available participation options include New York, see N.Y. Envtl. Conserv. Law § 23-0901(3)(c) (McKinney 2011), and Pennsylvania, see 58 Pa. Stat. § 408(c) (2011). 122 States that are either silent as to participation or merely state that the board must provide “just and reasonable terms and conditions” for participation include Georgia, Michigan, Oklahoma, Oregon, and Tennessee.

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Instead of leasing, many states allow the owner to retain their working interests, electing

varying options to finance those interests, while often allowing the owner to continue to receive

their royalty entitlement.123 At one extreme, owners in some states may elect to participate up-

front by paying for their portion of drilling and operating costs at the outset of operations and

sharing in the risk and rewards with other operators. For owners who cannot afford to pay the

cost initially, some states provide the option for the non-consenting party to have its financial

contribution carried, or financed, by the other working interest owners. In those situations, other

operators will pay the carried owners’ costs and in return will be reimbursed from the proceeds

of the carried owners’ portion of production, although the owners’ royalty entitlements may be

exempted from this recapture. Generally, carried participants, who are not vulnerable to the risk

of drilling a dry hole,124 will be charged a “risk penalty,” a fee that can be as much as double or

triple the actual prorated cost of drilling.125 Finally, some states allow “free rides” to non-

consenting owners, allowing owners to be carried without paying a risk penalty.126

The various schemes of working interest participation provide different incentives to non-

consenting owners in deciding whether to join a voluntarily pooling agreement. Owners who are

statutorily entitled to be carried as a free ride have no incentive to participate up front when they

may instead pay over time out of production with no interest charges and no risk penalty. For

owners subject to a substantial risk penalty, the incentive to participate up front increases, but

only so long as the well is likely to produce and provided that the owner has the capital to

participate.

123 This is a majority approach in which the statutes convert the unleased owners’ interest into a one-eighth royalty interest and a seven-eighths working interest and fit those interests into the states’ statutory structure for participation. 124 Operators may not sue these carried non-participating owners for recovery of their proportionate costs of drilling and operating but may only recover said costs from the proportionate share of production; thus if drilling results in a dry hole or marginal producer, the non-consenting owners are not subject to risk. 125 States that allow risk penalty charges include: Colorado, Louisiana, Nebraska, New Mexico, New York, Texas, Utah, and West Virginia. 126 These states are Alabama, Alaska, Arizona, Florida, Indiana, Iowa, Missouri, Montana, Nevada, North Carolina, and North Dakota.

26

Also, some statutes that provide for the option to carry or otherwise finance non-

consenting, unleased owners fail to express that the operator is entitled to retain working interest

revenue from production to recover well costs. In lieu of direct entitlement, those statutes give

the well operator a lien on the non-consenting owner’s share of production until such time as the

non-consenting owner’s share of costs has been recouped, thereby exposing the operator to

increased risk.

Additionally, states differ on whether providing options or offers to the non-consenting

owners is a prerequisite to pooling. Some states require the pooling order to include an offer to

the non-consenting owners of their option to elect, with a stated number of days within which the

operator must respond before he or she will be automatically considered to have chosen the

default election option.127 Other states, however, do not require the pooling order to set out the

options available, but instead incentivize the giving of options by, for example, allowing

operators to charge more in costs if they can show they have provided the non-consenting party

with the option to participate.128

The State of Washington provides a comprehensive example of statutory treatment of

unleased mineral owners. Washington provides non-consenting owners with several options

once a statutory pooling petition has been filed. The first option is a modified seven-eighths to

one-eighth option.

129 The unleased owner can be treated as both royalty owner and working

interest owner, with the possibility of a royalty greater than one-eighth should the leased royalty

owners in the pool have higher royalties, in which case, the remainder is treated as a working

interest.130

127 See, e.g., W. Va. Code § 22-8-11(e) (2011).

For the working interest share, the usual options are available, including the right to

participate and pay pro rata costs and the right to be carried until payout with an appropriate risk

128 See, e.g., Miss. Code Ann. § 53-3-7(2)(a) (2011). 129 Wash. Rev. Code Ann. § 78.52.250(4) (LexisNexis 2011). 130 Id. § 78.52.250(4)(a).

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penalty.131

The second option authorizes the unleased owner to grant a lease to the operator at the

current market price for comparable leases.

This scheme may present a better option than leasing if an owner knows his or her

tract will be part of a unit which will ultimately be pooled through the statutory process;

however, certainty is unlikely in most instances as the operator may redesign a unit to avoid

having unleased parties gain such economic benefits.

132 This option may be attractive if the lease bonus in

the area is high and the unleased owner will not be able to participate financially as a working

interest owner. Protections against unfair leasehold provisions are written into the statute so that

the operator cannot force the unleased owner to accept unconscionable terms. The final option

allows the unleased owner to treat his or her entire interest as a working interest.133 The owner

would resort to this last option only if the prospects for a very profitable well are high and he or

she can afford to participate in drilling costs. The Washington provision also states that if the

unleased owner does not make an election within 15 days, he or she is to be treated as having

opted for the seven-eighths to one-eighth choice.134

Another difference among the states is that some statutes and regulations provide other

rights to the individuals or entities who own either the surface or the coal seams, or both, within

the pooled acreage. These rights can include requirements that the oil and gas operator notify the

relevant entities of pooling hearings and perform surface reclamation, and also allow objections

by those entities regarding spacing and well location.

§ 01.04. Status of Pooling Statutes in Appalachian Shale States.

The current major horizontal shale development areas in Appalachia are Maryland, New

York, Pennsylvania, and West Virginia for Marcellus Shale development and, in addition to

these states, Ohio for Utica Shale development. Each of these states has adopted conservation

131 Id. § 78.52.250(2). 132 Id. § 78.52.250(4)(b). 133 Id. § 78.52.250(4)(c). 134 Id. § 78.52.250(4).

28

statutes.135

[1] — Maryland.

Notwithstanding the adoption of relatively comprehensive statutes by Ohio, New

York, Pennsylvania, and West Virginia, each state has unique problems, whether contained

within the statute itself or in the utilization or application of the statute for horizontal shale

development. These issues are discussed and summarized as follows:

In early June, 2011, an executive order was issued by Maryland’s governor requiring the

Maryland Departments of the Environment (“DOE”) and Natural Resources to conduct a study,

called the Marcellus Shale Safe Drilling Initiative, on the impacts of natural gas drilling in the

Marcellus Shale.136 The final results of that study are not due until August 2014.137 The order is

not a moratorium on permits being issued, but there has been little indication from Maryland that

the issuing of permits is likely before the study is completed. Besides environmental issues, the

Initiative will study spacing and other rules and regulations impacting oil and gas

development.138

In addition to the issues associated with this order and its impacts, a key difficulty that

Maryland oil and gas law presents for shale gas developers is the lack of a statutory pooling

statute. Indeed, the DOE, the state regulatory body, “may not prorate or limit the output of any

gas or oil well.”

139 The DOE is not authorized to order statutory pooling or unitization, even

though voluntary pooling and unitization for mutual benefit are acknowledged by statute.140

135 Each of these states are also members of the Interstate Oil & Gas Compact Commission which serves as a vehicle to assist member states to efficiently maximize oil and natural gas resources through sound regulatory practices while protecting the nation’s health, safety and environment. The IOGCC has drafted a model statute for conservation, i.e., the “2004 Model Oil and Gas Conservation Act.” See http://iogcc.state.ok.us.

For

those reasons, waste prevention and protection of correlative rights are primarily sought through

spacing requirements. Maryland law does contain linear spacing rules, imposing a 1,000-foot

setback between gas or oil wells and boundary lines, unless the owners of adjacent lands have

136 Exec. Order No. 01.01.2011.11 (June 6, 2011) available at http://www.governor.maryland.gov/documents.asp. 137 Id. 138 Id. 139 Md. Code Ann., Envir. § 14-103(LexisNexis 2010). 140 See Md. Code Regs. 26.19.01.09(J) (2010) (defining “pooled unit” as “an area within which permittees of different tracts in the area have voluntarily agreed to participate in a well drilled within the unit”).

29

consented to the spacing in writing.141 The DOE has the authority to prescribe the setbacks

between any wells located on the same property.142 Additionally, the DOE has discretion, after

notice and hearing, to allow drilling within the statutory limits if doing so is necessary due to site

constraints and if the applicant has notified all landowners and royalty owners within 2,000 feet

of the proposed well location by registered mail.143

[2] — New York.

New York law contains spacing rules, as well as both voluntary and statutory pooling and

unitization provisions. All wells in the state must be drilled in conformity with the spacing

requirements, 144 unless the unit otherwise meets the state policy objectives 145 of waste

prevention, increased recovery, and protection of correlative rights.146 The spacing rules differ

for oil and gas wells and are based upon target formation and upon direction; they contain both

lineal and density spacing requirements.147 Any party who applies for an oil or gas drilling

permit must control, either by ownership, voluntary agreement, or departmental integration

order, not less than 60 percent of the acreage in the proposed spacing unit.148

The Department of Environmental Conservation, the governing body, must issue permits

if the proposed spacing unit conforms to spacing rules and if it is approximately uniform in shape

compared to other units covering the same reservoir. The unit must also either adjoin other units

or leave enough space so that additional units may be developed.

149 Prior to issuance of a

permit, the Department must publish notice of intent in the Environmental Notice Bulletin.150

141 Md. Code Ann., Envir. § 14-112(a)(1) (LexisNexis 2010).

All comments and challenges must be received within 30 days of the notice and must include

proposed alternative spacing units, technical justification for the alternative, and the contact

142 Id. § 14-112(a)(2). 143 Md. Code Regs. 26.19.01.09(D) (2010). 144 N.Y. Envtl. Conserv. Law § 23-5301 (McKinney 2011). 145 Id. § 23-0503(3)(a). 146 Id. § 23-0301. 147 Id. § 23-5301. 148 Id. § 23-0501(2). 149 Id. § 23-0503(2). 150 Id. § 23-0503(2).

30

information and experience of any witness who supports the alternative. 151 If either no

challenges are submitted or no submitted challenges raise substantive issues, then the

Department will issue the permit.152 If significant issues were raised, however, the Department

will schedule a hearing on the matter.153

As previously noted, New York allows both voluntary

154 and statutory155 pooling and

unitization. Voluntary agreements may be submitted to the Department for approval as being in

the public interest or as being reasonably necessary to prevent waste,156 which approval provides

a blanket defense to lawsuits alleging violation of any trust or monopoly laws in the operation of

the unit.157

In the absence of voluntary agreements to integrate interests within a drilling unit, the

Department may mandate pooling or unitization.

158 Before requiring such an order, the

Department must find, after notice and hearing, that the order is necessary to carry out the

previously mentioned state policies.159 If the operator does not control all of the interests within

the unit, either by lease or agreement, the Department must schedule an integration hearing to

determine whether integration is in the public interest and necessary to prevent waste.160 The

uncontrolled owners are entitled to 30 days’ notice prior to the integration hearing.161 If those

owners are unknown, but the Department grants a spacing unit, the operator must retain the

royalties due to said unlocated owners in an interest-bearing account until the owners are located

or the property is deemed abandoned.162

151 Id. § 23-0503(3)(c).

152 Id. § 23-0503(3)(d). 153 Id. 154 Id. § 23-0701(1). 155 Id. § 23-0701. 156 Id. § 23-0701(1). 157 Id. 158 Id. § 23-0901. 159 Id. § 23-0901(2). 160 Id. § 23-0901(3). 161 Id. § 23-0901(3)(c). 162 Id. § 23-0901(3)(c).

31

An election form for uncontrolled interests must accompany the integration hearing

notice.163 The options available to such owners include integration as an integrated participating

owner,164 as an integrated non-participating owner,165 or as an integrated royalty owner.166 The

uncontrolled owners have 21 days after receipt of notice within which to indicate to the

Department the type of ownership status they will elect,167 and otherwise the default election

status is that of an integrated royalty owner.168

The Department may also order integration, after notice and hearing, upon its own

motion or after application is filed by an interested person.

169 The same policies regarding waste

prevention and protection of correlative rights are to be considered.170 Unitization orders must

have the written approval of 60 percent of the working interests and 60 percent of the one-eighth

royalty interests in the unit area,171 which approval must be shown within six months of the

issuance of the order or it will become ineffective.172 Orders may be amended in the same way

and are subject to the same conditions as the original orders,173 though only approval of affected

interests will be required.174

The foregoing shows that New York law provides relatively modern procedures that

should promote horizontal shale development. Yet, due to the virtual moratorium in recent

163 Id. § 23-0901(3)(c)(1). 164 An “integrated participating owner” or “participating owner” is a party who chooses to participate in the initial well, pay the costs associated with participating up front, and comply with any and all requirements for participation. Id. § 23-0901(3)(a)(2). 165 An “integrated non-participating owner” or “non-participating owner” is an owner who chooses to reimburse the operator from production proceeds for the owner’s proportionate share of the costs of the well. Id. § 23-0901(3)(a)(1). Once the operator has recouped the portion of the owner’s costs for the well plus a risk penalty, which is equal to 200 percent of the share of the actual well costs allocated to the owner, id. § 23-0901(3)(a)(1), the owner is then entitled to his or her full share of the production attributable to his or her proportionate interest. Id. 166 An “integrated royalty owner” is an owner who chooses to be an integrated royalty owner or who does not choose to operate as either of the previously discussed options; the owner will receive a royalty equaling the lowest royalty of the existing leases in the unit, but not less than one-eighth of the owner’s share of production, but will have no obligation to the well operator for other charges or fees. Id. § 23-0901(3)(a)(3). 167 Id. § 23-0901(3)(c)(2). 168 Id. § 23-0901(3)(c)(1)(i). 169 Id § 23-0901(4). 170 Id. § 23-0901(2). 171 Id. § 23-0901(6). 172 Id. 173 Id. § 23-0901(7). 174 Id. § 23-0901(7)(a).

32

months on hydraulic fracturing in New York which prevents horizontal shale development, the

statute has been rendered moot. In late June of this year, the Department issued

recommendations on mitigating the environmental impacts of high-volume hydraulic fracturing,

which would protect the sensitive watershed areas while allowing for development of

approximately 85 percent of the Marcellus Shale underlying New York lands. 175

(1) High-volume fracturing would be prohibited in the New York City and Syracuse watersheds, including a buffer zone;

Those

recommendations include the following:

(2) Drilling would be prohibited within primary aquifers and within 500 feet of their boundaries; (3) Surface drilling would be prohibited on state-owned land including parks, forest areas and wildlife management areas; (4) High-volume fracturing will be permitted on privately held lands under rigorous and effective controls; and (5) DEC will issue regulations to codify these recommendations into state law.176

Because these recommendations have not been finally adopted and implemented, whether New

York’s statute will be entirely satisfactory in the long term to address the unique challenges

associated with horizontal drilling is still unknown.

[3] — Ohio. While Ohio’s statute can be used for pooling in all active shale plays, such as the Utica,

procedural issues exist. The statute provides exclusive permitting and spacing authority to the

Division of Mineral Resources Management of the Department of Natural Resources.177 The

Chief of the Division administers the rules. The Oil and Gas Commission is strictly an appellate

body, created by statute to allow those adversely affected by an order to appeal to the

Commission.178

175 See Press Release, “New Recommendations Issued in Hydraulic Fracturing Review,” N.Y. Dept. of Envtl. Conservation (June 30, 2011), http://www.dec.ny.gov/press/75403.html.

Applications for drilling permits may be denied by the Chief if he determines

there is substantial risk that the drilling will violate statutory provisions or that the drilling will

176 Id. 177 Ohio Rev. Code Ann. § 1509.02 (LexisNexis 2011). 178 Id. § 1509.35.

33

put public health and safety or the environment in imminent danger.179 For permits requested in

an urbanized area, longer notice requirements are imposed and more site review is conducted.180

Ohio contains spacing requirements that are set by rule.

181 The Chief is permitted to

issue special orders providing for spacing over a pool or field.182 The rules distinguish between

the depth to which the well is drilled and include both linear and density spacing rules.183 The

rules, rather uniquely, do not distinguish based upon mineral produced; neither do they differ

based upon direction of drilling. In fact, Ohio regulations provide that unless approval is given

by the Chief, wells may not “vary unreasonably from the vertical drawn from the center of the

hole at the surface.”184

Pooling applications may be made to the Division for a mandatory pooling order.

185

Also, in order to accommodate horizontal shale well drilling, special field rules may be

necessary, as the current spacing rules may not be adequate, although to date, several horizontal

wells have been permitted and drilled without any request for special field rules. In the absence

of field rules, units must comply with the boundary set-offs of the general spacing rules, even for

units of larger size. If the information is complete in an application for a pooling order, the Chief

will notify the applicant, the attorneys, and all landowners in the area to be encompassed in the

drilling unit of the date of the hearing in front of the Technical Advisory Council (“TAC”).186

The TAC will recommend approving or denying the application based on the information

presented in the application and at the hearing. The Chief will review the application,

information presented at the hearing and the TAC recommendation and determine whether

179 Id. § 1509.06(F). 180 Id. § 1509.06(H). 181 Id. § 1504. 182 Id. § 1509.25. 183 Ohio Admin. Code 1501:9-1-04 (2011). 184 Id. § 1501:9-1-02(H). 185 Ohio Rev. Code Ann. § 1509.27 (LexisNexis 2011). 186 Id. The Technical Advisory Council on Oil and Gas was created under Section 1509.38 of the Ohio Revised Code and consists of eight members appointed by the Governor and meets at least once a calendar quarter. Additional meetings are at the request of its chair or two of its members, but such requests have not been used in at least 25 years.

34

mandatory pooling is necessary to protect correlative rights and to effectively develop the

mineral resources; then, it will enter an order.187 The order will specify the process whereby any

party to the order may appeal the Chief’s decision to the Oil and Gas Commission.188 For owners

who do not elect to participate in the risk and cost of drilling, those owners will be designated

non-participating owners on a limited or carried basis; applicants who pay for a non-participating

owner’s portion of costs are entitled to the non-participating owner’s share of production,

exclusive of the royalty interest due, until the applicants have been reimbursed the costs

expended plus an added percent of the owner’s share as the Chief may determine, the total

amount of which may not exceed 200 percent of the owner’s share of charges.189

As for unit operation of a pool, the Chief, either by his own motion or by application of

65 percent of the owners of the land overlying the pool, will hold a hearing to decide if a need

exists for the operation of the pool as a unit.

190 This provision was intended for application in

secondary oil recovery operations, involving the use of multiple wells in the unit, and is not

generally applicable to pooled units. Potentially, this could be applied in circumstances

involving the use of multiple horizontal boreholes but is better suited for its primary purpose,

efficient utilization of secondary recovery technology in oil fields. The Chief should enter the

order if it finds that unit operation is reasonably necessary to increase substantially the ultimate

recovery of oil and gas and that the added value likely will exceed the added costs.191 These

orders must also contain provisions providing for costs and potential financing options for

owners unable to meet up-front costs.192

As the foregoing indicates, Ohio’s statute is a relatively generic and comprehensive one.

However, the major issues with this statute and its application are procedural. For example, each

187 Id. 188 Id. § 1509.36 189 Id. § 1509.27(F). 190 Id. § 1509.28(A). 191 Id. § 1509.28(A)(1). 192 Id. § 1509.28(A).

35

entity is limited to five pooling applications per year, unless further applications are authorized

by the Director, and the TAC generally meets only once per quarter.193

[4] — Pennsylvania.

In addition to these

procedural restrictions, because the Utica is a recent horizontal shale development play, it is

unknown whether Ohio’s statute will be entirely satisfactory in the long term to address the

unique challenges associated with horizontal drilling.

Pennsylvania has three statutes that address oil and gas production: the Oil and Gas

Act, 194 the Oil and Gas Conservation Law (“Conservation Law”), 195 and the Coal and Gas

Resources Coordination Act (“Coal and Gas Coordination Act”),196 which was recently amended

by Pennsylvania Act 2 of 2011 (“Amendment”), effective May 13, 2011.197 The Department of

Environmental Protection (“DEP”) is the regulatory body with authority to carry out the

provisions of each act. The Oil and Gas Act is meant to allow for responsible development of

Pennsylvania’s oil and gas resources and does not restrict its application to any depth.198 The

Coal and Gas Coordination Act requires coordination between gas and coal operators199 and

applies to all gas wells which penetrate a workable coal seam. 200 The Coal and Gas

Coordination Act, however, does not apply to gas wells permitted under the Conservation Law or

to oil wells.201

The Conservation Law is the only act of the three that provides for unitization, and while

none of the three Acts address traditional oil and gas spacing, the Coal and Gas Coordination

Act, as amended, includes spacing designed to protect coal resources. The Conservation Law

provides the DEP with authority to provide for the integration or communitization of interests

193 Id. § 1509.27. 194 58 Pa. Stat. §§ 601.101-.605 (2011). 195 Id. §§ 401-419. 196 Id. §§ 501-518. 197 See S. 265, 2011 Gen. Assemb., Reg. Sess. (Pa. 2011). 198 Id. § 601.102. 199 Id. § 512. 200 Id. § 503(a); see also id. § 502 (defining a “workable coal seam” as “a coal seam identified …as capable of being mined by underground methods.”). 201 Id. § 503(b).

36

within a drilling unit202 to prevent waste. However, it only applies to wells that penetrate the

Onondaga horizon or, in those areas in which the Onondaga horizon is nearer to the surface than

3,800 feet, any wells that exceed a depth of 3,800 feet beneath the surface.203 The Marcellus

shale sits just above the Onondaga limestone formation,204 so it is not covered by any statutory

pooling provisions in Pennsylvania; the Utica, which is deeper,205

For those operators seeking an initial drilling permit in Pennsylvania, they must provide

the DEP with their application, which includes the names of all affected surface owners, surface

owners and water purveyors whose water supplies are within 1,000 feet of the proposed well

location, and the record owner or operator of all known underlying workable coal seams,

is covered by the Conservation

Law.

206 each

of which are entitled to a copy of the plat207 and who have 15 days within which to file an

objection.208 The application must also state whether the well will substantially deviate from the

vertical and which workable coal seams underlie the tract to be drilled.209

No spacing rules exist in Pennsylvania under any of the Acts; however, under the

Conservation Law, spacing or unit orders can be created by the DEP. The location of any wells

drilled subject to the Conservation Law must conform to any applicable spacing or pooling

orders issued under the Conservation Law.

210 The orders must, when created, specify the

minimum distance from the nearest spacing unit boundary.211

202 Id. § 405(c)(1)(iv).

The location of permitted wells

subject to the Conservation Law must be at least 330 feet from the nearest outside lease

203 Id. § 403(b)(1). 204 “Marcellus Shale FAQ,” W. Va. Geological & Economic Survey (Jan. 7, 2011), http://ims.wvgs.wvnet.edu/mar/marfaq.htm. 205“Marcellus and Utica Shales Data,” Ohio Dept. of Nat. Resources Div. of Geological Survey http://www.dnr.state.oh.us/geosurvey/tabid/23014/Deafult.aspx (last visited Jul. 18, 2011) (stating that the Utica Shale was of the Ordovician age, which is older than the Devonian, in which the Marcellus Shale is found). 206 58 Pa. Stat. § 601.201(b) (2011). 207 Id. § 601.201(c). 208 Id. 209 Id. § 601.201(b). 210 Id. § 403(b)(3). 211 Id. § 407.

37

boundary, which requirement may be waived if landowners outside that area have entered into a

voluntary pooling agreement or if the DEP grants an exception to the requirement.212

The Coal and Gas Coordination Act, as amended, which does not apply to wells subject

to the Conservation Law or oil wells, contains spacing rules which were not enacted under

traditional oil and gas concepts. Rather, these were enacted to limit the number of wells drilled

through coal seams and thereby protect coal reserves. Prior to its amendment, the Coal and Gas

Coordination Act set forth that no permits for gas wells subject to the Coal and Gas Coordination

Act may be issued unless the proposed gas well is not less than 1,000 feet from any “other well,”

which is defined as not including oil, gas, or injection wells that do not penetrate a workable coal

seam; oil, gas, or injection wells that have been plugged; nonproducing oil or gas wells drilled

and abandoned prior to 1955; and storage wells.

213 Further, while the applicant and the coal

seam owner may consent to waive the 1,000-foot spacing requirement, they cannot agree to any

distance less than 900 feet.214 However, where the producing formation is a vertical distance of

1,000 feet or more from the producing formation of any other well and if the applicant and coal

owner have consented in writing, the DEP can grant an exception to the 1,000-foot spacing

rule.215

Thus, prior to the Amendment of the Coordination Act, multi-well horizontal well pads

used in Marcellus shale drilling were at risk because a coal seam owner could arguably object to

the drilling of such wells due to the close spacing of the wells on the pad. The Amendment

makes a major change with respect to spacing in that it provides for 2,000-foot spacing between

“well clusters,” which are defined as the area of a well pad intended to host multiple horizontal

wells (and can be no larger than 5,000 square feet).

216

212 Id. § 407(6); 25 Pa. Code § 79.11(b) (2011).

213 58 Pa. Stat. § 507(a) (2011). 214 Id. § 507(b). 215 Id. § 507(c). 216 The 5,000 square feet limitation may or may not be prohibitive, depending on how an operator spaces its wellbores. This change resolves the uncertainty under the prior Coordination Act as to whether the 1,000-foot

38

Also, the Amendment provides that an operator has to obtain the consent as to a well

location from all owners of an operating coal mine that will be penetrated by the well.217 The

Amendment expands the definition of “active coal mine” to include “the area of the workable

coal seam which may reasonably be expected to be mined and permitted for mining by the

operator during the five-year period beyond the projected completion of the mining of the

currently permitted area.”218

For those wells subject to the Conservation Law, parties may obtain spacing orders by

submitting an appropriate application to the DEP after an initial discovery well has been

drilled.

219 Spacing unit orders must cover all lands believed to be underlain by the pool.220 If

the spacing units contain two or more separately owned tracts or interests, the owners of said

interests may decide to integrate for unit development.221 If parties do not voluntarily integrate

their interests, though, the DEP may issue an order, upon application of an operator who holds

interest in the tract, which provides for such integration.222 As part of the order, the DEP must

specify the terms and conditions upon which, in the absence of a voluntary agreement and

without an order explicitly integrating those interests, royalty interests in the units will be

deemed integrated.223

The order should also prescribe the manner and time in which the operators may elect to

participate in unit operations, as well as provisions for payment by those who elect not to

participate in the reasonable actual costs and expense of operations, plus a reasonable

supervision charge and interest on past due accounts.

224

spacing for wells barred having more than one horizontal well on a single well pad overlying workable coal, as well as giving coal producers more space in between well clusters than they are entitled to between vertical wells. These changes should lessen the impact of wells drilled through coal on coal reserve recovery.

If requested, the order must give just

217 See S. 265, 2011 Gen. Assemb., Reg. Sess. (Pa. 2011). 218 See id. 219 58 Pa. Stat. § 407(1) (2011). 220 Id. § 407(7). 221 Id. § 408(a). 222 Id. § 408(a). 223 Id. § 409. 224 Id. § 408(c).

39

and equitable alternatives for non-participating owners to surrender their leasehold interest on a

reasonable basis to participators; the surrender must be in exchange for reasonable consideration.

Otherwise, the order may provide for election to participate on a limited or carried basis.225

Operators who do the work of drilling or pay for such work for the benefit of a non-participator,

are entitled to such non-participating operators’ share of production, exclusive of a one-eighth

royalty interest, until market price of the production equals 200 percent of the share of such costs

payable to the interest.226

The obvious problems with the state of the law in Pennsylvania, then, is that statutory

pooling is limited to deep wells, which does not include wells drilled for Marcellus development.

For those wells that do come under the jurisdiction of the Conservation Law, the DEP has

discretion as to a substantial portion of the regulation—e.g., spacing rules and election rights—

which might result in uncertainty for various operators, at least until the DEP establishes

guidance through its application of this process. Additionally, statutes that regulate deep wells in

Pennsylvania do not address the issue of minimum operator controls. The lack of certainty and

the lack of a detailed framework may prove problematic as various shale plays are explored in

Pennsylvania.

[5] — West Virginia. West Virginia contains three rather complicated processes for dealing with oil and natural

gas development involving different governing entities, each with its own statutory

framework.227

The Department of Environmental Protection (“DEP”), and the Secretary thereof, have

general permitting authority for oil and gas development pursuant to the West Virginia Code.

228

225 Id.

226 Id. 227 This section is not meant to be a comprehensive coverage of the West Virginia statutes; for complete coverage, see “National Survey.” 228 W.Va. Code § 22-6-2 (2010); see generally id. §§ 22-6-1 to -41.

40

The Secretary is vested with statutory authority to perform all the necessary duties relating to

exploration, development, production, storage, and recovery of oil and gas.229

In addition, the Shallow Gas Well Review Board (“Review Board”) is the body that

reviews coal owner objections regarding shallow gas well placement.

230 The Review Board also

has statutory authority to create drilling units and pool interests within those drilling units, albeit

in extremely limited circumstances;231 so limited, in fact, that the Review Board has not issued a

single drilling unit or pooling order.232 As noted, the Review Board’s purview is limited, and it

does not have authority over deep wells, oil wells and enhanced recovery oil wells, or any

shallow well to which no objection is made.233

The Chief of the Office of Oil and Gas (“Chief”) is the state permitting authority for

coalbed methane wells,

234 much like the Secretary is the permitting authority for conventional oil

and gas wells. The Coalbed Methane Review Board (“CBM Review Board”) is the body that

hears coal operator objections to the drilling location of a coalbed methane well.235

Finally, the Oil and Gas Conservation Commission (“Commission”) has authority to

regulate deep well spacing,

236 and, as relates to deep wells, to approve or deny applications for

new well permits, to establish drilling units or special field rules, and to approve or deny

applications for the pooling of interests in a drilling unit.237

229 Id. § 22-6-2(c)(12).

The article that provides authority to

the Commission supplements and expands upon the statutory requirements set out in article six,

chapter 22 of the Code, which includes the Secretary’s permitting authority.

230 Id. § 22C-8-1(b); see also id. §22-6-1(4) (defining “shallow gas wells” as those gas wells drilled and completed above the uppermost member of the Onondaga Group, with an allowance of 20 feet into the Onondaga for logging and completion operations, but in no event may production be had therefrom). 231 Id. §§ 22C-8-7 to -11. 232 Telephone conversation with W. Va. DEP Staff (May 17, 2011). 233 W. Va. Code § 22C-8-3 (2011). 234 Id. § 22-21-4(b)(2). 235 Id. § 22-21-13. 236 Id. § 22C-9-4(f); see also id. § 22-6-1(g) (defining “deep wells” as those drilled and completed in a formation at or below the top of the uppermost member of the Onondaga Group). 237 Id. § 22C-9-4(h).

41

West Virginia’s general permitting statute238 contains significant notice requirements and

opportunities for objections by affected parties. An applicant seeking to drill an oil and gas well

must notify the record owner(s) of the surface tract where the well is to be located and of any

surface tracts to be utilized for roads or other surface purposes.239 Those surface owners have 15

days to submit comments as to the location or construction of the proposed work.240 In addition,

if the proposed well is underlain by a workable coal seam, owners and operators thereof also are

entitled to a 15-day notice and comment period.241 The Secretary may issue the well work

permit after reviewing any comments received or once the 15-day comment period has passed

with no comment submitted.242

Neither article six of chapter 22 nor the applicable state regulations provide spacing rules

that apply to shallow wells; however, any coal owner comments received regarding the location

of the wells, if not resolved, must be forwarded to the Review Board for hearing.

243

The Review Board will make a recommendation to the Secretary to refuse the permit or

to authorize drilling at the proposed or an alternate location.

At the

Review Board hearing stage, article eight of chapter 22C does contain spacing rules to be applied

in response to coal owner objections to shallow well locations. Thus, initial shallow gas well

permits are not subject to any spacing rules unless a coal owner objects to well location,

prompting the Shallow Gas Well Review Board’s jurisdiction.

244

(1) For all shallow wells with a depth less than [3,000] feet, there shall be a minimum distance of [1,000] feet from the drilling location to the nearest existing well . . .; and

In making its determination, the

Review Board must direct the Secretary to refuse to issue a drilling permit unless the following

spacing provisions are followed:

238 Id. § 22-6-1 et seq. 239 Id. § 22-6-9(a). 240 Id. § 22-6-10(a). 241 Id. § 22-6-17. 242 Id. § 22-6-11. 243 Id. § 22-6-17. 244 Id.

42

(2) For all shallow wells with a depth of [3,000] feet or more, there shall be a minimum distance of [1,500] feet from the drilling location to the nearest existing well . . ., except that where the distance from the drilling location to such nearest existing well is less than [2,000] feet but more than [1,500] feet and a coal seam owner has objected, the gas operator shall have the burden of establishing the need for the drilling location less than [2,000] feet from such nearest existing well. Where the distance from the drilling location proposed by the operator or designated by the board to the nearest existing well . . . is greater than [2,000] feet, distance criterion will not be a ground for objection by a coal seam owner.245

Only after this process has been completed may a party apply for the creation of a

shallow drilling unit. Under the Code, the Review Board’s authority to establish a drilling unit is

conditioned upon the Secretary’s prior refusal to permit drilling within the proposed unit acreage

because of an order of the Review Board.

246 The royalty owners and gas operators within the

drilling unit area must consent to the location therein.247 If unable to agree, the Review Board

will hold a hearing and either issue a written order establishing the drilling unit or dismiss the

application.248

(1) The applicant has proved that the drilling location on the drilling unit has been agreed to by all of the owners of the coal seams underlying such drilling location;

The Review Board may not establish a drilling unit unless it finds the following:

(2) The director has previously refused to issue a drilling permit on one of the tracts comprising the drilling unit because of an order of the board; (3) The drilling unit includes all acreage within the minimum distance limitations provided by section eight of this article, unless the gas operators and royalty owners of any excluded acreage have agreed to such exclusion; and (4) The drilling unit includes a portion of the acreage from under which the well operator intended to produce gas under the drilling permit which was refused.249

The complicated structure of such proceedings may help to explain why the Review Board has

yet to issue a drilling unit order.250

245 Id. § 22C-8-8(a).

246 Id. § 22C-8-10(c). 247 Id. § 22C-8-10(a). 248 Id. § 22C-8-10(b). 249 Id. § 22C-8-10(c).

43

An order to establish a shallow well drilling unit must pool the separately owned interests

in the gas to be produced from the unit.251 Absent a voluntary pooling agreement, the Review

Board will integrate such interests during the initial drilling unit hearing.252 Pooling orders must

be just and equitable and provide for the payment of all drilling and operating costs by all those

who elect to participate therein, including a reasonable charge for supervision and any

outstanding interest owed.253 Each pooling order also must provide working interest owners the

option to either participate or be carried, which option must be exercised within 10 days of the

order’s entry.254 By default, non-participating owners will be carried and receive a statutory one-

eighth royalty.255

Operators seeking coalbed methane well drilling permits undergo a process similar to

shallow gas well operators. Those entitled to notice of a coalbed methane permit application

include all owners and operators of any coal seam to be penetrated within 750 horizontal feet of

any part of the proposed well bore or within 100 vertical feet of the coal seam to be

stimulated.

256 In addition, notice must be given to all owners, lessees, and operators of natural

gas surrounding the well bore and existing formations above the uppermost member of the

Onondaga Group, or less than 6,000 feet deep, whichever is shallower.257

In the absence of a pooling order or an order establishing special field rules issued by the

CBM Review Board, no permit for a coalbed methane well may be given within 100 feet of the

outermost boundary of the coalbed methane tract, leased premises, or unit from which coalbed

methane will be produced or within 1,600 feet of an existing coalbed methane well for which a

permit application is on file, unless the coalbed methane well operator has received written

250 Telephone conversation with W. Va. DEP Staff (May 17, 2011). 251 W. Va. Code § 22C-8-11(a) (2011). 252 Id. § 22C-8-11(c). 253 Id. § 22C-8-11(d). 254 Id. § 22C-8-11(e). 255 Id. 256 Id. §§ 22-21-6(b)(1)-(2). 257 Id. § 22-21-9(a)(4).

44

consent of coal operators of seams to be penetrated or of seams at least 28 inches thick that are

targeted for production.258 Spacing will otherwise be provided by pooling order issued by the

Chief, an order establishing special field rules, or an order issued by the CBM Review Board.259

Consent to well location must be obtained from each owner or operator of any workable

coal seam that is at least 28 inches thick and within 750 horizontal feet of the proposed well

bore, if such coal seam is to be stimulated or within 100 vertical feet of any seam that the

applicant plans to stimulate.

260 A pre-existing contract or lease with the coal owner or operator

for coalbed methane development constitutes waiver of consent requirements.261 Coal owners

may also file written objections to the proposed drilling within 15 days of receipt of notice.262 In

addition to objections based on spacing, coal owners may also comment on the effect of the

proposed well on operations, safety, and ultimate recoverability of their reserves.263 The Chief,

upon receipt of such objections, will forward the application to the Chairman of the CBM

Review Board, who must promptly hold a hearing and provide 15 days’ notice to those who filed

objections or comments, to any person entitled to notice of the application, and to the applicant.

After the hearing, the CBM Review Board will direct the Chief to refuse the permit or to issue it,

either as is or with modifications.264

In developing coalbed methane, the statute allows the operator to apply to the Chief in

order to pool the separately owned interests of a single or multiple tracts to form a drilling unit

for production from one or more wells.

265

258 Id. § 22-21-20.

Prior to the hearing, the CBM Review Board must

provide a conference session between the applicant and all persons entitled to notice who have

259 Id. 260 Id. § 22-21-7. 261 Id. 262 Id. § 22-21-11. 263 Id. §§ 22-21-11, -13(b). 264 Id. § 22-21-13(d). 265 Id. § 22-21-15(a).

45

not yet entered into a voluntary agreement in order to facilitate a voluntary agreement.266 If

agreement is not reached, the CBM Review Board will then hold a hearing, after which time it

will grant or deny the application for a drilling unit.267

Finally, the West Virginia Conservation Commission is the authority governing the

spacing of deep wells.

268 The Commission has the authority to issue or deny permits, to

establish drilling units or special field rules, and to approve or deny applications for the pooling

of interests within a unit.269 The statute directing the Conservation Commission provides an

important policy, which dictates that a conflict between the duty to prevent waste and the duty to

protect correlative rights should be resolved in favor of waste prevention.270

(b) the locating, [and] drilling . . . of any oil or gas well in a manner that causes, or tends to cause, a reduction in the quantity of oil or gas ultimately recoverable from a pool under prudent and proper operations, or that causes or tends to cause unnecessary or excessive surface loss of oil or gas; or

Waste includes:

(c) the drilling of more deep wells than are reasonably required to recover efficiently and economically the maximum amount of oil and gas from a pool.271

An application to establish a drilling unit for a deep well must be preceded by completion

of a discovery well into the formation at issue. Upon application to establish the drilling units,

the Commission provides all interested parties with notice.272 The statute does not require a

hearing; instead, a hearing must be requested within 15 days of receipt of notice. If no request is

submitted, the Commission will proceed to process the application.273 The Commission has 45

days to either grant or deny the order establishing a drilling unit.274

266 Id. § 22-21-17(a).

If a hearing was held, the

order will be final; if no hearing was held, the Commission will issue a proposed order and

267 Id. § 22-21-17(c). 268 Id. § 22C-9-4(f). 269 Id. § 22C-9-4(h). 270 Id. § 22C-9-4(e)–(f). 271 Id. § 22-6-1(t). 272 Id. §§ 22C-9-7(1)-(2). 273 Id. §§ 22C-9-7(a)(1)-(2). 274 Id. § 22C-9-7(a)(9).

46

provide notice to all interested parties of said order. Parties may appeal the order to the full

Commission and request a hearing within 15 days of the order’s entry, after which time, if no

appeal has been filed, the order will become final.275

Drilling unit orders must cover all lands determined or believed to be underlain by a pool

and exclude all other lands.

276 The statute directs the Commission to form units no smaller than

the maximum area which can be drained efficiently and economically by one well277 and no

larger than 160 acres for oil wells or 640 acres for gas wells, with a 10 percent variance if a

larger area is required for efficient and economical drainage.278 If adequate information is not

available to determine the appropriate area, temporary drilling units may be created until such

time that adequate information is obtained. 279 Orders must establish boundary setback

requirements.280

Separately owned interests within a drilling unit may voluntarily integrate their interests

for the development of the unit.

281 In the absence of a voluntary pooling agreement between all

affected parties, and upon application of an interested operator in the unit, the Commission will

provide notice and a hearing,282 at which hearing the Commission will order pooling.283 The

pooling order must contain just and reasonable terms and conditions, and under no circumstances

may drilling be commenced on the tract of an unleased owner without the owner’s written

consent.284

275 Id. § 22C-9-7(a)(11).

Additionally, the order must provide the time and manner in which all owners of

working interest in the pooled tracts may elect to participate therein, along with payment of all

276 Id. § 22C-9-7(a)(4). 277 Id. § 22C-9-7(a)(5). 278 Id. § 22C-9-7(a)(7). 279 Id. § 22C-9-7(a)(5). 280 Id. § 22C-9-7(a)(6). 281 Id. § 22C-9-7(b)(1). 282 Id. 283 Id. § 22C-9-7(b)(1). 284 Id. Valuable consideration must also be given in exchange for the consent and an easement therefor. Id. § 22C-9-8(b)(4).

47

reasonable costs of operating and drilling, including a reasonable charge for supervision and for

interest on past-due accounts by those who elect to participate.285

The Commission lastly has authority over secondary recovery of oil and may provide

notice and a hearing to all interested parties upon application of an operator in a pool that is

productive of oil to provide for unit operation of the pool in connection with secondary recovery

of oil and unitizing the separately owned tracts in the pool.

286 Operators must have approval of

at least three-fourths of all the working interest and three-fourths of all the royalty owners within

the proposed unit prior to the order being granted.287

As the foregoing shows, West Virginia lacks an adequate structure to provide for

statutory pooling in connection with Marcellus shale development as those wells are classified as

shallow wells under the statute. The statute that covers shallow gas wells is primarily concerned

with resolving conflicts between well operators and coal operators and fails to address statutory

integration, the establishment of appropriate units based on the affected reservoir, or the

fundamental policy goals of correlative rights protection and waste prevention. The deep well

statutes are somewhat more comprehensive, but do not include common provisions such as

minimum operator controls or clear and detailed resolution of the rights of non-consenting

parties, nor does the statute address spacing rules specifically applicable to horizontal wells.

In summary, the use of New York’s and Ohio’s Conservation Statutes for large scale

horizontal drilling in the Marcellus and Utica Shales is still untested as to whether further

modifications are needed, or if such statutes will be sufficient to promote such development. On

the other hand, Maryland, Pennsylvania, and West Virginia all need statutes to address horizontal

shale development in the Marcellus formation, and because of the varying considerations in each

285 Id. § 22C-9-7(b)(3). 286 Id. § 22C-9-8(a). 287 Id.

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state, such as coal interests, severed interests, and shallow well operators, such statutes should be

uniquely tailored to each particular state.

§ 01.05. Recommendations for Statutory Improvements.

Any state conservation statute and implementation thereof needs to address factors that

are unique to horizontal development in Appalachia. Statutory pooling for horizontal Marcellus

and Utica wells will undoubtedly enhance a producer’s ability to efficiently recover oil and gas

from shale deposits. However, a proper regulatory framework should allow this statutory

integration alongside other provisions to ensure that all the various interests, i.e., oil and gas,

coal, and surface owners, are appropriately balanced by the new legal structure. Such

supplemental provisions must consider the unique nature of horizontal methods and should

address the measures discussed below.

[1] — Spacing Rules Tailored to Horizontal Wells. Unlike traditional vertical drilling, common horizontal industry practice—based on

technology and economies of scale—is to drill multiple horizontal wells together from a single

well pad. Further, one horizontal well may possess multiple horizontal side laterals to be drilled

into the same formation. However, increased well density, i.e., multiple wells spaced and drilled

on a well pad, may adversely impact the development of coal reserves because of the potential

inability of a coal operator to mine through the vertical sections of such wells. Thus, any statute

must address the maximum surface acreage to be utilized for the vertical sections of the

horizontal well locations (or “well cluster” as used in Pennsylvania’s recently enacted

Amendment discussed above) on any such multi-well pad; provide adequate minimum spacing

distances between the well cluster on one multi-well pad and the well cluster on any other multi-

well pad; and restrict or limit the drilling of individual conventional vertical wells between such

well clusters in order to both protect coal resources and promote horizontal well drilling.

Horizontal drilling allows significantly less surface disturbance within the encompassed

unit area because of the use of multi-well pads. A typical Marcellus multi-well pad is

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approximately five acres in disturbed surface size.288

Unlike a conventional vertical well, a horizontal shale well actually drills through the

formation, and its drainage is a limited area beyond the completion locations in the horizontal

bore. Furthermore, because of the irregular size of tracts involved in Appalachia and because

numerous tracts can be penetrated by the horizontal bore in Appalachia, any effective statute for

horizontal shale wells should include not only a combining of drained properties for the sharing

of production but also the right to drill through properties. This right to drill through properties

is somewhat different from the traditional use of conservation statutes that were originally

enacted to address drainage from an off-tract well in addition to addressing over-drilling. Also,

because of the continuing developments in horizontal drilling and completion technology, more

and more properties may be impacted by each horizontal well. Furthermore, an unleased tract in

the middle of a horizontal wellbore design has potentially greater negative impact as it could

affect rational development and deprive not only the oil and gas owner and developer of royalties

and income but also deprive a jurisdiction of significant revenues from taxes and other direct and

Utilizing this limited surface area for well

operations, an operator can produce more natural gas as compared to development by vertical

wells which would require many more conventional vertical well locations and therefore much

more surface disturbance. Thus, promoting development of horizontal multi-well pads and

providing spacing regulations to govern minimum distances between such well clusters better

serves surface owners, as well as environmental and land use interests, because on a macro level

there should be much less surface disturbance. In summary, restrictions on the maximum

acreage area associated with each well cluster, the minimum distance between well clusters, and

the location of conventional vertical wells between well clusters fosters many public policies,

while protecting the interests of surface owners and the coal owners and operators.

288 See, e.g., “Why Multiple Horizontal Wells from Centralized Well Pads Should Be Used for the Marcellus Shale,” W. Va. Surface Owners’ Rights Org., http://www.wvsoro.org/resources/marcellus/horiz_drilling.html (last visited July 10, 2011).

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indirect economic benefits associated with such well development. Additionally, there is greater

potential for stranded unleased tracts that will never be drilled or developed if pooling and

unitization principles are not adopted. Any statute should therefore address the right to penetrate

or drill through tracts.

[2] — Notice and Approval Requirements. The need for statutory pooling in Maryland, West Virginia, and Pennsylvania is partially

due to the severed land and mineral ownership, as well as the irregularly-shaped tracts in the

region. To ensure that the rights of surface, coal, and oil and gas owners are sufficiently

protected, the statutes should provide specific notice requirements which afford each owner

potentially affected by an application for a pooling order notice and an opportunity to voice

comments and concerns, e.g., surface owners could be impacted by use of their surface; coal

owners could be impacted by increased well density in the unit, and oil and gas owners could be

impacted by being statutorily pooled. In addition, such notice and a clear structure of what

factors should be considered by the reviewing body when addressing such comments are needed

in order to insure that not only are non-oil and gas owners’ rights protected, but that the oil and

gas owners’ rights are protected and that public policy to develop natural resources is fostered.

Additionally, a clear structure setting forth the election rights 289 will offer a currently non-

consenting oil and gas owner a final chance to negotiate with the applicant for consensual

pooling terms. The notice requirements currently in place in West Virginia for well work

applications 290

Further, the statute should subject any horizontal pooling order to minimum operator

control thresholds based on widely accepted standards found in other states. Currently, these

thresholds of required consent across the various jurisdictions range from 50 percent of proposed

offer an example well-suited to transition to applications for pooling and

unitization orders.

289 See text supra §§ 01.03. [2], 01.05. [3] for further discussion of election rights. 290 See W. Va. Code § 22-6-1, et seq. (2010).

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pooled interests to 75 percent or 80 percent consent by relevant owners thereof on a net acreage

basis.291 Most states require between 63 percent and 75 percent consent from working interest

and/or royalty owners.292 A minimum operator control threshold requiring 75 percent approval

on a net acreage basis also provides substantial protection to owners of unleased tracts and

smaller independent producers who may have acreage within a proposed unit.293

[3] — Allocation of Costs and Election Rights.

Another important aspect of comprehensive pooling statutes is the statutory presence of

clear election rights for non-consenting owners who are subject to a pooling or unitization order.

When issued by the authorized agency, these orders should provide general terms as to how such

non-consenting mineral owners are to be treated. As this article shows, there are many ways to

structure a statutory election scheme. The most comprehensive of these provides legislative

guidance in how these rights should be framed, but also allows agency discretion to set particular

terms based on the facts presented at the public hearing.

Severed ownership in Appalachia, coupled with the substantial initial and continuing

costs of Marcellus well production, suggests that non-consenting owners should be able to

transfer their interests to the operator on reasonable terms or be carried with a marginal risk

compensation fee. For example, as total compensation for the expense and inherent risks in

commencing drilling operations, a non-consenting owner may owe the operator 200 percent of

the unpaid portion of that owner’s share of drilling and operating costs. Notably, this payment

would come solely from such owner’s share of production from the unit and be withheld by the

operator exclusive of a royalty guaranteed by statute. 294

291 See “National Survey,” for further discussion of each state’s minimum control requirements.

This compensation scheme is

292 See text supra § 01.03. [2] for further discussion. 293 In West Virginia, this minimum threshold should also apply to any tracts owned by cotenants and to the extent 75 percent of such leased and unleased cotenants approve, such tract should be counted toward such approval threshold. This will prevent a cotenant with a small undivided interest from exercising a veto over the rights of all other cotenants who freely contract for or approve such pooling and unitization. 294 This proposed risk compensation fee for horizontal shallow wells would mirror those already in place in West Virginia for deep wells. See W. Va. Code § 22C-9-11(b)(6) (2011) (establishing that a deep well operator who obtains a pooling order is entitled to production of a carried non-participating owner “until the market value of such

52

significantly more generous to non-consenting owners than the law in many states, 295

[4] — Surface Use.

while

retaining a nominal fee to fairly protect horizontal well operators and incentivize smaller lessees

and unleased owners to negotiate with operators and feel secure in doing so.

In addition to the protections afforded to an unleased fee simple owner by adequate

notice, approval, and election schemes, a revised statute tailored to horizontal wells must

consider appropriate use of the surface with respect to unleased tracts that will be statutorily

pooled in a unit. For example, the horizontal pooling statute could require consent from the

owner of the surface overlying an unleased mineral owner before the unit operator may conduct

surface operations on said unleased tract. Although the owner of the surface overlying a

statutorily pooled unleased mineral owner holding a minority interest in the pooled acreage

should not able to unilaterally halt the unit operations of the total unit, traditional standards of

equity suggest that he should have some level of control over whether a horizontal well pad is

located on the surface overlying unleased acreage, which was statutorily pooled. Likewise,

public policy interests in some circumstances may require that the unit operator be granted

reasonable access to and from operation locations, and provisions could be set forth granting

access across such unleased tract. When the surface overlying a tract is owned by a number of

cotenants, a statutory requirement could be placed on the operator to secure the voluntary

agreement from a supermajority of the undivided interests before surface operations would be

permitted on the tract.

§ 01.06. Conclusion.

Throughout history, the Appalachian region has supplied the often-overlooked foundation

for America’s global leadership in energy production and technological advancement. The coal

industry in our area has traditionally provided the American public the irreplaceable service of non-participating owner's share of the production, exclusive of such royalty, overriding royalty or one-eighth of production, equals double the share of such costs payable by or charged to the interest of such nonparticipating owner”). 295 See “National Survey,” for further discussion of each state’s treatment of non-consenting owners or operators.

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affordable and reliable energy. Today, the vast natural reserves of the Marcellus Shale place

Maryland, West Virginia, and Pennsylvania at the precipice of unprecedented economic growth,

with the potential to reshape our nation’s energy portfolio, which is crucial to re-capturing fiscal

stability here and abroad. Further, modern innovation of horizontal drilling methods enables

production from these reserves with efficiency never-before imagined. The wealth of oil and

natural gas underlying our region demands that industrial and independent producers be

supported by a comprehensive regulatory framework to foster safe and efficient development of

these resources.

As this paper shows, there is substantial variety among the states in procedural treatment

of oil and gas production under conservation laws. However, the inclusion of statutory pooling

and unitization is the common trend underlying those regulatory schemes which are well-

developed and most sensitive to the various interests involved. In Appalachia, a cohesive

regulatory framework must protect the rights of surface, coal, and oil and gas owners; address

potential environmental concerns by promoting best industry practices and public education; and

capitalize on the unique natural resources of the region. To accomplish these goals, Maryland,

West Virginia, and Pennsylvania must advance their respective legal structures to incorporate

statutory pooling for all horizontal shale wells. It is inadequate to add a statutory pooling

provision for horizontal shallow wells to existing law; rather a sound, well-developed system for

pooling and unitization of horizontal wells will require a comprehensive approach.

The recommendations above are not intended to provide an exhaustive list of all

important aspects of this horizontal shale well regulation. However, such provisions will afford

benefit to landowners, successfully balance the interests of the coal and natural gas industries so

vital to local economies, and prompt more environmentally-responsible well location and

operation. While the authorized state agency should maintain some level of discretion to

determine proper details for each situation, the legislature must empower these bodies to use

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statutory integration to pool ownership interests so that production will minimize surface use,

protect coal resources, enhance oil and gas recovery, and provide otherwise unattainable

economic benefit to citizens, owners, and well operators.

This article’s summary of the various pooling strategies found throughout the nation

serves more than an academic exercise or guide for industry actors. It aims to clearly convey

that pooling and unitization are developed, long-standing legal doctrines formed and adopted by

the overwhelming majority of states to encourage the most efficient and cost-effective means of

recovering oil and gas. Further, the constitutional validity of these regulatory mechanisms is

beyond dispute. When done properly, these methods will spur economic growth and be a

catalyst that places Maryland, West Virginia, and Pennsylvania at the forefront of sustainable

energy production through the Twenty-First Century.

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Appendix

56

Appendix

Notwithstanding the effects of federal environmental legislation, oil and gas production

maintains its traditional place within the purview of state regulation. Many jurisdictions endorse

common goals and procedures in developing conservation mechanisms, yet each state addresses

oil and gas regulation in light of its particular social and economic aims. The logical variety

among states with regard to attainable intrastate resources and other localized interests thus

creates a hodgepodge of regulatory frameworks when considered on a national scale.

This Appendix offers a detailed summary of each state’s oil and gas conservation

regulations, with a focus toward pooling and unitization schemes. While some conservation

programs are significantly more in-depth than others, this Appendix provides a state-by-state

analysis to identify each state’s regulatory framework, procedural requirements imposed for

pooling and unitization, and notable areas of the law that impact their implementation. The

authors hope that the following serves as a reliable tool for industry members, legal

professionals, and anyone seeking to learn more about oil and gas conservation in their home or

other states.

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§ 02.01 Analysis of Alabama Regulatory Framework.

[1] – Name of the Governing Body.

The State Oil and Gas Board (“Board”) is the regulatory body created by the legislature

with specific authority to regulate pooling in the state.296

[2] – Membership on the Governing Body.

The Board consists of three members with staggered terms. The Governor appoints the

members, and for the initial appointments, one member is elected for a term of two years, one for

a term of four years, and one for a term of six years. At the expiration of the initial terms, each

newly appointed member will thereafter serve six-year terms. In the event of a vacancy, the

Governor must appoint a new member to fill the unexpired term of the previous member. All of

the members of the Commission must be residents of Alabama and must be a qualified voter in

that state. Each member is eligible for reappointment at the Governor’s discretion. Also, each

member must qualify by taking an oath of office and must hold his office until his successor is

appointed and qualified.297 Members who serve nineteen or more years continuously become

nonvoting members emeritus of the Board, which receive no compensation.298 Otherwise, each

member receives an annual compensation of $3,600.00, plus entitlement to a travel and office

expense allowance of $500.00 per month, which allowance is paid by the oil and gas fund.299

The Board is required to elect a chairman from its membership and is required to meet or

hold hearings at times and places found by the Board to be necessary to carry out its duties.

300

296 Ala. Code § 9-17-3(a) (2010).

297 Id. § 9-17-3(a). 298 Id. § 9-17-3(b). 299 Id. § 9-17-3(a). 300 Id.

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Two members of the Board constitute a quorum, but two affirmative votes are required for the

adoption or promulgation of any rule, regulation, or order of the Board.301

Additionally, the state geologist is, ex officio, the state oil and gas supervisor

(“Supervisor”). The Supervisor is given the duty to enforce this article and all rules, regulations,

and orders promulgated by the Board. Also, the Supervisor is, ex officio, secretary of the Board

and will keep all the Board’s minutes and records.

302 The Supervisor, with the Board’s

concurrence, has the authority and duty to employ all personnel necessary to carry out this

article’s provisions.303

[3] – Scope of Authority.

The Board has jurisdiction and authority “over all persons and property necessary to

administer and enforce effectively the provisions of this article and all other articles relating to

the conservation of oil and gas.”304 The article declares as its public policy the prevention of

waste of oil and gas and protection of correlative rights.305

(a) the inefficient, excessive, or improper use or dissipation of reservoir energy and the locating, spacing, drilling, equipping, operating, or producing of any oil or gas well or wells in a manner which results or tends to result in reducing the quantity of oil or gas ultimately to be recovered from any pool in this state;

“Waste” is defined as “‘physical

waste’ as that term is generally understood in the oil and gas industry,” and includes the

following:

(b) the inefficient storing of oil and the locating space, drilling, equipping, operating, or producing of any oil or gas well or wells in a manner causing or tending to cause unnecessary or excessive surface loss or destruction of oil or gas; (c) abuse of the correlative rights and opportunities of each owner of oil and gas in a common reservoir due to nonuniform,

301 Id. § 9-17-4. 302 Id. § 9-17-9. 303 Id. § 9-17-10(a). 304 Id. § 9-17-6(a). 305 Id. § 9-17-2.

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disproportionate and unratable withdrawals causing undue drainage between tracts of land; . . . (g) underground waste however caused and whether or not defined; [and] . . . (l) production of gas in excess of reasonable market demand.306

The Board has the authority and duty to determine whether or not waste exists or is imminent

within its jurisdiction,307 as this article explicitly prohibits waste.308

(1) collect data; (2) make investigation and inspection; (3) examine properties, leases, papers, books, and records, including drilling records, logs, and other geological and geophysical data; (4) examine, check, test, and gauge oil and gas wells, tanks, plants, processing facilities, structures, natural gas pipelines and gathering lines, and storage and transportation equipment and facilities, and other modes of transportation; (5) hold hearings; (6) appoint a hearing officer for the purpose of conducting public hearings on behalf of the board and making recommendations to the board; (7) require the keeping of records and the making of reports; [and] (8) take action as may be reasonably necessary to enforce the article.

In meeting that goal, the

Board has the authority to do the following:

309

The Board has authority to create reasonable rules, regulations, and orders that may be

necessary in the administration and enforcement of this article, after proper hearing and notice.310

(4) to require reports showing the location of wells and to require the filing of logs and drilling records and the lodgment in the office of the State Oil and Gas Supervisor of typical drill cutting or cores, if cores are taken, within six months from the time of any well’s completion; . . .

Such rules, regulations, and orders may be made for the following purposes, among others:

(6) to prevent wells from being drilled, operated, or produced in a way that causes injury to neighboring leases or property; . . . (11) to identify the ownership of all oil and gas wells, producing leases, tanks, plants, processing facilities, structures, natural gas

306 Id. § 9-17-1(19)(a)–(c), (g), (l). 307 Id. § 9-17-6(a). 308 Id. § 9-17-11. 309 Id. § 9-17-6(b)(1)–(8). 310 Id. § 9-17-6(c).

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pipelines and gathering lines and storage and transportation equipment and facilities; . . . (14) to establish drilling units, to determine the spacing of wells, to establish oil and gas fields for each oil and gas pool, to establish the spacing of wells for each pool, and to establish drainage or production units; (15) to limit and prorate the production of oil or gas or both from any pool or field for the prevention of waste as defined herein; [and] . . . (17) to prevent, so far as is practical, reasonably avoidable drainage from each developed unit which is not equalized by counterdrainage.311

The Rules and Regulations Governing the Conservation of Oil and Gas in Alabama can be found

in the Alabama Administrative Code.312

[4] – Process for Pooling.

The Alabama Administrative Code provides rules and regulations governing the

permitting of onshore wells,313 submerged offshore wells,314 coalbed methane gas wells,315 and

other injection and storage wells.316 The Administrative Code also includes rules and regulations

governing forced integration or forced pooling.317

Integration or pooling of interests or tracts of land may be appropriate when any mineral

interest deriving from two or more separately owned tracts of land exist within an established or

a proposed drilling or production unit or when there are separately owned interests in all or a part

of an established unit, or both.

318

311 Id. § 9-17-6(c)(1)–(18).

Pooling may be voluntary, such as when owners of interests

agree to pool and develop their land as a unit. Also, under the Board’s authority to prevent waste

312 Ala. Admin. Code r. 400-1-1-.01 (2010). 313 Id. 314 Id. at r. 400-2-1-.01. 315 Id. r. 400-3-1-.01. 316 Id. rr. 400-4-1-.01, 400-5-1-.01, 400-6-1-.01. 317 Id. r. 400-7-1-.01. 318 Ala. Code § 9-17-13(a) (2010).

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and to avoid drilling unnecessary wells, the Board may require non-consenting owners to pool

their interests and to develop the land as a unit.319

The Board, of its own volition or upon the petition of any interested person, must hold a

hearing to determine the need for the operation as a unit of an entire field or of any pool or pools

or of any portion of a pool or combination thereof within a field for the production of oil or

gas.

320 A petitioner other than the Board must comply with Rule 400-7-1-.11 relating to

notice,321 which requires the petitioner to file a proposed notice for publication along with a

written request for the Supervisor to approve publication of the notice as submitted or with

modifications.322 After the Supervisor approves the notice for publication, the petitioner will

publish at his or her own expense, and must also obtain proof of publication to be filed with the

Board at least three days before the hearing.323 The notice must have been published in the

appropriate newspaper at least ten days before the hearing.324

(a) Petitions for Exceptional Locations; (b) Petitions to Establish Spacing Units; (c) Petitions to Amend or Reform Established Spacing Units; (d) Petitions to Establish or Amend Allowables; (e) Petitions for Forced Pooling; (f) Petitions for Compulsory Unitization; (g) Petitions to Establish or Amend Special Field Rules; and (h) [when notice is otherwise required by the Supervisor].

Additionally, the petitioner must

give notice by first class mail to particular individuals in the following instances:

325

Such notice must be mailed at least fifteen days before the hearing date after a reasonably

diligent effort to find the correct mailing addresses.326

(a) The name of the petitioner;

The notice should include the following:

319 Id. § 9-17-13(a). 320 Id. § 9-17-81. 321 Ala. Admin. Code r. 400-7-1-.05(2) (2010). 322 Id. r. 400-7-1-.11(1). 323 Id. 324 Id. r. 400-7-1-.11(3). 325 Id. r. 400-7-1-.11(4)(a)–(h). 326 Id. r. 400-7-1-.11(4)(i)(1)–(2).

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(b) A statement of the time, place, and nature of the hearing; (c) A statement of the legal authority and jurisdiction under which

the hearing is to be held; (d) A reference to the particular sections of the statutes and rules

involved; (e) A short and plain statement of the matters asserted; [and] (f) An accurate description of the lands affected by the petition.327

In addition to the notice requirements, the petitioner must pay the filing fee, to be sent to

the State Treasurer of Alabama, in the amount of $150.00.328 Finally, the petitioner’s written

petition for a hearing must be filed with the Board, together with four copies, at least twenty-five

days before the hearing on the petition.329 Five copies of all exhibits used as evidence by

petitioner in the hearing must be submitted at least twenty days before the hearing, although all

other parties only need to submit their five copies at least two work days before the hearing.330

The Rules contain detailed requirements for the information to be contained in the

petition. Broadly, that information includes the name of petitioner, relief sought, property

involved, wells affected, and signature of the attorney or party attesting to the veracity of the

information contained therein.

331

If the Board finds that: (1) unit operation is reasonably necessary; (2) the proposed plan

for unit operations will increase the ultimate recovery of oil or gas by enhanced recovery

methods; or (3) the estimated additional cost incident to conducting such operation will not

exceed the value of the estimated additional recovery of oil and gas, the Board shall issue an

order requiring the unit operation.

332

327 Id. r. 400-7-1-.11(5).

Factors for the Board to consider when deciding whether

an integration or pooling order is reasonably necessary include the prevention of waste, the

328 Id. r. 400-7-1-.11(2). 329 Id. r. 400-7-1-.05(2). 330 Id. r. 400-7-1-.05(3). 331 Id. rr. 400-7-1-.06(1)–(2), 400-7-1-.07. 332 Ala. Code § 9-17-82 (2010).

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increase in the ultimate recovery of oil or gas, the avoidance of drilling unnecessary wells, the

allowance of drilling wells at optimum geologic locations, and the protection of correlative

rights.333

The Board will take prompt action as it considers appropriate concerning the subject

matter. Then, it will enter a formal written order, executed by the appropriate number of

members and attested by the Secretary.

334

Orders requiring pooling or integration within a drilling unit are different from orders

requiring pool-wide or field-wide unit operations.

335 A drilling unit is “[a]n administrative unit

established by the Board to provide and allow for the drilling of a well. Prior to the

establishment of a field and drainage or production unit within the field, the Board may establish

a drilling unit to allow for the drilling of a well in search of oil and gas.”336

(1) That the actual and reasonable costs of developing and operating the pooled integrated unit (including a reasonable charge for supervision) and, if applicable, a risk compensation fee . . . shall be charged to the separately owned tracts or interests in the unit in the same proportion that such tracts or interests share in production from the unit.

Those orders must

include the following information:

(2) That such costs and fee (if any) chargeable to a tract or interest shall be paid by the person or persons not entitled to share in production free of development and operating costs and who, in the absence of the pooling or integration order, would be responsible for the expense of developing and operating the tract or interest and that person’s or persons’ interest in the separately owned tract or interest shall be primarily responsible therefor. (3) That, if any non-consenting owner shall fail or refuse to pay the costs and/or fee (if any) chargeable to his or her tract or interest, the cost and/or fee shall be recoverable solely out of the production allocable to the tract or interest, provided, however, that this limitation shall not apply to a non-consenting owner who has

333 Id. §§ 9-17-81, 82. 334 Ala. Admin. Code r. 400-7-1-.23 (2010). 335 Ala. Code § 9-17-13(c) (2010). 336 Id. § 9-17-1(4).

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furnished the operator with a notarized statement agreeing to pay his or her proportionate share of the drilling and completion costs for a unit well as hereinafter provided. (4) That, when the full amount of any charge made against a separately owned tract or interest is not paid when due by the [responsible party], as provided above, then 13/16ths (or if said tract or interest is leased, the working interest fraction or percent if it is greater) of the oil and gas production allocated to the separately owned tract or interest may be appropriated by the operator and marketed and sold for the payment of the charge, but that a 3/16ths part (or the actual landowner royalty if it is less) of the unit production allocated to each separately owned tract or interest shall in all events be regarded as royalty and shall . . . be distributed to and among, or the proceeds thereof paid to, the person or persons owning royalty or unleased mineral interests . . . free and clear of the development and operating costs and of any risk compensation fee and free and clear of any lien for the payment of the costs and fee. (5) That any person owning any overriding royalty, oil and gas payment, royalty in excess of 3/16ths of production, or other interests, who is not primarily responsible for payment of the development and operating costs or risk compensation fee (if any), shall, to the extent of any payment or deduction therefor from his or her share, be subrogated to all the rights of the operator with respect to the interest or interests primarily responsible for the payment. . . .337

The orders must also contain provision regarding payment by non-consenting owners, allowing

them to agree to pay their share or not based on their signing a notarized statement.338

Unless the order specifies otherwise or the parties otherwise agree, production from any

unit formed by an order will be allocated to each separately-owned tract or interest in the

proportion that the acreage of each tract or unit bears to the total unit acreage. Allocation thus

determined is considered the just and reasonable allocation to give each owner his or her just and

equitable share of production. Also, no order will subject a non-consenting owner who is subject

337 Id. § 9-17-13(c)(1)–(5). 338 Id. § 9-17-13(c)(5).

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to a risk compensation fee to personable liability for damages stemming from any related

negligence or tort.339

Orders requiring unit operation for field-wide and pool-wide units are governed by

Section 9-17-83. They must be fair and reasonable under all circumstances, must protect the

rights of interested parties, and must include the following:

(1) A description of the area embraced, termed the unit area, and a description of the pool or pools or portions thereof affected and lying within the unit area, termed the unit pool; (2) A statement of the nature of the operations contemplated; (3) An allocation among the separately owned interested . . . of all the oil or gas, or both, produced from the unit pool within the unit area, and not required in the conduct of such operations or unavoidably lost, such allocation to be based on the relative contribution which each such tract or interest is expected to make during the course of such operation, to the total production of oil or gas, or both, so allocated; (4) A provision for adjustment among the owners of the unit area . . . of their respective investment in wells, . . . equipment, . . . and services of value attributable to the unit operations. . . . The adjustments provided for in this subdivision may be treated separately and handled by agreements separate from the unitization agreement; (5) A provision that the costs and expenses of unit operation, including investment, past and prospective be charged to the separately owned tracts or interests in the same proportions that such tracts or interests share in unit production, as provided in subdivision (3) of this section. . . . .; (6) The designation of, or a provision for the selection of, a unit operator. . . .; (7) A provision that when [a responsible party does not pay its costs and expenses that the owner may appropriate 7/8ths of its oil and gas production allocation to such payment, while the remaining 1/8th is considered to be royalty to be paid to the royalty owners free and clear of unit expenses]; and (8) The time the unit operation shall become effective and the manner in which and the circumstances under which the unit operation will terminate.340

339 Id.

340 Id. § 9-17-83.

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Orders requiring unit operations become effective only after the above provisions are

signed or ratified in writing by the owners of not less than 66 2/3 percent in interest as costs are

shared and revenue is distributed pursuant to Section 9-17-83(3). If the appropriate percentage

of interest-holders has not ratified an agreement within six months of the order date, the order

will be revoked automatically.341

Additionally, the Board may amend orders to add to unit operations pools or portions

thereof not included and may extend the unit area as required. In such a case, the Board will

reallocate production to include the correct proportion of the new area.

342 Such orders do not

become operative until the requisite 66 2/3 percent of the new ownership interest has ratified the

extension, with a six-month deadline for doing so.343 Costs and expenses will be governed as

provided in Section 9-17-83(5).344

[5] – Matters Covered.

[a] Number of Wells.

The Board has the authority to establish drainage or production units, the maximum area

that may be efficiently and economically drained by one well. The Board may later alter the

number of wells to be drilled and produced within a particular drainage or production unit in the

field after a party has demonstrated the necessity of the amendment based on geologic and

engineering evidence.345

[b] Spacing of Wells.

341 Id. § 9-17-84. 342 Id. § 9-17-85(a). 343 Id. § 9-17-85(b)(2). 344 Id. § 9-17-85(c). 345 Id. § 9-17-12(b).

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The Board has the authority to establish spacing requirements as part of special field rules

governing each established field.346 A field is “the general area in a pool which may be drained

efficiently and economically by one well.”347 Once the Board has established a field, it will

establish special field rules for that field. Those rules establish drainage or production units, also

called production units, for the specific field. A production unit is “the area in a pool that may

be drained efficiently and economically by one well.”348 Before a field is established and the

drainage or production units within the field are established, an operator may drill a well on a

drilling unit. A drilling unit is “an administrative unit established by the Board to provide and

allow for the drilling of a well.”349

For wells drilled that are not governed by field rules, likely because the field had not yet

been established and so the well was drilled on a drilling unit instead, the Board has set default

spacing provisions.

350 Those provisions have allowable exceptions and maximum limits. 351

After the field is established, the special field rules will apply to govern spacing.352

[c] Authority to Integrate Production.

In the event the owners have not agreed to integrate or pool, and as a means to prevent

waste and the drilling of unnecessary wells, the Board may require the owners to integrate or

pool so to develop their interests as a drilling or production unit.353

[d] Allocation of Production and Costs.

The Alabama Code requires that allocation of production and costs be provided for in

each pooling or unitization order. For unitization of interests within a drilling unit, the Board 346 Ala. Admin. Code r. 400-1-2-.02(1) (2010). 347 Ala. Code § 9-17-1(5) (2010). 348 Ala. Admin. Code r. 400-1-2-.02(1)–(2) (2010). 349 Id. r. 400-1-2-.02(1). 350 Id. r. 400-1-2-.02(2). 351 Ala. Code § 9-17-12(b) (2010). 352 Ala. Admin. Code r. 400-1-2-.02(1) (2010). 353 Ala. Code § 9-17-13(a) (2010).

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should refer to the guidelines in section 9-17-13(c), which states that actual and reasonable costs

and a risk compensation fee is charged to the separately owned tracts or interests in the unit in

the same proportion that such tracts or interests share in production.354 Each tract’s share of

production is such that it would afford to each interest-owner his or her just and equitable

share,355 equal to the amount recoverable in the developed area of the tract or interest in the tract

that bears to the amount recoverable in the total developed area of the pool. 356 When

determining the allocation for field-wide or pool-wide units, the Board should refer to the

guidelines in § 9-17-83 in promulgating its order, which requires that the order provide a plan of

allocation based on the relative contribution that those tracts or interests expect to make during

the course of the operations to the total production of oil or gas.357 Costs are to be allocated in

the same proportion as production.358

[e] Royalty Distribution.

The Code provides for two different levels of royalty payment.359 As for unitization of

interests within a drilling unit, governed by Section 9-17-13(c)(4), unless the actual landowner

royalty is less, 3/16ths of the unit production allocated to each separately owned tract or interest

will in all events be regarded as royalty.360 As for pool-wide or field-wide units, governed by

Section 9-17-83(4), one-eight of the unit production allocated to each separately owned tract or

interest will in all events be regarded as royalty.361

[f] Agreements Not Restraint of Trade.

Those amounts will be distributed to and

among, or the proceeds thereof paid to, the person or persons owning the respective royalties.

354 Id. § 9-17-13(c)(1). 355 Id. § 9-17-13(c). 356 Id. § 9-17-12(d). 357 Id. § 9-17-83(3). 358 Id. § 9-17-83(5). 359 Id. §§ 9-17-13(c). 360 Id. § 9-17-13(c)(4). 361 Id. § 9-17-83(4).

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When agreements for pooling interests in drilling units or for unit operations are

approved by the Board, they are authorized and will not be held or construed to violate state

statutes relating to trusts, monopolies, or contracts and combinations in restraint of trade.362

[g] Limitation on Production.

The Board has the authority, as part of its special field rules that apply to each established

field, to limit and prorate the production of oil or gas, or both, from any pool or field for the

prevention of waste. 363 When the Board limits the total amount of oil or gas that may be

produced in the state, it should allocate or distribute the allowable so fixed among all the

separate pools in the state.364 Likewise, when the Board limits the total amount of oil or gas that

may be produced by any pool to an amount less than it could otherwise produce, the Board

should prorate the allowable among the producers in the pool, subject to reasonable requirements

for prevention of waste.365

§ 02.02 Types of Alabama Pooling Statutes.

[1] – Mineral Distinctions.

The Alabama Oil and Gas Conservation and Unitization Statute (hereinafter, the Statute)

provides a limited number of mineral distinctions. 366 It states that gas is “all natural gas,

including casinghead gas, and all other hydrocarbons not defined as oil in subdivision (9) of this

section.”367 The Statute defines oil as “crude petroleum oil and other hydrocarbons, regardless

of gravity, which are produced at the well in liquid form by ordinary production methods and

which are not the result of a condensation of gas after it leaves the pool.”368

362 Id. § 9-17-14(e).

363 Id. § 9-17-6(b)(15). 364 Id. § 9-17-14(a). 365 Id. § 9-17-14(b). 366 Id. § 9-17-1. 367 Id. § 9-17-1(6). 368 Id. § 9-17-1(10).

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The Rules and Regulations Governing the Conservation of Oil and Gas in Alabama

provide some new and altered definitions. In the “Rules and Regulations of the State Oil and

Gas Board of Alabama Governing Onshore Land Operations,” which govern onshore land

operations but do not apply to coalbed methane gas operations,369 a different definition of gas is

given: “all natural gas, including casinghead gas and occluded natural gas found in coalbeds,

and all other liquid or gaseous hydrocarbons not defined as oil.”370

The “Rules and Regulations of the State Oil and Gas Board of Alabama Governing

Coalbed Methane Gas Operations,”

371 which govern coalbed methane gas operations, contain the

same definition of gas as in the onshore rules, but define additional terms. The Coalbed Methane

rules define coalbed methane gas as “occluded natural gas found in coalbeds” 372 ; coalbed

methane gas field as “the area defined by the operator and approved by the Board which is

underlain or appears to be underlain by at least one coalbed, capable of producing occluded

natural gas”373; and coalbed methane gas well as “a well capable of producing occluded natural

gas from a coalbed or coalbeds.”374

[2] – Split by Depth.

Both the Onshore Land Operation and the Coalbed Methane

Gas Operation rules and regulations state that the Rules and Regulations of the State Oil and Gas

Board of Alabama Governing Practice and Procedure and Forced Integration or Forced Pooling

apply in addition to the rules set forth within their sections.

Alabama law does not appear to distinguish based on drilling depth.

[3] – Spacing Rules and Size.

369 Ala. Admin. Code r. 400-1-1-.01 (2010). 370 Id. r. 400-1-1-.05(30). 371 Id. r. 400-3-1-.01. 372 Id. r. 400-3-1-.05(12). 373 Id. r. 400-3-1-.05(13). 374 Id. r. 400-3-1-.05(14).

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The Board has the authority to establish special field rules for each pool that set forth,

among other things, the drainage or production units for the field and production allowables for

each drainage or production unit. A drainage or production unit, also referred to as a “production

unit,” is “the maximum area which may be efficiently and economically drained by one well.”375

For those wells drilled that will not be governed by special field rules, pre-determined

spacing provisions are applicable.

376 The Onshore Lands Operations rules and regulations

provide spacing rules,377 as do the Coalbed Methane Gas Operations rules and regulations.378 As

governing onshore land operations, the default regulations require wells to be drilled on drilling

units that consist of a governmental quarter-quarter section, or about 40 acres and at least 330

feet from every exterior boundary of the drilling unit. 379 Also, a well may be drilled on a

governmental quarter section, or 160 acres. However, the larger unit may call for written

justification to be submitted to the Supervisor, and wells drilled thereon should be at least 660

feet from every exterior boundary of the unit.380

The onshore land operations rules also contain specific spacing provisions depending on

the county in which drilling occurs. If drilling is in Fayette, Lamar, Pickens, and Tuscaloosa

Counties, gas wells should be drilled on a drilling unit that consists of 320 acres, a governmental

half section, and located at least 660 feet from every exterior boundary of the unit. Operators

should designate an alternate forty-acre unit, with the well 330 feet from the exterior boundaries,

to revert to if the well is completed as an oil well.

381

375 Ala. Code § 9-17-12(b) (2010).

If the gas well is drilled in Baldwin,

Escambia, Mobile, and Washington Counties, the drilling units should be approximately 640

376 Ala. Admin. Code r. 400-1-2-.02(2) (2010). 377 Id. r. 400-1-2-.02. 378 Id. r. 400-3-2-.02. 379 Id. r. 400-1-2-.02(2)(a). 380 Id. r. 400-1-2-.03(2)(b). 381 Id. r. 400-1-2-.03(2)(c).

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acres, a governmental section, and wells should be located at least 1,320 feet from every exterior

boundary of the unit. The operators should designate an alternate one hundred sixty-acre drilling

unit in case the well is completed as an oil well, and the well should be at least 660 feet from all

exterior boundaries of that alternate drilling unit.382

The Supervisor may, after receiving written justification from the operator, allow

permitting for a well on a drilling unit that is about approximately 40, 160, 320, or 640

contiguous surface acres other than a governmental section.

383 The Supervisor may require a

well to be drilled on a drilling unit contiguous with an existing field as an extension of that field

and following the spacing provisions provided for by that field’s special field rules. However, an

operator can give written justification that the pool in which the current well is to be completed

is in a pool outside the already-established field, in which case the Supervisor may allow the

operator to follow the default spacing rules in the regulations.384

As provided for in Section 9-17-12(c) of the Code, the Board may allow exceptions if

reasonably necessary where, after notice and hearing, it can be shown that the spacing unit is

partly outside of the pool. Also, if it can be shown that a well located in accordance with the

applicable rules would be unproductive, would not be at the best placement in the unit for the

most efficient and economic drainage of the unit, or where physical conditions make the drilling

as authorized unduly burdensome.

385 No well may be drilled within 200 feet of any permanent

residence, unless the Board provides otherwise.386

As for established fields, parties may prove to the Board, after notice and hearing, using

substantial evidence based on geologic and engineering evidence and production information

382 Id. r. 400-1-2-.03(2)(d). 383 Id. r. 400-1-2-.03(2)(e). 384 Id. r. 400-1-2-.03(2)(f). 385 Id. r. 400-1-2-.03(g). 386 Id. r. 400-1-2-.03(h).

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that comes from wells in an established field, that one well will not efficiently and economically

drain the entire production unit provided for in the special field rules. In that case, the Board

may amend the rules to allow more than one well to be drilled and produced within that area.

Under no circumstances, however, may the Board establish a spacing unit in a shale natural gas

reservoir larger than 320 acres for a vertical well and 640 acres for a horizontal well. As for

coalbed methane reservoirs, a person may show that one well will not efficiently and

economically drain the entire drainage area, an established field providing for an eighty-acre

drainage and production unit, without a second well. In determining if a second well is needed,

the Board should consider factors including whether the second well: (1) will significantly

increase production from the unit; (2) will extend the duration of production from the unit; and

(3) is an unnecessary well.

The Board does have limits on the size of production units. It does not have the authority

to establish a production unit larger than 160 acres or one governmental quarter section plus 10

percent tolerance for any pool that is determined to be an oil reservoir or larger than 640 acres or

one governmental section plus 10 percent tolerance for any pool determined to be a gas reservoir.

The ten percent tolerance is given to allow for irregularities. However, the Board may establish

production units in excess of the limits when it is affirmatively demonstrated that the larger unit

is justified because of technical, economic, environmental or safety considerations, or other

reasons deemed valid by the Board, after notice and hearing. The Board may, after notice and

hearing, make production units for oil and gas pools not to exceed 50 percent larger than the

above limitations, provided that the action is justified by sufficient technical evidence, indicating

that the acreage or land in excess of the above limits is being drained or is in danger of being

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drained and that the owners of those excess acreage cannot otherwise receive their just and

equitable share of production from the pool being so drained.387

Finally, if owners voluntarily pool, the law provides that the owners can agree to the

establishment of production units containing as much or more acreage than the Board provided

or has the authority to provide for the same pool. Such unit may not be in excess of the same

limits given to the board, and up to 50 percent greater, as provided in the preceding paragraph.

However, the production unit so created will be valid and binding even if it encompasses more

acreage than the Board included or is authorized to include in a unit for the same pool, subject to

Board approval.

388

[4] – Minimum Operator Control.

Unit operation orders become effective only after the unitization plan prescribed by the

Board is signed or ratified in writing by the owners of not less than 66 2/3 percent in interest as

costs are shared and revenue is distributed pursuant to Section 9-17-83(3). If the appropriate

percentage of interest-holders has not ratified an agreement within six months of the order date,

the order will be revoked automatically.389

Additionally, the Board may amend unitization orders to add to unit operations pools or

portions thereof not included and may extend the unit area as required. In such a case, the Board

will reallocate production to include the correct proportion of the new area.

390 Such orders do

not become operative until the requisite 66 2/3 percent of the new ownership interest has ratified

the extension, with a six-month deadline for doing so.391

[5] – Directional Drilling.

387 Id. 388 Id. 389 Ala. Code § 9-17-84 (2010). 390 Id. § 9-17-85(a). 391 Id. § 9-17-85(b)(2).

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All wells must maintain a vertical wellbore unless the operator obtains a permit allowing

otherwise.392 The permit must provide that the bottom of the wellbore remains in compliance

with spacing provisions. Permits must be obtained even if the purpose of deviation is to drill

around an obstruction.393

[6] – Options.

The Statute does not appear to require the operator to extend an option to participate.

However, Section 9-17-13(c)(5) seems to incentivize such offers. That section states that if the

operator, or the operator together with the consenting owners, own a majority in interest of the

unit and the operator has made a good faith effort to negotiate with each non-consenting owner

to have that owner’s interest voluntarily integrated or pooled into the unit, among other things,

including “to offer each non-consenting owner the opportunity to lease or farm out on

reasonable terms or participate in the cost and risk of developing and operating the unit well

involved on reasonable terms,” then the pooling or integration order will, if the operator

requests, also provide that if the non-consenting owner does not pay his or her proportionate

costs within a certain period, or does not agree to do so, then there will be charged to that owner

150 percent of the tract’s or interest’s share of the actual and reasonable costs of drilling,

reworking, testing, plugging back, deepening, and completing that well.394

392 Ala. Admin. Code r. 400-1-2-.01(4)(a) (2010).

393 Id. r. 400-1-2-.01(4)(d). 394 Ala. Code § 9-17-13(c)(5) (2010).

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§ 03.01 Analysis of Alaska Regulatory Framework.

[1] – Name of the Governing Body. In Alaska, the agency with oversight of pooling is the Alaska Oil and Gas Conservation

Commission (“Commission”).395

[2] – Membership on the Board.

The Commission is composed of three Commissioners appointed by the governor and

confirmed by the legislature in joint session.396 In making appointments to the Commission, the

governor shall consider and give preference to a person who demonstrates experience in oil and

gas operations in the state.397 The governor shall designate one member of the Commission as

chair of the Commission. This member shall serve as chair for a term of four years but may not

be appointed for successive terms as chair of the Commission.398 The term of office of each

member is six years. A Commissioner, upon the expiration of a term, shall continue to hold

office until a successor is appointed and qualified.399

(1) one member shall be a petroleum engineer who:

Members shall be qualified as follows:

(A) holds a certificate of registration as an engineer under AS 08.48 and, under regulations adopted to implement that chapter, has qualified as a petroleum engineer; or (B) has earned a degree from a university in the field of engineering and has at least 10 years of professional subsurface experience in the oil and gas industry in drilling, well operations, production process operations, reservoir engineering, or a combination thereof; for the purposes of this subparagraph, a person meets the requirement of earning a degree in the field of engineering if the person obtains an undergraduate or graduate degree in engineering that meets the requirements for program accreditation by the Engineering Accreditation Commission of the Accreditation Board for Engineering and Technology and

395 Alaska Stat. § 31.05.005 (2010). 396 Id. § 31.05.005(a). 397 Id. 398 Id. § 31.05.005(b). 399 Id. § 31.05.007(a).

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the person completes university or industry training specific to petroleum engineering that illustrates application of engineering principles to the problems encountered and methods used in the petroleum industry, including drilling, production, reservoir engineering, fluid flow through subsurface formations, and hydrocarbon transportation;

(2) one member shall be a geologist who: (A) holds a certification as a professional geologist under

AS 08.02.011 and has professional experience in the field of petroleum geology; or

(B) has earned a degree in the field of geology from a university accredited in the field of geology and has a minimum of 10 years professional experience in the field of petroleum geology; and (3) one member who shall have training or experience that gives the person a fundamental understanding of the oil and gas industry in the state.400

Two members of the Commission constitute a quorum for the transaction of business, for the

performance of a duty, or for the exercise of a power of the Commission.401

[3] – Scope of Authority.

The Commission has jurisdiction and authority over all persons and property, public and

private, necessary to carry out the purposes and intent of Alaska’s Oil and Gas Conservation

Act. 402 The Commission shall investigate to determine whether or not waste exists or is

imminent, or whether or not other facts exist which justify or require action by it,403 and shall

adopt regulations and orders and take other appropriate action to carry out the purposes of the

Act.404

(1) identification of ownership of wells, producing leases, tanks, plants, and drilling structures;

The Commission may require the following:

(2) the making and filing of reports, well logs, drilling logs, electric logs, lithologic logs, directional surveys, and all other subsurface

400 Id. § 31.05.009. 401 Id. § 31.05.011. 402 Id. § 31.05.030(a). 403 Id. § 31.05.030(b). 404 Id. § 31.05.030(c).

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information on a well for which a permit to drill has been issued by the Commission, subject to the following:

(A) the reports required to be filed by the Commission under this paragraph shall be filed within 30 days after the completion, abandonment, or suspension of the well; and (B) the well logs, drilling logs, electric logs, lithologic logs, directional surveys, and all other information required to be filed by the Commission under this paragraph shall be filed within 90 days after the completion, abandonment, or suspension of the well, unless extended by the Commission on request;

(3) the drilling, casing, and plugging of wells in a manner that will prevent the escape of oil or gas out of one stratum into another, the intrusion of water into an oil or gas stratum, the pollution of fresh water supplies by oil, gas, or salt water, and prevent blowouts, cavings, seepages, and fires; (4) the furnishing of a reasonable bond with sufficient surety conditioned for the performance of the duty to plug each dry or abandoned well or the repair of wells causing waste; (5) the operation of wells with efficient gas-oil and water-oil ratios, and may fix these ratios; (6) the gauging or other measuring of oil and gas to determine the quality and quantity of oil and gas; (7) every person who produces oil or gas in the state to keep and maintain for a period of five years in the state complete and accurate records of the quantities of oil and gas produced, which shall be available for examination by the Commission at all reasonable times; (8) the measuring and monitoring of oil and gas pool pressures; (9) the filing and approval of a plan of development and operation for a field or pool to prevent waste, ensure a greater ultimate recovery of oil and gas, and protect the correlative rights of persons owning interests in the tracts of land affected.405

The Commission may regulate, for conservation purposes and, to the extent not in conflict with

regulation by the Department of Labor and Workforce Development or the Department of

Environmental Conservation, for public health and safety purposes,

(A) the drilling, producing, and plugging of wells; (B) the perforating, fracture stimulation, and chemical treatment

of wells; (C) the spacing of wells; (D) the disposal of salt water, nonpotable water, and oil field wastes;

405 Id. § 31.05.030(d).

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(E) the contamination or waste of underground water; (F) the quantity and rate of the production of oil and gas from a

well or property; (G) the underground injection of gas for purposes of storage.406

The Commission may also regulate the disposal of drilling mud, cuttings, and

nonhazardous drilling operation wastes in the annular space of a well for which a permit to drill

has been issued by the Commission. As used here, a "nonhazardous drilling operation waste"

means a waste, other than a hazardous waste identified by the Environmental Protection Agency

in Title 40 of the Code of Federal Regulations, part 261, the regulation that identifies and lists

hazardous wastes associated with the act of drilling a well for exploratory or production

purposes.407

For exploration and development operations involving nonconventional gas, the

Commission may not issue a permit to drill if the well would be used to produce gas from an

aquifer that serves as a source of water for human consumption or agricultural purposes unless

the Commission determines that the well will not adversely affect the aquifer as a source of

water for human consumption or agricultural purposes or allow injection of produced water

except at depths below known sources of water for human consumption or agricultural

purposes.408 For exploration and development operations involving nonconventional gas, the

Commission is charged to regulate hydraulic fracturing to ensure protection of drinking water

quality and regulate the disposal of wastes produced from the operations unless the disposal is

otherwise subject to regulation by the Department of Environmental Conservation or the United

States Environmental Protection Agency.409

406 Id. § 31.05.030(e)(1).

As a condition of approval of a permit to drill a

well for regular production of coal bed methane, the Commission shall require the operator to

407 Id. § 31.05.030(e)(2). 408 Id. § 31.05.030(j)(1). 409 Id. § 31.05.030(j)(2)(A)-(B).

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design and implement a water well testing program to provide baseline data on water quality and

quantity and shall make the results of the water well testing program available to the public.410

The Commission has authority to establish a drilling unit or units for each pool in order to

prevent waste, to protect and enforce the correlative rights of lessees in a pool, and to avoid the

augmenting and accumulation of risks arising from the drilling of an excessive number of wells,

or the reduced recovery which might result from too small a number of wells.

411 The

establishment of a unit for gas shall be limited to the production of gas. 412 Finally, the

Commission, upon proper petition, after notice and hearing, has jurisdiction, power, and

authority, and it is its duty, to make and enforce orders and to do the things necessary or proper

to carry out the purposes of Alaska’s Oil and Gas Conservation Act,413 including the authority to

provide for unitized operation of a pool.414

[4] – Process for Pooling and Matters Covered.

A person shall apply for and receive a permit from the Commission before drilling a well

in search of oil or gas, a well in support of the recovery or production of oil or gas, an

underground injection well for the purpose of gas storage, or an underground injection well for

which the state has acquired primary enforcement responsibility. 415 A separate permit

application must be submitted for each well.416 The permit application must be in the form

required by the Commission and include all information required by the Commission.417 The

Commission shall promptly approve or deny a permit application,418

410 Id. 31.05.030(j)(2)(C).

taking into consideration

411 Id. § 31.05.100(a). 412 Id. 413 Id. § 31.05.110(a). 414 Id. § 31.05.110(b). 415 Id. § 31.05.090(a). 416 Id. § 31.05.090(b). 417 Id. 418 Id. § 31.05.090(c).

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whether the proposed well is contrary to Alaska oil and gas laws or regulations, or any order,

stipulation, or term of a permit issued by the Commission, whether the applicant is in violation of

any Alaska oil and gas law or regulation or any order, stipulation, or term of a permit issued by

the Commission and the magnitude of such violation.419

The Commission may act upon its own motion, or upon the petition of an interested

person.

420 On the filing of a petition concerning a matter within the jurisdiction of the

Commission, the Commission shall promptly fix a date for a hearing and shall cause notice of

the hearing to be given.421 The hearing shall be held without undue delay after the filing of the

petition.422 The Commission shall enter its order within 30 days after the hearing.423

For an action that involves the exploration for or development of nonconventional gas

and that has application to a single well or a single field, upon the request of a lessee or operator,

the Commission may, where operations might be unduly delayed, approve a variance from the

Commission's regulations that apply to the well or field without providing notice and opportunity

to be heard.

424

(1) the approval provides at least an equally effective means of accomplishing the requirement set out in the Commission's regulation or the Commission determines that the request is more appropriate to the proposed operation than compliance with the requirement of the regulation; and

In the exercise of its authority to issue the variance, the Commission may

approve the variance if:

(2) the terms of the approval of the variance may include exempting the lessee or operator from a requirement of a regulation if the Commission determines that the requirement is not necessary or not suited to the well or field, taking into consideration the nature of the operation involved, the

419 Id. § 31.05.090(d). 420 Id. § 31.05.060(a). 421 Id. 422 Id. 423 Id. 424 Id. § 31.05.060(c).

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characteristics of the well or field for which the variance is sought, and the reasonably anticipated risks of the exemption from the requirement to human safety and the environment.425

[a] Establishment of Drilling Units.

The Commission has authority to establish a drilling unit or units for each pool in order to

prevent waste, to protect and enforce the correlative rights of lessees in a pool, and to avoid the

augmenting and accumulation of risks arising from the drilling of an excessive number of wells

or the reduced recovery which might result from too small a number of wells. The establishment

of a unit for gas shall be limited to the production of gas.426

Each permitted well on a drilling unit shall be drilled under the rules and regulations and

in accordance with the spacing pattern as the Commission prescribes for the pool in which the

well is located.427 Exceptions to the rules and spacing pattern may be granted where it is shown,

after notice and hearing, that the unit is partly outside the pool, or for some other reason a well so

located on the unit would be nonproductive, or where topographical conditions make drilling at

such a location unduly burdensome.428 If an exception is granted, the Commission must offset

any advantage the person securing the exception may have over other producers by drilling the

well as an exception and so that drainage from developed units to the tract with respect to which

the exception is granted will be prevented or minimized, and the producer of the well drilled as

an exception will be allowed to produce no more than a just and equitable share of the oil and

gas in the pool.429

When two or more separately owned tracts of land are embraced within an established

drilling unit, persons owning the drilling rights in it and the right to share in the production from

425 Id. § 31.05.060(c). 426 Id. § 31.05.100(a). 427 Id. § 31.05.100(b). 428 Id. 429 Id.

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it may agree to pool their interests and develop their lands as a drilling unit.430 If the persons do

not agree to pool their interests, the Commission may enter an order pooling and integrating their

interests for the development of their lands as a drilling unit for the prevention of waste, for the

protection of correlative rights, or to avoid the drilling of unnecessary wells.431

Orders effectuating pooling shall be made after notice and hearing and shall be upon

terms and conditions that will afford the owner of each tract the opportunity to recover or receive

the owner's just and equitable share of the oil and gas in the pool without unnecessary

expense.

432 Operations incident to the drilling of a well upon a portion of a unit covered by a

pooling order shall be considered for all purposes to be the conduct of the operation upon each

separately owned tract in the unit by the several lessees of it.433 The portion of the production

allocated to the lessee of each tract included in a drilling unit formed by a pooling order shall,

when produced, be considered as if it had been produced from the tract by a well drilled on it.434

If pooling is effectuated, the cost of development and operation of the pooled unit chargeable by

the operator to the other interested lessee is limited to the actual and reasonable expenditures for

this purpose, including a reasonable charge for supervision.435 As to lessees who refuse to agree

upon pooling, the order shall provide for reimbursement for costs chargeable to each lessee out

of, and only out of, production from the unit belonging to such lessee.436

In the event of a dispute relative to the costs, the Commission shall determine the proper

costs upon notice to all interested parties and hearing.

437

430 Id. § 31.05.100(c).

Appeals may be taken from the

431 Id. 432 Id. 433 Id. 434 Id. 435 Id. 436 Id. 437 Id.

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determination as from any other order of the Commission.438 If a lessee drills and operates, or

pays the expense of drilling and operating the well for the benefit of others, then in addition to

any other right conferred by the pooling order, the lessee drilling or operating has a lien on the

share of production from the unit accruing to the interest of each of the other lessees for the

payment of the proportionate share of such expenses.439 All the oil and gas subject to the lien, or

so much of the oil and gas subject to the lien as is necessary shall be marketed and sold by the

creditor, and the proceeds applied in payment of the expenses secured by the lien, with the

balance, if any, payable to the debtor.440

The Commission shall, in all instances where a unit has been formed out of lands or areas

of more than one ownership, require the operator, upon request of a lessee, but subject to the

right of the operator to market production and collect the proceeds with respect to a lessee in

default, as provided above, to deliver to the lessee or assigns the lessee's proportionate share of

the production from the well common to the drilling unit.

441 The lessee receiving a share shall

provide at the lessee's own expense proper receptacles for the receipt and storage of it.442

If persons owning the drilling or other rights in separate tracts embraced within a drilling

unit fail to agree upon the pooling of the tracts and the drilling of the well on the unit, and if the

Commission is without authority to require pooling as provided by law, then, subject to all other

applicable provisions of law, the lessee of each tract embraced within the drilling unit may drill

on the lessee's tract, but the allowable production from the tract shall be the proportion of the

438 Id. 439 Id. 440 Id. 441 Id. § 31.05.100(d). 442 Id.

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allowable production for the full drilling unit as the area of the separately owned tract bears to

the full drilling unit.443

[b] Unitization and Integration by Agreement.

To prevent waste, to ensure a greater ultimate recovery of oil and gas, and to protect their

correlative rights, persons owning interests in tracts of land may validly integrate their interests

to provide for the unitized management, development, and operation of those tracts as a unit.444

Such voluntary integration agreements must be filed with the Commission not later than 30 days

after the agreement’s execution.445 Prior to beginning production from the oil or gas pool, the

operator must submit to the Commission a plan of development and operation for the pool where

conduct is contemplated, which plan must provide for waste prevention, correlative rights

protection, and greater recovery of oil and gas.446

Where parties have not agreed to integrate their interests, the Commission, upon proper

petition, after notice and hearing, has jurisdiction, power, and authority, and it is its duty, to

make and enforce orders and to do the things necessary or proper to carry out the purposes of

Alaska’s Oil and Gas Conservation Act.

447

(1) the unitized management, operation and further development of a pool or portion of a pool is reasonably necessary in order to effectively carry on pressure control, pressure-maintenance or repressuring operations, cycling operations, water flooding operations, or any combination of these, or any other form of joint effort calculated to substantially increase the ultimate recovery of oil and gas from the pool;

Upon the filing of a petition by or with the

Commission, and after notice and hearing, the Commission will issue an order creating the unit

and providing for the unitized operation of the pool if it finds that:

443 Id. § 31.05.100(e). 444 Id. § 31.05.110(a). 445 Alaska Admin. Code tit. 20, § 25.518 (2010). 446 Id. § 25.517 (a), (c). 447 Alaska Stat. § 31.05.110(a) (2010).

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(2) one or more of the unitized methods of operation as applied to the pool or portion of it is feasible, and will prevent waste and will with reasonable probability result in the increased recovery of substantially more oil and gas from the pool than would otherwise be recovered; (3) the estimated additional cost, if any, of conducting such operations will not exceed the value of the additional oil and gas so recovered; and (4) the unitization and adoption of one or more of the unitized methods of operation is for the common good.448

The petition shall set out a description of the proposed unit area with a map or plat of it attached,

shall allege the existence of the facts required to be found by the Commission and shall have

attached to it a recommended plan of unitization applicable to the proposed unit area and which

the petitioner considers to be fair, reasonable and equitable.449

The order of the Commission shall define the boundary of the area to be included within

the unit area and prescribe with reasonable detail the plan of unitization applicable to it.

450 Each

unit and unit area may be limited to all or a portion of a single pool.451 Only so much of a pool

or pools as has been defined and determined to be productive on the basis of information

available to the Commission may be so included within the unit area.452 A unit may be created

to embrace less than the whole of a pool only where it is shown by the evidence that the area to

be so included within the unit area is of a size and shape as may be reasonably required for the

successful and efficient conduct of the unitized method of operation for which the unit is created,

and that the conduct of it will have no material adverse effect upon the remainder of the pool.453

448 Id. § 31.05.110(b).

The plan of unitization for each unit and unit area shall be suited to the needs and requirements

449 Id. 450 Id. § 31.05.110(c). 451 Id. 452 Id. 453 Id.

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of the particular unit dependent upon the facts and conditions found to exist with respect to it.454

(1) the efficient unitized management or control of the further development and operation of the unit area for the recovery of oil and gas from the pool affected;

Each plan of unitization shall contain fair, reasonable, and equitable provisions for:

(2) the division of interest or formula for the apportionment and allocation of the unit production, among and to the several separately owned tracts within the unit area such as will reasonably permit persons otherwise entitled to share in or benefit by the production from such separately owned tracts to produce and receive, instead thereof, their fair, equitable and reasonable share of the unit production or other benefits of it; (3) the manner in which the unit and the further development and operation of the unit area shall or may be financed and the basis, terms and conditions on which the cost and expense of it shall be apportioned among and assessed against the tracts and interests made chargeable with it, including a detailed accounting procedure governing all charges and credits incident to such operations; (4) the procedure and basis upon which wells, equipment and other properties of the several lessees within the unit area are to be taken over and used for unit operations, including the method of arriving at the compensation for it, or of otherwise proportionately equalizing or adjusting the investment of the several lessees in the project as of the effective date of unit operation; (5) the creation of an operating committee to have general overall management and control of the unit and the conduct of its business and affairs and the operations carried on by it, together with the creation or designation of other subcommittees, boards or officers to function under the authority of the operating committee as may be necessary, proper or convenient in the efficient management of the unit, defining the powers and duties of all the committees, boards and officers, and prescribing their tenure and time and method for their selection; (6) the time when the plan of unitization becomes effective; (7) the time when and the conditions under which and the method by which the unit shall or may be dissolved and its affairs wound up.455

§ 03.02 Types of Alaska Pooling Statutes.

[1] – Mineral Distinctions.

454 Id. 455 Id.

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"Gas" includes “all natural gas and all hydrocarbons produced at the wellhead not defined

as oil.”456 “Oil" includes “crude petroleum oil and other hydrocarbons regardless of gravity

which are produced at the wellhead in liquid form and the liquid hydrocarbons known as

distillate or condensate recovered or extracted from gas, other than gas produced in association

with oil and commonly known as casinghead gas.”457

[2] – Split by Depth.

The Alaska Oil and Gas Conservation

Law does not provide a definition for coal bed methane gas.

Alaska law does not differentiate spacing or pooling regulation based on the actual

proposed well depth.

[3] – Size and Spacing Rules.

The Commission will, in its discretion, establish drilling units to govern well spacing and

prescribe a spacing pattern by pool rules adopted in accordance with title 20 of Alaska

Administrative Code section 25.520. In the absence of an order by the Commission establishing

drilling units or prescribing a spacing pattern for a pool, the following statewide spacing

requirements apply:

(1) for a well drilling for oil, a wellbore may be open to test or regular production within 500 feet of a property line only if the owner is the same and the landowner is the same on both sides of the line; (2) for a well drilling for gas, a wellbore may be open to test or regular production within 1,500 feet of a property line only if the owner is the same and the landowner is the same on both sides of the line; (3) if oil has been discovered, the drilling unit for the pool is a governmental quarter section; not more than one well may be drilled to and completed in that pool on any governmental quarter section; a well may not be drilled or completed closer than 1,000 feet to any well drilling to or capable of producing from the same pool;

456 Id. § 31.05.170(6). 457 Id. § 31.05.170(9).

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(4) if gas has been discovered, the drilling unit for the pool is a governmental section; not more than one well may be drilled to and completed in that pool on any governmental section; a well may not be drilled or completed closer than 3,000 feet to any well drilling to or capable of producing from the same pool.458

A well may not begin regular production of oil from a property that is smaller than the

governmental quarter section upon which the well is located or begin regular production of gas

from a property that is smaller than the governmental section upon which the well is located,

unless the interests of the persons owning the drilling rights in and the right to share in the

production from the quarter section or section, respectively, have been pooled. A pooling

agreement must be filed with the Commission before regular production from the affected

property begins.459

The Commission will review an application for an exception to the provisions of this

section in accordance with title 20 of Alaska Administrative Code section 25.540. The applicant

for an exception shall send notice of the application by certified mail to the owners, landowners,

and operators described above and shall furnish the Commission with a copy of the notice, the

date of mailing, and the addresses to which the notice was sent. The application must include:

(1) the names of all owners, landowners, and operators of all properties within 1,000 feet of a well drilling for oil or within 3,000 feet of a well drilling for gas for which an exception is sought; (2) a plat drawn to a scale of one inch equaling 2,640 feet or larger, showing the location of the well for which the exception is sought, all other completed and drilling wells on the property, and all adjoining properties and wells; and (3) an affidavit by a person acquainted with the facts, verifying that all facts are true and that the plat correctly portrays pertinent and required data.460

458 Alaska Admin. Code tit. 20, § 25.055 (2010). 459 Alaska Stat. § 31.05.170(9) (2010). 460 Id.

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Upon application by the operator, the Commission will establish notice requirements

different from those above if the operator demonstrates to the Commission's satisfaction that

compliance with the notice requirements of this section is not feasible because of the complexity

of ownership within the notice area.461

[4] – Minimum Operator Control.

Neither the statutes nor Commission regulations specify a minimum proportional

threshold need of all relevant owners to approve pooling or unitization orders.

[5] – Directional Drilling.

Wells that are not intentionally deviated must be drilled as much as possible in a vertical

direction using conventional drilling techniques. Deviations that are permissible are those for

correcting issues that arise during drilling.462 For wells that will be intentionally deviated from

the vertical, the drilling permit application must include a plat showing the proposed wellbore

and all adjacent wellbores within 200 feet of any portion of the proposed well.463 For those wells

that are within 200 feet of the proposed wellbore, the application must include the names of all

operators affected, to the extent discoverable, providing said owners with a copy of the

application via certified mail, or a statement that the applicant is the only owner affected by the

proposed deviation.464

[6] – Options.

461 Id. 462 Alaska Admin. Code tit. 20, § 25.050(a)(1) (2010). 463 Id. § 25.050(b)(1). 464 Id. § 25.050(b)(2).

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Each plan of unitization must include a fair provision for carrying or otherwise financing

lessees unable to meet the upfront financial burden of drilling.465

465 Alaska Stat. § 31.05.110(c)(3) (2010).

Alaska law does not provide

statutory standards to dictate options and similar carrying arrangements.

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§ 04.01 Analysis of Arizona Regulatory Framework.

[1] – Name of Governing Body.

Oil and gas production in Arizona is governed by the state’s Oil and Gas Conservation

Commission (“Commission”).466

[2] – Membership on the Governing Body.

The Commission consists of the State Land Commissioner ex officio, who has no vote,

and five members to be appointed by the governor, no more than three of whom may be of the

same political party. The appointed members must be United States citizens and shall have been

residents of Arizona for not less than the five years immediately preceding their appointment.

Three members of the Commission constitute a quorum for the transaction of business.467 The

Arizona Geological Survey shall provide staff support to the Commission as needed.468

[3] – Scope of Authority.

The Commission administers and enforces the provisions of Arizona law relating to the

conservation of oil and gas.469 The Commission and administrative staff may, at any time, enter

upon property and inspect wells drilled for oil or gas and well records and shall control property,

machinery, and appliances necessary to gauge the wells. 470

(1) Administer oaths to a witness in any hearing, investigation or proceeding held under Arizona law relating to conservation of oil and gas.

The Commission may do the

following:

(2) Issue subpoenas requiring attendance and testimony of witnesses and production of books, papers, and records deemed material or necessary, and direct service of subpoenas by a sheriff or other officer authorized by law to serve process.

466 Ariz. Rev. Stat. Ann. § 27-515(A) (2010). 467 Id. § 27-514(B). 468 Id. § 27-515(A). 469 Id. 470 Id.

93

(3) Prescribe rules and do all acts necessary or advisable to carry out its duties. (4) Collect fees to cover the costs of services including, but not limited to, reproduction of records and copies of rules. (5) Publish technical maps, cross sections, and reports and sell these materials for a fee to cover the costs incurred in their preparation, reproduction and distribution.471

The Commission must make inquiries deemed proper to determine whether waste exists or is

imminent. In the exercise of such power the Commission may:

(1) collect data; (2) make investigations and inspections; (3) examine property, leases, papers, books, and records, including drilling records and logs; (4) examine, check, test, and gauge oil and gas wells, tanks, refineries, and modes of transportation; (5) hold hearings; (6) require keeping of records and making of reports; (7) take action necessary to enforce and effectuate the provisions of Arizona oil and gas conservation laws.472

The Commission may, in order to prevent waste and avoid drilling unnecessary wells,

permit the cycling of gas in any pool or portion thereof or the introduction of gas or other

substance into an oil or gas reservoir for the purpose of re-pressuring the reservoir, maintaining

pressure, or carrying on secondary recovery operations of any type. The Commission will permit

the pooling or integration of separate tracts when reasonably necessary in connection with the

operations.473

[4] – Process for Pooling and Matters Covered.

In order to prevent waste, to protect and enforce the correlative rights of owners in a pool,

and to avoid augmentation and accumulation of risks arising from drilling an excessive number

of wells, or reduced recovery which might result from too small a number of wells, the

471 Id. § 27-515(B). 472 Id. § 27-503(A)–(B). 473 Id. § 27-503(C).

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Commission must, after a hearing, establish a drilling unit or units for each pool. 474 The

establishment of a unit for gas will be limited to the production of gas.475

Each well permitted on a drilling unit will be drilled under the applicable rules and

regulations and in accordance with the applicable spacing pattern prescribed by the

Commission.

476 Exceptions to the rules and spacing pattern may be granted where it is shown,

after notice and hearing, that the unit is partly outside the pool or, for some other reason, a well

so located on the unit would be non-productive.477 Exceptions permitting a proposed well to be

drilled on an unconventional location may be granted on the basis of topography or terrain

without notice or hearing.478

If an exception is granted, the Commission must take action to offset any advantage to

the person securing the exception over other producers and so that drainage from developed units

to the exceptional tract is prevented or minimized, and the producer of the well drilled as an

exception will be allowed to produce no more than a just and equitable share of the oil and gas in

the pool.

479

When two or more separately owned tracts of land are embraced within an established

drilling unit, persons owning the drilling rights and the right to share in the production from

those tracts may agree to pool their interests and develop their lands as a drilling unit.

480 If they

do not agree to pool their interests, the Commission may enter an order pooling and integrating

their interests for the development of their lands as a drilling unit.481

474 Id. § 27-504(A)

Orders effectuating pooling

must be made after notice and hearing and upon terms and conditions that will afford the owner

475 Id. 476 Id. § 27-504(B). 477 Id. 478 Id. 479 Id. § 27-504(C). 480 Id. § 27-505(A). 481 Id.

95

of each tract the opportunity to recover or receive his just and equitable share of the oil and gas

in the pool without unnecessary expense.482

Operations incident to drilling a well upon any portion of a unit covered by a pooling

order will be deemed, for all purposes, to be the conduct of operations upon each separately

owned tract in the unit by the several owners thereof.

483 The portion of the production allocated

to the owner of each tract included in a drilling unit formed by a pooling order will, when

produced, be considered as if it had been produced from the tract by a well drilled thereon.484 If

pooling takes place, the cost of development and operation of the pooled unit chargeable by the

operator to other interested owners will be limited to the actual and reasonable expenditures

required for that purpose, including a reasonable charge for supervision.485

As to owners who refuse to agree to pool their interests, the order shall provide for

reimbursement for costs chargeable to each owner out of, and only out of, production from the

unit belonging to that owner.

486 In the event of a dispute relative to costs, the Commission will

determine the proper costs.487 Parties may appeal from the Commissioner’s determination of

costs, as they may do from any other order of the Commission.488 If one or more of the owners

drills and operates, or pays the expense of drilling and operating the well for the benefit of

others, then, in addition to any other rights conferred by the pooling order, that owner or owners

is entitled to a lien on the share of production from the unit accruing to the interest of each of the

other owners for the payment of his proportionate share of the expenses.489

482 Id.

All the oil and gas

subject to the lien, or as much as necessary, must be marketed and sold by the creditor and the

483 Id. 484 Id. 485 Id. 486 Id. 487 Id. 488 Id. 489 Id.

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proceeds applied in payment of the expenses secured by the lien, with the balance if any payable

to the debtor.490

The Commission shall, in all instances where a unit has been formed from lands or areas

of more than one ownership, require the operator, upon request of an owner, to deliver to the

owner or his assigns his proportionate share of the production from the well common to the

drilling unit.

491 The owner receiving his share shall provide at his own expense proper

receptacles for the receipt and storage thereof.492

If the persons owning and drilling or exercising other rights in separate tracts within a

drilling unit fail to agree to the pooling of the tracts and drilling of a well on the unit, and if the

Commission is without authority to require pooling, then, subject to all other applicable

provisions of law, the owner of each tract within the drilling unit may drill on his tract, but the

allowable production from the tract must be only the proportion of the allowable production for

the full drilling unit as the area of such separately owned tract bears to the full drilling unit.

493

The Commission shall, upon notice and hearing, regulate the drilling and location of

wells in any pool and the production therefrom in order to prevent reasonably avoidable net

drainage from each developed unit so that each owner in a pool can recover his fair and equitable

share of recoverable oil and gas in the pool.

494

Persons owning interests in tracts of land may voluntarily integrate their interests to

provide for the unitized management, development, and operation of those tracts as a unit to

prevent waste, to ensure a greater recovery of gas or oil, or to protect the correlative rights of the

490 Id. 491 Id. § 27-505(B). 492 Id. 493 Id. § 27-505(C). 494 Id. § 27-506(A).

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various owners.495

(1) The unitized management, operation, and further development of a pool or portion thereof is reasonably necessary in order to effectively carry on pressure control, pressure-maintenance or repressuring operations, cycling operations, water flooding operations, or any combination thereof, or any other form of joint effort calculated to substantially increase the ultimate recovery of oil and gas from the pool; and

Where there is no voluntary agreement to unitize interests, the Commission,

upon proper petition, after notice and hearing may make an order providing for the unitized

operation of a pool or part thereof if it finds that:

(2) One or more of the unitized methods of operation as applied to such pool or portion thereof are feasible, will prevent waste and will, with reasonable probability, result in the increased recovery of substantially more oil and gas from the pool than would otherwise be recovered; and (3) The estimated additional cost, if any, of conducting such operations will not exceed the value of the additional oil and gas so recovered.496

The order of the Commission shall define the area of the pool or portion thereof to be

included within the unit area and prescribe with reasonable detail the plan of unitization

applicable thereto.497 Each unit and unit area shall be limited to all or a portion of a single

pool.498 Only so much of a pool as has been defined and determined to be productive of oil and

gas by actual drilling operations may be included within the unit area.499 A unit may be created

which contains less than the whole of a pool only if it is shown by the evidence that the area to

be included within the unit area is of a size and shape that is reasonably required for the

successful and efficient conduct of the unitized method of operation will have no material

adverse effect upon the remaining portions of the pool.500

495 Id. § 27-531(A).

The plan of unitization for each unit

496 Id. § 27-531(A)–(B). 497 Id. § 27-532. 498 Id. 499 Id. 500 Id.

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and unit area must be one suited to the needs and requirements of the particular unit dependent

upon the facts and conditions found to exist.501

(1) The efficient unitized management or control of the further development and operation of the unit area for the recovery of oil and gas from the pool affected. Under such a plan the actual operations within the unit area may be carried on in whole or in part by the unit itself, or by one or more of the lessees within the unit area as the unit operator subject to the supervision and direction of the unit, dependent upon what is most beneficial or expedient. The designation of the unit operator shall be by vote of the lessees in the unit in a manner provided in the plan of unitization and not by the Commission.

In addition to the terms, provisions, conditions

and requirements found by the Commission to be reasonably necessary or proper, each plan of

unitization shall contain fair, reasonable and equitable provisions for the following:

(2) The division of interest or formula for the apportionment and allocation of the unit production, among and to the several separately owned tracts within the unit area as will reasonably permit persons otherwise entitled to share in or benefit by the production from the separately owned tracts to produce and receive, in lieu thereof, their fair, equitable, and reasonable share of the unit production or other benefits. (3) The manner in which the unit and the further development and operation of the unit area will be financed and the basis, terms, and conditions on which costs and expenses will be apportioned among the tracts, including a detailed accounting procedure governing all charges and credits incident to those operations. (4) The procedure and basis upon which wells, equipment, and other properties of the lessees within the unit area are to be taken over and used for unit operations, including the method of arriving at compensation or of otherwise proportionately equalizing or adjusting the investment of the several lessees in the project as of the effective date of unit operation. (5) The supervision and conduct of the unit operations, in respect to which each person shall have a vote with a value corresponding to the percentage of the costs of unit operations chargeable against the interest of such person. (6) The time when the plan of unitization becomes effective. (7) The time when, the conditions under which, and the method by which the unit shall or may be dissolved and its affairs wound up.502

501 Id.

502 Id.

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An order providing for unit operations may be amended by an order made by the

Commission, in the same manner and subject to the same conditions as an original order

providing for unit operations. Provided that,

(1) if an amendment affects only the rights and interests of the owners, the approval of the amendment by the royalty owners shall not be required; and (2) no order of amendment shall change the percentage for allocation of oil and gas as established for any separately owned tract by the original order, except with the consent of all persons owning interests in that tract.503

The Commission, by an order, may provide for the unit operation of a pool or a part

thereof that embraces a unit area established by a previous order of the Commission.504 Such an

order, in providing for the allocation of unit production, shall first treat the unit area previously

established as a single tract, and the portion of the unit production allocated to it shall then be

allocated among the separately owned tracts included in the previously established unit area in

the same proportions as those specified in the previous order.505

§ 04.02 Types of Arizona Pooling Statutes.

[1] – Mineral Distinctions.

"Gas" means “natural gas, casinghead gas, all other hydrocarbons not defined as oil,

carbon dioxide, and helium or other substances of a gaseous nature. Natural gas and casinghead

gas are further defined as follows:

(a) ‘natural gas’ means any combustible gas or vapor composed chiefly of hydrocarbons occurring in gaseous or vapor phase at initial reservoir conditions; (b) ‘casinghead gas’ means any gas or vapor indigenous to an oil stratum and produced from such stratum with oil.”506

503 Id. § 27-533(B).

504 Id. § 27-533(C). 505 Id. 506 Id. § 25-501(9).

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"Oil" means “crude petroleum oil and all other hydrocarbons, regardless of gravity,

which are produced at a well in liquid form by ordinary production methods and which are not

the result of condensation of gas.”507

[2] – Split by Depth.

Arizona law does not differentiate based upon depth.

[3] – Size and Spacing Rules.

Every well drilled for oil shall be located on a drilling unit consisting of approximately

80 contiguous surface acres within two governmental quarter-quarter sections or lots having one

side in common, upon which there is not located, and of which no part is attributed to, any other

well completed in or drilling to the same pool.508 In areas not covered by United States Public

Land Surveys, the oil drilling unit shall consist of an area bounded by four sides intersecting at

angles of not less than 85 degrees or more than 95 degrees.509 The unit shall contain at least 76

contiguous surface acres, and its maximum dimension shall not exceed 3,000 feet.510 No well

drilled for oil shall be located closer than 330 feet to any boundary of the drilling unit or closer

than 330 feet to the shortest center line of the drilling unit.511 No well drilled for oil shall be

located within a quarter-quarter section or lot having one side in common with another quarter-

quarter section or lot upon which there is located a well completed in or drilling to the same

pool.512

Every well drilled for gas shall be located on a drilling unit consisting of approximately 640

but not less than 600 contiguous surface acres within one governmental section upon which there

507 Id. § 25-501 (13). 508 Ariz. Admin. Code § 12-7-107(A) (2010). 509 Id. § 12-7-107(A)(1). 510 Id. 511 Id. § 12-7-107(A)(2). 512 Id. § 12-7-107(A)(3).

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is not located, and of which no part is attributed to, any other well completed in or drilling to the

same pool.513 In areas not covered by United States Public Land Surveys, the gas drilling unit

shall consist of an area bounded by four sides intersecting at angles of not less than 85 degrees or

more than 95 degrees.514 The unit shall contain at least 600 contiguous surface acres and its

maximum dimension shall not exceed 8,500 feet.515 No well drilled for gas shall be located

closer than 1,660 feet from any boundary of the drilling unit.516

If the operator drills a horizontal segment, that horizontal segment shall be located as

follows: at least 330 feet from the boundary of the spacing unit in the case of an oil well; at least

1,660 feet from the boundary of the spacing unit in the case of a gas well; and as approved or

modified by the Commission in the case of a geothermal well.

517

The Commission may grant exceptions to the regular locations specified above only after

notice and hearing.

518 Applications for exception shall fully state the reasons why the exception

is necessary and shall include a plat prepared and certified by a registered surveyor bearing the

surveyor's certificate number showing all other completed, drilling, and permitted wells on the

property and all adjoining surrounding properties and wells.519 Exceptions shall be granted only

after the operator provides by certified mail a copy of the application to all adjoining lessees and

only after the Commission determines in a duly noted public hearing that the application is

valid.520 The Commission may grant an exception location without notice or hearing when

topography prohibits drilling at a regular location on the drilling unit.521

513 Id. § 12-7-107(B).

If an existing well's

514 Id. § 12-7-107(B)(1) (2010). 515 Id. 516 Id. § 12-7-107(B)(2). 517 Id. § 12-7-107(D). 518 Id. § 12-7-107(E). 519 Id. § 12-7-107(E)(1). 520 Id. § 12-7-107(E)(2) (2010). 521 Id. § 12-7-107(E)(3).

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classification changes due to its recompletion or due to a change in the nature of the product

being produced, the Commission may approve an irregular location application with supporting

data and 10 days' notice and hearing, provided that the operator furnish the Commission with

proof of mailing of a copy of the application to all operators within a one-mile radius of the

acreage to be dedicated.522

[4] – Minimum Operator Control.

No order of the Commission for unitization becomes effective until the plan providing for

unit operations has been signed or approved in writing by lessees of not less than 63 percent of

the unit area and by owners of not less than 63 percent (exclusive of royalty interest owned by

lessees or by any lessees’ subsidiaries) of the normal 1/8th royalty interest in the unit. The

Commission must make a finding, either in the original unitization order or in a supplemental

order, that the required percentage has so approved. The Commission may hold supplemental

hearings upon notice and petition, to decide if the approval has been given by the appropriate

percentage of lessees and royalty owners. Said approval must be given within six months of the

original unitization order, or it will be automatically revoked.523

Unitization orders may be amended under the same conditions and subject to the same

procedure as the original unitization order. If the amendment only affects the rights of owners,

royalty owner approval is not required. No amendment may alter the allocation of production for

any separately owned tract in the original order without consent of all parties owning interest in

that tract.

524

[5] – Directional Drilling.

522 Id. § 12-7-107(E)(4). 523 Ariz. Rev. Stat. Ann. § 27-533(A) (2010). 524 Id. § 27-533(B).

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An operator drilling a well shall not intentionally deviate from the normal vertical course

of the well unless the operator first files an application and obtains approval from the

Commission after notice and hearing. The normal vertical course of a well is defined by an

average deviation from vertical of not more than five degrees in any 500-foot interval. The

operator shall test any vertical or deviated well that is drilled or deepened at least once each 500

feet or at the first bit change succeeding 500 feet. The operator shall tabulate all deviation tests

run and file the tabulation with the Commission within 30 days after drilling is completed.

Deviation from the vertical for short distances is permitted in the drilling of a well without

special approval only to straighten the hole, sidetrack junk, or correct other mechanical

difficulties.525

(1) The name, address, and telephone number of the operator;

An application for directional drilling shall include the following:

(2) The field name, lease name, well number, state permit number, reservoir name, and county where the proposed well is located; (3) A plat or sketch showing the distance from the surface location to section and lease lines and to the target location within the intended producing interval; (4) The reason for the intentional deviation; and (5) The signature of the operator.526

The operator of any well capable of production and whose producing interval or any

portion of the producing interval is located 330 feet or less in the case of an oil well or 1,660 feet

or less in the case of a gas well from the boundary of any drilling unit shall run a directional

survey before running the production casing.527

In order to ensure compliance with these requirements, the Commission may require the

operator to run a directional survey of any hole at the operator's expense. The Commission may

require an operator to run a directional survey of any hole at the request of an offset operator at

525 Ariz. Admin. Code §12-7-115 (2010). 526 Id. 527 Id.

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the expense and risk of the offset operator unless the survey shows that the well is completed at a

point outside the drilling unit or at an unauthorized point.528 Within 30 days following the

completion of drilling a directionally drilled well, the operator must file with the Commission a

complete angular deviation and directional survey of the well, obtained by a well survey

company.529 An operator must not drill a well in a manner that results in the well crossing

drilling unit lines, except by approval obtained from the Commission after notice and hearing.530

[6] – Options.

Arizona law does not appear to include an election right for parties. However, the law

does provide for a mandatory one-eighth royalty for owners of interest in separately owned

tracts.531

528 Id. 529 Id. 530 Id. 531 Ariz. Rev. Stat. Ann. § 27-535 (2010).

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§ 05.01 Analysis of Arkansas Regulatory Framework.

[1] – Name of the Governing Body.

The Arkansas Oil and Gas Commission (“the Commission”) regulates pooling under the

state’s Oil and Gas Conservation statute (“the Act”).532

[2] – Membership on the Governing Body.

The Commission consists of nine members, each appointed to a term of six years.533 In

the event of a vacancy, the governor must appoint a new member to fill the unexpired term of the

previous member.534 All Commission members must be state residents and citizens age 21 or

older, a majority of which must have experience in oil or gas development, production, or

transportation.535

The Commission is led by a chairman elected from among its membership to provide a

single voice for the agency’s action.

536 In addition, the Commission has appointed a Director of

Production and Conservation. 537 The director serves at the governor’s pleasure as the

Commission’s executive officer for oil and gas regulation, and performs any duty or act required

or authorized by the Commission.538 The Commission may also appoint an officer to preside

over public hearings and conduct proceedings in accordance with the Act and regulations

outlined below.539

[3] – Scope of Authority.

532 Ark. Code Ann. § 15-71-101 (2010). 533 Id. § 15-71-102(a). 534 Id. 535 Id. § 15-71-102(b). 536 Id. § 15-71-103(a) –(b). 537 Id. § 15-71-105(a)(1) (2010). 538 Id. § 15-71-105(c). 539 Id. § 15-71-106.

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The Act was “enacted for the protection of public and private interests” and to promote

waste prevention and correlative rights protection.540

[a] Matters Governed.

The Commission has jurisdiction over all persons and property necessary to administer

and enforce the Act.541

(A) The inefficient, excessive, or improper use or dissipation of reservoir energy and the locating, spacing, drilling, equipping, operating, or producing of any oil or gas well or wells in a manner which results, or tends to result, in reducing the quantity of oil or gas ultimately to be recovered from any pool in this state;

Waste is expressly prohibited and defined to include “physical waste,” as

well as:

(B) The inefficient storing of oil and the locating, spacing, drilling, equipping, operating, or producing of any oil or gas well or wells in a manner causing, or tending to cause, unnecessary or excessive surface loss or destruction of oil or gas; [and,] (C) Abuse of the correlative rights and opportunities of each owner of oil and gas in a common reservoir due to nonuniform, disproportionate, and unratable withdrawals causing undue drainage between tracts of land…542

The Commission may: (1) collect data; (2) make investigations and inspections; (3)

examine properties, leases, papers, books, and records; (4) examine, check, test, and gauge oil

and gas wells, tanks, refineries, and means of transportation; (5) hold hearings; (6) provide for

the keeping of records and the making of reports; and (7) take any other action reasonably

necessary to enforce the Act.543 In addition, the Commission may issue permits to authorize

drilling and well operation, establish drilling units, regulate the location and spacing of wells,

and integrate production among various owners within a relevant area.544

[b] Commission Procedure.

540 Id. § 15-72-101. 541 Id. § 15-71-110(a)(1). 542 Id. § 15-72-102(15). 543 Id. § 15-72-303(b). 544 Id. §§ 15-72-302 to 304.

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The Commission may meet or hold hearings at any time and place necessary to carry out

its duties.545 The Commission is authorized to enact and enforce rules, regulations, and orders

pursuant to the Act. 546 A majority of members constitutes a quorum for voting purposes;

however, in no event, may any rule, regulation, or order be adopted or promulgated without

receiving at least five affirmative votes.547

Excluding emergencies, the Commission must hold a public hearing prior to issuing any

rule, regulation or order.

548

“give notice of the public hearing to be held upon such application by one publication at least ten days prior to the date of the hearing, but not more than 30 days prior thereto, in a legal newspaper having a general circulation in the county, or [if applicable] in each county, in which the lands embraced within the application are situated, except that, as to any public hearing pertaining to a matter of general application throughout the State of Arkansas, the notice shall be published in a legal newspaper having state-wide circulation.”

When an application is filed with the Commission seeking action

authorized under the Act, the Commission must

549

In addition, the Commission may elect to give notice by personal service, which “may be made

by any officer authorized to serve process[,] or by any agent of the Commission in the same

manner as provided by law for the service of summons in civil actions.”550 All rules, regulations

and orders issued by the Commission must in writing and maintained as public record, copies of

which are receivable into evidence in all state courts.551

[4] – Process for Pooling and Matters Covered.

[a] Drilling Units.

545 Id. § 15-71-103(d). 546 Id. § 15-71-110(d). 547 Id. 548 Id. § 15-72-323(1). 549 Id. § 15-72-323(1). 550 Id. § 15-71-111(d). 551 Id. § 15-71-111(e).

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After notice and a hearing, the Commission may establish drilling units “for the

prevention of waste and to avoid the…accumulation of risks arising from the drilling of an

excessive number of wells.”552 A drilling unit “means a single governmental section or the

equivalent [i.e. a 640-acre tract] unless a larger or smaller area is requested by an owner.”553 The

Commission may “[d]esignate the number of wells that may be drilled and produced within a

drilling unit; and [r]egulate the spacing among multiple wells drilled and produced [therein].”554

An order establishing drilling units will specify the location of the permitted well(s)

thereon, “with such exception(s) as may be reasonably necessary where it is shown…that a well

drilled at a different location is likely to prevent waste or protect correlative rights of owners

within the unit.”

555 The Commission must act to offset any advantage conferred by an exception

to prevent drainage and ensure that “the producer of the well drilled as an exception will be

allowed to produce no more than his or her just and equitable share of the oil and gas in the

pool.”556

[b] Authority to Integrate Production.

When two or more separately owned tracts or interests are embraced within an

established drilling unit, the owners may voluntarily pool or integrate their tracts or interests for

the development and operation of the drilling unit.557

552 Id. § 15-72-302(b)(1).

If such owners do not voluntarily pool

their interests, upon the application of any interested owner or operator, the Commission may

enter an order integrating the tracts and interests in the drilling unit for the development and

operation of the drilling unit and sharing of production therefrom. The Commission will force

553 Id. § 15-72-302(b)(2). 554 Id. 555 Id. § 15-72-302(c)(1). 556 Id. 557 Id. § 15-72-303(a).

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integration if necessary to prevent waste and avoid extraneous drilling.558 An application to

integrate or pool rights to develop oil or gas must contain: (1) the applicant’s name and address;

(2) reasons for desiring to integrate the separately owned interests; (3) a legal land description of

the drilling unit sought to be established or integrated; (4) a geologic report of the area where the

drilling unit is to be located, indicating the known or potential presence of reservoirs.559

Any compulsory pooling order must establish reasonable terms to afford each owner in

the drilling unit an opportunity to recover or receive his or her just and equitable share of the oil

and gas in the pool.

560 If drilling has not commenced or is incomplete as of the effective date of

the pooling order, said order must: (1) authorize the drilling or completion and operation of a

well on the drilling unit; (2) provide who may drill, complete, and operate the well; (3) prescribe

the time and manner in which all owners in the drilling unit who desire to pay their share of the

operating costs and participate therein may elect to do so; and, (4) provide that an owner who

does not elect to participate in the risks and costs of operations must transfer his or her rights to

drill and produce from the unit well to those parties who elect to participate therein. Such

transfer must be for a reasonable consideration that, absent an agreement between the parties,

will be determined by the Commission.561

In the event that there is a well capable of producing oil or gas within the drilling unit

when the order is issued, the order will: (1) authorize the operation of the well; (2) provide who

may operate the well; and, (3) provide that within the time stipulated in the order, any owner in

the drilling unit who did not participate in the drilling of the well must either reimburse the

drilling parties in cash for his or her share of the actual cost of drilling, completing, and

558 Id. § 15-72-303(b). 559 Ark. Oil & Gas Commission, Gen. Rules & Regs., Rule A-3(b)(2) (2011). 560 Ark. Code Ann. § 15-72-304(a) (2010). 561 Id. § 15-72-304(b).

110

equipping the well, or transfer his or her rights in such drilling unit to the drilling parties until

those parties have received, out of the share of production attributable to the interest so

transferred, an amount equal to the share of the costs that would have been borne by the

transferring party had he or she participated in drilling and operating the well, plus an additional

sum to be fixed by the Commission.562 An owner of unleased mineral rights in a drilling unit

will be regarded as a royalty owner to the extent of having a 1/8th interest in and to said unleased

minerals.563

In addition to pooling, the Act also provides for voluntary or compulsory unitization.

Upon the filing of a petition, the Commission will hold a hearing to consider the need for unit

operations of a pool, or any portion thereof, to prevent waste, increase ultimate recovery of oil

and gas, and protect correlative rights.

564 The petition must contain: (1) a description of the

proposed unit area; (2) a statement of the nature of the proposed unit operation; and, (3) a copy

of the proposed unit operating agreement.565 Any person(s) authorized to do so in the proposed

unitization agreement may file the petition.566

The Commission will issue an order requiring unit operation in accordance with the terms

of the proposed unit agreement upon finding that: (1) the proposed unit agreement has been

executed by persons who, at the time of the filing, own legal title to at least an undivided 75

percent interest in the right to drill into and produce oil or gas from the proposed unit area, and

by persons who at that time own legal title to 75 percent of royalties and overriding royalties

payable with respect to oil or gas produced from the unit area; (2) the proposed unit operation is

reasonably necessary to prevent waste, increase ultimate recovery of oil or gas, and protect

562 Id. § 15-72-304(c). 563 Id. § 15-72-304(d). 564 Id. § 15-72-308(a). 565 Id. § 15-72-308(b). 566 Id. § 15-72-308(c).

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correlative rights; and, (3) the value of the additional oil or gas to be recovered from the

proposed unit area will exceed the additional cost incident to conducting said operation.567 Upon

entry, the order and the provisions of the unit operating agreement is binding upon each person

owning an interest in, or right to production or proceeds from in the unit area.568

A unitization order must provide: (1) a description of the unit area; (2) the allocation of

production to each separately owned tract, as agreed upon within the unit operating agreement;

(3) a provision for the credits and charges to be made in the adjustment among the owners for

their respective investments in wells, tanks, pumps, machinery, materials, and equipment

contributed to the unit operation; (4) a provision that the expenses of unit operation, including

capital investments, be charged to each separately owned tract in the same proportion that each

tract shares in the unit production; (5) the time at which the unit operation must commence; and,

(6) any additional provisions, not in conflict with or inconsistent with the unit operating

agreement, which the Commission determines to be appropriate for the prevention of waste and

protection of all interested parties.

569

[c] Limitation and Allocation of Production and Costs.

To prevent waste, the Commission may limit the total amount of oil or gas that may be

produced in Arkansas. 570 If a limitation in production is necessary, the Commission must

allocate allowable production among the various pools throughout the state on a reasonable

basis, giving to each pool with small wells of settled production an allowable that will not

accelerate premature abandonment of any well.571

567 Id. § 15-72-309(a).

Moreover, the Commission must allocate

production from each pool among the various units or wells therein in a manner that will

568 Id. § 15-72-309(b). 569 Id. § 15-72-310. 570 Id. § 15-72-324(a). 571 Id. § 15-72-324(b).

112

“prevent or minimize reasonably avoidable drainage…and [allow each] the opportunity to

produce or receive his just and equitable share…, subject to the requirements for the prevention

of waste.”572

The order of the Commission creating a drilling unit must provide that effective as of the

commencement of the drilling of a well upon the drilling unit or, if a well capable of producing

oil and gas in commercial quantities has already been completed on the lands included within the

drilling unit, all royalty, overriding royalty, production payment, or similar interests in the

drilling unit must be integrated without the necessity of any additional order or action by the

commission or owners.

573 The interests must be paid or delivered to each owner thereof in

conformance with the provisions of the appropriate lease, agreement, or contract creating it, but

computed upon the production allocated to each tract, rather than upon the actual production

therefrom.574

[d] Royalty Distribution.

One-eighth of all gas sold from any unit is considered royalty gas, and the net proceeds

received from the sale thereof must be distributed to the owners of marketable title in and to the

leasehold royalty.575 Unless all royalty owners within the drilling unit agree to an alternate

method, royalty distribution must comply with those provisions specified in the Act.576

572 Id. § 15-72-324(c).

Within

30 days of receipt of the proceeds from the gas sale, each working interest owner must provide

the designated operator with the following: (1) the names and addresses of all royalty owners

under the working interest owner’s leasehold; (2) each royalty owner’s tax information; (3) the

573 Id. § 15-72-305(a)(1). 574 Id. § 15-72-305(a)(2). 575 Id. § 15-72-305(a)(3). 576 Id.

113

fractional interests of each owned tract within the unit; and (4) if applicable, any information

necessary to facilitate a change in ownership therein.577

If a working interest owner fails or refuses to discharge these obligations, the operator

may notify said working interest owner of the royalty owner believed to be entitled to receive

payments pursuant to the terms.

578 If the working interest owner does not respond within 30

days, the operator is entitled to pay royalties as specified in the notice given.579 Alternatively,

the operator may file an application with the Commission to request an order that requires a

refusing working interest owner’s appearance at a hearing to show cause with respect to his

failure to comply.580

If an operator fails to remit revenues in a timely manner, a working interest owner whose

royalty obligations have not been paid may facilitate payment by either: (1) filing an application

with the Commission for an order requiring the operator to show cause to justify his failure at a

hearing; or, (2) file a civil action to compel the operator’s compliance, for which the operator

will be liable for all costs and expenses arising from the litigation.

581

[e] Agreements Not Restraint of Trade.

The formation of any drilling unit, or any agreement for pooled or unit operations of one

or more drilling units as provided under this Act, is not a violation of any Arkansas statute

related to trusts, monopolies, contracts, or combinations in restraint of trade.582

§ 05.02 Types of Arkansas Pooling Statutes.

[1] – Mineral Distinctions.

577 Id. 578 Id. 579 Id. 580 Id. 581 Id. 582 Id. § 15-72-307.

114

In Arkansas, gas is defined as “all natural gas, including casing head gas, and all other

hydrocarbons not defined as oil.”583 Oil includes “crude petroleum oil and other hydrocarbons,

regardless of gravity, which are produced at the well in the liquid form by ordinary production

methods and which are not the result of condensation of gas after it leaves the reservoir.”584

Further, a pool is defined as an underground reservoir containing an accumulation of crude

petroleum or natural gas, or both. 585

[2] – Split by Depth.

There is no mention of coalbed methane in the Arkansas

pooling statutes.

The Arkansas regulations make no distinctions based on depth. Rather, the Commission

hears evidence on the most effective and efficient manner of locating multiple wells for the

effective, but cost-efficient, removal of the maximum amount of oil or gas from a square mile

unit, as opposed to hearing evidence on the acreage that a single well would most economically

and efficiently drain.586 The current emphasis is on economic efficiency based on the geologic

characteristics of the reservoir.587

[3] – Size and Spacing Rules.

There is a statutory presumption in favor of 640-acre units, although the Commission

may establish a larger or smaller unit.588 Sixteen vertical or horizontal wells, or a combination

thereof, may be drilled in an exploratory drilling unit.589 For vertical wells, that amounts to a 40-

acre spacing pattern.590

583 Id. § 15-71-102(3).

For horizontal wells, even though 16 wells are permitted, the external

584 Id. § 15-71-102(7). 585 Id. § 15-71-102(11)(a). 586 Id. § 15-72-302(b)(2)(B). 587 Id. 588 Ark. Oil & Gas Commission, Gen. Rules and Regs., Rule B-43(f) (2011). 589 Id. Rule B-43(i)(4). 590 Id.

115

and internal unit well-location restrictions will allow only six to eight horizontal wells in the

unit.591

The internal well location restriction requires all wells in the unit to be spaced 448 feet

apart with an allowed variance of 20 percent.

592 Externally, each well is required to be located at

least 560 feet from each other well and a minimum of 560 feet from all unit boundaries.593

Applications for exceptions to the well location provisions relative to a drilling unit boundary or

other location in a common source of supply may be brought before the Commission.594

[4] – Minimum Operator Control.

The filing of an application to integrate separately owned tracts within an exploratory

drilling unit is permissible, provided that one or more persons who collectively own at least an

undivided 50 percent interest in the right to drill and produce oil and gas to support the filing of

the application.595 The filing of an application to integrate separately owned tracts within an

established or producing drilling unit is permissible without a minimum acreage requirement,

provided that one or more persons owning an interest in the right to drill, produce oil or gas, or

both from the total acreage assigned to such established drilling unit requests such integration.596

As shown above, a condition to the Commission granting an order for unit operations that

will force all owners within a prescribed area to comply with a proposed unitization agreement

requires consent of certain owners. In particular, when a petition seeking a unitization order is

filed, the applicant must show that “the proposed unit agreement has been executed by persons

591 Id. 592 Id. Rule B-43(i)(3). 593 Id. Rule B-43(i)(1). 594 Id. Rule B-43(i)(5). 595 Ark. Code Ann. § 15-72-302(e) (2010); see also id. Rule B-43(g). This 50% requirement is only applicable to ‘exploratory drilling units,’ as distinct from ‘established drilling units.’ A drilling unit is or becomes ‘established’ if it contains an existing well or completed well, and for which the operator has filed documentation with the Commission establishing such completion. See id. Rule B-43(f). 596 Id. Rule B-43(h).

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who, at the time of the filing, own legal title to at least an undivided 75 percent interest in the

right to drill into and produce oil or gas from the proposed unit area;” as well as those “persons

who[,] at that time[,] own legal title to 75 percent of royalties and overriding royalties payable

with respect to oil or gas produced from the unit area.”597

[5] – Directional Drilling.

The Commission may grant a drilling permit to allow deviated or horizontal drilling

methods. For the purpose of complying with spacing rules, well location is defined as the actual

physical location of the completed interval in the well, projected to the surface, as follows:

(A) In a vertically drilled well without a directional survey, the well location is the surface location. In a vertically drilled well, the well location is the location of the perforated interval of the well bore, projected vertically to the surface; (B) In a directionally drilled well, the well location is the location of the midpoint of the perforated interval of the producing formation, as calculated from the directional survey, projected vertically to the surface; (C) In a horizontally drilled well, the well location is the entire perforated length of the lateral section of the well bore, as shown on a directional survey, projected vertically to the surface.598

[6] – Options.

The Act acknowledges that an owner subject to compulsory pooling may elect to

participate in the cost of operation. If a pooling order is issued for a well that has not been

commenced within a drilling unit with no currently producible well, the order must provide “that

an owner who does not elect to participate in the risks and costs of operations must transfer his or

her rights to drill and produce from the unit well to those parties who elect to participate

therein.”599

597 Ark. Code Ann. § 15-72-309(b) (2010).

The transfer must be for a reasonable consideration which, absent an agreement

598 Ark. Oil & Gas Commission, Gen. Rules & Regs., Rule B-3(a)(2) (2011). 599 Ark. Code Ann. § 15-72-304(b) (2010).

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between the parties, will be determined by the Commission.600 Moreover, the transfer “may be

either a permanent transfer or may be for a limited period pending recoupment out of the share of

production attributable to the interest of the nonparticipating owner by the participating parties of

an amount equal to the share of the costs that would have been borne by the nonparticipating

party had he participated in the operations, plus and additional sum to be fixed by the

Commission.”601

The election rights are slightly different if a well capable of production exists on drilling

unit as of the effective date of the pooling order. In that event, the order must stipulate a time

period within which any owner in the drilling unit who did not participate in the drilling of the

well must either:

(A) reimburse the drilling parties in cash for his or her share of the actual cost of drilling, completing, and equipping the well[;] or… (B) transfer his rights in such drilling unit and the production from the well to the drilling parties[,] until those parties have received[,] out of the share of production attributable to the interest so transferred[,] an amount equal to the share of the costs that would have been borne by the transferring party had he participated in drilling, completing, equipping, and operating the well, plus an additional sum to be fixed by the Commission.602

The Act does not provide statutory requirements relating to carrying a non-consenting owner, or

enforcing a risk penalty for such situations. If applicable, the Commission will determine such

matters on a case-by-case basis.

600 Id. 601 Id. 602 Id. § 15-72-304(c).

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§ 06.01 Analysis of California Regulatory Framework.

[1] – Name of the Governing Body.

The Division of Oil, Gas, and Geothermal Resources (“Division”) in the Department of

Conservation (“Department”) was formed in 1915 to address the needs of the state, local

governments, and industry by regulating statewide oil and gas activities with uniform laws and

regulations. The Division supervises the drilling, operation, maintenance, plugging, and

abandonment of onshore and offshore oil, gas, and geothermal wells, preventing damage to life,

health, property, and natural resources; underground and surface waters suitable for irrigation or

domestic use; and oil, gas, and geothermal reservoirs. Division requirements encourage wise

development of California’s oil, gas, and geothermal resources while protecting the

environment.603

[2] – Membership on the Governing Body.

The state is divided into six districts, the boundaries of which are fixed by the Director of

the Department.604 The State Oil and Gas Supervisor (“Supervisor”) leads the Division of Oil,

Gas and Geothermal Resources 605 and appoints one Chief Deputy and at least one District

Deputy for each of the districts.606 The Chief Deputy appointees must be competent engineers or

geologists, registered in the state, and experienced in the development and production of oil and

gas. 607 Each District Deputy must also be a competent engineer or geologist, preferably

registered in the state, and experienced in the development and production of oil and gas.608

603 State of California Department of Conservation, Oil, Gas, & Geothermal-About Us, http://www.conservation.ca.gov/dog/Pages/aboutUs.aspx (last visited Jun. 6, 2011). 604 Cal. Pub. Res. Code § 3100 (West 2011). 605 Id. § 690. 606 Id. § 3101. 607 Id. § 3103. 608 Id. § 3104.

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[3] – Scope of Authority.

The Supervisor oversees the drilling, operation, maintenance, and abandonment of wells

to ensure that all suitable methods and practices known to the industry for increasing the ultimate

recovery of underground hydrocarbons are used.609 New wells shall not be drilled without first

obtaining approval from either the Supervisor or the District Deputy.610 If the Supervisor or the

District Deputy fails to give a written response to a notice of intent to drill within 10 working

days from the date of receipt, that failure shall be considered as an approval of the notice.611

The Supervisor is authorized to approve unit agreements proposed by landowners and

consented to by persons who own at least an undivided three-fourths of the total working

interests in the area proposed to be unitized and by persons who own at least an undivided three-

fourths of the total royalty interest in the area.

612 If a valid unit agreement is proposed, the

Supervisor shall issue orders directing unit operations in accordance with the agreement.613 An

order of the Supervisor approving unit operations must require the recordation of the agreement

in the county recorder’s office of each county in which any part of the unit area is situated and

must require that the interests of all persons in the unit area be thereafter subject to the unit

agreement the same as if all such persons had expressly consented to the unit agreement.614

The Supervisor's order shall include fair and reasonable provisions for all of the

following:

(a) The date when all tracts of land not theretofore committed to the unit shall be subject to unit operation (in no event earlier than the first day of the month following the effective date of the Supervisor's order.)

609 Id. § 3106(b). 610 Id. § 3203(a). 611 Id. 612 Id. § 3642. 613 Id. § 3641. 614 Id. § 3645.

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(b) Provision for the carrying or otherwise financing of any persons who request the same and who the Supervisor determines are unable to meet their financial obligations in connection with the unit operation, allowing a reasonable interest charge to those who carry or finance such obligations. (c) Such additional provisions which the Supervisor determines to be appropriate for bringing into the unit area on a fair and reasonable basis tracts of land and interests not theretofore committed to the unit agreement.615

The Supervisor may establish field rules for any oil and gas pool or zone in a field when

sufficient geologic and engineering data is available from previous drilling operations.616

The Supervisor may also establish variances from the statutory well-spacing requirements

if he determines that the development of a pool requires the adoption of a well-spacing pattern

other than that specified by statute in order to prevent waste and to increase the ultimate

economic recovery of oil or gas.

Field

rules supplement more broadly applicable statutory and regulatory requirements. Each field rule

is specific to a field, and in many cases, specific to areas and zones or pools within a field.

617 A well-spacing plan adopted by the Supervisor shall require

that all or certain parcels of land be included in a voluntary or mandatory pooling agreement if

necessary to protect correlative rights. 618 In any order adopting a well-spacing plan, the

Supervisor may provide up to 60 days from the date of the order for affected parties to attempt to

voluntarily pool their respective interests.619

615 Id. § 3646.

That period may be extended at the Supervisor's

discretion upon the written request of the affected parties. Any well-spacing order providing a

period for an attempt at voluntary pooling is not a final order of the Supervisor until either

voluntary pooling has been accomplished and the Supervisor notified of it or the Supervisor has

616 Cal. Code Regs. tit. 14, § 1722(k) (2011). 617 Id. § 1721.7. 618 Id. § 1721.8. 619 Id.

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ordered mandatory pooling upon the failure of the affected parties to reach a pooling agreement

voluntarily.620

[4] – Process for Pooling and Matters Covered.

Any person operating in a field may file a complaint with the Director alleging

unreasonable waste of gas, in which case the Director shall order the Supervisor to hold a

hearing. The Director, upon the application of the Supervisor, may also order a hearing.621

Notice of the time and place of the hearing shall be given by publication in a newspaper printed

and published in the county in which the unreasonable waste of gas is alleged to be taking place

or to be threatened. 622 The notice shall specify the commonly accepted name or a general

description of the field or locality.623 Publication shall be daily for five days prior to the time of

the hearing.624 The Supervisor shall also send notice by mail to each lessor, lessee, or operator

known to him of any well in the field.625 Upon the conclusion of the hearing, the Supervisor

shall determine whether or not there is an unreasonable waste of gas in the field, in existence or

threatened, and shall also determine the extent to which the waste of gas, occurring or threatened,

is unreasonable.626 Whenever the Supervisor finds that it is in the interest of the protection of oil

or gas from unreasonable waste, owners or operators in same producing or prospective oil or gas

field, may, with the approval of the Supervisor, enter into agreements for the cooperative

development and operation of all or a part or parts of the field.627

[a] Spacing Rules.

620 Id. 621 Cal. Pub. Res. Code §3302 (West 2011). 622 Id. § 3303. 623 Id. 624 Id. 625 Id. 626 Id. § 3306. 627 Id. § 3301.

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Whenever a new pool is discovered, the Supervisor may issue a notice of intent to

establish a well-spacing plan for the pool.628 The notice shall be delivered or mailed to all

operators in the pool and any other affected persons whose identity is known to or can readily be

ascertained by the Division and shall be published in a newspaper of general circulation in the

county in which the pool is located.629

Any affected person may, at any time after the discovery of a new pool, petition the

Supervisor to adopt a well-spacing plan other than that specified in the California Public

Resources Code.

630 The petition shall be supported by information necessary to establish the

need for an extent of such a well-spacing plan.631

[b] Directional Surveys.

The Supervisor may require, at the time he gives approval of a notice of intention to drill,

re-drill, or deepen, that a subsurface directional survey be made for the well and that a plat of the

directional survey be filed with the Supervisor within 15 days of completion.632

[c] Unitization.

Tracts of land may be unitized to provide for their management, development, and

operation as a unit to prevent waste and to increase the ultimate recovery of oil and gas.633

628 Cal. Code Regs. tit. 14, § 1721.2(a) (2011).

An

agreement for the management, development, and operation of two or more tracts of land in the

same field or in the same producing or prospective pool as a unit without regard to separate

ownerships, and for the allocation of benefits and costs as set forth in the agreement, shall be

valid and binding upon those who consent to it and may be filed with the Supervisor for

629 Id. 630 Id. § 1721.3 631 Id. 632 Cal. Pub. Res. Code § 3606 (West 2011). 633 Id. § 3640.

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approval.634 However, until the Supervisor approves the agreement, persons who do not consent

to the agreement will not be bound by it.635

Any proposed agreement for unit operation of tracts of land that has been consented to by

persons who own at least an undivided three-fourths of the total working interests in the area

proposed to be unitized, and by persons who own at least an undivided three-fourths of the total

royalty interest in the area proposed to be unitized, may be filed with the Supervisor by the

owner of any such working interest in conjunction with a petition requesting approval of an

agreement.

636

(a) The unit area of the proposed agreement for unit operation takes in all tracts which, consistent with good oilfield practice, should be considered a part of and related to the field or pool or pools, or portions thereof, proposed for unit operation but does not include tracts which, consistent with good oilfield practice, should not be considered a part of or related to the field or pool or pools, or portions thereof, proposed for unit operation.

The unit agreement shall be approved, if, after a public hearing, the Supervisor

finds all of the following:

(b) As of the date of filing of the petition, the proposed unit agreement was consented to by persons owning at least three-fourths of the working interests and three-fourths of the lessors' royalty interests. (c) The unitized management and operation of the pool or pools, or portions thereof, proposed to be unitized is reasonably necessary to carry on pressure maintenance or pressure replenishment operations, cycling or recycling operations, gas injection operations, water flooding operations, reduction of oil viscosity operations, or any combination thereof, or any other form of joint effort calculated to increase the ultimate recovery of oil and gas from the proposed unit area. (d) The value of the estimated recovery of additional oil or gas, or the increased present worth value due to accelerated recovery of oil or gas, as a result of the unit operations will exceed the estimated additional cost incident to conducting such operations. (e) The proposed unit agreement provides for an allocation of the unit production among and to the separately owned tracts in the

634 Id. § 3641. 635 Id. 636 Id. § 3642.

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area proposed to be unitized that will reasonably permit persons otherwise entitled to share in or benefit by the production from their separately owned tracts to produce or receive, in lieu thereof, their fair, equitable, and reasonable pro rata share of the unit production or other benefits thereof. (f) The proposed unit agreement provides, to the full extent practical, for the organization and consolidation of surface facilities, including oil production, storage, treatment, and transportation facilities, in a manner that will eliminate wasteful and excessive use of land surface areas, freeing such areas for other productive use and development, and provides a fair procedure for the waiver, from time to time, of the working interest owners’ right of entry on surface areas which in the future become unneeded for the conduct of unit operations. (g) The proposed unit agreement is fair and reasonable under all the circumstances in other material respects. (h) If state-owned lands under the jurisdiction of the State Lands Commission are included in the proposed unit agreement, the agreement has been reviewed and approved by the Commission.637

§ 06.02 Types of California Pooling Statutes.

[1] – Mineral Distinctions.

"Oil" includes petroleum, and "petroleum" includes oil. 638 "Gas" means any natural

hydrocarbon gas coming from the earth.639

[2] – Split by Depth.

California does not differentiate based upon depth.

[3] – Size and Spacing Rules.

Except as otherwise provided by California law, any oil or gas well drilled within 100

feet of an outer boundary of the parcel of land on which the well is situated, or within 100 feet of

a public street or road or highway dedicated prior to the commencement of drilling of the well, or

within 150 feet of a well producing oil or gas or capable of producing oil or gas, is a public

637 Id. § 3643. 638 Id. § 3006. 639 Id. § 3007.

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nuisance.640 Further, the producing interval of any well drilled into a new pool must not be less

than 75 feet from an outer boundary line.641

Where a parcel of land contains one acre or more, but is less than 250 feet in width, only

one well may be drilled on the parcel of land to each acre of the area if the surface location of

any well or wells is as far from the lateral boundary lines of the parcel of land as the

configuration of the surface and the existing improvements thereon will permit.

642 Where a

parcel of land contains one acre or more and the hydrocarbons to be developed are too heavy or

viscous to produce by normal means, the Supervisor may approve proposals to drill wells at

whatever locations he deems advisable for the purpose of the proper development of such

hydrocarbons by the application of pressure, heat, or other means for the reduction of oil

viscosity, and such wells shall not be classed as public nuisances.643

Where a parcel of land contains one acre or more and where all or substantially all of the

surface of such parcel of land is unavailable for the surface location of oil or gas wells, there may

be drilled or produced not more than one well into each acre of such parcel of land, and the

surface location of such well may be located upon property which may or may not contain one

acre or more of surface area, and the property upon which the surface location of such well may

be located may or may not be contiguous to such parcel of land, provided:

(1) No operator shall construct or maintain any derrick within 150 feet of any other derrick, then standing, of that operator unless approved in advance by the Supervisor who may, in granting approval, attach conditions that are reasonably necessary. (2) The surface location of a well, as measured from the center of the hole, shall be not less than 25 feet from an outer boundary of the surface of the property the well is located upon, and shall be

640 Id. § 3600. 641 Cal. Code Regs. tit. 14, § 1721.1 (2011). 642 Cal. Pub. Res. Code § 3602 (West 2011). 643 Id. § 3602.1.

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not less than 25 feet from any dedicated public street, road or highway in public use at the time drilling of the well commences. (3) The producing interval of the well shall be not less than 75 feet from an outer boundary of the parcel of land into which the producing interval is drilled, and the producing interval of the well shall be not less than 150 feet, as measured horizontally in the same zone, from the producing interval of any other well producing or capable of producing oil or gas. If the parcel of land qualified to be drilled is less than 150 feet in width, the producing interval of that well shall be as far from the lateral boundary lines of the property as is practicable.644

The 150-foot restriction shall apply only to wells drilled and producing from the same

zone or pool; provided, however, that the well density shall not exceed one well per acre unless

the Supervisor shall determine that more than one zone or pool underlies the property and that it

is not practical to produce from all zones or pools from a single well per acre and that other

zones or pools are being drained by offset wells. In such cases only, a maximum density of two

wells per acre may be approved.645

[4] – Minimum Operator Control.

Unitization agreements must be authorized by persons owning three-fourths of the total

working interest in the unitized area and by persons owning three-fourths of the total royalty

interest in that area.646

[5] – Directional Drilling.

California does not appear to regulate based upon the direction of operations.

[6] – Options.

The owner of any working interest or royalty interest in a tract that is the subject of a unit

agreement who did not consent to the proposed unit agreement shall, 60 days after the Supervisor

644 Id.§ 3606. 645 Id. § 3606.1. 646 Id. § 3642.

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issues his order, be entitled to offer his interest for sale.647 All working interest owners who

consented to the proposed unit agreement shall be entitled to purchase that interest in proportion

to their respective shares of unit production.648 Unless one or more working interest owners

purchase that interest, the order of the Supervisor will not become effective.649

If a disagreement arises with respect to the purchase price for such an interest, then

either party may request the Supervisor to authorize the creation of an arbitration committee

consisting of three members, one member appointed by the seller, one member appointed by the

purchaser or purchasers, and a third member selected by the other two members, to make an

independent appraisal of the value of the interest as of the date the Supervisor issued his order.

650

The arbitration committee shall consider all relevant data and information submitted by

interested parties and may seek and consider other information it deems relevant. The arbitration

committee shall determine the fair market value of the interest as of the date the Supervisor

issued his order and fix the price at which the sale shall be consummated.651

The arbitration committee’s determination shall be binding on the parties except that,

within 30 days after the determination of the arbitration committee has been mailed to the parties

concerned, the seller or any one or more of the purchasers may have such price judicially

determined by filing suit for a declaratory judgment as to the fair market value in the superior

court for the county in which the tract involved, or the greater portion of it, lies.

652

647 Id. § 3647.

The

compensation and expenses of the arbitration committee shall be subject to approval by the

Supervisor and, if the unit becomes effective, shall be paid by the working interest owners who

648 Id. 649 Id. 650 Id. 651 Id. 652 Id.

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elected to participate in purchasing the interest in the proportion they share unit expenses.653 If

the unit does not become effective within the time provided for in the order of the Supervisor, the

working interest owners who have consented to the unit agreement and have requested the

independent appraisal shall pay such compensation and expenses in proportion to what would

have been their shares of unit expenses.654

653 Id. 654 Id.

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§ 07.01 Analysis of Colorado Regulatory Framework.

[1] – Name of the Governing Body.

The Colorado Oil and Gas Conservation Commission (“Commission”) regulates oil and

gas production and exploration within the state pursuant to the Oil and Gas Conservation Act

(“Act”).655

[2] – Membership on the Governing Body.

The Commission is comprised of nine members, two of which are the executive directors

of the Department of Public Health and the Department of the Environment, respectively.656 The

remaining seven members are appointed by the governor based on the area from which they hail:

at least two must reside west of the continental divide; and, when possible, “other members shall

be appointed taking into account the need for geographical representation of other areas of the

state with high levels of oil and gas activity or employment.”657 No less than three members of

the Commission must have substantial experience in the oil and gas industry, and at least two of

those three must possess a college degree in petroleum geology or petroleum engineering.658

Additionally, at least one member of the Commission must be a local government

official, one member must have formal training or experience in environmental or wildlife

protection, one member must have formal training in soil reclamation, and one member must be

actively engaged in agricultural production, “and also be a royalty owner.”

659 Not including the

two executive directors, no more than four members of the Commission may belong to the same

political party.660 Each person on the Commission serves for a term of four years.661

655 Colo. Rev. Stat. §§ 34-60-101, 34-60-103 (2010).

656 Id. § 34-60-104(2)(a). 657 Id. 658 Id. 659 Id. 660 Id. 661 Id. § 34-60-104(2)(b).

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[3] – Scope of Authority.

The Commission’s duty is to promote the public interest and policy goals specified in the

Act, including to:

(I) foster the responsible, balanced development, production, and utilization of the natural resources of oil and gas in the state of Colorado in a manner consistent with protection of public health, safety, and welfare, including protection of the environment and wildlife resources; (II) protect the public and private interests against waste in the production and utilization of oil and gas; (III) safeguard, protect and enforce the coequal and correlative rights of owners and producers in a common source or pool of oil and gas to the end that each such owner and producer…may obtain a just and equitable share of production therefrom; and (IV) plan and manage oil and gas operations in a manner that balances development with wildlife conservation in recognition of the state’s obligation to protect wildlife resources . . . .662

It is neither the intent nor purpose of the Act “to require or permit the proration or distribution of

the production of oil and gas among the fields and pools of Colorado on the basis of market

demand.”

663 Rather, the Act seeks to allow “each oil and gas pool in Colorado to produce up to

its maximum efficient rate of production,” subject to the goals stated above.664

[a] Matters Governed.

As expressed above, the Commission’s authority is grounded in the aim of waste

prevention.665 “Waste” is prohibited under the Act666

(a) Waste, as applied to gas, includes the escape, blowing, or releasing, directly or indirectly into the open air, of gas from wells productive of gas only, or gas in an excessive or unreasonable amount from wells producing oil, or both oil and gas; and the production of gas in quantities or in such manner as unreasonably reduces reservoir pressure or unreasonably diminishes the quantity

and defined to include:

662 Id. § 34-60-102(1)(a). 663 Id. § 34-60-102(1)(b). 664 Id. 665 Id. 666 Id. § 34-60-107.

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of oil or gas that ultimately may be produced; excepting gas that is reasonably necessary in the drilling, completing, testing, and in furnishing power for the production of wells. (b) waste, as applied to oil includes underground waste; inefficient, excessive, or improper use or dissipation of reservoir energy, including gas energy and water drive; surface waste, open-pit storage, and waste incident to the production of oil in excess of the producer's aboveground storage facilities and lease and contractual requirements, but excluding storage, other than open-pit storage, reasonably necessary for building up or maintaining crude stocks and products thereof for consumption, use, and sale; and, (c) waste in addition [to the above] means physical waste, as…generally understood in the oil and gas industry; [t]he locating, spacing, drilling, equipping, operating, or producing of any oil or gas wells in a manner which causes or tends to cause reduction in [the] quantity of oil or gas ultimately recoverable from a pool under prudent and proper operations[,] or which causes or tends to cause unnecessary or excessive surface loss or destruction of oil and gas; [a]buse of the correlative rights of any owner in a pool due to non-uniform, disproportionate, unratable, or excessive withdrawals of oil or gas therefrom, causing reasonably avoidable drainage between tracts of land or resulting in one or more producers or owners in such pool producing more than his equitable share of the oil or gas from such pool.667

The Commission has jurisdiction over “all persons and property, public and private, necessary to

enforce” the Act, and has general authority “to do whatever may reasonably be necessary to

carry out the Act’s provisions.

668

For example, the Commission may require the “[i]dentification of [well] ownership…;

the making and filing of…well logs, directional surveys, and reports on well location…; drilling

[and other operations] in such manner as to prevent the escape of oil or gas,…the intrusion of

water into oil or gas strata, the pollution of fresh water supplies;…[keeping of] complete and

accurate [production] records;” and various other aspects of oil and gas production.

669

667 Id. §§ 34-60-103(11)-(13) (emphasis added).

In

addition, the Commission has authority to dictate the spacing of wells, and “to limit and to

668 Id. § 34-60-105(1). 669 Id. § 34-60-106(1).

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allocate the production from [any] pool or field among or between tracts of land having separate

ownerships therein.”670

[b] Commission Procedure.

The Commission is authorized to enact and enforce rules, regulations, and orders

pursuant to the Act.671 The Commission is empowered to act upon its own motion or that of any

interested person.672 Any person, or the attorney general on behalf of the state, may apply for a

hearing before the Commission in relation to any issue within its jurisdiction.673 Except in

emergency situations, the Commission may not make any rule, regulation, or order without a

hearing upon no less than 20 days notice.674

Any notice required [under the Act]…shall be given by the election of the Commission either by mailing a copy thereof…to the last known mailing address of the person to be given notice, or by personal service. In addition, the Commission shall cause one publication of such notice, at least 10 days prior to the hearing, in a newspaper of general circulation in the county where the land affected, or some part thereof, is situated. The notice shall issue in the name of the state, shall be signed by the Commission or [its] secretary, and shall specify the style and number of the proceeding and the time and place of the hearing at which the hearing will be held, shall state the time within which protests to the granting of a petition shall be filed if [applicable], and shall briefly state the purpose of the proceeding. Should the Commission elect or be required to give notice by personal service, such service may be made by any officer authorized to serve summons[,] or by any agent of the Commission[,] in the same manner and extent as is provided by law for the service of summons in civil actions in the district courts of this state. Proof of service by such agent shall be by his affidavit, and proof of service by an officer shall be in the form required by law with respect to service of process in civil actions. In all cases

Such notice must be made as follows:

670 Id. § 34-60-106(3). 671Id. § 34-60-105(1). 672 Id. § 34-60-108(7). 673 Id. § 34-60-105(1). 674 Id. § 34-60-108(2)-(3).

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where there is an application for the entry of a pooling order or unitization order, or an application for an exception from an establish well spacing pattern, or a complaint is made by the Commission or any party[,] that any part of any provision of [the Act], or any rule, regulation, or order of the commission is being violated, notice of the hearing to be held on such application or complaint shall be served on the interested parties either by mail or in the same manner as is provided in the Colorado rules of civil procedure for the service of process in civil actions in the district courts of this state.675

Any rule, regulation, or order issued by the Commission must be in writing and maintained as

public record, copies of which are receivable into evidence in all state courts.

676

Any interested person may file a written protest with the Commission that states the

grounds for such protest, which must be filed at least three days prior to the hearing.

677 A timely

protest affords the applicant the right to be heard at the hearing.678 In any case, the Commission

will enter its order within 30 days of the hearing, and “any person affected by any order…shall

have the right at any time to apply to the Commission to repeal, amend, modify, or supplement

the same.”679

[4] – Process for Pooling and Matters Covered.

[a] Drilling Units.

After notice and a hearing, the Commission may establish drilling units “to

prevent…waste, to avoid the drilling of unnecessary wells, or to protect correlative rights.680

Such a hearing may be prompted by the Commission itself, or upon the application of any

interested party.681

675 Id. § 34-60-108(4).

The Commission will set drilling units based on efficient production from an

676 Id. § 34-60-108(6). 677 Id. § 34-60-105(7). 678 Id. 679 Id. § 34-60-108(7). 680 Id. § 34-60-116(1). 681 Id.

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entire pool, and if necessary, the Commission may “divide any pool into zones and establish

drilling units for each zone, which…may differ in size and shape from those established in any

other zone, so that the pool as a whole will be efficiently and economically developed.”682

Notwithstanding this discretion, “no drilling unit shall be smaller than the maximum area that

can be efficiently and economically drained by one well.”683 Each rule governing a drilling unit

applies only to the relevant area in question and not to all units on a statewide basis.684

An order establishing drilling units “shall permit only one well to be drilled and produced

from the common source of supply on a drilling unit,” and must “specify the location of the

permitted well thereon, with such exception…as may be reasonably necessary for [existing]

wells[,] or where…the Commission finds [that] the requirement to drill…at the authorized

location on the unit would be inequitable or unreasonable.”

685 The Commission must act to

offset any advantage conferred by such exceptions and “include in the order suitable provisions

to prevent the production from the drilling unit of more than its just and equitable share of the oil

and gas in the pool.”686

[b] Authority to Integrate Production.

If multiple, separately owned tracts are embraced within one drilling unit, “persons

owning such interests [therein] may pool their interests for the development and operation of the

drilling unit.”687 In the absence of voluntary pooling, the Commission may, upon application

from an interested person, and after notice and a hearing, “order pooling of all interests in the

drilling unit for the development and operation thereof.”688

682 Id. § 34-60-116(2).

683 Id. 684 Id. 685 Id. § 34-60-116(3). 686 Id. 687 Id. § 34-60-116(6). 688 Id.

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Each pooling order must provide just and reasonable terms and conditions, and “shall

make provision for the drilling of a well on the drilling unit, if not already drilled, for the

operation thereof, and make provision for the payment of the reasonable actual cost [of

operation], including a reasonable charge for supervision and storage.”689 In addition, a pooling

order must establish how production and costs will be allocated among the various owners within

the pool.690 The Act affords election rights in compulsory pooling situations, yet enforces a risk

penalty for those non-consenting owners who refuse to sell their rights in the pool.691

The Act also allows voluntary and compulsory unitization. Upon application from any

interested person, the Commission will hold a hearing to consider the need for unit operations of

one or more pools.

This will

be discussed in further detail below.

692 After the hearing, the Commission will order unitization if it finds that

such is reasonably necessary to increase ultimate recovery, and that the “value of the estimated

additional recovery of oil or gas exceeds the estimated additional cost incident to conducting

such operations.”693

(a) A description of the pool, or parts thereof, to be so operated, termed the unit area, but only so much of a pool as has reasonably been defined and determined by drilling operations to be productive of oil or gas may be included within the unit area.

A unitization order must contain the following information:

(b) A statement of the nature of the operations contemplated. (c) An allocation to the separately owned tracts in the unit area of all the oil and gas that is produced from the unit area and is saved, being the production that is not used in the conduct of operations on the unit area or not unavoidably lost. (d) A provision for the credits and charges to be made in the adjustment among the owners in the unit area for their respective investments in wells, tanks, pumps, machinery, materials, and equipment contributed to the unit operations.

689 Id. § 34-60-116(7)(a). 690 Id. 691 Id. § 34-60-106. 692 Id. § 34-60-118(2). 693 Id. § 34-60-118(3).

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(e) A provision providing how the costs of unit operations, including capital investments, shall be determined and charged to the separately owned tracts and how said costs shall be paid, including a provision providing when, how, and by whom the unit production allocated to an owner who does not pay the share of the cost of unit operations charged to such owner, or the interest of such owner, may be sold and the proceeds applied to the payment of such costs. (f) A provision, if necessary, for carrying or otherwise financing any person who elects to be carried or otherwise financed, allowing a reasonable interest charge for such service payable out of such person’s share of the production. (g) A provision for the supervision and conduct of the unit operations, in respect to which each person shall have a vote with a value corresponding to the percentage of the costs of unit operations chargeable against the interest of such person; (h) The time when the unit operations shall commence, and the manner in which, and the circumstances under which, the unit operations shall terminate. And, (i) Such additional provisions that are found to be appropriate for carrying on the unit operations, and for the protection of correlative rights.694

[c] Allocation of Production and Costs.

The Commission has express authority to limit and allocate production among various

pools and wells to prevent waste and protect correlative rights.695 Allocation must be made “on

a reasonable basis [to] prevent[] or minimiz[e] reasonably avoidable drainage, so that each

property will have the opportunity to produce or to receive its just and equitable share, subject to

the reasonable necessities for the prevention of waste.”696

The effect of a unitization agreement or order is to treat all tracts within the unit area, and

owners thereof, equitably based on respective interests therein. As a general matter, “[a]ll

operations…of a well upon any portion of the unit area shall be deemed for all purposes the

conduct of such operations upon each separately owned tract in the unit area by the several

694 Id. § 34-60-118(4). 695 Id. § 34-60-117(1). 696 Id. § 34-60-117(2).

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owners thereof.” In turn, “the portion of unit production allocated to a separately owned tract in

a unit area” is considered “to have been actually produced from such tract by a well drilled

thereon.”697

As shown above, an order for unit operations must provide terms upon which production

and costs will be allocated.

698 An agreement for reasonable allocation made by all interested

parties will control and be stated in the order.699 In the event that no agreement exists, the

Commission will “determine the relative value, from evidence introduced at the hearing, of the

separately owned tracts in the unit area…[and] require the production of [any]…evidence[] at the

hearing…as may be required to protect the interests of all interested persons.”700 Under the

order, “[t]he production allocated to each tract shall be the proportion that the relative value of

each tract so determined bears to the relative value of all tracts in the unit area.”701

[d] Royalty Distribution.

A non-consenting owner of an unleased tract lying within a drilling unit is presumed

under the Act “to have a landowner’s royalty of 12.5 percent,” or one-eighth.702

[e] Restraint of Trade.

A voluntary agreement among owners to pool interests within a drilling unit, or to carry

on unitized or cooperative operations, “is authorized and may be performed, and shall not be

held or construed to violate any statutes relating to trusts, monopolies, or contracts and

combinations in restraint of trade.” 703

697 Id. § 34-60-118(9).

This protection under the Act only applies “if the

698 Id. § 34-60-118(4). 699 Id. 700 Id. 701 Id. 702 Id. § 34-60-116(7)(c). 703 Id. § 34-60-118(1).

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agreement is approved by the Commission as being in the public interest for conservation[,] or is

reasonably necessary to increase ultimate recovery or to prevent waste.”704

[f] Impact on Existing Contracts.

Unless otherwise agreed upon, a unitization order “shall [not] be construed to result in a

transfer of all or any part of the title of any person to the oil and gas rights in any tract in the unit

area.” 705 Further, an order will not terminate any existing contract “relating to the sale or

purchase of production from a separately owned tract” within the unit area, which will remain in

force and “apply to oil and gas allocated to such tract until terminated in accordance with the

provisions thereof.” 706 The Act offers a limited ‘compliance defense’ in stating that

“[o]perations conducted pursuant to [a unitization] order…shall constitute a fulfillment of all the

express or implied obligations of each lease or contract covering lands in the unit area to the

extent that compliance with such obligations cannot be had because of the order.”707

§ 07.02 Types of Colorado Pooling Statutes.

[1] – Mineral Distinctions.

As defined in the Act, “gas” includes “all natural gases and all hydrocarbons not

[otherwise] defined as oil.”708 “Oil” is defined as “crude petroleum and any other hydrocarbons,

regardless of gravities, which are produced at the well in liquid form by ordinary production

methods, and which are not the result of condensation of gas before or after it leaves the

reservoir.”709

704 Id.

With regard to spacing or pooling provisions, the Act does not distinguish between

based on whether oil or gas is produced from a given well.

705 Id. § 34-60-118(12). 706 Id. § 34-60-118(11). 707 Id. § 34-60-118(9). 708 Id. § 34-60-103(5). 709 Id. § 34-60-103(6).

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[2] – Split by Depth.

As shown below, Colorado’s default spacing rules vary by well depth. There are no other

relevant provisions treating wells differently based on such grounds.

[3] – Spacing Rules.

Commission regulations provide default setback rules applicable to all oil and gas wells.

Unless otherwise authorized by the Commission after notice and a hearing, these regulations

control the required spacing between wells and/or other tracts.710 Any oil or gas well drilled at a

depth of 2,500 feet or greater may not be located within 600 feet of any lease line, or within

1,200 feet of any other producible well within the same pool.711 No well at a depth of 2,500 feet

or less may be located within 200 feet of any lease line, nor within 300 feet of any other

producible well drilling from the same pool.712 For wells subject to a unitization agreement or

order, these spacing rules are limited to the following: wells deeper than 2,500 feet may not be

within 600 feet of the any boundary line of the unit area; in turn, those drilled less than 2,500 feet

deep may not be located less than 200 feet of such unit boundaries.713 In addition, no well may

be drilled within 200 feet of a shaft or entrance to a coal mine (unless abandoned and sealed); nor

within 100 feet of any mine shaft house, mine boiler house, mine engine house, or mine fan; nor

within 15 feet of any mine haulage or airway.714

[4] – Minimum Operator Control.

A unitization order issued by the Commission will not become effective without the

written approval of a proportion of relevant operators and owners. The Commission must find,

either in the original order or a supplementary order if necessary, that approval is given from

710 Colo. Code Regs. § 404-318 (2010). 711 Id. 712 Id. 713 Id. 714 Id.

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those “who will be required to pay at least 80 percent of the costs of the unit operation, and also

by the owners of at least 80 percent of the production or proceeds thereof that will credited to

interests which are free of cost, such as royalties, overriding royalties, and production

payments.”715 If such approval is not granted within six months of issuance, the order will

become ineffective and is revoked, “unless for good cause shown the Commission extends said

time.”716

[5] – Directional Drilling.

The Commission may permit an operator to drill a horizontal or deviated well using

controlled directional drilling methods, conditioned upon the operator’s satisfaction of additional

notice and permitting requirements stated in the regulations.717

[6] – Options.

The Act requires that all owners within a drilling unit pay their fair share of the costs of

drilling and operating the well thereon.718

A pooling order must establish the relative “interest of each owner in the [drilling] unit

and provide that each consenting owner is entitled to receive, subject to royalty or similar

obligations, the share of the production from the well applicable to his interest in the drilling

unit.”

The Act affords any owner subject to compulsory

pooling or unitization the right to opt out of participation in the pool or unit, the terms of which

must be provided in the relevant order.

719

715 Colo. Rev. Stat. § 118(5) (2010).

Unless otherwise agreed among the owners, the order will state each consenting

owner’s “proportionate part of the non-consenting owner’s share of such production until costs

are recovered, and that each non-consenting owner is entitled to own and to receive the share of

716 Id. 717 Colo. Code Regs. § 404-321 (2010). 718 Colo. Rev. Stat. § 34-60-116(6) (2010). 719 Id. § 34-60-116(7)(a).

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the production applicable to his interest in the unit after the consenting owners have recovered

the non-consenting owner’s share out of production.”720

If one or more owners within a pooled drilling unit refuse to pay, each will be subject

to an additional risk penalty respective of each non-consenting owner’s interest until all costs and

other charges are recovered by the consenting owners. This statutory penalty allows respective

consenting owners or operators to recover:

(1) One hundred percent of the non-consenting owner's share of the cost of surface equipment beyond the wellhead connections (including, but not limited to, stock tanks, separators, treaters, pumping equipment, and piping); plus, (2) One hundred percent of the non-consenting owner's share of the cost of operation of the well commencing with first production and continuing until the consenting owners have recovered such costs; and, (3) Two hundred percent of that portion of the costs and expenses of staking, well site preparation, obtaining rights-of-way, rigging up, drilling, reworking, deepening or plugging back, testing, and completing the well, after deducting any cash contributions received by the consenting owners; and, (4) Two hundred percent of that portion of the cost of equipment in the well, including the wellhead connections.721

This penalty applies to non-consenting owners who are oil and gas lessees.

722

A non-consenting owner of a tract in a drilling unit which is not subject to any lease or other contract for the development thereof for oil and gas shall be deemed to have a landowner's proportionate royalty of twelve and one-half percent [i.e. 1/8th] until such time as the consenting owners recover, only out of the non-consenting owner's proportionate seven-eighths share of production, the costs specified [above]. After recovery of such costs, the non-consenting

However, the Act

affords owners of unleased tracts within a unit further protection by allowing a non-consenting

owner to acquire a working interest in the well upon the other consenting owners’ cost recovery.

The Act provides:

720 Id. 721 Id. 722 Id. § 34-60-116 (7)(c).

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owner shall then own his proportionate eight-eighths share of the well, surface facilities, and production and then be liable for further costs as if he had originally agreed to drilling of the well.723

In addition, the Commission may not enter a pooling order over the protest of an owner of

unleased minerals unless shown that such owner has “been tendered a reasonable offer to lease

upon terms no less favorable that those currently prevailing in the area,” and has “been furnished

in writing such owner’s share of the estimated drilling and completion costs of the well, the

location and objective depth of the well,” and the estimated time of commencing operations.

724

The Act does not provide a risk penalty for owners subject to forced unitization because

such an owner has limited election rights. The cost allocation must be provided in an order for

unit operations to show “how the costs of unit operations, including capital investments, shall be

determined and charged to the separately owned tracts and how said costs shall be paid,

including”

(1) a provision providing when, how, and by whom the unit production allocated to an owner who does not pay the share of the cost of unit operations charged to such owner, or the interest of such owner, may be sold and the proceeds applied to the payment of such costs; and, (2) a provision, if necessary, for carrying or otherwise financing any person who elects to be carried or otherwise financed, allowing a reasonable interest charge for such service payable out of such person's share of the production725

Thus, the non-consenting owner subject to forced unitization may either elect to sell his interest

or portion of production; or in turn, may be carried by other owners who so agree without facing

a statutory risk penalty.

723 Id. 724 Id. § 34-60-116(7)(d). 725 Id. § 34-60-118(4)(d)-(e) (emphasis added).

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§ 08.01 Analysis of Connecticut Regulatory Framework.

[1] – Governance.

The body charged with jurisdiction over the preservation of natural resources in

Connecticut is the Department of Environmental Protection (“Department”). 726 The

Commissioner of Environmental Protection (“Commissioner”) directs the Department.727 The

Commissioner’s duties and powers embrace those necessary and convenient to carry out the

state’s environmental policies, including providing for “minimum state-wide standards for the

mining, extraction, excavation or removal of earth materials of all types,”728 and he may employ

such agents and employees as necessary to carry out his duties.729

[2] – Procedure.

Connecticut has not enacted legislation directly related to pooling or spacing. However,

the Department of Environmental Protection has promulgated regulations for oil and gas

exploration and production.730 Those regulations primarily govern permitting for exploration

and production wells.731

(A) The name, . . . mailing and location address and telephone number of the person for whom the exploration is conducted, and, if such person is a business, the name, mailing and location address and telephone number of the individual designated as the contact for the Commissioner.

They require that persons exploring for oil or gas to register with the

Commissioner by submitting information set forth in the regulations:

(B) A United States Geologic Survey topographic map at a scale of one inch equals 25,000 feet which shows the location of the exploration activity. (C) A description of the exploration activity, including but not limited to a description of the methods of exploration to be used and the location, depth and number of borings to be drilled.

726 Conn. Gen. Stat. § 22a-2(a) (2011). 727 Id. 728 Id. § 22a-5. 729 Id. § 22a-4. 730 Conn. Agencies Regs. § 22a-472-1 (2011). 731 Id.

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(D) A registration fee of $50 payable by certified check or money order to the Commissioner of Environmental Protection. And, (E) Any other information which the Commissioner deems necessary.732

Exploration may not begin until after the Commissioner approves the registration.

733

A separate registration must be submitted for each exploratory well and each production

well.

734 That registration must include the proposed final depth of the proposed well735 and “the

depth of each private well within a 1000 foot radius of the proposed well and the depth of each

public water supply well within a one mile radius of the proposed well.”736 Additionally, the

registration must include a “surety or performance bond payable to the State of Connecticut in

the sum of $25,000 for each proposed well, conditioned on the well being drilled, maintained and

abandoned in accordance with this section and the exploration and production activities not

causing pollution.” 737 If drilling is not commenced within one year of the Commissioner’s

approval of registration, that registration expires.738

The regulations also provide a definition for oil and gas.

739 Oil is defined as “crude

petroleum oil and other hydrocarbons, regardless of gravity, that are produced in liquid form by

ordinary production methods,” while gas is defined as “all natural gas and all other hydrocarbons

that occur in a gaseous phase in the reservoir.”740

[3] – Operating Requirements.

No definition is given for coalbed methane

gas.

732 Id. § 22a-472-1(b)(2). 733 Id. § 22a-472-1(b)(1). 734 Id. § 22a-472-1(b)(3). 735 Id. § 22a-472-1(b)(3)(C). 736 Id. § 22a-472-1(b)(3)(D). 737 Id. § 22a-472-1(b)(3)(I). 738 Id. § 22a-472-1(c). 739 Id. § 22a-472-1(a). 740 Id.

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The remaining portions of the regulations set forth construction, drilling, and abandonment

requirements. Casing must be sufficient to prevent oil or gas from infiltrating a water-bearing

horizon. 741 Drilling activities must be conducts such that they do not create a reasonable

expectation of water pollution.742 Finally, registrants must give 30 days’ notice of abandonment

to the Commissioner 743 and must perform abandonment in conformity with the regulations

within 180 days of cessation of drilling unless the Commissioner approves otherwise.744

741 Id. § 22a-472-1(d). 742 Id. § 22a-472-1(e). 743 Id. § 22a-472-1(f)(1). 744 Id. § 22a-472-1(f)(2)–(5).

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§ 09.01 Analysis of Delaware Regulatory Framework.

The state of Delaware has not enacted statutes addressing oil and gas conservation.

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§ 10.01 Analysis of Florida Regulatory Framework.

[1] – Name of the Governing Body.

The body vested with the authority to enforce Florida’s Oil and Gas Conservation Statute

(“Oil and Gas Statute”)745 is the Division of Water Resource Management (“Division”) of the

Department of Environmental Protection (“Department”).746

[2] – Membership on the Governing Body.

The Department of Environmental Protection is headed by a secretary (“Secretary”), who

is appointed by the Governor with concurrence of three or more members of the Cabinet747 and

confirmation by the Senate.748 The Secretary serves at the pleasure of the Governor749 and may

appoint three deputy secretaries, which serve at the pleasure of the Secretary.750 The Oil and Gas

Statute is administered by the Division of Water Resource Management.751 The departmental

divisions are each headed by a director752

[3] – Scope of Authority.

to be appointed by the Secretary and to serve at his or

her pleasure.

The Division has jurisdiction and authority over “all persons and property necessary to

administer and enforce effectively the provisions of this law and all other laws relating to the

conservation of oil and gas.”753

745 Fla. Stat. § 377.01–.42 (2010).

All production of oil and gas from common supply sources are

746 Id. § 377.07. Although the statute states that the Division of “Resource Management” is the governing body, the more accurate name is the Division of Water Resource Management so to distinguish it from the Division of Air Resource Management. 747 Id. § 20.255(1). 748 Id. § 20.05(2). 749 Id. 750 Id. § 20.255(2)(a). 751 Id. § 377.07. 752 Id. § 20.04(3)(a). 753 Id. § 377.21(1).

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controlled and regulated under the Oil and Gas Statute,754 which declares that the public policy

of Florida includes the following: “to conserve and control the natural resources of oil and gas in

said state . . .; to prevent waste of said natural resources; to provide for the protection and

adjustment of the correlative rights of the owners of the land wherein said natural resources lie

and the owners and producers of oil and gas resources and the products made therefrom and of

others interested therein.”755

Waste of oil and gas is prohibited.

756

(a) The inefficient, excessive or improper use or dissipation of reservoir energy; and the locating, spacing, drilling, equipping, operating or producing of any oil or gas well or wells in a manner which results, or tends to result, in reducing the quantity of oil or gas ultimately to be recovered . . . .

Waste is defined to mean “physical waste” as

understood in the oil and gas community and also including the following:

(b) The inefficient storing of oil; and the locating, spacing, drilling, equipping, operating, or producing of any oil or gas well or wells in a manner causing, or tending to cause, unnecessary or excessive surface loss or destruction of oil or gas. (g) Underground waste however caused and whether or not defined. (k) Abuse of correlative rights and opportunities of each owner of oil and gas in a common reservoir due to nonuniform, disproportionate and unratable withdrawals, causing undue drainage between tracts of land.

The Division has the authority and duty to investigate as is proper to determine if waste exists or

is imminent.757

(a) Collect data.

In the exercise of those duties, the division has the authority to:

(b) Make investigations and inspections. (c) Examine properties, leases, papers, books, and records and to examine, survey, check, test, and gauge oil and gas wells, tanks, storage tanks, treatment plants and facilities, and modes of transportation used to gather and process crude oil or gas and

754 Id. § 377.18. 755 Id. § 377.06. 756 Id. § 377.20. 757 Id. § 377.21(2).

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products derived from wells within the state, prior to delivery to common carrier. (d) Hold hearings. (e) Provide for the keeping of records and making of reports. (f) Take such action as may be reasonably necessary to enforce this law.758

The Department may issue orders and rules in order to implement and enforce this

chapter. Rules and orders may be promulgated under the authority of this chapter for the

following reasons, among others:

(d) To require the drilling, casing, and plugging of wells to be done in such a manner as to prevent the escape of oil or other petroleum products from one stratum to another. (f) To require a reasonable bond, or other form of security acceptable to the department, conditioned upon the performance of the duty to plug properly each dry and abandoned well and the full and complete restoration by the applicant of the area of which geophysical exploration, drilling, or production is conducted to the similar contour and general condition in existence prior to such operation. (i) To prevent wells from being drilled, operated, or produced in such a manner as to cause injury to neighboring leases or property. (r) If necessary for the prevention of waste, as herein defined, to determine, limit, and prorate the production of oil or gas, or both, from any pool or field in the state. (t) To regulate the spacing of wells and to establish drilling units. (u) To prevent, so far as is practicable, reasonably avoidable drainage from each developed unit which is not equalized by counterdrainage. (x) To act in a receivership capacity for fractional mineral interests for which the owners are unknown or unlocated and to administratively designate the operator as the lessee.759

When necessary to prevent waste and to avoid drilling unnecessary wells, the Division

may establish a drilling unit or units for each pool.

760 A drilling unit is defined as “the maximum

area in a pool which may be efficiently and economically drained by one well.”761

758 Id.

Owners of

759 Id. § 377.22(2). 760 Id. § 377.25(2). 761 Id.

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two or more separately owned tracts may, on their own, agree to integrate their interests and

develop the land as a unit.762 If no agreement has been reached, the Division may require

owners of two or more separately owned tracts within an established drilling unit to integrate

their interests and develop their land as a drilling unit.763 The Department also has the authority

to issue an order requiring the operation as a unit of an entire field or of a pool or pools

therein.764

[4] – Process for Pooling.

Florida requires permits be obtained prior to drilling wells and prior to operating those

wells.765 Before an applicant may apply for a drilling permit, he or she must have “a lawful right

to drill, explore, or develop from a majority of the mineral interests within a drilling unit,”

whether by owning or leasing the minerals.766 Unallocated interests may be unitized.767 Also,

prior to issuing a permit, the Division must find that the applicant has implemented, or will

implement, programs to control oil- and petroleum-related pollution and the abatement

thereof.768

All permits to drill must include the address of the applicant’s residence or the several

applicants’ residences,

769

762 Id. § 377.27(1).

as well as the following: an Organization Report, performance

security, location plat, site construction plans, casing and cementing program, contingency plan

if appropriate, and application fee of $2,000. If the application is one for a nonroutine well, a

well not in conformity with given spacing or location requirements, it should also include a lease

763 Id. 764 Id. § 377.28(1). 765 Fla. Admin. Code Ann. r. 62C-26.003, 008 (2010). 766 Fla. Stat. § 377.2411(2010); see also id. § 377.243(1). 767 Id. § 377.243(1). 768 Id. § 377.243(2). 769 Id. § 377.24(2) (2010).

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map or document and letter of justification.770 If the Department has any of these items on file,

they may be included by reference.771 The application will be considered incomplete until the

applicant also has requested a “preliminary site inspection” to be made by the Department.772

No permit may be given to allow for the drilling of an oil or gas well on certain coastal locations

or within corporate municipalities. 773 Permits will be valid for one year from the date of

approval and may be extended for up to one year for an additional fee of $1,000.774

After obtaining a permit to drill, the operator must give written notice by certified mail,

return receipt requested, of the proposal to drill to all those mineral owners both who hold a

minority interest and who are either unleased mineral owners or owners of minerals leases who

have not entered farmout agreements or other like agreement to drill with the operator.

775 This

notice must include an offer to participate for a pro rata share of costs or to lease or farm out its

right in the drilling unit.776 However, the bonus and royalty amounts included in the offer may

not be less than a $26-per-acre one-time bonus and a one-eighth royalty.777 This notice must be

given at least 60 days before drilling the well.778

Notified owners have 30 days after receipt of notice to respond in writing. Otherwise,

they will be deemed a “carried owner.”

779 Carried owners do not receive revenue until the

applicant and its partners in the joint venture have been paid from production for an amount

equal to 300 percent of the actual costs of drilling, developing, and producing the well. 780

770 Fla. Admin. Code Ann. r. 62C-26.003(3) (2010).

771 Id. 772 Id. r. 62C-003(4). 773 Fla. Stat. § 377.24(5)–(9) (2010). 774 Fla. Admin. Code Ann. r. 62C-26.003(1) (2010). 775 Fla. Stat. § 377.2411(1)(a) (2010). 776 Id. § 377.2411(1)(b). 777 Id.; see also id. § 377.247(2). 778 Id. § 377.2411(1)(c). 779 Id. § 377.2411(2)(a). 780 Id. § 377.2411(2)(b).

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Carried owners are entitled to an annual accounting of the amount still owing to the operators.781

If the mineral owner is the State, these provisions do not apply.782

Further, operating permits are necessary for each well not plugged and abandoned to

authorize operators to use them for their intended purpose, i.e., to produce oil or gas; these

permits should be obtained during the testing phase.

783 Every five years, the Department

conducts a field inspection of the well and operating permit to verify compliance.784 Every

application and re-certification for operating permits must include the following: Form 14, the

Application for Permit to Operate Well; application fee of $2,000; continued or revised bond or

security coverage; new or updated Spill Prevention and Clean Up Plan; new or updated Flowline

specifications and installation plan; and Secondary Containment Facility Certification, if not

already on file and current.785 Further, the Department will not issue an operating permit unless

all reporting and data submission requirements have been met, which include the following:

Well Record with driller’s log, Well Completion Report, Monthly Well Production and Test

Report, Monthly Injection Well Report, and copies of all mud logs, well logs, samples, cores,

core analysis reports, and directional surveys.786

The Division may deny any application for just and lawful cause.

787

(1) The nature, character and location of the lands involved; whether rural, such as farms, groves, or ranches, or urban property vacant or presently developed for residential or business purposes or are in such a location or of such a nature as to make such improvements and developments a probability in the near future.

The Division must

base its decision of whether to issue a permit on consideration of the following criteria:

781 Fla. Stat. § 377.2411(2)(c) (2010). 782 Id. § 377.2411(2)(d). 783 Fla. Admin. Code Ann. r. 62C-25.006(2) (2010); see also id. r. 62.26.008(1). 784 Id. r. 62C-25.006(2). 785 Id. r. 62C-26.008(3). 786 Id. r. 62C-26.008(4). 787 Fla. Stat. § 377.24(4) (2010).

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(2) The nature, type and extent of ownership of the applicant, including such matters as the length of time the applicant has owned the rights claimed without having performed any of the exploratory operations so granted or authorized. (3) The proven or indicated likelihood of the presence of oil or gas or related minerals in such quantities as to warrant the exploration and extraction of such products on a commercially profitable basis.788

The board

789 will establish a drilling unit or units for each pool in order to prevent waste

and to avoid drilling unnecessary wells.790 A drilling unit is the “maximum area in a pool which

may be efficiently and economically drained by one well.”791 The Division, as previously noted,

has the authority to integrate interests “when two or more separately owned tracts are embraced

within an established drilling unit.”792 If the owners agree to pool their interests within the

drilling unit, they may do so voluntarily. 793 If pooling does not take place voluntarily, the

Division will require such integration in the prevention of waste and to avoid the drilling of

unnecessary wells.794 If the Division is found to lack the authority to require integration, the

owners may each drill on their respective tracts subject to a limitation on production allowing

each owner to produce only the proportion of the allowable for the whole drilling unit as the tract

bears to the full drilling unit.795 Also, the Oil and Gas Statute provides that the Department may

determine that an entire field or any pool or pools or portions thereof may need to be operated as

a unit.796

Although the Florida Oil and Gas Statute does not explicitly call for a hearing prior to

integration of interests or orders of unit operation, the Florida Administrative Code’s

788 Id. § 377.241. 789 This is a body not defined by statute; presumably the “Division” is intended. 790 Id. § 377.25(2). 791 Id. 792 Id. § 377.27(1). 793 Id. 794 Id. 795 Id. § 377.27(2). This provision appears to be in place as a safety feature in the statute. 796 Id. § 377.28(1).

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Administrative Procedure Act provides a procedure for “decisions which affect substantial

interests,” applicable to all proceedings in which substantial interests of a party are determined

by an agency. 797 That section says that, unless otherwise agreed, section 120.57(2) of the

Administrative Code applies to all cases.798 Section 120.57(2) requires that affected persons be

afforded reasonable notice of agency action, whether proposed or already taken, with a summary

of the grounds upon which that action rests; the option to present evidence in opposition to the

action or to otherwise challenge the action; and a written explanation within seven days.799

Parties’ notice must include information that an administrative hearing or judicial review may be

had and should indicate the procedure to obtain such review.800

Petitions or requests for hearings should be filed with the “agency,”

801 which can be

defined as the Department.802 All parties are entitled to reasonable notice of not less than 14

days, which notice requirement may be waived. 803 If not waived, notice must include a

statement of (1) the time, place, and nature of the hearing and (2) a statement of the legal

authority and jurisdiction under which the hearing will be held.804 Besides requirements adopted

specifically by law, the petition or request for hearing must be signed by the party or the party’s

attorney805

(a) The identification of the petitioner.

and must include the following:

(b) A statement of when and how the petitioner received notice of the agency’s action or proposed action. (c) An explanation of how the petitioner’s substantial interests are or will be affected by the action or proposed action.

797 Id. § 120.569(1). 798 Id. 799 Id. § 120.57(2)(a). 800 Id. § 120.569(1). 801 Id. § 120.569(2)(a). 802 Id. § 120.52(1)(a). 803 Id. § 120.569(2)(b). 804 Id. 805 Id. § 120.569(2)(e).

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(d) A statement of all material facts disputed by the petitioner or a statement that there are no disputed facts. (e) A statement of the ultimate facts alleged, including a statement of the specific facts the petitioner contends warrant reversal or modification of the agency’s proposed action. (f) A statement of the specific rules or statutes that the petitioner contends require reversal or modification of the agency’s proposed action, including an explanation of how the alleged facts relate to the specific rules or statutes. (g) A statement of the relief sought by petitioner, stating precisely the action petitioner wishes the agency to take with respect to the proposed action.806

Upon receipt of notice in proper conformity with the above requirements, the agency may

dismiss it as having an incurable defect; promptly give notice to all parties of action taken on the

petition, including particular reasons if not granted; or refer to the Division for the assignment of

an administrative law judge.

807 A final order must be in writing and include finding of facts and

conclusions of law separately; it also should be rendered within 90 days after the hearing, if

conducted by the agency; after a recommended order is submitted to the agency and mailed to all

parties, if conducted by an administrative law judge; or after the agency has received all material

it has authorized to be submitted, if no hearing was conducted.808

Orders requiring integration and pooling must be on just and reasonable terms and must

afford the owners of each tract the opportunity to obtain the tract’s just and equitable share of

production from the pool.

809

(a) A description of the area embraced, termed the “unit area” and a description of the pool or pools, or portions thereof, affected and lying within the unit area.

Orders for unit operation must be fair and reasonable, must protect

the rights of interested parties, and must include the following:

(b) A statement of the nature of the operations contemplated.

806 Id. § 120.54(5)(b)(4). 807 Id. § 120.569(2)(c)-(d). 808 Id. § 120.569(2)(l). 809 Id. § 377.28(9).

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(c) A method of allocation among the separately owned tracts in the unit area of all the oil or gas, or both, produced from the unit pool within the unit area and not required in the conduct of such operation or unavoidably lost, such method of allocation to be on a formula that is fair and equitable and that will protect the correlative rights of all interested parties. (d) A provision for adjustment among the owners of the unit area (not including royalty owners) of their respective investments . . . attributable to the unit operations. . . . The adjustment provided for herein may be treated separately and handled by agreements separate from the unitization agreement. (e) A provision that the costs and expenses of unit operation, including investment, past and prospective, be charged to the separately owned tracts in the same proportions that such tracts share in unit production. The expenses chargeable to a tract shall be paid by the person not entitled to share in production free of operating costs and who, in the absence of unit operation, would be responsible for the expenses of developing and operating such tracts, and such person’s interest in the separately owned tract shall be primarily responsible therefor. The obligation or liability of such persons in the several, separately owned tracts for the payment of unit expense shall at all times be several, and not joint or collective. . . . (f) The designation of, or a provision for the selection of, a unit operator. . . . (g) A provision that when the full amount of any charge made against any interest in a separately owned tract is not paid when due by the person or persons primarily responsible therefor, then all of the oil and gas production allocated to the interest in default in such separately owned tract, upon which operator has a lien, may be appropriated by the unit operator and marketed and sold for the payment of such share, together with interest at a rate of six percent (6%) per annum. The remaining portion of the unit production, or the proceeds derived therefrom, allocated to each separately owned tract shall in all events be regarded as royalty to be paid to the owners, free and clear of all unit expense and free and clear of any lien therefor. . . . (h) The time the unit operation shall become effective and the manner in which, and the circumstances under which, the unit operation shall terminate.810

Owners of fractional undivided mineral interests in lands subject to permits are entitled to

their pro rata share of the earnings after costs of exploration and operation have been

810 Id. § 377.28(3).

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allocated.811 When operators cannot find the owner of the minority mineral interest in a drilling

unit after reasonable attempts to locate that owner, the operator may call for the Department to

act as the receiver for that party. Unlocated owners are entitled to the one-time bonus payment

of $26 per acre and one-eighth production royalty.812

The orders requiring unit operations are not effective until the unitization agreement is

ratified or approved in writing by the owners of at least 75 percent of the cost allocation and by

75 percent of the holders of production allocated to royalty owners.

813 A party potentially could

be responsible for both cost and also be a holder of royalty interest. If that is the case, the party

may cast their vote as one or the other, but not as both. For example, if such party votes its cost

allocation percentage toward the 75 percent required approval, that party’s percentage interest as

a royalty holder will be excluded when calculating the percentage of consenting and non-

consenting royalty holders.814 Additionally, parties responsible for at least 75 percent of the

costs must ratify a contract incorporating the operation arrangements.815 If the required approval

does not take place within six months of the order date, or within a department-granted extension

period, the order is automatically revoked.816

Additionally, the Board may amend or add to orders providing for unit operations by

entering a new order or by amending an order, and production should then be reallocated among

the tracts.

817 No order that changes the percentage of oil and gas allocated to each separately

owned tract is retroactive.818

811 Id. § 377.245.

Orders that extend or add to an existing unit area are only effective

812 Id. 813 Id. § 377.28(4)(a). 814 Id. 815 Id. § 377.28(4)(b). 816 Id. 817 Id. § 377.28(5)(a). 818 Id. § 377.28(6).

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upon ratification by the appropriate percentage, given above, of interested parties in the tracts to

be added.819

The portions allocated to each tract in unit operations will be considered to have been

produced from each tract by a well drilled on said tract.

820 Also, for required integration and

pooling, operators have the right to charge each owner with the actual and reasonable cost of

development and operation, including a reasonable charge for supervision.821 The operator also

has the right to first production for payment of costs. If a dispute arises regarding the amount of

costs, the Division may determine appropriate costs. If the well drilled is a dry hole, no liability

for payment attaches to any person by virtue of the unit operation order.822

[5] – Matters Covered.

[a] Number of Wells.

The drilling units, as set by the Department, should contain only one currently producing

well in the same pool, and no drilling unit should be attributed to any other producing well in the

same reservoir unless allowed in the special field rules or in a non-uniform permit under Florida

Administrative Code section 62C-26.004(6).

[b] Spacing and Depth of Wells.

The Florida Administrative Code provides that unless governed by special field rules

adopted by the Department, general spacing rules apply. For gas wells of any depth, exploratory

wells should be on 640-acre units, and routine test wells or condensate wells should have a

bottom hole location of not closer than 1,320 feet to the closets drilling unit boundary. For oil

wells less than 7,000 feet deep, exploratory wells should be on 40-acre lots, and routine test

819 Id. § 377.28(5)(b)(2). 820 Id. § 377.28(9). 821 Id. 822 Id.

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wells should have a bottom hole location no closer than 460 feet to the closest drilling unit

boundary. As for oil wells drilled to below 7,000 feet, exploratory wells should be on 160-acre

units, while routine test wells should have a bottom hole location no closer than 920 feet to the

nearest drilling unit boundary.

If the bottom hole location does not meet the spacing requirements or the drilling unit

shapes are not in conformity with the rules and the location has not been approved as a condition

of the drilling permit, the well will be called a “nonroutine location.”823 The operator must then

apply for a nonroutine location, at which time the Department may grant drilling permits with

shorter distances to surrounding drilling units or on different drilling units.824

[c] Authority to Integrate Production.

When more than one separately owned tract is found within an established drilling unit

and the owners thereof have not agreed to integrate their interests, the Division shall require

them to do so and to develop their land as a drilling unit if it finds that the interests of preventing

waste and avoiding unnecessary drilling are thereby served.825 Additionally, the Department

may adjudge the necessity for operating a field or pools as a unit and will require unit operation,

if necessary.826

[d] Allocation of Production and Costs.

Owners who have been ordered to integrate and pool their interests in a drilling unit may

be charged by the operator the actual costs of development and operations, including a

reasonable charge for supervision, which costs will be charged against the owners’ interest in the

823 Fla. Admin. Code Ann. r. 62C-26.004(4)(c) (2010). 824 Id. r. 62C-26.004(6). 825 Fla. Stat. § 377.27(1) (2010). 826 Id. §§ 377.28(1)-(2).

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production unit.827 The operator has the right to the first production from wells drilled thereon in

order to pay for others’ share of drilling expenses. However, if he drills a dry hole, the others

will not be liable for payment unless they specifically agreed to be so liable.828

For orders requiring unit operation, production allocation is to be made according to a

formula that is “fair and equitable and that will protect the correlative rights of all interested

parties.”

829 Costs should be shared in the same proportion as production is distributed, with a

lien on the oil and gas rights, exclusive of the royalty provided for by agreement, held by the

operator in payment of each tract’s share of the production costs.830 Also, the order may provide

for adjustment among owners of their investments in production equipment and services

attributable to the unit operations, which adjustment may be set out in a separate agreement from

the unitization agreement. 831 If owners cannot agree on the amount to be so charged, the

Department can help in making the determination.832

[e] Royalty Distribution.

Unit operators must give minority interests the option to participate for pro rata share of

costs or to lease or farm out their right to drill.833 The bonus and royalty amounts in the offer

may not be less than a $26-per-acre one-time bonus and a one-eighth royalty.834 If the owners do

not respond to the offer within 30 days, they will be deemed a “carried owner.”835

827 Id. § 377.248(9).

Carried

owners do not receive revenue until the applicant and its partners in the joint venture have been

paid from production for an amount equal to 300 percent of the actual costs of drilling,

828 Id. 829 Id. § 377.248(3)(c). 830 Id. § 377.248(3)(e). 831 Id. § 377.248(3)(d). 832 Id. 833 Id. § 377.2411(1)(b). 834 Id.; see also id. § 377.247(2). 835 Id. § 377.2411(2)(a).

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developing, and producing the well.836 Minority owners who the operator cannot locate may be

appointed a receiver. In that case, the operator must forward the bonus and royalty to be held for

the unlocatable owner.837 Otherwise, in payment of the costs and expenses allocated among the

tracts, the operator has a lien upon the leasehold estate, not including the royalty interest

provided in the lease, and upon the unleased oil and gas rights, not including a one-eighth

royalty.838 Orders requiring integration and pooling do not make note of a royalty due to interest

holders.839

[f] Agreements Not Restraint of Trade.

The Code provides that approval by the Division of agreements for co-operative

development and operation of units in the interest of oil and gas conservation or for the

prevention of waste will not be held to violate any state statutes related “to trusts, monopolies, or

contracts and combinations in restraint of trade.”840

[g] Limitation on Production.

The Division may limit the total amount of oil or gas that may be produced in the state

when the total amount produced by all pools therein exceeds the amount necessary to meet

reasonable market demand for the state.841 Reasonable market demand is defined as “the amount

of oil reasonably needed for current consumption, together with a reasonable amount of oil for

storage and working stocks.”842

836 Id. § 377.2411(2)(b).

The Division must fix allowables in a way that avoids undue

discrimination and prevents waste. The same standards used to distribute the allowable for the

837 Id. § 377.247. 838 Id. § 377.248(3)(e). 839 Id. § 377.248(9). 840 Id. § 377.29. 841 Id. § 377.30(1). 842 Id. § 377.19(15).

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state shall be used for similar reserves.843 Also, when limiting production within a single pool,

the Division, to a reasonable extent, must prorate the allowable production among producers in

the pool to prevent or minimize avoidable drainage that is not equalized by counter-drainage and

to afford each producer the opportunity to produce its just and equitable share.844

§ 10.02 Types of Florida Pooling Statutes.

[1] – Mineral Distinctions.

The term oil is defined as “crude petroleum oil and other hydrocarbons, regardless of

gravity, which are produced at the well in liquid form by ordinary production methods, and

which are not the result of condensation of gas after it leaves the reservoir.”845 Gas means “all

natural gas, including casinghead gas, and all other hydrocarbons not defined as oil in subsection

(4) above.”846 The rules provide additional definitions. They define condensate as “the liquid

hydrocarbons produced by the condensation of a vapor or gas, either after it leaves the reservoir

or while still in the reservoir. Condensate is often called distillate, drips, white oil, etc.”847 Dry

gas means “natural gas obtained from formations that produce gas only, or natural gas which

does not contain the heavier fractions which may easily condense under normal atmospheric

conditions; not casinghead gas.”848

[2] – Spacing and Depth Rules.

Wells drilled in existing fields will be spaced according to special field rules adopted by

the Department.849 Otherwise, default rules apply to the spacing of wells.850

843 Id. § 377.30(1).

The default spacing

provisions for gas wells do not provide variations based on depth, but oil wells are spaced based

844 Id. § 377.30(2). 845 Id. § 377.19(4). 846 Id. § 377.19(5). 847 Id. § 377.19(16). 848 Id. § 377.19(25). 849 Fla. Admin. Code Ann. r. 62C-26.004(1) (2010). 850 Id.

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upon whether they are drilled to a depth of greater than or less than 7,000 feet.851 Additionally,

horizontal wells have their own spacing rules. Routine drilling units are based on the U.S.

Government Surveyed Township and Range system, which will be used to space wells. 852

Routine drilling units should be shaped so that the diagonals lie completely within the unit, the

length of the longest diagonal not to exceed 125 percent “of the length of a diagonal of a square

containing the same number of acres as the unit.”853

Each well should be drilled roughly in the center of a drilling unit unless the Division

determines that conditions require otherwise.

854 The surface location is determined by the

surface conditions, and wells should be placed where they cause the least amount of surface

disturbance and where they do not cause other environmental issues.855 For wells with a bottom

hole location that is not in conformity with the spacing requirements in Administrative Code

section 62C-24.004, and if the location was not approved as a condition of the drilling permit, a

well is considered to be in a nonroutine location and the operator must apply for a nonroutine

location as provided in the rules.856 The Department may grant drilling permits that allow for

less distance between unit boundaries when it is necessary.857

To apply for a permit for nonroutine wells or drilling units, the applicant should include

the names and addresses of all “substantially affected parties (offsetting mineral-interest owners,

operators, and lessees).”

858

851 Id. r. 62C-26.004(2)-(6).

The Department should base the determination of whether to grant

the nonroutine well or unit on whether doing so is necessary to prevent waste or to protect

852 Id. r. 62C-26.004(3). 853 Id. r. 62C-26.004(3)(b). 854 Fla. Stat. § 377.25(3) (2010). 855 Fla. Admin. Code Ann. r. 62C-26-004(4) (2010). 856 Id. r. 62C-26-004(4)(c). 857 Id. r. 62C-26.004(6). 858 Id. r. 62C-26.004(6)(a).

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correlative rights.859

(24) DRILLING UNIT shall mean the block of land surrounding and assigned to a particular well and into which no other like well may be completed.

For purposes of this section, the Florida Administrative Code provides the

following pertinent definitions:

(31) HORIZONTAL WELL shall mean any well within a horizontal or nearly horizontal borehole within the production interval. (38) NONROUTINE DRILLING UNIT shall mean any drilling unit composed of unsurveyed land not divided into townships and sections, composed of irregular townships and sections, or composed of odd sized lots other than 40, 160, or 640 acres. (39) NONROUTINE SPACING shall mean that the required amount of land surrounding an oil or gas well is uncommon in its size, shape, etc., and does not conform to 62C-26.004(1) through (4). (45) ROUTINE DRILLING UNITS are those units based on U.S. Government surveyed township and range lines and, for oil wells, are quarter-quarter or quarter sections (depending on well depth) and for gas wells of any depth, full sections. (46) ROUTINE LOCATION OR WELL shall mean an oil or gas well whose bottom hole position complies with 62C-26.004(4). A routine oil well drilled to a depth of less than 7,000 feet has a bottom hole position no closer than 460 feet to the nearest drilling unit boundary while an oil well drilled to a greater depth has a bhp no closer than 920 feet to the nearest drilling unit boundary. A routine gas well of any depth has a bhp no closer than 1360 feet to the nearest drilling unit boundary. (47) ROUTINE SPACING shall mean well spacing based on the U.S. Government Township and Range System as described in 62C-26-004. Routine spacing for oil wells are quarter-quarter sections for wells less than 7,000 feet deep and quarter sections for wells greater than 7,000 feet deep. Gas wells, regardless of depth, are assigned 650 acres.860

[a] Gas Wells.

859 Id. r. 62C-26.004(6)(b). 860 Id. r. 62C-25.002.

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Exploratory gas wells, regardless of depth, should be located on 640-acre units. All

routine gas test wells or gas condensate wells should have a bottom hole location not closer than

1,320 feet to the nearest drilling unit boundary.861

[b] Oil Wells Less Than 7,000 Feet Deep.

Exploratory oil wells of less than 7,000 feet should be located on 40-acre units.862 All

routine oil test wells drilled above that depth should have a bottom hole location no closer than

460 feet to the nearest drilling unit boundary.863

[c] Oil Wells Greater Than 7,000 Feet Deep.

Exploratory oil wells drilled to a depth of more than 7,000 feet should be located on 160-

acre units.864 All routine oil test wells drilled below that depth should have a bottom hole

location no closer than 920 feet to the nearest unit boundary.865

[d] Horizontal Wells and Associated Drilling Units.

No producing section of a well may be closer than 1,840 feet to another productive

well.866 All 10-acre blocks whose nearest boundary is within 920 feet of the productive section

of a horizontal well needs to be included in the unit.867 If a horizontal well with productive

sections penetrates within the 400-foot square in the center of a routine drilling unit, that well

should include the entire 160-acre unit. The special requirements for nonroutine drilling units

also apply to horizontal wells.868

[3] – Minimum Operator Control.

861 Id. r. 62C-26.004(4)(b). 862 Id. r. 62C-26.004(2). 863 Id. r. 62C-26.004(4)(a). 864 Id. r. 62C-26.004(2). 865 Id. r. 62C-26.004(4)(a). 866 Id. r. 62C-26.004(5)(a). 867 Id. r. 62C-26.004(5)(b). 868 Id. r. 62C-26.004(5)(f).

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Unit operations orders do not become effective until the unitization agreement is ratified

or approved in writing by the owners of at least 75 percent of the cost allocation and by 75

percent of the holders of production allocated to royalty owners.869 If a party is responsible for

costs and also a royalty interest holder, the party may cast its vote as one or the other type of

interest holder, but not as both. For example, if the party votes its cost allocation percentage

toward the 75 percent required approval, that party’s percentage interest as a royalty holder will

be excluded when calculating the percentage of consenting and non-consenting royalty

holders.870 Additionally, parties responsible for at least 75 percent of the costs must ratify a

contract incorporating the operation arrangements.871 If the required approval does not take

place within six months of the order date, or within a department-granted extension period, the

order is automatically revoked.872

The Board may amend or add to orders providing for unit operations by entering a new

order or by amending an order, and production should then be reallocated among the tracts.

873

No order that changes the percentage of oil and gas allocated to each separately owned tract will

be retroactive.874 Orders that extend or add to an existing unit area are only effective upon

ratification by the appropriate percentage, given above, of interested parties in the tracts to be

added.875

[4] – Directional Drilling.

The statute provides a definition of horizontal well, which is “a well completed with the

wellbore in a horizontal or nearly horizontal orientation within 10 degrees of horizontal within

869 Fla. Stat. § 377.28(4)(a) (2010). 870 Id. 871 Id. § 377.28(4)(b). 872 Id. 873 Id. § 377.28(5)(a). 874 Id. § 377.28(6). 875 Id. § 377.28(5)(b)(2).

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the producing formation.”876 The Administrative Code gives a slightly different definition: “any

well within a horizontal or nearly horizontal borehole within the productive interval.”877

The rules provide regulations for the drilling units and spacing of horizontal wells.

Specifically, no producing section of a horizontal well may be within 1,840 feet of another

productive well.

878 All 10-acre blocks within the 160-acre routine drilling unit whose nearest

boundary is within 920 feet of the productive section of a horizontal well is to be included in the

unit. Those wells with productive sections that penetrate the 400-foot square in the center of a

routine drilling unit will include the entire 160-acre unit.879 The rules also request that horizontal

wells should be unitized as soon as possible after testing is finished.880 A Directional survey

should be taken from the surface casing shoe to full depth to be filed with the Oil and Gas

Administrator within 30 days.881 The Oil and Gas Administrator is “the State Geologist and

Chief of the Florida Geological Survey.”882 Finally, the special nonroutine drilling unit and well

requirements apply to horizontal wells.883

[5] – Options.

Any operator who has gotten a permit to drill must give notice to owners holding a

minority interest within the drilling unit and who are: (1) unleased; or (2) owners of mineral

leases which have not entered into a farmout agreement or any other agreement to drill or

produce with the operator.884

876 Id. § 377.19(25).

The notice must include an offer to allow the owner to participate

in its pro rata share of costs of drilling or to lease or farm out its interest. The notice must

877 Fla. Admin. Code Ann. r. 62C-25.002(31) (2010). 878 Id. r. 62C-26.004(5)(a). 879 Id. r. 62C-26.004(5)(b). 880 Id. r. 62C-26.004(5)(c). 881 Id. r. 62C-26.004(5)(e). 882 Id. r. 62C-25.002(1). 883 Id. r. 62C-26.004(5)(f). 884 Fla. Stat. § 377.2411(1)(a) (2010).

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include the bonus and royalty as previously noted.885 The notified owner has 30 days to make

the election.886

885 Id. § 377.2411(1)(b). 886 Id. § 377.2411(2)(a).

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§ 11.01 Analysis of Georgia Regulatory Framework.

[1] – Name of the Governing Body.

The Board of Natural Resources (“Board”) is a Constitutional Board that is empowered

by the legislature with specific authority to regulate pooling of oil and gas resources in the

state.887

[2] – Membership on the Governing Body.

The Board, which is appointed by the Governor of Georgia and subject to approval by the

State Senate, consists of a total of eighteen members. There is one member from each

congressional district in Georgia and five members from the state at large, one of whom must be

from one of the following counties: Chatham, Bryan, Liberty, McIntosh, Glynn, or Camden.

The members will each serve a term of seven years and shall represent all areas and functions

encompassed within the Department of Natural Resources (DNR). 888

[3] – Scope of Authority.

The Board shall have authority to make such inquiries as it may deem necessary into any

matter over which it has jurisdiction and to adopt and promulgate rules and regulations.889

(1) protect the health, safety and welfare of the citizens of Georgia by requiring that adequate protection of underground fresh water supplies be assured in any drilling operation which may penetrate through any strata which contains fresh water;

The

purpose of these rules is to establish the administration and enforcement procedures of the

Georgia Oil and Gas and Deep Drilling Act of 1975 (“Act”), as amended, and to carry out the

purposes and requirements of the Act. These rules are promulgated in order to:

(2) protect environmentally sensitive areas; and (3) encourage oil and gas exploration to identify new sources of energy.890

887 Ga. Const. art. IV, § VI.

888 Id. 889 Ga. Code Ann. §§ 12-4-43(1), (4) (2010). 890 Ga. Comp. R. & Regs. 391-1-1-.01 (2010).

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The Board has jurisdiction and authority over the drilling of and subsequent use of any

exploration, production, or storage well.891

(1) the drilling of and subsequent use of any exploration or production oil or gas well;

This includes, but is not limited to, jurisdiction and

authority for:

(2) any exploration or production well that is drilled to a depth of 1,800 feet for any other mineral; (3) any exploration or production well drilled to a depth sufficient to interfere with the fresh-water aquifer system in an environmentally sensitive area of the coastal zone; (4) any underground storage well that is used for disposal of waste; (5) any fresh water production well drilled deeper than 1,800 feet; and, (6) any salt water or brine exploration or production well.892

The Board has the authority to establish drilling units and operation units, and to allocate

production within a drilling unit.

893 Additionally, the Board has the power to integrate drilling

units to prevent waste.894

(1) the inefficient, excessive or improper use or dissipation of reservoir energy;

Waste, in addition to its ordinary meaning, means “physical waste” as

that term is generally understood in the oil and gas industry. It shall include, but is not limited

to:

(2) the locating, spacing, drilling, equipping, operating, or producing of any oil or gas well or wells in a manner which results or tends to result, in a reduction in the quantity of oil or gas ultimately to be recovered from any pool in this State; (3) the inefficient storing of oil; (4) the locating, spacing, drilling, equipping, operating or producing of any oil or gas well or wells in a manner causing, or tending to cause, unnecessary or excessive surface loss or destruction of oil or gas; (5) abuse of the correlative rights and opportunities of each owner of gas or oil in a common reservoir due to nonuniform,

891 Ga. Code Ann. § 12-4-43 (2010). 892 Id. 893 Id. § 12-4-45(a). 894 Id.

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disproportionate and unratable withdrawals causing undue drainage between tracts of land; (6) the production of oil or gas in such a manner as to cause unnecessary water channeling or zoning; (7) the operation of any oil well or wells with an inefficient gas-oil ratio; (8) the drowning with water of any stratum of part thereof capable of producing gas or oil, except where approval of such a project has been granted by the Director; (9) underground waste, however caused and whether or not defined as the same relates to any activity regulated by the provisions of these Rules; (10) the creation of unnecessary fire hazards as the fire relates to any activity regulated by the provisions of these Rules; (11) the escape into the open air, from a well producing both oil and gas, of gas in excess of the amount which is necessary in the efficient drilling or operation of the well; and, (12) permitting gas produced from a gas well to escape into the air, except for testing.

To fulfill the duty of waste prevention, the Board has the authority to: (1) investigate; (2)

hold a hearing; (3) grant reasonable and practicable drilling unit and operation unit orders after

notice and hearing; and (4) grant a new or amended operational unit order.895

The Board has authority to adopt and promulgate rules and regulations dealing with the

control of matters over which it has jurisdiction as above stated. Such rules and regulations shall

include, but are not limited to, rules and regulations for, among others, the following purposes:

(1) to require the making of reports showing the location of all wells regulated under this part, including the filing of drill cutting samples, cores, and copies of all logs, and to further require that the operator submit the name classification used for each of the subsurface formations penetrated and the depth at which each such formation was penetrated; (2) to prevent fires, waste, and spillage as same relates to any activity regulated by the provisions of this part; (3) to identify the ownership of all oil or gas wells, producing leases, refineries, tanks, plants, structures, and all storage and transportation equipment and facilities; (4) to limit and prorate the production of oil or gas, or both, from any pool or field for the prevention of waste;

895 Id. § 12-4-45.

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(5) to regulate the spacing of wells and to establish drilling units; (6) to prevent, insofar as is practical, avoidable drainage from each developed unit which is not equalized by counter drainage; (7) to require that accurate records be kept on forms to be prescribed by the director, which records shall be reported to the director within the time specified in such rules and regulations. The reports shall include such information as the director may prescribe, including, but not limited to, information concerning cuttings, subsurface samples, and lithologic and geophysical logs; (8) to require that geologic and testing information obtained from a well regulated under this part be held in confidence by the director for a period of at least six months from the time of drilling to total depth, or, if the director approves, a longer period, if the operator makes a written request for the same stating the length of the extension desired and the reasons therefore. This will only be grant if the guarantee of confidentiality provided for in this paragraph shall in no way impair the ability of the board or the director to enforce this part; (9) to regulate the issuance, denial, and revocation of permits and to regulate bonds required under this part, except to persons found to have violated any provision, rule or regulation, or any order or permit; (10) to regulate the issuance of permits to persons who have been found to have violated any provision of this part, any rule or regulation adopted and promulgated pursuant to this part, or any order or permit issued under this part, and to establish the amount of bond for such persons; (11) to regulate the cooperative development or operation of all or part of an oil or gas pool as a unit; (12) to regulate the underground storage or disposal of substances other than those substances covered by The Underground Gas Storage Act.896

Lastly, the Board has authority, subject to the Governor’s approval, to appoint and

remove the Commissioner of Natural Resources (“Commissioner”) and the Director of the

Environmental Protection Division (“Director”).

The Commissioner has the authority to supervise, direct, account for, plan, administer

and execute all the respective statutory functions of the DNR and the Divisions, including the

Environmental Protection Division. The Commissioner has authority, subject to the approval of

896 Id. § 12-4-48.

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the Board, to appoint the director of the remaining DNR Divisions: Wildlife Resources; Parks,

Recreation and Historic Sites; Coastal Resources; Pollution Prevention Assistance; Historic

Preservation; and Program Support. 897

The Director of the Environmental Protection Division supervises, directs, accounts for,

organizes, plans and enforces the rules and regulations made by the Board under the Act.

898 The

Director may have the power, if delegated to him, to consider and issue permits to drill wells and

to establish drilling and operation units. 899

[4] – Process for Pooling and Matters Covered.

[a] Authority to Integrate Production.

All drilling units and operating units, whether ordered by the Board or created by

voluntary agreement among owners and operators, are established to: (1) conserve gas and/or oil;

(2) prevent waste; (3) ensure the ultimate hydrocarbon recovery; and (4) avoid the drilling of

unnecessary wells. 900 The owners, operators, and royalty owners who have separate holdings in

the same oil or gas pool or in any area that appear from geological or other data to be in the same

reservoir can voluntarily agree to enter into and carry out a cooperative development, and

operation plan, of the pool or area. 901 More specifically, when two or more separately owned

tracts of land are contained within an established drilling unit, the owners may voluntarily agree

to combine or integrate their tracts or interests for the development or operation of that drilling

unit.902

897 Ga. Comp. R. & Regs. 391-1-1-.01 (2010).

898 Id. 899 Ga. Code Ann. § 12-4-43(5) (2010). 900 Id. § 12-4-45(b). 901 Id. 902 Id. § 12-4-45(a).

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However, if the owners have not agreed to integrate their interests, the Director may enter

an order that requires the owners to integrate all tracts and interests in the drilling unit.903 All

orders requiring integration of drilling units are subject to the Director’s discretion of what is

reasonable and practicable. 904

The allowable production on the single owner’s tract or tracts is limited in proportion of

those tracts to the full drilling unit.

If the Director does not have the authority to require integration

and there is no owner agreement, then each owner embraced within the drilling unit may drill on

his own tract.

905 Thus, the reservoir will not be fully drained, which

effectively reserves the non-agreeing owners’ rights to drill and produce proportionately on their

respective tracts. The Director will then allocate the production of the unit and, after an

investigation and hearing, must afford the owner and/or producer of each tract or interest in the

drilling unit the opportunity to use its just and equitable share of the reservoir energy.906 As an

alternative to a drilling unit, the Director shall, after discovery of an oil and gas pool and after

due investigation and a hearing, establish operation units.907

The plan for a drilling unit, voluntarily agreed upon by an owner or operator, or both

must be submitted to the Board for approval.

908 The plan may be mailed to the Director. 909

903 Id.

The need of a petition for approval of a drilling unit involuntarily formed or any further

information on a petition for approval of a plan is not provided in the Act, in DNR’s rules and

regulations, or in Georgia’s Administrative Procedure Act.

904 Id. 905 Id. § 12-4-45(a)(1). 906 See Ga. Dep’t of Natural Res. Rules and Regs. § 391-3-13.06. 907 Id. 908 Ga. Code Ann. § 12-4-45(b). 909 See Ga. Dep’t of Natural Res. Rules and Regs. § 391-1-1.04(d).

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The Board shall have power, after notice and hearing, either to approve or to disapprove

the drilling unit agreement(s) made between owners or operators, or both. 910

After the Director has concluded a hearing, he may grant an order for a drilling unit or

operation unit to the owners or the operators. To grant an operation unit order, the Director must

find that the unit operation is necessary to prevent waste or to increase ultimate recovery of oil or

gas by additional recovery methods and that the estimated additional cost, as a result of the unit

operation, will not be more than the estimated value of the additional recovery of oil or gas.

Additionally, the

Board shall have the power, after due investigation and a hearing, to grant an order to the owners

or operators, or both, for an operation unit. The procedure that the Board must follow when

conducting a hearing is not discussed in the Act, in DNR’s rules and regulations, or in Georgia’s

Administrative Procedure Act.

911

All orders for unit operation must be fair and reasonable and must protect the rights of all

interested parties.912

The order requiring unit operation must include:

1) a description of the unit area; 2) a description of the pool or pools affected and lying within the unit area; 3) a statement of the nature of the operations contemplated; and 4) a fair and equitable formula, which will protect the correlative rights of all interested parties, for the allocation of oil or gas, or both, among the separately owned tracts in the unit area.913

If at any time the contribution of a separately owned tract with respect to any unit pool

has been established, such contribution can not be altered except to correct mathematical errors

or clerical errors.

914

910 Ga. Code Ann. § 12-4-45(b).

The order shall contain a provision requiring the costs and expenses of unit

operations, including investments, past and prospective, to be charged to the separately owned

911 Ga. Code Ann. § 12-4-45(a)(2)(B). 912 Id. § 12-4-45(a)(2)(D). 913 Id. § 12-4-45(a)(2)(D)(i)–(iii). 914 Id. § 12-4-45(a)(2)(G).

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tracts. The charges are to be made in the same proportions that such tracts share in unit

production. Also, the order must contain a provision for adjustment among the owners of the

unit area, not including royalty owners, of their respective investments in wells, tanks, pumps,

machinery, materials, equipment, and other items and services of value for the unit operation.

The amount to be charged for any item will be determined by the unit area owners. However, if

the owners are unable to agree upon the amount or correctness of such charges, the Board shall

determine the amount.

The unit operation order also must contain the designation of, or a provision for the

selection of, a unit operator to be governed by the terms and provisions of the unitization

agreement. The owner of any overriding royalty, oil and gas payment, or other interest who is

not primarily responsible for the debt will be subrogated for any lost payment or deduction from

his share, and any surplus from the sale will be proportionally distributed to those from which it

was taken. Lastly, the unit operation order must contain when the unit operation will become

effective, and the manner in which and the circumstances under which, the unit operation will

terminate. 915

An order requiring unit operation shall not become effective unless and until all of the

appropriate persons, discussed infra, have signed or ratified or approved in writing the

appropriate contract, and unless and until the Board has made a finding that those contracts have

been signed, ratified, or approved.

916

[5] – Modifications.

At any time after the initial operation unit has been approved and ordered, the Board may

enter a new or amended order to add new portions of pools or new pools to the operation unit

915 Id. § 12-4-45(a)(2)(D)(iv)–(viii). 916 Id. § 12-4-45 (a)(2)(E).

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and may extend the unit area to fit the new unit operation boundaries. The procedure that the

Board must follow when making modifications is not discussed in the Act, in DNR’s rules and

regulations, or in Georgia’s Administrative Procedure Act. 917

When a modification is made, the amended order will provide new allocations. A portion

of the total production of oil or gas, or both, from all pools affected within the unit area as

enlarged will first be allocated to the new portions of a pool(s) or a new pool(s). The allocation

to the new portions of a pool(s) must be allocated based on a formula that is fair and equitable.

The previously established unit area interest holders will divide the remaining portion of unit

production in the same proportions as specified in the original order, unless such proportions are

shown to be erroneous. If this occurs, the errors will be corrected.

918

The newly modified operation unit will take effect at 7:00AM on the first day of the

month next following the day on which the order becomes effective.

919 However, a new or

amended order to add portions of a pool(s) or a new pool(s) will not become effective unless and

until: all of the terms and provisions of the unitization agreement relating to the changes have

been fulfilled and satisfied with submitted evidence to the Board; and the appropriate persons

have agreed to the changes in writing.920 If these provisions are not met within six months of the

order, then the order will automatically be revoked. If this six month window passes without a

signed agreement, the Board may extend the time period past six months to fulfill the required

provisions.921

917 Id. § 12-4-45(a)(2)(F)(i).

If these provisions are not met within six months of the order, then the order will

918 Id. 919 Id. 920 Id. § 12-4-45(a)(2)(F)(ii). 921 Id.

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automatically be revoked. If this six month window passes without a signed agreement, the

Board may extend the time period past six months to fulfill the required provisions.922

[6] – Royalty Distribution.

The Act or DNR’s rules and regulations do not specify the royalty interest to be received

by the mineral interest owner or the producer.

§ 11.02 Types of Georgia Pooling Statutes. [1] – Mineral Distinctions. In Georgia, a mineral means any naturally occurring substance found in the earth, which

has commercial value; mineral includes oil and gas, but not fresh water. Gas is defined as all

natural gas, including casing head gas, and all other hydrocarbons not defined as oil.923 Oil is

defined as crude petroleum oil and other hydrocarbons, regardless of gravity, which are produced

at the well in the liquid form by ordinary production methods and which are not the result of

condensation of gas after it leaves the reservoir.924 Further, a pool is defined as an underground

reservoir containing an accumulation of crude petroleum or natural gas, or both. The term pool

also covers each zone of a general structure which is completely separated from any other zone

in the structure. 925 Moreover, a field is defined as the general area that is underlaid or appears to

be underlaid by at least one pool; a field includes the underground reservoir or reservoirs

containing crude petroleum oil or natural gas, or both. A field may relate to two or more pools;

and field and pool mean the same thing when only one underground reservoir is involved.926

[2] – Split by Depth.

There is no mention of coalbed methane in the Georgia pooling statutes.

922 Id. 923 Id. § 12-4-42(5). 924 Id. § 12-4-42(10). 925 Id. § 12-4-42(13). 926 Id. § 12-4-42(4).

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The Act specifics that the Board shall have authority to regulate: (1) any exploration or

production well that is drilled to a depth of 1,800 feet for any other mineral; (2) any exploration

or production well drilled to a depth sufficient to interfere with the fresh-water aquifer system in

an environmentally sensitive area of the coastal zone; and (3) for any fresh water production well

drilled deeper than 1,800 feet.927

[3] – Spacing Rules.

The Act does not address any other depth requirements.

The spacing of wells, in proven oil and/or gas fields or in areas that the Board may

designate, shall be governed by special rules for that particular field or area. The rules and

regulations adopted by the DNR do not address what the content of or procedure for adopting the

special rules. The Board may adopt spacing provisions after notice and a public hearing. The

process for notice and a public hearing is not address in the rules and regulations. 928

Wells drilled in areas not covered by special rules shall be drilled a minimum of 330 feet

or any other distance determined by the Director, from any lease boundary, property line,

dwelling, place of public gathering, or producing oil or gas well to provide an adequate safety

buffer to the public. The distance must be great enough to ensure an adequate safety buffer to

the public.

929

Oil wells not covered by special rules shall be located 330 feet from the exterior

boundary of the drilling unit and at least 660 feet from the every other well drilling to or

producing from, or for which a permit shall have been granted to drill to the same pool. Gas

wells not covered by special rules shall be located 660 feet from the exterior boundary of the

927 Id. § 46-4-50. 928 See Ga. Dep’t of Natural Res. Rules and Regs. § 391-3-13.05. 929 Id.

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drilling unit and at least 1,867 feet from every other well drilling to or producing from, or for

which a permit shall have been granted to drill to the same pool. 930

[4] – Size.

Oil wells drilled in areas not covered by special rules shall be drilled on a drilling unit

consisting of 40 surface contiguous acres. Gas wells drilled in areas not covered by special rules

shall be drilled on a drilling unit consisting of 160 surface contiguous acres. 931

[5] – Minimum Operator Control.

For a unit operation order to become effect, a written contract, incorporating the

unitization agreement, must be signed or ratified or approved in writing by the owners of at least

75 percent interest as costs are shared, and the royalty owners in the unit area controlling 75

percent in interest, as production is to be allocated; additionally, a second contract that

incorporates the required arrangements for operations needs to be sign or ratified or approved in

writing by the owners of at least 75 percent in interest as costs are shared.932 To add portions of

a pool(s) or a new pool(s) to a previously established unit, the new or amended unit order must

be approved in writing by 75 percent of interest holders that share costs in the new portion of the

production unit and 75 percent of royalty owners.933

930 Id. 931 Id. 932 Ga. Code Ann. §12-4-45 (a)(2)(E). 933 Id. § 12-4-45(a)(2)(F)(ii).

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§ 12.01 Analysis of Hawaii Regulatory Framework.

[1] – Name of the Governing Body.

In Hawaii, the State Board of Land and Natural Resources (the “Board”), within the

Department of Land and Natural Resources (the “Department”), oversees mining and exploration

of mineral interests, but only where state lands are involved. 934

[2] – Membership on the Governing Body.

There are no statutes or

regulations governing mineral interests on privately-held property.

The Board is composed of seven members: one from each of four land districts, two at

large, and the Chairperson, who is the executive head of the Department.935 The Board convenes

twice monthly to review and take action on department submittals, including land leases and

Conservation District Use Applications (CDUAs).936

[3] – Scope of Authority.

In Hawaii, all minerals in, on or under state lands are reserved to the State.937 “Minerals”

means “any or all of the oil, gas, coal,…[and] all other mineral substances and ore deposits

whether solid, gaseous, or liquid, including all geothermal resources, in, on, or under any land,

fast or submerged, but does not include sand, rock, gravel, and other materials suitable for use

and used in general construction.”938

A purchaser or lessee of such lands acquires no right, title or interest in or to the minerals

and the rights of any purchaser or lessee shall be subject to the conditions and limitations

prescribed by law providing the state and persons authorized by it to prospect for, mine, and

934 Haw. Rev. Stat. § 182-1 (2010). 935 Id. § 171-4. 936 Dept. of Land & Nat. Resources, Board of Land and Natural Resources, http://hawaii.gov/dlnr/boards (last visited Jun. 7, 2011). 937 Haw. Rev. Stat. § 182-2(a) (2010). 938 Id. § 182-1.

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remove minerals and occupy and use so much of the surface as is required for reasonably

removing the minerals.939 The State can lease its mineral rights to others.940 Anyone holding

such a lease of mineral rights must file with the Board a bond, in a form and amount approved by

the board, payable to the State, conditioned upon the faithful performance by the lessee of all

requirements of relevant law, of the lease, and also upon payment by lessee of any damages to

occupiers of the land.941

The Board may also revoke leases if the lessee fails to pay rentals when due or if any of

the terms of the lease or the law are not complied with, or if the lessee wholly ceases all mining

operations for reasons other than force majeure or uneconomic operation for a period of one year

without the written consent of the Board.

942 The Board must give the lessee notice of default and

allow the lessee six months or such other time as provided by the regulations to remedy the

default.943 The Board also oversees the assignment of any lease, in whole or in part, and must

approve such assignment.944

[4] – Process.

Any person wishing to conduct exploration on state lands shall apply to the Board for an

exploration permit.945 No minerals beyond that reasonably required for testing and analysis shall

be extracted and removed from state lands during exploration. 946 Upon termination of the

exploration permit, the drill logs and the results of assays shall be turned over to the Board.947

939 Id. § 182-2(a).

If

940 Id. § 182-4(a). 941 Id. §182-3(a). 942 Id. § 182-10. 943 Id. 944 Id. § 182-11. 945 Id. § 182-6. 946 Id. 947 Id.

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the person conducting the exploration does not apply for a mining lease within 6 months, the

information can be released publicly by the Board.948

If any minerals are discovered or known to exist on state lands, anyone interested can

apply to the Board for a mining lease.

949 The notice shall be accompanied by a $100 fee together

with a description of the land desired to be leased, minerals involved, and such additional

information and maps as the board may prescribe by regulation.950 The Board shall then cause a

notice to be published in a newspaper of general circulation where the lands are located at least

once per week for three successive weeks, describing the lands and the minerals to be leased.951

The Board may hold a public auction for the mineral lease within 6 months after the date of the

first notice, or such further time as may be reasonably necessary.952

The Board may also determine if the present use of the land is more valuable or of greater

benefit to the State than the proposed mining use of the land.

953 The Board can disapprove an

application for a lease without holding an auction if it determines the present use is of greater

benefit.954 The Board determines the area to be offered for lease and can modify the boundaries

of the land area.955 At least thirty days prior to a public auction, the Board shall publish a notice

in a newspaper of general circulation in the State at least once a week for three weeks.956

Bidders at the public auction may be required to bid on the amount of annual rental to be

paid for the term of the lease based on an upset price fixed by the Board, a royalty based on gross

proceeds or net profits, cash bonus, or any combination or other basis, and under such terms and

948 Id. 949 Id. § 182-4(a). 950 Id. 951 Id. 952 Id. 953 Id. 954 Id. 955 Id. 956 Id.

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conditions as may be set by the Board.957 If the person who discovered the minerals did so as a

result of an exploration permit issued by the Board, and if that person bids at auction and is

unsuccessful in obtaining the lease, that person shall nevertheless be reimbursed by the highest

bidder for the direct or indirect costs incurred in the exploration of the land, excluding salaries,

attorneys fees and legal expenses.958

A slightly different process exists for “reserved lands,” which are those lands that are

owned or leased by someone other than the State, but in which the State has reserved to itself the

minerals or the right to mine minerals.

959 Anyone seeking a mineral lease for reserved lands

must also apply for a mining lease, and pay the $100 fee.960 However, with reserved lands, the

Board may grant a mining lease without holding a public auction to the occupier of those lands if

two-thirds of the Board members agree.961 Such a lease can also be granted to someone other

than the occupier of the lands, if the occupier has assigned his or her rights to apply for a mining

lease to that other person.962 For any oil or gas lease, the Board and lessee will negotiate and fix

a fair royalty to be paid on production under the lease.963

The Board is authorized to impose a limitation on the number of leases or acres that a

mining lessee may hold, imposing such terms and conditions as the Board determines are in the

State’s best interest. No lease may grant and include an area of land larger than four contiguous

square miles, in which the longest dimension of the area shall exceed its narrowest by more than

six times, unless the Board approves otherwise.

964

957 Id. 958 Id. § 182-4(b). 959 Id. § 182-5. 960 Id. 961 Id. 962 Id. 963 Id. § 182-7. 964 Id. § 182-8.

185

§ 12.02 Types of Hawaii Pooling Statutes.

As the statutory language particular to mining suggests, the primary focus of energy

regulation in Hawaii is limited to development of the state’s substantial geothermal resources.965

The Board has developed regulations only for geothermal extraction and development. 966

Further, the Act’s sole provision concerning pooling or unitization is: “upon motion by the Board

or petition filed by any mining lessee, the Board, in its discretion, may order lessees or owners of

mineral rights on adjoining properties to collectively adopt, and operate under, a cooperative or

unit plan of development, if the Board finds that such a plan will prevent the waste of any

mineral, increase the ultimate recovery, avoid the drilling, digging or excavating of any

unnecessary well, or for such other reason that would encourage and promote the development of

mineral resources.”967

Other than this single provision allowing the Board to order compulsory unitization under

an existing mining lease, Hawaii law does not address conservation, pooling or unitization of

interests for production of other resources. Neither the Act nor Board regulations specify

requirements relative to well spacing, unit size, minimum operator controls, or directional

drilling for oil and gas.

965 See Haw. Code R. §§ 13-7-184 et seq. (2010). 966 Id. 967 Haw. Rev. Stat. § 182-9.5 (emphasis added) (2010).

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§ 13.01 Analysis of Idaho Regulatory Framework.

[1] – Name of the Governing Body.

The Oil and Gas Conservation Commission (“Commission”) of the state of Idaho

oversees pooling and related issues.968

[2] – Membership on the Governing Body.

The State Board of Land Commissioners (“Board”) acts as the Oil and Gas Commission

and regulates the exploration, drilling, and production of oil and gas resources.969 The governor,

secretary of state, attorney general, state controller, and superintendent of public instruction are

members of the Idaho State Board of Land Commissioners as enacted in Section Seven of

Article IX of the Constitution of the state of Idaho. The Board shall have the direction, control,

and disposition of the public lands of the state and exercise those constitutional functions through

the Department of Lands.970

[3] – Scope of Authority.

The Commission has jurisdiction and authority over all persons and property, public and

private, necessary to enforce the provisions of Idaho oil and gas law, has the power and authority

to make and enforce rules, regulations, and orders, and has the power to do whatever may

reasonably be necessary to carry out its responsibilities. The Commission has jurisdiction to

hear and determine any question relating to the administration of oil and gas law.971

The Commission is authorized and it is its duty to prevent waste of oil and gas, to protect

correlative rights, and otherwise to administer and enforce oil and gas law.

972

968 Idaho Code Ann. § 47-317 (2010).

It has jurisdiction

969 Id. 970 Id. 971 Id. § 47-317(b). 972 Id. § 47-319(b).

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over all persons and property necessary for that purpose.973 In the event of a conflict, the duty to

prevent waste is paramount.974 The Commission is authorized to make such investigations as it

deems proper to determine whether action by the Commission is necessary.975

(1) identification of ownership of oil or gas wells, producing leases, tanks, plants, structures, and facilities for the transportation or refining of oil and gas;

Without limiting

its general authority, the Commission has the specific authority to require the following:

(2) the taking and preservation of samples and the making and filing with the Commission of true and correct copies of well logs and directional surveys both in form and content as prescribed by the Commission; provided, however, that logs of exploratory or wildcat wells marked confidential shall be subject to disclosure according to chapter 3, title 9, Idaho Code; (3) the drilling, casing, operation and plugging of wells in such manner as to prevent the escape of oil or gas out of one (1) pool into another; the detrimental intrusion of water into an oil or gas pool that is avoidable by efficient operations; the pollution of fresh water supplies by oil, gas, or salt water; blow-outs, cavings, seepages, and fires; and waste; (4) the taking of tests of oil or gas wells; (5) the furnishing of a reasonable performance bond with good and sufficient surety, conditioned upon the performance of the duty to comply with the requirements of this law and the regulations of the Commission with respect to the drilling, maintaining, operating, and plugging of each well drilled for oil or gas; (6) that the production from wells be separated into gaseous and liquid hydrocarbons, and that each be measured by means and upon standards that may be prescribed by the Commission; (7) that wells not be operated with inefficient gas-oil or water-oil ratios, and to fix these ratios, and to limit production from wells with inefficient gas-oil or water-oil ratios; (8) metering or other measuring of oil, gas, or product; (9) that every person who produces oil or gas in the state keep and maintain for a period of five (5) years complete and accurate records of the quantities thereof, which records, or certified copies thereof, shall be available for examination by the Commission or its agents at all reasonable times within said period, and that every such person file with the Commission such reasonable reports as it may prescribe with respect to such oil or gas production;

973 Id. 974 Id. 975 Id. § 47-319(c).

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(10) the filing of reports of plats with the Commission that it may prescribe.976

The Commission also has authority to regulate the drilling and plugging of wells and all

other operations for the production of oil or gas; the shooting and treatment of wells; the spacing

or locating of wells; operations to increase ultimate recovery, such as cycling of gas, the

maintenance of pressure, and the introduction of gas, water, or other substances into a producing

formation; and the disposal of salt water and oil-field wastes.

977 The Commission can also

classify and reclassify pools as oil, gas, or condensate pools, or wells as oil, gas, or condensate

wells and has authority to make and enforce rules, regulations, and orders reasonably necessary

to prevent waste, protect correlative rights, to govern the practice and procedure before it.978

[4] – Process for Pooling.

Anyone who wants to drill a well must first notify the Commission and obtain a

permit.979 No permit may be issued by the Commission until it has notified the Director of the

Department of Water Resources, who has 15 days from the date of receipt of such notification to

recommend conditions he believes necessary to protect fresh water supplies.980 Upon issuance

of any permit, a copy thereof, including any limitations, conditions, controls, rules, or regulations

attached thereto for the protection of fresh water supplies, shall be forwarded to the Director of

the Department of Water Resources.981

The Commission may act upon its own motion, or upon the petition of any interested

person.

982

976 Id. § 47-319(d).

On the filing of a petition for a hearing concerning any matter within the jurisdiction

977 Id. § 47-320. 978 Id. 979 Id. 980 Id. 981 Id. 982 Id. § 47-324(c).

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of the Commission, it shall promptly fix a date for a hearing and provide public notice. The

hearing shall be held without undue delay after the filing of the petition.983

When two or more separately owned tracts are embraced within a spacing unit, or when

there are separately owned interests in all or a part of a spacing unit, the interested persons may

integrate their tracts or interests for the development and operation of the spacing unit.

984 In the

absence of voluntary integration, the Commission, upon the application of any interested person,

shall make an order integrating all tracts or interests in the spacing unit for the development and

operation thereof and for the sharing of production therefrom.985 The Commission, as a part of

the order establishing a spacing unit or units, may prescribe the terms and conditions upon which

the royalty interests in the unit or units shall, in the absence of voluntary agreement, be deemed

to be integrated without the necessity of a subsequent separate order integrating the royalty

interests.986 Each such integration order shall be upon terms and conditions that are just and

reasonable.987

Any person desiring Commission approval relating to any method of unit, cooperative

development, or operation of a field or pool or a part of either, shall file an application with the

Director for approval of such agreement, attaching a copy of the agreement to the application.

988

Notice of a hearing on the application shall be publishes in a newspaper of general circulation in

Ada County, Idaho, and the county of the unit operation.989

[5] – Matters Covered.

[a] Spacing.

983 Id. 984 Id. § 47-322(a). 985 Id. 986 Id. 987 Id. 988 Idaho Admin. Code r. 20.07.02.340 (2010). 989 Id.

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The Commission shall promptly establish spacing units for each pool except in those

pools that have been developed to such an extent that it would be impracticable or unreasonable

to establish spacing units at the existing stage of development.990 An order establishing spacing

units shall specify the size and shape of the units, which, in the opinion of the Commission,

result in the efficient and economical development of the pool as a whole.991 The unit sizes

should not to be smaller than the maximum area that can be efficiently and economically drained

by one well.992 If insufficient evidence is available to determine the appropriate unit size, the

Commission may order temporary spacing units until enough information is gathered to

determine what the ultimate spacing should be.993

Spacing orders should direct that no more than one well shall be drilled to and produced

from the common source of supply on any unit and shall specify the location for drilling the well

in accordance with a reasonably uniform spacing pattern, with necessary exceptions for wells

drilled or drilling at the time of the filing of the application.

994 If the Commission finds that a

well drilled at the prescribed location would not be likely to produce in paying quantities, or that

surface conditions would substantially add to the burden or hazard of drilling the well, or for

other good cause shown, the Commission is authorized to make an order permitting the well to

be drilled at a location other than that prescribed by such spacing order.995

990 Idaho Code Ann. § 47-321(a) (2010).

Application for an

exception shall be filed with the Director of the Idaho Department of Lands and may be granted

by him where it is shown that good cause for an exception exists and that consent to an exception

has been given by the owners of all drilling units directly or diagonally offsetting the drilling unit

991 Id. § 47-321(b). 992 Id. 993 Id. 994 Id. § 47-321(d). 995 Id.

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for which the exception is requested.996 As to lands upon which drilling units have not been

established, consent must be given by the owners of those lands that would be included in

directly or diagonally offsetting drilling units under the order, if the order were extended to

include those additional lands.997 Where an exception is not granted by the Director or where an

objection to the action of the Director is filed with the Commission within 10 days after he has

granted or denied the application, no well shall be drilled on the drilling unit except in

accordance with the order establishing drilling units, unless and until the Commission grants an

exception.998

An order establishing spacing units for a pool shall cover all lands determined or believed

to be underlaid by the pool, and may be modified by the Commission from time to time to

include additional lands determined to be underlaid by the pool or to exclude lands determined

not to be underlaid by the pool.

999 An order establishing spacing units may also be modified by

the Commission to change the size or shape of one or more spacing units, or to permit the

drilling of additional wells on a reasonably uniform pattern.1000 Upon the filing of an application

to establish spacing units, no additional well shall be commenced for production from the pool

until the order establishing spacing units has been made, unless the commencement of the well is

authorized by order of the Commission.1001

§ 13.02 Types of Idaho Pooling Statutes.

[1] – Mineral Distinctions.

996 Id. 997 Id. 998 Id. 999 Id. § 47-321(e). 1000 Id. § 47-321(f). 1001 Id. § 47-321(g).

192

“Oil” means “crude petroleum oil and all other hydrocarbons, regardless of gravity, that

are produced in liquid form by ordinary production methods, but does not include liquid

hydrocarbons that were originally in a gaseous phase in the reservoir.”1002 “Gas” means “all

natural gas and all other fluid hydrocarbons not hereinabove defined as oil, including condensate

because it originally was in the gaseous phase in the reservoir.”1003

[2] – Split by Depth.

Idaho law does not appear to differentiate based upon depth.

[3] – Spacing Rules.

In the absence of an order by the Commission setting spacing units for a pool, the

following default rules apply:

[a] Spacing Units—Oil.

Every well drilled for oil must be located in the center of a 40-acre governmental quarter

section, lot or tract, or combination of lots or tracts substantially equivalent thereto as shown by

the most recent governmental survey, with a tolerance of 200 feet in any direction from the

center location; provided that no oil well shall be drilled less than 920 feet from any other well

drilling to or capable of producing oil from the same pool, or no oil well shall be completed in a

known pool unless it is located more than 920 feet from any other well completed in and capable

of producing oil from the same pool.1004

[b] Spacing Units—Gas.

Every well drilled for gas must be located on a drilling unit consisting of approximately

640 contiguous surface acres, which shall be one governmental section or lot(s) equivalent

thereto, upon which there is not located, and of which no part is attributed to, any other well

1002 Idaho Code Ann. § 47-318(e) (2010). 1003 Id. § 318(f). 1004 Idaho Admin. Code r. 20.07.02.330.01(2010).

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completed in or drilling to the same pool. In areas not covered by United States Public Land

Surveys, a drilling unit must:

(1) be bounded by four sides intersecting at angles of not less than 85 degrees or more than 95 degrees; (2) be such that the distance between two points farthest apart thereon shall not exceed 8,500 feet; and, (3) contain at least 600 contiguous surface acres.

In areas covered by United States Public Land Surveys, such drilling unit shall consist of one

governmental section containing not less than 600 surface acres. Each well drilled for gas shall

be located within a square, each side of which is one 1,660 feet in length and parallel to a center

line of the section. The center of such square shall coincide with the geometric center of the

section.1005

[c] Well Locations Adjacent to Spaced Areas.

The Commission shall have the discretion to determine the pattern location of wells

adjacent to an area spaced by the Commission, or under application for spacing where there is

sufficient evidence to indicate that the pool or reservoir spaced or about to be spaced may extend

beyond the boundary of the spacing order or application, and the uniformity of spacing patterns

is necessary to insure orderly development of the reservoir pool.1006

[d] Exceptions to Spacing Orders.

Upon proper application, the Director may approve, as an administrative matter, an

exception to the above spacing requirements or any order of the Commission establishing well

spacing for a pool.1007 If for any reason the Commission fails or refuses to approve such an

exception, the Director may, after notice and hearing, grant the exception.1008

1005 Id. r. 20.07.02.330.02.

1006 Id. r. 20.07.02.330.03. 1007 Id. r. 20.07.02.330.04. 1008 Id.

194

The application for an exception shall state fully the reasons why such an exception is

necessary or desirable and shall be accompanied by a plat showing: the location at which an oil

or gas well could be drilled in compliance with the rule, above, or the applicable order; the

location at which the applicant requests permission to drill; and the location at which oil or gas

wells have been drilled or could be drilled, in agreement with the provisions above or the

applicable order, directly or diagonally offsetting the proposed exception.1009 No exception will

prevent any owner from drilling an oil or gas well on adjacent lands, directly or diagonally

offsetting the exception, at locations permitted by applicable Commission rule or order.1010

[4] – Size.

The size of spacing units shall not be smaller than the maximum area that can be

efficiently and economically drained by one well; provided, that if, at the time of a hearing to

establish spacing units, there is not sufficient evidence from which to determine the area that can

be efficiently and economically drained by one well, the Commission may make an order

establishing temporary spacing units for the orderly development of the pool pending the

obtaining of the information required to determine what the ultimate spacing should be.1011

Except where circumstances reasonably require, spacing units shall be of approximately uniform

size and shape for the entire pool.1012 The Commission may establish spacing units of different

sizes or shapes for different parts of a pool or may grant exceptions to the size or shape of any

spacing unit or units or may change the sizes or shape of one or more existing spacing units.1013

[5] – Minimum Operator Control.

1009 Id. 1010 Id. r. 20.07.02.330.04(c). 1011 Idaho Code Ann. § 47-321(b) (2010). 1012 Id. § 47-321(c). 1013 Id.

195

Idaho law appears not to contain a provision requiring approval of operators or royalty

interest holders prior to unitization.

[6] – Directional Drilling.

The maximum point at which a well penetrates the producing formation shall not

unreasonably vary from the vertical drawn from the center of the hole at the surface. 1014

Deviation is permitted without special permission to remedy blowouts and, for short distances, to

straighten the hole, sidetrack junk, or correct other mechanical difficulties.1015

Except for the purposes recited above, no well drilled may be intentionally directionally

deviated from the vertical unless the operator first files an application and obtains a permit from

the Commission.

1016 Such an application shall contain the following information: Name and

address of the operator; lease name, well number, name of field and reservoir and county;

description of surface location and proposed location of the producing interval (footage from

lease and section or block and survey lines); reason for intentional deviation; list of offset

operators and statement that each has been furnished a copy of the application by registered mail;

signature of representative of operator; notification to offset operators that any objection they

may have to the proposed intentional deviation of the well must be filed with the Commission

within fifteen days of receipt of a copy of the application.1017

The application shall be accompanied by a neat, accurate plat or sketch of the lease and

all offset leases showing the names of all offset operators and the surface and proposed

producing interval locations of the well.

1018

1014 Idaho Admin. Code r. 20.07.02.170.01 (2010).

The plat shall be drawn to a scale that permits facile

1015 Id. 1016 Id. r. 20.07.02.170.02. 1017 Id. r. 20.07.02.170.02(a)-(g). 1018 Id. r. 20.07.02.170.02(h).

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observation of all pertinent data.1019 At the time the application is filed with the Commission, a

copy of the application and the plat shall be forwarded by registered mail to all offset operators

to the lease on which the well is to be drilled.1020 Upon receipt, the Commission will hold the

application for fifteen days.1021

If objection from any offset operator to the proposed intentional deviation is received

within 15 days of receipt of the application, or if the Commission is not in agreement with the

proposed deviation, the application shall be set down for public hearing.

1022 If no objection from

either an offset operator or the Commission is interposed within the fifteen-day period, the

application shall be approved and a permit issued by the Commission.1023 If written consent of

the offset operator(s) is filed concurrently with the application to drill directionally, the

Commission may immediately approve the application without waiting fifteen days.1024

Upon completion, a complete angular deviation and directional survey of the well

obtained by an approved well surveying company shall be filed with the Commission, together

with other regularly required reports.

1025 In the event the proposed, or final, location of the

producing interval of the directionally deviated well is not in agreement with spacing or other

rules of the Commission applicable to the reservoir, proper applications shall be made to obtain

approval of exceptions to such rules. 1026 Such approval shall be granted or denied at the

discretion of the Commission and shall be accorded the same consideration and treatment as if

the well had been drilled vertically to the producing interval.1027

1019 Id.

1020 Id. r. 20.07.02.170.03. 1021 Id. r. 20.07.02.170.04. 1022 Id. 1023 Id. 1024 Id. 1025 Id. r. 20.07.02.170.05. 1026 Id. r. 20.07.02.170.06. 1027 Id.

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[7] – Options.

Each integration order shall authorize the drilling, equipping, and operation, or operation,

of a well on the spacing unit; shall provide who may drill and operate the well; shall prescribe

the time and manner in which all the owners in the spacing unit may elect to participate therein;

and shall make provision for the payment by all those who elect to participate therein of the

reasonable actual cost thereof, plus a reasonable charge for supervision and interest. 1028 If

requested, each integration order shall provide for one or more just and equitable alternatives

whereby an owner who does not elect to participate in the risk and cost of the drilling and

operation, or operation, of a well may elect to surrender his leasehold interest to the participating

owners on some reasonable basis and for a reasonable consideration which, if not agreed upon,

shall be determined by the Commission, or may elect to participate in the drilling and operation,

or operation, of the well, on a limited or carried basis upon terms and conditions determined by

the Commission to be just and reasonable.1029

If one or more of the owners drill, equip, and operate, or operate, or pay the costs of

drilling, equipping, and operating, or operating, a well for the benefit of another person as

provided for in an order of integration, then those owners or owner shall be entitled to the share

of production from the spacing unit accruing to the interest of that other person, exclusive of a

royalty not to exceed one-eighth of the production, until the market value of the other person’s

share of the production, exclusive of the royalty, equals the sums payable by or chargeable to the

interest of the other person.

1030 If there is a dispute as to the costs of drilling, equipping, or

operating a well, the Commission shall determine such costs.1031

1028 Idaho Code Ann. § 47-322(c) (2010).

In instances where a well is

1029 Id. 1030 Id. 1031 Id.

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completed prior to the integration of interests in a spacing unit, the sharing of production shall be

from the effective date of the integration, except that, in calculating costs, credit shall be given

for the value of the owner’s share of any prior production from the well.1032

1032 Id.

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§ 14.01 Analysis of Illinois Regulatory Framework.

[1] – Name of the Governing Body.

The Department of Natural Resources (“Department”) was statutorily created by the

legislature with specific authority to regulate pooling in the state of Illinois.1033 However, the

Director of Natural Resources (“Director”) also appoints the Oil and Gas Board (“Board”) to

advise the Department. The Board acts solely as an advisory body to the Department and its

recommendations have no binding effect on the Department.1034

[2] – Membership on the Governing Body.

The Director, who is appointed by the Governor of Illinois, is charged to appoint a seven-

member Board. Six of the members need to be actively engaged in the oil and gas industry.

When the Director appoints the six members representing the oil and gas industry, he has to give

due consideration to the recommendations of organizations and associations representing the

various interests of the oil and gas industry. With these recommendations in mind, the Director

will appoint individuals in such a manner as to assure the representation of petroleum

engineering, petroleum geology, oil and gas operations and production, and the servicing of oil

and gas operations and production. The final member is appointed by the Director upon

consultation with the Illinois Farm Bureau and must be active in production agriculture.1035

Board members are be appointed to two year terms beginning on the third Monday in

January of odd numbered years, and may be reappointed for additional terms provided that no

member may be reappointed for a term which would cause his continued service to exceed eight

years. Any appointment to fill a vacancy shall be for the unexpired portion of the term. The

1033 225 Ill. Comp. Stat. 725/4 (2010). 1034 Id. at 725/1.2. 1035 Id.

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Director may remove any member who fails to attend two consecutive meetings of the Board

without sufficient excuse or for any other good cause as determined by the Director.1036

(1) review all federal and State rules and laws affecting the oil and gas industry in Illinois;

The

Board shall meet at least quarterly to:

(2) advise and consult with the Director concerning the adoption of rules pertaining to the conservation of oil and gas; (3) review technical information and operations concerning the improvement of methods, conditions, and equipment for the production of oil and gas; (4) advise and consult with the Director concerning the proper drilling, casing and plugging of oil wells; (5) review the methods and procedures for the issuance of proper permits to drill oil and gas wells; (6) advise and consult with the Director in the administration of the Oil and Gas Well Site Plugging and Restoration Program; and, (7) advise and consult with the Director on any and all other subjects about which the Department should seek information in relation to the oil and gas industry.

The Board, by a majority vote on record, may make specific recommendations to the Department

on any of the above matters.

[3] – Scope of Authority.

The Department has jurisdiction and authority over all persons and property necessary to

enforce effectively the Oil and Gas Act (“Act”).1037 The Department is charged with the duty of

enforcing this Act and all rules, regulations and orders promulgated pursuant of the Act.1038 In

this vein, the Department has the duty to prevent waste.1039

1036 Id.

Waste, in addition to its ordinary

meaning, means "physical waste" as that term is generally understood in the oil and gas industry

and expressly includes:

1037 Id. at 725/4. 1038 Id. at 725/3. 1039 Id. at 725/1.1.

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(1) the locating, drilling and producing of any oil or gas well or wells drilled contrary to the valid order, rules and regulations adopted by the Department under the provisions of this Act; (2) permitting the migration of oil, gas, or water from the stratum in which it is found, into other strata, thereby ultimately resulting in the loss of recoverable oil, gas or both; (3) the drowning with water of any stratum or part thereof capable of producing oil or gas, except for secondary recovery purposes; (4) the unreasonable damage to underground, fresh or mineral water supply, workable coal seams, or other mineral deposits in the operations for the discovery, development, production, or handling of oil and gas; (5) the unnecessary or excessive surface loss or destruction of oil or gas resulting from evaporation, seepage, leakage or fire…; (6) permitting unnecessary fire hazards; (7) permitting unnecessary damage to or destruction of the surface, soil, animal, fish or aquatic life or property from oil or gas operations.1040

To fulfill the duty of waste prevention and to enforce the Act, the Department has the

authority to make such inquiries as it may think proper to determine whether or not waste, over

which it has jurisdiction, exists or is imminent. In the exercise of such power the Department has

the authority to: (1) collect data; (2) make investigation and inspections; (3) examine properties,

and drilling records; (4) examine, check and test oil and gas wells; (5) hold hearings; and (6) take

any other action reasonably necessary to enforce the Act.

1041

To further the purpose of waste prevention, the Department has the authority to conduct

hearings and make reasonable rules and regulations to ensure proper enforcement of the Act.

This includes the authority to adopt rules and to hold hearings in order to:

(1) require the drilling, casing and plugging of wells to be done in such a manner as to prevent the migration of oil or gas from one stratum to another; to prevent the intrusion of water into oil, gas or coal strata; (2) require the filing with the State Geological Survey of all geophysical logs, a well drilling report and drill cuttings or cores, if cores are required, within 90 days after drilling ceases; and to

1040 Id. at 725/1. 1041 Id. at 725/8.

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file a completion report with the Department within 30 days after the date of first production following initial drilling or any reworking, or after the plugging of the well, if a dry hole…; (3) prevent "blowouts", "caving" and "seepage" in the same sense that conditions indicated by such terms are generally understood in the oil and gas business; (4) prevent fires; (5) ascertain and identify the ownership of all oil and gas wells, producing leases, refineries, tanks, plants, structures, and all storage and transportation equipment and facilities; (6) regulate the use of any enhanced recovery method in oil pools and oil fields; (7) regulate or prohibit the use of vacuum; (8) regulate the spacing of wells, the issuance of permits, and the establishment of drilling units; (9) regulate directional drilling of oil or gas wells; (10) prohibit waste, as defined in this Act; (11) require the keeping of such records, the furnishing of such relevant information and the performance of such tests as the Department may deem necessary to carry into effect the purposes of this Act; (12) prescribe rules, conduct inspections and require compliance with health and safety standards for the protection of persons working underground in connection with any oil and gas operations.1042

[4] – Process for Pooling.

[a] Drilling Units.

Pool-wide drilling units may be created by voluntary agreement or Department order.

The Department will designate and establish pooled units when reasonably necessary enable,

authorize, and require operations to increase the ultimate recovery of oil and gas; prevent the

waste of oil and gas; and protect correlative rights of the owners of the oil and gas.1043 An

‘owner’ is any person having an interest in the right to drill and produce oil or gas from any pool,

and to appropriate the production for such owner or others.1044

1042 Id. at 725/6.

1043 Id. at 725/23.3. 1044 Id. at 725/22.2(a).

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Generally, the Department may issue a permit and, upon application of any interested

person, establish a drilling unit or units for the production of oil and gas or either of them for

each pool. As discussed in the next section, the Act provides default size and spacing

characteristics of a standard drilling unit.

[b] Authority to Integrate Production.

More specifically, when two or more separately owned tracts of land are embraced within

an established drilling unit, or when there are separately owned interests in all or a part of such

units, the owners of all oil and gas interests therein may validly agree to integrate their interests

and to develop their lands as a drilling unit.1045 The orders requiring integration will be upon

terms and conditions that are just and reasonable. The terms and conditions have to afford to the

owners of all oil and gas interests ion each tract in the drilling unit the opportunity to recover or

receive their just and equitable share of oil or gas from the drilling unit without unreasonable

expense, will prevent or minimize unreasonable drainage.1046

In making the determination of integrating separately owned interests the Department

may consider:

(1) the reasons requiring the integration of separate interests; (2) the respective interests of the parties in the drilling unit sought to be established, and the pool or pools in the field where the proposed drilling unit is located; (3) any parties' prior or present compliance with the Act and the Department's rules; and, (4) any other information relevant to protect the correlative rights of the parties sought to be affected by the integration order.1047

Where such owners have not agreed to integrate their interests and where at least one of the

owners has drilled or has proposed to drill a well on an established drilling unit, the Department,

1045 Id. at 725/22.2(b). 1046 Id. at 725/22.2(c). 1047 Id. at 725/22.2(e).

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upon the application of an owner, shall require such owners to do so and to develop their lands as

a drilling unit. The Department, as a part of the order integrating interests, may prescribe the

terms and conditions upon which the royalty interests in the unit or units shall, in the absence of

voluntary agreement, be determined to be integrated without the necessity of a subsequent

separate order integrating the royalty interests. Each such integration order shall be upon terms

and conditions that are just and reasonable.1048

If the Department decides, based on the criteria set forth above, to integrate the owners’

interests in one drilling unit, then each order must:

(1) authorize the drilling, testing, completing, equipping, and operation of a well on the drilling unit; (2) provide who may drill and operate the well; (3) prescribe the time and manner in which all the owners in the drilling unit may elect to participate therein; and, (4) make provision for the payment by all those who elect to participate therein of the reasonable actual cost thereof, plus a reasonable charge for supervision and interest.1049

Should an owner not elect to voluntarily participate in the risk and costs associated with unit

operations, the order must specify options available to such non-consenting owners. These

options are discussed in the following section. In addition, the order must:

(1) specify the size and shape of the unit, which must be sufficient to result in the efficient and economical development of the pool as a whole; (2) cover all lands determined or believed to be underlaid by such pool; and, (3) prohibit the drilling of more than one well on any drilling unit for the production of oil or gas from the particular pool with respect to which the drilling unit is established.1050

For the Department to issue a unitization order, there must be two or more separately

owned tracts of land that are embraced within a pool or a portion of a pool suitable for any

1048 Id. at 725/22.2(b). 1049 Id. at 725/22.2(f). 1050 Id. at 725/21.2(b).

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enhanced recovery method. When this occurs, the owners may validly agree to unitize to

integrate their interest and to develop their land as a unit.1051

(1) the unitized management and operation is economically feasible and reasonably necessary to increase the ultimate recovery of oil and gas, to prevent waste, and to protect correlative rights;

The Department will issue an order

providing for the unit operation of a pool or pools, or parts thereof, if it is determined, that

(2) the value of the estimated ultimate additional recovery of oil and gas will exceed the estimated additional cost, if any, incident to conducting the unit operation; (3) the areal extent of the pool or pools, or parts thereof, has been reasonably defined and determined by drilling operations, and the unitization and operation of such will have no substantially adverse effect upon the remainder of the pool or pools, or parts thereof; (4) the allocation of unit production to each separately owned tract is fair, reasonable, and equitable to all owners of oil and gas rights in the unit area; (5) the determination and allocation of unit expense is fair, reasonable and equitable to the working interest owners; (6) the compensation or adjustment for wells, equipment and other properties of the working interest owners is fair, reasonable and equitable.1052

An interested person may petition the Department to hold a public hearing to consider the

need for operating a pool, pools, or any portion thereof, as a unit. The petition for an order to

unitize must be filed with the Department office located in Springfield, Illinois. The petition will

be deemed filed when received by the Departments' Division of Oil and Gas.

1053 Each petition

must be signed by the petitioner or a representative and provide relevant contact information. If

after the petition is filed, and prior to setting a hearing date, the Department finds the petition

deficient relative to the requirements, the Department will return the petition to the applicant

with a statement describing the deficiencies.1054

A valid petition must provide the following information:

1051 Id. at 725/23.2(a). 1052 Id. at 725/23.5. 1053 Id. at 725/23.3. 1054 Id.

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(1) A description of the land and pool, pools, or parts thereof, within the proposed unit area. (2) The names of all persons owning or having an interest in the oil and gas rights in the proposed unit area as of the date of filing the petition, as disclosed by the records in the office of the recorder for the county or counties in which the unit area is situated, and their addresses, if known. If the address of any person is unknown, the petition shall so indicate. (3) A statement of the type of operations contemplated for the unit area. And, (4) A copy of a proposed plan of unitization signed by persons owning not less than 51% of the working interest underlying the surface within the area proposed to be unitized, which the petitioner considers fair, reasonable and equitable.1055

The proposed unitization plan must indicate clearly any details relevant to the Department’s

approval. In particular, it must provide the following:

(1) A plan for allocating to each separately owned tract in the unit area its share of the oil and gas produced from the unit area and not required or consumed in the conduct of the operation of the unit area or unavoidably lost. (2) A provision indicating how unit expense shall be determined and charged to the several owners, including a provision for carrying or otherwise financing any working interest owner who has not executed the proposed plan of unitization and who elects to be carried or otherwise financed, and allowing the unit operator, for the benefit of those working interest owners who have paid the development and operating costs, the recovery of not more than 150% of such person's actual share of development costs of the unit plus operating costs, with interest. Recovery of the money advanced to owners wishing to be financed, for development and operating costs of the unit, together with such other sums provided for herein, shall only be recoverable from such owner's share of unit production from the unit area. (3) A procedure and basis upon which well equipment, and other properties of the several working interest owners within the unit area are to be taken over and used for unit operations, including the method of arriving at the compensation therefor. (4) A plan for maintaining effective supervision and conduct of unit operations, in respect to which each working interest owner

1055 Id. at 725/23.3(1).

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shall have a vote with a value corresponding to the percentage of unit expense chargeable against the interest of such owner.1056

When the petitioner files the petition with the Department, he may also be asked to file relevant

notice of the petition among the appropriate land records where the affected property lies. Such

notice must convey (1) the type of proceedings before the Department; (2) general statements of

the purpose of such proceedings; and (3) a legal description of the lands, oil and gas lease or

leases, and other oil and gas property interests, which may be affected by the proposed

unitization.

1057

Upon issuing adequate notice, all transfers of title to oil and gas rights will be subject to

the final order of the Department, and the notice shall be constructive notification to every

person subsequently acquiring an interest in the affected property. Any person whose interest or

lien is not shown of record at the time the notice is filed will be deemed a subsequent purchaser

and will be bound by the proceedings before the Department to the same extent and in the same

manner as if he were a party to the hearing.

1058

After Department receives a petition for unitization, it will fix the time and place for a

public hearing. The public hearing will not be less than 30 days nor more than 60 days after the

date of the filing of the petition. The Department, at petitioner's expense, shall give notice of the

hearing at least ten days prior to the hearing in the following manner:

(1) By mailing such notice by United States Mail, postage prepaid, and directed to the persons named in the petition at their last known addresses 10 days prior to the hearing. And, (2) By publication of such notice for service on those persons whose addresses are unknown or whose names are unknown, once each week for 2 consecutive weeks. The first notice must appear at least 10 days prior to the hearing in a newspaper of general

1056 Id. 1057 Id. at 725/23.3(2). 1058 Id.

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circulation that is published in each county containing some portion of the proposed unit area.1059

All notices for public hearing under this Section shall issue in the name of the State of Illinois

and shall be signed by the Director. Such notices will specify (1) the number and style of the

proceedings; (2) the time and place of the hearing; (3) the purpose of the hearing, (4) the name of

the petitioner; and, (5) a legal description of the lands contained within the proposed unit

area.

1060

[d] Impact on Existing Agreements and Orders.

Adjoining owners within the same pool portions thereof may create a new unit, including

a unit area of another or other units. To do so, the owner must file a petition. Then a notice will

be issued and a hearing will be held following the same procedure that was followed for the

creation of a unit in the first instance.1061 Once the Director issues the order to create a new unit,

the new unit will supersede the existing unit or units. The new order will not alter the

proportionate allocation of unit production among the separately owned tracts included in the

previously established unit area or unit areas. Any new working interest owner whose interest is

added to the new unit area and who becomes liable for his proportionate share of the unit

expense will not be liable for any unit expense incurred prior to that person's entry in the new

unit.1062

Additionally, a drilling unit may be modified after the order has been issued. It may be

modified to include additional lands determined to be underlaid by such pool, to change the size

1059 Id. at 725/23.4(1). 1060 Id. at 725/23.4(2). 1061 Id. at 725/23.12. 1062 Id.

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of the drilling unit, or to permit the drilling of additional wells.1063 Otherwise, the drilling and

operation of any well in the pool that underlies the ordered drilling unit is prohibited.1064

[e] Royalty interest.

Unless otherwise specified by agreement or Department order, a mineral owner of

unleased interest may elect to participate in risk and expense of operation, thereby securing a

default seven-eighths working interest and a one-eighth royalty from production. 1065

[f] Agreements Not Restraint of Trade.

In the

alternative, such owners may negotiate with proposed operators to enter into a leasehold

relationship and secure a more favorable royalty payment. These option-based rights are

discussed further in the following section.

Once the Department approves an agreement, it will not be held or construed to violate

any Illinois law that relate to trusts, monopolies, contracts, or any combination thereof.1066

§ 14.02 Types of Illinois Pooling Statutes.

[1] – Mineral Distinctions.

In Illinois, gas is defined as all natural gas, including casinghead gas, and all other

hydrocarbons not defined as oil. Oil is defined as natural crude petroleum oil or petroleum and

other hydrocarbons, regardless of gravity, which are produced at the well in liquid form by

ordinary production methods or by the use of an oil and gas operator and which are not the result

of condensation of gas after it leaves the underground reservoir. Further, a pool is defined as a

natural, underground reservoir containing in whole or in part, a natural accumulation of oil or

gas, or both. The term pool also covers each productive zone or stratum in general, which is

1063 Id. at 725/21.2(c). 1064 Id. at 725/21.2(e). 1065 Id. at 725/22.2(g). 1066 Id. at 725/23.2(b).

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completely separated from any other zone or stratum in the structure. Moreover, a field is

defined as that general area which is underlaid or appears to be underlaid by one or more

pools.1067

[2] – Split by Depth.

Department regulations specify a depth split for gas wells at 5,000 feet or at the top of the

Trenton formation, which ever is greater. As such, any gas well drilled deeper 5,000 feet or the

top of the Trenton formation is considered a “deep well.” Those gas wells not reaching this

depth threshold are defined as “shallow wells.”1068

[3] – Spacing Rules.

There are similar distinctions for oil wells,

with the depth division resting at 4,000 feet.

Drilling units shall be of approximately uniform size and shape for each entire pool,

except that where circumstances reasonably require, the Department may grant exceptions to the

size or shape of any drilling unit or units. However, the size of a drilling unit shall not be smaller

than the maximum area that can be efficiently and economically drained by one well. 1069

Additionally, no oil or gas well shall be drilled nearer than 250 feet to any opening to a working

coal mine used as a means of ingress or egress for the persons employed therein or which is used

as an airshaft. Notwithstanding this setback, wells may be located within such restricted areas

agreed to by relevant and mine and well operators or owners.1070

[a] Unit Size.

Oil and gas wells must comply with standard unit dimensions differentiated by well

depth. All shallow oil wells must be located on: (a) 10 acres of surface area lying within the

1067 Id. at 725/1. 1068 Ill. Admin. Code tit. 62, § 240.410 (2001). 1069 225 Ill. Comp. Stat. 725/21.1(b) (2010). 1070 Id. at 725/20.

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quarter-quarter-quarter section of land for 4,000 feet beneath the surface; or, (b) [20] acres of

surface area lying within the east-west or north-south one-half of a quarter-quarter section. For

deep oil wells, the applicable unit size is 40 acres.1071

(a) 10 surface acres lying within the quarter-quarter-quarter section for gas wells less than 2,000 feet deep and not producing from a limestone/dolomite reservoir.

Gas wells are subject to similar 10, 20,

and 40-acre limitations as follows:

(b) 20 surface acres lying within the quarter-quarter-quarter section for gas wells less than 2,000 feet deep and producing from a limestone/dolomite reservoir (c) 40 surface acres of lying within a quarter-quarter section for gas wells with a depth between 2,001 and 5,000 or the top of the Trenton formation, which is deeper. (d) 160 surface acres lying within a quarter section of land for all deep gas wells.1072

For a coalbed gas well that is drilled into an unmined coal seam, the well spacing must conform

to the drilling unit requirements of 10 acres of surface area lying within a quarter-quarter-quarter

section of land.

1073

[b] Setback Rules.

Department regulations provide default spacing rules based on unit size and mineral

produced. All oil wells must conform to the following spacing rules:

(a) For an area of [10] or [20] surface acres, the location of the well shall not be less than [330] feet from the nearest external boundary lines of the drilling unit, nor less than [660] feet from the nearest location of a producing well, a well being drilled, or a well for which a permit has previously been issued, but not yet drilled, for a well to the same individual reservoir. Or, (b) For an area of [40] surface acres the location of the well shall be not less than [330] feet from the nearest external boundary lines of the drilling unit, nor less than [900] feet from the nearest location of a producing well, a well being drilled, or a well for

1071 Id. 1072 Id. 1073 Id.

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which a permit has previously been issued, but not yet drilled, for a well to the same individual reservoir.1074

Similarly, all gas wells must comply with the following:

(a) For an area of [10] or [20] surface acres, the location of the well shall not be less than [330] feet from the nearest external boundary lines of the drilling unit, nor less than [660] feet from the nearest location of a producing well, a well being drilled, or a well for which a permit has previously been issued, but not yet drilled, for a well to the same individual reservoir. Or, (b) For an area of [40] surface acres, the location of the well shall not be less than [330] feet from the nearest external boundary lines of the drilling unit nor less than [900] feet from the nearest location of a producing well or well being drilled or for which a permit has previously been issued but not yet drilled for a well to the same individual reservoir.1075

The standards affect all applicable wells regardless of depth, with one exception: no deep gas

well may be drilled within 660 feet of the nearest external boundary line of the drilling unit.

1076

The only codified spacing rule for coalbed gas wells requires a minimum setback 330 feet from

the nearest external boundary lines of the drilling unit.1077

[4] – Minimum Operator Control.

A unitization order will not become effective until the plan and order from the Director

has been approved in writing by those persons who, under the order, will be required to pay at

least 51 percent of the unit expense, and also by the persons owning at least 51 percent of the

unit production or proceeds. If the requisite number of persons and the requisite percentage of

interests in the unit area do not approve the plan of unitization within a period of 6 months from

the date of the order providing for unitization, then the Department will revoke the order. But if

1074 Ill. Admin. Code tit. 62, §240.410. 1075 Id. 1076 Id. 1077 Id.

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good cause can be shown to the Department, it may extend the time for an additional period of

time that may not exceed one year. 1078

[5] – Options.

All unitization orders must specify the treatment of non-consenting owners. If any owner

refuses to participate in the risk and costs of the drilling, testing, completing and operation of a

well as determined by the Department, the integration order shall provide either that:

(1) the nonparticipating owner shall surrender a leasehold interest to the participating owners on a basis and for such terms and consideration the Department finds fair and reasonable; or, (2) the nonparticipating owner shall share in a proportionate part of the production of oil and gas from the drilling unit determined by the Department, and pay a proportionate part of operation cost after the participating owners have recovered from the production of oil or gas from a well all actual costs in the drilling, testing, completing and operation of the well plus a penalty to be determined by the Department of not less than 100 percent nor more than 300 percent of such actual costs.1079

1078 225 Ill. Comp. Stat. 725/23.8 (2010). 1079 Id.

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§ 15.01 Analysis of Indiana Regulatory Framework.

[1] – Name of the Governing Body.

Indiana’s Department of Natural Resources (“Department) is the statutorily created body

empowered to enforce the state’s Oil and Gas Conservation Act (“Act”) 1080 and foster the

conservation and development of the natural resources of Indiana.1081 The Department’s Oil and

Gas Division (“Division”) directly administers the Act; 1082 however, the Indiana Natural

Resources Commission (“Commission”), which is also established by statute, is the ultimate

authority on administrative orders and procedure.1083

[2] – Membership on the Governing Body.

The Department consists of a director appointed by the governor, four deputy directors,

and any other personnel necessary to adequately perform Department functions. 1084 The

Division Director is selected by the Commission to oversee the Division’s enforcement of the

Act.1085 The Commission members include the: (1) commissioner [or designated representative]

from the department of transportation; (2) commissioner [or designated representative] from the

department of environmental management; (3) director [or designated representative] from the

office of tourism development; (4) Department Director; (5) chairperson of the advisory council

under § 14-9-6-1; (6) president [or designated representative] from the non-profit Indiana

Academy of Science; and (7) six citizen members.1086

1080 Ind. Code §§14-8-2-67, -9-1-1, -9-4-1 (2010). 1081 Id. § 14-11-1-6. 1082 Id. § 14-9-4-1. 1083 Id. § 14-10-2-3. 1084 Id. § 14-9-1-1. 1085 Id. § 14-9-7-4(a). 1086 Id. § 14-10-1-1.

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These positions are filled by governor appointment based on expertise in the relevant areas.1087

Of the six citizen appointees, at least two must have knowledge or experience in environmental

or natural resource conservation, and no more than three may be of the same political party.1088

Unless removed for cause, citizen members serve three-year terms on the Commission.1089

The Commission elects officers annually from its amongst its members, including a

chairman and vice chairman to preside over Commission meetings, and a secretary responsible

for maintaining Commission records.

1090

[3] – Scope of Authority.

The Department has the duty to recommend and secure the enforcement of laws for the

conservation and development of the natural resources of Indiana.1091 In furtherance of this duty,

the Department has the authority to make emergency rules,1092 as well as to investigate, compile

and disseminate information and make recommendations in primary pursuit of waste

prevention.1093 Waste is strictly prohibited,1094

(1) locating, spacing, drilling, equipping, operating, or producing a well for oil and gas…in any manner that reduces…the quantity of oil or gas ultimately to be recovered from any well in this state or violates the spacing provisions;

and includes conduct such as the

(2) storing oil in earthen reservoirs except in an emergency to prevent the total loss of that oil; (3) producing oil or gas in a manner that will cause water channeling or zoning; (4) injecting fluids into a stratum or part of a stratum capable of producing oil or gas, except in accordance with the terms of a permit for an injection well issued under this article; (5) allowing water other than fresh water to flow from any producing horizon located in a producing pool, except in

1087 Id. §§ 13-13-1-1, 8-23-2-1. 1088 Id. § 14-10-1-1. 1089 Id. § 14-10-1-3. 1090 Id. § 14-10-1-5. 1091 Id. § 14-11-1-6. 1092 Id. § 14-10-2-5. 1093 Id. § 14-11-1-1. 1094 Id. § 14-37-11-1.

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accordance with the terms of a permit issued under this article; and, (6) allowing gas from a well that produces only gas to escape into the atmosphere, except as is necessary while making or changing connections, completing the well, or reconditioning the well. 1095

The Department Director has the duty, among others, to supervise the work of the

Department and of each of the divisions.

1096 The Department Director may also appoint and

remove deputy directors, and upon the recommendation of the deputy director of a bureau,

appoint and remove all officers and employees of the bureau.1097 The Department Director, with

the approval of the commission, may: (1) cooperate with any other department of state

government in the enforcement of law; (2) assign deputies to aid the other departments in

making inspections and in the prevention or detection of crime; and (3) receive similar assistance

from the deputies of any other state department.1098

As part of the Division’s authority, it must notify a permit applicant if the application is

within the permit boundaries of an underground mine for which a mine plan has been filed or

which contains commercially mineable coal resources.

1099

(1) associated with an underground mine permitted and specifically intended to be mined under the permit;

A commercially minable coal

resource is a seam of coal that can be mined using generally accepted underground practices and

suitable equipment, and consists of coal in sufficient quantities and of sufficient quality to be

commercially saleable. A commercially minable coal resource includes a seam of coal to which

the seam is:

(2) associated with an inactive underground mining operation at which mining operations have temporarily ceased and are

1095 312 Ind. Admin. Code 16-1-50 (2011). 1096 Ind. Code § 14-9-2-3 (2010). 1097 Id. § 14-9-2-2. 1098 Id. § 14-9-2-4. 1099 312 Ind. Admin. Code § 16-5-4 (2011).

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anticipated to be resumed by the person with the right to develop the seam; (3) identified as a commercially minable coal resource by the owner or lessee of the seam by a map accompanied by an affidavit that is filed with the division of oil and gas and states that the coal in the seam is being held for later commercial production; or, (4) at least thirty-six inches thick and located not more than 800 feet below the surface. 1100

The Commission has, among others, the power and duty to establish, in accordance with

criteria established by the United States Secretary of the Interior, a program of matching grants-

in-aid to public agencies for projects having as their purpose the preservation for public benefit

of properties that are significant in American or Indiana history, architecture, archeology, and

culture; and to establish fees.

The Commission oversees the drilling, casing, operating, plugging, and abandoning of

wells and any related fluid storage to prevent waste and minimize environmental impact of the

operations.1101 To further these duties, the Commission may adopt rules to govern any aspect of

oil and gas production within its jurisdiction.1102

The Commission, unless specified elsewhere, is the ultimate authority of the Department

for administrative orders and procedures.

In particular, the Commission has the authority

to regulate spacing through lineal and well density requirements, which are discussed further in

the following section.

1103 Under this power, the Commission is free to

delegate powers and duties to other Department employees or divisions. 1104

[4] – Process for Pooling.

[a] Commission Procedure.

1100 Ind. Code § 14-8-2-47 (2010). 1101Id. § 14-37-3-5. 1102 Id. § 14-37-3-15. 1103 Id. § 14-10-2-3. 1104 Id. § 14-37-2-2.

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The Commission may hold informal hearings to consider any matter that assists in the

administration of the Division. The Commission may hold or authorize an informal hearing on

its own initiative. These informal hearing may relate to various issues, in particular addressing

requests to: amend, modify, or repeal a Commission rule, order or permit; receive exceptions to

spacing requirements; obtain a Commission order integrating all interests within a drilling unit

for unitized operation. 1105 Any order that is the result of an informal hearing is subject to

administrative review.1106

A person may file with the Commission a written request for an informal hearing to

consider any matter relevant to oil and gas production. The written request must set forth the

relief sought and identify in particular or by class the persons who would be affected, while

additional requirements for informal hearing procedures may vary by individual

circumstances.

1107

When a request for an informal hearing has been filed, the Division Director must

conduct appropriate proceedings, and make written findings and recommendations for

disposition. An informal hearing will be conducted in a manner that will facilitate public

participation and is not governed by the rules of evidence or discovery. Notification of an

informal hearing needs to be made by the Division by first class mail, publication, or both, and

must be reasonably calculated to inform affected persons of the time, place, and purpose of the

hearing. Any order that results from this informal hearing process is subject to administrative

review.

1108

[b] Authority to Integrate Production.

1105 Id. § 14-37-3-16. 1106 Id. § 14-37-3-17. 1107 312 Ind. Admin. Code 16-2-3(a)(2011). 1108 Id. at 16-2-3(b)-(e).

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If at least two separately owned tracts of land are located within an established drilling

unit; or within a pool or part of a pool suitable for secondary recovery methods, then the owners

of the separate tracts may agree to integrate their interests and to develop their land as a drilling

unit.1109 A person may file with the Commission a written request for an informal hearing to

consider modifying an order.1110

If the owners of separate tracts of land do not agree to integrate their interests, then for

the prevention of waste or to avoid the drilling of unnecessary wells, the Commission will

require the owners to integrate their interests and to develop the land as a drilling unit.

1111 The

Commission will then enter an integration order. An order for integration that is issued must be

based upon reasonable terms that give the owner of each tract an equitable share of oil and

natural gas in the unit or pool. The part of the production allocated to the owner of each tract

must be considered as if produced from a well drilled on that tract. Under the Act, the

Commission may not limit well production.1112

If an integration order is entered, the operator may assess each interested owner for the

actual reasonable expenditures required in development and operations, including charges for

supervision. The operator is entitled to receive the first production from a well that otherwise

would be credited to the other owners of the integrated interests, so that the proportionate share

owed by the other owners for expenditures is paid to the operator from production. The value of

the production shall be calculated at the market price in the field when the production is received

by the operator or placed to the credit of the operator.

1113

[c] Protection of Coal Resources.

1109 Ind. Code § 14-37-9-1 (2010) 1110 312 Ind. Admin. Code 16-2-3(a) (2011). 1111 Ind. Code § 14-37-9-1 (2010). 1112 Id. § 14-37-9-2. 1113 Id. § 14-37-9-3.

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When an oil and gas well is drilled on lands underlaid by an inactive underground coal

mine or within the permit boundaries of an active underground coal mine, then an owner or

operator must run an intermediate string of casing from the surface to a point at least fifty feet

below the base of the commercially mineable coal resources or the mine floor, whether drilled

through a pillar or not.

Upon written application to the Department Director by a person that proposes to drill

one of these wells, the Department Director may grant a variance from the requirement of

running an intermediate string of casing if written consent to the variance is given by the

permittee or the person that has the right to develop the coal resource or by the coal mine

operator. If a variance is granted, the well must be completed in a manner that prevents: (1)

waste; (2) fresh water pollution; (3) cavings; (4) seepages; (5) fires; and (6) unreasonably

detrimental effects upon fish, wildlife, and botanical resources.

If an oil and gas well is drilled and completed through a commercially minable coal

resource and within an area for which a mine plan is filed, an owner or operator must set a

production string of casing, properly centralized and cemented, as documented by a sonic cement

bond-variable density log. Additionally, an owner or operator shall provide at least forty-eight

hours notice to the Division and to the person who filed the mine plan before commencing

logging operations. The person who filed the mine plan is entitled to be present during logging

operations and to examine the log.

If the Division determines that the cement bonding failed between fifty feet below and

100 feet above the commercially minable coal resource, then an owner or operator must

remediate to ensure adequate bonding. Within thirty days of commencing logging operations, an

owner or operator must provide the Division and the person who filed the mine plan with a copy

221

of the sonic cement bond-variable density log. The preparation of a log or any remedial action

will be at the expense of the owner or operator.

If a well is drilled and completed as a well for oil and gas purposes through a

commercially mineable coal resource, unless it is identified and placed into one of the above coal

resource categories, then that resource will be protected by a properly cemented, centralized

production string of casing.1114

§ 15.02 Types of Indiana Pooling Statutes.

[1] – Mineral Distinctions.

In Indiana, gas is defined as natural gas, unless otherwise specified.1115 Natural gas

means hydrocarbons that when produced in a natural state from an underground reservoir will

remain in a gaseous state at atmospheric conditions.1116 Oil means all liquid petroleum produced

at a well.1117 Pool is defined as an accumulation of oil or natural gas that occurs in a separate

underground reservoir under a single pressure system. 1118 Reservoir means an underground

geological formation that contains oil or natural gas.1119 And a field means a group of pools that

are related to a single geologic feature by structure or stratigraphy.1120

Coal bed methane is defined as gaseous substances of whatever character lying within or

emanating from: (1) unmined coal seams, either naturally or as a result of stimulation of the coal

seam; (2) the void created by mining out coal seams; or (3) the gob created by longwall or other

extraction methods of coal mining.

1121

[2] – Split by Depth.

1114 312 Ind. Admin. Code 16-5-4 (2011). 1115 Id. 16-1-24. 1116 Ind. Code § 14-8-2-176 (2010). 1117 Id. § 14-8-2-186. 1118 Id. § 14-8-2-208. 1119 Id. § 14-8-2-239. 1120 Id. § 14-37-9-3. 1121 Id. § 14-8-2-42.2.

222

The Act splits the spacing and drilling unit requirements by depth or by reservoir type.

The spacing rules categorized as (1) general, or no specified depth; (2) Trenton limestone

reservoir; or (3) deep wells of 1,000 feet or greater. Drilling units are split by reservoir type as

follows: (1) a sandstone reservoir; (2) the Trenton limestone reservoir; and (3) all other

reservoirs.1122

[3] – Spacing Rules.

All wells, unless specified, must be located no less than 330 feet from a lease line,

property line, or subdivision that separates unconsolidated property interests; and 660 feet from a

well for oil and gas purposes and is capable of production from the same reservoir.

For a well that is established in the Trenton limestone reservoir, it cannot be located less

than 165 feet from a lease line, property line, or subdivision that separates unconsolidated

property interests and 330 feet from a well for oil and gas purposes that is not included as an

exception.

If a well is drilled deeper than 1,000 feet for the commercial production of natural gas, it

must be located at least 330 feet from a lease line, property line, or subdivision that separates

unconsolidated property interests. Further, these deep gas wells must be no less than 1,320 feet

from any other well capable of producing gas from the same reservoir.1123

Again, the Commission has full discretion to grant exceptions after holding informal

hearings. However, the Division Director may modify the location of any well not more than

fifty feet from the location shown in the survey or the plat in the permit application. As a matter

of course, all injection, storage, noncommercial and test wells are all exempt from default

spacing requirements.

1122 312 Ind. Admin. Code 16-5-1, -5-2 (2011). 1123 Id. at 16-5-1.

223

[4] – Size.

For a sandstone reservoir, drilling units are to be ten acres for every quarter, quarter,

quarter section of the U.S. Public Lands Survey. A reservoir that is contained within the Trenton

limestone needs to have a drilling unit that contains five acres for every half of every quarter,

quarter, quarter section. For all other reservoirs, the drilling unit must contain twenty acres,

more or less, for every half a quarter, quarter section. The use of any portion of one quarter,

quarter section with any portion of another quarter, quarter section is prohibited unless approved

by the Commission. For an irregular section containing more or less than 640 acres, the

Department may establish drilling units other than those defined above of approximately twenty

acres or ten acres.1124

There may be an exception made to the drilling unit size, following an informal hearing,

if the exception is supported by unusual regional or geological characteristics and is conducive to

the most efficient and economical recovery of oil and gas.

1125 If an area is not covered by the

rectangular surveying system of the United States Public Lands Survey, then a drilling unit may

be established following an informal hearing. The drilling unit shall conform as nearly as

practicable to the drilling unit requirements for reservoirs of similar lithology in those areas

covered by the rectangular surveying system.1126

[5] – Minimum Operator Control.

Neither Act nor any other regulations specify minimum ownership approval requirements

for request or issuance of Commission orders.

1124 Id. at 16-5-2(g). 1125 Id. at 16-5-2. 1126 Id.

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§ 16.01 Analysis of Iowa Regulatory Framework.

[1] – Name of the Governing Body.

The Iowa Department of Natural Resources (“Department”) maintains regulatory

authority over oil and gas production and unitization within the state.1127

[2] – Membership on the Governing Body.

The Department is led by a Director, appointed by the governor based upon expertise in

natural resource and environmental management.1128 Subject to state senate confirmation, the

Director serves at the governor’s pleasure.1129 The Director oversees Department operations

from the capitol complex, and may not pursue other political positions during his tenure.1130

Within the Department, the Commission of Environmental Protection (“Commission”)

executes Iowa’s oil and gas laws under the Director’s leadership.

1131 The Commission is

comprised of nine gubernatorial appointees who serve staggered four-year terms upon senate

confirmation.1132 Each nomination is based upon the individual’s knowledge and experience,

while Commission membership must include: three members actively engaged in livestock or

farming; one member actively engaged in the business or financial sector; one member holding a

management position for a manufacturing company; and, four members who are voting residents

of Iowa. 1133 The Commission must convene no less than four times annually, led by a

chairperson and other applicable officers elected by its members.1134

[3] – Scope of Authority.

1127 Iowa Code §§ 458A.2, 458A.4 (2010). 1128 Id. § 455A.3. 1129 Id. 1130 Id. § 455A.4. 1131 Id. § 455A.5-6. 1132 Id. § 455A.6. 1133 Id. 1134 Id.

225

The Iowa Oil and Gas Conservation and Unitization Statute (“the Act”) is grounded in

the state’s policy to “foster and promote” oil and gas production in a manner that will prevent

waste and “result in the greatest possible economic recovery of [oil and gas] to the end that the

land owners, the royalty owners, the producers, and the general public realize and enjoy the

greatest possible good from these vital natural resources.”1135

[a] Matters Governed.

To accomplish these goals, the Director has a duty to make proper investigation to

determine the existence or possibility of waste.1136

(1) physical waste, as…generally understood in the oil and gas industry;

Waste, which is explicitly prohibited by

statute, includes:

(2) the inefficient, excessive, or improper use of, or the unnecessary dissipation of reservoir energy; (3) the location, spacing, drilling, equipping, operating, or producing of any oil or gas well or wells in a manner which causes, or tends to cause, reduction in the quantity of oil or gas ultimately recoverable from a pool under prudent and proper operations, or which causes or tends to cause unnecessary or excessive surface loss or destruction of oil or gas; (4) the inefficient storing of oil; and, (5) the production of oil or gas in excess of transportation or marketing facilities or . . . reasonable market demand.1137

The Director is granted broad authority to combat waste. The Director may enact regulations

and issue orders to effectively enforce the Act and encourage efficient production.

1138

For example, the Director may require “identification of [well] ownership…making and

filing of mechanical well logs and…surveys; operation…of wells in such manner as to prevent

1135 Id. § 458A.1. 1136 Id. § 455A.4. 1137 Id. § 458A.2 (19). 1138 Id. § 458A.4.

226

the escape of oil or gas out of one stratum into another; [and maintenance] of complete and

accurate [production] records.”1139 In addition, the Director is authorized to regulate nearly all

aspects of oil and gas production, including but not limited to the “drilling,…chemical

treatment…, [and] spacing of wells.”1140

The Commission may also promulgate rules to preserve surface and subsurface integrity,

and thereby affect the scope of Director authority. A majority of the Commission constitutes a

quorum needed to achieve Commission decisions such as rule making, hearing relevant

challenges to Department action, and restricting waste disposal.

1141

[b] Procedure.

The Department must provide notice and a hearing prior to entering an order.1142 The

Department may act upon its own motion, or upon the petition of “any interested person.”1143

No order may be issued without a least ten days notice and the Department must afford any

interested person the opportunity to be heard at the public hearing. 1144

Any notice required by this chapter shall be given at the election of the Department either by personal service or by letter to the last recorded address [of those persons affected] and one publication in a newspaper of general circulation in the state capital city and in a newspaper of general circulation in the county where the land affected, or some part thereof, is situated. The notice shall issue in the name of the state, shall be signed by the Director, shall specify the style and number of the proceeding, the time and place of the hearing, and shall briefly state the purpose

Upon petition, the

Department will cause notice of the hearing to be given. The Statute specifies notice

requirements particular to Council actions:

1139 Id. 1140 Id. 1141 Id. 1142 Id. § 458A.11. 1143 Id. The Act does not define “interested person.” 1144 Id.

227

of the proceeding. Should the Department elect to give notice by personal service, the service may be any officer authorized to serve process, or by any agent of the Department, in the same manner as is provided by law for the service of original notices in civil actions in the district court of the state. Proof of service by such agent shall be by the affidavit of the person making personal service.1145

A Department order must be written and kept by the state geologist as public record, certified

copies of which are receivable in evidence in all Iowa courts.

1146

[4] – Process for Pooling and Matters Covered.

Neither the Act nor

Department regulations specify appellate procedure for those adversely affected by an order.

Among the Department’s statutory duties is the requirement that it determine market

demand for each “marketing district” and limit production within such areas to avoid waste.1147

“Reasonable market demand” is defined in the Act to mean that “demand for oil or gas for

reasonable current requirements for consumption and use within and without the state,” together

with that amount needed to build and maintain reasonable reserves of those products.1148 When

the Department restricts oil and gas production, it must “allocate or distribute the allowable

production among the pools in the district on a reasonable basis” and prevent “premature

abandonment of…wells in the pool.”1149

If a particular pool is limited to produce less than it otherwise would without restraint, the

Department “shall allocate or distribute the allowable production among the several wells or

producing properties in the pool on a reasonable basis, preventing or minimizing reasonable

avoidable drainage, so that each property will have the opportunity to produce or receive its just

1145 Id. 1146 Id. 1147 Id. § 458A.6. Neither the Act nor Department regulations define or clarify what constitutes a “marketing district.” 1148 Id. § 458A.2 (18). 1149 Id.

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and equitable share, subject to the…prevention of waste.”1150 The Department defines “just and

equitable share” to mean, respective to each person, “that part of the authorized production from

the pool that is substantially in the proportion that the amount of recoverable oil [and] gas…in

the developed area of the person’s tract or tracts in the pool bears to the recoverable oil [and] gas

in the total developed area in the pool.”1151

[a] Spacing.

The Department must establish spacing units for a pool when necessary to prevent waste,

avoid unnecessary drilling, or protect correlative rights.1152 In general, each spacing unit within

a pool should be uniform in size and shape.1153 However, if necessary to achieve the above-

stated goals, the Department may divide a pool into zones and establish spacing units for each

zone, which “may differ in size and shape from those established in any other zone.” 1154

Whether or not zonal subdivision is needed, spacing units must be set in aims of “the efficient

and economical development of the pool as a whole.”1155

An order to establish spacing units for a pool must specify unit dimensions and proposed

well location(s) to comprise a “reasonably uniform spacing plan.”

1156 In addition, the order must

cover all land “determined or believed to be underlain by such pool.”1157 If the state geologist

finds that a proposed well site will not prove sufficiently productive, or may cause substantial

burden or hazard for drilling, the state geologist may enter its own order to change the

Department’s prescribed location.1158

1150 Id.

In that event, the state geologist’s order must include

1151 Iowa Admin. Code r. 565-51.1(19) (2010). 1152 Iowa Code § 458A.7 (2010). 1153 Id. 1154 Id. 1155 Id. 1156 Id. 1157 Id. 1158 Id.

229

“suitable provisions to prevent the production from the spacing unit of more than its just and

equitable share of the oil and gas in the pool.”1159

The state geologist may amend a spacing plan to include additional lands later found to

overly an identified pool.

1160 When necessary to prevent waste, avoid needless drilling, or

protect correlative rights, the state geologist may modify an existing spacing order “to increase

the size of spacing units in the pool or any zone thereof, or to permit the drilling of additional

wells on a reasonably uniform plan in the pool, or any zone thereof.”1161 Any person may appeal

an order from the state geologist to the Department within 30 days.1162

A Department order or other action is subject to judicial review under standard

administrative procedure stated in Chapter 17A of the Iowa Code.

1163 In addition, a petition for

review may be filed in Polk County or in any Iowa district court in which the affected property

lies in whole or in part.1164

[b] Authority to Integrate Production.

Owners within the same spacing area may pool their interests voluntarily.1165 Otherwise,

upon the application of any interested person, the Department may “enter an order pooling all

interests in the spacing unit for the development and operations of the [entire] unit.”1166 The

Department must provide notice and a hearing prior to issuing a pooling order, and its terms

must “afford to the owner of each tract or interest in the spacing unit the opportunity to recover

or receive, without unnecessary expense, a just and equitable share.”1167

1159 Id.

1160 Id. 1161 Id. 1162 Id. 1163 Id. 1164 Id. § 458A.14. 1165 Id. § 458A.8. 1166 Id. 1167 Id.

230

In Iowa, a pooling order must “make provision for the drilling and operation of a well on

the spacing unit, and for the payment of the reasonable actual cost of the well by the owners of

interests in the spacing unit, plus a reasonable charge for supervision.” 1168

[c] Allocation of Production and Costs.

Other than this

information, the Act and Department regulations do not provide specific facts required for a

pooling order.

All operation related to oil and gas drilling that occurs on a portion of any spacing unit

covered within a pool is deemed to have occurred on all portions.1169 Thus, operations on a part

of a pooled unit are considered, for all purposes, “the conduct of operations upon each separately

owned tract in the drilling [i.e. spacing] unit by the several owners of the unit.”1170 Likewise,

“[t]hat portion of the production allocated to each pooled tract included in a spacing unit covered

by a pooling order shall, when produced, be deemed for all purposes to have been produced from

such tract by a well drilled on it.”1171

The Act similarly allocates drilling costs among owners within a pool. In the event that

an “owner shall drill and operate, or pay the expenses of drilling and operating the well for the

benefit of others, then [that] owner…shall, upon [perfection], have a lien on the share of

production from the spacing unit accruing to the interest of each of the other owners for the

payment of his proportionate share of such expenses.”

1172

[d] Royalty Distribution.

In regard to pooling, Iowa treats royalty interests like other ownership interests. For

example, the Department defines “correlative rights protection” to require that applicable

1168 Id. 1169 Id. 1170 Id. 1171 Id. 1172 Id. § 458A.10.

231

Department action must “afford a reasonable opportunity to each person entitled therein to

recover or receive the oil or gas in the person’s tract, or tracts, or the equivalent thereof, without

being required to drill unnecessary wells or incur other unnecessary expense to recover or

receive such oil or gas or its equivalent.”1173 In line with this definition, royalty owners may

arrange terms through voluntary pooling agreement, or be subject to compulsory pooling and

maintain those rights and obligations pertaining to other forms of ownership interest.1174

[e] Agreements Not Restraint of Trade.

If approved by the Department, an agreement for operation of a pool or other cooperative

unit for the production of oil and gas will not be considered a violation of any Iowa statute or

regulation relating to restraints of trade.1175

§ 16.02 Types of Iowa Pooling Statutes.

[1] – Mineral Distinctions.

The Act defines “gas” to include “all natural gas and all other fluid hydrocarbons which

are produced at the wellhead and not [otherwise] defined as oil.”1176 “Oil” encompasses “crude

petroleum oil and other hydrocarbons, regardless of gravity, which are produced at the wellhead

in liquid form, [including] those liquid hydrocarbons known as distillate or condensate recovered

or extracted from gas.”1177 This does not include gas produced in association with oil, often

referred to as casinghead gas.1178

[2] – Split by Depth.

There is no distinction under Iowa law based on the proposed or actual depth of drilling

operations. 1173 Iowa Admin. Code § 565-51.1(30) (2010) (emphasis added). 1174 Id. 1175 Iowa Code § 458A.9 (2010). 1176 Id. § 458A.2(7). 1177 Id. § 458A.2(12). 1178 Id.

232

[3] – Size and Spacing Rules.

The Department has authority to regulate the spacing of wells.1179 Absent an order to

impose specific spacing requirements, well location must comply with the following default

regulatory standards.1180

[a] Oil Wells.

No more than one well drilled for oil may be located “upon any tract of land other than a

governmental quarter quarter section or governmental lot corresponding thereto,” or, for lands

not covered by United States Public Land Surveys, upon “an arbitrary 40-acre tract.”1181 An oil

well may not be located closer than 330 feet to any boundary line of such an area, “nor closer

than 600 feet to the nearest well drilling to or capable of producing from the same pool on the

same lease or unit.” 1182 Further, “[s]hould [the] governmental quarter quarter section,

governmental lot, or arbitrarily designated tract contain less than 36 acres, no well shall be

drilled thereon except by special order of the Department.”1183

[b] Gas Wells.

For gas wells, “not more than one well shall be drilled…upon any tract…other than a

governmental section, or, in areas not covered by U.S. public land surveys, an arbitrarily

designated 640-acre tract.”1184 Wells may not be drilled closer than 1,320 feet to any boundary

line of said governmental or arbitrary tract.1185

1179 Id. § 458A.7.

In addition, wells within the same pool and on

the same lease or unit may not be located within 3,750 feet of one another if both are in operation

1180 Iowa Admin. Code r. 565-51.15(1) (2010). 1181 Id. 1182 Id. 1183 Id. 1184 Id. r. 565-51.15(2). 1185 Id.

233

or capable of production.1186 Similar to oil well restrictions, in the event a governmental section

or arbitrarily designated tract contains less than 600 acres, “no well shall be drilled thereon

except by special order of the Department.”1187

[4] – Minimum Operator Control.

The Act does not specify a requirement for approval from a certain proportion of relevant

owners in order to effectuate a Department order.

[5] – Directional Drilling.

Under Department regulation, “[n]o well may be intentionally directionally deviated from

the vertical without written approval of the Department.”1188 Special permission is not needed if

deviation occurs “for short distances, to straighten [a] hole, sidetrack junk, or correct other

mechanical difficulties.”1189 The Department has explicitly established that the “maximum point

at which a well penetrates the producing formation shall not vary unreasonably from the vertical

drawn from the center of the hole at the surface.”1190 The Department may order that a well be

straightened if necessary to protect correlative rights.1191

[6] – Options.

The Act does not address the issue of election rights recognized by some jurisdictions in

pooling situations.

1186 Id. 1187 Id. 1188 Id. r. 565-51.9. 1189 Id. 1190 Id. 1191 Id.

234

§ 17.01 Analysis of Kansas Regulatory Framework.

[1] – Name of the Governing Body.

The Kansas State Corporation Commission (“Commission”) and its internal divisions

regulate all matters related to oil and gas production throughout the state.1192

[2] – Membership on the Governing Body.

The Commission is comprised of three members who serve four-year staggered

terms. 1193 Each commissioner is appointed by the governor and confirmed by the state

senate.1194 No more than two commissioners serving simultaneously may belong to the same

political party. 1195 The Commission has extensive jurisdiction over resource and economic

development in Kansas, which is carried out through four divisions: Conservation,

Transportation, Energy, and Utilities. 1196 The oil and gas conservation statute (“statute” or

“Act”) is administered by the Commission’s Division of Conservation, which is led by a

Commission-appointed director who oversees daily activity of oil and gas production.1197 The

conservation division acts as the ‘face’ of the Commission’s regulatory authority over oil and gas

production.1198

The Commission may not promulgate any rule or regulation without first obtaining

formal recommendation from the “advisory committee on regulation of oil and gas

activities.”

1199

(1) Kansas Petroleum Council;

This advisory committee contains twelve members appointed by various bodies

throughout the state government and relevant industries as follows:

1192 Kan. Stat. Ann. § 55-150(a) (2010). 1193 Id. § 74-601(a). 1194 Id. 1195 Id. 1196 See Kan. Corp. Commission, http://www.kcc.state.ks.us (last visited June 10, 2011). 1197 Kan. Stat. Ann. § 74-630 (2010). 1198 Kan. Admin. Regs. § 82-3-101(17) (2011). 1199 Kan. Stat. Ann. § 55-152(a) (2010).

235

(2) Kansas Independent Oil and Gas Association; (3) Eastern Kansas Oil and Gas Association; (4) Jointly by the Kansas Farm Bureau and Kansas Livestock Association (appointee must own surface interest within the state); (5) Jointly by the Southwest Kansas Royalty Owners Association and Eastern Kansas Royalty Owners Association (appointee must own mineral interest within the state); (6) Governor of Kansas, (appointee must be a member of the general public); (7) Jointly by presidents of each groundwater management district (to represent the districts collectively); (8) Department of Health and Environment; (9) Kansas Geological Survey; (10) Kansas Water Office; (11) Department of Agriculture, Division of Water Resources; (12) State Corporation Commission.1200

Each appointee serves at the pleasure of the respective represented body.

1201 The person

designated by the Commission (‘number twelve’) serves as the chairperson of the advisory

committee and organizes quarterly meetings. 1202

[3] – Scope of Authority.

For clarity, “Commission” will hereinafter

indicate this collective source of authority under the Act.

The Commission maintains jurisdiction over all matters related to oil and gas production

and unitization throughout Kansas. 1203 The statutory prohibition of waste supplies the

foundation of the Commission’s authority under the Act.1204

1200 Id. § 55-153.

Waste is defined throughout the

Act, and “in addition to its ordinary meaning, . . . include[s] economic waste, underground waste,

surface waste, waste of reservoir energy, . . . the production of [oil or gas] in excess of

transportation or marketing facilities or reasonable market demands; . . . [and] both economic

1201 Id. 1202 Id. 1203 Id. §§ 55-150; 55-603; 55-703; 55-1301. 1204 Id. §§ 55-601, 55-701. The Act does not provide the “ordinary meaning” of waste.

236

and physical waste resulting from the development and operation separately of tracts that can

best be operated as a unit.”1205

[a] Matters Governed.

The Commission may “make and enforce rules, regulations and orders for the prevention

of waste,”1206 and has an affirmative duty to prevent the inefficient and inequitable taking of oil

of gas.1207 In pursuit of these goals, it is authorized to “ascertain[] the several factors entering

into the determination of the productive capacity of each well [and] the total productive capacity

of all wells in [any] common source of supply.”1208 The Commission has broad jurisdiction to

“establish[]…such other standard[s] as [it]…may find proper to determine the productive

capacity of…all wells…and…carry out the spirit and purpose” of the Act.1209

[b] Commission Procedure.

A proceeding to initiate any Commission action under the Act may be instituted by the

Commission itself, the attorney general, or any other person. 1210 Within its authority to

promulgate rules, the Commission has established procedural requirements relevant to certain

situations. If a regulation contains application and notice standards therein, such language

controls for the relevant issue(s) involved.1211

1205 Id. §§ 55-602, 55-702, 55-1302(d).

If applicable, particular procedural rules will be

discussed alongside the substantive law to which they apply. Otherwise, “the notice

requirements [outlined below] apply to each hearing arising under any rule[,] regulation or

1206 Id. § 55-604(a)(2). 1207 See id. § 55-603. 1208 Id. § 55-704. 1209 Id. 1210 Id. § 55-606(a). 1211 Kan. Admin. Regs. § 82-3-135a (2011).

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statutory provision for the conservation of crude oil and natural gas…heard by the

Commission.”1212

If any person submits an application to the Commission for an order or permit under the

Act, the applicant must give notice of such on or before the date the application is filed by

mailing or delivering a copy of the application to: (1) each operator or lessee of record within a

one-half mile radius of the subject well and/or acreage; and, (2) each mineral owner of record in

unleased acreage within that same one-half mile radius.

1213 In addition, the applicant must

publish notice of the application “in at least one issue of the official county newspaper of each

county in which the lands affected by the application are located” and “in at least one issue of the

Wichita Eagle newspaper.”1214

Upon adequate notice of application, there will be a short abeyance period to afford time

for any affected party to file a protest.

1215 A written protest may be filed by “any person having

a valid interest in the application”1216 within 15 days of notice thereof.1217 The protest must be

served upon the applicant either at the same time or before filing it with the Commission.1218

A valid protest must contain the following information: (1) the protester’s name and

address; (2) the title and docket number of the proceeding; and, (3) a “clear and concise

statement of the direct and substantial interest of the protester in the proceeding, including

specific allegations as to the manner in which the grant of the application will cause waste,

violate correlative rights, or pollute [state waters].”

1219

1212 Id. § 82-3-135(a).

To ensure the Commission’s

consideration, the protestor must provide evidence of injury, a written statement, or offer to

1213 Id. § 82-3-135a(b). 1214 Id. § 82-3-135a(d). 1215 Id. § 82-3-135a(e). 1216 Id. § 82-3-135b(a). 1217 Id. § 82-3-135b(c)(1)(A). 1218 Id. § 82-3-135b(d). 1219 Id. § 82-3-135b(a).

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participate in the hearing.1220

If the Commission or the state’s attorney general initiates a hearing, notice of such

hearing must comply with the following:

If the Commission finds that a protest is valid, a hearing will be

held, and the applicant must publish notice of the hearing as specified below.

(1) Notice of the hearing shall be published by the Commission in the Wichita Eagle newspaper and in the Kansas Register. Notice of the hearing shall also be published in the official county newspaper of each county in which the lands affected by the hearing are located. If that county does not have an official county newspaper, notice may be published in any newspaper satisfying the requirements of § 64-101 in a county in which the lands affected by the hearing are located. (2) A copy of the notice of the hearing shall be mailed by the Commission to each person who has filed for the purpose of receiving notice. The notice shall be mailed not less than 10 days prior to the hearing date. (3) Any additional notice required by any rule, regulation or statute which applies to the hearing or which is necessary to provide due process to any person whose property may be affected by the hearing shall be provided by the Commission.1221

If the hearing is initiated by any other person, notice must be given as follows:

(1) Anyone who initiates a hearing shall publish notice of the hearing in the Wichita Eagle newspaper and in the official county newspaper of each county in which the lands affected by the hearing are located. Anyone who initiates a hearing may publish notice in any newspaper satisfying the requirements of K.S.A. 64-101 in a county in which the lands affected by the hearing are located, if that county does not have an official newspaper. (2) A copy of the notice of the hearing shall be mailed by the commission to each person who has filed for the purpose of receiving notice. The copy of the notice shall be mailed not less than 10 days prior to the hearing date. (3) Anyone who initiates a hearing shall provide any additional notice required by any rule, regulation or statute which applies to the hearing or is necessary to provide due process to any person whose property may be affected by the hearing.1222

1220 Id. § 82-3-135b(e).

1221 Id. § 82-3-135(b). 1222 Id. § 82-3-135(c).

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If the Commission is required to publish notice, it must establish proof that such was properly

given in the form of an affidavit sworn by a staff member that notice is perfected. If another

person must publish notice, the applicant for said hearing must provide a sworn affidavit of

perfection.1223

[4] – Matters Covered.

The disjointed structure of the Act and regulations provides separate rules pertaining to

oil and gas respectively in different articles or sections.1224 Despite this format, the rules often

govern the two products on identical or similar grounds. Further, any provision for unitization

references oil and gas simultaneously. 1225

The regulatory scheme in Kansas is two-fold: the Commission has established general

rules governing allowable production that are “statewide in application” unless otherwise

stated.

For clarity, this discussion will not distinguish

between oil and gas whenever possible, and will signify circumstances where the laws’

distinctions merit attention.

1226 On the other hand, “special orders shall be issued when required, and shall prevail

over general rules” if conflict arises.1227 Further, as will be discussed herein, the Commission

may grant an exception to the requirements of any regulation upon application, notice and

hearing.1228

In Kansas, there is no compulsory pooling per se. Rather, the Commission regulates oil

and gas production through a system of allowable calculations and proration among relevant

1223 Kan. Admin. Regs. § 82-3-135(d) (2010). 1224 See generally Kan. Stat. Ann. §§ 55-601 et seq. (Oil Production & Sale), Kan. Admin. Regs. §§ 82-3-200 et seq. (Oil Conservation Rules); Kan. Stat. Ann. §§ 55-701 et seq. (Production & Conservation of Natural Gas), Kan. Admin. Regs. §§ 82-3-300 et seq (Gas Conservation Rules). 1225 See generally Kan. Stat. Ann. §§ 55-1301 et seq. (Unitization), Kan. Admin. Regs. §§ 82-3-100 et seq. (General Conservation Rules). 1226 Kan. Admin. Regs. § 82-3-100(a) (2011). 1227 Id. For the purposes of this discussion, “order” means “special order,” as compared to general rules. 1228 Id. § 82-3-100(b).

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areas. The Commission will classify wells “by the common source of supply [or pool] from

which they produce.”1229 The Commission has the authority and responsibility to regulate the

taking of oil and gas from any pool as to prevent: (1) waste; (2) “the inequitable or unfair taking”

of oil and gas; and (3) “unreasonable discrimination” among pools and wells therein.1230

The following discussion should be prefaced by highlighting some key terms used below.

As defined by the Commission, “proration” means the “regulation of the amount of allowed

production to prevent waste[,] or to prevent any of the following[,] in a manner that would favor

any one pool [over another]: undue drainage between developed leases; unratable taking; or

unreasonable discrimination between or among operators, producers, and royalty owners who are

within a common source of supply.”

1231

The phrases “attributable acreage” and “acreage-attribution” are used interchangeably by

the Commission to mean “the acreage assigned to a well in accordance with the well spacing

program for each of the prorated fields.”

In other words, proration refers to the Commission’s

general authority and duty to control oil and gas production on efficient and equitable grounds.

1232

[a] Allowable Production System.

The Commission defines a well’s attributable

acreage as one factor used to determine the allowable production to be granted to a particular

well, as well as to a certain well pool or field under an order.

Pursuant to its statutory duty, the Commission will limit the amount of production within

the state, and among the pools and wells therein, through a system of allowable production

standards. The Act states that “[t]he drilling and completion of a…well shall not itself entitle

1229 Id. § 82-3-102. A “pool” is “any common source of supply” of oil and/or gas. Kan. Stat. Ann. § 55-603 (2010). 1230 Kan. Stat. Ann. § 55-603 (2010). 1231 Kan. Admin. Regs. § 82-3-101(58) (2011). 1232 Id. § 82-3-101(7).

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said well to an allowable for production.”1233 As such, an “allowable” is “the amount of oil or

gas authorized to be produced by order of the Commission.”1234

[b] Default Allowable—Gas Wells.

The Commission will grant an allowable to each gas well within a prorated pool upon an

operator’s application that provides the following: (1) a written request for an allowable on a

form prescribed by the Commission; (2) an acreage plat displaying well location and a

description of such well’s attributable acreage; and, (3) results of the Commission-supervised

test as required under the applicable pooling order.1235

In determining an allowable for each well, the Commission will consider waste

prevention and correlative rights protection, as well as “market demand” for the product.

1236 The

Commission will base its calculation of market demand upon “the reasonable current

requirements for current consumption and use within and without the state, and such other

factors, conditions, or circumstances that would aid” in this evaluation.1237

This broad statutory guidance will be involved in the Commission’s allowable

determination. However, gas wells are subject to regular testing of production upon which the

Commission will calculate each well’s “actual open flow potential.”

1238 For gas wells, the

“standard daily allowable…shall be limited to 50% of the well’s actual open-flow potential.”1239

So long as a gas well operator complies with regulatory testing requirements, it “shall be entitled

to a minimum allowable of 250 mcf per day.”1240

1233 Kan. Stat. Ann. §55-703a (2010).

1234 Kan. Admin. Regs. § 82-3-101(2) (2011). 1235 Id. § 82-3-300(a). Additional information is required if request is for a replacement well. 1236 Kan. Stat. Ann. § 55-703 (2010). 1237 Id. § 55-703(a). 1238 Kan. Admin. Regs. § 82-3-303 (2011). Equations to calculate open-flow potential are stated in this provision. 1239 Id. § 82-3-312(a). 1240 Id.

242

In addition to applicable exceptions discussed below, the Commission may make

exceptions or modifications to an allowable to prevent waste or protect correlative rights.1241

Regardless of attributable acreage, the Commission may a grant a well “the full allowable if any

of these conditions exist: (1) location exceptions have been granted for man-made structures or

topographic features; (2) no interference with drainage of adjacent wells can be shown by

competent evidence; or (3) actual interference is less than the reduced allowable.”1242

[c] Default Allowable—Oil Wells.

The Commission will hold a monthly hearing to determine the statewide oil allowable for

the coming month, or ‘proration period’.1243 The overall allowable will be that amount which

“can be produced daily throughout the state, during the next succeeding proration period, without

causing waste.” 1244 Once the Commission establishes this amount, it then must allocate

allowable production among the prorated pools and wells within the state1245 in a manner that

“prevent[s] unreasonable discrimination in favor of any one pool as against any other.” 1246

Therefore, generally speaking, an allowable will be the “amount of oil which may be produced

currently…without causing waste or injury to correlative rights, and without discriminating

between pools.”1247

Once the Commission determines allowable production for the various pools, it will

prorate that amount among the several wells within each pool based on the following

considerations: (1) the “productivity of each…well;” (2) “the acreage of each well owner which

is reasonably attributable to each of the owner’s wells;” and (3) the “efficient utilization of the

1241 Id. § 82-3-312(f). 1242 Id. 1243 Id. § 82-3-200(b)(1). 1244 Id. § 82-3-200(b)(2). 1245 Id. § 82-3-200(b)(3). 1246 Kan. Stat. Ann. § 55-603 (2010). 1247 Kan. Admin. Regs. § 82-3-200(c) (2011).

243

reservoir energy in the pool.”1248 As the Act expressly prohibits waste, it is unlawful for any

person to produce more “than the allowable specified by the Commission.”1249

For a particular oil well in a prorated pool, the Commission will consider the results of

initial and annual productivity testing, and any applicable overages or underages from the

previous proration periods.

1250 For a well not covered by proration agreement or order,

allowables “shall be assigned on an individual well basis” based on a depth schedule as

follows1251

Producing Interval Found Between

:

(depth in feet) Daily Allowable (barrels/well/day)

0-4000 100 4,001-6,000 200 6,000+ 300 Upon application, the Commission may assign an allowable and attributable acreage to a given

oil well that varies from the applicable default allowable shown above.1252

(1) the exact location of the well and the acreage attributed to the well;

For non-prorated

wells, the application must provide:

(2) the allowable requested; (3) the geological name of the producing formation; (4) the top and bottom depths of the producing formation; (5) an affidavit indicating the date that applicant provided proper notice of the application to, and the names and addresses of, each operator and/or lessee of record and each unleased mineral owner within a one-half mile radius of the proposed well; and, (6) any other information the Commission may require.1253

In addition, any interested party may file an application for an exception to an allowable assigned

by the Commission by initiating a hearing in compliance with the procedures outlined above.

1254

1248 Kan. Stat. Ann. § 55-604(b) (2010).

1249 Kan. Admin. Regs. § 82-3-200(a) (2011). 1250 Id. §§ 82-3-200(c); 82-3-202. 1251 Id. § 82-3-203(a). 1252 Id. § 82-3-203(c)-(d). 1253 Id. § 82-3-203(c).

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[d] Spacing and Proration Orders.

The Commission has discretionary authority to establish “well spacing [requirements] in

any…common source of supply and provide for the orderly development thereof.”1255

Any person having an interest in oil or gas production within a particular area “may file

an application for . . . a well spacing or basic proration order.”

Thus, in

terms of well location and common source production, a person may petition the Commission to

enter a special order defining well-spacing and proration rules for an applicable pool; in the

absence of such order, the law provides default restrictions for all wells within the state, subject

to available individual exceptions in some circumstances.

1256

(1) if the application is for amendment, a description of the nature of the amendment sought;

These applications must

contain the following:

(2) the location, depth, and common source of supply from which a well or wells in the subject acreage are producing; (3) a description of the acreage subject to the application, with an affirmation that all of the acreage is reasonably expected to be productive from the subject common source of supply; (4) the proposed well location restriction and proposed provisions for any exceptions thereto; (5) the proposed configuration of producing units for acreage attribution purposes; (6) the name and address of each operator or lessee of record in the subject acreage, and, a certificate of mailing indicating the date service of a copy of the application was made to each; (7) the name and address of each owner of record of the minerals in unleased acreage within the subject acreage, and a certificate of mailing indicating the date service of a copy of the application was made to each; (8) the name and address, as shown by the applicant's books and records, of each person owning the royalty or leasehold interest in the subject acreage and operated by the applicant, or on which the applicant has a lease or an interest in the lease, and a certificate of

1254 Id. § 82-3-203(d). 1255 Kan. Stat. Ann. § 55-703a (2010). 1256 Kan. Admin. Regs. § 82-3-109(a) (2011).

245

mailing indicating the date service of a copy of the application was made to each; (9) if a proration formula is sought, the specific factors proposed to be utilized in the allocation of production; (10) the applicant's license number; and (11) such other information which may be required by the Commission.1257

The applicant must file the original and four copies of the application with the

Commission, which will set a hearing to consider the action sought.

1258 The applicant must then

publish notice of the hearing under the terms outlined above.1259 Upon adequate notice, no well

may be drilled within the area sought to spaced or prorated by the application until the hearing

concludes, unless that “well location conforms to the most restrictive location provisions sought

in the pending application.”1260

If a special order is entered, “any well drilled or being drilled in violation [thereof] shall

be considered…unlawful [and]…presumed to be in violation of correlative rights[,] and to

constitute waste.”

1261 Upon such violation, the Commission may issue a “show cause order to

determine whether the [unlawful] drilling…was necessary to protect correlative rights or prevent

waste,” and will hold a hearing to consider an exception.1262 If good cause is not sufficiently

established, the Commission may require that “the well…be permanently capped or plugged and

abandoned,” or permit “production at a reduced rate…to ensure the protection of correlative

rights and the prevention of waste.”1263

[e] Exceptions to Special Orders.

1257 Id. 1258 Id. § 82-3-109(c). 1259 Id. 1260 Id. § 82-3-109(d). The Commission may grant exceptions to temporary drilling ban after notice and hearing. Id. 1261 Id. § 82-3-110(a). 1262 Kan. Admin. Regs. § 82-3-110(a) (2011). 1263 Id. § 82-3-110(b).

246

Any gas well located within a prorated pool that requires exceptions to any provision of a

proration order “may be granted an allowable by the Commission only after an application has

been filed.”1264

(1) The exact location of the well and the acreage attributed to the well;

An application seeking such exception must contain the following information:

(2) The common source of supply from which the well is producing; (3) The name and address of the purchaser, if known; (4) A statement of the exception being requested and the reasons the exception should be granted; (5) A plat showing the location and approximate depths of all wells and dry holes that have been drilled within one mile from the acreage to be attributed; (6) The applicant's license number; (7) The names and addresses of each person owning a royalty or working interest in the acreage to be attributed, and a certificate of mailing indicating the date on which service of a copy of the application was made to each person; (8) The names and addresses of all operators of producing acreage abutting or adjoining the acreage to be attributed, and a certificate of mailing indicating the date on which service of a copy of the application was made to each operator; (9) The names and addresses of all lessees of record of nonproducing acreage abutting or adjoining the acreage to be attributed, and a certificate of mailing indicating the date on which service of a copy of the application was made to each lessee; (10) The names and addresses of all owners of record of the minerals in, or royalty of unleased acreage abutting or adjoining, the acreage to be attributed, and a certificate of mailing indicating the date on which service of a copy of the application was made to each owner; (11) The names and addresses of all persons owning the royalty or leasehold interests in acreage abutting or adjoining the acreage to be attributed that is operated by the applicant or on which the applicant has a lease or an interest in the lease, and a certificate of mailing indicating the date on which service of a copy of the application was made to each person; (12) A statement advising each person listed in paragraphs (7) through (11) of this subsection that the person has 15 days in which to file a protest to the application with the conservation division pursuant to the provisions of K.A.R. 82-3-135b; and

1264 Id. § 82-3-300(c).

247

(13) Any other relevant information that the commission may require.1265

In addition to providing notice to each person as outlined above, the applicant must also publish

notice “in at least one issue of the official county newspaper of each county in which lands

affected by the application are located and in the Wichita Eagle newspaper.”

1266

[f] Unitization.

Upon such

notice, the application will be held in abeyance for 15 days to allow potential protests as

discussed above.

In the absence of special order, persons holding oil and gas interests within a shared pool

may establish a terms for unitization by agreement. Under the Act, “if all mineral and royalty

owners[,] and not less than 90% of the working interest owners” approve, in writing, a contract

for unit operation, such agreement “shall become effective without application to or order by the

Commission.”1267 A “working interest owner” is an “owner of tracts or interests who, in the

absence of a unitization order, would have the right to drill and operate a well or wells on the

separately owned tracts comprising the unit.”1268

Prior to such a contract becoming effective, those seeking unitization must file a copy of

the agreement with the Commission and “notify all working interest owners of the intention to

conduct the unit operation” in the same manner required for notice of an application for unit

operation.

1269

1265 Id.

The notice must inform those owners that each has 30 days to institute

1266 Id. § 82-3-300(d). 1267 Kan. Stat. Ann. § 55-1317(b) (2010). 1268 Id. § 55-1302(e). 1269 Id. § 55-1317(c).

248

proceedings before the Commission challenging the agreement. 1270 If no such proceedings

occur, the contract for unitization becomes effective after that 30-day period.1271

The Act allows any working interest owner to file an application with the Commission

for an order establishing unit operation of a pool, or any portion thereof.

1272

(1) A description of the land and pool or part thereof to be so operated, termed the unit area;

The application

must contain the following:

(2) A statement of the type of operations contemplated for the unit area; (3) A copy of a proposed plan of unitization which the applicant considers fair, reasonable and equitable; (4) A copy of a proposed operating plan covering the manner in which the unit will be supervised and managed and costs allocated and paid; and, (5) An allegation of the facts required to be found by the Commission [provided below].1273

The facts to be alleged in the application must all be found accurate by the Commission.

1274

(a)(1) The primary production from [the applicant pool or part thereof] has reached a low economic level and, without introduction of artificial energy, abandonment of oil or gas wells is imminent; or, (2) the unitized management, operation and further development of [the applicant pool or part thereof] is economically feasible and reasonably necessary to prevent waste within the reservoir and thereby substantially increase the ultimate recovery of oil or gas;

After notice and a hearing, the Commission will grant a unitization order only if the following

conditions exist:

(b) The value of the estimated recovery of oil or gas substantially exceeds the estimated additional cost incident to conducting [unitized] operations; and, (c) The proposed operation is fair and equitable to all interest owners.1275

1270 Id.

1271 Id. 1272 Id. § 55-1303. 1273 Id. 1274 Id. § 55-1304.

249

If the Commission determines that such facts are true, it may grant an order for unit

operation.1276

A unitization order issued by the Commission will not come into effect without formal

approval from a proportion of relevant interest-holders.

1277 The percentage of ownership

approval required will depend on the findings of the Commission in granting the order. If the

Commission grants the order upon finding that “primary production from [the applicant pool or

part thereof] has reached a low economic level and, without introduction of artificial energy,

abandonment of oil or gas wells is imminent,”1278

approved in writing by those persons who, under the…order, will be required to pay at least 63% of the costs of the unit operation, and also by the owners of at least 63% of the production or proceeds thereof that will be credited to royalties, excluding overriding royalties or other like interests which are carved out of the leasehold estate.

then the order must be

1279

If the order is granted because “the unitized management, operation and further development of

[the applicant pool or part thereof] is economically feasible and reasonably necessary to prevent

waste within the reservoir and thereby substantially increase the ultimate recovery of oil or gas,”

the order must be:

approved in writing by those persons who, under the commission's order, will be required to pay at least 63% of the costs of the unit operation, and also by the owners of at least 75% of the production or proceeds thereof that will be credited to royalties, excluding overriding royalties or other like interests which are carved out of the leasehold estate.1280

1275 Id.

1276 Id. § 55-1305. 1277 Id. 1278 Id. § 55-1304(a)(1). 1279 Kan. Stat. Ann. § 55-1305 (2010). 1280 Id. (emphasis added).

250

In either case, the Commission must make a formal finding that the plan for unitization

has been so approved, and may hold supplemental hearings to obtain such approval.1281 If the

proposed order has not been approved within six months of entry, it “shall cease to be of further

force and effect and shall be revoked” unless the Commission finds good cause for extending the

approval period.1282

A unitization order must be “upon terms and conditions that are just and reasonable” and

provide a unit operation plan that includes the following:

(a) A legal description in terms of surface area of the pool or a part thereof to be so operated, termed "the unit area"; (b) A statement of the nature of the operations contemplated; (c) An allocation to the separately owned tracts in the unit area of all the oil and gas that is produced from the unit area and is saved; (d) A provision for the credits and charges to be made in the adjustment among the working interest owners in the unit area for their respective investments in wells, tanks, pumps, machinery, materials and equipment contributed to the unit operations; (e) A provision providing how the costs of unit operations, including capital investments, shall be determined and charged to the separately owned tracts and how such costs shall be paid, including a provision providing when, how and by whom the unit production allocated to a working interest owner who does not pay the share of the cost of unit operations charged to such owner, or to the interest of such owner, may be sold and the proceeds applied to the payment of such costs; (f) A provision whereby a non-operating working interest owner shall be furnished, but not more often than once a month, reasonably detailed information regarding the nature and amount of the various items of costs and expenses, including capital investments, chargeable against the interest of the non-operating working interest owners; (g) A provision for carrying any non-operating working interest owner on a limited, carried or net-profits basis, payable out of production, upon terms and conditions determined by the Commission to be just and reasonable, or otherwise financing any non-operating working interest owner who elects to be carried or otherwise financed or who does not meet the owner's financial obligations with the unit and a provision for establishing a

1281 Id. 1282 Id. This ‘good cause’ extension period may be no more than 60 days.

251

reasonable rate of interest and a penalty on all unpaid expenses, in amounts established by rules and regulations adopted by the Commission; (h) A provision for the supervision and conduct of the unit operations, including the selection, removal or substitution of an operator from among the working interest owners to conduct the unit operations; (i) A provision for a voting procedure for the decision of matters to be decided by the working interest owners in respect to which each working interest owner shall have a vote with a value corresponding to the percentage of the costs of unit operations chargeable against the interest of such owner; (j) The time when the unit operations shall commence and the manner in which, and the circumstances under which, the unit operations shall terminate and for the settlement of accounts upon such termination; (k) A provision specifying the particular records the unit operator shall keep and the detailed accounting procedure that the unit operator shall follow; and (l) Such additional provisions that are found to be appropriate for carrying on the unit operations and for the protection of correlative rights.1283

[g] Allocation of Production and Costs.

As expressed above, the terms upon which production and costs are distributed among

interest-holders in the unit area must be stated in the applicable unitization order. The Act

provides that “[t]he portion of the unit production allocated to any tract, and the proceeds from

the sale thereof, shall be the property and income of the several persons to whom, or to whose

credit, the same are allocated or payable under the order providing for unit operations.”1284

Further, all real and personal property “acquired in the conduct of unit operations…shall be

acquired for the account of the working interest owners within the unit area, and shall be the

property of such owners in the proportion that the expenses of unit operations are charged.”1285

1283 Id.

1284 Id. § 55-1306. 1285 Id.

252

The obligation of each working interest owner within the unit, whether operator or non-

operator, “at all times shall be several and not joint or collective, and a working interest owner of

the oil or gas rights in [each] separately owned tract shall not be . . . obligated or liable . . . for

more than the amount apportioned . . . or charged to his or her interest in the separately owned

tract pursuant to the order.”1286

The Act stipulates a one-eighth minimum production right for any owner subject to a

unitization order. As such, “a [one-eighth] part of the production allocated to each tract under an

order . . . shall in all events be and remain free and clear of any cost or expense of developing or

operating the unit.”

1287 Further, if a lease pertaining to a tract or interest stipulates a royalty or

other payment or obligation in excess of one-eighth of production, then “the working interest

owner subject to such excess payment or other obligation shall bear and pay the same.”1288

Production that is saved (not used in operation or unavoidably lost) will be allocated in

accordance with any controlling agreement among all interest owners. If no agreement exists,

the Commission will “determine the relative value of the separately owned tracts in the unit area,

exclusive of physical equipment, for development of oil and gas by unit operations, and the

[saved] production allocated to each tract shall be the proportion that the value of each tract so

determined bears to the total value of all tracts in the unit area.”

1289

In general terms, “[a] plan of unitization shall not be considered fair and reasonable if it

contains a provision for operating charges which include any part of district or central office

expense other than reasonable overhead charges.”

1290

[h] Modification and Effect of Orders.

1286 Id. 1287 Id. § 55-1308. 1288 Id. 1289 Id. § 55-1305. 1290 Id.

253

The Commission may amend an order to unitize operations under the same terms and

conditions necessary to enter the original order, subject to three primary exceptions.1291 First, if

the amendment to be made “affects only the rights and interest of the working interest owners,

the approval of the royalty owners shall not be required.” 1292 Second, modification of an

existing order may not change the percentage allocation of production expressed therein unless

the Commission obtains “consent of all persons owning oil and gas rights in such tract.”1293

Third, the amendment may not alter the percentage allocation of costs stated in the original

order, “except with the consent of all working interest owners” in the unitized area.1294

The Act clarifies that an order “may provide for unit operations on less than the whole of

a pool.”

1295 While inclusion of an entire pool may be most efficient in some cases, the

Commission is not bound to extend the coverage of an order so far if “the unit area is of such

size and shape” that a smaller scope is preferable.1296 In addition, the Commission may only

issue an order covering a portion of a pool if operations thereon “will have no adverse effect

upon other parts of the pool.”1297

The Commission may also order unitized operation of a pool “that embraces a unit area

previously established either by voluntary agreement or order.”

1298 In that event, the later order

“shall first treat the unit area previously established as a single tract.”1299

1291 Id.

Once a portion of

1292 Id. 1293 Id. 1294 Id. 1295 Id. 1296 Id. 1297 Id. 1298 Id. 1299 Id.

254

production is allocated to that ‘single tract’ under the later order, it will then be distributed

among the separate owners within that ‘single tract’ under the terms of the previous order.1300

A unitization order “shall [not] be construed to result in a transfer of all or any part of the

title of any person to the oil and gas rights in any tract in the unit area,” unless otherwise agreed

among relevant parties.

1301 Further, no such order will terminate an existing contract “relating to

the sale or purchase of production from a separately owned tract” within the unit area, which

remains enforceable and “appl[ies] to oil and gas allocated to such tract until terminated in

accordance with the provisions of such…contract.”1302

Although not terminated, existing contracts or other obligations “shall be regarded as

amended and modified…to the extent necessary to conform to the provisions and requirements”

of the Act and applicable unitization orders, “but otherwise shall remain in full force and

effect.”

1303 The Act protects subject owners facing conflict with existing contracts, as

“[o]perations conducted pursuant to [a unitization] order…shall constitute a fulfillment of all the

express or implied obligations of each lease or contract covering lands in the unit area to the

extent that compliance with such obligations cannot be had because of the order.”1304

[i] Royalty Distribution.

Under the Act, an owner who maintains oil and gas rights in an unleased tract “shall be

regarded as a working interest owner to the extent of a [seven-eighths] interest in and to such

rights[,] and a royalty owners to the extent of the remaining [one-eighth] interest therein.”1305

1300 Id.

However, the Commission is authorized to alter this presumption if, “under the prevailing

1301 Id. § 55-1306. 1302 Id. 1303 Kan. Stat. Ann. § 55-1308 (2010). 1304 Id. § 55-1306. 1305 Id. § 55-1308.

255

industry practice in the area where the unit is located, oil and gas leases contain…higher…than

[a one-eighth] royalty interest.”1306 Under such circumstances, the Commission may increase the

royalty presumption to be consistent with relevant industry standards.1307

[j] Agreements Not Restraint of Trade.

An agreement for unit operations entered into by lessees or owners in accordance with

the Act “shall [not] be held to violate any [Kansas]…statute [or other law]…prohibiting

monopolies or [other] restraint of trade or commerce.”1308

§ 17.02 Types of Kansas Pooling Statutes.

[1] – Mineral Distinctions.

As outlined above, the regulatory structure in Kansas distinguishes between oil and gas,

except those provisions applying to unitization. At no point does the Act clearly define oil or gas

individually; however, Article 13 governing unit operations defines “oil and gas” to mean “crude

oil, natural gas, casinghead gas, condensate, or any combination thereof.”1309

Commission regulations define “gas” as a general reference to any “gas obtained from

gas or combination wells, regardless of its chemical analysis.”

1310 In turn, “oil” includes “any

petroleum hydrocarbon that is produced from a well in liquid phase and that existed in a liquid

phase in the reservoir.”1311

A notable mineral distinction among the regulations is the exemption of coalbed natural

gas wells from annual wellhead production testing for calculation of standard daily allowable.

1312

1306 Id.

1307 Id. 1308 Id. § 55-1311. 1309 Id. § 55-1302(c). 1310 Kan. Admin. Regs. § 82-3-101(35) (2011). 1311 Id. § 82-3-101(45). 1312 Id. §§ 82-3-304(f); 82-3-312(b).

256

A coalbed natural gas well is one that produces only coalbed gas, or “natural gas produced from

coal seams or associated shale.”1313

[2] – Split by Depth.

The only default depth restrictions or distinctions are found in the drilling lessened

setback rules for oil wells drilled in eastern Kansas, and the amount required for a performance

bond shown below. 1314

[3] – Size and Spacing Rules.

However, nothing in the Act or regulations suggests that the

Commission’s authority to restrict depth by order is limited.

[a] General Rules.

The Commission has established general rules for well spacing to prevent waste and

inequitable taking. The regulations provide minimum setback requirements to provide each well

an opportunity to obtain the oil and gas lying reasonably below its attributable acreage. In

general, no oil or gas well may be drilled “nearer than 330 feet from any lease or boundary

line.”1315 However, this rule does not apply to oil wells of certain depths located in eastern

Kansas. Any oil well drilled to a total depth of less than 2,000 feet and located in one of 27

specified counties, as well as any oil well drilled less than 2,500 feet deep in Chautauqua

County, “shall not be [located] nearer than 165 feet from the nearest lease or unit boundary

line.”1316

In addition to general setback rules, the Commission has established dimensional spacing

requirements for oil and gas wells. In both cases, the “standard drilling unit shall be 10

1313 Id. § 82-3-101(11). 1314 Id. §§ 82-3-108(b); 82-3-155(d). 1315 Id. § 82-3-108(a). 1316 Id. § 82-3-108(b).

257

acres.” 1317 This is the default attributable acreage for each well that satisfies the 330-foot

setback requirement. Unless otherwise excepted (and apart from those counties in eastern

Kansas noted above), “each [oil or] gas well located nearer than 330 feet to any lease or unit

boundary line shall have acreage attributed to it by the establishment of an acreage attribution

unit.”1318 The acreage attribution unit will have an identical length and width, each defined “as

being twice the distance from the well to the nearest lease or unit boundary.”1319 In order to

properly allocate production, a well with attributable acreage of less than 10 acres will be granted

an allowable that is “reduced in the same proportion that the acreage attributable to the well

bears to 10 acres.”1320

While equitable factors must be considered in determining allowable production, the Act

and Commission regulations impose minimum amounts that each well must be allowed to

produce.

1321 For a well located on a spacing unit or attributable acreage of 10 acres or more, the

minimum allowable that the Commission may set is 25 barrels of oil per day.1322 However, if

the “acreage attributable” to a well is less than 10 acres, “the 25 barrels per day minimum…may

be reduced in the proportion that the acreage attributable to the well bears to 10 acres.”1323

[b] Exceptions.

If necessary to prevent waste or protect correlative rights, the Commission may grant a

well location exception to setback rules, as well as to an excepted well’s attributable acreage and

1317 Id. §§ 82-3-207(a), 82-3-312(c). 1318 Id. § 82-3-312(d); see also id. § 82-3-207(b). 1319 Id. §§ 82-3-207(b), 82-3-312(d). 1320 Id. §§ 82-3-207(c), 82-3-312(e). 1321 Kan. Stat. Ann. § 55-604(b) (2010). 1322 Id. § 55-604(b)(3). “Attributable acreage” generally refers to the surface area from under which a single well may produce, or the “acreage assigned to a well in accordance with [a] well spacing program” for a prorated pool or field. Kan. Admin. Regs. § 82-3-101(7) (2011). 1323 Kan. Stat. Ann. § 55-604(b)(3) (2010).

258

allowable production.1324

(1) A brief explanation of the exception or exceptions requested;

An exception will only be granted upon proper application containing

the following:

(2) The proposed location of the well, including the distance to the nearest lease or unit boundary line; (3) A list of the following:

(A) Each offset operator whose lease line is located less than the required distance from the proposed location; (B) Each unleased offset mineral owner whose property boundary is located less than the minimum distance required by subsection (a) or (b) from the proposed locations; and (C) The applicant’s lessor or lessors, if the applicant operates any lease that will be situated less than the minimum distance required by subsection (a) or (b) from the proposed well location;

(4) The acreage attributable to the well; and, (5) The allowable requested.1325

In addition, the application must be accompanied by a notice of intent to drill and a plat

displaying: “(1) the property on which the well is sought to drilled; (2) all other completed,

partially drilled or permitted wells on the property; and (3) all adjacent properties and wells.”

1326

[4] – Minimum Operator Control.

A voluntary agreement to unitize operations will be valid and effective without a

Commission order “if all mineral and royalty owners[,] and not less than 90% of the working

interest owners” approve, in writing, a contract expressing such intent.1327

A unitization order issued by the Commission requires approval of a certain percentage

of relevant owners, depending on the grounds for granting the order.

1328

1324 Kan. Admin. Regs. § 82-3-108(c) (2011).

If the Commission

grants the order upon finding that “primary production from [the applicant pool or part thereof]

1325 Id. § 82-3-108(d). 1326 Id. § 82-3-108(e). 1327 Kan. Stat. Ann. § 55-1317(b) (2010). 1328 Id.

259

has reached a low economic level and, without introduction of artificial energy, abandonment of

oil or gas wells is imminent,”1329

approved in writing by those persons who, under the…order, will be required to pay at least 63% of the costs of the unit operation, and also by the owners of at least 63% of the production or proceeds thereof that will be credited to royalties, excluding overriding royalties or other like interests which are carved out of the leasehold estate.

then the order must be

1330

If the order is granted because “the unitized management, operation and further development of

[the applicant pool or part thereof] is economically feasible and reasonably necessary to prevent

waste within the reservoir and thereby substantially increase the ultimate recovery of oil or gas,”

the order must be

approved in writing by those persons who, under the commission's order, will be required to pay at least 63% of the costs of the unit operation, and also by the owners of at least 75% of the production or proceeds thereof that will be credited to royalties, excluding overriding royalties or other like interests which are carved out of the leasehold estate.1331

If the applicable percentage of owners have not approved the order within six months of

issuance, it will not go into effect unless the Commission finds good cause to extend the

approval period for an extra 60 days.

1332

[5] – Directional Drilling.

An operator or other person responsible for operation must submit a written application

to the Commission prior to drilling “any hole where [the] intended deviation from the surface to

1329 Id. § 55-1304(a)(1). 1330 Id. § 55-1305. 1331 Id. (emphasis added). 1332 Id.

260

the top of the producing formation exceeds seven degrees.” 1333 The Commission may only

approve such deviated drilling after sufficient notice and a hearing.1334

[6] – Options.

The Act acknowledges rights of election and optional carrying for those owners who

refuse or are unable to pay drilling and operating costs. 1335

a provision providing when, how and by whom the unit production allocated to a working interest owner who does not pay the share of the cost of unit operations charged to such owner, or to the interest of such owner, may be sold and the proceeds applied to the payment of such costs…;

The options available for non-

consenting owners and any other terms of election must be stated in the unitization agreement or

order that, if applicable, must include:

If parties involved choose to establish a system to carry non-contributing working interest owner,

they may do so and provide for the terms of such in the applicable agreement or order. The Act

requires that an order or agreement include:

A provision for carrying any non-operating working interest owner on a limited, carried or net-profits basis, payable out of production, upon terms and conditions determined by the Commission to be just and reasonable, or otherwise financing any non-operating working interest owner who elects to be carried or otherwise financed or who does not meet the owner's financial obligations with the unit and a provision for establishing a reasonable rate of interest and a penalty on all unpaid expenses, in amounts established by rules and regulations adopted by the Commission.1336

In situations where an operator or owner carries a non-contributing owner, the agreement

or order may also specify a ‘risk-penalty.’

1337

1333 Kan. Admin. Regs. § 82-3-103a(a) (2011).

The terms must remain just and reasonable to all

1334 Id. § 82-3-103a(b). 1335 See Kan. Stat. Ann. § 55-1305 (2010). 1336 Id. 1337 Id.

261

parties affected and reimbursement will be taken from the non-contributing owner’s share of

production.1338

(1) One hundred percent of the unpaid portion of the owner's share of the cost of aboveground surface equipment beyond the wellhead connection, including, but not limited to, stock tanks, separators, treaters, pumping equipment and piping, plus 100% of the unpaid portion of the owner's share of the cost of operation of the unit, all subject to the rate of interest established;

Under the Act, such penalties may not exceed:

(2) Three hundred percent of the unpaid portion of the owner's share of the costs and expenses of drilling wells in the unitized area, including staking, well site preparation, rigging up, or drilling, and reworking, deepening or plugging back, testing and completing wells; and (3) Three hundred percent of the unpaid portion of the owner's share of the costs and expenses of underground pipeline systems, expenses for injected substances and any other non-recoupable expenses incurred.1339

1338 Id.

1339 Id.

262

§ 18.01 Analysis of Kentucky Regulatory Framework.

[1] – Name of the Governing Body.

In Kentucky, the Department of Natural Resources’ Division of Oil and Gas (“Division”)

oversees the majority of oil and gas production in the state. 1340 However, the Department also

includes the Oil and Gas Conservation Commission (“Commission”), which has express

authority to administer those sections under the state’s oil and gas conservation statute (“Act”)

particular to deep-well pooling and unitization.1341

While the Act discusses issues relevant to the protection of coal rights, the significance of

coal production to Kentucky’s economy prompted the legislature to codify statutes particular to

the coalbed methane regulation in 2004.

1342

[2] – Membership on the Governing Body.

The Kentucky coalbed methane laws will be

discussed separately in §§ 18.01. and 18.02.

The Division and Commission work in tandem to implement the Act. The Division is led

by a director, who is appointed by the secretary of the Energy and Environment Cabinet.1343 The

director must have at least five years field experience oil and gas production or exploration when

appointed.1344 While in office, the director may not acquire a financial interest in any activity

related to oil and gas production within the state.1345 The director may employ staff to carry out

daily Division activities.1346

1340 Ky. Rev. Stat. Ann. § 353.530(2) (LexisNexis 2010) (The Division director shall “administer the provisions of §§ 353.500 to 353.720…”).

1341Id. § 353.565(7) (“The Commission shall execute and carry out, administer and enforce the provisions of §§ 353.651 and 353.652.”). 1342 See Ky. Rev. Stat. Ann. §§ 349.005 et seq (2010). 1343 Id. § 355.530. 1344 Id. § 355.530. 1345 Id. 1346 See Dep’t. Nat. Resources, Div. Oil & Gas, http://oilanggas.ky.gov/Pages/AboutUs/aspx (last visited June 15, 2011) (“The Division of Oil and Gas currently employs 14 field inspectors, 3 field supervisors, and 9 administrative staff personnel.”).

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The Commission is comprised of five members, four of which are appointed by the

governor.1347 The fifth member is the director of the Division, who serves as the Commission’s

non-voting chairman.1348 The four gubernatorial appointees serve staggered four-year terms.1349

Each must be a state resident, with two hailing from eastern Kentucky and two from western

Kentucky.1350 No more than one of these four may be “directly employed in the exploration for

or the production of oil and gas, or derive more than 50% of [his or her] income” from such

activity.1351 If applicable, a member may not participate in deliberation or vote on any matter in

which such financial interests exist; however, all members may be involved in general matters,

“such as the fixing of statewide spacing patterns,” regardless of an interest therein.1352

For clarity, the Division and Commission will hereafter be referred to collectively as the

Department of Natural Resources (“the Department”), with which all authority rests under the

Act.

1353

[3] – Scope of Authority.

The Department maintains “jurisdiction over all persons and property necessary” to

enforce the Act.1354 The Department may promulgate rules and regulations and “take all actions

necessary to assure efficient oil and gas operations.”1355

…to foster conservation of all mineral resources, to encourage exploration for such resources, to protect correlative rights of land and mineral owners, to prohibit waste and unnecessary surface loss and damage and to encourage the maximum recovery of oil and

The Department acts pursuant to the

public interests stated in the Act, which are

1347 Ky. Rev. Stat. Ann. § 353.565(1) (LexisNexis 2010). 1348 Id. The director may cast a deciding vote in the event of deadlock among the four voting Commission members. 1349 Id. 1350 Id. 1351 Id. 1352 Id. 1353 Ky. Rev. Stat. Ann. § 353.540 (LexisNexis 2010). 1354 Id. 1355 Id. § 353.500(2).

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gas from all deposits thereof now known and which may hereafter be discovered; and to promote safety in the operation thereof. 1356

[a] Matters Governed.

The Act expressly prohibits waste.1357

(a) The locating, drilling, equipping, operating or producing of any oil or gas well, or wells drilled, deepened, or reopened in a manner that causes, or tends to cause, a reduction in the quantity of oil or gas ultimately recoverable from a pool under prudent and proper operations, or contrary to any provision of, or any order, rule or regulation promulgated [under the Act];

“Waste” means “physical waste as that term is

generally understood in the oil and gas industry,” and in particular includes:

(b) Permitting the migration of oil, gas or water from the stratum in which it is found into other strata, thereby ultimately resulting in the loss of recoverable oil or gas; (c) The drowning with water of any stratum or part thereof capable of producing oil or gas in paying quantities, except for secondary recovery purposes, or in hydraulic fracturing or other completion practices; (d) The unreasonable damage to underground, fresh or mineral water supply, workable coal seams, or other mineral deposits in the operations for the discovery, development, production or handling of oil and gas; (e) The unnecessary or excessive loss of oil and gas by spillage or venting or destruction of oil or gas or their constituents; and (f) The drilling of more wells than are reasonably required to recover efficiently the maximum amount of oil and gas from a pool.1358

The Act explicitly states that it “shall not be construed to authorize any limitation of production

of oil or gas…to prevent or control [solely] economic waste[,] or to limit production to market

demand.”

1359

In discharging its duties, the Department may require: identification of mineral

ownership; the making and filing of logs and surveys; drilling and operation [as to] prevent the

1356 Id. § 353.500(1). 1357 Id. § 353.520(2). 1358 Id. 1359 Ky. Rev. Stat. Ann. § 353.720(1) (LexisNexis 2010).

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escape of oil and gas from one pool into another, or into mineral bearing stratum; and all other

aspects of well operation and production.1360 Further, the Department has the authority and duty

to regulate “the spacing or locating of wells.”1361 The Act expressly prohibits production from

any well without a valid permit, or in violation of any well-spacing requirements specified

therein.1362

[b] Department Procedure.

Any rule, regulation or order “other than those of general…statewide effect” may be

adopted only after notice and a hearing.1363 The Department may act upon its own motion; or, an

interested party may petition for a public hearing at which all such “interested person[s] shall be

entitled to be heard.”1364 An application to initiate a hearing may be filed with the Department to

provide a brief and concise written statement of “the matter upon which [Department] action is

desired, the interest of the applicant [therein]…the action sought, and the reasons therefor.”1365

Unless otherwise stated, all hearings will be held in Lexington, Kentucky, at a time

specified by the Department.

1366 Notice of a hearing must be published in accordance with state

administrative law,1367 and in particular must provide “the time and place of the hearing, the

name of the party requesting the hearing, the nature thereof, the action sought, and the docket

number.”1368 If applicable, the Commission will provide personal notice by registered mail to

certain parties potentially affected by the action sought.1369

1360 Id. § 353.550.

1361 Id. § 353.560(1). 1362 Id. § 353.520(3). 1363 805 Ky. Admin. Regs. 1:100 (2010); see also id. § 353.670(1). 1364 805 Ky. Admin. Regs. 1:100 (2010). 1365 Id. 1366 Id. 1367 See Ky. Rev. Stat. Ann. §§ 434.001 et. seq. (LexisNexis 2010). 1368 805 Ky. Admin. Regs. 1:100 (2010). 1369 Id.

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Once the Department receives a valid application, the hearing will commence within 30

days of filing.1370 The Department will issue an order or take other necessary action no more

than 30 days following the hearing’s conclusion. 1371 All entries all are maintained by the

Department as public record, copies of which are receivable into evidence in all state courts.1372

Any person aggrieved by a Department order may appeal to “the circuit court of the county in

which the premises or any portion thereof affected by the order is located, or in the Franklin

Circuit Court.”1373 Any appeal must be brought within 30 days of the relevant order’s entry,

“and in the event no suit is filed within the thirty-day period, the order shall be final.”1374

In Kentucky, deep wells are permitted and regulated under the formation of drilling

units.

1375 A “drilling unit” is the “maximum area in a pool which may be drained efficiently by

one well so as to produce the reasonable maximum recoverable oil and gas in such area.”1376

After notice and a hearing, the Department has a duty to regulate the location of deep wells “as

to reasonably prevent avoidable net drainage…so that each owner in a pool shall have the right

and opportunity to recover his fair and equitable share of the recoverable oil and gas in such

pool.”1377 Pursuant to this duty, the Department will establish drilling units for each pool in

order to prevent waste, protect correlative rights, and avoid unnecessary drilling.1378

An operator may not produce from any deep well without first filing and application and

obtaining a certificate of compliance from the Department.

1379

1370 Id.

The application must provide

such information necessary to establish that the operator has complied with all rules and

1371 Id. 1372 Ky. Rev. Stat. Ann. § 353.670(4) (LexisNexis 2010). 1373 Id. § 353.700(2). 1374 Id. 1375 Id. § 353.651(1). 1376 Id. § 353.510(19). 1377 Ky. Rev. Stat. Ann. § 353.651(1) (LexisNexis 2010). 1378 Id. 1379 Id.

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regulations governing oil and gas conservation in the state; and, one of the following conditions

is satisfied: (1) “all working interest in the drilling [or proposed] unit are identically owned,…or

have been pooled [either] by voluntary agreement or [Department] order;” or “the well may

produced without violating the correlative rights of any owner in the unit.”1380

[4] – Process for Pooling and Matters Covered.

Kentucky law recognizes voluntary pooling and unit operating agreements, and also

grants the Department the authority to compulsorily pool or unitize separately-owned interests

under certain conditions.

[a] Spacing Rules.

The Department regulates the location and spacing of wells throughout the state.1381

Pursuant to that power, the Department has enacted rules to provide uniform boundary and

distance standards for each class of wells. 1382 The Department may create and enforce special

rules applicable to a particular pool or field. 1383 In the absence of special rules, spacing

restrictions are governed by general statewide regulation.1384

[b] Authority to Integrate Production.

The Act supports the ability of owners and/or operators to voluntarily pool and/or unitize

their respective interests “for the purpose of bringing about the development and operation of [a]

field, pool, or area . . . as a unit, and for establishing . . . a plan for the cooperative development

and operation thereof.”1385

1380 Id.

In the absence of such agreements, the Department may force owners

to pool or unitize if certain criteria are met.

1381 Id. § 353.560(1). 1382 Id. § 353.610. 1383 Ky. Rev. Stat. Ann. § 353.651(1) (LexisNexis 2010). 1384 Id. 1385 Id. § 353.565(9).

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If a separately-owned tract of land is so situated that it is impossible to locate a well

thereon without violating spacing requirements, the Department may order, after notice and a

hearing, “the pooling of all oil and gas interests in the separate tract . . . with all like interests in a

contiguous tract or tracts . . . as [is] necessary to afford the pooled tracts one location” for such

drilling, deepening or reopening in compliance with spacing rules.1386

Upon an operator’s application to drill, deepen, or reopen a well that would require the

pooling of interests as above, the Department will order pooling if either: (1) the operator has

secured the written consent of owners holding no less than 51 percent of operating interests in

the relevant area; or, (2) the operator “owns or controls the right to develop the oil and gas

underlying 100% of the interests each tract, or portions thereof, included in the proposed pooled

acreage.”

1387 If one of these conditions is satisfied, the Department may issue the permit and

“require the development and operation of all pooled acreage as a single leasehold estate.”1388

For an existing well, an operator’s application for a pooling order must provide “a

list…of all persons reasonably known to own an oil or gas interest in any tract, or portion

thereof, proposed to be pooled.”

1389 The Department will not issue an order until after it has

provided such owners with notice and held a public hearing to consider pooling of their

interests.1390 In the event that relevant owners are unknown or unable to be located, the operator

must publish, “at least 20 days prior to the hearing, . . . one notice in the newspaper of largest

circulation in each county in which any tract, or portion thereof, proposed to be pooled is

located.”1391

1386 Id. § 353.630(1).

This published notice must:

1387 Id. § 353.630(2)-(3). 1388 Id. § 353.630(1). 1389 Ky. Rev. Stat. Ann. § 353.640(1) (LexisNexis 2010). 1390 Id. 1391 Id.

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(a) State that an application for a pooling order is being filed …; (b) Describe any tract, or portion thereof, proposed to be pooled; (c) In the case of an unknown owner, identify the name of the last known owner; (d) In the case of an non-locatable owner, identify the owner and owner’s last known address; and, (e) State that any party claiming an interest in any tract, or portion thereof, proposed to be pooled should contact the operator at the published address and provide a copy of the notification [to the Department] within 20 days of the date of publication.1392

A pooling order must provide certain information to govern the development and operation of

the pooled area. In particular, the order must:

(1) Authorize the drilling, deepening, or reopening, and the operation of a well for the production of oil or gas on the tracts or portions thereof pooled; (2) Designate the operator to drill and operate the well; (3) Prescribe the time and manner in which all owners of operating interests in the pooled tracts or portions thereof may elect to participate therein; (4) Provide that all reasonable costs and expenses of drilling, deepening, or reopening, and the completing, operating, plugging, and abandoning the well shall be borne, and all production from the well shall be shared, by all owners of operating interests in proportion to the net mineral acres in the pooled tracts owned or under lease to each owner; and, (5) Make provision for the payment of the reasonable actual cost thereof, including a reasonable charge for supervision, by all those who elect to participate therein.1393

Any person who has transferred his or her to oil and gas rights under a lease or other

contract is not considered an owner requiring notice.

1394 A certified copy of a pooling order may

be recorded in the clerk’s office of any county or counties in which all or a portion of the pooled

area rests.1395

1392 Id.

1393 Id. § 353.640(2). 1394 Id. § 353.640(6). 1395 Ky. Rev. Stat. Ann. § 353.640(7) (LexisNexis 2010).

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The Act also provides specific procedure for pooling particular to deep wells.1396 In this

case, multiple owners may voluntarily “pool their tracts or interests for the development and

operation of the drilling unit.”1397 In the alternative, any operator having an interest in the

drilling unit may file an application to request a pooling order.1398

After notice is given “to all persons reasonably known to own an interest in the oil or gas

in the drilling unit,” and a hearing is held, the Department may “enter an order pooling all tracts

or interests in the drilling unit for the development and operation thereof and for the sharing [of]

production therefrom.”

1399

(1) Authorize the drilling and operation of a deep well for the production of oil or gas from the pooled acreage;

A pooling order must establish “just and reasonable” terms to govern

the operation, and in particular must:

(2) Designate the operator to drill and operate such deep well; (3) Prescribe the time and manner in which all owners of operating interests in the pooled tracts or portions of tracts may elect to participate therein; (4) Provide that all reasonable costs and expenses of drilling, completing, equipping, operating, plugging, and abandoning the deep well shall be borne, and all production therefrom shared, by all owners of operating interests in proportion to the acreage in the pooled tracts owned or under lease to each owner; and, (5) Make provision for payment of all reasonable costs thereof, including reasonable charge for supervision and for interest on past due accounts, by all those who elect to participate therein.1400

By its own motion, or upon the application of a lessee or owner within a proposed unit,

the Department may hold a hearing to consider the necessity for unit operations of all or part of a

pool, “for the production of oil and associated gas in order to increase their ultimate recovery . . .

so that each owner in the [unit area] shall have the opportunity to recover his fair and equitable

1396 Id. § 353.651(1). 1397 Id. § 353.651(2). 1398 Id. 1399 Id. 1400 Id.

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share of . . . oil and gas [therein].”1401

(a) A description of the area to be included in the unit, with a map attached, and a description of the pool or pools, or portions thereof, to be included within the unit;

An application for proposed unit operations must provide

the following:

(b) A statement of the nature of the unit operations contemplated; (c) A proposed allocation of production and reserves among the separately owned tracts and interests contributed to the unit; (d) The procedure upon which wells and equipment of the separately-owned tracts and interests are to be used and compensated for in unit operations; and, (e) Documentation that the application is approved by at least [51%] ownership in the interests proposed for inclusion in the unit.1402

A unitization hearing will be conducted under the terms of state administrative

procedure.

1403 The Department will provide notice “to all persons reasonably known…to be a

lessee or owner of an oil and gas interest in a pool or pools within a proposed unit.”1404 After

notice and a hearing, the Department will enter an order “establishing a unit and requiring unit

operation and development” thereof if: (1) unitization is reasonably necessary to increase

ultimate recovery and the estimated value of additional recovery exceeds to additional cost of

unit operations; or, (2) unitization is needed to prevent waste and protect correlative rights of

owners in the unit area.1405

(a) Authorize the unit operation of a pool or pools, including drilling, deepening, reopening, conversion to injection wells, and operation of all wells within the unit for the production of oil and gas from the unit:

If granted, a unitization order must:

(b) Designate the unit operator of the operation; (c) Approve a unit operating agreement; (d) Provide for the allocation of production and reserves among all separately owned tracts and interests in the unit;

1401 Ky. Rev. Stat. Ann. § 353.645(1) (LexisNexis 2010). 1402 Id. § 353.645(2). 1403 Id.; see also id. § 13B.008 et seq. 1404 Id. The Department may require an application fee from the applicant for the cost of notice. 1405 Id. § 353.645(3).

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(e) Provide for the proportionate allocation of all reasonable costs and expenses of unit operations as these costs and expenses are set out in the approved operating agreement; and (f) Establish the spacing approved for the unit.1406

Any pooling or unitization order must offer information outlining the rights and obligations of

any owner who does not desire to participate in the joint operation.

1407

The Act also provides specific provisions governing unitization of interests within a

drilling unit. Upon the application of “any operator in a deep well pool” productive of oil and/or

gas, the Department will provide notice “to all persons reasonably known to own an interest in

the oil or gas in the pool,” and conduct a hearing to determine whether a compulsory unitization

order should be issued.

1408

A unitization order will only be granted if the Department finds that: (1) unitization is

reasonably necessary to prevent waste; (2) the proposed unit operating plan will increase oil and

gas recovery from the pool, and is economically feasible; and, (3) the production of oil and gas

“from the unitized pool can be allocated in a manner to insure the recovery by all owners of their

just and equitable share of the production.”

1409 Prior to entering the order, the Department must

also receive written consent to the unitization agreement by the owners of at least “75% in

interest as production is to be allocated of the royalty in the unit area.”1410 Further, both the

unitization agreement and “a contract incorporating the required arrangements for operations”

must be approved by owners of “at least 75% in interest as costs are shared under the terms of

the order.”1411

[c] Modifications and Exceptions.

1406 Id. 1407 Ky. Rev. Stat. Ann. §§ 353.640(3), 353.645(6)-(7) (LexisNexis 2010). 1408 Id. § 353.652(1). 1409 Id. § 353.652(2). 1410 Id. § 353.652(1). 1411 Id.

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After notice and a hearing, the Department may amend or vacate an order to establish a

unit upon “a demonstration by affected persons of a significant change of circumstances

supporting the amendment.”1412 Any amendment to enlarge the unit area must “be agreed upon

in writing by documented owners of at least a 51% ownership in the interests in the pool or pools

in the unit.”1413 Further, upon extending the size of a unit, the Department must re-allocate

production among the several owners in the enlarged unit area “in proportion to the contribution

of [each] tract or interest to the unit during the remaining course of unit operations.”1414 This

modified distribution scheme will “supersede and be in lieu of the allocation of production

provided for in any previously-established unit [order],” and become effective as of the date

specified in the supplementary order for amendment.1415

Similarly, the Department may provide notice and conduct a hearing to “enlarge [a] unit

area by approving agreements [which incorporate] a pool or any portion or combinations thereof

not previously included.”

1416 An new or amended order to alter the scope of an existing unit will

only be effective if: (1) such enlargement and any conditions thereto are stated in the existing

unit agreement and duly satisfied; and (2) the owners of tracts to be added approve the order with

the same 75 percent threshold of interests sharing in costs, as well as 75 percent of royalty

interests therein.1417

[d] Allocation of Production and Costs.

If one or more working interest owners in a pooled tract drill and operate, or pay the cost

thereof, for the benefit of others in the pool, such paying owner or owners are entitled to the

1412 Id. § 353.645(8). 1413 Ky. Rev. Stat. Ann. § 353.645(8) (LexisNexis 2010). 1414 Id. 1415 Id. 1416 Id. § 353.652(3). 1417 Id.

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proceeds from the share of production accruing to the interest of non-paying owner(s).1418 The

paying owners are only entitled to recover “until such proceeds equal the sums payable by or

charged to the interest of the [non-paying] owner, plus a reasonable charge for interest on such

sums.”1419 Any dispute over the actual costs of developing or operating a well will be resolved

by the Department, which will determine and apportion such costs as it sees fit.1420 As noted

below, this is exclusive of royalties under an existing lease, or the statutory default of 1/8th.1421

All operations related to a deep well that occur on any portion of a drilling unit for which

a pooling order or agreement exists “shall be deemed for all purposes the conduct of those

operations upon each separately owned tract in the drilling unit by the several owners

thereof.”

1422 As such, “[t]hat portion of the production allocation to a separately owned tract

included in a drilling unit shall, when produced, be deemed for all purposes to have been actually

produced from the tract by the deep well drilled thereon.”1423

A final unitization order must designate one operator as “unit operator” and provide for

the “proportionate allocation to all operators of the costs and expenses of the unit operation,

including a reasonable charge for supervision.”

1424 This allocation will be “in the proportion that

the separately-owned tracts share in the production from the unit.”1425 The operators may agree

on how to share the costs of capital investments in wells, equipment, and “intangible drilling

costs.”1426

1418 Id. § 353.650(1).

In the absence of such agreement, the Department will order that such expenses be

shared in the same proportion as the operating costs; however, “any operator who has not

1419 Ky. Rev. Stat. Ann. § 353.650(1) (LexisNexis 2010). 1420 Id. § 353.650(2). 1421 Id. § 353.650(1). 1422 Id. § 353.651(2). 1423 Id. 1424 Ky. Rev. Stat. Ann. § 353.652(2) (LexisNexis 2010). 1425 Id. 1426 Id.

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consented to the unitization shall not be required to contribute to the costs or expenses of the unit

operation, or to the cost of capital investments . . . except out of the proceeds from the sale of the

production accruing to the interest of the operator [and] exclusive of any royalty or overriding

royalty interest.”1427

Applicable only to deep wells, the Act provides that “[e]ach operator shall have the right

to take in kind its share of any oil or gas produced from any [unitized] drilling unit or pool.”

1428

Each operator is responsible for the expenses related to such taking “and pay or account to the

unit operator for the oil or gas[,] or the value thereof[,] if he has not paid his share of drilling,

completing and operating costs.”1429

[e] Royalty Distribution.

Under the Act, a “royalty owner” is “any owner of oil and gas in place, or oil and gas

rights, to the extent such owner is not an operator” as defined therein.1430 An “operator” is

defined to include “any owner of the right to develop, operate and produce oil and gas from a

pool[,] and to appropriate the oil and gas produced therefrom, either for himself or for himself

and others.” 1431 In situations involving unleased rights to oil and gas, the owner thereof is

“considered as ‘operator’ to the extent of [seven-eighths] of the oil and gas in that portion of the

pool underlying the tract owned by [said person], and as ‘royalty owner’ as to [one-eighth]

interest in such oil and gas.”1432

If owners pay operating costs for the benefit of other owners in a pool, they are entitled to

a production share of such non-paying owners.

1433

1427 Id.

However, this is “exclusive of any royalty

1428 Id. § 353.653. 1429 Id. 1430 Ky. Rev. Stat. Ann. § 353.510(18) (LexisNexis 2010). 1431 Id. § 353.510(17). 1432 Id. 1433 Id. § 353.650(1).

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reserved in any lease or leases in [the tracts of non-paying owners], or exclusive of 1/8th of [the]

production attributable to all unleased tracts or portions thereof.” The proceeds from an oil pool

must be apportioned according to each person's contributions to the total production from the

pool. For example, where the property under the lease comprised only 60 percent of a pool, the

assignor who held a one-eighth overriding royalty interest was only entitled to 60 percent of said

interest, or 7.5 percent of the well’s total production.1434

[f] Agreements Not Restraint of Trade.

An agreement among owners to voluntarily pool or unitize interests, when approved by

the Department, is duly “authorized and shall not be held or construed to violate any [Kentucky]

laws relating to trusts, monopolies, or . . . restraint of trade.”1435

§ 18.02 Types of Kentucky Pooling Statutes.

[1] – Mineral Distinctions.

Under the Act, gas is defined as “all natural gas, including casinghead gas, and all other

hydrocarbons not [otherwise] defined as oil.”1436 Oil includes “natural crude oil or petroleum

and other hydrocarbons, regardless of gravity, which are produced in liquid form by ordinary

production methods and which are not the result of condensation of gas after it leaves the

underground reservoir.”1437

[2] – Split by Depth.

As discussed below, the default spacing requirements are different

based upon the mineral produced from a given well.

Kentucky law provides significant variation based on proposed or actual well depth.

Under the Act, a “shallow well” is one “drilled and completed at a depth less than 4,000

1434 See, e.g., Rice Bros. Mineral Corp. v. Talbott, 717 S.W.2d 515, 1986 Ky. App. LEXIS 1457 (Ky. Ct. App. 1986). 1435 Ky. Rev. Stat. Ann. § 353.565(9) (LexisNexis 2010). 1436 Id. § 353.510(8). 1437 Id. § 353.510(7).

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feet.”1438 If located east of longitude line 84 degrees 30 minutes, shallow wells are those which

are completed at a depth less than 4,000 feet, or “above the base of the lowest member of the

Devonian Brown Shale, whichever is deeper.”1439 Thus, a “deep well” is “any well drilled and

completed below the depth of 4,000 feet or, [if so located], below 4,000 feet or below the base of

the lowest member of the Devonian Brown Shale, whichever is deeper.”1440

[3] – Spacing Rules.

In the absence of special rules, well spacing is governed by statewide regulation.1441 The

Department will not issue any permit or authorization to drill or operate a well that violates

applicable spacing requirements unless through documented exception.1442

In addition to distance requirements for all wells, shallow well restrictions are based on

minimum setbacks from boundaries of adjacent, non-pooled tracts that overlie separately owned

minerals, while deep well spacing is regulated by drilling unit size. One exception is a uniform

restriction that no oil or gas well may be drilled within 150 feet of any building unless: (1) a

waiver of objection the proposed well location is executed by the owner(s) of any building

within that distance; or, (2) the Department, after notice and a hearing, determines that drilling

and producing at the proposed location does not violate the public policy concerns stated in the

Act.

As provided below,

the majority of these standards vary based the depth of a well and the mineral(s) produced

therefrom.

1443

[a] Shallow Oil Wells.

1438 Id. § 353.510(15). 1439 Id. 1440 805 Ky. Admin. Regs. 1:100 (2010). 1441 Ky. Rev. Stat. Ann. § 353.651(1) (LexisNexis 2010). 1442 Id. § 353.610. 1443 805 Ky. Admin. Regs. 1:030 (2010).

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No shallow oil well may be located nearer than 330 feet from the nearest mineral

boundary of the premises upon which the proposed operations are to occur.1444 In addition, any

such wells must be at least 660 feet from the nearest oil producing well within the same pool.1445

The Act provides less-restrictive spacing rules for shallow oil wells “completed at a depth of less

than 2,000 feet where there are no workable beds of coal at lesser depths[,] and the formation

from which the oil is expected to be extracted is not appreciably affected by factors…other than

natural drainage.”1446 A well fitting these criteria “shall be at least 200 feet from the nearest

boundary of the premises upon which the well is to be drilled, deepened or reopened;” and, may

be not less than 400 feet from the nearest oil well producing from the same pool.1447

[b] Shallow Gas Wells.

No shallow gas well may be located within 500 feet of the nearest mineral boundary of

the premises of which said well is to be drilled.1448 Further, shallow gas wells must be at least

1,000 feet from the nearest producing gas well within the same pool.1449

[c] Deep Oil Wells.

The default drilling unit size for a proposed deep oil well is a square unit with sides of

1,750 feet if the well is to be drilled less than 7,000 feet deep.1450 A deep oil well may not be

located within 536 feet of the boundary of the drilling unit on which it rests.1451 If the well is to

exceed 7,000 feet in depth, the unit size shall be a square with sides of 2,500 feet; in that case,

the well may not be drilled within 766 feet of any unit boundary.1452

1444 Ky. Rev. Stat. Ann. § 353.610(1) (LexisNexis 2010).

1445 Id. 1446 Id. § 353.610(3). 1447 Id. § 353.510(3). 1448 Id. § 353.610(2). 1449 Id. 1450 Ky. Rev. Stat. Ann. § 353.610(2) (LexisNexis 2010). 1451 Id. 1452 Id.

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[d] Deep Gas Wells.

A proposed drilling unit for a deep gas well is a square with sides of 3,500 feet if the

proposed depth is less than 7,000 feet.1453 A deep gas well limited to that depth must be at least

1,072 feet from any unit boundary.1454 If drilling will be in excess of 7,000 feet deep, the unit

shall be a square with sides of 5,000 feet and the well may not be nearer than 1,532 feet of the

boundary.1455

[e] Modifications and Exceptions.

The Department may grant exceptions to these spacing requirements for a number of

reasons. Upon application for a permit to drill or operate a well that is “closer to a boundary or

to another well” than otherwise allowed, the Department may issue the permit upon receiving

“the written consent of all owners of oil and gas interests in the adjacent premises directly

affected by the prescribed boundary distances…[and] which will be offset by the proposed

well.”1456

The Department may “issue a permit for a well to be drilled, deepened or reopened closer

to a boundary than prescribed [above] if a pooling order has been issued” for that unit area.

1457

Further, an exception may be provided if, after notice and a hearing, the Department finds

evidence to determine that “a proposed…or previously formed unit is partly outside of the pool,

or, for some other reason, a well located in accordance with the statewide rules could not

reasonably be expected to be productive[,] or topographical conditions are such as to make the

Sensibly, an existing pooling order will only exempt a proposed well from applicable boundary

restrictions, not from rules relating to distance between wells.

1453 Id. 1454 Id. 1455 Id. 1456 Ky. Rev. Stat. Ann. § 353.610(2) (LexisNexis 2010). 1457 Id. § 353.620(3) (LexisNexis 2010).

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drilling at such a location unduly burdensome.”1458 If an exception is sought due to potentially

burdensome topographical conditions, the operator seeking such must establish that the

Department is able to effectively offset any advantage that may accrue by virtue of the exception

being granted. 1459 In turn, upon granting such exception, the Department must offset any

resulting advantage in order to properly protect the correlative rights of other owners or units

within the pool.1460

The Act acknowledges that default spacing regulations to not apply to lands within an

incorporated municipality which, by ordinance, has minimum requirements that are “not less

than [those] prescribed [herein].”

1461

(1) A deep oil well at a depth less than 7,000 feet may be located no closer than 438 feet to the boundary of the proposed unit.

Notwithstanding an exception to default spacing rules

being granted, an approved location must comply with the following limitations for deep wells:

(2) A deep oil well at a depth of 7,000 feet or more may be located no closer than 625 feet to the boundary of the proposed unit. (3) A deep gas well at a depth less than 7,000 feet may be located no closer than 875 feet to the boundary of the proposed unit. (4) A deep oil well at a depth of 7,000 feet or more may be located no closer than 1,250 feet to the boundary of the proposed unit.1462

A “wildcat well” refers to either (1) “a deep well drilled with the intent of discovering

and producing hydrocarbons from a formation or formations not previously productive of oil or

gas[,] from a well within 25,000 feet of its location;” or, (2) “a well drilled under such proven

geological conditions that, even though located less than 25,000 feet from the nearest deep well

previously productive of oil or gas, will not, if completed successfully, produce from a

1458 Id. 1459 Id. 1460 Id. 1461 Ky. Rev. Stat. Ann. § 353.610(3)(d) (LexisNexis 2010). 1462 Id.

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previously productive pool.”1463 In the event that a deep well “encounters a formation or pool as

to which it is not a wildcat well,” such may only produce from such pool if otherwise in

compliance with spacing regulations for other wells in that formation or pool.1464

[4] – Minimum Operator Control.

As discussed in above, the Act states that the validity of any pooling or unitization

agreement or order requires the written consent of owners comprising at least 51 percent of the

rights to oil and gas within the proposed area.1465 In addition, the Department may grant a

pooling order without such formal consent if the application is filed by the operator owning

exclusive drilling rights in the lands to be pooled.1466

A greater percentage of approval is required to unitize tracts or interests for deep wells.

Prior to issuing an order for unit operations, the Department must find that “a contract

incorporating the unitization agreement has been…approved by the owners of at least 75% in

interest as costs are shared under the terms of the order[,] and by 75% in interest as production is

to be allocated of the royalty in the unit area.”

1467 In addition, the Department must find that “a

contract incorporating the required arrangements for operations [must be] approved by the

owners of at least 75% in interest as costs are shared.”1468

[5] – Directional Drilling.

A well may not be intentionally deviated from the vertical without Department

authorization.1469

1463 Id.

Unless so authorized, “every well shall be drilled in such a manner that at any

measured depth the actual or apparent location of the well bore [is] within a circle whose center

1464 Id. 1465 Id. § 353.630(2). 1466 Id. § 353.630(3). 1467 Ky. Rev. Stat. Ann. § 353.652(1)(d) (LexisNexis 2010). 1468 Id. 1469 805 Ky. Admin. Regs. 1:100 (2010).

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is the surface location and whose radius is equal to the measured depth multiplied by a factor

0.087156.”1470 The actual or apparent horizontal deviation of the well bore may not exceed 5

degrees at any depth.1471 An application to deviate from the vertical must provide extensive

surveys as specified in the Department regulations, and must still “comply with all minimum

distances from unit lines as prescribed by all statewide orders or applicable field orders.”1472

[6] – Options.

Any pooling order must establish a procedure for a working interest owner who does not

become a participating operator of the pooled acreage. 1473 Such an owner may either:

“surrender, by means of sale or lease, the interest to a participating operator on a reasonable basis

and for a reasonable consideration;” or, “share in the operation of the well as a non-participating

operator on a carried basis after the proceeds allocable to his or her share equal 200% of the

share of costs allocable to his or her interest.”1474 The Act specifies that “[a] person whose

interest is subject to an oil or gas lease or other agreement which grants to another the right to

operate or conduct operations shall not own an operating interests” for the purposes of election

rights.1475

If the Department enters a pooling order, and one or more owners remain unable to be

identified or located at the close of the hearing, such absentee owners “shall be deemed to have

elected to lease [their] interest[s] to the…operator, exclusive of 1/8th of the production

attributable to the unleased interest, and shall not be entitled to make the election” as provided

above.

1476

1470 Id.

Similarly, if an owner does not make an election within 30 days of the order’s entry,

1471 Id. 1472 Id. 1473 Ky. Rev. Stat. Ann. § 353.640(3) (LexisNexis 2010). 1474 Id. 1475 Id. § 353.640(6). 1476 Id. § 353.640(4).

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he or she “shall be deemed to have leased the oil or interest to the…operator” in the same

manner.1477

If a holder of an operating interest has obtained the interest by lease or other agreement

granting the right to conduct operations to anyone other than the holder of the oil and gas estate,

and if the owner of the operating interest does not make an election under the pooling order, the

holder of the operating interest shall be deemed to have elected to share in the operation of the

well on a carried basis after the proceeds allocable to his or her share equal 200 percent of the

share of the costs allocable to his or her interest.

1478

A unitization order must provide for the proportionate allocation of costs of unit

operations as set out in the approved unit operating agreement.

1479 Moreover, costs must “be

allocated among all participating owners of operating interests who elect to participate in the

proportion that the separately-owned tracts and interests.1480 As such, a unitization order must

provide “just and equitable alternatives” whereby a working interest owner who does not elect to

participate in the risk and costs of unit development may elect to: (1) “surrender his interest, or a

portion of it, to the participating owners on a reasonable basis and for a reasonable consideration,

which if not agreed upon, shall be determined by the Department;” or, (2) “elect to participate in

the development of the unit on a carried basis on terms and conditions which, if not agreed upon,

shall be determined by the Department to be just and reasonable.”1481

If a dispute arises as to the costs of operating and developing a unit, then the department

shall determine and apportion the costs within ninety (90) days after the date of written

notification to the department of the existence of the dispute; however, any person disputing an

1477 Id. § 353.640(5). 1478 Id. 1479 Ky. Rev. Stat. Ann. § 353.645(7) (LexisNexis 2010). 1480 Id. § 353.645(6). 1481 Id. § 353.645(7).

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actual or proposed expenditure shall file notice of the disputed costs within one (1) year after

notice of the actual or proposed expenditure was received by the person filing the dispute.1482

Upon request from any such party, a pooling order must provide “just and equitable

alternatives” by which a working interest owner who does not wish to participate in the risk and

cost of the drilling of a deep well may elect to: (1) surrender his interest to participating owners

“on a reasonable basis and for a reasonable consideration;” or, (2) participate in the operations

“on a limited or carried basis on terms and conditions which [are]…just and reasonable.”

1483

If such nonparticipating owner’s interest is not subject to any lease, the Act presumes

such exclusion is one-eighth of his entitled production. Carrying agreements provide a key

difference between wells of varying depths: for shallow wells, the participating owners are

entitled to the other’s production until the market value (exclusive of royalty) of that production

equals costs payable for such expenses; however, for deep well pooling, that entitlement

continues until the market value of the carried owner’s production “equals two times the share of

costs payable by or charged to the interest of the nonparticipating owner.”

In

the event that such owner elects to be carried by an operator, the operator who incurs costs “shall

be entitled to the share of production…accruing to the interest of the nonparticipating owner,

exclusive of any royalty or overriding royalty” reserved in any existing lease agreement.

1484

1482 Id. § 353.645(7).

1483 Id. § 353.651(2). 1484 Id.

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§ 18.03 Analysis of Kentucky Regulatory Framework—Coalbed Methane.

[1] – Name of the Governing Body.

Although the Kentucky Oil and Gas Conservation Act discusses issues relevant to the

protection of coal rights, the significance of coal production to Kentucky’s economy prompted

the legislature to codify statutes particular to the coalbed methane regulation in 2004

(collectively, “CBM Act”).1485 The CBM Act created the Coalbed Methane Well Review Board

(“CBM Board”) within the Department of Natural Resources to directly regulate coalbed

methane development.1486

[2] – Membership on the Governing Body.

The CBM Board is comprised of five members, three of which are from within the

Department: the Department commissioner, the director of the Division of Mine Reclamation

and Enforcement, and the director of the Division of Oil and Gas.1487 The two additional CBM

Board members are appointed by the governor for four-year terms and are representatives of the

oil and gas industry and coal industry, respectively.1488

[3] – Scope of Authority.

The CBM Board may promulgate rules and regulations, and issue orders relating to the

development and production of coalbed methane within the state.1489

1485 See Ky. Rev. Stat. Ann. §§ 349.005 et seq (LexisNexis 2010).

The Board must conduct

its procedures pursuant to the public interest stated in the CBM Act, which include: (1) the

preservation of coal seams for safe mining; (2) the facilitation of expeditious and safe evacuation

of coalbed methane from Kentucky’s coal reserves; (3) the promotion of commercial

development of coalbed methane throughout the state; and, (4) the protection of “correlative

1486 Id. § 349.055. 1487 Id. § 349.055(2). 1488 Id. 1489 Id. § 349.060(4).

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rights of coalbed methane operators…and owners in a pool…so that each operator and owner

obtain his or her just and equitable share of production.”1490

The CBM Board is authorized to rule on objections to proposed location or operation of

coalbed methane wells and appeals of coalbed methane well permit denials made by the

Department. In addition, the CBM Board conducts hearings under the CBM Act, including those

for drilling unit applications, requests for pooling or unitization orders, and the adoption of

special field rules.

1491

[a] Matters Governed.

Committing or inducing waste of coalbed methane is statutorily prohibited.1492

(a) The locating, drilling, equipping, operating or producing of any coalbed methane well or wells drilled, deepened, or reopened in a manner that causes, or tends to cause, a reduction in the quantity of coalbed methane ultimately recoverable from a pool under prudent and proper operations, or contrary to any provision of, or any order, rule or regulation promulgated [under the CBM Act];

“Waste”

includes “physical waste as that term is generally understood in the oil, gas, and coalbed methane

industry,” as well as:

(b) Permitting the migration of coalbed methane from the stratum in which it is found into other strata, thereby ultimately resulting in the loss of recoverable coalbed methane; (c) The drowning with water of any stratum or part thereof capable of producing coalbed methane in paying quantities, except for secondary recovery purposes, or in hydraulic fracturing or other completion practices; (d) The unlawful damage to underground, fresh or mineral water supply, coalbeds, or other mineral deposits in the operations for the discovery, development, production or handling of coalbed methane; (e) The unnecessary or excessive loss of coalbed methane by spillage or venting or destruction of coalbed methane or its constituents; and,

1490 Ky. Rev. Stat. Ann. § 349.005(4) (LexisNexis 2010). 1491 Id. § 349.060(1). 1492 Id. § 349.035(2).

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(f) The drilling of more wells than are reasonably required to recover efficiently the maximum amount of coalbed methane from a pool.1493

Similar to Kentucky’s Oil and Gas Conservation Act, the CBM Act does not “authorize any

limitation of production of coalbed methane from any coalbed methane well, lease, drilling unit,

pool, field or property to prevent or control economic waste[,] or to limit production to market

demand.”

1494

[b] Department Procedure.

No person may conduct operations to extract or produce coalbed methane in the state

without first obtaining the applicable permits.1495

(a) The county in which the coalbed methane well drill site is located;

A drilling permit application must include an

attached plat displaying:

(b) The name of the surface owner of the drill site tract, the acreage of the drill site tract, the names of the surface owners of adjacent tracts, the names of all coal interest holders from the surface to [50] feet below the deepest penetration of the coalbed methane well on the tract on which the well is proposed to be located, and the names of all oil and gas owners from the surface to [100] feet below the deepest penetration of the coalbed methane well on the tract on which the well is proposed to be located; (c) The proposed or actual location of the coalbed methane well determined by bearing and distance, relative to [2] permanent points or monuments that appear on the applicable United States Geological Survey [7½] minute topographic quadrangle map; (d) The location of any other existing or permitted coalbed methane well or any oil or gas well located within [1,500] feet of the well; (e) The outside boundary of the mineral tract from which the coalbed methane is to be produced if within [750] feet of the well; and, (f) The number to be given the coalbed methane well, the earliest date for commencement of drilling, the earliest date for

1493 Id. 1494 Id. § 349.160(5). To avoid confusion, the legislature clarified coalbed methane regulation is subject only to the provisions of the CBM Act, unless otherwise stated therein. See id. § 349.160(7). 1495 Id. § 349.035(5).

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commencement of any stimulation of the coalbed methane well, and if horizontal drilling of a coalbed methane well is proposed, the vertical and horizontal alignment and extent of the coalbed methane well.1496

The applicant must also provide notice of the application and a copy of the plat to all relevant

surface owners, coal owners, and permitted operators noted therein.

1497 Such notice must inform

the relevant parties that each has twenty days from receiving notice to file an objection to the

proposed well, which will be heard and considered by the CBM Board.1498

Provided that relevant conditions stated in the CBM Act are met, and no objection is filed

within twenty days, the Department will “immediately issue a drilling permit to the well

operator[,] approving the location of the well and authorizing the well operator to proceed to drill

at that location.”

1499 If a coal interest holder objects to a well permit for proposed stimulation,

the Department will not issue a permit allowing such practices “unless the applicant has

obtained…an agreement between the coal interest holders of any workable coalbed within 500

horizontal feet of the proposed coalbed methane well to be stimulated and within the 500 foot

horizontal radius and 50 vertical feet above or below the workable coalbed…to be

stimulated.”1500

However, such proof is not required if the operator has a contractual right to develop and

stimulate by virtue of an existing lease, deed, or other agreement.

1501

1496 Ky. Rev. Stat. Ann. § 349.015(1) (LexisNexis 2010).

In addition, if the operator

fails to supply the Department with an agreement to stimulate, he or she may request a hearing

before the Board by filing an affidavit that provides: (1) a statement that the coal interest holder

1497 Id. § 349.015. 1498 Id. 1499 Id. § 349.020(4). 1500 Id. § 349.050(1). The CBM Act defines “stimulat[ion]” as “any action taken to increase the flow of coalbed methane, or the inherent productivity of a coalbed methane well, including but not limited to fracturing, shooting, acidizing, or waterflooding, but excluding cleaning out, bailing, or workover operations.” Id. § 349.010(28). 1501 Id. § 349.050(2).

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has refused to sign a written agreement to stimulate the workable coalbed; (2) a statement

detailing the efforts undertaken by the operator to obtain such consent; and, (3) a statement that

the proposed method of stimulation does not involve the use of explosives, pose a significant

adverse affect on the mineability of the workable coalbed, or impair mine safety.1502

The CBM Board conducts proceedings under the administrative rules codified in Ky.

Rev. Stat. §§13B.008 et seq.

1503 Upon an objection to a permit application, the CBM Board will

determine whether the Department should issue the permit, and may include any conditions

needed to ensure safe and equitable production from the well.1504

(a) The declaration of public policy and legislative findings as set forth in this chapter;

In deciding whether to grant

the permit, the CBM Board will consider the following factors applicable each proceeding:

(b) Whether the proposed coalbed methane well can be drilled safely, taking into consideration the dangers from creeps, squeezes, or other disturbances due to the extraction of coal; (c) The feasibility of moving the proposed drilling location to another location; (d) Whether any stimulation of the workable coalbed will have a significant adverse affect on the mineability of that workable coalbed or any other workable coalbeds within [500] feet of the proposed coalbed methane well to be stimulated or within the [500] foot horizontal radius and [50] vertical feet above or below the workable coalbed proposed to be stimulated or impair mine safety; (e) Whether the drilling location is above or in close proximity to any mine opening, shaft, entry, travelway, airway, haulageway, drainageway or passageway, or to any proposed extension thereof, any abandoned, operating coal mine or any coal mine already surveyed and platted but not yet being operated; (f) Whether the proposed drilling can reasonably be done through an existing or planned pillar of coal, or in close proximity to an existing or planned pillar of coal, taking into consideration the surface topography; (g) The extent to which the proposed drilling location interferes with the safe recovery of coal or coalbed methane;

1502 Ky. Rev. Stat. Ann. § 349.050(4) (LexisNexis 2010). 1503 Id. § 349.065(3). 1504 Id.

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(h) The extent to which the proposed drilling location will unreasonably interfere with present or future coal mining operations; (i) The technology and methods proposed for the safe and efficient recovery of coal and coalbed methane; (j) The practicality of locating the coalbed methane well out of a uniform pattern with other wells; (k) The surface topography and use; and, (l) Any other factor the review board determines would be considered consistent with [the CBM Act].1505

The CBM Board will “enter a written order containing findings of fact and conclusions which

address any [of these] considerations,” and file it with the Department. The order also provides

the CBM Board’s recommended action, which may include issuing permits, enforcing general

orders, and granting modifications or exceptions thereto.

1506

[4] – Process for Pooling and Matters Covered.

The CBM Act authorizes the CBM Board to establish and modify drilling units, assist in

the enforcement of voluntary pooling agreements of separately-owned interests therein, and

compulsorily pool such interests for the joint development of coalbed methane wells.1507

[a] Drilling Units.

The CBM Act defines a “drilling unit” as “the maximum area in a pool which may be

drained efficiently by one well so as to produce the reasonable maximum recoverable coalbed

methane in the area.”1508 Upon its own motion, or upon the application of an operator or owner

of coalbed methane, the Board may “establish or modify drilling units, establish or modify field

rules, or unitize coalbed methane wells, pools or fields” in order to prevent waste or protect

correlative rights.1509

1505 Id. § 349.065(4).

If possible, drilling units will be uniform in size and shape for an entire

1506 Id. § 349.065(5). 1507 Id. § 349.060(1). 1508 Ky. Rev. Stat. Ann. § 349.010(10) (LexisNexis 2010). 1509 Id. § 349.070(1).

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pool or field.1510

(a) The area which may be drained efficiently and economically by the proposed coalbed methane well or wells and the spacing requirements of Section 349.075;

Upon request for the creation or modification of a drilling unit or applicable

field rules, the Board will consider the following factors in making its determination:

(b) The plan of development for the coal, that drilling units conform to mine development plans, and the need for proper ventilation of any mines or degasification of any affected coal seams; (c) The nature and character of any coal seam or seams which will be affected by the coalbed methane well or wells; (d) The surface topography and mineral boundaries of the lands underlaid by the coal seams to be included in the unit; (e) Evidence relevant to the proper boundary of the drilling unit; (f) The nature and extent of ownership of each coalbed methane owner or claimant and whether conflicting claims exist; (g) Whether the applicant for the drilling unit proposes to be the operator of the coalbed methane well within the drilling unit; and if so, whether the applicant has a lease or other agreement from the owners or claimants of a majority interest in the proposed drilling unit; (h) Whether a disagreement exists among the coalbed methane owners or claimants over the designation of the operator for any coalbed methane well within the drilling unit; and if so, relevant evidence to determine which operator can properly and efficiently develop the coalbed methane within the drilling unit for the benefit of the majority of the coalbed methane owners; (i) If more than one person is interested in operating a coalbed methane well within the drilling unit, the estimated cost of submitting by each such person for drilling, completing, operating and marketing the coalbed methane from any proposed coalbed methane well or wells; (j) Any other available geological or scientific data pertaining to the pool which is proposed to be developed; (k) The correlative rights of the operators and owners of coalbed methane, so that each operator and owner may obtain his or her just and equitable share of production from the coalbed methane; and, (l) Any other factor the review board determines should be considered consistent with KRS Chapters 350 and 352, and this chapter. 1511

1510 Id.

1511 Id. § 353.070(2).

292

Like drilling permits, the CBM Board will “enter a written order containing findings of fact and

conclusions which address any relevant considerations” and file an order with the Department

which: (1) establishes or modifies a drilling unit, field rules or unitizing coalbed methane wells,

pools or fields; (2) refuses to establish or modify a drilling unit, field rules or unitization of

coalbed methane wells, pools or fields; or (3) attaches certain conditions to the establishment or

modification of a drilling unit, field rules, or unitization of coalbed methane wells, pools or

fields.1512

[b] Spacing Rules.

The Board will not issue a permit for coalbed methane well operations unless the

proposed location complies with statutory spacing requirements.1513 Certain exceptions may be

granted to default spacing rules due to necessary modifications to drilling units if the

considerations above dictate such changes.1514 Further, spacing rules may be varied under a

voluntary pooling agreement.1515 Pursuant to legislative direction under the CBM Act, the Board

is charged with enacting regulations particular to horizontal coalbed methane wells.1516

[c] Authority to Integrate Production.

Owners or operators holding separately owned interests in a tract or tracts that are

embraced within a single drilling unit “may pool their interests for the development and

operation of the drilling unit by voluntary agreement.”1517 These agreements may be exercised

based on the right to pool or unitize as “granted in any gas or oil lease, coal lease, coalbed

methane lease, or similar instrument.”1518

1512 Id. § 353.070 (3).

1513 Id. § 353.070(2). 1514 Ky. Rev. Stat. Ann. §353.070(2) (LexisNexis 2010). 1515 Id. 1516 Id. § 349.075. 1517 Id. § 349.045(1). 1518 Id.

293

In the absence of voluntary agreement, the Department may to issue a drilling permit and

pool the separately owned interests within the proposed drilling unit.1519 No pooling order will

be issued with respect to a certain tract upon which a well is to be located unless request to pool

is made prior to commencing drilling operations. If a pooling request comes from a proposed

operator or working interest owner, the application must also include a reasonable bond or other

security determined by the CBM Board.1520 Further, the CBM Act clarifies that pooling orders

subject to disputed ownership may only be issued if the proposed pooled well location complies

with the spacing rules set out above.1521

Pursuant to such conditions, any owner or operator may make a formal request to the

Department to issue a pooling order. The applicant must provide the Department with “a list of

all persons reasonably known to own an oil or gas interest[,] and all coal interest holders, in any

tract upon which the coalbed methane well will be located[,] from the surface to a depth of 100

feet below the base of the deepest coal seam to be penetrated.”

1522 The Department will provide

notice to all relevant owners listed, and the CBM Board will hold a hearing to consider

pooling.1523

In the event that relevant owners are unknown or unable to be located, the applicant must

publish, “at least 20 days prior to the hearing,…one notice in the newspaper of largest circulation

in each county in which any tract, or portion thereof, proposed to be pooled is located.”

1524

(a) State that an application for a pooling order is being filed with the CBM Board;

This

notice must:

1519 Ky. Rev. Stat. Ann. § 349.085(1) (LexisNexis 2010). 1520 Id. § 349.080(3). 1521 Id. § 349.080(2). 1522 Id. 1523 Id. 1524 Id.

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(b) Describe any tract, or portion thereof, proposed to be pooled; (c) In the case of an unknown owner, identify the name of the last known owner; (d) In the case of a non-locatable owner, identify the owner and owner’s last known address; and, (e) State that any party claiming an interest in any tract, or portion thereof, proposed to be pooled should contact the permit applicant at the published address and provide a copy of the notification to the CBM Board within 20 days of the date of publication.1525

Whenever a permit applicant proposes to drill or conduct operations, and the ownership of the

right to produce coalbed methane is in dispute, the Department will refer the application to the

CBM Board to consider the issuance of a pooling order for the well.

1526 If the CBM Board finds

pooling reasonable, the Department will issue a permit and require the development and

operation of all pooled tracts and interests as a single leasehold estate in accordance with the

pooling order.1527

In making its determination, the CBM Board weighs the following factors that it

considers applicable to the proceeding:

(a) The area which may be drained efficiently and economically by the proposed coalbed methane well or wells and the spacing requirements of Ky. Rev. Stat. § 349.075; (b) The plan of development of the coal and the need for proper ventilation of any mines or degasification of any affected coal seams; (c) The nature and character of any coal seam or seams [that] will be affected by the proposed coalbed methane well or wells; (d) The surface topography and mineral boundaries of the lands underlaid by the coal seams to be included in the unit; (e) Evidence relevant to the proper boundary of the drilling unit; (f) The nature and extent of ownership of each coalbed methane owner or claimant and whether conflicting claims exist; (g) Whether the applicant for the drilling unit proposes to be the operator of the coalbed methane well or wells within the drilling unit; and if so, whether the applicant has a lease or other agreement

1525 Ky. Rev. Stat. Ann. § 349.080(3) (LexisNexis 2010). 1526 Id. § 349.080(1). 1527 Id.

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from the owners or claimants of a majority interest in the proposed drilling unit; (h) Whether a disagreement exists among the coalbed methane owners or claimants over the designation of the operator for any coalbed methane wells within the unit, and if so, relevant evidence to determine which operator can properly and efficiently develop the coalbed methane within the unit for the benefit of the majority of the coalbed methane owners; (i) If more than one person is interested in operating a coalbed methane well within the unit, the estimated cost submitted by each such person for drilling, completing, operating, and marketing the coalbed methane from any proposed coalbed methane well or wells; (j) Any other available geological or scientific data pertaining to the [proposed] pool … to be developed; (k) The correlative rights of the operators and owners of the coalbed methane, so that each operator and owner may obtain his or her just and equitable share of production from the coalbed methane; and, (l) Any other factor the CBM Board determines should be considered consistent with Ky. Rev. Stat. §§ 349, 350 and 352.1528

The CBM Board will render a decision to grant or deny a pooling order, and enter a written

statement of factual findings to support its ruling.

1529 The CBM Board will then file this written

order with the Department to grant or deny the pooling order, which may be conditioned upon

any issues the CBM Board proposes.1530

If granted, a coalbed methane pooling order must provide information to govern the

development and operation of the pooled area. Each pooling order will:

(1) Authorize the drilling, deepening, or reopening, and the operation of a well for the production of coalbed methane on the tracts or portions thereof pooled; (2) Designate the operator to drill and operate the well; (3) Prescribe the time and manner in which all owners of working interests in the pooled tracts or portions thereof may elect to participate therein; (4) Provide that all reasonable costs and expenses of drilling, deepening, or reopening, and the completing, operating, plugging,

1528 Id. § 349.085(2). 1529 Id. § 349.085(3). 1530 Id.

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and abandoning the well shall be borne, and all production from the well shall be shared, by all owners of working interests in proportion to the net mineral acres in the pooled tracts owned or under lease to each owner; and, (5) Make provision for the payment of the reasonable actual cost thereof, including a reasonable charge for supervision, by all those who elect to participate therein.1531

A pooling order must also establish a procedure for election rights for owners who do not wish to

participate in the operation, which are discussed in the following section.

1532

Any person who has transferred his or her to rights to coalbed methane under a lease or

other contract is not considered a working interest owner for notice purposes.

1533 A certified

copy of a pooling order may be recorded in the clerk’s office of any county or counties in which

all or a portion of the pooled area rests.1534

[d] Allocation of Production and Costs.

In general, the coalbed methane produced from any pooled well is “deemed for all

purposes to have been so produced from each tract or portion thereof included in the pool in

proportion to the amounts established in the pooling order.”1535 If pooling is ordered despite

ownership disputes, the order must also establish “an interest-bearing escrow account to be

maintained by the Department.” 1536

(a) Each participating working interest owner, except for the unit operator, shall deposit in the escrow account the owner’s proportionate share of the costs allocable to the ownership interest claimed by each participating working interest owner as set forth in the pooling order; and,

The escrow account will “receive deposits and hold

payments for costs and proceeds attributable to the conflicting interests” in the following

manner:

1531 Ky. Rev. Stat. Ann. § 349.085(4) (LexisNexis 2010). 1532 Id. § 349.085(5). 1533 Id. § 349.085(8). 1534 Id. § 349.085(9). 1535 Id. § 349.080(4). 1536 Id. § 349.085(10).

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(b) The unit operator shall collect all proceeds from the sale or use of coalbed methane and deposit in the escrow account all proceeds attributable to the conflicting interests of lessors, lessees, or royalty owners and all proceeds in excess of the recovery of all capital costs and expenses and all ongoing operational expenses including reasonable overhead costs and operating fees attributable to conflicting working interests.1537

The Department will order payment of principal and any accrued interest from the escrow

account to all parties entitled thereto within 30 days an agreement among all claiming an

ownership interest, or a final determination of entitlement made by the Department.

1538

(a) Each legally entitled participating working interest owner shall receive a proportionate share of the proceeds attributable to the conflicting ownership interest;

Unless

otherwise consented to by such voluntary agreement among actual or potential owners, the

Department’s final determination will provide the allocation of production and costs as follows:

(b) Each legally entitled nonparticipating working interest owner shall receive a proportionate share of the proceeds attributable to the conflicting ownership interest, less the cost of being carried as a nonparticipating working interest owner as determined by the election of the person under the applicable pooling order; (c) Each person leasing or deemed to have leased its coalbed methane ownership interest to the unit operator shall receive a share of the royalty proceeds as set out in the applicable pooling order attributable to the conflicting interests of the lessees; (d) The unit operator shall receive the costs contributed to the escrow account by each legally entitled participating working interest owner, but only to the extent that the costs and expenses described in subsection (10)(b) of this section have not been recouped from production proceeds; (e) Each participating working interest owner who is determined not to hold an ownership interest shall receive a refund of all amounts placed in escrow pursuant to subsection (10)(a) of this section plus interest earned thereon; and, (f) All amounts remaining in escrow, after distribution of amounts described in paragraphs (a), (b), (c), (d), and (e) of this subsection,

1537 Ky. Rev. Stat. Ann. § 349.085(10) (LexisNexis 2010). 1538 Id. § 349.085(11).

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shall be distributed to the legally entitled participating working interest owners in proportion to their interests.1539

[e] Royalty Distribution.

The CBM defines a “royalty owner” as “any owner of coalbed methane in place, or oil

and gas rights, to the extent such owner is not an operator” as defined therein.1540 An “operator”

is defined to include “any owner of the right to develop, operate and produce coalbed from a

pool[,] and to appropriate the coalbed methane produced therefrom,” either for his own benefit,

or for the benefit of himself and others.1541 Absent a coalbed methane lease with respect to a

certain tract, the owner thereof is “considered as an ‘operator’ to the extent of 7/8th of the

coalbed methane in that portion of the pool underlying the tract owned by that owner, and as a

‘royalty owner’ as to 1/8th interest in that coalbed methane.”1542 Royalty owners are entitled to

receive the royalty under their respective leases, or by terms stated in a pooling order to govern

the escrow account as described above.1543

[f] Agreements Not Restraint of Trade.

The CBM Act states that “no voluntary pooling agreement between or among coalbed

methane operators or owners shall be held to violate the statutory or common law of the

Commonwealth which prohibits…[any act] in restraint of trade or commerce.”1544

§ 18.04 Types of Kentucky Pooling Statutes—Coalbed Methane.

[1] – Mineral Distinctions.

1539 Id. 1540 Id. § 349.010(27). 1541 Id. § 349.010(20). 1542 Id. 1543 Ky. Rev. Stat. Ann. §§ 349.085(10)-(11) (LexisNexis 2010). 1544 Id. § 349.045(2).

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The CBM Act applies only to coalbed methane production, which is defined therein as

any “gas produced from a reservoir found in a coalbed, a mined-out area, or gob.”1545 This

includes gas taken from both workable and unworkable coalbeds.1546

[2] – Split by Depth.

The CBM Act does not make distinctions based on actual or proposed well depth. Under

applicable permitting rules, no existing well may deepened beyond the depth provided in the

permit without Department approval.1547

[3] – Spacing Rules.

Unless otherwise established by special rule or pooling order, coalbed methane wells are

subject to statewide spacing rules. The Department will not issue a permit to drill or operate a

vertical coalbed methane well that is to be located nearer than “750 feet horizontally from the

nearest mineral boundary upon which the well is to be drilled.”1548 In addition, the proposed

location must be at least 1,500 feet from the nearest coalbed methane well, “unless the

Department orders that a different spacing distance shall apply.”1549

[4] – Minimum Operator Control.

Thus, under its general

authority to modify drilling unit size, the Department may require that two vertical coalbed

methane wells be subject to more or less stringent spacing requirements.

The CBM Act does not provide minimum percentage requirements needed for approval

of pooling orders. However, some level of protection exists in the form of broad notice

1545 Id. § 349.010(4). 1546 Id. § 349.010(3). 1547 805 Ky. Admin. Regs. 9:060 (2010). 1548 Id. § 349.075. 1549 Id.

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requirements to all oil, gas, and coal owners of proposed pooled tracts, as well as the Board’s

consideration of ownership disputes at a pooling hearing.1550

[5] – Directional Drilling.

The Department has established more extensive plat requirements to be submitted with an

application for a permit of a horizontal well.1551 The CBM Act defines “horizontal drilling” to

include any “intentional act of drilling a borehole, shaft, or hole, which deviates from the vertical

for the purpose of penetrating a coal seam to produce coalbed methane.”1552 As noted above,

horizontal wells must comply with spacing requirements as measured by “the actual drilled

course of the well, its end point, the intersection of the well bore and the producing

formations.”1553

[6] – Options.

A pooling order must establish a procedure for an owner who claims a “working interest”

in pooled acreage but “does not decide to become a participating working interest owner.”1554

(a) Surrender, by means of sale or lease, the interest to a participating operator on a reasonable basis and for a reasonable consideration, which if not agreed upon will be one-eighth of the production attributable to the well; or,

This owner has two options under the CBM Act, and may either:

(b) Share in the operation of the well as a non-participating working interest owner on a carried basis after the proceeds allocable to his or her share equal 200% of the share of costs allocable to his or her interest.1555

1550 Ky. Rev. Stat. Ann. §§ 349.085(1)-(2) (LexisNexis 2010).

1551 Id. § 349.010(15). 1552 Id. 1553 805 Ky. Admin. Regs. 9:070 (2010). 1554 Ky. Rev. Stat. Ann. § 349.085(5) (LexisNexis 2010). The CBM Act defines “participating working interest owner” as “a coalbed methane owner or lessee who elects to bear a share of the risks and costs of drilling,…and operating…a well equal to the proportion which the acreage in the drilling unit he or she owns or holds under lease bears to the total acreage of the drilling unit.” Id. § 349.010(22). 1555 Id.

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A coalbed methane owner or claimant who remains unable to be identified or located at the close

of the hearing, such an owner “shall be deemed to have elected to lease the interest to the

coalbed methane operator, exclusive of [one-eighth] of the production attributable to the

unleased interest, and shall not be entitled to make the election” as provided above.1556 Further,

an owner who does not make an election within 30 days of the order’s entry “shall be deemed to

have leased the coalbed methane interest to the…operator” in the same manner. 1557 These

presumptions and election rights only apply to those parties holding coalbed methane interests

not subject to a lease or other agreement that grants the right to operate and produce to another

party.1558

1556 Id. § 349.085(6). 1557 Id. § 349.085(7). 1558 Id. § 349.085(8).

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§ 19.01 Analysis of Louisiana Regulatory Framework.

[1] – Name of the Governing Body.

The Louisiana Office of Conservation (“OC”) has primary responsibility for the

regulation and conservation of oil, gas, and other natural resources.1559 The OC was made a part

of the Louisiana Department of Natural Resources (“DNR”) in 1983.1560 The jurisdiction of the

OC consists of all natural resources of the state that are not within the jurisdiction of other state

departments or agencies,1561 including oil and gas. The Commissioner of Conservation is the

principal state official dealing specifically with pooling and unitization issues, in addition to the

generalities of oil and gas conservation.1562

[2] – Membership on the Governing Body.

The OC is directed and controlled by a Commissioner of Conservation

(“Commissioner”).1563 The Commissioner is appointed by the Governor, with the consent of the

Senate, for a term of four years.1564 In the event of a vacancy, the Governor shall, with the

consent of the Senate, fill the office by appointment for the unexpired term.1565 The Assistant

Secretary of the Office of Conservation (“Assistant Secretary”) also has authority similar to that

of the Commissioner.1566

[3] – Scope of Authority.

1559 See Office of Conservation, Department of Natural Resources State of Louisiana, http://dnr.louisiana.gov/ (last visited May 27, 2011). 1560 La. Rev. Stat. Ann. § 30:359(D) (2011) (“The State Department of Conservation…is transferred to and hereafter shall be within the Department of Natural Resources as provided in Rev. Stat. Ann. 36:806.”); see Bruce M. Kramer , The Law of Pooling and Unitization § 30.18A (3d ed. 2007). 1561 La. Rev. Stat. Ann. § 30:1(C). 1562 See Bruce M. Kramer , The Law of Pooling and Unitization § 30.18A (3d ed. 2007). 1563 La. Rev. Stat. Ann. § 30:1(A). 1564 Id. 1565 Id. 1566 See La. Rev. Stat. Ann. §§ 30:4(D), 30:5(C) (2011). It appears that, on some occasions, the terms “Commissioner” and “Assistant Secretary” are used interchangeably, but other times there is a distinction between the two designations.

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The Commissioner has broad authority under the OC. His authority and jurisdiction

extend to “all persons and property necessary to enforce effectively the provisions of this

Chapter and all other laws relating to the conservation of oil or gas.”1567 Additionally, after

appropriate notice and a hearing, the Commissioner has the authority to make “any reasonable

rules, regulations, and orders that are necessary for the proper administration of this Chapter.”1568

The Commissioner specifically has jurisdiction over waste,

Rules and regulations promulgated pursuant to La. Rev. Stat. Ann. § 30:1 et seq. may be found in

Title 43 of the Louisiana Administrative Code.

1569 which is strictly

prohibited by Louisiana law.1570 “Waste,” in addition to its ordinary meaning, is defined to be

“physical waste” as it is generally understood in the oil and gas industry. 1571 This general

understanding includes: (1) the inefficient, excessive, or improper use or dissipation of reservoir

energy, and the location, spacing, drilling, equipping, operating, or producing of an oil or gas

well in a manner that results, or tends to result, in reducing the quantity of oil or gas ultimately

recovered from a pool; (2) the inefficient storing of oil, the producing of oil or gas from a pool in

excess of transportation or marketing facilities or of reasonable market demand, and the location,

spacing, drilling, equipping, operating, or producing of an oil or gas well in a manner causing, or

tending to cause, unnecessary or excessive surface loss or destruction of oil or gas; and (3) the

disposal, storage or injection of any waste product in the subsurface by means of a disposal

well.1572

1567 Id. § 30:4(A).

1568 Id. § 30:4 (C). 1569 Id. § 30:4 (B). 1570 Id. § 30:2. 1571 Id. § 30:3(1). 1572 La. Rev. Stat. Ann. § 30:3(1) (a)–(c) (2011). For laws regarding underground injection control, see id. § 30:4.1.

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The Commissioner is required to make inquiries to determine whether or not waste exists

or is imminent.1573

to collect data; to make investigations and inspections; to examine properties, leases, papers, books, and records; to examine, survey, check, test, and gauge oil and gas wells, tanks, refineries, and modes of transportation; to hold hearings; to provide for the keeping of records and the making of reports; to require the submission of an emergency phone number by which the operator may be contacted in case of an emergency, and to take any action as appears reasonably necessary to enforce this chapter.

In doing so, the Commissioner has the authority:

1574

For the purpose of preventing waste, the Commissioner may regulate the pooling,

unitization and consolidation of oil and gas tracts and/or leases.

1575 Included within his

jurisdiction is the authority to establish drilling units, 1576 to compulsorily pool owner’s oil

and/gas interests, 1577 to limit and prorate the production of oil and/or gas from any pool or

field,1578 and to regulate the spacing of wells.1579 The Commissioner may even designate a new

well operator where a well is not being operated in order to prevent waste.1580

[4] – Process for Pooling.

[a] Establishing Drilling Units by the Assistant Secretary.

Upon the application of any interested party, the Assistant Secretary is authorized to enter

an order requiring unit operation of any pool or combination of two pools in the same field,

productive of oil or gas, or both, in connection with the institution and operation of systems of

pressure maintenance by the injection of gas, water, or any other extraneous substance, or in

1573 Id. § 30:4(B). 1574 Id. 1575 Id. § 30:5.1(C). 1576 Id. §§ 30:5.1(C) (13), 30:9(B). 1577 Id. § 30:10(A)(1). 1578 La. Rev. Stat. Ann. § 30:4(C)(11) (2011). 1579 Id. § 30:5.1(C)(13). 1580 See EnerQuest Oil & Gas, LLC v. Asprodites, 02- 0822 (La. App. 1 Cir. 4/2/03); 843 So. 2d 535.

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connection with any program of secondary or tertiary recovery.1581 The Assistant Secretary is

also empowered to require the unit operation of a single pool in any situation where the ultimate

recovery can be increased and waste and the drilling of unnecessary wells can be prevented by

such unit operation.1582 This process impliedly applies to shallow wells, as deep oil and gas

pools are addressed in a separate action.1583

[b] Establishing Drilling Units by the Commissioner.

In order to prevent waste and to avoid the drilling of unnecessary wells, the

Commissioner is required to establish a drilling unit or units for each pool.1584 This process

impliedly applies to shallow wells, as deep oil and gas pools are addressed in a separate

section. 1585 A “drilling unit” is defined as the maximum area that may be efficiently and

economically drained by one well.1586 A “pool” refers to an underground reservoir containing a

common accumulation of crude petroleum oil or natural gas or both.1587 Due to this definition of

a “pool,” the Commissioner has traditionally taken the position that it does not have jurisdiction

to form a unit unless there is evidence that the interval is productive.1588

1581 La. Rev. Stat. Ann. § 30:5(C)(1)(a).

1582 Id. § 30:5(C)(1)(b). 1583 See La. Rev. Stat. Ann. § 30:5.1. 1584 La. Rev. Stat. Ann. § 30:9(B) (2011). “[E]xcept for those pools which, prior to July 31, 1940, had been developed to an extent and where conditions exist making it impracticable or unreasonable to use a drilling unit at the present stage of development.” Id. The provisions of this Section are intended to and shall affect presently existing units. Id. § 30:9.1(E). Note that La. Rev. Stat. Ann. § 30:5 also provides the Assistant Secretary certain powers regarding establishing and regulating units. That section states that it does not in any way modify the authority granted to the Assistant Secretary in La. Rev. Stat. Ann. § 30:9(B); however, as stated above, that cited section provides authority to the Commissioner rather than the Assistant Secretary. 1585 See La. Rev. Stat. Ann. § 30:5.1. 1586 Id. § 30:9(B). 1587 Id. § 30:3(6). 1588 Brent G. Sonnier, Oil & Gas Development and Unitization Laws in Various States 27 (March 2010), available at http://www.hadoa.org/publications/2010. Note that the tests providing such evidence do not have to be in the same reservoir, or even an adjacent one, but can be from any well within the field, or a correlative sand outside the field but in the general area of the proposed unit. Id.

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The Commissioner also has the authority to establish the location at which a well may be

drilled upon a drilling unit.1589 In determining the location, the Commissioner shall consider all

available geological and engineering evidence, and shall provide for the unit well to be located at

the optimum position for the most efficient and economic drainage of the unit.1590 However, the

Commissioner must also fix the well at a location so that the producer thereof shall be allowed to

produce no more than his just and equitable share of the oil and gas in the pool.1591

…that part of the authorized production of the pool, whether it be the total which could be produced without any restriction on the amount of production, or whether it be an amount less than that which the pool could produce if no restrictions on amount were imposed, which is substantially in the proportion that the quantity of recoverable oil and gas in the developed area of his tract or tracts in the pool bears to the recoverable oil and gas in the total developed area of the pool, in so far as these amounts can be practically ascertained.

A producer’s

“just and equitable share” is defined as

1592

Mineral owners are also entitled to their equitable share of production, and the Commissioner

may issue orders to ensure that each owner is able to so recover.

1593

Unless sooner terminated, extended or otherwise modified, any unit established by the

Commissioner shall remain in full force and effect so long as: (1) a well is producing from the

pool for which the unit(s) was established; (2) a well is completed in the pool for which the

unit(s) was established, and, although not producing, has been proved capable of producing; or

(3) drilling, reworking, recompletion, plugging back or deepening operations are being

conducted on a well to secure or restore production from the pool for which the unit(s) was

1589 La. Rev. Stat. Ann. § 30:9(C) (2011). 1590 Id. 1591 Id. 1592 Id. § 30:9(D). 1593 See Amoco Production Co. v. Thompson, 86-0190 (La. App. 1 Cir. 9/17/87); 516 So. 2d 376 ( holding that the Commissioner of Conservation has authority to issue any order necessary to ensure that the owner of each tract be given the opportunity to recover his equitable share of the gas in a compulsory unit).

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developed.1594 If none of the above conditions have occurred within a time period of one year

and ninety days, the Commissioner may, by order issued after 10 days legal notice, terminate all

units within the pool. 1595 Absent any objection to such an order, no public hearing is

required.1596

Units may also be terminated by request. The Commissioner may, upon application and

by order issued after ten days notice, terminate any unit or units when he finds that, as of the date

of the application for termination, each of the following items are true: (1) a period of five years

has elapsed without any production from the unit; (2) there is no well located on the unit which is

capable of producing from the pool for which the unit was established; (3) a period of one year

and ninety days has elapsed without any drilling, reworking, recompletion, plugging back, or

deepening operations having been conducted on a well located on the unit in an attempt to obtain

or restore production from the pool for which the unit was established; and (4) there is no

unexpired drilling permit for the drilling of a new well on the unit to a depth which could

penetrate the pool for which the unit was established.

1597

The Commissioner has the authority to prescribe, issue, amend and rescind such orders,

rules and regulations as he finds necessary or appropriate to carry out the provisions of the

Act.

1598 This includes the power to amend the acreage of a previously established drilling unit.

That issue was addressed in Monsanto Chemical Co. v. Hussey, where the Louisiana Supreme

Court held that the Commissioner has the authority to issue an amendatory order increasing the

acreage of previously established units to govern the production of gas and condensate.1599

1594 La. Rev. Stat. Ann. § 30:9.1(A)(1)–( 3) (2011).

1595 Id. § 30:9.1 (B). 1596 Id. 1597 Id. § 30:9.1 (C)(1)–(4). 1598 Id. § 30:9.1 (D). 1599 Monsanto Chem. Co. v. Hussey, 102 So. 2d 255 (La. 1958).

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Once a producing well is located on a unit, the unit is considered a “developed area.”1600

The effect of a unit being a “developed area” is that no other well can be drilled on the unit into

the same pool.1601 This limitation to one well has been held to be a valid exercise of the State’s

police power.1602

(1) make it necessary for the producer from, or the owner of, a tract of land in the pool, in order that he may obtain the tract’s just and equitable share of the production of the pool…to drill and operate any well or wells on the tract in addition to the well or wells that can without waste produce this share; or,

Although the Commissioner has broad authority, his authority is expressly

subject to the prohibition that any action taken by the Commissioner may not:

(2) occasion net drainage from a tract unless there be drilled and operated upon the tract a well or wells in addition to the well or wells thereon that can without waste produce the tract’s just and equitable share of the production of the pool.1603

An example of the Commissioner exceeding his authority can be found in Alexander v.

Holt.

1604 In that case, defendant Holt sold to plaintiff Alexander a tract of land, reserving to

himself a mineral servitude. Plaintiff contended that the mineral reservation had not been used

for over ten years, and thus had expired and prescribed. Defendant countered that, by virtue of a

voluntary unitization agreement, which was approved by the Commissioner of Conservation, his

mineral servitude had been tolled. The issue at bar was whether the effect of the

Commissioner’s Order was to integrate or force pool the entire area, so as to toll the ten-year

liberative prescription limitation, or whether it simply approved of the voluntary unitization

agreement. 1605

1600 La. Rev. Stat. Ann. § 30:9(B) (2011).

Ultimately, the Court held that the Commissioner’s Order was merely an

approval of the voluntary agreement and could not function to institute a compulsory unit.

1601 See Alexander v. Holt, 116 So. 2d 532, 534 (La. Ct. App. 1959) (“[E]ach well is ordinarily limited to one well for developmental purposes.”); see also Sohio Petroleum Co. v. V.S. & P.R.R., 62 So. 2d. 615 (La. 1952). 1602 See Robinson v. Horton, 2 So. 2d 647 (La. 1941); see also Childs v. Wash., 87 So. 2d 111 (La. 1956). 1603 La. Rev. Stat. Ann. § 30:9(A)(1),(2) (2011). 1604 Alexander, 116 So. 2d at 532. 1605 Id. at 532–534.

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Where forced pooling is directed by an Order of the Commissioner, the owners of an

established drilling unit must pool their interests.1606 When a well is drilled within such a unit, it

has the effect of interrupting the running, or tolling, the liberative prescription as to each

individual tract of minerals located in the unit because each unit is ordinarily limited to one well

in the interest of preventing waste.1607 In Alexander, a voluntary unitization agreement was

entered into by most, but not all, of the mineral holders in the area of interest, including

defendant Holt. This voluntary agreement was then approved by an Order of the Commissioner

of Conservation, known as Order 96—G. The Court previously considered Order 96—G in

Hunter v. Hussey, finding that in the said Order, the Commissioner “specifically disclaimed

authority to institute a compulsory water injection secondary recovery program” and further

provided that no person not a party to the Unit Operating or Unitization Agreements would

become subject to such agreements providing for a field-wide water injection secondary recovery

program.”1608

The present Court was in “full accord” with this finding, and held that “there was no

integration or forced pooling of the area involved or contemplated by the voluntary

agreements.”

1609 In other words, ordering the integration or forced pooling of the area was not a

proper exercise of the Commissioner’s power under La. Rev. Stat. Ann. § 30:9(A) because the

signing of the voluntary unitization agreement, even with the Commissioner’s approval, was no

more than a voluntary act. 1610 Therefore, Holt’s voluntary action in signing the unitization

agreement was merely voluntary, and thus he was powerless to extend his mineral servitude.1611

1606 Id. at 534.

1607 Id. 1608 Id. at 535–36 (citing Hunter v. Hussey, 90 So. 2d 429, 432 (La. Ct. App. 1956). 1609 Alexander v. Holt, 116 So. 2d 532, 536 (La. Ct. App. 1959). 1610 Id. at 536–37. 1611 Id. at 537.

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Another example may be found in Monsanto Chemical Co. v. Southern Natural Gas

Co.,1612 where it was held that although the Commissioner’s pooling order could allocate to each

tract its pro rata share of production, it was beyond the Commissioner’s authority to determine

who was entitled to that production under the terms of voluntary agreements.1613 Monsanto was

followed by Southwest Gas Producing Co. v. Creslenn Oil Co.,1614 which held that an operating

agreement executed by working interest owners that provided for the allocation of their interests

on the basis of surface acreage did not conflict with was not superseded by a Commissioner’s

order that created field-wide units and allocated production on by a ‘60/40 formula’ (60% based

on productive acre feet and 40% on productive surface area).1615 This was true because the

action of the Commissioner recognized the distribution of production in accordance with any

agreement in effect prior to the effective date of the field-wide unit agreement.1616 “Private

contractual rights are only superseded when they are in conflict with the valid orders of the

Commissioner of Conservation.”1617

[c] Compulsory Pooling by the Commissioner.

When two or more separately owned tracts of land are embraced within a drilling unit

established by the Commissioner pursuant to La. Rev. Stat. Ann. § 30:9(B), landowners may

voluntarily agree to pool their interests.1618

1612 Monsanto Chem. Co. v. S. Natural Gas Co., 102 So. 2d 223 (La. 1958).

However, even if there is no voluntary pooling

1613 See 6 Patrick H. Martin & Bruce M. Kramer, Williams & Meyers, Oil and Gas Law § 941.3 (MB 2008). 1614 Sw. Gas Producing Co. v. Creslenn Oil Co., 181 So. 2d 63 (La. App. 1965), appeal denied, 182 So. 2d 74 (La. 1966). 1615 See 6 Patrick H. Martin & Bruce M. Kramer, Williams & Meyers, Oil and Gas Law § 941.2 n.2 (MB 2008); see also Sw. Gas Producing Co., 181 So. 2d at 67. 1616 Sw. Gas Producing Co., 181 So. 2d at 67. 1617 Id. (citing Ark. La. Gas Co. v. Sw. Natural Gas Producing Co., 60 So. 2d 9 (La. 1952)). 1618 La. Rev. Stat. Ann. § 30:10(A) (2011).

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agreement, Louisiana law provides the Commissioner the authority to compulsorily pool their

interests “if he finds it necessary to prevent waste or to avoid drilling unnecessary wells.1619

The language of the statute provides “little direction [to] the Commissioner in issuing

compulsory pooling orders except that they must be just and reasonable.”

1620 All orders

requiring pooling shall be made after notice and hearing.1621 These must also be made upon just

and reasonable terms and conditions that afford the owner of each tract the opportunity to

recover his just and equitable share of the oil and gas in the pool without unnecessary

expense.1622 Additionally, the order must prevent or minimize reasonable avoidable drainage

from each developed tract that is not equalized by counter drainage.1623 The portion of the

production allocated to each owner shall, when produced, be considered as if it had been

produced from his tract by a well drilled thereon.1624

In the event that owners of separate tracts embraced within a drilling unit fail to agree

upon the pooling of the tracts and the drilling of a well on the unit, and should it be established

by final and irreversible judgment of the court that the Commissioner is without authority to

require pooling, then the owner of each tract so embraced may drill thereon.

1625 The allowable

production therefrom shall be the proportion allowable for the full unit as the area of the

separately owned tract bears to the full drilling unit.1626

[d] Pooling by the Assistant Secretary.

1619 Id. § 30:10(A) (1). 1620 6 Patrick H. Martin & Bruce M. Kramer, Williams & Meyers, Oil and Gas Law § 10.02[3] (MB 2008). 1621 La. Rev. Stat. Ann. § 30:10(A)(1)(a). 1622 Id. 1623 La. Rev. Stat. Ann. § 30:10(A)(1)(a). 1624 La. Rev. Stat. Ann. § 30:10(A)(1)(b) (2011). The Court has held that this subsection is also applicable to field-wide units created by the Commissioner.; see Ark. La. Gas Co. v. Sw. Gas Producing Co., 181 So. 2d 9, 68 (La. 1952) (“Although the statute relates to drilling units, we can find no ground for distinction in its application to a field-wide unit such as that created by the Commissioner in this case.”). 1625 La. Rev. Stat. Ann. § 30:10(B). 1626 Id.

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Where a reservoir is of sufficient size and characteristics that more than one well is

necessary to efficiently and economically drain it, or where gas injection pressure maintenance

or enhanced recovery projects are appropriate, the Commissioner has the authority to create a

single, “reservoir-wide” unit.1627 Although not necessary for primary recovery operations, this

type of unit is also available in those cases if the requisite statutory requirements can be met.1628

In connection with a unit operation under La. Rev. Stat. Ann. § 30:5(C), the Assistant Secretary

has the right to unitize, pool and consolidate all separately owned tracts and other property

ownerships.1629 Any such order may be issued only after notice and hearing.1630 Reservoir units

authorize the operator to complete as many unit wells as necessary, without needing to obtain

subsequent orders for substitute or alternate well approval.1631

In making an order, the Assistant Secretary should consider all available geological and

engineering evidence.

1632 The proposed unit operation must be economically feasible, and the

order shall be based on the fact that it is reasonably necessary to prevent waste or drilling of

unnecessary wells, and will appreciably increase the ultimate recovery of oil or gas from the

affected pool or combination of two pools.1633 The order must also provide for the allocation to

each separate tract within the unit of a proportionate share of the unit production to insure the

recovery by the owners of that tract of their just and equitable share of the recoverable oil or gas

in the unitized pool or combination of two pools.1634

1627 Brent G. Sonnier, Oil & Gas Development and Unitization Laws in Various States 27 (March 2010), available at http://www.hadoa.org/publications/2010.

1628 Id. at 29. 1629 La. Rev. Stat. Ann. § 30:5(C)(2) (2011). 1630 Id. 1631 Brent G. Sonnier, Oil & Gas Development and Unitization Laws in Various States 27 (March 2010), available at http://www.hadoa.org/publications/2010. 1632 La. Rev. Stat. Ann. § 30:5(C)(4). 1633 Id. § 30:5 (C)(2)(a)–(b). 1634 Id. § 30:5(C)(2)(c).

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Additionally, the plan and terms of unit operation must be approved by at least three-

fourths of the owners and three-fourths of the royalty owners as to a particular interest.1635 The

first category of owners here is thought to refer to working interest owners.1636 Such approval

must be evidenced by a written contract covering the terms and operation of the unitization,

signed and executed by the required three-fourths owners and three-fourths royalty owners, and

filed with the Assistant Secretary on or before the day set for hearing.1637

For the purpose of calculating the required three-fourths approval, “royalty owner” means

any interested party other than the owner of an unleased interest or a mineral lessee or the owner

of any interest created out of the interest of a mineral lessee, such as a net operating interest,

overriding royalty or production payment.

1638 Without the necessary percentage of approvals of

both royalty owners and working interest owners, a unit cannot effectively be created, even if all

of the other requirements are met, and even if the evidence is “clear and undisputed” that such a

unit is necessary to prevent waste or to avoid the drilling of unnecessary wells.1639

Any order hereby entered requiring unit operation must designate a unit operator, and

must also make provision for the proportionate allocation to the owners of the costs and expenses

of the unit operation.

1640 Said allocation shall be in the same proportion that the separately

owned tracts share in unit production.1641

1635 La. Rev. Stat. Ann. § 30:5 (C)(2)(d) (2011).

In the absence of a voluntary agreement among the

owners, the cost of capital investment in wells, physical equipment and intangible drilling costs

1636 Brent G. Sonnier, Oil & Gas Development and Unitization Laws in Various States 27 (March 2010), available at http://www.hadoa.org/publications/2010 (“[A]t least 3/4ths of royalty owners and 3/4ths of the working interest owners. . . . ”). 1637 La. Rev. Stat. Ann. § 30:5(C)(2)(d). 1638 Id. § 30:5(C)(5). 1639 Brent G. Sonnier, Oil & Gas Development and Unitization Laws in Various States 27 (March 2010), available at http://www.hadoa.org/publications/2010. 1640 La. Rev. Stat. Ann. § 30:5(C)(3) (2011). 1641 Id.

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shall be shared in like proportion. 1642 However, any owner who has not consented to the

unitization shall not be required to contribute to the proceeds of production accruing to the

interest of such owner out of production from such unit operation.1643 The order requiring unit

operation shall not vary or alter any terms of the above referenced contract, nor impose any term

or operation upon non-signers of the contract more onerous than the terms and operations set out

in the contract(s). 1644 Upon application, and after notice and public hearing, to the extent

required by the evidence so established, the Assistant Secretary may revise any reservoir-wide

unit(s) so created.1645

[e] Limitation and Allocation of Production.

The Commissioner has the authority to limit the production of a pool to an amount less

than that which the pool could produce if no restriction were imposed.1646 Pursuant to his charge

in preventing waste, the Commissioner may even prohibit the production of minerals.1647 When

the Commissioner limits production, he must prorate the allowable production among the

producers in the pool on a reasonable basis so as to prevent or minimize avoidable drainage from

each developed area that is not equalized by counter drainage.1648 He must also ensure that each

producer will have the opportunity to produce or receive his just and equitable share, subject to

the reasonable necessities for the prevention of waste.1649

1642 Id.

After the effective date of a rule,

regulation or order of the Commissioner fixing the allowable production of oil or gas or both for

a pool, no person shall produce from a well, lease or property more than the allowable

1643 Id. 1644 Id. 1645 Id. § 30:5(C)(4). 1646 La. Rev. Stat. Ann. § 30:11(B) (2011). 1647 See Delatte v. Woods, 94 So. 2d 281 (La. 1957) (finding the Commissioner has the authority to regulate and control, or to prohibit the production of minerals); see also La. Rev. Stat. Ann. § 30:2. 1648 La. Rev. Stat. Ann. § 30:11(B). 1649 Id.

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production which is applicable, nor shall any person produce be in a manner different than the

manner of production which was authorized.1650

Whenever the Commissioner limits the total amount of oil or gas that may be produced,

he shall allocate the allowable production among the fields.

1651 A “field” is the general area

underlaid by at least one pool, and includes the underground reservoir(s) containing crude

petroleum oil or natural gas or both.1652 Distinguished from the definition of a “pool,” a “field”

may relate to two or more pools.1653 This allocation must be made on a reasonable basis, giving

to each field with small wells of settled production an amount which will prevent a general

premature abandonment of the wells in the field.1654

An order fixing allowable production of oil or gas, or making changes therein, shall be

issued by the Commissioner on or before the 23rd day of the month preceding the month for

which the order is to be effective.

1655 The order shall be promulgated by immediate publication

in the official journal of the state.1656 In the case of old fields or pools for which schedules had

already been issued, no hearing is required before the issuance of a subsequent order unless there

is a written request for a hearing made by an interested person.1657 In the event that a schedule is

promulgated without prior notice and hearing, an aggrieved producer may, within 72 hours, file

with the Commissioner a sworn written statement, detailing the grounds of his complaint.1658

The Commissioner shall then hold a hearing within 48 hours. 1659

1650 Id. § 30:11 (C).

At this hearing, oral or

1651 Id. § 30:11 (A). 1652 Id. § 30:3(7). 1653 La. Rev. Stat. Ann. § 30:3(7) (2011). However, if only one underground reservoir is involved, “field” and “pool” mean the same thing. Id. 1654 Id. § 30:11(A). 1655 Id. § 30:7(A). 1656 Id. 1657 Id. § 30:7 (B)(1). 1658 La. Rev. Stat. Ann. § 30:3(7) (B)(2) (2011). 1659 Id.

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documentary evidence may be received in favor of and against the complaint.1660 After the

hearing, the Commissioner shall summarily render a decision.1661 If his decision is not made on

or before the effective date of the order complained of, that order shall be suspended until a

decision is rendered. During such suspension, the former order remains in force.1662

[f] Application Process.

There are three categories of individuals that an applicant must keep in mind in filing any

application: interested owners, represented parties, and interested parties. An “interested owner”

is defined as any owner who presently owns an interest within the area of, or proximate to, the

tracts directly affected by the application.1663 A “represented party” is any person who is known

to the applicant after reasonable search to presently own an interest within the area of, or

proximate to, the tracts directly affected by the application, and who is also known to the

applicant to have either a consultant or attorney representing him in conservation matters.1664 An

“interested party” is any person other than an interested owner or a represented party who owns

an interest within the area of, or proximate to, the tracts directly affected by the application.1665

Unless pre-application notice is waived,

1666 any person intending to apply for a hearing,

prior to filing an application, must send a notice outlining the proposal to the Commissioner in

duplicate, with a copy to the District Manager and to each interested owner and represented

parties.1667

1660 Id.

The following list of items must be furnished to the Commissioner, interested owners

and represented parties, but the first item need not be furnished to represented parties or

interested owners unless so requested:

1661 Id. 1662 Id. 1663 La. Admin. Code tit. 43, § 3903 (2011). 1664 Id. 1665 Id. 1666 For procedures on waiver, see id. § 3917. 1667 Id. § 3907(A).

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(1) The names and addresses of all interested owners and represented parties to whom it is being sent; (2) A statement that a reasonable effort has been made to determine to whom the notices as required by this rule must be sent; (3) An explanation of the nature of the proposal and a copy of a unit plat for each sand, if units are involved, prepared in accordance with La. Admin. Code tit. 43:XIX.103; (4) A day, time and place for a conference which need by held only if notice of a desire to confer with respect to the application is given as herein provided; and, (5) A definition of the sand proposed for unitization with such sand defined in each reservoir thereof by reference to well log measurements.1668

If the applicant has proof that there is no indication of opposition from any person to whom pre-

application notice must be sent, and the Commissioner finds such proof acceptable, the applicant

may immediately proceed to file his application and need not schedule a conference.

1669

Unless otherwise agreed, any requested conference must be held within the state of

Louisiana in a city reasonably convenient to the persons involved and shall be scheduled for not

less than 20 days after the date of pre-application notice.

1670 Pertinent data must be made

available to interested owners and represented parties sufficiently in advance of any conference

so as to allow them reasonable time for review and interpretation.1671 Reference to the source of

data may be obtained at the cost of the requesting party.1672 Within ten days of receiving pre-

application notice, any interested owner or represented party may advise the applicant of his

desire to confer about his proposal.1673

1668 Id. § 3907(A)–(B)(5).

The applicant, within 15 days after the date of pre-

application notice, shall inform the Commissioner, the District Manager, and all other persons to

1669 La. Admin. Code tit. 43, § 3903(C) (2011). 1670 Id. § 3903 (B)(4). 1671 Id. § 3909. 1672 Id. 1673 Id. § 3911(A).

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whom the pre-application notice was sent, in writing, that the conference will be held.1674 Any

interested owner and represented party may attend and participate, even if he did not request the

conference.1675

Conferences held pursuant to these procedures are designed to promote an open exchange

of views among the parties.

1676 The applicant shall present the available and appropriate

geological, engineering or other bases for his position supported by sufficient data and detail for

the conferees to have reasonable opportunity to discuss and attempt to resolve their differences in

good faith.1677 Any applicant proposing to create or revise a unit shall also exhibit a map or plat,

reasonably prepared in sufficient size and detail to enable affected parties to determine the

location of their lands.1678 Any opponent shall present his position in sufficient detail to allow

for the resolution of differences. 1679 Any reference to discussions among the parties as to

geological, engineering or other basis for the party’s position is not admissible in evidence at any

subsequent hearing, nor shall any tape recordings or transcripts made at the conference be

admissible.1680

An applicant’s hearing application may be filed immediately after the pre-application

conference.

1681 The application shall be filed in duplicate with the Commissioner, with a copy to

the District Manager and to each interested owner and represented party.1682

1674 Id.

The following list

of items must be furnished to the Commissioner, interested owners and represented parties, but

1675 La. Admin. Code tit. 43, § 3911(A) (2011). 1676 Id. § 3913(E). 1677 Id. § 3913 (A). 1678 Id. § 3913 (D). 1679 Id. § 3913 (B). 1680 Id. § 3913 (E). 1681 La. Admin. Code tit. 43, § 3915(A) (2011). 1682 Id.

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the first two items need not be furnished to represented parties or interested owners unless so

requested:

(1) The names and addresses of interested owners and represented parties notified; (2) The names and addresses of all interested parties who are known to the applicant after reasonable search; (3) A statement that a reasonable effort has been made to obtain a complete list of interested parties, interested owners and represented parties; (4) A statement that a conference has or has not been held, including a brief report on the conference, if held, and a list of the parties in attendance; (5) A unit plat, if units are involved, prepared in accordance with La. Admin. Code tit. 43 XIX.103; and, (6) A definition of the sand proposed for unitization with such sand defined in each reservoir thereof by reference to well log measurements.1683

Requests for separate sands are considered a separate application for each sand; the

Commissioner should be furnished an extra copy of the application for each additional sand.

1684

If, as a result of a conference, an applicant’s proposal is revised, the revised proposal

should be explained in the application, and if units are involved, the revised unit plats should be

filed with the application.

1685 If differences are not resolved, or if any interested owner or

represented party wishes to oppose or support a proposal by the introduction of evidence at the

hearing, then not less than 15 days before the hearing such a person must file with the

Commissioner and the District Manager, as well as the applicant and all persons who attended

the pre-application conference, his counter plan or supporting plan.1686

1683 Id. § 3915(1)–(6).

If units are involved, his

plan must include a plat of his proposed units, with any geological bases for any unit

1684 Id. § 3915(B). 1685 Id. § 3915(C). 1686 Id. § 3915(E).

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boundary.1687 Finally, he must provide a letter explaining any points of difference between his

plan and the applicant’s plan.1688 The Commissioner has reserved the right to call a pre-hearing

conference at any time prior to the hearing if he believes that it would resolve or narrow the

issues in controversy, or would assist in the conduct of the hearing.1689

After the application is filed, if the applicant’s proposal is revised, the applicant must

promptly notify the Commissioner, the District Manager, and all parties to whom the application

was sent of the revision.

1690 Additionally, the applicant must furnish to them a copy of any

revised plan and unit plat, if units are involved, and shall, if requested, hold a conference to

discuss the revised proposal prior to the hearing.1691 No revised proposal shall be considered at

the hearing unless notice of the revision has been provided as required above at least five days

prior to the hearing.1692 If appropriate notice has been provided, the applicant must present both

the original application proposal and the revised proposal at the time of hearing, with evidence to

support the revision.1693

Statewide Order 29-R-10/11, effective November 19, 2010, sets forth the application fees

associated with various activities for the fiscal year 2010-2011.

1694 Several relevant fees are as

follows: the fee for an Application for Public Hearing is $755 and the fee for an Application for

Unit Termination is $252. 1695

1687 La. Admin. Code tit. 43, § 3915(E) (2011).

Fees for applications to Permit to Drill, as well as to Amend

1688 Id. For additional procedures regarding opposition to or support of an application, see id. § 3921. 1689 Id. § 3923(A). 1690 Id. § 3919(A). 1691 Id. 1692 Id. 1693 La. Admin. Code tit. 43, § 3919(A) (2011). 1694 Id. § 701. 1695 Id. § 703.

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Permits to Drill or to Drill Minerals Deeper vary based upon substance and depth.1696 There are

also regulatory fees and production fees applicable to certain oil and gas production activities.1697

Whenever any application is made for “creation, revision, or modification of any unit or

units for production of oil or gas, or for adoption of any plan for spacing of wells or for cycling

of gas, pressure maintenance, or restoration, or other plan of secondary recovery…at least thirty

days notice shall be given of the hearings to be held.”

1698 Other hearing matters require only ten

days notice.1699 Procedures for conducting hearings before the Commissioner can be found in

Title 43, Part XIX, Subpart 17 and Chapter 39 of the La. Admin. Code. These procedures are

applicable to all hearing applications requiring 30 days notice, with certain narrow

exceptions,1700 and, to the extent practical, also apply to hearing applications which require ten

days notice.1701

The applicant is required to publish legal notice by the Commissioner in the official state

journal, and must provide for the posting of a copy of the legal notice of hearing, as well as unit

plats, in a prominent place in the area affected.

1702 A copy must also be published in a

newspaper in the vicinity or general area of the affected field at least 15 days before the

hearing. 1703

1696 See id.

The applicant must mail copies of the legal notice to all interested owners,

represented parties and interested parties, and a copy of the unit plat or plats shall be included if

1697 See id. 1698 Id. § 30:6(B). 16996 Patrick H. Martin & Bruce M. Kramer, Williams & Meyers, Oil and Gas Law § 11.04[4] (MB 2008). 1700 La. Admin. Code tit. 43, § 3905(A) (2011) (“[T]hese rules of procedure shall not apply to applications relating to the initial creation of poolwide units under Section 5C. . . of Title 30. . . .”). If the application relates to the creation of a poolwide units under Section 5C, a copy of the application must be given to each interested owner and represented party. Id. § 3905 (B). If the required 75% of owners have not joined the agreement by the 15th day prior to the date of hearing, the application shall secure cancellation of the hearing and shall notify all owners, represented parties, and interested parties of the cancellation. Id. 1701 Id. § 3905 (C). 1702 Id. § 3915(A)(2). 1703 Id.

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they have not already been provided to the same. 1704 Evidence to establish the posting,

publication, and mailing of notice shall be submitted at the hearing.1705

Although notice by mailing should be provided as required, actual notice obtained by an

interested party may cure a defect in procedure in giving notice.

1706 “As a general proposition, it

is reasonable to expect one with knowledge of notice of an administrative proceeding affecting

his rights not to stand by until the day of the hearing and then for the first time assert lack of

notice.”1707 Kaiser Aluminum Exploration Co. v. Thompson upheld a similar concept, holding

that, even though the applicant had made no effort to give notice by mail to certain owners in a

non-producing unit, such failure to give notice does not mean that a resultant order is invalid.1708

Furthermore, it has been found that failure to provide notice will not invalidate an order of

unitization where the unitization was advantageous to the one who was not notified based upon a

presumption that such a person would not have opposed the application had he been notified.1709

At the hearing, the applicant presents his case first. In doing so, he shall present the

entire geological, engineering or other bases in support of his proposal.

1710 Next, any interested

owner or represented party who supports the applicant and has complied with §§ 3915, 3917 and

3921 shall present his entire geological, engineering or other bases in support of the applicant’s

proposal. 1711

1704 Id.

Any interested party wishing to present evidence supporting the applicant’s

proposal shall do so immediately after the applicant and supporting parties have completed their

1705 Id. 1706 See Brown v. Sutton, 356 So. 2d 965 (La. 1978) (holding that an order approving a petroleum company’s application for a unitized operation and secondary recovery project under LA. REV. STAT. ANN. § 30:5(C) (2011) was valid because the lack of formal notice to a purported assignee was cured by actual notice and the order was referred to in this case as an order of the Commissioner, not an order of the Assistant Secretary); see also 6 6 Patrick H. Martin & Bruce M. Kramer, Williams & Meyers, Oil and Gas Law § 11.04[4] (MB 2008). 1707 Brown, 356 So. 2d at 972. 1708Kaiser Aluminum Exploration Co. v. Thompson, 525 So. 2d 1050 (La. 1988); see also 6 6 Patrick H. Martin & Bruce M. Kramer, Williams & Meyers, Oil and Gas Law § 11.04[4] (MB 2008). 1709 Placid v. N. Cent. Tex. Oil Co., 19 So. 2d 616, 622 (La. 1944). 1710 La. Admin. Code tit. 43, § 3292(A) (2011). 1711 Id.

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presentations.1712 Opponents who have complied with §§ 3915, 3917 and 3921 will then present

their entire geological, engineering or other bases for their opposition.1713 After all opponents

have completed their presentations, the applicant may present rebuttal geological, engineering or

other testimony, but is strictly limited to a refutation of the matters covered by the opponents.1714

Rebuttal evidence should not be used to prove matters that should have been proven on direct

examination.1715

In making their presentations, parties are permitted to call witnesses. Any witness shall

be subject to cross-examination by the Commissioner or any member of his staff, and by no

more than two representatives of a party.

1716 Cross-examination should be limited to questions

concerning the testimony and exhibits presented by the witness.1717 The witness should not be

required to make measurements or calculations or comparisons between his exhibits and those

presented by other witnesses. 1718 There should be no attempt to establish matters that are

peculiarly within the knowledge of the witness as such should been presented on direct

examination.1719

After the applicant and any opponents have made their presentations, any party shall be

afforded an opportunity to make a statement.

1720 If the statement involves technical data, the

party must be sworn in and cross-examined.1721

1712 Id. § 3292 (B).

The applicant, any opponent and any supporting

party may make opening or closing statements, but they should not include technical matters

1713 Id. § 3292 (C). 1714 Id. 1715 Id. 1716 La. Admin. Code tit. 43, § 3929(D) (2011). 1717 Id. § 3929 (1). 1718 Id. 1719 Id. § 3929 (2). 1720 Id. § 3929(E). 1721 Id.

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which have not been presented by sworn testimony.1722 The applicant has the right to make the

last closing statement.1723

If new pertinent information becomes available to any person after proceedings have

been initiated, such evidence shall immediately be made available to all interested owners and

represented parties by notice according to § 3909.

1724 Such evidence may be used by any person

at the hearing, but the Commissioner, in his discretion, may determine that additional time

should be affording for its consideration.1725 The Commissioner may also establish a time limit

beyond which new evidence may not be submitted in the present proceeding.1726 If such is the

case, application for a new hearing to consider the new evidence must be made as soon as

possible.1727

Unless circumstances indicate that undue hardship would otherwise result, every

applicant shall commence proceedings under these rules so as to permit the application to be

docketed, advertised, heard and properly considered for at least 15 days before the order is

issued.

1728 Failure to comply with the provisions or spirit of these rules of procedure will

prevent an application from being advertised or heard, or will prevent an opponent or supporting

party from presenting evidence at the hearing. 1729 However, an order issued by the

Commissioner shall not be invalid by the operation of this rule.1730

In addition to a hearing based upon the filing of an application, any interested person has

the right to submit a written request to have the Commissioner call a hearing for the purpose of

1722 La. Admin. Code tit. 43, § 3929 (F) (2011). 1723 Id. 1724 Id. § 3931(A). 1725 Id. 1726 Id. 1727 Id. 1728 La. Admin. Code tit. 43, § 3937(a) (2011). 1729 Id. § 3935(A). 1730 Id.

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taking action in respect to any matter within his jurisdiction.1731 Upon receiving such a request,

the Commissioner shall promptly call a hearing.1732 After the hearing, and with all convenient

speed, in any event within 30 days of the conclusion of the hearing, the Commissioner shall take

whatever action he deems appropriate.1733 In the event that the Commissioner fails to issue an

order within 30 days, he may be compelled to do so by mandamus at the suit of any interested

party.1734

[5] – Matters Covered.

[a] Spacing Rules.

Although Chapter 30 of the Louisiana Code does not specifically address matters such as

spacing requirements or unit size, the Commissioner has promulgated rules and regulations

pursuant to that Chapter which do address those matters. Such rules and regulations can be

found in Part XIX, Chapter 14 of Title 43 of the La. Admin. Code. Statewide Order 29-E

specifically addresses oil and gas well spacing.1735 Statewide Order 29-F deals with allowable

productions of natural gas,1736 whereas Statewide Order 151-A-2 addresses crude oil allowable

from both vertical and horizontal wells.1737 Statewide Order 45-I-A includes base gas/oil ratios

and amount of allowable production.1738 New pools are covered under Statewide Order 29-H-

1.1739 Termination of Units is discussed in Statewide Order 29-L-3.1740

§ 19.02 Types of Louisiana Pooling Statutes.

[1] – Mineral Distinctions.

1731 Id. § 30:6(F). 1732 Id. 1733 Id. 1734 La. Admin. Code tit. 43, § 30:6(F) (2011). 1735See La. Admin. Code tit. 43, §§ 1905, 1907, 1909 (2011). 1736 See id. §§ 2101, 2103 1737 See id. §§ 3703, 3705, 3707. 1738 See id. §§ 3501, 3503, 3505, 3507, 3509, 3511. 1739 See id. §§ 2501, 2503. 1740 See id. §§ 3101, 3103, 3105.

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Aside from spacing regulations and allowable production discussed below, there is little

if no distinction made between oil and gas. There are separate but similar rules and procedures

governing coal seam natural gas. However, despite the statutory specificity toward coalbed gas,

Louisiana has not formally addressed the issues surrounding coal seam gas ownership.

The Commissioner is authorized to establish a single unit to be served by one or more

wells for a coal seam natural gas producing area.1741 Upon the application of any interested

party, the Commissioner may enter an order requiring the unit operation of any coal seam natural

gas producing area when such unit operation will promote the development of coal seam natural

gas, will prevent waste, and will avoid the drilling of unnecessary wells.1742 In connection with

such an order, the Commissioner has the right to unitize, pool and consolidate all separately

owned tracts and other property ownerships within the unit.1743

An order creating a coal seam natural gas unit shall be issued only after notice and public

hearing.

1744 It shall also be based on findings that: (1) the order is reasonably necessary to

promote the development of coal seam natural gas in a producing area and for the prevention of

waste and the drilling of unnecessary wells; (2) the proposed unit is economically feasible; and

(3) sufficient evidence exists to reasonably establish the limits of the coal seam natural gas

producing areas.1745 The order shall provide for the initial allocation of unit production on a

surface acreage basis to each separately owned tract within the unit.1746

No order may be issued unless interested parties have been given a reasonable

opportunity to review and evaluate all data submitted by the applicant to the Commissioner to

1741 La. Rev. Stat. Ann. § 30:5.2(A) (2011). 1742 Id. § 30:5.2 (B). 1743 Id. § 30:5.2(C). 1744 Id. 1745 Id. § 30:5.2(1)–(3). 1746 Id. § 30:5.2(D).

327

establish the limits of the producing area.1747 The order must designate a unit operator and make

provision for the proportionate allocation of costs and expenses, as well as the cost of capital

investment, similar to the provisions for oil and gas wells contained in § 30:5(C)(3), discussed

hereinabove.1748

Upon application, and after notice and hearing and consideration of all new available

geological and engineering evidence, the Commissioner, to the extent required, may create,

revise, or dissolve any unit, or modify any provision of an order.

1749 Any such order shall

provide for the allocation of unit production on a just and equitable basis to each separately

owned tract within the unit.1750 Furthermore, the Commissioner shall prescribe, issue, amend

and rescind orders, rules and regulations as he finds necessary and appropriate to enforce this

Chapter.1751

[2] – Split by Depth.

Section 30:5, discussed hereinabove, impliedly relates to shallow oil and gas wells,

whereas § 30:5.1 makes separate provision for deep wells, which are at least 15,000 feet in

depth. 1752 For similar reasons of preventing waste, avoiding unnecessary drilling, and

encouraging production of deep oil and gas pools, the Commissioner is authorized to establish a

single unit to be served by one or more wells for a deep pool.1753 The Commissioner is further

authorized to adopt a development plan for a deep unit.1754

1747 La. Rev. Stat. Ann. § 30:5.2(E) (2011).

While this authorization is for the

1748 See id. § 30:5.2(F). 1749 Id. § 30:5.2(G). 1750 Id. 1751 Id. § 30:5.2(H). 1752 See id. § 30:5.1(C)(3). 1753 La. Rev. Stat. Ann. § 30:5.1(A) (2011). 1754 Id.

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creation of a single unit, there is no limitation on the Commissioner’s authority to approve the

drilling of alternate wells on drilling units established pursuant to § 30:9(B).1755

Upon the application of any interested party, the Commissioner may order the unit

operation of any deep pool when such operation will promote the development of deep pools,

prevent waste, and avoid drilling unnecessary of wells.

1756 In connection with such an order, the

Commissioner has the right to unitize, force pool and consolidate all separately owned tracts and

other property ownerships within the unit.1757

(1) the order is reasonably necessary to promote the development of a deep pool and for the prevention of waste and the drilling of unnecessary wells;

Any order creating a unit shall be issued only after

notice and public hearing, and shall be based on findings that:

(2) the proposed unit operation is economically feasible; (3) the geologic top of the deep pool was encountered in the initial well for the pool at a depth in excess of 15,000 feet true vertical depth; (4) sufficient evidence exists to reasonably establish the limits of the deep pool; and, (5) the plan of development for the unit is reasonable.1758

The plan should be revised only if approved by the Commissioner after notice and public

hearing.

1759

The order shall provide for the initial allocation of unit production on a surface acreage

basis to each separately owned tract within the unit.

1760 No order may be issued unless interested

parties have been given a reasonable opportunity to review and evaluate all data submitted by the

applicant to the Commissioner to establish the limits of the producing area.1761

1755 Id. § 30:5.1(I).

1756 Id. § 30:5.1(B). 1757 Id. 1758 Id. § 30:5.1(C)(1)–(5). 1759 La. Rev. Stat. Ann. § 30:5.1(C)(5) (2011). 1760 Id. § 30:5.1(D). 1761 Id. § 30:5.1(E).

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The order must designate a unit operator and make provision for the proportionate

allocation of costs and expenses of the unit operation, as well as the cost of capital investment,

similar to the provisions for oil and gas wells contained in § 30:5(C)(3), discussed

hereinabove.1762 The Louisiana statute and regulations do not specifically define what costs and

expenses must be considered. However, an example of a definition of “unit expense” as

contained within a Reservoir-wide Unit Agreement is “all cost, expense or indebtedness incurred

by Working Interest Owners or Unit Operator pursuant to this Agreement and the Unit Operating

Agreement for or on account of Unit Operations.”1763 “Unit Operations” are broadly defined to

include “all operations conducted pursuant to this Agreement and the Unit Operating

Agreement.”1764

Upon application, and after notice and hearing and consideration of all new available

geological and engineering evidence, the Commissioner, to the extent required, may create,

revise, or dissolve any unit, or modify any provision of an order.

1765 Any such order shall

provide for the allocation of unit production on a just and equitable basis to each separately

owned tract within the unit.1766 Furthermore, the Commissioner shall prescribe, issue, amend

and rescind orders, rules and regulations as he finds necessary and appropriate to enforce the

law.1767

[3] – Spacing Rules.

Spacing regulations in Louisiana make a distinctions based upon the depth of the well to

be drilled, as well as between whether the well to be drilled is for the production of oil or the

1762 See id. § 30:5.1(F). 1763 6 Patrick H. Martin & Bruce M. Kramer, Williams & Meyers, Oil and Gas Law § 29.17[5] (MB 2008). 1764 Id. 1765 La. Rev. Stat. Ann. § 30:5.1(G) (2011). 1766 Id. 1767 Id. § 30:5.1(H).

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production of gas. In the absence of spacing set by a unit order, well spacing is governed by

Statewide Order 29-E.1768

(1) No spacing shall be required for wells drilled in search of oil to depths less than 3,000 feet subsea, except as provided for in the last Paragraph of this order.

Louisiana Office of Conservation Statewide Order 29-E provides, in

relevant part:

1769

(2) Wells drilled in search of oil to depths below 3,000 feet subsea shall not be located closer than 330 feet from any property line nor closer than 900 feet from any other well completed in, drilling to, or for which a permit shall have been granted to drill to, the same pool.

(3) Wells drilled in search of gas shall not be located closer than 330 feet to any property line nor closer than 2,000 feet to any other well completed in, drilling to, or for which a permit shall have been granted to drill to, the same pool.1770

Note that there are several instances in which the Commissioner may grant an exception to the

above requirements, such as when the Commissioner believes that the wells drilled in a certain

area will be affected by piercement type salt domes, or where a pool has already been partially

developed with a greater density than prescribed by these orders.

1771 Furthermore, in addition to

such prescribed exceptions, the Commissioner may, without additional public hearing, grant an

exception in any case where it appears to be necessary to prevent waste, to prevent inequity or

loss of property rights.1772

1768 Brent G. Sonnier, Oil & Gas Development and Unitization Laws in Various States 27 (March 2010), available at http://www.hadoa.org/publications/2010.

However, such an exception may only be granted when the applicant

has furnished the proper data and evidence, defined in § 1907(5)(a)-(d) through the district

manager.

1769 The last paragraph of Statewide Order 29-E provides: “This order also is not intended to eliminate pools shallower than 3,000 feet from appropriate rules and regulations, including spacing regulations after notice and public hearing. After sufficient geological and engineering evidence is available with respect to these pools found at depths of 3,000 feet or less subsea then the operator or operators owning wells therein are required to petition the Commissioner of Conservation for a public hearing for the purpose of establishing rules and regulations and the creation of drilling units for each such pool.” La. Admin. Code tit. 43, § 1909(C) (2011). 1770 Id. § 1905(A)(1)–(3). 1771 See id. § 1907. 1772 Id. § 1907 (5).

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When forming units, the Commissioner sets field rules and spacing requirements as part

of the unit order. 1773 Usually, the Commissioner will incorporate Statewide Order 29-E in

defining spacing requirements within the unit order. 1774 However, the Commissioner has

approved special field spacing rules that require greater distances from unit boundaries. 1775

Additionally, special field spacing rules are normally issued for horizontal wells.1776

There has been virtually no litigation on the subjects of well spacing and exceptional well

locations for several reasons.

1777 First, the OC has been consistent in not granting exception well

locations until a well has been drilled at a regular location.1778 Second, the OC encourages

parties to resolve their difference outside of litigation. 1779 Third, “it is well understood in

Louisiana that the courts will defer to the Commissioner of Conservation on technical

matters.”1780

[4] – Size.

A “drilling unit” is defined as “the maximum area which may be efficiently and

economically drained by one well.” 1781 Generally, the Commissioner favors geological

boundaries in South Louisiana when there is enough data to reasonably delineate the reservoir

limits.1782 When such data is not available, drilling units are formed in geographical shapes.1783

1773 Brent G. Sonnier, Oil & Gas Development and Unitization Laws in Various States 27 (March 2010), available at http://www.hadoa.org/publications/2010.

Alternatively, in North Louisiana, due to the lower permeability and lateral sands, almost all

drilling units are formed on a geographic basis, “rectangular or square in shape with a standard

1774 Id. 1775 Id. 1776 Id. 1777 See 6 Patrick H. Martin & Bruce M. Kramer, Williams & Meyers, Oil and Gas Law § 5.02 (MB 2008). 1778 Id. 1779 Id. 1780 Id. 1781 La. Rev. Stat. Ann. § 30:9(B) (2011). 1782 Brent G. Sonnier, Oil & Gas Development and Unitization Laws in Various States 27 (March 2010), available at http://www.hadoa.org/publications/2010. 1783 Id.

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number of acres sufficient for one well to drain the unit.”1784 Louisiana does not have any

defined size or acreage limits, and the Commissioner exercises broad discretion in setting unit

sizes on a case-by-case basis. Typically, however, units are 640 acres, or about one square

mile,1785 though smaller units do exist.1786

In the case of a single-well reservoir, drilling units are determined by the geological

boundaries of the reservoir.

1787 If those boundaries cannot be determined, geographic units will

be formed, the size determined by estimating the drainage for the well, its depth, the reservoir

pressure and other characteristics of that particular location.1788 In the case of multiple drilling

and production units per reservoir, the Commissioner will consider various economic factors

which drive operators to determine how many wells should be drilled to adequately develop the

reservoir in determining the size and shape of the units.1789 Finally, reservoir-wide units are

always governed by the size and shape of the reservoir as defined by its geological boundaries;

these units are formed when there is enough development to ensure the productive field limits

and reservoir fluid contacts have been adequately determined.1790

[5] – Minimum Operator Control.

In general, a lessee is not in a fiduciary relationship with his lessor, but he is bound to act

in good faith and to develop and operate the property leased as a reasonably prudent operator for

1784 Id. 1785 See Office of Conservation, Department of Natural Resources State of Louisiana, http://dnr.louisiana.gov/index.cfm?md=pagebuilder&tmp=home&pid=46&ngid=4 (last visited May 27, 2011). 1786 See Ark. v. Sw. Gas Producing Co., 181 So. 2d 9, 65 (“[T]he Commissioner of Conservation had developed a program establishing spacing and drilling units in the area involved upon the basis of 320 acre tracts delineated as the North and South Halves of each Section of land.”); Alexander v. Holt, 116 So. 2d 532, 533 (“By virtue of the Commissioner’s Order 96, 40-acre spacing or drilling units were established for the field.”). 1787 Brent G. Sonnier, Oil & Gas Development and Unitization Laws in Various States 27 (March 2010), available at http://www.hadoa.org/publications/2010. 1788 Id. 1789 Id. 1790 Id.

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the benefit of himself and his lessor.1791 Parties are permitted to stipulate what shall constitute

reasonably prudent conduct on behalf of the operator.1792

[6] – Directional Drilling.

Statewide Order 45-I-A defines a “horizontal well” as a well with the wellbore drilled

laterally at an angle of at least 80 degrees to the vertical and with a horizontal well displacement

of at least 50 feet in the pool in which the well is completed for production, measured from the

initial point of penetration into such pool.1793 Similarly, Statewide Order 151-A-2 defines a

“horizontal oil well” as a well with the wellbore drilled laterally at an angle of at least 80 degrees

to the vertical and with a horizontal displacement of at least 50 feet in the pool in which the well

is completed for production, measured from the initial point of penetration into such pool.1794

This Order establishes allowable schedules for oil wells that are both horizontal, and other than

horizontal. For oil wells other than horizontal wells, the statewide allowable is a power of ten

less than the measured depth of the deepest perforation in the pool.1795

For horizontal oil wells, the amount of production allowable for each horizontal well is

its maximum efficient rate.

For example, a well

depth of 2,000 feet has an allowable of 200 BDP, a well depth of 12,000 feet has an allowable of

1,200 BDP, and so on. No mention is made of horizontal gas wells.

1796 “Maximum efficient rate” is defined to be the maximum

sustainable daily oil withdrawal rate from a reservoir which will permit economic development

and depletion without causing waste.1797

1791 La. Rev. Stat. Ann. § 30:122 (2011).

Allowables assigned to units in competitive reservoirs

shall be subject to adjustment if needed to prevent adverse drainage or to protect correlative

1792 Id. 1793 La. Admin. Code tit. 43, §3501(A) (2011). 1794 Id. § 3703(A). 1795 Id. § 3705(A)–(B). 1796 Id. § 3707(A). 1797 Id. § 3703(A).

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rights after public hearing based on ten days legal notice.1798 If a unit in a competitive reservoir

contains multiple unit wells, at least one of which is a horizontal well, the allowable will be

equal to the greater of the maximum efficient rate for the horizontal well or the applicable depth

bracket.1799

[7] – Options.

Any owner drilling, or intending to drill, a unit well on any drilling unit created by the

Commissioner under La. Rev. Stat. Ann. § 30:10 may, by certified mail, notify all other owners

in the unit of the drilling, or the intent to drill, and give each owner the opportunity to elect to

participate in the risk and expense of such well.1800 The owners required to receive notice are the

owners of record as of the date on which the notice is sent.1801 Such notice should include the

following: (1) an estimate of the cost of drilling, testing, completing and equipping the well; (2) a

proposed location of the well; (3) a proposed objective depth of the well; and (4) all logs, core

analysis, production data, and well test data not yet made public.1802

An election to participate must be exercised within 30 days after receipt of the initial

notice by mailing written notice by certified mail, return receipt requested, to the owner drilling

or intending to drill.

1803 Failure to give timely written notice of election will be deemed an

election not to participate.1804 If the proposed drilling is not commenced within 90 days after the

receipt of the initial notice, another initial notice must be sent in order for the provisions of this

Subsection to apply.1805

1798 Id. § 3707(B).

1799 La. Admin. Code tit. 43, §3501 (C) (2011). 1800 La. Rev. Stat. Ann. § 30:10(A)(2)(a)(i) (2011). 1801 Id. § 30:10(A)(2)(h). 1802 Id. § 30:10(A)(2)(a)(i)(aa)–(dd). 1803 Id. § 30:10(A)(2)(a)(ii) 1804 Id. 1805 Id. § 30:10(A)(2)(a)(iii).

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If a notified owner elects not to participate in the risk and expense of the unit well, or

should the owner elect to participate and then fail to pay his share of such expenses within 60

days of receipt of detailed invoices, the drilling owner shall be entitled to own and recover out of

production from such unit well the nonparticipating owner’s allocated share,1806 in addition to

any other available legal remedies to enforce collection of such expenses.1807 Furthermore, in

addition to recovering the nonparticipating owner’s share of actual reasonable expenditures

incurred in drilling, testing, completing, equipping or operating the unit well, a risk charge may

also be recovered by the operator; said risk charge shall be 200 percent of the tract’s allocated

share of the cost of drilling, testing and completing the well.1808 Any owner not notified will

bear only his tract’s allocated share of the actual reasonable expenditures incurred, including a

charge for supervision.1809 In order for [this Subsection] to have any valid effect outside of a

Commissioner’s compulsory drilling unit, however, some conservation measure must thereby be

served.1810

If a drilling unit is created by order of the Commissioner around a well already drilled or

drilling, and includes one or more tracts as to which the owner(s) thereof has not participated in

the risk and expenses of drilling, the above provisions regarding notice, election and

participation will be applicable as if a unit well were being proposed by the owner who drilled or

was drilling such well.

1811

1806 La. Rev. Stat. Ann. § 30:10(A)(2)(b)(i) (2011).

If a drilling unit is revised by order of the Commissioner so as to

1807 See Superior Oil Co. v. Humble Oil & Refining Co., 165 So. 2d 905 (La. Ct. App. 1964), cert. denied , 167 So. 2d 668 (La. 1964) (holding reimbursement from well proceeds was not the exclusive method for the operator to recover the drilling expenses from the co-owners). Similarly, La. Rev. Stat. Ann. § 30:10 is not the sole remedy for unleased land owners. See Lamson Petroleum Co. v. Hallwood Petroleum, Inc., 99-1444 (La. App. 3 Cir. 5/24/00); 770 So. 2d 786, cert. denied , 775 So. 2d 448 (La. Nov. 27, 2000). 1808 Id. 1809 La. Rev. Stat. Ann. § 30:10(A)(2)(b)(ii). 1810 See Exchange Oil & Gas Co. v. Foster, 237 So. 2d 904 (La. Ct. App. 1970), cert. denied, 37 So. 2d 709 (La. 1970). 1811 La. Rev. Stat. Ann. § 30:10(A)(2)(c) (2011).

336

include additional tracts, the above provisions shall be applicable to such added tracts and the

owners thereof as if a unit well were being proposed by the owner who had drilled on the

unit.1812 However, to determine that share of cost allocable to the subsequently included tracts,

the cost of drilling, testing, completing, equipping, and operating the unit well shall be reduced

in the same proportion as the recoverable reserves in the unitized pool have been recovered by

prior production, if any, in which said tracts did not participate.1813

If a drilling unit is revised to exclude a tract, to determine the share of cost allocable to

the subsequently excluded tracts, the cost of drilling, testing, completing, equipping and

operating shall be reduced in the same proportion as the recoverable reserves in the unitized pool

have been recovered by prior production.

1814

In the event of a dispute regarding the calculation of unit well costs or depreciated unit

well costs, the Commissioner shall determine the proper costs after notice to all interested

owners and public hearing.

1815 However, such a determination amounts merely to a finding of

fact, and is reviewable by the District Court of East Baton Rouge Parish.1816

Notwithstanding these provisions, a royalty and overriding royalty owner shall receive

that portion of production due to them under the terms of the contract creating the royalty.

1817

Royalty owners are entitled to payment on the basis of the amounts realized by their own lessees

from the sale of production allocated to the tracts in which they had an interest, rather than from

the sale of all gas and distillate from the unit.1818

1812 Id. § 30:10(A)(2)(d)(i).

1813 Id. 1814 Id. § 30:10(A)(2)(d)(ii). 1815 Id. § 30:10(A)(2)(f). 1816 See Superior Oil Co. v. Humble Oil & Refining Co., 226 So. 2d 565 (La. Ct. App. 1969), annulled by, 241 So. 2d 911 (La. 1970). 1817 La. Rev. Stat. Ann. §30:10(A)(2)(e) (2011). 1818 See Ark. La. Gas Co. v. Sw. Natural Gas Producing Co., 60 So. 2d 9 (La. 1952).

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§ 20.01 Analysis of Maine Regulatory Framework.

[1] – Governing Body and Structure.

Maine law provides little discussion of oil and gas production, none of which references

pooling or unitization. The following is an analysis of existing substantive law and procedures

related to oil and gas in Maine. The Maine Mining Statute (“the statute”), grants to the State

Bureau of Geology and Natural Areas (“the Bureau”) jurisdiction over all state-owned lands for

the purpose of mineral development and mining on that land. 1819 Under the statute, those

“minerals” concerned include all naturally occurring mineral deposits, including hydrocarbons

and peat, but excluding sand, gravel and water.”1820

The Bureau is “established within the Maine Department of Conservation and is

administered by the commissioner. The bureau consists of the Maine Geological Survey, and the

Natural Areas Program. The executive director of the bureau is the director of the survey.”

1821

Under the statute the director of the survey is granted power to issue exploration permits,

regulate the issue of mining leases, and promulgate rules governing the exploration and mining

of hydrocarbons in the state.1822

[2] – Scope of Authority.

The director of the survey and the director of the Bureau of Parks and Lands are

permitted to “promulgate rules governing exploration and mining of hydrocarbons on all lands

within the jurisdiction of the State, public and private, in order to prevent the waste of

hydrocarbons and to protect correlative rights and natural resources.”1823

1819 Me. Rev. Stat. Ann. tit. 12, § 549 (2010).

The directors are also

permitted to, “promulgate rules on all lands in the State to specify the size of the area of

1820 Id. § 549-A(6). 1821 Id. § 541-A. 1822 Id. § 549-B. 1823 Id. § 549-B(2).

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exploration, the amount charged for exploration permits and exploration claims, the duration of

those permits and claims and other matters related to the exploration and mining of hydrocarbons

on State lands.”1824

[3] – Regulatory Process.

The Bureau regulates the surveying of minerals on state lands through the use of

exploration permits.1825 The Bureau may grant any individual over 18 years of age the authority

to explore state lands.1826 “Exploration” is defined as, “an examination of an area for the purpose

of discovering the presence of minerals with techniques which include all of the manual,

mechanical, electronic or chemical methods of determining the presence, size and quality of a

mineral deposit.”1827

An individual is authorized to enter upon state lands for exploration upon “receipt of an

exploration permit from the director of the survey for the purpose of exploration.”

1828

“An exploration permit shall bear a number and be dated on the date of issue of the permit and shall expire at midnight on the next June 30th.

Exploration permits must meet the following guidelines:

1829 The holder of an exploration permit is entitled to a renewal of his permit upon expiration of the permit, upon making application to the director of the survey on or before June 30th, including payment of the prescribed fee, which renewal shall take effect on July 1st and bear the same number as the expired permit.”1830

The statute differentiates between standard exploration and exploration involving machinery or

explosives stating:

1824 Id. 1825 Id. § 549-B(1). 1826 Id. 1827 Id. § 549-A(3). 1828 Id. § 549-B(1). 1829 Id. 1830 Id.

339

“If machinery or explosives are to be used for exploration on state lands, the methods to be employed and the amount of explosives to be allowed shall first be approved by the director of the survey and the director of the agency having jurisdiction over the state land. The use of machinery or explosives shall be approved only where it will be done in harmony with the activities of the agency having jurisdiction over the state land and will not result in environmental harm.” 1831

Upon securing an exploration permit, any person or corporation is permitted to locate

their exploration claim, by establishing the boundary lines of the claim or claims. The

exploration claim cannot be smaller than 20 acres, unless the only available area on a parcel of

state land is smaller than 20 acres.

1832 The exploration claim is “construed to include all surface

found within the surface boundary lines, and all ledges throughout their entire vertical depth, but

shall not include any portion of the ledges beyond the end and sidelines of the exploration claim

or timber or growth on the exploration claim.”1833

The director of the agency with jurisdiction over the relevant state lands may issue

mining leases with the consent of the director of the survey.

1834 Once a corporation or individual

acquires a valid and recorded exploration permit they are permitted to apply for a mining lease

with the director of the agency.1835 The director of the agency will grant the petitioner a hearing

within 90 days of the application.1836

“… a report from a certified geologist or mining engineer containing all information of a geologic, engineering and operational nature which is required by the director of the survey or the director of the agency having jurisdiction over the state lands on which the mining lease is sought to properly evaluate the application and an accurate survey of the property boundaries

The application should include

1831 Id. § 549-B(1). 1832 Id. § 549-B(3). 1833 Id. 1834 Id. § 549-B(7)(D). 1835 Id. § 549-B(7)(A). 1836 Id. § 549-B(7)(B).

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certified by a registered surveyor and evidence of ability to finance the proposed mining operations”1837

Upon receipt of a completed application the director of the agency will hold a hearing to

determine whether the mining leases should or should not be granted.

1838

“The hearing shall be held within 90 days of receipt of the application and notice of the date, time and place shall be given to the applicant and public notice shall be made by causing publication of the notice twice in a newspaper of general circulation in the proposed locality or, if none, in the state paper. The date of first publication shall be at least 10 days and the last publication shall be at least 3 days before the date of the hearing… A decision…shall be issued within 120 days of the date of the hearing.”

The proceedings must

meet the following standards:

1839

Once in receipt of a lease, the lessee must provide a bond in an amount to be determined

by the director of the agency.

1840 The bond may be used to “reclaim the area mined and to protect

against damage that may be caused to any property located outside the leased area by the lessee's

mining operations.” In lieu of a bond, the lessee is permitted to provide other security to be

determined by the director of the agency.1841

The lessee shall also be required to pay royalties annually or more frequently if specified

in the lease. The director of the survey and the director of the agency will determine the

“amount of royalty payments, including minimum royalties and preproduction payments,

together with the other terms and conditions of the lease.”

1842 The royalty rate should be

reasonably related to the prevailing royalty rates.1843

1837 Id. § 549-B(7)(A). 1838 Id. § 549-B(7)(B). 1839 Id. § 549-B(7)(B)-(C). 1840 Id. § 549-E. 1841 Id. 1842 Id. § 549-B(9). 1843 Id.

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[d] Termination and Injunction.

The statute provides the director of the survey or the director of the agency the power to

terminate the rights of alleged violators of the statute. 1844

…the director of the survey or the director of the agency having jurisdiction over the state-owned lands shall notify the explorer, claimant or lessee, as the case may be, of the alleged violation and of the nature of the alleged violation, by sending the notice by registered or certified mail to him at his last known address. If the violation is not remedied within 30 days after the date of mailing the notice, the permit, claim or lease of the violator in existence at the time of the violation may be terminated by the State through the director of the survey or the director of the agency having jurisdiction over the state-owned lands by giving written notice of termination in the same manner specified for notice of violation.

If an explorer or lessee is alleged to

have violated the statute:

1845

If it appears that any person is violating or threatening to violate the statute the state is

permitted to seek injunction against the person in Superior Court.

1846 The Superior court has

jurisdiction to grant to the state without bond, an injunction as warranted by the facts, “including

temporary restraining orders and preliminary injunctions.”1847

[e] Common and Undivided Interests.

The director of the survey and the director of the Bureau of Parks and Lands may

together promulgate procedures for the filing of exploration claims and issuance of exploration

permits and leases addressing, “state-owned public lands, including public reserved lands, which

are comprised of state-owned common and undivided interests.”1848

1844 Id. § 549-B(14).

The regulations promulgated

by the directors may, “condition the issuance of an exploration permit or mining lease and the

filing of an exploration claim upon the consent of a majority of the private common and

1845 Id. 1846 Id. § 549-B(15). 1847 Id. 1848 Id. § 549-B(8).

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undivided ownership of the parcel of land to which the exploration permit, exploration claim or

mining lease relates.”1849

1849 Id.

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§ 21.01 Analysis of Maryland Regulatory Framework.

[1] – Name of the Governing Body.

In Maryland, oil and gas production is regulated by the Department of the Environment

(“Department”).1850

[2] – Scope of Authority.

The state’s statutory provisions governing oil and gas conservation (collectively, “Act”)

focus primarily on the protection of environmental resources and private property rights. Despite

the statutory acknowledgment that “the production and development of oil and gas resources is

important to the economic well-being of the state and the nation,”1851 the regulatory climate

emphasizes environmental quality and any allowed drilling requires “the use of the most

environmentally sound drilling and production methods.”1852 Further, the Act states that safe

utilization of oil and gas resources demands that circumstances may often require production to

be strictly prohibited without exception.1853

The Department may enact rules and regulations as necessary to enforce the Act.

1854 The

Department may act upon its own motion, or the petition of any interested person.1855 Absent an

emergency, the Department will not enter any rule, regulation or order without holding a public

hearing upon at least ten days’ notice. 1856 The hearing will be held at a time and place

determined by the Department, at which any interested person is entitled to be heard.1857

1850 Md. Code Ann., Envir. § 14-102(d) (LexisNexis 2010).

All

1851 Id. § 14-101. 1852 Id. (emphasis added). 1853 Id. 1854 Id. § 14-103. 1855 Id. § 14-114(d). 1856 Id. § 14-114(a). 1857 Id.

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rules, regulations, and orders must be written and maintained as public records, copies of which

are receivable in all state courts.1858

Any person adversely affected by any Department rule, regulation or order may file a

written application for a rehearing within 15 days after the effective date thereof.

1859 The

Department will act upon the application within 15 days of filing, and promptly hold a hearing if

it so chooses.1860 If the rehearing is not granted, “any person aggrieved by any action of the

Department may apply to the circuit court of the county in which the person resides[,] or the well

is located[,] for review of [the Department’s] decision.”1861 The Department may become a

party to such appeal.1862 The court will review the agency’s decision de novo and determine all

matters of law and fact without a jury.1863 Any party aggrieved by a final decision of the circuit

court may then appeal to the Maryland Court of Special Appeals.1864

[3] – Drilling and Operating Permits.

No person may drill a well without first obtaining a permit from the Department.1865

(1) The names and contact information of the applicant, operator, and resident agent;

An

application for a drilling and operating permit must include, among other information:

(2) An environmental assessment; (3) A copy of the oil and gas lease that gives the applicant the right to enter and drill at the proposed location, and if the mineral rights have been severed, a copy of the right of entry agreement with the surface owner; (4) If a pooled unit, copies of all leases in the unit which shall accompany the application showing the right to pool interests; and,

1858 Id. § 14-114(c). 1859 Id. § 14-116. 1860 Id. 1861 Id. § 14-117(a). 1862 Id. 1863 Id. 1864 Id. § 14-117(b). 1865 Id. § 14-104(a)-(b).

345

(5) Certification that the applicant has provided written notice of intent to drill to each landowner and leaseholder of property that borders the proposed drillable lease area.1866

Upon proper application, the Department will notify the public via weekly publication for two

consecutive weeks “in a newspaper of general circulation in the county where the proposed

permit activity would occur” that a complete application has been received.

1867 The notice must

provide an opportunity for any interested person to request a public hearing, which will be held

within 45 days the Department’s receipt of such request.1868 The Department will then publish

notice of the hearing in the same fashion, hold a public hearing, and decide whether to approve

or deny the permit within 30 days thereafter.1869

Maryland imposes a statutory ban against drilling for oil or gas in the coastal waters and

tributaries of the Chesapeake Bay.

1870 Further, the Department may deny a permit application if

the proposed operation poses a substantial threat to public safety, or a risk of environmental

damage to: the Chesapeake Bay Critical Area; any wetlands; endangered or threatened species or

habitats thereof; designated historic properties; or populated areas.1871 No permit will be granted

if the operation “will constitute a significant physical hazard to” any dwelling, school, church,

hospital, commercial or industrial building, public road, or other public or private property.1872

Further, a permit will be denied if proposed operations will adversely affect the use of any public

park, forest, or recreation area.1873

[4] – Spacing Rules.

1866 Md. Code Regs. 26.19.01.06(C) (2010). 1867 Id. 21.19.01.07(B). 1868 Id. 1869 Id. 21.19.01.07(C). 1870 Md. Code Ann., Envir. § 14-107 (LexisNexis 2010). 1871 Md. Code Regs. 26.19.01.09(H) (2010). Lands included in the Chesapeake Bay Critical Area are defined and regulated under Md. Code. Ann., Nat. Res. § 8-1807 (LexisNexis 2010). 1872 Md. Code Ann., Envir. § 14-107 (LexisNexis 2010). 1873 Id.

346

No oil or gas well may be drilled on any tract nearer than 1,000 feet from any boundary

of said tract without the written consent of all owners of oil and gas underlying adjacent

lands. 1874 For coalbed methane wells, the required distance is 500 feet from any property

boundary.1875

The Department is authorized to prescribe the distance required between any two wells

located on the same property.

1876 The Department may also allow drilling within general

setbacks if necessary due to site constraints, provided that the applicant has notified all

landowners and royalty owners within 2,000 feet of the proposed well location. 1877 If the

Department grants an exception, it will “notify every landowner, royalty owner, [and]

leaseholder within the required minimum of the proposed well, giving them a reasonable

opportunity to file objections to the issuance of the permit.”1878

After notice, the Department will hold a hearing to determine whether an exception is

necessary.

1879 Any landowner, royalty owner, or leaseholder within the relevant distance may

file for a rehearing or appeal to a court of competent jurisdiction, which stays any authorization

granted under the permit until a final determination is made.1880

The Department may not issue a drilling permit for a gas well nearer than 2,000 feet to

any existing gas well in the same reservoir.

1881 Similarly, the Department may not issue a permit

to drill an oil well closer than 1,320 feet to any existing oil well within the same reservoir.1882

1874 Id. § 14-112(a)(1).

For both oil and gas wells, the Department may allow an exception to these distance

1875 Id. § 14-112(a)(2). 1876 Id. 1877 Md. Code Regs. 26.19.01.09(D) (2010). 1878 Md. Code Ann., Envir. § 14-112(a)(2) (2010). 1879 Id. 1880 Id. § 14-112(c). 1881 Md. Code Regs. 26.19.01.09(E) (2010). 1882 Id. at 26.19.01.09(F).

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requirements if it is provided “with credible geologic evidence of reservoir separation to warrant

granting a spacing exception.” 1883 In addition, unless the Department receives evidence of

written consent from all relevant owners, no drilling permit will be issued for any proposed well

located within 1,000 feet of any school, church, drinking water supply, wellhead protection area,

or occupied dwelling.1884

[5] – Pooling and Unitization.

The Department “may not prorate or limit the output of any gas or oil well.”1885 Thus,

waste prevention and correlative rights protection are sought through drilling permit restrictions

and spacing requirements. Waste is not expressly defined or prohibited by the Act or

regulations; however, the Department “may not issue a drilling and operating permit when the

proposed drilling or well operation would result in physical and preventable loss of oil and gas

through inefficient or careless operating practices.” 1886 Such careless practices include

“operating or producing any oil or gas well in a manner that would result in a reduction of the

ultimate quantity of oil or gas to be recovered from a pool.”1887

The Act does not authorize the Department to order compulsory pooling or unitization,

but acknowledges the right to voluntarily pool or unitize production for mutual benefit. For

example, the Department defines “pooled unit” as “an area within which permittees of different

tracts in the area have voluntarily agreed to participate in a well drilled within the unit.”

1888

1883 Id. at 26.19.01.09(E)-(F).

Likewise, the Act notes that upon “completion of [an oil or gas] well on any leased lands

included under a unit operation agreement, royalties from the producing well shall be paid on all

1884 Id. at 26.19.01.09(G). 1885 Md. Code Ann., Envir. § 14-103 (2010). 1886 Md. Code Regs. 26.19.01.09(J) (2010). 1887 Id. 1888 Id. at 26.19.01.01(40).

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lands originally included with [said] agreement.”1889 Then, six months after initial production,

“the lands within the unit agreement not included as ‘in pool’ acreage[,] and on which no

royalties are payable[,] shall be released,” unless the owners of such lands have provided written

consent otherwise.1890

[6] – Directional Drilling

Notwithstanding these indirect references, Maryland law does not directly

address pooling or unitization or specify operator control requirements, restraints of trade, or

similar matters contemplated by other states.

Upon application, the Department may grant a permit for directional, or horizontal,

drilling operations.1891 The application must state (1) the reason(s) for proposed directional

drilling; (2) the depth at which deviation from the vertical is planned; and, (3) the horizontal

distance and direction of the proposed objective in reference to surface location.1892 Horizontal

operations also require extensive surveys to be taken prior to and during drilling and

production.1893

Absent a permit to authorize directional drilling, “a well may not vary more than 3

degrees from the vertical.”

1894 The Department may grant a permit for greater deviation “in

order to straighten the hole, sidetrack impenetrables, or to correct other mechanical difficulties,”

so long as correlative rights are not in dispute. 1895 Also, the Department may require the

deviation of a particular well to be less than three degrees if necessary to protect correlative

rights.1896

1889 Md. Code. Ann., Envir. § 14-113 (2010).

The Department may require a well to be re-drilled, or plugged and abandoned, “[i]f

1890 Id. 1891 Md. Code. Regs. 26.19.01.06(D) (2010). 1892 Id. 1893 Id. at 26.19.01.10(T)-(U). 1894 Id. at 26.19.01.11(A). 1895 Id. at 26.19.01.11(B). 1896 Id. at 26.19.01.11(C).

349

an angular deviation and directional survey verifies violations of the approved well location or

spacing requirements.”1897

1897 Id. at 26.19.01.11(E).

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§ 22.01 Analysis of Massachusetts Regulatory Framework.

[1] – Governing Body and Structure.

Massachusetts law provides little discussion of oil and gas production, none of which

references pooling or unitization. The state Oil and Gas Act (“Act”), which comprises only three

statutory sections,1898 grants authority to the Department of Environmental Protection’s Division

of Mineral Resources (“Department”) to oversee mineral extraction within the

commonwealth.1899 Under the Act, those “mineral resources” concerned include “oil, gas, fossil

fuels, sulphur, metal, ores, minerals, rock, soil, sand and gravel.”1900

(a) license orderly exploration for mineral resources;

The Division of Mineral

Resources is led by a Director who, with Department approval, may:

(b) lease exclusive rights for extraction of such mineral resources as have been discovered; (c) establish…fees for such licenses; and, (d) adopt, after a public hearing, such rules and regulations relating to such exploration and extraction of mineral resources…as will insure the proper utilization of such resources consistent with the harvesting and propagation of other valuable natural resources and the general safety, welfare and convenience of the commonwealth.1901

[2] – Procedure.

The Department may not grant any license or adopt any rule under the Act without

holding “a public hearing, notice of which, including a statement of intent, shall be sent, at least

thirty days prior to said public hearing, to each city and town bordering on the coastal waters of

the commonwealth.”1902

1898 Mass. Gen. Laws ch. 21, §§ 54-56 (2010).

1899 Id. § 54. 1900 Id. 1901 Id. 1902 Id.

351

Under the Act, “[n]o lease shall be issued for the extraction of any mineral resource until

such time as the Department has obtained reliable information as to the quantities, quality and

location of the resource available…and as to the extent of and risk of harm to marine and other

natural resources.”1903 The Department makes this information public prior to the hearing to

afford citizens the ability to comment at the proceeding.1904

Prior to commencing extraction operations, a licensee or lessee must post a bond

“guaranteeing faithful performance of the contract with the commonwealth, …observance of any

applicable rules, regulations and statutes, and timely payment as provided in said contract for any

materials removed.”

1905 The Act does not specify a required bond amount, but only that it shall

serve to indemnify the commonwealth against any and all matters “in relation to or in connection

with [the applicable] license or lease.”1906

[3] – Extraction Operations.

The Act prohibits a licensee or lessee from operating under its contract “in such a manner

as to interfere unreasonably with navigation or fishing, or with the conservation of natural

resources.”1907 The Department may revoke or suspend any active license or lease “upon any

breach…by the licensee of any of the terms and conditions of the [contract], or upon any attempt

to assign the rights of the licensee to any third party, …or any evidence of [the licensee’s]

insolvency or…inability to perform under the contract.”1908

[4] – Other Matters.

1903 Id. 1904 Id. 1905 Id. 1906 Id. 1907 Id. Note that ‘conservation’ herein is not mineral waste prevention per se. In Massachusetts, “natural resources” includes mineral resources, but also all “wild birds,…wild mammals and game; sea and fresh water fish…; forests and all uncultivated flora;… land, soil and soil resources, lakes, ponds, streams, coastal, [and] underground and surface waters.” Id. ch. 21, § 1. 1908 Id.

352

The remainder of the Act authorizes and requires the Department to cooperate with other

states and political entities regarding off-shore mineral extraction, 1909 and establishes civil

penalties for mineral exploration or extraction without a license or lease from the

Department.1910

1909 Id. § 55. 1910 Id. § 56.

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§ 23.01 Analysis of Michigan Framework.

[1] – Name of the Governing Body.

The Michigan Department of Environmental Quality (“Department”) has the power to

regulate unitization and pooling.1911 The Office of Geologic Survey, which is a division in the

Department, oversees the locating, drilling, operating, and plugging of oil and gas wells.1912

[2] – Membership on the Governing Body.

The Michigan Department of Environmental Quality (“Department”) was created by

executive order in 1995. The authority to govern unitization, plus many other actions, was then

transferred from the Michigan Department of Natural Resources to the Department by the

Governor.1913

[3] – Scope of Authority.

The Director of the Department (“Director”) is appointed by the Governor, and

may delegate his authority as necessary to adequately perform his duties.

Michigan’s stated policy to foster natural resource conservation frames the Department’s

goals to prevent waste and promote industry development and ultimate recovery of the maximum

production of these oil and gas.1914 Under direction of a designated supervisor, the Department

has jurisdiction over all persons and things necessary for effective enforcement of conservation

rules.1915 Waste is strictly prohibited under the Act1916

(1) underground waste, as those words are generally understood in the oil business;

and defined to include:

(2) the inefficient, excessive, or improper use or dissipation of the reservoir energy, including gas energy and water drive, of any pool;

1911 Mich. Comp. Laws § 324.99903 (2011). 1912 Department of Environmental Quality, http://www.michigan.gov/deq/0,1607,7-135-3306---,00.html (last visited June 9, 2011). 1913 Mich. Comp. Laws § 324.99903 (2011). 1914 Id. § 324.61502. 1915 Id. § 324.61505. 1916 Id.

354

(3) the locating, spacing, drilling, equipping, operating, or producing of a well or wells in a manner to reduce or tend to reduce the total quantity of oil or gas ultimately recoverable from any pool; (4) unreasonable damage to underground fresh or mineral waters, natural brines, or other mineral deposits from operations for the discovery, development, and production and handling of oil or gas; (5) surface waste, as those words are generally understood in the oil business; (6) the unnecessary or excessive surface loss or destruction without beneficial use, however caused, of gas, oil, or other product, but including the loss or destruction, without beneficial use, resulting from evaporation, seepage, leakage, or fire, especially a loss or destruction incident to or resulting from the manner of spacing, equipping, operating, or producing a well or wells, or incident to or resulting from inefficient storage or handling of oil; (7) the unnecessary damage to or destruction of the surface, soils, animal, fish, aquatic life, property, or other environmental values from or by oil and gas operations; (8) the unnecessary endangerment of public health, safety, or welfare from or by oil and gas operations; (9) the drilling of unnecessary wells; and, (10) market waste, which includes the production of oil or gas in any field or pool in excess of the market demand.1917

In order to prevent waste, the supervisor has broad authority and may promulgate and

enforce rules, issue orders of specific or general application, hold hearings, and “do whatever

may be necessary [to administer the Act]…whether or not indicated, specified, or enumerated

[therein].”

1918

[4] – Process for Pooling.

[a] Authority to Integrate Production.

To prevent the drilling of unnecessary wells, which is considered waste, the supervisor

may establish a drilling unit for each pool. A drilling unit is the maximum area that may be

efficiently and economically drained by one well.1919

1917 Id. § 324.61501(q).

All operations on any portion of the unit

1918 Id. § 324.61506. 1919 Id. § 324.61513(2).

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area shall be considered the conduct of those operations upon each separately owned tract. As

such, the portion of the unit production allocated to a single tract is deemed to have been actually

produced from a well drilled on that tract.1920

The voluntary pooling of interests is permitted under the Act. If an agreement cannot be

made among owners, the supervisor may require pooling in any case when and to the extent that

the smallness or shape of a separately owned tract or tracts would, under the enforcement of a

uniform spacing plan or proration or drilling unit, otherwise deprive owners of the opportunity to

recover or receive a just and equitable share of oil or gas in the pool.

1921

The owner of any tract that is smaller than the drilling unit established for the field will

not be deprived of the right to drill on and produce from that tract, if the drilling and production

can be done without waste. If these conditions are met, the allowable production from that tract,

as compared with the allowable production if that tract were a full unit, will be in the ratio of the

area of the tract to the area of a full unit. A smaller ratio may be required to maintain average

bottom hole pressures in the pool, to reduce the production of salt water, or to reduce an

excessive gas-oil ratio. The portion of the production allocated to the owner of each tract

included in a drilling unit formed by voluntary agreement or by a pooling order will be

considered as if it had been produced from the tract by a well drilled on the tract.

1922

Michigan law provides for the orderly development of state-owned resources through an

oil and gas leasing program. The pooling of state-owned lands is not required if the supervisor

determines the owner of each tract is afforded the opportunity to recover and receive his or her

just and equitable share of the hydrocarbon resources in the pool.

1923

1920 Id. § 324.61712.

1921 Id. § 324.61513(4). 1922 Id. 1923 Id. § 324.61513(a).

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[b] Application for Pooling Orders.

Any interested lessee may file a verified petition with the supervisor requesting an order

for the unit operation of a pool, pools, or parts of one or more pools. The petition needs to

contain:

(1) a description of the pool, pools, or parts of one or more pools to be so operated, termed the unit area; (2) the names of all persons owning or having an interest in oil and gas in the proposed unit area; (3) the names of all surface owners in the proposed unit area, as disclosed by the records in the office of the register of deeds for the county in which the unit area is situated, and their addresses, if known. If the address of any person is unknown, the petition shall so indicate; (4) a statement of the type of the operations contemplated; (5) a recommended plan of unitization applicable to the proposed unit area which the petitioner considers fair, reasonable, and equitable; (6) a verified statement indicating in detail what action the petitioner has taken to contact and obtain the approval of all persons of record owning or having an interest in oil and gas in the proposed unit area who have not approved the proposed plan of unitization. This verified statement need not be part of the petition and may be filed separately prior to the supplemental hearing if the question of whether the plan for unit operations has been approved and is to be considered at a supplemental hearing.1924

Once the petition is filed, the petitioner will give notice to all interested persons.

1925

(1) once each week for [two] weeks consecutively in a newspaper of general circulation in the county in which the unit area or any portion of the unit area is located if the date of last publication is at least [twenty] days prior to the date set for the hearing; and,

Notice of time, place, and issues involved must be published:

(2) at least [twenty] days prior to the date set for the hearing in a trade journal, periodical, or newsletter or paper, or commercially available scout report, in general circulation in exploratory and developmental branches of the oil and gas industry in this state.1926

1924 Id. § 324.61703.

1925 Id. § 324.61704 (1). 1926 Id. § 324.61726.

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The petitioner’s notice to interested persons needs to provide the procedure required to

file a protest and the name, address, and phone number of a representative of the petitioner who

is available to discuss the petition.1927 A person protesting the petition has fifteen days after the

completion of the publication of notice to provide the supervisor with written notice of protest

and the reason or reasons for the protest.1928 Other than this requirement, the Act does not set

forth any other procedure to protest the petition. The notice also needs to state that the

supervisor may issue an order approving the petition without a hearing if no protests are received

within the proscribed period of time. The notice to all mineral owners who have not approved

the plan of unitization shall include a copy of the petition.1929

Additionally, the notice needs to be provided to the last known address of the following

interested persons:

(1) the last owner of record of the oil and gas mineral interests underlying the lands or areas directly affected by the proposed action, and of the surface owners; (2) the last owner of record of the oil and gas mineral interests underlying the lands or areas immediately adjacent to, and contiguous to, the lands or areas directly affected by the proposed action, and of the surface owners; and (3) the last owner of record of oil and gas leases from one or more owners described above.1930

If the delivery of the notice is by certified mail, then receipts need to be filed with the

supervisor on or before the date of the hearing, or before the supervisor's order is issued if there

is no hearing. Undelivered notices that are returned to the petitioner will be filed with the

supervisor on or before the date of the hearing, or before the supervisor's order is issued if there

is no hearing. If notice is given by personal service, an affidavit of service will be filed with the

1927 Id. § 324.61704(2). 1928 Id. § 324.61704(1). 1929 Id. § 324.61704(2). 1930 Id. § 324.61727(1).

358

supervisor on or before the date of the hearing, or before the supervisor's order is issued if there

is no hearing. 1931

If no protests are filed, the supervisor may issue an order without holding a hearing.

1932

However, the supervisor may call a hearing to determine whether or not waste is taking place or

is reasonably imminent, and what action should be taken to prevent that waste. If the supervisor

determines it appropriate, the supervisor will hold a hearing and promptly make findings and

recommendations.1933

The supervisor may hold a public hearing upon his own initiative, and is required to do so

in response to filed complaint or protest from affected parties.

1934 If an adequate filing is made,

no affected rule or order will be effective until a public hearing is held.1935 During the hearing,

the supervisor will consider findings and recommendations in issuing rules or orders as

necessary to prevent waste.1936 Public hearings are to be held at such time, place, and manner

and upon notice of not less than twenty days, unless a different time period is provided by a

rule.1937 The supervisor will prescribe procedural rules in hearings or other proceedings he or

she hears.1938

[c] Unitization Orders.

The supervisor will issue an order providing for the unit operation of a unit area if he or

she finds that:

(1) the unitization requested is reasonably necessary to substantially increase the ultimate recovery of oil and gas from the unit area;

1931 Id. § 324.61727 (2)-(4). 1932 Id. § 324.61704(3). 1933 Id. § 324.61507. 1934 Id. §§ 324.61725, 324.61704(3). 1935 Id. § 324.61725. 1936 Id. § 324.61507. 1937 Id. § 324.61725. 1938 Id. § 324.61508(1).

359

(2) the type of operations contemplated by the plan are feasible, will prevent waste, and will protect correlative rights; and, (3) the estimated additional cost of conducting such operations will not exceed the value of the additional oil and gas so recovered.1939

The order needs to be upon terms and conditions that are fair, reasonable, and equitable.

The order for the unit operation plan will provide:

(1) a description of the unit area; (2) a statement in reasonable detail of the operations contemplated; (3) an allocation to the separately owned tracts in the unit area of all the oil and gas that is produced from the unit area and is saved, excepting that production that is used in the conduct of operations on the unit area or unavoidably lost. A separately owned tract's fair, reasonable, and equitable share of production shall be measured by the value of the tract for oil and gas purposes and its contributing value to the unit in relation to like values of all tracts in the unit; (4) the manner in which the unit and the further development and operation of the unit area shall or may be financed and the basis, terms, and conditions on which the cost and expense will be apportioned among and assessed against the tracts and interests made chargeable therewith, including a detailed accounting procedure governing all charges and credits incident to the operations; (5) provisions for carrying or otherwise financing a person who elects to be carried or otherwise financed, allowing a reasonable interest and service charge payable out of the person's share of production; (6) the procedure and basis upon which wells, equipment, and other properties of the several lessees within the unit area are to be taken over and used for unit operations, including the method of arriving at the compensation therefore; (7) provisions for supervision and conduct of the unit operations, in respect to which each person will have a vote with a value corresponding to the percentage of the costs of unit operations chargeable against the interest of the person; (8) the time when the plan of unitization becomes effective and when unit operations commence; (9) the time when, conditions under which, and method by which the unit shall be dissolved and its affairs wound up; and, (10) additional provisions that are found to be appropriate for carrying on the unit operations and for the protection and adjustment of correlative rights.1940

1939 Id. § 324.61704(4).

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An order of the supervisor providing for unit operations cannot be declared or become

effective until the supervisor makes a finding, either in the order providing for unit operations or

in a supplemental order, that the plan for unit operations has been approved in writing by the

appropriate persons. If a finding of approval by the appropriate person is not made at the time of

the order for unit operations, the supervisor, after notice and on the supervisor's motion or the

motion of any interested person, will hold supplemental hearings to determine if the plan for unit

operations has been approved. If the written approval is found, then the supervisor will make a

supplemental order declaring the plan effective and setting forth the date for the commencement

of unit operations. If the written approval is not found within a period of six months from the

date on which the order providing for unit operations is made, the order will be ineffective and

must be revoked by the supervisor unless, for good cause shown, the supervisor extends the time

for an additional period not to exceed one year.

Additionally, an order providing for unit operations may be amended by an order made

by the supervisor in the same manner and subject to the same conditions as an original order for

unit operations after approval by the appropriate persons. An amendment will not change the

percentage for the allocation of oil and gas as established for any separately owned tract without

the consent of all persons entitled to receive the allocation.1941

Operations conducted pursuant to an order of the supervisor for unit operations constitute

a fulfillment of all the express and implied obligations of each lease or contract covering lands in

the unit area to the extent that compliance with the obligations cannot be had because of the

order of the supervisor.

1942

[d] Royalty Distribution.

1940 Id. § 324.61705. 1941 Id. § 324.61708. 1942 Id. § 324.61713.

361

Neither the Act nor any other promulgated rules discuss the royalty interest rate.

[e] Modifications and Exceptions.

The supervisor, by order, may provide for the unit operation of a unit area that embraces

a unit area established by a previous order. The order in providing for the allocation of unit

production first will treat the unit area previously established as a single tract, and the portion of

the unit production so allocated thereto will then be allocated among the separately owned tracts

included in the previously established unit area in the same proportions as those specified in the

previous order.1943

An order may provide for a unit area less than the whole of a pool if the unit area is of

such size or shape as may be reasonably adaptable to unit operation and if the conduct of that

unit area will not have a substantially adverse effect upon other portions of the pool, whether

unitized or not.

1944

§ 23.02 Types of Michigan Pooling Statutes.

[1] – Mineral Distinctions.

For general application to waste prevention and the creation of drilling units, the Act

defines oil and gas as follows:

(1) “Gas” means a mixture of hydrocarbons and varying quantities of non-hydrocarbons in a gaseous state which may or may not be associated with oil, and includes those liquids resulting from condensation. (2) “Oil” means natural crude oil or petroleum and other hydrocarbons, regardless of gravity, that are produced at the well in liquid form by ordinary production methods and that are not the result of condensation of gas after it leaves the underground reservoir.1945

The Act also provides a collective definition particular to unitization concerns:

1943 Id. § 324.61710. 1944 Id. § 324.61711. 1945 Id. § 324.61501.

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(1) “Oil and gas” means oil and gas as such in combination one with the other and also means oil, gas, casinghead gas, casinghead gasoline, gas distillate, or other hydrocarbons, or any combination or combinations of these substances, which may be found in or produced from a common source of supply of oil, gas, oil and gas, or gas distillate.1946

[2] – Split by Depth.

The Act does not differentiate its default provisions based on well depth.

[3] – Spacing Rules.

Each well permitted to be drilled upon any drilling unit shall be located in the

approximate center of the drilling unit, or at such other location on the drilling unit as may be

necessary to conform to a uniform well spacing pattern as adopted and promulgated by the

supervisor.1947

(1) the unit is partly outside the pool or that, for some other reason, a well at the location would be unproductive;

The well may be located so it does not conform with the uniform well spacing

pattern if the supervisor finds that:

(2) the owner or owners of a tract or tracts covering that part of the drilling unit or tract on which the well would be located if it conformed to the uniform well spacing pattern refuses to permit drilling at the regular location; (3) topographical or other conditions are such as to make drilling at the regular location unduly burdensome or imminently threatening to water or other natural resources, to property, or to life.1948

Also, the drilling and permitting of an oil and gas well is prohibited if located within 450 feet of

a residence lying in a city or township with a population of 70,000 or more. However, a waiver

may be granted by the supervisor if:

(1) the clerk of the city, village, or township in which the well is located has been notified of the application for the well permit; (2) the owner or owners of all residential buildings located within 450 feet of the proposed well give written consent;

1946 Id. § 324.61701. 1947 Id. § 324.61513(2). 1948 Id. § 324.61513(5).

363

(3) the supervisor determines that there is no reasonable alternate location for the well that will allow the oil and gas rights holder to develop the oil and gas; and, (4) the well will not cause waste.1949

[4] – Size.

The Act does not specify the size of a drilling unit.

[5] – Minimum Operator Control.

For an order of the supervisor providing for unit operations to be declared or to become

effective, the plan for unit operations needs to have been approved in writing by:

(1) those persons who under the supervisor's order will be required to pay at least 75% of the costs of unit operation, and also by those persons who under the supervisor's order will be entitled to at least 75% of the production from the unit area or the proceeds of that production that will be credited to interests that are free of cost, including, but not limited to, royalties, overriding royalties, and production payments; (2) those persons who under the supervisor's order will be entitled to at least 75% of all production from the unit area or the proceeds of that production, provided that among those persons there must be persons who under the supervisor's order will be entitled to at least 50% of the production from the unit area or the proceeds of that production that will be credited to interests that are free of cost, including, but not limited to, royalties, overriding royalties, and production payments; or (3) those persons who under the supervisor's order will be entitled to at least 90% of all production from the unit area or the proceeds of that production.1950

Additionally, when an order providing for unit operations has been amended, and the

amendment affects only the rights and interests of those persons responsible for the payment of

the costs of unit operations, only 75 percent of these persons are required to effectuate the

amendment. If an amendment in whole or in part changes the percentage of allocation of cost,

then the consent of all these persons is required. If the consent is granted by all person entitled to

1949 Id. § 324.61506(b). 1950 Id. § 324.61706.

364

receive the allocation of oil and gas as established for any separately owned tract, then the

amendment may change the percentage of allocation.1951

1951 Id. § 324.61708.

365

§ 24.01 Analysis of Minnesota Regulatory Framework.

[1] – Governance.

In Minnesota, the Commissioner of the Department of Natural Resources (“Department”)

is given the authority to adopt rules relating to spacing, pooling, and unitization of oil and

gas.1952 The Commissioner is the head of the Department1953 and is appointed by the Appointing

Authority with consent of the Senate.1954 The Appointing Authority is defined as “a person or

group of persons empowered by the Constitution, statute, or executive order to employ persons

in or to make appointments to positions in the civil service,”1955 here, the governor.1956 The

Commissioner’s term expires along with the term of governor, whether the governor’s term ends

due to natural expiration or is vacated for other reasons.1957 No former commissioner or deputy

commissioner may participate in a proceeding of the Department representing private interests

within one year of leaving the position.1958

If a vacancy occurs in the Commissioner’s office or the incumbent is not designated at

the term’s end, the Deputy Commissioner fills in until further notice. If more than one deputy

commissioner exists, the governor determines which takes charge; if no deputy commissioner

exists, the governor will appoint a temporary commissioner.

1959 The governor also has the

power to appoint someone other than the Deputy Commissioner as the temporary

commissioner.1960

1952 MINN. STAT. § 93.515 (2010).

1953 Id. § 15.06(1). 1954 Id. § 15.06(2). 1955 Id. § 43A.02(5); see also id. § 179A.22(1). 1956 Id. § 84.01(1). 1957 Id. § 15.06(2). 1958 Id. § 15.06(9). 1959 Id. § 15.06(3). 1960 Id. § 15.06(4).

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The Commissioner has the authority to appoint all subordinate employees and prescribe

their duties.1961 He or she may also delegate to any subordinate employee the exercise of the

Commissioner’s statutory powers or duties, so long as each such delegation is made by written

order and filed with the Secretary of State and so long as only a deputy commissioner may have

all the same powers or duties of the Commissioner.1962 Unless specifically authorized by statute,

the Department of Natural Resources may not have more than one deputy commissioner.1963

Finally, the Commissioner may organize the Department with approval of the Commissioner of

Administration and prescribe the Department’s internal management to the extent procedures do

not affect public rights or procedure.1964

Minnesota dedicates little legislative material to the regulation of oil and gas production.

The statutes contain one section to that end which grants authority to the Natural Resources

Commissioner to adopt rules related to spacing, pooling, and unitization.

1965

The Minnesota Exploratory Borings Act (“Act”),

However, no rules

have been promulgated under this authority.

1966 which governs the development and

protection of groundwater1967 and is under the jurisdiction of the Department of Health,1968

regulates exploratory borings.1969

1961 Id. § 15.06(6)(2).

Although it defines neither oil nor gas, the Act states that

exploratory boring means “a surface drilling done to explore or prospect for oil, natural gas, [a

1962 Id. § 15.06(6)(1). 1963 Id. § 15.06(8). 1964 Id. § 15.06(6)(3)–(4). 1965 Id. § 93.515. 1966 Id. §§ 103I.001–.605. 1967 Id. § 103I.001. 1968 Id. § 103I.101(1). 1969 Id. §§ 103I.601–.605.

367

host of other minerals], and a drilling or boring for petroleum.1970

[2] – Procedure.

The Department of Health is

organized and populated in the same manner as the Department of Natural Resources.

The Act provides that no person may make an exploratory boring without an explorer’s

license.1971 Requirements for exploratory boring include designating a responsible individual to

supervise and oversee the process of exploration; 1972 registering with the Commissioner of

Natural Resources and providing a copy of the registration to the Commissioner of Health;1973

providing a bond, security, or assurance to the Commissioner of Natural Resources, if

requested; 1974 and complying with several reporting requirements. 1975 The registration to be

provided to the Commissioners must include the following: “(1) the identity of the firm,

association, or company engaged in exploratory boring; and (2) the identification of an agent,

including the agent’s business address.”1976

Lastly, the Act requires the explorer to submit data obtained in the process of exploratory

boring to the Commissioner of Natural Resources.

1977 Data is defined as “samples and factual

noninterpreted data obtained from exploratory borings and samples including analytical

results.”1978

1970 Id. § 103I.005(9).

1971 Id. § 103I.601(2)(a). 1972 Id. § 103I.601(2)(d). 1973 Id. § 103I.601(3)(a). 1974 Id. § 103I.601(3)(b). 1975 Id. § 103I.601(3)–(9). 1976 Id. § 103I.601(3)(a). 1977 Id. § 103I.605(1). 1978 Id. § 103I.601(1)(b).

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§ 25.01 Analysis of Mississippi Regulatory Framework.

[1] – Name of the Governing Body.

The State Oil and Gas Board (“Board”) is the regulatory body vested with the authority

and responsibility of carrying out all laws relating to oil and gas conservation in Mississippi.1979

[2] – Membership of the Governing Body.

The State Oil and Gas Board consists of five members, who are appointed using two

different methods. Two members are appointed from the state at large for four-year terms: one is

appointed by the Lieutenant Governor, and one is appointed by the Attorney General of the State

of Mississippi. Three members, each with staggered six-year terms, are appointed by the

Governor, one from each Supreme Court district: one from the First Supreme Court District for

an initial term of two years; one from the Second Supreme Court District with an initial term of

four years; and one from the Third Supreme Court District with an initial term of six years.

After the expiration of the initial terms, these three positions each have six-year terms.1980 All

members must be confirmed by the Senate. In the event of a vacancy, the respective appointing

officer will fill the unexpired term by appointment. All members are eligible for reappointment

at the determination of the appointing officer.1981

To be eligible to serve on the Board, a member must be a United States citizen, as well as

a Mississippi resident, must be a qualified elector in Mississippi, and must be a person of

integrity and sound, non-partisan judgment.

1982

1979 Miss. Code Ann. § 53-1-17 (2011); see also id. § 53-1-5.

Additionally, no person who is in the business of

buying or selling mineral leases or minerals, drilling, producing, transporting, refining, or

1980 Id. § 53-1-5(1). 1981 Id. 1982 Id.

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distributing oil or gas in any state will be eligible to serve on the Board as a member or

employee.1983

The Board must meet and have hearings at a time and place decided on by the Board. A

majority constitutes a quorum, while three affirmative votes are required to adopt or promulgate

a rule or order. Members who are absent from three consecutive regular meetings, unless such

absence is due to that member’s illness, will be removed by the Governor.

1984

The Board will appoint a State Oil and Gas Supervisor (“Supervisor”), who must be “a

competent and qualified administrator” and who will receive a yearly salary to be fixed by law.

The Supervisor is charged with enforcement and administration duties and is the ex officio

secretary of the Board and give surety conditioned on his truthful accounting of all funds that

pass through his hands.

1985 Finally, the Supervisor is authorized to hire geologists, petroleum

engineers, field inspectors, and other essential personnel to carry out his responsibilities, each of

whom must be a resident and qualified elector in Mississippi.1986

[3] – Scope of Authority.

The Mississippi State Oil and Gas Board Statute (“Statute”) gives the Board jurisdiction

and authority over “all persons and property necessary to enforce effectively the provisions of

this chapter and all other laws relating to the conservation of oil and gas.”1987

1983 Id. § 53-1-13.

The Statute states

that its policy includes to foster the development, production, and utilization of oil and gas; to

protect the public and private interests against waste in the production of oil and gas by

prohibiting waste as defined herein; to protect co-equal and correlative rights of owners in a

common reservoir such that each may obtain his just and equitable share of production

1984 Id. § 53-1-5(2). 1985 Id. § 53-1-7. 1986 Id. § 53-1-15. 1987 Id. § 53-1-17(1).

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therefrom; and to obtain the full development of all producing pools or those which may later be

brought into production.1988

Further, it is not the State’s intent to prorate oil and gas production on the basis of market

demand, but rather to allow each pool in the State to be produced to its maximum efficient rate

of production, subject to the prohibition of waste and subject to protection of correlative

rights.

1989

(1) The inefficient storing of oil; and the locating, spacing, drilling, equipping, operating or producing of any oil or gas well or wells in a manner causing or tending to cause unnecessary or excessive surface loss or destruction of oil or gas.

Waste is explicitly made unlawful in section 53-3-3 of the Statute. The Statute

defines “waste” as follows:

(2) Abuse of the correlative rights and opportunities of each owner of oil or gas in a pool due to non-uniform, disproportionate, or unratable withdrawals causing undue drainage between tracts of land or resulting in one or more owners in such pool producing more than his just and equitable share of the production from such pool. (3) Producing oil or gas in such manner as to cause unnecessary channeling of water or gas or both or coning of water. (4) The operation of any oil well or wells with an inefficient gas-oil ratio. (5) The drowning with water of any stratum or part thereof capable of producing oil or gas. (6) The creation of unnecessary fire hazards. (7) The escape into the open air, from a well producing both oil and gas, of gas in excess of the amount which is necessary in the efficient drilling or operation of the well. (8) Permitting gas produced from a gas well to escape into open air. (9) The use of gas from gas wells, except sour gas, for the manufacture of carbon black, except and unless the board shall find that there are no adequate pipeline connections to otherwise market the gas.1990

1988 Id. § 53-1-1.

1989 Id. 1990 Id. § 53-1-3(l).

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The Board has the authority and duty to discover whether or not waste exists or is

imminent. In exercising that authority, the Board may do the following: collect data; make

investigations and inspections; examine properties, leases, papers, books and records, including

drilling records and logs; examine, check, test and gauge oil and gas wells, tanks, refineries, and

modes of transportation; hold hearings; require recordkeeping and report-making; and do all

other things reasonably necessary to enforce sections 53-1-1 through 53-1-47 and 53-3-1 through

53-3-21 of the Statute.1991

The Board also has the authority and duty to make reasonable rules and orders for the

following purposes, among others:

(c) To require adequate proof of financial responsibility in a form acceptable to the board and conditioned for the performance of the duties [of drilling in an environmentally responsible manner] as outlined in paragraphs (a) and (b) of this subsection . . . . (k) To regulate the spacing of wells and to establish drilling units. (l) To allocate and apportion the production of oil or gas, or both, from any pool or field for the prevention of waste as herein defined, and to allocate such production among or between tracts of land under separate ownership in such pool on a fair and equitable basis to the end that each such tract will be permitted to produce not more than its just and equitable share from the pool. (m) To prevent, so far as is practicable, reasonably avoidable drainage from each developed unit [that] is not equalized by counter-drainage.1992

The Board has the authority to regulate the drilling and location of wells in pools and to

regulate the production from those wells so “to prevent reasonably avoidable net drainage from

each developed unit (that is, drainage which is not equalized by counterdrainage)” so that all

1991 Id. § 53-1-17(2). 1992 Id. § 53-1-17(3).

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owners might be able to receive their fair and equitable share of production from the pool.1993 In

carrying out all of its duties to prevent waste and protect correlative rights, the Board should

establish a drilling unit or units for each pool.1994 The Board has the authority to require owners

of separate tracts and/or separate interests within those drilling units to integrate or pool their

interests for development.1995 Additionally, the Board, upon application of an interested person,

may hold a hearing to determine whether an entire field, or an entire pool or pools, or any portion

or portions or combinations thereof, within a field, should be operated as a unit for production of

oil or gas, or both, to increase the ultimate recovery of oil and gas and to prevent waste.1996

[4] – Process for Pooling.

Integration of interests and development of lands as a drilling unit may be appropriate

when an established drilling unit covers two or more separately owned tracts or embraces

separately owned interests. The persons owning such tracts or interests may agree to integrate

their interests. However, in the event such owners have not so agreed, the Board may require

integration in order to prevent waste or to avoid drilling unnecessary wells. Such an order must

be made after notice and hearing and should be upon terms that are just and reasonable and that

will give owners the ability to recover their just and equitable share of oil and gas in the pool

without unnecessary cost.1997 The Board, upon the application of an interested person, may also

determine whether or not an entire field, or a pool or pools, or a portion or combination thereof,

should be operated as a unit in the interest of preventing waste and of preventing the drilling of

unnecessary wells.1998

1993 Id. § 53-3-5(a).

1994 Id. § 53-3-5(b). 1995 Id. § 53-3-7(1). 1996 Id. § 53-3-101. 1997 Id. § 53-3-7(1)(a). 1998 Id. § 53-3-101.

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In the absence of an emergency, the Board may not make any rules or orders without first

holding a public hearing upon a minimum of 10 days’ notice.1999 Any interested person, which

term is to be “interpreted broadly and liberally and shall include all mineral and royalty

owners,”2000 may request that the Board hold a hearing, and the Board must act promptly after it

receives such request.2001 According to the Rules of Order and Procedure for Hearings before

Board (“Hearing Rules”), the Board must call the hearing within 30 days after proper notice of

the hearing.2002 A petition for hearings should be in written letter form and should state the

generalities of the matter upon which action is requested, the interest of the applicant, the relief

sought, and the reason for said relief.2003

Notice should be given by publication unless otherwise required by law. Notice by

publication must be given at least 20 days prior to the hearing date in a Jackson, Mississippi

general circulation daily publication, as well as in a general circulation paper in the county or

counties in which the lands involved are located.

2004 Notice of the hearing by personal service is

required for a petition seeking any of the following action: (1) Location Exception and

Intentional Deviation; (2) Amendment to Established Drilling or Developed Units; (3)

Establishment or Amendment of Allowables; (4) Petitions for Forced Pooling; (5) Approval of

Voluntary and Compulsory Unitization; (6) Creation or Amendment Special Field Rules; (7)

Determination of Reasonable Well Costs; (8) Operation of Multiple Wells on a Unit; (9)

Authorization of Down Hole Commingling; (10) Operation of Injection Wells; and (11)

Exception from Unitization Orders.2005

1999 Id. § 53-1-21.

2000 Id. § 53-3-119. 2001 Id. § 53-1-29. 2002 60-040-001 Miss Code R. § 1 (LexisNexis 2011). 2003 Id. § 2. 2004 Id. § 4(A). 2005 Id. § 4(B).

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The requirements for personal notice are that such notice be given in writing in the same

form and with the same content as the published notice.2006 It should be given 25 days prior to

the hearing date unless more time is required for another reason. 2007 Any type of notice

sufficient for ordinary business purposes, such as first class mail,2008 may be used. A copy of the

petition should be attached to the notice.2009 The petitioner should make a diligent effort in

determining the proper name and address of each person to whom personal notice is due. If

reasonable diligence does not yield that information, however, publication will be a sufficient

means of notice.2010 Even if the petitioner does not give proper notice, if the Board finds that the

person in question had actual notice at least 10 days prior to the hearing date, the Board may

hold the hearing nevertheless.2011 Also, notice may be waived in writing as to an individual’s

interest only.2012

The Board must base its decision whether or not to establish a drilling unit or units for

each pool on whether doing so will prevent waste, protect and enforce correlative rights of

owners, and avoid the changing and accumulation of risks arising from the drilling of excessive

wells or the reduced recovery that might result in too few wells being drilled.

2013 Also, the

Board may require integration of interests within a drilling unit when doing so would prevent

waste and require fewer wells to be drilled.2014

(a) Unit operation of the field or of any pool or pools, or of any portion or portions or combinations thereof within the field, is

Finally, the Board may issue an order requesting

unit operations based on the following findings:

2006 Id. § 4(C)(1). 2007 Id. § 4(C)(2). 2008 Id. § 4(C)(6). 2009 Id. § 4(C)(5). 2010 Id. § 4(C)(3). 2011 Id. § 4(C)(4). 2012 Id. § 4(C)(8) 2013 Miss. Code Ann. § 53-3-5(b) (2011). 2014 Id. § 53-3-7(1)(a).

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reasonably necessary in order to effectively carry on secondary recovery, pressure maintenance, repressuring operations, cycling operations, water flooding operations, or any combination thereof, or any other form of joint effort calculated to substantially increase the ultimate recovery of oil or gas or both, from the unit so formed, or to prevent waste as defined [herein]; (b) One or more method of unitized operation as applied to such common source of supply or portion thereof is feasible and will prevent waste or will with reasonable probability result in the recovery of substantially more oil or gas, or both, from the unit so formed than would otherwise be recovered; (c) The plan of unitization and the agreements effectuating same are fair and reasonable under all of the circumstances and protect the rights of all interested parties; (d) The correlative rights of interested parties will be protected; (e) The estimated additional cost incident to conducting such operation will not exceed the value of the estimated additional recovery of oil and gas and such cost of oil operation shall not be borne by the royalty owners.2015

Unit operators must have drilled enough wells to a sufficient depth and at such locations “as may

be necessary for the board to approve the boundaries of the unit and determine that the field, pool

or pools have been reasonably developed according to a spacing pattern approved by the

board.”

2016 Field unitization may not be approved until each of the field’s drilling units have

been drilled, unless the Board waives this requirement after finding that it is not economically

feasible for a certain drilling unit to be drilled.2017

The prevailing party must draft a proposed order for the Board to review and approve,

which order must specify the findings of fact and conclusions of law.

2018 The signed order must

then be filed with the Board not more than 30 days after the final decision.2019

2015 Id. § 53-3-103.

Unitization orders

should be fair and reasonable under all circumstances and must include the following:

2016 Id. 2017 Id. 2018 60-040-001 Miss. Code R. § 10(A) (LexisNexis 2011). 2019 Id. § 10(D).

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(a) A description of the unit area. (b) A statement of the nature of the operations contemplated. (c) A formula for allocating production from the unit, which allocation should provide each person with his or her just and equitable share of unit production, being the proportionate part of the unit production value contributed by his or her tract as said tract bears to the total of all like values of all tracts in the unit. (d) A provision for the adjustment among the owners (not including royalty owners) of their respective investment in drilling materials and services for unit operations. The owners of the unit area will determine the amount to be charged; if those owners cannot agree to the amount, the Board must determine appropriate charges after notice and hearing. The cost of dry holes drilled within the unit area before the effective date of an order of the Board is not chargeable as investment unless used in the unit operation, in which event its value to the unit shall be charged as investment. (e) A provision that the costs and expenses of unit operation, including investment past and prospective, will be borne by the owner or owners (not entitled to share in production free of operating costs and who in the absence of unit operation would be responsible for the expenses of developing and operating) of each tract in the same proportion that such tract shares in unit production. The unit operator has a lien thereon to secure payment of such share. If any owner fails to pay his part when due, then all of that owner’s interest in the unit production and equipment may be foreclosed in the same manner and under the same procedures provided for the foreclosure of mortgages in chancery court. A transfer or conversion of any owner’s interest or any portion thereof, however accomplished after the effective date of the order creating the unit, shall not relieve the transferred interest of said operator’s lien on said interest for the cost and expense of unit operations, past or prospective. (f) The designation of, or a provision for the selection of a successor to the unit operator, the conduct of whom is governed by the terms of the unitization agreement. (g) The time the unit operation shall become effective and the manner in which, and the circumstances under which, the unit operation shall terminate. (h) A requirement that all oil and/or gas contained in a unit area shall be produced and sold as rapidly as possible without decreasing the ultimate recovery of such oil and/or gas causing damage to the reservoir.2020

2020 Miss. Code Ann. § 53-3-105 (2011).

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Orders requiring unitization do not become effective until the plan and agreement have

been signed or ratified in writing by the owners or lessees of at least 75 percent in interest in

proportion to the surface acreage content of the unit area and by at least 75 percent (exclusive of

royalty interests owned by lessees or by subsidiaries or successors in title of any lessee) in

interest of the royalty owners on the basis of the surface acreage content. Also, the Board must

have found that the requisite approval has been given in the initial order or in a supplemental

order. If the required percentage of interest holders does not give such approval within 12 month

of the order, it will be automatically revoked.2021 The Board may extend or add new portions of

pools to an existing unit area to be approved by the same percentage of interest holders of the

area to be added.2022

Board orders may be appealed to the chancery court of the county where the land

involved is located. Appeals must be made within 30 days from the date the order is filed with

the Board.

2023

[5] – Matters Covered.

[a] Number of Wells.

As noted above, a petition may be filed to obtain permission to drill multiple wells within

a single unit. Unless such an exception is granted, not more than one well may be producing

from or drilled to the same pool in a unit.2024

[b] Depth and Spacing Rules.

The Statewide Rules and Regulations (“Statewide Rules”) provide detailed spacing and

depth requirements. Spacing rules differ based upon which pool is drained, as well as based

2021 Id. § 53-3-107. 2022 Id. § 53-3-109. 2023 Id. § 53-3-119. 2024 60-040-002 Miss. Code R. §§ 7–9 (LexisNexis 2011).

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upon whether the well is a gas well or an oil well. These rules are covered in greater detail in

Section IV, infra.

[c] Allocation of Production and Costs.

Orders requiring unit operation must provide a formula for allocating the production

among the separately owned tracts. Such formula must be reasonably suited to allow each owner

to receive the benefit of the equitable and reasonable share of production from his tract, which is

“that proportionate part of unit production that the contributing value of such tract for oil and gas

purposes in the unit area and its contributing value to the unit bears to the total of all like values

of all tracts in the unit.”2025

Orders will also provide that the costs and expenses of unit operations must be borne by

the owners (not entitled to share in production free of operating costs) of each tract in the same

proportion that such tracts share in unit production. The unit operator has a lien on each tract’s

production to pay the owner’s share, which may be foreclosed on in the event of nonpayment.

2026

Additionally, orders may call for adjustment among the owners (not including royalty

owners) of their respective investments attributable to unit operations. The owners must agree

upon the amount charged for each such item, but in the absence of such an agreement, the Board

may make the determination. The amount charged against the owner of a tract will be

considered expenses of unit operation chargeable against his tract. These adjustments may be

provided for in a separate agreement from the unitization agreement.

2027

The portion of unit production to be allocated to each tract is deemed to be actually

produced from that tract, and operations conducted thereon will similarly be considered

operations actually conducted on each tract. However, if a lease covers land partially in and

2025 Miss. Code Ann. § 53-3-105(c) (2011). 2026 Id. § 53-3-105(e). 2027 Id. § 53-3-105(d).

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partially out of the unit area, the unit agreement and production on the unit does not have effect

on those lands that are outside of the unit; failure of lessee to drill on such outside lands within

one year or during the term of the lease, whichever is longer, after the date of creating the unit

area, renders such lease on said outside lands void unless the lessee otherwise obtains production

on that land.2028

If an order requires integration of interests in a drilling unit, all production allocated to

each tract within that unit is considered to have been produced from such tract by a well drilled

thereon.

2029 Unless “alternate charges” are allowed, development and operation costs of the

pooled unit are limited to the actual expenditures, which may not be more than a reasonable

amount, including a reasonable charge for supervision. The operator may charge to the other

owners their proportionate amount of those charges.2030 In no event will the operator or the

appropriate consenting owners be entitled to recover less than the charges provided for in section

53-3-7(1)(b) of the Statute.2031

If one or more owners owning at least 33 percent of drilling rights in the drilling unit has

consented to the drilling unit, and the operator has “made a good faith effort to (i) negotiate with

each non-consenting owner to have said owner’s interest voluntarily integrated into the unit, (ii)

notify each non-consenting owner of the names of all owners of drilling rights who have agreed

to integrate . . ., (iii) ascertain the address of each non-consenting owner, (iv) give each non-

consenting owner written notice of the proposed operation, specifying the work to be performed,

the location, proposed depth, objective formation, and estimated cost of the proposed operation,

and (v) offer each non-consenting owner the opportunity to lease or farm out on reasonable terms

2028 Id. § 53-3-111. 2029 Id. § 53-3-7(1)(a). 2030 Id. § 53-3-7(1)(b). 2031 Id. § 53-3-7(2)(g).

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or to participate in the cost and risk of developing and operating the unit well involved, on

reasonable terms, by agreeing in writing,” then said operator may make a petition to the Board to

allow alternate charges. 2032 The petition to the Board must include the names of all non-

consenting real parties of interest in the drilling unit as of not more than 90 days before the

petition was filed, giving the parties’ names and addresses, if known, or stating that after diligent

search, a party’s address is still unknown. Only parties with actual or constructive notice may be

subject to alternate charges.2033

The Board should publish notice for parties to appear before the Board, which notice

must be early enough to allow 30 days between the last publication and the date of the meeting.

The Statute provides a form notice.

2034 Notice for parties with unknown addresses must be made

once each week during the three successive weeks in a public county newspaper where drilling is

proposed or, if none exists, in a state general circulation newspaper.2035 Additionally, personal

notice by certified mail must be provided to each non-consenting owner whose address is known

sufficiently before the meeting to allow 30 days to pass between the date of mailing and the date

of the meeting.2036

If a pooling order is issued, if non-consenting owners do not agree to the order in writing,

if operations are commenced within 180 days after the order is issued, and if the well is actually

completed as a well capable of production, then “the operator and/or the appropriate consenting

owners shall be entitled to receive as alternate charges, . . . the share of production from the well

attributable to the non-consenting owner’s non-consenting interests in the unit established or

subsequently reformed for production therefrom, until the point in time when the proceeds from

2032 Id. § 53-3-7(2)(a). 2033 Id. § 53-3-7(2)(b). 2034 Id. § 53-3-7(2)(c). 2035 Id. § 53-3-7(2)(d). 2036 Id. § 53-3-7(2)(e).

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the sale of such share, . . . or the market value thereof if such share is not sold, after deducting

production and excise taxes, . . . and the payment required herein” is equal to the sum of the

following:

(a) [100%] of the non-consenting owner’s non-consenting share of the cost of any newly acquired surface equipment beyond the wellhead connections including, but not limited to, stock tanks, separators, treaters, pumping equipment and piping; (b) [250%] of that portion of the costs and expenses of operations provided for in the pooling order, and [250%] of that portion of the cost of newly acquired equipment in the well, including wellhead connections, which would have been chargeable to the non-consenting owner’s non-consenting share thereof, provided, however, when a mineral interest that is severed from the surface estate is owned by a non-consenting owner or when a mineral interest is subject to an oil and gas lease that is owned by a non-consenting owner, the payment under this subparagraph shall be [300%]; and (c) [100%] of the non-consenting owner’s non-consenting share of the cost of operation of the well commencing with the first production and continuing to such point in time.2037

Within 60 days after completion of operations on which alternate charges were ordered,

the operator must furnish to non-consenting owners who make a request an itemized statement of

the costs of production; or the operator may submit detailed monthly statements of its costs

instead of an itemized statement. Amounts realized from the sale or disposition of equipment

obtained in connection with operations which would have been owned by a non-consenting

owner had that owner participated will be credited against the total unreturned costs of the work

done and equipment purchased in determining when the interest of that non-consenting owner

will be owned by that non-consenting owner. If there is a credit balance, it must be paid to the

non-consenting owner.

2038

2037 Id. § 53-3-7(2)(g).

2038 Id. § 53-3-7(2)(h).

382

After the costs due in section 53-3-7(2)(g) have been paid by said non-consenting owner,

that owner will then own the same interest in the well, material, and equipment, and the

production therefrom, as that owner would have owned had it participated in the drilling.

Thereafter, the operator will be entitled to charge the non-consenting owner’s proportionate part

of all reasonable costs of operation, including a reasonable charge for supervision. The operator

may take such charges from that owner’s portion of production.2039

[d] Royalty Distribution.

If a leased interest is subject to a pooling and integration order, and the operator and/or

consenting owners are entitled to alternate charges, the lessor of the lease will be paid royalties,

not to exceed an amount of three/sixteenths of the proceeds attributable to the non-consenting

owner’s share of production.2040

When a disbursing agent, defined as “that person who, pursuant to an oil and gas lease,

operating agreement, purchase contract, or otherwise, assumes the responsibility of paying

royalty proceeds derived from a well’s oil and gas production to the royalty owner or owners

legally entitled thereto,”

No other specifics are provided regarding the amount of royalty

to be paid.

2041 has not disbursed royalty proceeds to the royalty owner within 120

days after the date of the first sale if the disbursing agent is a first purchaser, or within 120 days

following the date the disbursing agent receives the proceeds from such production if the

disbursing agent is not the first purchaser, the royalty owner will have a lien to secure payment

of royalty.2042

2039 Id.

The first purchaser, that is, “the first person who purchases oil or gas production

from the interest owners after the production is severed and may include the operator if the

2040 Id. § 53-3-7(2)(i). 2041 Id. § 53-3-41(1)(d). 2042 Id. § 53-3-41(2).

383

operator acts as a purchaser of production attributable to other interest owners,” 2043 is not

considered the “disbursing agent” unless he or she expressly assumes that responsibility in the

purchase contract.2044 The lien held by the royalty owner begins after a financing statement is

filed in conformity with section 75-9-401,2045 and expires one year after the effective date unless

the royalty owner has taken action against the disbursing agent or unless the time period is tolled

due to insolvency proceedings against the disbursing agent.2046

[e] Agreements Not Restraint of Trade.

The Statute provides that agreements made “in the interest of conservation of oil or gas,

or both, or for the prevention of waste, between and among owners or operators, or both, owning

separate holdings in the same field or pool, or in any area that appears from geologic or other

data to be underlaid by a common accumulation of oil or gas, or both, and agreements between

and among such owners or operators, or both, and royalty owners therein, for the purpose of

brining about the development and operation of the field, pool or area, or any part thereof, as a

unit, and for establishing and carrying out a plan for the cooperative development and operation

thereof,” if such agreement is approved by the Board, may not “be held or construed to violate

any of the statutes of this state relating to trusts, monopolies, or contracts and combinations in

restraint of trade.”2047

[f] Limitation on Production.

As soon as possible, the Board must regulate production in all common oil and gas

sources of supply as warranted by the facts. The Board may do so on its own motion or at the

request of any interested party and must call a hearing to determine the “maximum efficient rate

2043 Id. § 53-3-41(1)(e). 2044 Id. § 53-3-41(1)(d). 2045 Id. § 53-3-41(3). 2046 Id. § 53-3-41(4). 2047 Id. § 53-3-7(8).

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at which the several pools in the state can produce oil and gas without waste.”2048 When the

Board fixes the amount of production allowed from any pool, the Board must also allocate the

allowable amount among producers in that pool on a reasonable basis “so as to prevent

reasonably avoidable drainage from each developed unit which is not equalized by counter-

drainage, and so that each producer will have the opportunity to produce or receive his just or

equitable share.”2049 Unless otherwise provided, allocations of production should be made “on

the basis of and in proportion to the surface acreage content of the drilling units prescribed for

the producing horizons for the pools so that each such prescribed unit shall have equal

opportunity to produce the same daily allowable, and any special unit of less than the prescribed

amount of surface acreages shall be allowed to produce only in the proportion that the surface

acreage content of any such special unit bears to the surface acreage content of the regular

prescribed unit.”2050

Where exceptions are granted to allow a well to be drilled out of conformity with the

spacing patterns created by the Board, which may be done when a party has shown after notice

and a hearing that the unit is partly outside of the pool or that it would otherwise be inefficient to

drill in conformity with such rules, the Board must offset advantages that a producer may have

from securing the exception.

2051

2048 60-040-002 Miss. Code R. § 32 (LexisNexis 2011).

If the exception is granted because a portion of the drilling unit

upon which the well is located is partly outside the pool, the well will be allocated “a reduced

daily production allowable” unless the operator is able to satisfy the Board that “the productive

acreage underlying such drilling unit is equal to, or more than, the reasonable minimum amount

of productive acreage which would underlie such drilling unit under the minimum conditions

2049 Miss. Code Ann. § 53-3-9(a) (2011). 2050 Id. § 53-3-5(d). 2051 Id. § 53-3-5(c).

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which would permit the drilling of a well thereon so located as to comply with all applicable

footage limitations.”2052

§ 25.02 Types of Mississippi Pooling Statutes.

Those minimum footage limitations are set out in Section IV, infra,

with the spacing requirements.

[1] – Mineral Distinctions.

The Statute defines “oil” as “crude petroleum oil and all other hydrocarbons, regardless

of gravity, which are produced at the well in liquid form by ordinary production methods and

which are not the result of condensation of gas.” 2053 Gas is “all natural gas, whether

hydrocarbon or nonhydrocarbon or any combination or mixture thereof, including hydrocarbons,

hydrogen sulphide, helium, carbon-dioxide, nitrogen, hydrogen, casinghead gas, occluded

natural gas from coal seams, compressed air and all other hydrocarbons not defined as

oil . . . .”2054 The Statewide Rules add definition for “casinghead gas,” which is “any gas or

vapor, or both gas and vapor, indigenous to an oil pool and produced from such pool with oil,”

and “condensate,” which is “liquid hydrocarbons which, at the time of discovery, existed in the

gaseous state in the reservoir.”2055

[2] – Spacing Rules.

[a] Oil Wells.

“With respect to each pool occurring in the discovery well, the top of which is

encountered below a measured depth of 12,000 feet below the surface, and in the Pennsylvanian

and older formations with respect to each pool occurring in the discovery well, the top of which

is encountered below a measured depth of 3,500 feet below the surface,” each oil well must be

2052 Id. 2053 Id. § 53-1-3(c). 2054 Id. § 53-1-3-(d). 2055 60-040-002 Miss. Code R. § 2(e), (f) (LexisNexis 2011).

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on a drilling unit that consists of 80 contiguous surface acres or two contiguous governmental

quarter-quarter sections containing not less than 72 acres nor more than 88 acres on which no

drilling or producible well is located. “Contiguous” as used in this section means “bordering

each other at more than one point.” 2056 Any drilling unit that is not composed of two

governmental quarter-quarter section must be wholly encompassed by the “perimeter of a

rectangle 1600 feet by 2725 feet.” However, no such unit may create island acreage.2057 Wells

must be at least 1,000 feet from other drilling wells or wells producing from or completed in the

same pool.2058 The wells must be at least 500 feet from every exterior boundary of the drilling

unit.2059

For each pool “occurring in the discovery well, the top of which is encountered below a

measured depth of 12,000 feet below the surface,” the Supervisor may allow 160-acre units for

those pools if the unit size will foster the orderly development of the pool.

2060

(a) on a drilling unit of four contiguous quarter-quarter sections of not less than 144 nor more than 176 acres upon which no other well producing from or drilling to the same pool is located;

All wells drilled

in such pools must be

(b) if not made of four contiguous quarter-quarter sections, 160 surface acres, which must be completely encompassed by the perimeter of a rectangle 2,640 feet by 3,500 feet, so long as no island acreage is thereby created; and, (c) each well must be at least 1,500 feet from other wells drilling or producing from the same pool and not less than 750 feet from all exterior boundaries of the drilling unit.2061

For all other pools, all oil wells must be on a drilling unit of 40 contiguous surface acres

or a governmental quarter-quarter section of not less than 36 acres nor more than 44 acres, upon

2056 Id. § 7(1)(a). 2057 Id. § 7(1)(b). 2058 Id. § 7(1)(c). 2059 Id. § 7(1)(d). 2060 Id. § 7(2). 2061 60-040-002 Miss. Code R. § 7(2) (LexisNexis 2011).

387

which no other producible or drilling well is positioned. 2062 If a drilling unit is not a

governmental quarter-quarter section, it must be totally surrounded by “the perimeter of a

rectangle 1810 feet by 1445 feet,” so long as no island acreage is created.2063 The well must be

at least 660 feet from all other wells producing from the same pool and must not be closer then

330 feet from all exterior unit boundaries.2064

No part of a drilling unit where a well is positioned should be attributed whatsoever to

any other drilling or producible well in the same pool.

2065 If a well drilled under the spacing

rules for oil wells is completed as a gas well, it may only be produced for a test period of not

more than 45 days and only thereafter if in compliance with special field rules or if the Board has

granted authorization after notice and hearing.2066

[b] Gas Wells.

For each pool in the discovery well, “the top of which is encountered below a measured

depth of 12,000 feet below the surface, and in the Pennsylvanian and older formations with

respect to each pool occurring in the discovery well, the top of which is encountered below a

measured depth of 3,500 feet below the surface,” each gas well must be on a drilling unit made

of: (1) 640 contiguous surface acres; or (2) a governmental section containing not less than 600

acres nor more than 680 acres; or (3) 16 contiguous governmental quarter-quarter sections which

have a total acreage of not less than 600 acres nor more than 680 acres. No other well producing

from the same pool may be located on such unit. 2067

2062 Id. § 7(3)(a).

Gas drilling units must be wholly

surrounded by the “perimeter of a rectangle 5580 feet by 6245 feet,” so long as no island acreage

2063 Id. § 7(3)(b). 2064 Id. § 7(3)(c), (d). 2065 Id. § 7(4). 2066 Id. § 7(5). 2067 60-040-002 Miss. Code R. § 8(1)(a) (LexisNexis 2011).

388

is created.2068 The well must be at least 3,000 feet from each other well drilling to, completed in,

or producing from the same pool, and it must not be less than 1,500 feet from each exterior

boundary of the drilling unit.2069

Regarding all pools “occurring in the Oligocene and younger [f]ormations, the top of

which is encountered in the discovery well above a measured depth of 5,000 feet below the

surface,” the Supervisor may allow 160-acre units for those pools if the unit size will foster the

orderly development of the pools.

2070 Each gas well drilled on such a pool must be on a drilling

unit that is: (1) 160 contiguous surface acres; or (2) a governmental quarter section containing

not less than 144 acres nor more than 176 acres, and no other producing well may be located on

the unit.2071 Any such gas unit must be wholly contained in the perimeter of a rectangle 2,640

feet by 3,500 feet, so long as no unit creates island acreage.2072 The well must be at least 1,500

feet from each well drilling to, completed in, or producing from the same pool, and it must not be

placed closer than 750 feet from each exterior drilling unit border.2073

Regarding all other pools, each gas well must be on a drilling unit of: (1) 320 contiguous

surface acres; or (2) a governmental half-section of not less than 300 acres nor more than 340

acres; or (3) eight contiguous governmental quarter-quarter sections totaling not less than 300

nor more than 340 acres, so long as no well on the same drilling unit is producing from the same

pool.

2074 A drilling unit so created must be wholly surrounded by a perimeter of a rectangle

3,735 feet by 5,380 feet, so long as no island acreage is created.2075

2068 Id. § 8(1)(b).

The well must be at least

2069 Id. § 8(1)(c), (d). 2070 Id. § 8(2). 2071 Id. § 8(2)(a). 2072 Id. § 8(2)(b). 2073 60-040-002 Miss. Code R. § 8(2)(c), (d) (LexisNexis 2011). 2074 Id. § 8(3)(a). 2075 Id. § 8(3)(b).

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1,980 feet from each other well drilling to, completed in, or created from the same pool, and

must not be less than 990 feet from each exterior boundary of the drilling unit.2076

No part of the drilling unit on which a well is positioned may be attributed whatsoever to

any other well drilling to or producing from the same pool.

2077 If a well is drilled according to

the gas spacing rules but is completed “in the gas cap of a pool productive of oil[] or . . . is

productive from or completed in an oil pool,” it may not be produced except for a test period of

not more than 45 days without authorization granted by the Board or without special field rules

applicable to it.2078

[c] Modifications and Exceptions.

The Board may allow exceptions to any spacing rules after notice and hearing if it finds

that “the unit is partly outside the pool, or, for some other reason, a well so located on the unit

would be non-productive or topographical conditions are such as to make the drilling at such

location unduly burdensome.”2079 Applications for such exceptions must be accompanied by a

plat or sketch showing the property; all other completed, drilling, and permitted wells on the

property; and all surrounding properties and wells. The sketch should be verified by someone

who is familiar with the facts.2080

When such an exception is granted, the Board must act to offset any advantage that may

be had by the person obtaining the exception over other producers. The action must prevent or

minimize drainage from developed units to the exceptional tract. The exceptional unit must only

2076 Id. § 8(3)(c), (d). 2077 Id. § 8(4). 2078 Id. § 8(5). 2079 60-040-002 Miss Code R. § 9 (LexisNexis 2011). 2080 Id.

390

be permitted to produce “in the proportion that the acreage content of such special unit bears to

the acreage content of the regular prescribed unit.”2081

[3] – Minimum Operator Control.

Compulsory unitization orders are not effective until after the unitization plan and

agreement are signed or ratified in writing by the owners or lessees of at least 75 percent in

interest in proportion to the surface acreage content of the unit area and by at least 75 percent

(exclusive of royalty interests owned by lessees or by subsidiaries or successors in title of any

lessee) in interest of the royalty owners on the basis of the surface acreage content. The Board

must make a finding that the requisite approval has been given in either the initial order or in a

supplemental order. If the requisite percentage of interest holders does not give such approval

within 12 month of the order, the order will become void.2082 The Board may extend or add new

portions of pools to an existing unit area, to be approved by the same percentage of interest

holders of the area to be added.2083

[4] – Directional Drilling.

The Statute states that the State’s policy is to have full development by “progressive

drilling” of all wells in all producing pools.2084 The Statewide Rules add that except in three

scenarios, all directional deviations must be authorized first by the Board after notice and

hearing.2085 As used herein, “deviation” means “any intentional directional change in a well’s

normal course of any degree, including, but not limited to, those which are horizontal.”2086

2081 Id.

The

exceptions are as follows: (1) short intentional deviations may be had without a permit if done to

2082 Miss. Code Ann. § 53-3-107 (2011). 2083 Id. § 53-3-109. 2084 Id. § 53-1-1. 2085 60-040-002 Miss. Code R. § 14(c) (LexisNexis 2011). 2086 Id. § 14(k).

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“straighten the hold, sidetrack junk, or correct other mechanical difficulties, although the Board

must be notified; (2) so long as the unit configuration, surface location, proposed bottomhole

location, and all perforations still comply with spacing requirements or special field rules, no

notice and hearing is required; and (3) if an operator commences drilling in good faith and

thereafter deviates directionally “for reasons acceptable to the operator,” so long as he first

notifies the Board and after completion applies for a permit from the Board on notice and hearing

for approval of the deviation.2087 Where deviation is had, the operator must finance a “complete

angular deviation and directional survey” of the finished well, filing a certified copy of the

survey with the Board within 30 days.2088

[5] – Options.

Pooling orders must provide each non-consenting owner an opportunity to participate in

the development and operation of the well in the unit as to all or any part of the owner’s interest

“on the same basis as the consenting owners by agreeing in writing to pay that part of the costs

of such development and operation chargeable to said non-consenting owner’s interest, or to

enter into such other written agreement with the operator as the parties may contract.” The

acceptance must be in writing and filed with the Board within 20 days after the pooling order is

filed with the Board.2089 The order must state that the well is to be drilled on a competitive,

arm’s length basis. The operator may use his or her own tools but must charge not more than the

prevailing rate for such equipment.2090

2087 Id. § 14(d)–(f). 2088 Id. § 14(h). 2089 Miss. Code Ann. § 53-3-7(2)(g) (2011). 2090 Id.

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§ 26.01 Analysis of Missouri Regulatory Framework.

[1] – Name of the Governing Body.

The State Oil and Gas Council (“Council”), within the Missouri Department of Natural

Resources, regulates oil and gas production within the state under authority conferred by the Oil

and Gas Conservation and Unitization Statute (“Act”).2091

[2] – Membership on the Governing Body.

The Council is comprised of five state agencies, each represented by its respective

executive head, as well as two Missouri residents with knowledge and interest in the oil and gas

industry, who are appointed by the governor.2092 The agencies are: the Division of Geology and

Land Survey, the Division of Commerce and Industrial Development, the Missouri Public

Service Commission, the Clean Water Commission, and the University of Missouri.2093

The state geologist serves as director of the Division of Geology and Land Survey and

supervises the Council.

2094 In addition to the state geologist, the Council elects a chair and vice-

chair from its members.2095 Agency heads may designate a replacement from within their staff

to sit on the Council in their stead.2096 The University of Missouri is represented by a professor

of petroleum engineering currently employed by the school.2097

[3] – Scope of Authority.

The Council acts on behalf of stated public interests related to natural resource

conservation and protection. In particular, these goals include:

2091 Mo. Rev. Stat. § 259.070 (2010). 2092Id. § 259.010 to -.020. 2093 Id.; Mo. Code Regs. Ann. tit. 10, § 50-1.010 (2001). 2094 Mo. Rev. Stat. § 259.030 (2010). 2095 Id. 2096 Id. § 259.020. 2097 Id.

393

(a) To foster, to encourage and to promote the orderly and economic development, production and utilization of natural resources of oil and gas. (b) To authorize and to provide for the operation and development of oil and gas properties in a manner that a greater ultimate recovery of oil and gas be had and that the correlative rights of all owners be fully protected. (c) To encourage and to authorize the development and use of physical processes to obtain the greatest possible economic recovery of oil and gas. (d) To provide for complete protection of…fresh water…; and, (e) To provide for the elimination of surface or subsurface pollution or waste during and after drilling, producing and abandonment procedures in all wells.2098

Under the state geologist’s supervision, the Council has broad statutory authority to foster

oil and gas development in Missouri and prevent waste, which is explicitly prohibited.

2099

(a) Physical waste, as…generally understood in the oil and gas industry, but not including unavoidable or accidental waste;

“Waste” is defined to include:

(b) The inefficient, excessive, or improper use of, or the unnecessary dissipation of, reservoir energy; (c) The location, spacing, drilling, equipping, operating, or production of any oil or gas well or wells in a manner which causes, or tends to cause, reduction in the quantity of oil or gas ultimately recoverable from a pool under prudent and proper operations, or which causes or tends to cause unnecessary or excessive surface loss or destruction of oil and gas; (d) The inefficient storing of oil; (e) The production of oil or gas in excess of transportation or marketing facilities or in excess of reasonable market demand; and, (f) Through negligence, the unnecessary or excessive surface loss or destruction of oil or gas resulting from evaporation, seepage, leakage or deliberate combustion.2100

The Council must engage in reasonable investigation to determine existing or potential

waste, and in doing so may require the “identification of [well] ownership, . . . making and filing

of all mechanical well logs; . . . operation . . . of wells in such manner as to prevent the escape of

2098 Mo. Code Regs. Ann. tit. 10, § 50-1.020 (2001). 2099 Mo. Rev. Stat. § 259.060 to -.070 (2010). 2100 Id. § 259.050 (15).

394

oil or gas out of one stratum into another,” and other related practices pursuant of waste

prevention.2101 In addition, the Council may regulate “[t]he drilling, producing, and plugging of

wells, and all other operations for the production of oil and gas; . . . the spacing of wells; [and]

operations to increase ultimate recovery . . . .”2102 This encompassing authority includes, among

other things, the ability “to limit and [] allocate the production of oil and gas from any field,

pool, or area” within the state.2103

In general terms, the Council is authorized and required to “promulgate and enforce rules,

regulations, and orders to effectuate the purposes and intent” of the Act.

2104 Except in

emergency situations, the Council must provide notice and a hearing prior to entering an

order.2105 The Council may act upon its own motion, or upon a petition of “any interested

person.”2106

Any notice required by this chapter shall be given at the election of the Council either by personal service or by letter to the last recorded address of the person to whom the order is directed and one publication in a newspaper of general circulation in the county where the land affected, or some part thereof, is situated. If the notice is applicable throughout the state, then it shall be published in a newspaper of general circulation which is published in Jefferson City. The notice shall issue in the name of the state, shall be signed by the state geologist, shall specify the style and number of the proceeding, the time and place of the hearing, and shall briefly state the purpose of the proceeding. Should the Council elect to give notice by personal service, such service may be made by any officer authorized to serve process, or by any agent of the Council, in the same manner as is provided by law for the service of

If a petition is filed, the Council will promptly cause notice of the hearing to be

given. The Act specifies notice requirements particular to Council actions:

2101 Id. § 259.070. 2102 Id. 2103 Id. 2104 Id. §§ 259.070, 259.140. 2105 Id. § 250.140. 2106 Id. Neither Missouri statute nor regulation related to oil and gas define “interested person.”

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original notices in civil actions in . . . the state. Proof of the service by such agent shall be by the affidavit of the person making personal service.2107

A Council order must be in writing and entered within 30 days following the hearing.

2108

Once entered, all orders are kept by the state geologist as public record, copies of which are

receivable into evidence in all Missouri courts.2109 Any person adversely affected by an order

may, within 30 days of its effective date, move the Council for a rehearing.2110 The Council may

deny such application, in which case the applicant may appeal to the Circuit Court of Cole

County or any locality in which a portion of the affected property rests.2111

[4] – Process for Pooling and Matters Covered.

To avoid waste, the Council consistently assesses market demand for oil and gas. As

defined in the Act, “reasonable market demand” is “the demand for oil or gas for reasonable

current requirements for consumption and use,” both within and outside Missouri, together with

the quantity needed to maintain reliable reserves of each product.2112 The Council must limit

production to that amount which can be produced without waste and without exceeding market

demand.2113

If restrictions are needed, the Council shall allocate allowable production reasonably

among pools within the state. Further, if the Council limits production within a particular pool, it

must distribute allowable production among the various wells or producing properties on a

reasonable basis.

2114

2107 Id.

Subject to aims of waste prevention, allocation within a pool should

minimize avoidable drainage to ensure that “each property will have the opportunity to produce

2108 Id. 2109 Id. 2110 Id. § 259.160. 2111 Id. § 259.170. 2112 Id. § 259.050 (14). 2113 Id. § 259.090. 2114 Id.

396

or receive its just and equitable share.”2115

[a] Spacing Rules.

Although undefined, an owner’s share may be ‘just

and equitable’ if it reasonably affords him or her benefit proportional to a respective ownership

interest.

The Council has express authority to establish well-spacing standards for a pool when

needed to prevent waste, avoid unnecessary drilling, or protect correlative rights. 2116 The

Missouri Act defines “pool” as “an underground reservoir containing a common accumulation”

of oil and/or gas.2117 Each spacing unit within a pool should be uniform in size and shape;

however, if its conservation-based goals so require, the Council may divide any pool into zones

and establish spacing units for each zone.2118 If zonal subdivision is proper, spacing units “may

differ in size and shape from those established in any other zone.”2119 In all circumstances,

spacing units are to be set in a manner that “will result in the efficient and economical

development of the pool as a whole.”2120

An order to establish spacing units for a pool must include all land under which said pool

is known or believed to lie,

2121 and contain unit dimensions and the location of wells therein in

accordance with a reasonably uniform spacing plan.2122 Proposed well may be altered by the

state geologist upon finding that the prescribed location will not prove sufficiently productive, or

conditions will cause substantial burden or hazard for drilling.2123

2115 Id.

Upon such a finding, the state

geologist may enter a unilateral order to relocate the proposed well, so long as the order

2116 Id. § 259.100. 2117 Id. § 259.050 (11). 2118 Id. 2119 Id. 2120 Id. § 259.100. 2121 Id. 2122 Id. 2123 Id.

397

“include[s] suitable provisions to prevent the production from the spacing unit of more than its

just and equitable share of the oil and gas in the pool.”2124

In addition, the state geologist may amend a spacing plan to include additional lands

determined to be underlaid by a pool. If needed to prevent waste, avoid unnecessary drilling, or

protect correlative rights, the state geologist may modify an existing spacing order to increase the

size of a pool (or any zone therein), or permit additional wells to be drilled within the pool.

2125

Any order by the state geologist may be appealed to the Council within 30 days of entry.2126

[b] Authority to Integrate Production.

Separately owned tracts or interests within a spacing unit may be pooled by voluntary

agreement or by compulsory order from the Council.2127 If no voluntary agreement is reached,

“upon application of any interested person, [the Council] shall enter an order pooling all interests

in the spacing unit for the development and operations thereof.”2128 If necessary to prevent

waste, the Council will issue a compulsory pooling granting each owner a fair opportunity to

recover his or her “just and equitable share.”2129

A proposed agreement to pool among a portion of relevant owners may be presented to

the Council to force a non-consenting owner to comply.

2130 If a unit agreement is reached and

one or more applicable owner fails or refuses to join in execution, the agreeing owners may

petition the Council to hold a public hearing to consider the necessity of pooled operation.2131

2124 Id.

Such a petition may be filed by any number of consenting owners and must contain: “(1) a

2125 Id. 2126 Id. 2127 Id. § 259.110. 2128 Id. 2129 Id. 2130 Id. § 259.120. 2131 Id.

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description of the proposed unit area; (2) a statement of the nature of the proposed unit operation;

and (3) conformed copies of the applicable unit agreements.”2132

The Council will require the refusing owner’s incorporation into the proposed pooling

agreement if, after notice and hearing, the Council determines that: (1) at least 75 percent of

interests in the right to drill and produce from the proposed unit agree to pool; (2) pooling is

reasonably necessary to avoid waste, increase recovery, and protect correlative rights; and, (3)

the value of additional oil and gas recoverable under the proposed plan outweighs the costs

needed to effectuate the proposal.

2133 Once so ordered, the proposed agreements bind all parties

owning interest in the unit area or any oil or gas produced therefrom.2134

A compulsory pooling order must be fair and reasonable under all circumstances.

2135

Each pooling order shall account for the drilling and operation of a well on the spacing unit, and

payment of costs required for operation, plus a reasonable charge for supervision. 2136

(1) A description of the unit area;

In

particular, each order must include the following:

(2) An allocation, upon the basis agreed upon by the provisions of the unit applicable agreements, and found by the council to be fair and equitable to each separately owned tract in the unit area, in that under the allocation each separately owned tract receives its fair share of all of the oil and gas produced from the unit area and not required or consumed in the conduct of the operation of the unit area or unavoidably lost; (3) A provision for the credits and charges to be made in the adjustment among the owners of the unit area for their respective investments in wells, tanks, pumps, machinery, materials and equipment contributed to the unit operation; (4) A provision that a part of the expenses of unit operation, including capital investments, be charged to each separately owned

2132 Id. 2133 Id. 2134 Id. 2135 Id. 2136 Id. § 259.110.

399

tract in the same proportion that the tract shares in the unit production; (5) Designation of the unit operator and the time at which the unit operation shall commence; and, (6) Those additional provisions, not in conflict with, or inconsistent with, the applicable unit agreements, which the Council determines to be appropriate for the prevention of waste and the protection of all interested parties.”2137

[c] Allocation of Production and Costs.

All operation related to oil and gas development that occurs on any portion of a pooled

area is deemed to have occurred on all portions.2138 In turn, “that portion of the production

allocated to each tract included in a spacing unit covered by a pooling order shall, when

produced, be deemed for all purposes to have been produced from such tract by a well drilled

thereon.” 2139

Expenses incurred by owners within a pool are similarly apportioned amongst the group.

In compulsory pooling situations, “the net amount charged against the owner or owners of a

separately owned tract shall be considered expenses of unit operation chargeable against such

tract.”

In other words, each owner within a pooled unit is entitled to production

proportional to his or her respective ownership interest of the entire pool.

2140 Further, “expenses chargeable to a tract shall be paid by the person or persons who, in

the absence of unit operation, would be responsible for the expense of developing and operating

such tract.”2141

Liability for expenses is allocated to each owner based on that party’s respective

interest.

2142

2137 Id. § 259.120.

The obligation of each interest-holder within a pool “shall at all times be several and

2138 Id. § 259.110. 2139 Id. 2140 Id. § 259.120. 2141 Id. 2142 Id.

400

not joint or collective.”2143 The interest distribution is established in the relevant pooling order or

agreement, and “in no event shall an owner of the oil and gas rights in [a] separately owned tract

be chargeable with, obligated or liable, directly or indirectly, for, more than the amount

apportioned, assessed or otherwise charged to his interest in such separately owned tract pursuant

to the plan of unitization.”2144

[d] Royalty Distribution.

Missouri does not treat royalty interests differently than other ownership or production

interests in regard to pooling. Royalty owners may contract for reasonable terms under a

voluntary pooling agreement; likewise, those holding royalty interests subject to forced pooling

maintain similar rights and obligations pertaining to other interests.2145

[e] Agreements Not Restraint of Trade.

An agreement for development or operation of a pool for oil and gas production that is

approved by the Council is does not violate any Missouri statute or regulation relating to

restraints of trade.2146

§ 26.02. Types of Missouri Pooling Statutes.

[1] – Mineral Distinctions.

Under Missouri law, gas is defined to include “all natural gas and all other fluid

hydrocarbons which are produced at the wellhead and not [otherwise] defined as oil.”2147

2143 Id.

Oil, on

the other hand, encompasses “crude petroleum oil and other hydrocarbons regardless of gravity

which are produced at the wellhead in liquid form[,] and the liquid hydrocarbons known as

2144 Id. 2145 Id. 2146 Id. 2147 Id. § 259.050 (4).

401

distillate or condensate recovered or extracted from gas.”2148 This does not include gas produced

in association with oil, often referred to as casinghead gas.2149

[2] – Split by Depth.

The Act does not explicitly

reference other hydrocarbons which may be extracted in liquid or gaseous form, such as coal bed

methane.

As outlined below, Missouri law provides an exception from spacing requirements for

wells which do not extend below a certain depth.

[3] – Size and Spacing Rules.

The Council has authority to regulate the spacing of wells.2150 Absent an order to impose

specific spacing requirements, well location must comply with default regulatory standards.2151

[a] Oil Wells.

No more than one oil well may be drilled on a governmental quarter quarter section of

land covered U.S. Public Land Surveys, or, if not so covered, an arbitrary 40-acre tract.2152 A

well for oil may not be located closer than 500 feet to any boundary line of such an area, “nor

closer than approximately one thousand feet (1000’) to the nearest well drilling or capable of

producing from the same pool on the same lease or unit.” 2153 Further, “[s]hould the

governmental quarter-quarter section, governmental lot, or arbitrarily designated tract contain

less than thirty-six (36) acres, no well shall be drilled thereon except by special order of the

Council.”2154

2148 Id. § 259.050 (9).

2149 Id. 2150 Id. §§ 259.070, 259.100. 2151 Mo Code Regs Ann. tit. 10, § 50-2.070 (2001). 2152 Id. 2153 Id. 2154 Id.

402

The Council has developed an exception to this spacing requirement based on depth.

Those “[w]ells whose oil-producing formations may be reasonably expected to be less than one

thousand two hundred feet (1200’) in depth may be excepted from the forty (40)-acre spacing

requirement at the discretion of the Council.” 2155 In no case may a well eligible for this

exception be located closer than 165 feet to any lease boundary or property line.2156

[b] Gas Wells.

For gas wells, the required distance between wells extends to a full section of surveyed

public land, or an arbitrary tract containing 640 acres.2157 Wells may not be drilled closer than

2,220 feet to any boundary line of said governmental or arbitrary tract. In addition, wells within

the same pool and on the same lease or unit may not be located within 4,500 feet of one another

if both are in operation or capable of production.2158 Similar to oil well restrictions, in the event

the governmental section or arbitrarily designated tract contains less than 600 acres, “no well

shall be drilled thereon except by special order of the Council.”2159

Gas wells are also afforded an exception to these spacing requirements. Wells “whose

gas-producing formations may be reasonably expected to be less than one thousand five hundred

feet (1500’) in depth may be excepted from the six hundred forty (640)-acre spacing

requirement” if the Council so decides.

2160

[c] Waiver.

The Council allows spacing and lease-line rules stated above to be waived in some

circumstances. Upon application to the state geologist, these requirements “may be waived…to

2155 Id. 2156 Id. 2157 Id. 2158 Id. 2159 Id. 2160 Id.

403

protect against offset drainage in the event offset wells were drilled prior to the enactment of” the

Act.2161

[4] – Minimum Operator Control.

As noted above, the Council will not grant a compulsory unitization order unless it

receives approval from the owner(s) of at least 75 percent of the interests in the drilling and

production rights from the total proposed unit area, as well as the owner(s) of at least 75 percent

of production payments, royalty, and overriding royalty that is payable with respect to oil and

gas produced from the area to be covered by the order.2162

[5] – Directional Drilling.

Neither the Act nor Council regulations distinguish or reference vertical or horizontal

drilling.

[6] – Options.

Missouri statutes and regulations do not address the issue of election rights related to oil

and gas production.

2161 Id. The Act, codified at Section 259 of the Missouri Revised Statutes, was enacted in 1965. 2162 Mo. Rev. Stat. § 259.120 (2010).

404

§ 27.01 Analysis of Montana Regulatory Framework. [1] – Name of Governing Body. In the state of Montana, the Oil and Gas Conservation Act of 1953 (“Act”) created the

Board of Oil and Gas Conservation (“Board”) as a quasi-judicial agency to oversee the use of the

state’s natural resources.

[2] – Membership on the Governing Body. The Board is made up of seven members.2163 The Governor of Montana, upon his or her

election, appoints four of the Board members when he or she takes office. Two years later, the

Governor appoints the three remaining Board members.2164 The members must meet certain

qualifications prior to serving on the Board. Three members must be from the oil and gas

industry and have at least three years of experience in the production of oil and gas.2165 Two

members must be landowners residing in oil- or gas-producing counties of the state but not

actively associated with the oil and gas industry.2166 Of these two members, one must be a

landowner who owns the mineral rights with the surface, and the other shall be a landowner who

does not own the mineral rights.2167 The final member of the Board must be an attorney.2168

Each Board member serves four-year terms.2169

[3] – Scope of Authority.

The statute at issue is Montana Code Annotated section 82-11-101, et seq. According to

a case that has interpreted this statute, U.V. Industries v. Danielson, the primary purpose of the

Act is to prevent the waste of oil and gas by vesting power in the Board of Oil and Gas

2163 Mont. Code Ann., Envir. § 2-15-3303 2164 See Montana Board of Oil and Gas, http://bogc.dnrc.mt.gov/ (last updated Jan. 1, 2011). 2165 Mont. Code Ann., Envir. § 2-15-3303. 2166 Id. 2167 Id. 2168 Id. 2169 Id.

405

Conservation to regulate the drilling, producing, and spacing of wells and the pooling and

utilization of oil and gas interests.2170 Generally, the Montana Legislature has empowered the

Board to “make investigations that it considers proper to determine whether waste exists or is

imminent . . . .”2171 Further, the Board has exclusive jurisdiction over all Class II injections

wells2172 and all pits and ponds in relation to those wells such that it may issue, suspend, revoke,

modify, or deny permits to operate such wells; may clearly specific limits as to volume and

characteristics of the fluids to be injected and the operation of the well; and may authorize staff

to enter upon any public or private property to inspect and investigate conditions relating to

violations of permit conditions.2173

Specifically, “the Board of Oil and Gas Conservation has broad powers to (1) conduct

evidentiary hearings; (2) establish well spacing units; (3) order involuntary pooling of interests

within such units; (4) grant or deny permission to drill wells; and (5) issue rules, regulations, and

orders to prevent waste.”

2174 Waste of oil and gas or either of them is prohibited. 2175

“‘Waste’2176

(i) physical waste, as that term is generally understood in the oil and gas industry; (ii) the inefficient, excessive, or improper use of or the unnecessary dissipation of reservoir energy; (iii) the location, spacing, drilling, equipping, operating, or producing of any oil or gas well or wells in a manner which causes or tends to cause reduction in the quantity of oil or gas ultimately recoverable from a pool under prudent and proper operations or which causes

is defined as the following:

2170 See U.V. Indus., Inc. v. Danielson, 184 Mont. 203, 602 P.2d 571 (1979). 2171 Mont. Code Ann. § 82-11-111(1) (2010). 2172 Id. § 82-11-101(3). "Class II injection well" means a well, as defined by the federal Environmental Protection Agency or any successor agency, that injects fluids: (a) that have been brought to the surface in connection with oil or natural gas production; (b) for purposes of enhancing the ultimate recovery of oil or natural gas; or (c) for purposes of storing liquid hydrocarbons. 2173Id. § 82-11-111(5)(a)–(d). 2174 U.V. Indus., Inc., 184 Mont. at 212, 602 P.2d at 578. 2175 Mont. Code Ann. § 82-11-121 (2010). 2176 The loss of gas to the atmosphere during coal mining operations is not waste within the meaning of this definition.

406

or tends to cause unnecessary or excessive surface loss or destruction of oil or gas; and (iv) the inefficient storing of oil or gas. (The production of oil or gas from any pool or by any well to the full extent that the well or pool can be produced in accordance with methods designed to result in maximum ultimate recovery, as determined by the [B]oard, is not waste within the meaning of this definition.) 2177

Furthermore, the Code allows the Board, in the interest of preventing waste, to establish

well spacing units (through the size and shape

2178) for a pool of oil or gas and to grant exceptions

in appropriate cases to allow for a well to be drilled outside the location generally authorized by

the Board’s spacing orders.2179 “The size and shape of spacing units shall be such as will result

in efficient and economic development of the pool as a whole, and the size shall be the area that

can be efficiently drained by one well.”2180

[4] – Process for Pooling.

[a] Spacing units.

The Board, upon its own motion or upon application of an interested person, after

hearing, may order and establish (a) temporary spacing units on a statewide basis or for defined

areas within the state . . . oil, gas, or oil and gas wells drilled to varying depths; and (b)

permanent spacing units for a discovered pool . . . .” A temporary spacing unit must remain in

effect until the Board issues another order or until a permanent spacing unit is established. The

Board, upon application, notice, and hearing, may increase or decrease the size of a temporary or

permanent spacing unit or permit the drilling of additional wells in a spacing unit to (1) prevent

2177 Mont. Code Ann. § 82-11-101 (16) (a), (b) (2010). 2178 Mont. Admin. R. § 36-3-18(10)-S18040 (2010). 2179 Mont. Code Ann. § 82-11-201 (2010). 2180 Id. § 82-11-201(2).

407

or assist in preventing waste of oil or gas prohibited by this chapter, (2) avoid the drilling of

unnecessary wells, or (3) protect correlative rights.2181

[b] Pooling.

When two or more separately owned tracts are embraced within a temporary or

permanent spacing unit or when there are separately owned interests in all or a part of the

spacing unit, then the persons owning those interests may pool their interests for the

development and operation of the spacing unit.

The Board, upon the application of an interested person, may enter an order pooling all

interests in the permanent spacing unit for the development and operation of the permanent

spacing unit and the allocation of production if the applicant has made an unsuccessful, good

faith attempt to voluntarily pool the interests within the permanent spacing unit. The applicant

must be a person who owns an interest in the oil or gas underlying the permanent spacing unit or

who has drilled a well, proposes to drill a well, or proposes to conduct other operations on a well,

including recompleting, deepening, or stimulation.2182

Operations incident to the drilling of a well upon any portion of a permanent spacing unit

covered by a pooling order are considered, for all intents and purposes, the conduct of the several

owners of the tracts as if they were operating on each separately owned tract.

2183 However, an

order providing for unit operations or pooling of resources does not result in a transfer of all or

any part of the title of any person to the oil and gas rights in any tract of the unit area.2184

2181 Id. § 82-11-20 (2010).

Furthermore, the formation of such a unit shall not create a relationship between the parties

2182 Id. § 82-11-202. 2183 Id. § 82-11-202(1)(b). 2184 Id. § 82-11-214.

408

thereto which would be deemed to be a joint endeavor, adventure, undertaking, association, or

mining or other partnership.2185

[c] Applications and Hearings.

The Board holds approximately six pre-scheduled hearings a year to hear drilling

applications from interested persons.2186 In order to be heard at such a hearing, an interested

individual must submit his or her application by noon on the date of the hearing.2187 However,

the applicant must notify all known persons owning an interest in the oil and gas within the

proposed unit area at least 60 days prior to application of the applicant’s intent to apply for the

order.2188 Applications are available to be downloaded from the Board’s website.2189 According

to the rules promulgated by the Board, a notice of intention and application for permit to drill

must include a survey plat certified by a registered surveyor that shows the location of the

proposed well with reference to the nearest lines of an established public survey.2190 The permit

should be accompanied with payment of the applicable fee which is calculated pursuant to the

proposed well’s depth.2191

For the Board to hold a hearing to consider the need for the operation of one or more

pools or parts of the pools in a field as a unit, the persons owning leasehold interests underlying

60 percent of the surface within the unit must apply for a hearing. The applicant, at least 60 days

prior to application, shall, by registered or certified mail, notify all known persons owning an

2185 Id. § 82-11-216. 2186 See Montana Board of Oil and Gas, http://bogc.dnrc.mt.gov/ (last updated Jan. 1, 2011). 2187 Id. 2188 Mont. Code Ann. § 82-11-204(2) (2010). Upon written request of an operator of a lease which is in whole or in part within the confines of the proposed area, the applicant shall furnish the operator with copies of any exhibits to be submitted to the Board at the time of the hearing. 2189 See Montana Board of Oil and Gas, http://bogc.dnrc.mt.gov/ (last updated Jan. 1, 2011). 2190 Mont. Admin. R. § 36.22.602 9 (2010). 2191 Id. § 36.22.603. “(1)(a) for each well whose estimated depth is 3,500 feet or less, $25.00; (b) from 3,501 feet to 7,000 feet, $75.00; (c) 7,001 feet and deeper, $150.00. (2) Permits for deepening wells shall require the payment of fees for the estimated new total depth; where fees have been paid for the previous depth, credit shall be given therefor.”

409

interest in the oil and gas within the proposed unit area of the applicant's intention to make the

application. These known persons are those on record in the county or counties where the

proposed unit area is situated. The notice will be sent to these persons' last known addresses.

At the same time as notification, producers must be furnished with a plan of unit

operations. Upon written request of an operator for a lease that is in whole or in part within the

confines of the proposed delineated area, the applicant shall furnish the operator with copies of

any exhibits to be submitted to the Board at the time of hearing.2192

[d] Orders.

[i] Shaping Unit Orders.

The Board has the authority to regulate the size and shape of the pool of resources to be

developed on both a statewide scale and on a smaller scale. The Board may first establish well

spacing units by a statewide spacing order.2193 This type of order is done on the Board’s own

motion and without the necessity of notice or a hearing.2194 Or, the Board may make an order

on a smaller scale by specific order upon application of an interested party. Such a specific

order, which is issued after notice and a hearing before the Board, covers a specific area

overlying a pool or reservoir of oil or gas.2195

2192 Mont. Code Ann. § 82-11-204 (2010).

Such an order can essentially alter the obligations

of performance under a previously-executed lease: “[o]perations conducted pursuant to an order

of the [B]oard providing for unit operations shall constitute a fulfillment of all the express or

implied obligations of each lease or contract covering lands in the unit area to the extent that the

2193 Mont. Admin. R. § 36-3-18(10)-S18040 (2010). 2194 The size—in terms of acreage—and number of wells can vary depending on the Board’s current order in place. For example, in the U.V. Industries case, the Court discussed the order of the Board in 1972 which dictated that one well could be drilled and operated on each quarter section (160 acres) and the subsequent order of the Board which provided that one well could be drilled and operated on each half section (320 acres). See U.V. Indus., Inc., 184 Mont. at 212, 602 P.2d at 578. 2195 See id. at 212, 602 P.2d at 578.

410

obligations cannot be performed because of the order of the [B]oard.”2196 Furthermore, orders

of the Board of Oil and Gas Conservation are incorporated into oil and gas leases as a matter of

law.2197

The order must be upon terms and conditions that are just and reasonable, and it must

prescribe a plan for unit operations. That plan must include the following:

(1) a description of the pool or pools or parts of a pool or pools to be operated, termed the unit area, but only so much of a pool as has reasonably been defined and determined by drilling operations to be productive of oil or gas may be included within the unit area;2198

(2) a statement of the nature and purpose of the plan and operations contemplated, together with a copy of the proposed unit agreement and unit operating agreement;

(3) a plan for allocating to each tract in the unit area its fair share of the oil and gas produced from the unit area and not required or consumed in the conduct of the operation of the unit area or unavoidably lost; (4) a provision for the credits and charges to be made in the adjustment among the owners in the unit area for their respective investments in wells, tanks, pumps, machinery, materials, and equipment contributed to the unit operations; (5) a provision providing how the costs of unit operations, including overhead and capital investments, must be determined and charged to the separately owned tracts; (6) a provision for the supervision and conduct of the unit operations, in respect to which each owner has a vote with a value corresponding to the percentage of the costs of unit operations chargeable against the interest of the owner; (7) a provision by which the unit operator, after having operated for a minimum period of 2 years, may be challenged by any other owner in the unit; (8) the time when the unit operations must commence and the manner in which and the circumstances under which the unit operations must terminate; and

2196 Mont. Code Ann. § 82-11-211(2) (2010). 2197 See U.V. Indus., Inc. v. Danielson, 184 Mont. 203, 212, 602 P.2d 571, 578 (1979). 2198 If the unit is formed solely for production of gas, a spacing unit on which is located a well producing or capable of producing gas on March 1, 1971, may not be included in the unit area without the written consent of the majority in interest of the working interest owners of the spacing unit and well. Mont. Code Ann. § 82-11-206 (2010).

411

(9) additional provisions that are found to be appropriate for carrying on unit operations and for the protection and adjustment of correlative rights.2199

An order establishing temporary or permanent spacing units may permit only one well to

be drilled and produced from the common source of supply on any spacing unit. The well must

be drilled at a location authorized by the order, with an exception as may be reasonably

necessary. The well location exception may be included in the request to establish permanent or

temporary spacing units if, upon application, notice, and hearing, the Board finds that the spacing

unit is located on the edge of a pool or field and adjacent to a producing unit or, for some other

reason, the requirement to drill the well at the authorized location on the spacing unit would be

inequitable or unreasonable. The Board shall take action to offset any advantage that the person

securing the exception may have over other producers by reason of drilling the well as an

exception. The order must include provisions to prevent production from the spacing unit from

being more than its just and equitable share of the producible oil and gas in the pool.

2200

Additionally, an order establishing temporary or permanent spacing units for a pool must

cover all lands determined or believed to be underlaid by the pool and may be modified after

notice and hearing by the Board to include additional areas subsequently determined to be

underlaid by the pool.

2201

However, the Board may provide by an order for the unit operation of a pool or pools or

parts of a pool or pools that embrace a previously established unit. The order, in providing for

the allocation of unit production, must first treat the unit area previously established as a single

tract, and the portion of the unit production allocated to that tract must then be allocated among

the tracts included in the previously established unit area in the same proportions as those

2199 Id. § 82-11-206. 2200 Id. § 82-11-201. 2201 Id.

412

specified in the previous order. A new owner, whose interest by the order is added to the unit

area and who becomes liable for the owner's proportionate share of the costs of unit operations,

is not liable for any unit operating costs incurred prior to the person's entry in the unit.2202

Additionally, an order may provide for unit operations on less than the whole of a pool

where the unit area is of such size and shape as may be reasonably required for that purpose and

the conduct thereof will have no adverse effect upon other portions of the pool.

2203

An order of the Board providing for unit operations may not become effective unless the

plan for unit operations prescribed by the Board has been approved in writing by the required

persons and the Board has made a finding, either in the order providing for unit operations or in a

supplemental order, that the plan for unit operations has been approved. If the plan for unit

operations has not been approved at the time the order providing for unit operations is made, the

Board shall, upon application and notice, hold supplemental hearings that may be required to

determine if and when the plan for unit operations has been approved.

2204 If the requisite

number of owners and persons and the requisite percentage of interests in the unit area do not

approve the plan for unit operations within a period of six months from the date on which the

order providing for unit operations is made, the Board shall revoke the order unless, for good

cause shown, the Board extends the time.2205

[ii] Pooling orders.

The specific criteria considered by the Board when it considers whether it is appropriate

to order the pooling of resources is whether (1) such operation is reasonably necessary to

increase the ultimate recovery of oil or gas; (2) the value of the estimated additional recovery of

2202 Id. § 82-11-209. 2203 Id. § 82-11-210. 2204 Id. § 82-11-207. 2205 Id.

413

oil or gas less royalties or, as to gas pools only, the value of the economies to be affected,

exceeds the estimated additional cost incident to conducting such operations; and (3) the full

areal extent of the pool or pools or part thereof has been reasonably defined and determined by

drilling operations.2206 It must provide for the drilling and operating of a well on the permanent

spacing unit and for the payment of the cost of the well, if a well has not been drilled prior to the

hearing on the application.2207

The pooling order must be upon terms and conditions that are just and reasonable and

that afford to the owner of each tract or interest in the permanent spacing unit the opportunity to

recover or receive without unnecessary expense a just and equitable share of the oil or gas

produced and saved from the spacing unit. Operations incident to the drilling of a well upon any

portion of a permanent spacing unit covered by a pooling order are considered, for all purposes,

the conduct of the operations upon each separately owned tract in the spacing unit by the several

owners of the tracts. That portion of the production allocated to each tract included in a

permanent spacing unit covered by a pooling order must, when produced, be considered for all

purposes to have been produced from the tract by a well drilled on the tract.

If an owner refuses to pay that owner's share of the costs of development or other

operations, the order must provide for payment of the owner's share of the cost out of and only

out of production from the well allocable to the owner's interest in the permanent spacing unit,

excluding royalty or other interest.

If a well has not been drilled prior to the hearing on the application, the pooling order

must provide for the drilling and operating of a well on the permanent spacing unit and for the

payment of the cost of the well, which may include a reasonable charge for supervision,

2206 Id. § 82-11-205. 2207 Id. § 82-11-202(2)(a).

414

handling, and storage. If a dispute arises as to the cost, the Board by subsequent order, after

notice and hearing, shall determine the proper cost. The order may provide in substance that the

owners who agree to share in the cost of drilling and operating the well are, unless they agree

otherwise, entitled to receive, subject to royalty or similar obligations, all of the production of the

well until they have recovered all of the costs out of the production. After all costs of drilling and

operation are recovered, all of the owners in the permanent spacing unit are entitled to receive

their respective shares of the production of the well as their interest may appear after deducting

their respective shares of current operating costs.2208

If a well has been drilled prior to the hearing on the application and an owner, after

written demand, has failed or refused to pay the owner's share of the costs of development or

other operations or if a well has not been drilled prior to the hearing on the application and an

owner refuses to agree to pay the owner's share of drilling and completion costs, the order must

also include the following as costs:

(i) 100% of the refusing owner's share of the cost of newly acquired surface equipment beyond the wellhead connections, including but not limited to stock tanks, separators, treaters, pumping equipment, and piping, plus 100% of the refusing owner's share of the cost of operation of the well commencing with first production and continuing until the agreeing owners have recovered the costs; and (ii) 200% of the refusing owner's share of the costs and expenses of staking, well site preparation, obtaining rights-of-way, rigging up, drilling, reworking, deepening or plugging back, testing, and completing the well, after deducting any cash contributions received from the refusing owners by the agreeing owners, and 200% of that portion of the cost of equipment in the well, including the wellhead connections. 2209

[iii] Amendments.

2208 Id. § 82-11-202. 2209 Id.

415

An order providing for unit operations may be amended by an order made by the Board

in the same manner and subject to the same conditions and notice as an original order providing

for unit operations; however, if such an amendment affects only the rights and interests of the

owners, the approval of the amendment by the persons owning interests which are free of costs,

such as royalties, overriding royalties, and production payments, is not required, and an order of

amendment may not change the percentage for the allocation of oil and gas as established for any

tract by the original order, except with the consent of all persons owning oil and gas rights in the

tract, or change the percentage for the allocation of cost as established for any tract by the

original order, except with the consent of all owners in the tract.2210

[5] – Matters Covered.

[a] Royalty Interest and Election Rights.

An owner who refuses to lease his or her oil and gas interest in a spacing unit or contract

for the development oil and gas is considered to own a landowner royalty equal to one-eighth of

the owner’s proportionate share of production from the well until such time as the consenting

owners recover costs.2211 After costs have been recovered by the agreeing owners, the refusing

owner owns the refusing owner's proportionate share of the well, surface facilities, and

production and is liable for further costs as if the refusing owner had originally agreed to drill the

well. 2212

[b] Coalbed Methane.

2210 Id. § 82-11-208. 2211 Id. § 82-11-202. Any interest in production from the spacing unit to which the interest of the refusing owner may be subject must be deducted from the royalty considered to be owned by the refusing owner. 2212 Id. § 82-11-202(2)(d). The operator of a well under a pooling order which is subject to a refusing owner shall, upon demand, furnish the refusing owner with a monthly statement of all costs incurred, together with the quantity of oil or gas produced and the amount of proceeds realized from the sale of production during the preceding month.

416

Coalbed methane production wells that involve the production of ground water must

comply with Code section 82-11-175. That section specifies that if ground water is produced in

association with a coalbed methane well, it must be managed in any of the following ways:

(a) used as irrigation or stock water or for other beneficial uses in compliance with Title 85, chapter 2, part 3; (b) reinjected to an acceptable subsurface strata or aquifer pursuant to applicable law; (c) discharged to the surface or surface waters subject to the permit requirements of Title 75, chapter 5; or (d) managed through other methods allowed by law.

Prior to the development of a coalbed methane well that involves the production of

ground water from an aquifer that is a source of supply for appropriation rights or permits to

appropriate under Title 85, chapter 2, the developer of the coalbed methane well shall notify and

offer a reasonable mitigation agreement to each appropriator of water who holds an

appropriation right or a permit to appropriate under Title 85, chapter 2, that is for ground water

and for which the point of diversion is within (i) one mile of the coalbed methane well or (ii)

one-half mile of a well that is adversely affected by the coalbed methane well. The mitigation

agreement must address the reduction or loss of water resources and must provide for prompt

supplementation or replacement of water from any natural spring or water well adversely

affected by the coalbed methane well. The mitigation agreement is not required to address a loss

of water well productivity that does not result from a reduction in the amount of available water

because of production of ground water from the coalbed methane well.2213

§ 27.02 Types of Montana Pooling Statutes.

[1] – Mineral Distinctions. Prior to 1993, there was no specific reference in the Montana statutes to coal seam

methane gas; however, “gas” was defined at Montana Code Annotated section 82-11-101(9)

2213 Id. § 82-11-175.

417

(1991) as “all natural gases and all other fluid hydrocarbons as produced at the wellhead and not

defined as oil . . . .”2214

(1) “Coal” means a combustible carbonaceaous rock formed from the compaction and induration of variously altered plant remains. Coal does not include:

In 1993, the Montana Legislature deleted the definition of gas from the

Code and added a new section that defines coal, gas, and oil. Section 82-1-111 provides as

follows:

(a) methane gas or any other natural gas that may be found in any coal formation, (b) oil shale, or (c) gilsonite.

(2) “Gas” means all natural gases and all other fluid hydrocarbons, including methane gas or any other natural gas found in any coal formation, as produced at the wellhead and not defined as oil in subsection (3).2215

(3) “Oil” means crude petroleum oil and other hydrocarbons, regardless of gravity, that are produced at the wellhead in liquid form by ordinary production methods and that are not the result of condensation of gas before or after it leaves the reservoir.

2216

In addition, the legislature inserted a new section into the Montana Code to insure that all

instruments regarding coal, oil, and gas are interpreted according to this section of the Code.

Section 1-4-110 of the Code, provides that “[w]hen used in any instrument, unless the clear and

express terms of the instrument provide otherwise, the terms “coal,” “gas,” and “oil” must be

construed as defined in 82-1-111.”2217

Within Code section 82-11-101, “‘[f]ield’ means the general area underlaid by one or

more pools.” “‘Pool’ means an underground reservoir containing a common accumulation of oil

or gas or both; each zone of a structure which is completely separated from any other zone in the

same structure is a pool . . . .”

2218

2214 Mont. Code Ann. § 82-11-101(9) (1991). 2215 Thus, coalbed methane is included in the definition of “gas.” 2216 Mont. Code Ann. § 82-1-111 (1993). 2217 Id. § 1-4-110 (1993). 2218 Mont. Code Ann. § 82-11-101 (2010).

418

[2] – Split by Depth. The Board distinguishes between well depths by requiring differing permit fees based on

the depth of the well to be drilled. These different depths are (a) 3,500 feet or less; (b) from

3,501 feet to 7,000 feet; and (c) 7,001 feet and deeper. 2219

[3] – Spacing Rules.

The Board does not otherwise

distinguish between well depths except that the depths of a well must be designed to promote the

orderly development of unproven areas.

The size and shape of temporary spacing units must be established to promote the orderly

development of unproven areas and must be uniform throughout the surface area including

depths covered by the unit.2220

Conversely, a permanent spacing unit need not be uniform in size or shape, but must

result in the efficient and economic development of the pool as a whole.

2221 The Board may

divide a pool into zones and establish spacing units for each zone if necessary to prevent waste

and promote efficiency or to facilitate production through the use of innovative drilling and

completion methods.2222

The spacing units within the zone may differ in size and shape from spacing units in any

other zone but may not be smaller than the maximum area that can be efficiently and

economically drained by one well.

In establishing permanent spacing units, the acreage to be embraced

within a unit and the shape of the unit must be determined by the Board based upon evidence

introduced at the hearing.

2223

[4] – Size.

2219 Mont. Admin. R. § 36.22.603 (2010). 2220 Mont. Code Ann. § 82-11-201(2) (2010). 2221 Id. § 82-11-201(3). 2222 Id. 2223 Id. § 82-11-201.

419

An order establishing either temporary or permanent spacing units for a pool must cover

all lands determined or believed to be underlaid by the pool and may be modified after notice

and hearing by the Board to include additional areas subsequently determined to be underlaid by

the pool.2224 When establishing the size and shape of the permanent spacing unit, the acreage to

be included within the unit and its shape must be determined by the Board based on the evidence

introduced at the hearing.2225

[5] – Minimum Operator Controls.

The statute does not speak to the specific method for determining

what area over the pool is covered by the Board’s jurisdiction; however, it is likely that any

reasonable, scientific method of determining this data would be received into evidence by the

Board.

In order for a unit operations plan that is issued by the Board to become effective, the unit

operations plan must have been approved in writing by those persons who under the Board's

order will be required to pay at least 70 percent of the costs of the unit operations and also by the

persons owning at least 60 percent of the production or proceeds of the unit operations that will

be credited to interests that are free of cost, such as royalties, overriding royalties, and production

payments.

However, some exceptions to this rule exist. If one owner, who is obligated to pay costs

of the unit operation, owns 70 percent or more, but less than 100 percent, the approval of that

owner and at least one other owner is require. Additionally, if one person, who is entitled to

production or proceeds of the production that will be credited to interests free of costs, owns 60

2224 Id. § 82-11-201(5). 2225 Id.

420

percent or more but less than 100 percent, the approval of that person and at least one other

owner is required.2226

2226 Id. § 82-11-207.

421

§ 28.01 Analysis of Nebraska Regulatory Framework.

[1] – Name of Governing Body.

The Nebraska Oil and Gas Conservation Commission (“the Commission”) regulates oil

and gas production within the state under authority conferred by the state’s oil and gas

conservation and unitization statute (“the Act”).2227

[2] – Membership on the Governing Body.

The Commission consists of three individuals appointed by the Nebraska Governor.2228

At least one Commission member must have experience in oil and gas production and have

resided in Nebraska for one year or more.2229 Each of the other two members must have resided

in the state for at least three years.2230 Commission members today serve four-year terms subject

to removal for cause, which must be initiated by the governor and approved by the

legislature.2231 The director of the State Geological Survey serves as a technical advisor to the

Commission but has no voting power in that capacity. 2232 Thus, any two commissioners

constitute a quorum for voting purposes.2233

To better enable performance of the Commission’s duties, the Act provides that a

Director shall be employed, in addition to the Commission members, to serve as the body’s chief

administrator.

2234 The Director must be a qualified petroleum engineer with at least three years

of field experience in drilling and operating oil and gas wells. 2235

2227 Neb. Rev. Stat. § 57-905 (2010).

The Director also is the

2228 Id. § 57-904. 2229 Id. 2230 Id. 2231 Id. 2232 Id. § 57-904. 2233 Id. 2234 Id. § 57-917. 2235 Id.

422

“secretary” of the Commission and maintains minutes and records, for which he or she must hire

necessary assistants to support the Director and members.2236

[3] – Scope of Authority

The Commission’s statutory jurisdiction stems from the Act’s declared public interests.

In particular, these goals are as follows:

to foster, to encourage and to promote the development, production and utilization of natural resources of oil and gas in the state in such a manner as will prevent waste; to authorize and to provide for the operation and development of oil and gas properties in such a manner that the greatest ultimate recovery of oil and gas be had; and that the correlative rights of all owners be fully protected; and to encourage and to authorize . . . recovery operations in order that the greatest possible economic recovery of oil and gas be obtained within the state to the end that the landowners, the royalty owners, the producers and the general public realize and enjoy the greatest possible good from these vital irreplaceable natural resources.2237

The Act further states that its “intent and purpose [is] . . . to permit each and every oil and gas

pool in Nebraska to be produced up to its maximum efficient rate of production, subject to the

prohibition of waste, . . . [and] the enforcement and protection of [owners’] correlative rights, . . .

so that each common owner may obtain his just and equitable share of . . . production” from a

pool.2238

[a] Matters Governed.

As expressed above, the Commission’s authority stems from its primary aim of waste

prevention.2239

(a) Waste, as applied to oil, shall include underground waste, inefficient, excessive, or improper use, or dissipation of reservoir energy, including gas energy and water drive, surface waste, open pit storage, and waste incident to the production of oil in excess of

“Waste” is prohibited under the Act and defined to include the following:

2236 Id. 2237 Id. § 57-901. 2238 Id. 2239 Id.

423

the producer's aboveground storage facilities and lease and contractual requirements, but excluding storage, other than open pit storage, reasonably necessary for building up or maintaining crude stocks and products thereof for consumption, use, and sale; (b) waste, as applied to gas shall include (i) the escape, blowing, or releasing, directly or indirectly, into the open air of gas from wells productive of gas only, or gas from wells producing oil or both oil and gas and (ii) the production of gas in quantities or in such manner as will unreasonably reduce reservoir pressure or unreasonably diminish the quantity of oil or gas that might ultimately be produced, but excluding gas that is reasonably necessary in the drilling, completing, testing, and producing of wells and gas unavoidably produced with oil if it is not economically feasible for the producer to save or use such gas; and (c) waste shall also mean the abuse of the correlative rights of any owner in a pool due to nonuniform, disproportionate, unratable, or excessive withdrawals of oil or gas therefrom causing reasonably avoidable drainage between tracts of land or resulting in one or more owners in such pool producing more than his or her just and equitable share of the oil or gas from such pool.2240

The Commission has an affirmative duty to investigate “to determine whether waste exists or is

imminent or whether other facts exist which justify action” within its authority.

2241 Pursuant to

that duty, the Commission maintains jurisdiction over all persons subject to service and property,

public and private, within the state.2242

Among its powers, the Commission may require the “[i]dentification of [well]

ownership . . .; the making and filing of directional surveys[] and reports on well location . . .;

[all matters of well operation] in such manner as to prevent the escape of oil or gas, . . . the

intrusion of water into oil or gas strata, the pollution of fresh water supplies; . . . the furnishing of

a reasonable bond . . .”; and various other aspects of oil and gas development.

2243

2240 Id. § 57-903(1) (emphasis added).

Moreover, the

Commission has direct authority, for the sake of waste prevention, to regulate the “drilling,

producing and plugging of wells . . . and all other operations for the production of oil or gas; . . .

2241 Id. § 57-905(2). 2242 Id. § 57-905(1). 2243 Id. § 57-905(3).

424

[the] chemical treatment of wells; . . . the spacing of wells; . . . [and all] operations to increase

ultimate recovery” of oil and gas.2244 The Commission may only limit production of oil and gas

in a pool or field if necessary to prevent waste therein.2245

[b] Commission Procedure.

The Commission may “promulgate and enforce rules, regulations, and orders to

effectuate the purposes and intent” of the Act. 2246 The Commission may act upon its own

motion, or upon a petition of “any interested person.”2247 A petition for public hearing must

include a $250.00 filing fee.2248 Unless deemed an emergency, the Commission must hold a

public hearing prior to any order or rule entered. 2249

Any notice required [hereunder] . . . shall be given at the election of the Commission either by personal service, registered or certified mail, or one publication in a newspaper of general circulation in the county where the land affected, or some part thereof, is situated. The notice shall be issued in the name of the state, shall be signed by a member of the Commission or its secretary, and shall specify the style and number of the proceedings, the time and place of the hearing, and the purpose of the proceeding. Should the commission notice be by personal service, such service may be made by any officer authorized to serve summons, or by any agent of the Commission, in the same manner and extent as is provided by law for the service of summons in civil actions in the district courts of this state. Proof of the service by such agent shall be by his or her affidavit and proof of service by an officer shall be in the form required by law with respect to service of process in civil actions. In all cases where a complaint is made by the Commission or the Director of the Nebraska Oil and Gas Conservation Commission that any part of any provision of sections 57-901 to 57-921, or any rule, regulation, or order of the commission is being violated, notice of

All hearings must be preceded by at least

15 days notice in accordance with the following:

2244 Id. § 57-905(4). 2245 Id. § 57-905(5) (“Commission shall not have authority to limit . . . production . . . except to prevent waste.”) (emphasis added). 2246 Id. § 57-905(7). 2247 Id. § 57-911(6). The Act does not define “interested person.” 2248 Id. § 57-911(7). 2249 Id. § 57-911(2)–(3).

425

the hearing to be held on such complaint shall be served on the interested parties in the same manner as is provided in the code of civil procedure for the service of process in civil actions in the district courts of this state. In addition to notices required by this section, the Commission may provide for further notice of hearing in such proceedings as it may deem necessary in order to notify all interested persons of the pendency of such proceedings and the time and place of hearing and to afford such persons an opportunity to appear and be heard.2250

The Commission will enter a written order within 30 days after a hearing.2251 Any rule or order

issued is maintained by the Commission as public record, copies of which are deemed original

and receivable into evidence in all Nebraska courts.2252

Any person holding an interest in property affected by a Commission rule or order may

appeal under the process established in the Nebraska Administrative Procedure Act.

2253

[4] – Process for Pooling & Matters Covered.

The Commission has a statutory duty to “limit the production of oil and gas from each

pool to that amount which can be produced without waste in such pool.”2254 The Act defines

“pool” to mean “an underground reservoir containing a common accumulation” of oil and/or gas

and includes that “each zone of the structure which is completely separated from any other zone

in the same structure is a pool.”2255 If waste prevention so requires, the Commission “shall

allocate or distribute the allowable production among the several wells or producing properties in

the pool on a reasonable basis . . . [to ensure] that each property will have the opportunity to

produce or . . . receive its just and equitable share.”2256

2250 Id. § 57-911(4).

Although undefined in the Act, a “just

2251 Id. § 57-911(6). 2252 Id. § 57-911(5). 2253 Id. § 57-913. 2254 Id. § 57-907(1). 2255 Id. § 57-903(6). 2256 Id. § 57-907(2).

426

and equitable share” should reasonably afford an owner his or her entitled benefit proportional to

a respective ownership interest.

[a] Spacing of Wells.

If needed to prevent waste, avoid unnecessary drilling, or protect correlative rights, the

Commission will enter an order to establish spacing units for a pool.2257 An order to establish

spacing units must “cover all lands determined or believed to be underlai[n] by such pool.”2258

Spacing units within each pool should be uniform in size and shape; however, if these same

considerations require, the Commission may “divide any pool into zones and establish spacing

units for each zone, which . . . may differ in size and shape from those . . . in any other zone.”2259

Notwithstanding the need for such subdivision, the Commission will always set the dimensions

of spacing units to an area “that can be efficiently and economically drained by one well” and

“will result in the efficient and economical development of the pool as a whole.”2260

In a spacing order, the Commission will specify unit dimensions and corresponding well

locations in accordance with a reasonably uniform spacing plan.

2261 Upon application from any

person with drilling rights therein, the Commission may modify the location prescribed in the

order if it finds that a well there will “not produce in paying quantities,” or conditions pose a

substantial burden to drilling operations.2262

2257 Id. § 57-908(1).

If necessary, an order to change well location must

include provisions to prevent inequitable production as a result of modifying the spacing

2258 Id. § 57-908(4). 2259 Id. § 57-908(1). 2260 Id. § 57-908(2). 2261 Id. § 57-908(3). 2262 Id. § 57-908(3).

427

plan.2263 The Commission is further authorized to amend spacing orders whenever required to

prevent waste, avoid the drilling of unneeded wells, or protect correlative rights.2264

[b] Authority to Integrate Production.

One or more persons owning interest in production within the same spacing unit may

voluntarily agree to integrate such interests “for the development and operation of the spacing

unit.” 2265 If no such agreement exists, the Commission may require owners to do so through

compulsory pooling order.2266 Upon the application of any interested person, and after notice

and hearing, the Commission may “order pooling [of] all interests in the spacing unit.”2267

(1) A description of the land and pool, pools, or parts thereof to be so operated . . .; (2) The names of all persons owning or having an interest in the oil and gas in the proposed unit area or the production therefrom, including mortgagees and the owners of other liens or encumbrances, as disclosed by the public records . . . and their addresses, if known. If . . . unknown, the application shall so indicate; (3) A statement of the type of the operations contemplated in order to effectuate the purposes of [the Act]; (4) A proposed plan of unitization applicable to the proposed unit area which the petitioner considers fair, reasonable, and equitable; and (5) A proposed operating plan covering the manner in which the unit will be supervised and managed and costs allocated and paid, unless . . . [already expressed in an applicable operating agreement].

An

application must contain the following information:

2268

The Commission will consider an application and other information provided at the hearing, and

will accept proposed unit agreements upon satisfaction of certain factors. The Act specifies

conditions which must be present for the Commission to issue a compulsory pooling order:

2263 Id. 2264 Id. § 57-908(4). 2265 Id. § 57-909(1). 2266 Id. 2267 Id. 2268 Id. § 57-910.01.

428

(1) The material averments of the application are true; (2) Such unit operation is feasible, will prevent waste, and can reasonably be expected to increase substantially the ultimate recovery of oil or gas, or both; (3) The value of the estimated additional recovery of oil or gas will exceed the estimated additional costs incident to conducting unit operations; and (4) The oil and gas allocated to each separately owned tract within the unit area under the proposed plan of unitization represents, so far as can be practicably determined, each such tract's just and equitable share of the oil and gas, or both, in the unit area.2269

In addition, the Commission must receive written notice to establish that a proposal has been

agreed upon by “those persons who own at least seventy-five percent of the unit production or

proceeds thereof.” 2270 If the application includes a proposed operating plan, that plan must be

similarly approved “by those persons who will be required to pay at least sixty-five percent of

the costs of unit operation.”2271

If there is any person with oil and gas interests in an area covered by the proposed plan

who has not agreed thereto at the time of hearing, the Commission may nonetheless issue the

order and thereby bind all such persons to its terms.

2272

(a) Makes a fair and equitable adjustment among the owners within the unit area for their respective investments in [all] equipment . . . contributed to the unit operation;

However, the Commission will only do

so if the proposed plan does the following:

(b) Provides for a fair and equitable determination of the cost of unit operations, including capital investment, and establishes a fair and equitable method for allocating such costs to the separately owned tracts and for payment of such costs by the owners of such tracts, either directly or out of such owner's respective shares of unit production; (c) Establishes, if necessary, a fair and equitable method for carrying or otherwise financing any owner who elects to be carried, or otherwise financed, allowing a reasonable interest

2269 Id. § 57-910.03. 2270 Id. § 57-910.03(5)(d). 2271 Id. 2272 Id. § 57-909; see also id. § 57-910.

429

charge for such service payable out of such owner's share of the unit production; and, (d) Provides that each owner shall have a vote in the supervision and conduct of unit operations corresponding to the percentage of the costs of unit operations chargeable against the interest of such owner.2273

If the percentage requirements are not met, the Commission may hold “supplemental hearings

. . . as may be required to determine if there has been such consent so that a supplemental order

authorizing the commencement of unit operations can be entered.” 2274 Notice of any

supplemental hearing will be delivered by mail at least ten days prior to such hearing. 2275 If the

consent needed has still not been obtained within six months of Commission approval, the order

is “ineffective and shall be revoked by the Commission unless, for good cause shown, the

Commission extends that time.” 2276

A certified copy of any active pooling order may be filed with the appropriate clerk or

register for recording among the real property records in the county or counties where the

affected property lies. Like other applicable documents, satisfactory recordation of a pooling

order constitutes constructive notice thereof.

2277

[c] Contents of Pooling Order.

Each pooling order must account “for the drilling and operation of the authorized well on

the spacing unit, and for the payment of the reasonable actual cost thereof, including a

reasonable charge for supervision.2278

2273 Id. § 57-910.03.

The Act provides that a pooling order must “determine

the interest of each owner in the unit” and contain specific measures to dictate allocation of

2274 Id. § 57-910.03(5)(d). 2275 Id. 2276 Id. 2277 Id. § 57-909(3). 2278 Id. § 57-909(2).

430

production and cost among such owners.2279

[d] Allocation of Production and Costs.

These terms may be agreed upon by consenting

owners who contribute to operating costs; for those who refuse to do so, the order will supply

applicable “risk penalties” as stated in the Act. This situation is outlined in more detail below in

Section 27.02[6].

All operations incident or related to oil and gas development which occur on any part of a

pooled area are deemed to have occurred on each separately-owned portion within the unit.2280

As such, “[t]hat portion of the production allocated to each tract included in a spacing unit

covered by a pooling order shall, when produced, be deemed for all purposes to have been

produced from such tract by a well drilled thereon.”2281 This equitable allocation of production

is the foundation of pooling schemes, as each owner is entitled to production proportional to his

respective interest in the entire pool. However, the Act clarifies that allocation will be dictated

by order: “[t]he portion of the unit production allocated to any tract, and the proceeds from the

sale thereof, shall be the property and income of the several persons . . . to whose credit the same

are allocated or payable under the [pooling] order.” 2282

In theory, expenses incurred by applicable owners within a pool are similarly apportioned

among the group. Consenting owners may agree to reasonable terms regarding allocation of

drilling and operating costs.

2283 In the event that owners subject to a pooling order refuse to

cover their respective shares of such costs, the Commission’s order will account for allocation

through a ‘risk penalty’ discussed in Section 27.02[6].2284

2279 Id.

2280 Id. § 57-906. 2281 Id. 2282 Id. § 57-910.07. 2283 Id. 2284 Id. § 57-909(2).

431

[e] Royalty Distribution.

In providing statutory allocation of operating costs, the Act distinguishes between

“owners” and “royalty owners,” as the latter maintains no obligation for such expenses. The

default royalty amount is one-eighth as presumed for unleased interests within a pooled area.2285

Under the Act, an owner of such interest is deemed “an owner obligated to pay costs of unit

operations to the extent of seven-eighths of such interest[,] and . . . a royalty owner to the extent

of one-eighth of such interest free from such costs.”2286

[f] Restraint of Trade.

An agreement to develop and operate a pooled unit for oil and gas production does not

violate any Nebraska law relating to restraints of trade, so long as its terms “are in the public

interest, protective of correlative rights, and reasonably necessary to increase ultimate recovery

or to prevent waste of oil or gas.”2287

[g] Impact of Order on Existing Contracts.

A pooling order issued under the Act “shall [not] be construed to result in a transfer of all

or any part of the title of any person to the oil and gas rights in any tract in the unit area.”2288 In

addition, no such order will terminate an existing contract “relating to the sale or purchase of

production from a separately-owned tract” within the unit area, which will remain in force and

apply to oil and gas allocated to such tract until terminated in accordance with the provisions

thereof.”2289

2285 Id.

The Act also protects certain owners in providing that “[o]perations conducted

pursuant to [a pooling] order . . . shall constitute a fulfillment of all the express or implied

2286 Id. § 57-910.11. 2287 Id. § 57-910. 2288 Id. § 57-910.09. 2289 Id. § 57-910.08.

432

obligations of each lease or contract covering lands in the unit area to the extent that compliance

with such obligations cannot be had because of [Commission] orders.”2290

The Commission may enter an order for pooled operation of an area that “embrace[] a

unit area established by a previous order.”

2291 In that situation, the later order’s allocation

provisions will “treat the unit area previously established as a single tract,” and the portion of

production allocated thereto under the later order will then be distributed amongst the various

owners within that ‘single tract’ under the terms of the previous order. 2292

§ 28.02 Types of Nebraska Pooling Statutes.

[1] – Mineral Distinctions.

The Act defines “oil” as “crude petroleum oil and other hydrocarbons regardless of

gravity which are produced at the wellhead in liquid form[,] and the liquid hydrocarbons known

as distillate or condensate recovered or extracted from gas,” but not including gas produced in

association with oil, referred to as casinghead gas.2293 On the other hand, “gas” includes “all

natural gas and all other fluid hydrocarbons not defined as oil.”2294

[2] – Split by Depth.

The Act does not provide for

distinct spacing or pooling rules based on hydrocarbon produced.

The Act does not provide any distinctive reference to well or pool depth.

[3] – Spacing Rules.

2290 Id. § 57-910.06. 2291 Id. § 57-910.05. 2292 Id. 2293 Id. § 57-903(4). 2294 Id. § 57-903(5).

433

The Commission has authority to regulate the spacing of wells through rule or order.2295

[4] – Minimum Operator Control.

Outside of the general guidelines discussed in Section 27.01[4][a], the Act does not otherwise

specify any default spacing requirements.

Prior to an order for unitization becoming effective, the Commission must receive written

notice to establish that a proposal has been agreed upon by “those persons who own at least

seventy-five percent of the unit production or proceeds thereof.” 2296 If the application includes a

proposed operating plan, that plan must be similarly approved “by those persons who will be

required to pay at least sixty-five percent of the costs of unit operation.”2297

[5] – Directional Drilling.

The Act does not reference or distinguish between vertical and horizontal drilling

practices.

[6] – Election.

The Act acknowledges the right of election in forced pooling situations, which generally

allows those subject to a pooling order to agree or refuse to contribute up-front operating costs

and remain entitled to shared production. In supplying the required contents of a Commission

order to establish pooling, the Act states, in relevant part, the following:

[A]s to each owner who agrees with the person or persons drilling and operating the well for the payment by the owner of his share of the costs, such owner, unless he has agreed otherwise, shall be entitled to receive, subject to royalty or similar obligations, the share of the production of the well applicable to the tract of the consenting owner.2298

2295 Id. § 57-908. 2296 Id. § 57-910.03(5)(d). 2297 Id. 2298 Id. § 57-909(2).

434

A non-consenting owner will likewise remain entitled to recover production proportionate to his

share; however, he will only receive such benefit once the operator and contributing owners are

adequately “reimbursed” for up-front costs:

As to each owner who refuses to agree upon the terms for drilling and operating the well, the order shall provide for reimbursement for his share of the costs out of, and only out of, production from the unit representing his interest, excluding royalty or other interest not obligated to pay any part of the cost thereof.2299

Nebraska incentivizes voluntary pooling arrangements by offering unattractive terms to owners

who refuse to contribute operating costs. The Act provides that “reimbursement” is not limited

to the actual expense put forth for operation, but includes a “risk penalty” owed to the operator

and carrying owners. As such, upon production the contributing owners or operators may recoup

over and above the monetary value of their initial investment from non-contributing owners. For

example,

[A]s to each owner who does not agree, he shall be entitled to receive from the person or persons drilling and operating said well on the unit his share of the production applicable to his interest, after the person or persons drilling and operating said well have recovered two hundred percent of that portion of the costs and expenses of [any aspect of well construction or operation] and other intangible expenses approved by the Commission chargeable to each owner who does not agree, and one hundred percent of all [drilling and operating] equipment . . . plus one hundred percent of the nonconsenting owner's share of the cost of operation and a reasonable rate of interest on the unpaid balance.2300

Any dispute over the existence or amount of drilling costs may be resolved by the

Commission.

2301

2299 Id.

For the purpose of formulating cost allocation under this method, the Act

presumes that an owner of unleased oil and gas rights within a pool “shall be regarded as a lessee

2300 Id. (emphasis added). 2301 Id.

435

to the extent of a seven-eighths interest in and to such rights[,] and [as] a lessor to the extent of

the remaining one-eighth interest therein.”2302

2302 Id.

436

§ 29.01 Analysis of Nevada Regulatory Framework.

[1] – Name of Governing Body.

In Nevada, pooling is regulated by the Division of Minerals (“the Division”) of the

Commission on Mineral Resources, pursuant to the state’s oil and gas conservation statute (“the

Act”).2303

[2] – Membership on the Board.

The Chief Administrative Officer of the Division is the Administrator, who must be

appointed by the Commission. The Administrator of the Division must be a graduate of an

accredited college or university and have substantial administrative or industry experience; be in

the unclassified service of the state; must devote his or her entire time and attention to the

Administrator’s duties as a public officer; and may not pursue any other business or occupation

or hold any other office for profit.2304

[3] – Scope of Authority.

The Division has jurisdiction over all persons and property, public and private, necessary

to effectuate the purpose and intent of the Act.2305 Pursuant to the Act’s prevention of waste, the

Division may investigate or take other action as required to determine whether waste exists or is

imminent.2306

(1) The inefficient, excessive or improper use of or unnecessary dissipation of reservoir energy;

“Waste” is defined to include the following:

(2) The locating, spacing, drilling, equipping, operating, or producing of any oil or gas well in a manner which results or tends to result in reducing the quantity of oil or gas to be recovered from any pool in this state under operations conducted in accordance with good engineering practices in an oil field; (3) The inefficient aboveground storage of oil;

2303 Nev. Rev. Stat. § 522.040 (2009). 2304 Id. § 513.083. 2305 Id. § 522.040(1). 2306 Id. § 522.040(2).

437

(4) The locating, spacing, drilling, equipping, operating or producing of any oil or gas well in a manner causing or tending to cause unnecessary or excessive surface loss or destruction of oil or gas; (5) Producing oil or gas in such manner as to cause unnecessary water channeling or coning; (6) The operation of an oil well with an inefficient ratio of gas to oil; (7) The drowning with water of any pool or part thereof capable of producing oil or gas, except insofar as and to the extent authorized by the Commission under this chapter; (8) Underground waste; (9) The creation of unnecessary fire hazards; (10) The escape into the open air, from a well producing oil or gas, of gas in excess of the amount which is reasonably necessary in the efficient production of the well; and (11) The use of gas for the manufacture of carbon black, except as provided for in this chapter.2307

The Division is authorized to promulgate rules and regulations and issue orders to

conserve Nevada’s oil and gas resources.2308

(1) Identification or ownership of wells, producing leases, tanks, plants and drilling structures;

Among its powers, the Division may require the

following:

(2) The making and filing of reports, well logs and directional surveys. Logs of exploratory or “wildcat” wells marked “confidential” must be kept confidential for 6 months after the filing thereof, unless the owner gives written permission to release those logs at an earlier date; (3) The drilling, casing and plugging of wells in such a manner as to prevent the escape of oil or gas out of one stratum into another, the intrusion of water into an oil or gas stratum, the pollution of fresh water supplies by oil, gas or salt water, and to prevent blowouts, cavings, seepages and fires; (4) The furnishing of a reasonable bond with good and sufficient surety conditioned for the performance of the duty to plug each dry or abandoned well or the repair of wells causing waste; (5) The operation of wells with efficient gas-oil and water-oil ratios and to fix these ratios; (6) The gauging or other measuring of oil and gas to determine the quality and quantity thereof;

2307 Id. § 522.039. 2308 Id. § 522.040(3).

438

(7) That every person who produces oil or gas in Nevada keep and maintain for a period of 5 years complete and accurate record of the quantities thereof, which must be available for examination by the Division or its agents at all reasonable times.2309

The Division regulates the drilling, producing and plugging of wells; the shooting and

chemical treatment of wells; the spacing of wells; and the contamination or waste of

underground water.

2310 The Division issues permits to drill in search of oil or gas and collects a

fee for each permit application.2311 The drilling of a well without a permit is prohibited.2312

[4] – Process for Pooling & Matters Covered.

[a] Drilling Units.

If necessary to prevent waste, protect correlative rights, or avoid the drilling of an

excessive or insufficient number of wells, the Division will hold a hearing to establish one or

more drilling units for each pool within the state.2313 Each well permitted on a drilling unit is

subject to the regulations and spacing patterns that the Division prescribes for the relevant

pool.2314 The Department may grant exceptions to such rules after notice and a hearing, if a

party shows that “the unit is partly outside the pool, or for some other reason a well so located on

the unit would be non-productive, or topographical conditions are such as to make drilling at

such a location unduly burdensome.”2315

2309 Id. § 522.040(4)(a).

If an exception is granted, the Division must offset any

advantage accruing to the excepted well, and minimize drainage from developed units to the tract

2310 Id. § 522.040(4)(b). 2311 Id. § 522.050(1). 2312 Id. 2313 Id. § 522.060(1). 2314 Id. § 522.060(2). 2315 Id.

439

with the exception.2316 A producer who obtains an exception for well location will be allowed to

produce no more than a just and equitable share of the oil and gas in the pool.2317

[b] Authority to Integrate Production.

When multiple, separately-owned tracts are within an established drilling unit, persons

owning the drilling and production rights therein may agree to pool their interests and develop

their lands as a pooled drilling unit.2318 In the absence of voluntary pooling, the Division may,

after notice and a hearing, enter an order to integrate their interests for the development of their

lands as a drilling unit.2319 A pooling order must be “upon terms and conditions which will

afford [each] owner . . . the opportunity to recover or receive [his or her] just and equitable share

of the oil and gas in the pool without unnecessary expense.”2320

In addition to voluntary and compulsory pooling, the Act provides procedural guidelines

for the unitization of operations within a particular pool or field. Persons owning tracts of land

may voluntarily integrate their interests to provide for the unitized management, development

and operation of those tracts of land as a unit.

2321 If no such agreement is reached, an owner may

file a petition to seek a unitization order.2322 The petition must provide “a description of the

proposed unit area with a map or plat thereof attached, must allege the existence of [certain] facts

required to be found by the Division [to order unit operations], and must have attached thereto a

recommended plan of unitization applicable to the proposed unit area and which the petitioner

considers to be fair, reasonable and equitable.”2323

2316 Id.

2317 Id. 2318 Id. § 522.060(3). 2319 Id. 2320 Id. 2321 Id. § 522.0824(1). 2322 Id. 2323 Id. § 522.0824(2).

440

Upon a valid petition, the Division will provide notice and hold a hearing to determine

whether a unitization order should be granted.2324

(1) The unitized management, operation and further development of a pool or portion thereof is reasonably necessary in order effectively to carry on pressure control, pressure-maintenance or repressuring operations, cycling operations, waterflooding operations, or any combination thereof, or any other form of joint effort calculated to substantially increase the ultimate recovery of oil and gas from the pool;

The Act specifies the grounds required to

issuing such an order, and the Division must make the following findings:

(2) One or more of the unitized methods of operation as applied to the pool or portion thereof are feasible, will prevent waste and will, with reasonable probability, result in the increased recovery of substantially more oil and gas from the pool than would otherwise be recovered; (3) The estimated additional cost, if any, of conducting those operations will not exceed the value of the additional oil and gas so recovered; and (4) The unitization and adoption of one or more of the unitized methods of operation is for the common good and will result in the general advantage of the owners of the oil and gas rights within the pool or the portion thereof directly affected.2325

If such conditions exist, the Division will order unitization and establish any terms and

conditions thereon “which are necessary or proper to protect, safeguard and adjust the respective

rights and obligations of the several persons affected, including royalty owner, owners of

overriding royalties, oil and gas payments, carried interests, mortgages, lien claimants and

others, as well as the lessees.”

2326

A unitization order must define the pool or portion thereof to be included in the unit area

and outline the accepted plan for unit operations.

2327

2324 Id. § 522.0828.

The scope of the unit area will only include

those lands which have been determined to be productive by actual drilling operations and will

2325 Id. 2326 Id. 2327 Id. § 522.083(1).

441

cover portions of a single pool only where the Division finds that such limitation “is reasonably

required for the successful and efficient conduct of the unitized operation, and that unitized

operation will have no material adverse effect upon the remainder of the pool.”2328

Each unitization plan will be tailored to the specific needs of the particular unit area

covered thereby.

2329

(1) The efficient unitized management or control of the further development and operation of the unit area for the recovery of oil and gas from the pool affected. Under such a plan the actual operations within the unit area may be carried on in whole or in part by the unit itself, or by one or more of the lessees within the unit area as the unit operator subject to the supervision and direction of the unit, dependent upon what is most beneficial or expedient. The designation of the unit operator must be by vote of the lessees in the unit in a manner provided in the plan of unitization and not by the Division;

In addition to such other terms and conditions that the Division finds

necessary or proper, each plan of unitization must contain fair, reasonable, and equitable

provisions for the following:

(3) The division of interest or formula for the apportionment and allocation of the unit production among and to the several separately owned tracts within the unit area as will reasonably permit persons otherwise entitled to share in or benefit by the production from such separately owned tracts to produce and receive, in lieu thereof, their fair, equitable and reasonable share of the unit production or other benefits thereof. A separately owned tract’s fair, equitable and reasonable share of the unit production must be measured by the value of each tract for oil and gas purposes and its contributing value to the unit in relation to like values of other tracts in the unit, taking into account acreage, the quantity of oil and gas recoverable, location on the structure, its probable productivity of oil and gas in the absence of unit operations, the burden of operation to which the tract will or is likely to be subjected, or such other factors as may be reasonably susceptible of determination; (3) The manner in which the unit and the further development and operation of the unit area will be financed and the basis, terms and conditions on which the cost and expense thereof will be apportioned among and assessed against the tracts and interests

2328 Id. 2329 Id. § 522.083(2).

442

made chargeable therewith, including a detailed accounting procedure governing all charges and credits incident to the operations. Upon and subject to such terms and conditions as to time and rate of interest as is fair to all concerned, reasonable provisions must be made in the plan of unitization for carrying or otherwise financing lessees who are unable promptly to meet their financial obligations in connection with the unit; (4) The procedure and basis upon which wells, equipment and other properties of the several lessees within the unit area are to be taken over and used for unit operations, including the method of arriving at the compensation therefor, or of otherwise proportionately equalizing or adjusting the investment of the several lessees in the project as of the effective date of unit operation; (5) The creation of an operating committee to have general overall management and control of the unit and the conduct of its business and affairs and the operations carried on by it, together with the creation or designation of such other subcommittees, boards or officers to function under the authority of the operating committee as may be necessary, proper or convenient in the efficient management of the unit, defining the powers and duties of all those committees, boards and officers, and prescribing their tenure and time and method for their selection; (6) The time when the plan of unitization becomes effective; (7) The time when and the conditions under which and the method by which the unit may be dissolved and its affairs wound up.2330

The unit area of a unit may be enlarged to include adjoining portions of the same pool,

including the area of an existing unit. A new unit created for the unitized management,

operation, and further development of the enlarged unit area or the plan of unitization may be

amended, all in the same manner, upon the same conditions and subject to the same limitations

applicable to the creation of a unit in the first instance. However, where the amendment to the

plan affects only the rights and obligations as between lessees, the requirement that it be

approved by royalty owners therein does not apply.

2331

[c] Allocation of Production and Costs.

2330 Id. § 522.0838. 2331 Id. § 522.084.

443

Operations incident to the drilling of a well upon any portion of a pooled drilling unit

covered by an order shall be deemed to be the conduct of the operation upon each separately

owned tract in the unit by the several lessees thereof.2332 The portion of the production allocated

to the lessee of each tract therein, when produced, is considered as if it had been produced from

the tract by a well drilled thereon.2333

The cost of development and operation of a pooled unit chargeable by the operator to the

other interested lessees is limited to the actual and reasonable expenditures required for that

purpose, including a reasonable charge for supervision.

2334 In the event of a dispute over those

costs, the Division shall determine the proper amount.2335 Appeals may be taken from this

determination as from any other order of the Division.2336

If the persons owning the production rights in separate tracts embraced within a drilling

unit fail to agree upon pooling, and the Division is without authority to require pooling as

provided in the Act, the lessee of each tract may drill upon his acreage, but the allowable

production from each well will be proportionate to the allowable production for the entire

drilling unit as the area of such tract bears to the acreage of the whole unit.

However, the Act also provides a risk

penalty for lessees who refuse to share in the upfront costs and risks of drilling operations, which

is further discussed below.

2337

If one or more of the lessees drill and operate, or pay the expense of drilling and

operating, the well for the benefit of others, in addition to any other right conferred by the

pooling order, the lessee or lessees have a lien on the share of production from the unit accruing

2332 Id. § 522.060(3). 2333 Id. 2334 Id. § 522.060(4). 2335 Id. 2336 Id. 2337 Id.

444

to the interest of each non-contributing lessee for the payment of a proportionate share of the

expenses.2338 All the oil and gas subject to the lien, or so much thereof as is necessary, must be

marketed and sold by the creditor and the proceeds applied in payment of the expenses secured

by the lien, with any remaining balance payable to the debtor.2339

In all instances where a unit has been formed out of lands or areas of more than one

ownership, the Division shall require the operator, upon request of a lessee, but subject to the

right of the operator to market production and collect the proceeds with respect to a lessee in

default, to deliver to the lessee or the lessee’s assigns his or her proportionate share of the

production from the well common to the drilling unit. The lessee receiving his or her share shall

provide at the lessee’s own expense proper receptacles for the receipt and storage thereof.

2340

Only the amount of the unit production allocated to each separately owned tract within the unit is

considered as production from the separately owned tract.

2341 Except as may be otherwise

authorized by the Act or approved unitization plan, that amount of unit production or proceeds

thereof must be distributed among the persons entitled to share in the production in the same

proportion as would be required absent the unitization order.2342

The obligation or liability of the lessees or other owners of the oil and gas in the

separately owned tracts for the payment of unit expense is several, and in no event is a lessee or

other owner liable for more than the amount apportioned to his or her interest in the separately

owned tract pursuant to the plan of unitization.

2343

2338 Id. § 522.060(6).

2339 Id. 2340 Id. § 522.060 (2009). 2341 Id. § 522.085(1). 2342 Id. 2343 Id § 522.0854.

445

Subject to such reasonable limitations as may be set out in the plan of unitization, the unit

has a first and prior lien upon the leasehold estate and all other oil and gas rights (exclusive of a

one-eighth landowners’ royalty interest) in each separately owned tract, the interest of the

owners thereof in the unit production and all equipment in the possession of the unit, to secure

the payment of the amount of the unit expense charged to the separately owned tract.2344

The interest of the lessee or other persons who by lease, contract or otherwise are

responsible for the cost and expense of developing and operating a separately owned tract for oil

and gas in the absence of unitization, is primarily responsible for any assessment for unit expense

made against the tract and resort may be had to overriding royalties, oil and gas payments,

royalty interests in excess of one-eighth of the production, or other interests not otherwise

chargeable with that cost, only if the owner of interest primarily responsible fails to pay the

assessment of the production to the credit thereof, or production is insufficient for that

purpose.

2345

If the owner of any royalty interest, overriding royalty, oil or gas payment, or any other

interest which under the plan of unitization is not primarily responsible therefor pays in whole or

in part the amount of an assessment for unit expense for the purpose of protecting that interest, or

the amount of the assessment in whole or in part is deducted from the unit production to the

credit of that interest, the owner thereof is to the extent of the payment or deduction subrogated

to all the rights of the unit with respect to the interest or interests primarily responsible for the

assessment.

2346

2344 Id. § 522.0858(1).

2345 Id. § 522.0858(2). 2346 Id. § 522.0858(3).

446

A one-eighth part of the unit production allocated to each separately owned tract must in

all events be regarded as royalty to be distributed to and among, or the proceeds thereof paid to,

the royalty owners free and clear of all unit expense and free of any lien therefor.2347

[d] Royalty Distribution

For purposes of determining the respective rights of the lessor and lessee and the owners

of a royalty interest, overriding royalty interest, and any other nonworking interest in the money

earned from any oil and gas lease or other agreement concerning the sale of the production from

an oil or gas well located in Nevada:

(a) The lessee is liable for all of the costs of production, which must be deducted from the working interest. (b) The lessor’s interest, the mineral owner’s royalty interest and the overriding royalty interest must not be decreased by the costs of production. (c) The following information must be reported with each remittance, unless otherwise reported each month, to the owner of an interest:

(1) The name or number used to identify the lease, property or well; (2) The month and year during which any sale occurred for which payment is being made; (3) The total number of barrels of oil or thousands of cubic feet of gas sold; (4) The price per barrel of oil or the price per thousand cubic feet of gas; (5) The total amount of state taxes on the net proceeds of minerals, taxes ad valorem and other taxes on the production from an oil or gas well, if the payment of those taxes reduces the amount paid to the owner of an interest; (6) An itemized list of any other deductions or adjustments that reduce the amount paid to the owner of an interest; (7) The net value of total sales after deductions or adjustments that reduce the amount paid to the owner of an interest; (8) The percentage share of the owner of an interest in the sales of the production from the oil or gas well, lease or property as expressed by a decimal number; (9) The share of the total value attributed to the owner of an interest in the sales of the production from the oil or gas well,

2347 Id.

447

lease or property before any deductions or adjustments and after any deductions or adjustments; and (10) A name and an address where the owner of an interest may receive clarification of the information reported pursuant to this paragraph and additional information concerning the owner’s interest. If information is requested by certified mail, an answer must be mailed by certified mail within 30 days after receipt of the request.2348

The term “costs of production” means all costs incurred for the exploration and

development of, primary or enhanced recovery of oil or gas from, and operations associated with

the abandonment of, an oil or gas well, including costs associated with the acquisition of an oil

and gas lease; drilling and completion of the well; pumping or lifting, recycling, gathering,

compressing, pressurizing, heater treating, dehydrating, separating and storing of oil or gas; and

transporting of oil to storage tanks, or gas into the pipeline for delivery. Such costs do not

include the reasonable and actual direct costs associated with transporting oil from storage tanks

to the market, gas from the point of entry into the pipeline to the market or the processing of gas

in a processing plant.

2349 However, a Division order may not alter or amend the terms of a

previously-executed oil or gas lease or other written agreement.2350

[e] Restraint of Trade.

The Act specifies that “[n]o agreement or plan for the development and operation of a

field or pool of oil or gas as a unit, if approved by the Division for the purpose of conserving oil

or gas, violates any [Nevada] statutes . . . prohibiting monopolies or acts . . . in restraint of trade

or commerce.”2351

§ 29.02 Types of Nevada Pooling Statutes.

[1] – Mineral Distinctions.

2348 Id. § 522.115. 2349 Id. 2350 Id. § 522.118. 2351 Id. § 522.0868.

448

Nevada defines “gas” to include “all natural gas and all hydrocarbons produced at the

wellhead except oil.” 2352 “Oil” is defined to include the crude petroleum oil and other

hydrocarbons regardless of gravity which are produced at the wellhead in liquid form; and the

liquid hydrocarbon known as distillate or condensate recovered or extracted from gas, other than

gas produced in association with oil and commonly known as casinghead gas.2353

[2] – Split by Depth.

As discussed

below, the general statewide spacing rules are different for oil and gas wells. Other than the

spacing rules stated below, there is little language in the Act or Division rules to distinguish

between the two.

As noted below, the Division regulations provide default spacing rules which vary based

upon the depth of a given well.

[3] – Size & Spacing Rules.

In a proven oil and gas field, the spacing of wells is governed by special rules for each

particular field, to be adopted by the Division after notice and hearing. 2354

(1) Each well drilled for oil with a projected depth of 5,000 feet or less must be located not less than 330 feet from the outside boundary of a government quarter-quarter section, or of a lot, tract or combination of lots or tracts substantially equivalent to a quarter-quarter section as shown by the most recent government survey. Unless the administrator, in his discretion, determines otherwise, only one well may be issued a permit to produce oil from the same reservoir within the same quarter-quarter section.

In the absence of a

special order of the Division establishing drilling units or authorizing different densities of wells

or patterns of location for particular pools or parts of pools, the following requirements apply:

(2) Each well drilled for oil with a projected depth of greater than 5,000 feet must be located not less than 330 feet from the outside boundary of a government quarter section, or of a lot, tract or

2352 Id. § 522.027. 2353 Id. § 522.029. 2354 Nev. Admin. Code § 522.235 (2011).

449

combination of lots or tracts substantially equivalent to a quarter section as shown by the most recent government survey. Unless the administrator, in his discretion, determines otherwise, only one well may be issued a permit to produce oil from the same reservoir within the same quarter section. (3) Each well drilled for gas with a projected depth of 5,000 feet or less must be located not less than 660 feet from the outside boundary of a government quarter section, or of a lot, tract or combination of lots or tracts substantially equivalent to a quarter section as shown by the most recent government survey. Unless the administrator, in his discretion, determines otherwise, only one well may be issued a permit to produce gas from the same reservoir within the same quarter section. (4) Each well drilled for gas with a projected depth of greater than 5,000 feet must be located not less than 990 feet from the outside boundary of a government section, or of a lot, tract or combination of lots or tracts substantially equivalent to a section as shown by the most recent government survey. Unless the administrator, in his discretion, determines otherwise, only one well may be issued a permit to produce gas from the same reservoir within the same section. (5) These requirements for the location of a well do not apply to federal units, wells drilled pursuant to a working interest agreement, and areas subject to existing orders for drilling and spacing. (6) The administrator will determine the pattern for the location of wells adjacent to an area in which the spacing of wells is prescribed by the Division or under application for spacing, where there is sufficient evidence to indicate that the pool or reservoir for which the spacing of wells is or will be prescribed by the Division may extend beyond the boundary of the spacing order or application, and the uniformity of the pattern of spacing is necessary to ensure an orderly development of the pool.2355

Upon proper application, the administrator may approve an exception to general spacing

laws or to any order of the Division dictating the spacing of wells for a pool.

2356

(a) The locations at which an oil or gas well could be drilled in compliance with law or an applicable order;

An application

for an exception must state the reasons the exception is sought and be accompanied by a plat

showing the following:

2355 Id. 2356 Id. § 522.240.

450

(b) The location at which the applicant requests permission to drill; and (c) The locations at which oil or gas wells have been or could be drilled in accordance with law or an applicable order:

(1) In a quarter section, for any oil well, regardless of depth, or any gas well of 5,000 feet or less; or (2) In a section, for any gas well greater than 5,000 feet, directly or diagonally adjoining the quarter section or section for which the proposed exception is sought.

An exception approved by the administrator does not affect the rights of owners of directly or

diagonally adjoining tracts to drill for oil or gas.2357 If, before drilling a well, the person to

whom the permit was originally issued desires to change the location, he must submit a letter so

stating and another application showing the new location.2358

[4] – Minimum Operator Control.

The Act states that a Division order for unitization will not become effective without the

written approval “by the lessees of record of not less than 62.5 percent of the unit area affected

thereby[,] and by the owners of record of not less than 62.5 percent (exclusive of royalty interests

owned by lessees or subsidiaries of any lessee) of the normal one-eighth landowners’ royalty

interest in and to the unit area.”2359 The Division must make a formal finding that such consent

has been granted, and may hold supplemental hearings as necessary to obtain the requisite

percentage.2360 If sufficient approval has not be established within six months of the order’s

issuance, the Division will revoke the order.2361

[5] – Directional Drilling.

Except for wells that are intentionally deviated, all wells must be drilled as nearly

vertically as possible by normal, prudent, and practical drilling operations. No interval in an oil

2357 Id. 2358 Id. § 522.245. 2359 Nev. Rev. Stat. § 522.0834(1)(a). 2360 Id. § 522.0834(2). 2361 Id.

451

well may be opened to the wellbore closer than 330 feet from the outer boundary of the lease on

which the well is located, and no interval in a gas well may be opened to the well bore closer

than 660 feet from the outer boundary of the lease on which the well is located. Plans for

directional drilling must be approved by the Division before the drilling is begun. Upon

completion of the well, a complete directional survey of the well, including a plat obtained by

methods used for surveying wells must be filed with the Division. Deviation from the plan is

permitted without the approval for short distances to straighten the hole, sidetrack junk, or

correct other mechanical difficulties.2362

[6] – Election.

As to lessees who refuse to agree upon pooling, the order must provide for reimbursement

for 300 percent of the costs chargeable to each lessee out of, and only out of, production from the

unit belonging to the lessee.2363

2362 Id. § 522.275.

2363 Id. § 522.060(4).

452

§ 30.01 Analysis of New Hampshire Regulatory Framework. The state of New Hampshire has not enacted any statute addressing oil and gas

conservation.

453

§ 31.01 Analysis of New Jersey Regulatory Framework.

[1] – Name of Governing Body.

New Jersey law does not provide an express statutory provision relating to pooling or

unitization and only includes a discussion of oil and gas production. Chapter 1M, Title 13 of the

New Jersey statute (“Act”) discusses the drilling requirements for an oil and natural gas well.2364

Natural gas does not include methane or other hydrocarbon gases resulting from the

decomposition of organic matter in solid waste at any landfill facility. 2365

The Act provides that no person may begin operations incident to the exploration and

drilling of oil or natural gas wells without having received a permit from the Department of

Environmental Protection (“Department”).

2366

Within the Department, there is the Commissioner of the Department (“Commissioner”),

who is the Department administrator and head. The Commissioner has the Deputy

Commissioner, the Chief of Staff, two Counselors to the Commissioner, and eight Assistant

Commissioners, report directly him or her.

2367

(1) administer the work of the Department;

The Commissioner, as the head of the

Department, has the authority to do the following:

(2) appoint and remove officers and other personnel employed within the Department, subject to the provisions of Title 11 of the Revised Statutes, Civil Service, and other applicable statutes, except as herein otherwise specifically provided; (3) perform, exercise, and discharge the functions, powers, and duties of the Department through such divisions as may be established by this act or otherwise by law; (4) organize the work of the Department in such divisions, not inconsistent with the provisions of this act and in such bureaus and other organizational units as he may determine to be necessary for efficient and effective operation;

2364 N.J. Stat. Ann. §13:1M-2 (West 2011). 2365 Id. 2366 Id. 2367 N.J. Admin. Code §7:1-1.2 (a) (2011).

454

(5) adopt, issue, and promulgate, in the name of the Department, such rules and regulations as may be authorized by law; (6) formulate and adopt rules and regulations for the efficient conduct of the work and general administration of the Department, its officers and employees; (7) institute or cause to be instituted such legal proceedings or processes as may be necessary properly to enforce and give effect to any of his powers or duties; (8) make an annual report to the Governor and to the Legislature of the Department's operations, and render such other reports as the Governor shall from time to time request or as may be required by law; (9) co-ordinate the activities of the Department, and the several divisions and other agencies therein, in a manner designed to eliminate overlapping and duplicating functions; (10) integrate within the Department, so far as practicable, all staff services of the Department and of the several divisions and other agencies therein; and (11) perform such other functions as may be prescribed in this act or by any other law. 2368

The Deputy Commissioner provides policy recommendations to the Commissioner and

serves as Acting Commissioner in the Commissioner's absence or disability.

2369 The Chief of

Staff coordinates staff functions in the Commissioner's office. He or she is also responsible for

the day-to-day administration of Department activities. 2370

Two Counselors to the Commissioner serve as the Commissioner's legal liaisons with the

Department of Law and Public Safety and advise the Commissioner regarding policy

implications of legal issues that arise in connection with the Department's work. In addition, the

lead Counselor to the Commissioner serves as the Department's Ethics Liaison Officer and the

Department's liaison to all of the agencies allocated to the Department in accordance with the

New Jersey Constitution and commonly known as "in but not of agencies." The lead Counselor

2368 N.J. Stat. Ann. § 13:1B-3. 2369 N.J. Admin. Code §7:1-1.2 (b). 2370 Id. § 7:1-1.2 (c).

455

to the Commissioner oversees the Office of Legal Affairs and the Office of Dispute

Resolution. 2371

Additionally, each of the eight Assistant Commissioners oversees a number of programs

and organizational units. However, none of these programs or organizational units is granted

specific authority over the drilling of oil and natural gas wells. The Act only grants general

authority to the Department to oversee and regulate drilling for oil and gas.

2372

[2] – Procedure.

In order to drill for oil and gas, a person needs to file with the Department, upon forms

proscribed and supplied by the Department, for a permit to drill. A permit will be issued only

upon a written finding by the Department that the authorized actions will not result in any (1)

adverse consequences to groundwater and surface water; (2) significant degradation of

landscape; (3) threat to public health and safety; and (4) substantial air and noise pollution. 2373

(1) the name and address of the owner, and if a corporation, the name and address of the statutory agent;

The permit or application to drill an oil and gas well needs to include the following information:

(2) the signature of the owner or his authorized agent. When an authorized agent signs an application it shall be accompanied by a certified copy of his appointment as such agent; (3) the names and addresses of all persons holding the royalty interest in the tract upon which the well is located or is to be drilled or within a proposed drilling unit; (4) the location of the tract or drilling unit on which the well is located or is to be drilled, as identified by municipal tax map by lot and block; (5) designation of the well by name and number; (6) the geological formation to be tested or used and the proposed total depth of the well; (7) the type of drilling equipment to be used; (8) the name of the New Jersey-licensed well driller or driller who supervises the drilling operations;

2371 Id. § 7:1-1.2 (d). 2372 See generally id. § 7:1 (2010); N.J. Stat. Ann. § 13:1M-2 (West 2011). 2373 N.J. Stat. Ann. § 13:1M-3.

456

(9) the name and address of the corporate surety and the identifying number of the bond required; (10) a plan for ground and surface water protection, which shall include a method for disposal of water and other waste substances—including brine—resulting, obtained, or produced in connection with the exploration and drilling for oil or natural gas; (11) a plan for casing; (12) a plan for handling muds; (13) a plan for safety; (14) a plan for restoration of the land surface disturbed by operations incident to the exploration, drilling, and plugging and abandonment of wells for oil or natural gas; (15) if the well is for the injection of a liquid, identity of the geological formation to be used as the injection medium and the composition of the liquid to be injected; (16) a sworn statement that the owner has in force and will maintain until abandonment of any oil or gas well in this State liability insurance coverage in an amount not less than $10,000,000.00 for bodily injury and $10,000,000.00 for property damage, to pay claims arising out of the drilling, operation, or plugging and abandonment of the wells; (17) a sworn statement that all requirements of any municipality having jurisdiction over any activity related to the exploration, drilling, and plugging and abandonment of any oil or gas well that have been filed with the Department and are in effect at the time the application is filed, including but not limited to zoning ordinances and resolutions, will be complied with; (18) a description, by name or number, of the county, State, and municipal roads, streets, and highways that the applicant anticipates will be used for access to and egress from the well site; and (19) a map, on a scale not smaller than four hundred feet to the inch, prepared by a surveyor licensed in New Jersey, showing the location of the well and containing such other data as may be required by the Department.2374

The permit must be accompanied by a permit fee and a surety bond.

2375

Prior to the approval of a permit or an amended permit, the Department must provide

timely and informative notice of permit application to the public of the affected area. The public

will then be afforded an opportunity to review and comment on the permit application. Any

2374Id. § 13:1M-2. 2375Id. §§13:1M-4, 5.

457

public comment that is made and submitted to the Department will be made part of the record.

The Department will consider these comments when deciding whether to approve the permit.

Additionally, the Department will hold a public hearing if any person requests that such be

done.2376

The permit holder may change the well site with the approval of the Department.

Requests for change must be accompanied by an amended application. The Act prohibits the

commencement of drilling on the new drilling site until the new location has been approved by

the Department. The Department will show its approval by posting the amended permit at the

well site.

2377

Once the well is drilled and it is determined that it will produce marketable quantities of

oil or natural gas, the permit holder must file a written report within seven days of the

determination of marketable quantities to the Department that provides (1) the location and depth

of the well; (2) the estimated quantity of oil or natural gas producible from the well; (3) the

plans, if any, for extraction of the oil or natural gas; and (4) any additional information that may

be required by the Department.

2378

An oil and gas well must be plugged if it is incapable of producing oil or gas in

commercial quantities, unless the Department grants written permission to do otherwise. If the

Department finds that the well needs to be plugged and abandoned, then it will notify and order

in writing the permittee to plug the well. The order will contain a reasonable time for

compliance.

2379

2376 Id. § 13:1M-4.

2377 Id. § 13:1M-9. 2378 Id. § 13:1M-9. 2379 Id. § 13:1M-13.

458

§ 32.01 Analysis of New Mexico Regulatory Framework.

[1] – Governing Body.

New Mexico (along with Oklahoma) enacted the first compulsory pooling statute in the

United States.2380 New Mexico currently has both compulsory pooling and unitization.2381 The

Oil Conservation Division of the Energy, Minerals, and Natural Resources Department

(“Division”) carries out compulsory pooling under the Oil and Gas Act and unitization under the

Statutory Unitization Act in New Mexico.2382

[2] – Membership on the Governing Body.

The New Mexico Oil Conservation Commission (“Commission”) is the policymaker for

the Division. The Commission is composed of a designee of the Commissioner of Public Lands,

a designee of the Secretary of Energy, Minerals, and Natural Resources, and the director of the

Oil Conservation Division. 2383 The designees of the Commissioner of Public Lands and the

Secretary of Energy, Minerals, and Natural Resources must be persons who have expertise in the

regulation of petroleum production by virtue of education or training.2384 The Oil and Gas Act

states that the term of office of each member of the Commission is concurrent with the other

office held by him (in the case of a designee, although the statute is not clear, this presumably

means that their tenure is based on the tenure of the official that designated them, whether the

Commissioner of Public Lands or the Secretary of Energy, Minerals, and Natural Resources).2385

The director of the Division is appointed by the Secretary of Energy, Minerals, and

Natural Resources and must (1) be a resident of the state and (2) be registered by the state board

2380 See Patrick Martin & Bruce Kramer, The Law of Pooling and Unitization § 3.02 (MB 2010). 2381 N.M. Stat. Ann. §§ 70-2-17, -2-1 to -2-38, -7-1 to -7-21 (2011). 2382 Id. § 70-2-17. 2383 Id. § 70-2-4. 2384 Id. 2385 Id.

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of registration for professional engineers and land surveyors as a petroleum engineer or (3) by

virtue of education and experience have expertise in the field of petroleum engineering.2386 His

official title is the “State Petroleum Engineer.”2387

[3] – Scope of Authority.

The Commission and the Division have jurisdiction over all matters relating to oil and

gas conservation.2388 The statutory sections generally refer to the authority of the Division rather

than the Commission, but the Commission has concurrent jurisdiction and authority with the

Division.2389 The Division has the authority to determine and change the limits of pools and

units.2390 Regulatory decisions must be based on substantial evidence.2391 Courts generally

defer to administrative technical authority.2392

The Division has the power and duty under the Oil and Gas Act to prevent waste and

protect correlative rights.

2393 The Division has the power to prescribe “proration units” in a pool

(these appear to be similar to the “drilling units” in other states), being the area that can be

efficiently drained by one well in the pool. The Division may vary the standard spacing rules if

the deviation is necessitated by a variation in public land surveys upon application. 2394 In

regards to compulsory pooling, the Division has the power to pool two or more separately owned

tracts of land within a spacing or proration unit to avoid waste and protect correlative rights, but

only when the owners have not agreed to pool their interest voluntarily.2395

2386 Id. § 70-2-5.

2387 Id. 2388 Id. § 70-2-6. 2389 Id. 2390 Id. § 70-2-12. 2391 See Santa Fe Exploration Co. v. Oil Conservation Comm'n of N.M., 114 N.M. 103, 114, 835 P.2d 819, 830 (1992). 2392 See, e.g., id. at 114, 835 P.2d at 819. 2393 N.M. Stat. Ann. § 70-2-11 (2011). 2394 N.M. Code R. § 19.15.15.11 (2011). 2395 N.M. Stat. Ann. § 70-2-17 (2011).

460

The Division also has the express authority to carry out the purposes of the Statutory

Unitization Act.2396 The Act seeks to “authorize and provide for the unitized management,

operation and further development of the oil and gas properties to which the Statutory

Unitization Act is applicable, to the end that greater ultimate recovery may be had therefrom,

waste prevented, and correlative rights protected of all owners of mineral interests in each

unitized area.”2397 The Act applies to “any type of operation that will substantially increase the

recovery of oil above the amount that would be recovered by primary recovery alone and not to

what the industry understands as exploratory units.”2398

The Division has the expressly enumerated power to collect data; make investigations

and inspections; examine properties, leases, papers, books, and records; examine, check, test, and

gauge oil and gas wells, tanks, plants, refineries, and all means and modes of transportation and

equipment; hold hearings; provide for the keeping of records and the making of reports and for

the checking of the accuracy of the records and reports; limit and prorate production of crude

petroleum oil or natural gas; and require certificates of clearance or tenders in connection with

the transportation of oil or gas or any products of either.

2399 It also has the authority to regulate

well plugging, well production records, the encroachment of water in productive strata, the

prevention of fires, blow-ups, and caving, well spacing, classification of wells and pools as gas

or oil pools or wells, oil or gas storage (including subsurface storage), secondary recovery

activities, including natural gas injection, water use and disposal, and oil treatment plants.2400

[4] – Process for Pooling.

2396 Id. §70-7-3. 2397 Id. §70-7-1. 2398 Id. 2399 Id. § 70-2-12. 2400 Id.

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An application for a pooling order or unitization order must include (1) the applicant's

name; (2) the applicant's address, or the address of the applicant's attorney, including an e-mail

address and fax number if available; (3) the name or general description of the common source

or sources of supply or the area the order sought affects; (4) the general nature of the order

sought; (5) a proposed legal notice for publication; and (6) any other matter specifically required

under the law regulating the type of order sought.2401

After an application has been submitted, the Division must publish notice of an

adjudicatory hearing in the name of the “State of New Mexico,” signed by the director and

bearing the Commission's seal, stating (1) the hearing's time and place; (2) whether the case is set

for hearing before the Commission or a Division examiner; (3) the applicant's name and address,

or address of the applicant's attorney, including an e-mail address and fax number if available;

(4) a case name and number; (5) a brief description of the hearing's purpose; (6) a reasonable

identification of the adjudication's subject matter that alerts persons who may be affected if the

division grants the application; (7) if the application seeks to adopt, revoke, or amend special

pool orders, establish or alter a non-standard unit, permit an unorthodox location, or establish or

affect a well's or proration unit's allowable, the notice must specify each pool or common source

of supply that the Division or Commission's granting the application may affect; and (8) if the

application seeks compulsory pooling or statutory unitization, the notice must contain a legal

description of the spacing unit or geographical area the applicant seeks to pool or unitize.

2402

2401 N.M. Code R. § 19.15.4.8 (2011)

The notice must be given at least 30 days before the hearing by posting on the Division’s

website, by first class mail to any persons requesting notice, and if the hearing is before the

2402 Id. § 19.5.4.9.

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Commission, by notice by publication.2403 A person with standing may intervene in proceedings

by giving notice at least one business day before the due date of filing for a pre-hearing

statement.2404

Applicants requesting an order for compulsory pooling and statutory unitization must

also give notice to any owner of an interest in the mineral estate of any portion of the lands the

applicant proposes to be pooled or unitized whose interest is evidenced by a written conveyance

either of record or known to the applicant at the time the applicant filed the application and

whose interest has not been voluntarily committed to the area proposed to be pooled or unitized

(other than a royalty interest subject to a pooling or unitization clause).

2405 Applicants for non-

standard proration units must give notice to the owners of interest who would be included in a

standard unit and will be excluded under the applicant’s proposed unit. 2406 Under all

applications for surface disposal of proposed water or fluids, surface owners within one half mile

of the proposed disposal site must be given notice.2407

When notice has been given according to the general rules, if the requested pool complies

with spacing rules and all owners that could be located do not oppose the petition, applicants

may file an alternative application containing (1) a statement that the applicant expects no

opposition including the reasons why; (2) a map outlining the spacing unit to be pooled, showing

the ownership of each separate tract in the proposed unit and the proposed well's location; (3) the

names and last known addresses of the interest owners to be pooled and the nature and percent of

their interests and an attestation that the applicant has conducted a diligent search of all public

records in the county where the well is located and of phone directories, including computer

2403 Id. 2404 Id. 2405 Id. § 19.15.4.12. 2406 Id. 2407 Id.

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searches; (4) the names of the formations and pools to be pooled; (5) a statement as to whether

the pooled unit is for gas or oil production or both; (6) written evidence of attempts the applicant

made to gain voluntary agreement including but not limited to copies of relevant

correspondence; (7) proposed overhead charges (combined fixed rates) to be applied during

drilling and production operations along with the basis for such charges; (8) the location and

proposed depth of the well to be drilled on the pooled units; and (9) a copy of the AFE2408 the

applicant, if appointed operator, will submit to the well's interest owners.2409

The Division must set unopposed pooling applications for hearing.

2410 If the Division

finds the application complete, the information submitted with the application constitutes the

record in the case, and the Division issues an order based on the record.2411 At an interested

person's request or upon the Division's own initiative, the Division may set a pooling application

for full hearing with oral testimony by the applicant.2412

Applicants must file two sets of pleadings and correspondence in cases pending before a

division examiner with the division clerk. Parties before Division adjudications who intend to

present evidence must also submit a prehearing statement at least four business days before the

hearing, but in no event later than 5 p.m. MST on the Thursday before the hearing. The

statements must include (1) the names of the party and the party's attorney; (2) a concise

statement of the case; (3) the names of witnesses the party will call to testify at the hearing, and

in the case of expert witnesses, their fields of expertise; (4) the approximate time the party will

need to present its case; and (5) identification of any procedural matters that are to be resolved

prior to the hearing. A party other than the applicant must include in its pre-hearing statement, a

2408 Id. § 19.15.2.7(7). 2409 Id. § 19.15.4.12. 2410 Id. 2411 Id. 2412 Id.

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statement of the extent to which the party supports or opposes the issuance of the order the

applicant seeks, and the reasons for such support or opposition.2413

Hearings are conducted informally. Testimony is given under oath and transcripts are

taken.

2414 The rules of evidence do not apply to hearings. Parties may appear pro se or through

an attorney, but collective entities may only appear through an attorney, an authorized officer, or

member. Parties may request that the director of the Division issue a subpoena for attendance or

for the production of materials prior to the hearing. The Division examiners adjudicating

hearings may consider pre-hearing motions. The director of the Division must appoint as

Division examiners, Division staff who are licensed attorneys, or who have experience in

hydrogeology, hydrology, geology, petroleum engineering, environmental engineering, or a

related field and a college degree in geology, engineering, hydrology, or a related field.2415

Upon conclusion of a hearing the Division examiner must prepare a written report with

recommendations for the matter or proceeding. The Division examiner drafts a proposed order

and submits it to the Director with the certified record of the hearing.

2416 After receipt of the

Division examiner's report, the Director enters the Division's order, which the Director may have

modified from the Division examiner's proposed order, disposing of the matter.2417

[a] Statutory Requirements for Pooling Orders.

Compulsory pooling orders must describe the lands included in the proration unit,

identify the pool or pools to which it applies, and designate an operator for the unit. 2418

2413 Id. § 19.15.4.13 (2011).

Allocation of proceeds of production is based on surface acreage within the unit (rather than on

2414 Id. § 19.15.4.14. 2415 Id. §§ 19.15.4.14, .16, .17, .18. 2416 Id. § 19.5.4.21. 2417 Id. § 19.5.4.22. 2418 N.M. Stat. Ann. § 70-2-17 (2011).

465

the area of drainage, although of course proration unit boundaries are supposed to be defined by

the area that can be drained efficiently).2419 Unleased landowners must be treated as one-eighth

royalty owners and seven-eighths working interest owners (thus entitling them to a share of net

profits, potentially diminished by the risk penalty if they do not pay for their share of drilling

costs). 2420 The default risk penalty is 200 percent, although it may be altered upon

application.2421

[b] Statutory Requirements for Unitization Orders.

Unitization orders are entered after notice and hearing.2422 Any working interest owner

may file an application with the Division requesting an order for the unit operation of a pool or

any part thereof. An application must contain (1) a description of the proposed unit area and the

vertical limits to be included therein with a map or plat thereof attached; (2) a statement that the

reservoir or portion thereof involved in the application has been reasonably defined by

development; (3) a statement of the type of operations contemplated for the unit area; (4) a copy

of a proposed plan of unitization which the applicant considers fair, reasonable, and equitable;

(5) a copy of a proposed operating plan covering the manner in which the unit will be supervised

and managed and costs allocated and paid; and (6) an allegation of the facts required to be found

by the Division under section 70-7-6 of the New Mexico statutes.2423

Section 70-7-6 requires the following facts be found for the issuance of a unitization

order:

(1) that the unitized management, operation, and further development of the oil or gas pool or a portion thereof is reasonably necessary in order to effectively carry on pressure

2419 Id. 2420 Id. 2421 N.M. Code R. § 19.15.3.8 (2011). 2422 N.M. Stat. Ann. § 70-7-6 (2011). 2423 Id. § 70-7-5.

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maintenance or secondary or tertiary recovery operations, to substantially increase the ultimate recovery of oil and gas from the pool or the unitized portion thereof; (2) that one or more of the said unitized methods of operations as applied to such pool or portion thereof is feasible, will prevent waste and will result with reasonable probability in the increased recovery of substantially more oil and gas from the pool or unitized portion thereof than would otherwise be recovered; (3) that the estimated additional costs, if any, of conducting such operations will not exceed the estimated value of the additional oil and gas so recovered plus a reasonable profit; (4) that such unitization and adoption of one or more of such unitized methods of operation will benefit the working interest owners and royalty owners of the oil and gas rights within the pool or portion thereof directly affected; (5) that the operator has made a good faith effort to secure voluntary unitization within the pool or portion thereof directly affected; and (6) that the participation formula contained in the unitization agreement allocates the produced and saved unitized hydrocarbons to the separately owned tracts in the unit area on a fair, reasonable, and equitable basis.2424

Unitization orders must be ratified by 75 percent of the production owners and the cost

providers.

2425 If one owner controls more than 75 percent of the minerals, there must

nonetheless be at least one other owner who consents to the order. Unleased landowners owners

receive a one-eighth royalty.2426

[5] – Matters Covered.

Spacing rules fall under New Mexico Administrative Code section 19.15.15 and are more

fully described in Section 31.02, infra. As mentioned above, in addition to regulating pooling

and unitization, the Division also regulates well plugging, well production records, the

encroachment of water in productive strata, the prevention of fires, blow-ups, and caving,

classification of wells and pools as gas or oil pools or wells, oil or gas storage (including

2424 Id. § 70-7-6. 2425 Id. § 70-7-8. 2426 Id. § 70-7-18.

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subsurface storage), secondary recovery activities including natural gas injection, water use and

disposal, and oil treating plants.2427

§ 32.02 Types of New Mexico Pooling Statutes.

[1] – Mineral and Depth Distinctions.

In New Mexico pooling applies to oil and gas pools. 2428 Coalbed methane is not

expressly included or excluded from the definition of oil and gas under the Oil and Gas Act, New

Mexico oil and gas regulations, or state case law. The pooling statute is not expressly limited to

any strata or depth. Unitization expressly applies to oil and gas.2429 “Oil and gas” are defined

under the Act as “crude oil, natural gas, casinghead gas, condensate or any combination

thereof.”2430

[2] – Spacing and Size Rules.

Thus, the Unitization Act does not expressly include or exclude coalbed methane.

The Act also does not expressly limit its application to any depth or strata. Wells are treated

differently by strata, to the extent that spacing is different based on the strata that a well drains,

as described in more detail, infra.

The spacing rules in New Mexico are different according to the type of well, the county

in which the well is located, and the pool from which it produces.2431 The spacing rules first

distinguish between wildcat wells and development wells.2432

(1) In San Juan, Rio Arriba, Sandoval, and McKinley counties, a wildcat well is a well to be drilled the spacing unit of which is a distance of two miles or more from:

A wildcat is defined as follows:

(a) the outer boundary of a defined pool that has produced oil or gas from the formation to which the well is projected to be drilled; and

2427 Id. § 70-2-12. 2428 Id. § 70-2-17. 2429 Id. § 70-7-1. 2430 Id. § 70-7-4. 2431 N.M. Code R. § 19.15.3.8 (2011). 2432 Id.

468

(b) a well that has produced oil or gas from the formation to which the proposed well is projected to be drilled. (2) In all counties except San Juan, Rio Arriba, Sandoval, and McKinley, a wildcat well is a well to be drilled the spacing unit of which is a distance of one mile or more from: (a) the outer boundary of a defined pool that has produced oil or gas from the formation to which the well is projected to be drilled; and (b) a well that has produced oil or gas from the formation to which the proposed well is projected.2433

[3] – Spacing for Oil Wells.

A well that is not a wildcat well is classified as a development well for the nearest pool

that has produced oil or gas from the formation to which the well is projected to be drilled. The

operator must space, drill, operate, and produce a development well in accordance with the rule

or order in effect for that pool, provided the well is completed in that pool.2434

A wildcat well that the operator projects to drill as an oil well to a formation and in an

area that in the Division's opinion may reasonably be presumed to produce oil rather than gas,

and each development well for a defined oil pool unless otherwise provided in special pool

orders, must be located on a spacing unit consisting of approximately 40 contiguous surface

acres, substantially in the form of a square that is a legal subdivision of the United States public

land surveys and is a governmental quarter-quarter section or lot, and shall be located no closer

than 330 feet to a boundary of the unit.

2435 Only 40-acre spacing units committed to active

secondary recovery projects may be permitted more than four wells.2436 If a proposed oil well is

completed as a gas well, the operator must seek Division approval for the nonstandard location

of the well before it may produce.2437

2433 Id. § 19.15.15.8.

2434 Id. 2435 Id. § 19.15.15.9. 2436 Id. 2437 Id.

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[4] – Spacing for Gas Wells.

A wildcat well that the operator projects to drill as a gas well to a formation and in an

area that in the Division's opinion may reasonably be presumed to produce gas rather than oil

and each development well for a defined gas pool, unless otherwise provided in special pool

orders, shall be spaced and located as follows:

(1) 640-acre spacing applies to a deep gas well2438

(2) 320-acre spacing applies to a deep gas well in Lea, Chaves, Eddy, or Roosevelt Counties that is projected to be drilled to a gas-producing formation, or is within a defined gas pool, that is in the Wolfcamp or an older formation. The well must be located on a spacing unit consisting of 320 surface contiguous acres, more or less, comprising any two contiguous quarter sections of a single section that is a legal subdivision of the United States public land surveys provided that (1) the initial well on a 320-acre unit is located no closer than 660 feet to the outer boundary of the quarter section on which the well is located and no closer than 10 feet to a quarter-quarter section line or subdivision inner boundary and (2) only one infill well on a 320-acre unit shall be allowed provided that the well is located in the quarter section of the 320-acre unit not containing the initial well and is no closer than 660 feet to the outer boundary of the quarter section and no closer than 10 feet to a quarter-quarter section line or subdivision inner boundary;

in Rio Arriba, San Juan, Sandoval, or McKinley Counties that is projected to be drilled to a gas producing formation older than the Dakota formation or is a development well within a gas pool created and defined by the Division after June 1, 1997 in a formation older than the Dakota formation, which formation or pool is located within the surface outcrop of the pictured cliffs formation (i.e., the San Juan basin). The well must be located on a spacing unit consisting of 640 contiguous surface acres, more or less, substantially in the form of a square that is a section and legal subdivision of the United States public land surveys and must be located no closer than (1) 1,200 feet to an outer boundary of the spacing unit; (2) 130 feet to a quarter section line; and (3) 10 feet to a quarter-quarter section line or subdivision inner boundary;

(3) 160-acre spacing applies to a gas well not covered above. The well must be located in a spacing unit consisting of 160 surface contiguous acres, more or less, substantially in the form of a square

2438 “Deep gas well” is not defined in the regulations; however “deep pool” is defined as “a common source of supply that is situated 5,000 feet or more below the surface”; presumably a “deep well” is one that produces from a “deep pool.” See id. § 19.15.2.7(D)(1).

470

that is a quarter section and a legal subdivision of the United States public land surveys and must be located no closer than 660 feet to an outer boundary of the unit and no closer than 10 feet to a quarter-quarter section or subdivision inner boundary.2439

[5] – Non-Standard Spacing Units.

Division district offices may approve non-standard spacing units without notice when the

unorthodox size or shape is necessitated by a variation in the legal subdivision of the United

States public land surveys or consists of an entire governmental section, and the non-standard

spacing unit is not less than 70 percent or more than 130 pecent of a standard spacing unit.2440

The director may approve administratively an application for non-standard spacing units after

notice and opportunity for hearing when the unorthodox size or shape is necessitated by a

variation in the legal subdivision of the United States public land surveys or the following facts

exist: (a) the non-standard spacing unit consists of a single quarter-quarter section or lot or

quarter-quarter sections or lots joined by a common side and (b) the non-standard spacing unit

lies wholly within a single quarter section if the well is completed in a pool or formation for

which 40, 80, or 160 acres is the standard spacing unit size; a single half section if the well is

completed in a pool or formation for which 320 acres is the standard spacing unit size; or a single

section if the well is completed in a pool or formation for which 640 acres is the standard spacing

unit size.2441

[6] – Directional Drilling.

No New Mexico oil and gas statutes or regulations contain any provisions specifically

applicable to horizontal wells.

[7] – Minimum Operator Control.

2439 Id. § 19.15.15.10 . 2440 Id. § 19.15.15.11(b)(1). 2441 Id. 19.15.15.11(b)(2).

471

No unitization order of the Division providing for unit operations shall become effective

unless and until the plan for unit operations prescribed by the Division has been approved in

writing by those persons who, under the Division's order, will be required initially to pay at least

75 percent of the costs of the unit operations, and also by the owners of at least 75 percent of the

production or proceeds thereof that will be credited to interests which are free of cost such as

royalties, overriding royalties, and production payments.2442 If 75 percent or more of the unit

area is owned, as to working interest, by one working interest owner, the working interest owner

must be joined by at least one other working interest owner in ratifying and approving the plan of

unit operations, unless such working interest owner is the owner of 100 percent of the working

interest in said unit area.2443 However, if a single owner is one who, under the Division's order

will be required initially to pay at least 25 percent, but not more than 50 percent, of the costs of

unit operation, such owner must be joined by at least one other owner of the same type of interest

in disapproving, or failure to approve, the plan of unit operations to defeat the plan.2444 If one

owner is the owner of at least 25 percent, but not more than 50 percent, of the production or

proceeds thereof that will be credited to interests which are free of costs, such owner must be

joined by at least one other owner of the same type of interest in disapproving, or failure to

approve, the plan of unit operations to defeat the plan.2445

[8] – Review of Election Rights/Options.

The risk penalty for nonparticipating owners is 200 percent by default, although it may be

changed upon application.2446

2442 N.M. Stat. Ann. § 70-7-8 (2011).

Unleased landowners owners are treated as one-eighth royalty

2443 Id. 2444 Id. 2445 Id. 2446 N.M. Code R. § 19.15.13.8 (2011).

472

owners and seven-eighths working interest owners under the pooling statute and similarly

receive a one-eighth royalty under the Statutory Unitization Act.2447

2447 N.M. Stat. Ann §§ 70-2-17, 70-7-18 9 (2011).

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§ 33.01 Analysis of New York Regulatory Framework.

[1] – Governing Body.

Article 23 of the New York Environmental Conservation Law, entitled the Oil, Gas, and

Solution Mining Law (“the Act”),2448 was developed around the goal of preventing the waste of

natural resources. 2449 The statute grants the Department of Environmental Conservation

(hereinafter the “Department”) the authority to carry out the provisions of the Act.2450 The

Department created the Bureau of Mineral Resources (hereinafter the “Bureau”)2451 to administer

and enforce all rules, regulations, orders, and amendments of the Department relating to oil and

gas.2452

[2] – Membership on the Board.

The Department of Environmental Conservation is led by a Commissioner, who holds

powers and duties under section 23-0305 of the New York statute. There is also a 13-person Oil,

Gas, and Solution Mining Advisory Board (hereinafter the “Board”) to assist the Commissioner

in the regulation of the mining industry.2453 The members of the Board are appointed by the

governor, including a majority representative of the respective industries. Three of the

appointments must be made at the recommendation of the Senate majority leader, and three must

be made at the recommendation of the Speaker of the Assembly. The members serve in three-

year terms and continue in office until their successors are appointed and qualified. 2454

2448 N.Y. Envtl. Conserv. Law § 23-0102 (McKinney 2011).

Additionally, the chair of the public service commission, the president of the New York State

Energy Research and Development Authority, the state geologist, and the Commissioner serve

2449 Id. § 23-0301. 2450 Id. § 23-0303(1). 2451 N.Y. Comp. Codes R. & Regs. tit. 6, § 550.2(a) (2011). 2452 Id. § 550.2(b). 2453 N.Y. Envtl. Conserv. Law § 23-0311(1) (McKinney 2011). 2454 Id.

474

on the Board in an ex-officio capacity.2455 The Bureau of Mineral Resources is directed by a

chief, 2456 aided by and assistant chief, who acts in the chief’s absence. 2457 The Bureau is

organized into regions, each with a regional supervisor acting as the chief’s deputy.2458

[3] – Scope of Authority.

The Department is granted its authority and given the framework for regulating the oil

and gas industry by the Act, 2459 as amended by Chapter 386 of the Laws of 2005. The

Department may, with regard to oil and gas pools and fields, investigate as necessary to

determine if waste exists or is imminent. 2460 The Department has the authority to regulate

pooling and spacing, as well as to review drilling proposals, conduct hearings, investigate the

environmental impact of drilling, and conduct site inspections, among other things.2461

[4] – Process for Pooling.

The Department may not promulgate any orders without first holding a public hearing

upon at least 10 days’ notice.2462 Hearings must be conducted by the director2463 or his staff as

designated. 2464 Notice of Department hearings must be given, either by personal service,

newspaper publication, or by mail and must address the purpose, style, number, time, and place

of the hearing.2465

Any party who applies for a permit to drill an oil or gas well must control, either through

fee ownership, voluntary agreement, or integration order of the Department, not less than 60

2455 Id. § 23-0311(2). 2456 N.Y. Comp. Codes R. & Regs. tit. 6, § 550.2(c) (2011). 2457 Id. § 550.2(d). 2458 Id. § 550.2(e). 2459 N.Y. Envtl. Conserv. Law § 23-0303(1) (McKinney 2011). 2460 Id. § 23-0305(7)(a). 2461 Id. § 23-0305. 2462 N.Y. Comp. Codes R. & Regs. tit. 6, § 550.4(a) (2011). 2463 The regulations state that the “director” conducts hearings, although the director is an undefined term; likely, either the commissioner of the Department or the chief of the Bureau were intended. 2464 N.Y. Comp. Codes R. & Regs. tit. 6, § 550.4(b) (2011). 2465 Id. § 550.4(c).

475

percent of the acreage in the proposed spacing unit for that well.2466 Those parties must also

submit to the Department a map of the proposed spacing unit in conformity with statewide

spacing rules, discussed in detail below, and a showing that the applicant controls the appropriate

percentage of oil or gas rights.2467 If the proposed spacing unit conforms to said spacing rules

and is approximately the same shape as other units in the same pool or field, and if it either

adjoins other units or leaves enough space for additional units to be developed, then the

Department will issue the permit. 2468 However, before it may issue such permits, the

Department must publish notice of intent to do so in the Environmental Notice Bulletin.2469

If the proposed unit does not fit the statewide spacing provisions, the Department may

still issue a permit if the unit meets the state’s policy objectives

2470—i.e., to prevent waste, to

increase ultimate recovery, and to protect correlative rights.2471 If approved, the Department

must make adjustments to production allowables so that each owner in the unit receives his or

her equitable share of production from the underlying pool.2472

The Department must receive all comments and challenges regarding the notice of intent

to issue a permit within 30 days of sending the notice, which challenges must include a

description and map of a proposed alternative spacing unit, technical justification for such

alternative spacing unit, and the name, address, and experience of any expert witnesses

supporting the alternative unit.

2473

2466 N.Y. Envtl. Conserv. Law § 23-0501(2) (McKinney 2011).

If the Department determines that the challenge raises no

substantive issues, or if no challenge is submitted, the Department will issue the permit and final

2467 Id. § 23-0501(2)(a)–(b). 2468 Id. § 23-0503(2). 2469 Id. 2470 Id. § 23-0503(3)(a). 2471 Id. § 23-0301. 2472 Id. § 23-0503(3)(b). 2473 Id. § 23-0503(3)(c).

476

spacing order.2474 However, if significant issues have been raised, the Department will schedule

an adjudicatory hearing.2475

With some specific exceptions, a spacing unit is binding on all persons, their heirs,

successors, and assigns. A decision may be modified without a hearing if it is determined that no

facts are in dispute after all affected parties have been given a reasonable opportunity to

comment.

2476 Once the well permit expires, or the wells in a unit are plugged and abandoned,

the spacing unit is extinguished and all of the land in the unit is eligible to be included in future

spacing units.2477

The Department may also integrate or unitize interests within a spacing unit.

2478 New

York law allows voluntary integration or unitization, whereby two or more parties mutually

consent to pool their interests and tracts within a spacing unit for the purpose of drilling.2479 An

agreement evidencing that decision can then be submitted to the Department for approval as

being in the public interest or as being reasonably necessary to prevent waste. 2480 While

Department approval is not a prerequisite for drilling, once such approval is granted, it provides

a blanket defense to any lawsuit alleging violation of any trust or monopoly laws in the operation

of the unit.2481 However, failure to submit the plan for approval will not constitute evidence or

an implication that the agreement is in violation of trust or monopoly laws.2482

Once the fee owners of the leased oil and gas interests in the spacing unit are given 21

days’ notice, the operator can record a declaration of voluntary integration for each tract in

2474 Id. § 23-0503(3)(d). 2475 Id. 2476 Id. §23-0503(6). 2477 Id. §23-0503(7). 2478 Id. § 23-0701. 2479 Id. § 23-0701(1). 2480 Id. 2481 Id. 2482 Id.

477

receipt of notice.2483 This declaration must include the acreage of each tract and the portion of

the entire spacing unit that that acreage constitutes. This declaration is final and binding on all

persons, as well as their heirs, successors, and assigns and all parties who take title by operation

of the law.2484

If the parties cannot or will not arrive at a voluntary integration agreement, the

Department has the authority to force such an agreement.

2485 No order requiring integration of

interests in a spacing unit may be issued unless the Department finds, after notice and hearing,

that such integration is necessary to carry out the following policies:2486 “[to] prevent waste; to

authorize and to provide for the operation and development of oil and gas properties in such a

manner that a greater ultimate recovery of oil and gas may be had, and that the correlative rights

of all owners and the rights of all persons including landowners and the general public may be

fully protected . . . .”2487

If the Department makes the above findings, it “shall make an order integrating all tracts

and interests in the spacing unit for development and operation.”

2488 If a well permit is issued by

the Department and the operator does not control all of the owners within the unit by lease or

agreement, the Department will schedule an integration hearing to determine whether integration

is in the public interest and necessary to prevent waste. 2489

(a) Physical waste, as that term is generally understood in the oil and gas industry;

The statute defines “waste” as

follows:

(b) The inefficient, excessive or improper use of, or the unnecessary dissipation of reservoir energy;

2483 Id. § 23-0701(2). 2484 Id. 2485 Id. § 23-0901. 2486 Id. § 23-0901(2). 2487 Id. § 23-0301. 2488 Id. § 23-0901(3). 2489 Id. § 23-0901(3)(b).

478

(c) The locating, spacing, drilling, equipping, operating, or producing of any oil or gas well or wells in a manner which causes or tends to cause reduction in the quantity of oil or gas ultimately recoverable from a pool under prudent and proper operations, or which causes or tends to cause unnecessary or excessive surface loss or destruction of oil or gas; (d) The inefficient storing of oil or gas; and (e) The flaring of gas produced from an oil or condensate well after the department has found that the use of the gas, on terms that are just and reasonable, is, or will be economically feasible within a reasonable time.2490

Where an integration hearing is scheduled, the operator must give at least 30 days’ notice

to the uncontrolled owners.

2491 The operator must also provide an estimate of well costs to be

paid by the participating owners based on their proportionate interests, a list of the controlled

tracts, and a list of the names and addresses of the uncontrolled owners.2492 The operator must

indicate if the identities of the uncontrolled owners are unknown. Where the owners are

unknown and a spacing unit is ordered, the operator must hold the royalties payable to the

unknown owner in an interest-bearing account until the owner is located or the property is

deemed abandoned.2493

The notice of the hearing for uncontrolled owners must be in a form prescribed by the

Department and include several provisions.

2494 It must contain an election form allowing

uncontrolled owners to elect to be integrated into the spacing unit as an integrated participating

owner, an integrated non-participating owner, or an integrated royalty owner, along with

estimated costs of participation; if uncontrolled owners do not make a timely election, the default

election status is that of an integrated royalty owner, 2495

2490 Id. § 23-0101(19).

discussed further below.

2491 Id. § 23-0901(3)(c). 2492 Id. 2493 Id. 2494 Id. § 23-0901(3)(c)(1). 2495 Id. § 23-0901(3)(c)(1)(i).

479

Notice must also include the proposed integration order. 2496

(A) The owner is liable for its proportionate share of all costs and expenses and third-party claims related to the well;

The proposed order has

several required terms, including the following:

(B) The well operator should hold risk penalty funds in an interest-bearing account until those funds are used for plugging and abandonment; (C) The owner is liable for and shall indemnify all other participants in the development of the well from and against all claims arising from the owner’s non-payment of rentals, royalties, and other required payments and from and against all claims associated with the loss or failure of title to the mineral rights; (D) The well operator has a lien on the production of owners to pay outstanding costs and may retain revenue or production to pay such costs owed under the integration order; (E) The well operator must submit to all owners written authority for expenditures of the costs associated with construction of the facilities that are not included in well costs beyond surface equipment at the wellhead to the first point of interconnection with other facilities that commingle production from a group of wells that include the well. If the owner does not elect to participate and pay its proportionate share within 30 days, the owner is deemed not to have elected, and the operator is entitled to retain all of the owner’s share of production until he has recouped from the net proceeds the actual costs plus a risk penalty of 100 percent of the costs; (F) If the owner is not subject to a risk penalty, the owner has the right to take its share of production and be responsible for marketing and transportation. The owner’s election to take in kind must be communicated to the operator not later than 14 days before first production or upon 75 days’ notice to the operator at any time thereafter subject to the expiration of an existing contract; (G) If the owner is not subject to a risk penalty and does not take its production share in kind, the operator will market such share with its own share for the owner’s account and pay the owner based on the price received in the general area minus (I) the owner’s proportionate share of costs and (II) a marketing fee not to exceed five percent of the sales price; (H) The operator is entitled to propose and conduct subsequent operations on a well; owners will be provided with written authorization for expenditure of the estimated costs of subsequent operations. Owners in a risk penalty phase may not participate in such subsequent operations but will be charged the owner’s

2496 Id. § 23-0901(3)(c)(1)(ii).

480

proportionate share of actual costs plus 200 percent risk penalty. Owners not in a risk penalty phase have 30 days to elect to participate unless the rig is already on location, in which case telephone notification is allowed, and the owner has 48 hours, exclusive of weekends and holidays, to accept. If no election is made, the operator may retain the owner’s proportionate share plus 200 percent of actual costs; (I) The operator, on behalf of the owner, is entitled to conduct all acts relating to the well; and (J) Other terms are allowed to be included in the order if the Department determines those terms are reasonably required to further the section 23-0301 policy objectives.2497

Within 21 days of receipt of the notice, the uncontrolled owners must indicate to the

Department and the operator the type of ownership status (discussed in detail in below) that they

elect.

2498 If the owner fails to make an election, the owner will be integrated as an integrated

royalty owner.2499

If substantive and significant issues are raised during the initial hearing, then the Division

will schedule an adjudicatory hearing regarding the issues.

2500 If there are no such issues,

however, the Division will issue a final order of integration confirming the status of all

uncontrolled owners. The order will be recorded in the office of the county clerk in the county or

counties where the property is located, and the order will be final and binding on the well

operator as well as the owners and their heirs, successors, and assigns.2501 All operations on a

spacing unit that is covered by an integration order are deemed to be conducted upon each

separately owned tract in the spacing unit by the owner or owners thereof, and production

allocated to each tract under an integration order is deemed to have been produced by a well

drilled thereon.2502

2497 Id.

2498 Id. § 23-0901(3)(c)(2). 2499 Id. 2500 Id. § 23-0901(3)(d). 2501 Id. § 23-0901(3)(e). 2502 Id. § 23-0901(3)(f).

481

The Department’s authority to order compulsory integration also pertains to integration

resulting in the unit operation of an entire pool.2503 The Department may elect to hold a hearing

to consider the need for unit operation upon its own motion and it must hold such a hearing when

an application is filed by an interested person.2504 Once an application is filed, a hearing should

be held without “undue delay,” and the Department must issue an order within 60 days of the

conclusion of the hearing.2505 In making its determinations, the same policies regarding waste

prevention and correlative right protection must be considered.2506 Prior to issuing an order, the

Department has broad powers of investigation and may subpoena parties to testify.2507 Once a

permit is issued, the operator must notify by certified mail any local government affected by the

location of the drilling site prior to commencing operations.2508

If the Department decides that unit operations are reasonably necessary to increase

substantially the ultimate recovery of oil and gas and that the estimated additional recovery value

is greater than the estimated additional cost of running such operations, the Department will

issue an order providing for unit operations.

2509

(a) A description of the unit area; (b) A statement of the nature of the operations contemplated; (c) An allocation of production that is not used in conducting operations and that is not unavoidably lost. If the parties have not agreed as to the allocation, the Department will determine the production allocation, which must be the proportion that the value of each tract bears to the value of all tracts in the unit area; (d) A provisions for charges to be made in adjusting among owners for their investments in operations; (e) A provision providing how expenses, including capital investment, will be charged and paid; (f) A provision, if needed, for carrying or

The order must be fair and reasonable and must

include the following:

2503 Id. § 23-0901. 2504 Id. § 23-0901(4). 2505 Id. § 23-0305(6). 2506 Id. § 23-0901(2). 2507 Id. § 23-0305(7). 2508 Id. § 23-0305(13). 2509 Id. § 23-0901(5).

482

financing those unable to pay for their portion of unit operations; (g) A provision for the supervision and conduct of the operations; (h) The time when operations begin and the manner in which they end; (i) Additional provisions as appropriate.2510

Unitization orders are not effective until the plan issued by the Department is approved in

writing by the owners of 60 percent or more in interest as the costs are shared under the order

and by owners of a like percentage of a one-eighth royalty interest in the unit area.

2511 The

Department must make a finding that the plan has been adequately approved, and such approval

must be had within six months from the order date or it will become ineffective.2512

Orders may be amended in the same way and subject to the same conditions as the

original order.

2513 However, if the amendment only affects rights of owners, royalty owners

need not give their approval. 2514 Amendments may not change the percentage allocation

provided for in the original order without the consent of all persons owning interest in the tract at

issue.2515 Also, the Department may provide for unit operation in an area that is covered by a

previous order so long as allocation is had for the new portion of the tract.2516

§ 33.02 Types of New York Pooling Statutes.

[1] – Mineral Distinctions.

New York law provides the following definitions. “Gas” is defined as “all natural,

manufactured, mixed, and byproduct gas, and all other hydrocarbons not defined as oil in this

section.”2517

2510 Id.

“Oil” means “crude petroleum oil and all other hydrocarbons, regardless of gravity,

2511 Id. § 23-0901(6). 2512 Id. 2513 Id. § 23-0901(7). 2514 Id. § 23-0901(7)(a). 2515 Id. § 23-0901(7)(b). 2516 Id. § 23-0901(8). 2517 Id. § 23-0101(7).

483

that are produced at the wellhead in liquid form by ordinary production methods and that are not

the result of condensation of gas.”2518

[2] – Spacing Rules.

Spacing orders are not required for wells that were drilled, operated, plugged, or

converted prior to January 1, 1981. 2519

For gas pools drilled to any depth in the Medina Formation, the spacing unit must be within 10 percent of 40 acres, with the wellbore within the target formation no less than 460 feet from any unit boundary, plus, if applicable, the number of additional acres necessary and sufficient to ensure that any horizontal wellbore within the target formation is not less than 460 feet from any unit boundary;

The following spacing requirements are listed in

subsection (b)(1) of section 23-0501(1) for wells drilled after that date unless another percentage

is specifically stated:

For gas pools drilled to any depth in the Onondaga reef or Oriskany formation, the spacing unit must be within 10 percent of 160 acres, with the wellbore within the target formation no less than 660 feet from any unit boundary, plus, if applicable, the number of additional acres necessary and sufficient to ensure that any horizontal wellbore within the target formation is not less than 660 feet from any unit boundary; For hydrothermal dolomite gas pools drilled from 4,000 to 8,000 feet in the fault-bounded Trenton and/or Black River formation, the spacing unit must be within 10 percent of 320 acres, with the proposed productive section of the wellbore within the target formation no less than one-half mile from any other well in another unit in the same pool and no less than 1,000 feet from any unit boundary that is not defined by a field-bounding fault, but in no event less than 660 feet from any unit boundary; For hydrothermal dolomite gas pools drilled below 8,000 feet in the fault-bounded Trenton and/or Black River formation, the spacing unit must be within five percent of 640 acres, with the proposed productive section of the wellbore within the target formation no less than one mile from any other well in another unit in the same pool and no less than 1,500 feet from any unit boundary that is not defined by a field-bounding fault, but in no event less than 660 feet from any unit boundary;

2518 Id. § 23-0101(10). 2519 Id. § 23-0503(1).

484

For shale gas pools at any depth, for a vertical well outside any existing spacing unit for the same formation, the spacing unit must be within 10 percent of 40 acres, with the wellbore within the target formation no less than 460 feet from any unit boundary; For shale gas pools at any depth, for a horizontal well outside any existing spacing unit for the same formation and with a written commitment from the well operator to drill infill wells pursuant to subdivision 4 of section 23-0503 of this title, with all horizontal infill wells in the unit to be drilled from a common well pad within three years of the date the first well in the unit commences drilling, notwithstanding the 10 percent tolerance specified in this subparagraph, the spacing unit may be up to 640 acres, with the initial horizontal wellbore or wellbores within the target formation approximately centered in the spacing unit, and no wellbore in the target formation less than 330 feet from any unit boundary; For shale gas pools at any depth, for a horizontal well outside any existing spacing unit from the same formation and in the absence of a written commitment from the well operator to drill infill wells pursuant to subdivision 4 of section 23-0503, the spacing unit must be within 10 percent of 40 acres, with the wellbore within the target formation no less than 330 feet from any unit boundary plus the number of additional acres necessary and sufficient to ensure that the wellbore within the target formation is not less than 330 feet from any unit boundary; For all other gas pools where the majority of the pool is above 4,000 feet, the spacing unit must be within 10 percent of 80 acres, with the wellbore within the target formation no less than 460 feet from any unit boundary, plus, if applicable, the number of additional acres necessary and sufficient to ensure that any horizontal wellbore within the target formation is not less than 460 feet from any unit boundary; For all other gas pools where the majority of the pool is 4,000 to 6,000 feet deep, the spacing unit must be within 10 percent of 160 acres, with the wellbore within the target formation no less than 660 feet from any unit boundary, plus, if applicable, the number of additional acres necessary and sufficient to ensure that any horizontal wellbore within the target formation is not less than 660 feet from any unit boundary; For all other gas pools where the majority of the pool is 6,000 to 8,000 feet deep, the spacing unit must be within 10 percent of 320 acres, with the wellbore within the target formation no less than 1,000 feet from any unit boundary, plus, if applicable, the number of additional acres necessary and sufficient to ensure that any horizontal wellbore within the target formation is not less than 1,000 feet from any unit boundary;

485

For all other gas pools where the majority of the pool is below 8,000 feet, the spacing unit must be within five percent of 640 acres, with the wellbore within the target formation no less than 1,500 feet from any unit boundary, plus, if applicable, the number of additional acres necessary and sufficient to ensure that any horizontal wellbore within the target formation is not less than 1,500 feet from any unit boundary; For oil pools in the Bass Island, Trenton, Black River, Onondaga reef or other oil-bearing reefs at any depth, the spacing unit must be within 10 percent of 40 acres, with the wellbore within the target formation no less than 460 feet from any unit boundary, plus, if applicable, the number of additional acres necessary and sufficient to ensure that any horizontal wellbore within the target formation is not less than 460 feet from any unit boundary; and For all other oil pools at any depth, the wellbore within the target formation must be at least 165 feet from any lease boundary.2520

Wells drilled as oil wells may not produce natural gas before the spacing unit is modified

pursuant to gas spacing provisions.

2521

[3] – Minimum Operator Control.

An order issued by the Department compelling operations will not be effective unless and

until the unit operations plan is approved in writing by owners of 60 percent or more of the

interests, and by a like percentage of the owners of one-eighth royalty interests, and the

Department has found that the plan has been approved by the requisite number of owners. If the

plan has not been approved by the requisite percentage within six months of the order, the order

will then be revoked by the Department.2522

[4] – Review of Election Rights/Options.

Non-participating owners have 30 days after receipt of the proposed order for integration

to elect to participate.2523 The election form they will receive as part of their notice2524

2520 Id. § 23-5301(1)(b)(1).

must

2521 Id. 2522 Id. § 23-0901(6) 2523 Id. § 23-0901(3)(c)(1)(ii)(E). 2524 Id. § 23-0901(3)(c)(1)(i).

486

include the operator’s good faith estimate of costs. Uncontrolled owners who do not make a

timely election to participate or who do not make the requisite payments will be integrated as an

integrated royalty owner, described further below.2525

[a] Non-Participating Owners.

An “integrated non-participating owner” or “non-participating owner” is an owner who

chooses to reimburse the operator from production proceeds for the owner’s proportionate share

of the costs of the well.2526 Once the operator has recouped the portion of the owner’s costs for

the well plus a risk penalty,2527 the owner is then entitled to his or her full share of the production

attributable to his or her proportionate interest.2528

Where the tract is under lease, a royalty is deducted from the non-participating owner’s

share of production, without being subject to charges and costs.

2529

(i) During the recovery of the actual well costs, 1/16 or 6.25%; (ii) During the recovery of the first 100% of the risk penalty, 3/32 or 9.38%; (iii) During the recovery of the second 100% of the risk penalty, the lowest royalty fraction set forth in an existing lease in the unit, but no less than 1/8 or 12.5%.

The royalty is calculated

separately and paid to the non-participating owner on the royalty owner’s behalf under the

following allocations:

2530

The lessee is not relieved of any obligations to pay any remaining royalty and/or overriding

royalty owed under the terms of its lease.

2531

[b] Integrated Participating Owner.

2525 Id. 2526 Id. § 23-0901(3)(a)(1). 2527 Id. “Risk penalty” is defined as the percentage applied to well costs to reimburse the operator for the risk associated with exploration and development. Id. § 23-0901(3)(a)(4). The risk penalty is equal to two hundred percent of the share of the actual well costs allocated to the owner. Id. § 23-0901(3)(a)(1). 2528 Id. § 23-0901(3)(a)(1). 2529 Id. 2530 Id. 2531 Id.

487

An “integrated participating owner” or “participating owner” is a party who chooses to

participate in the initial well, pay the costs associated with participating up front, and comply

with any and all requirements for participation.2532

[c] Integrated Royalty Owner.

An integrated royalty owner is an owner who chooses to be an integrated royalty owner

or who does not choose to operate as either of the previously-discussed options (the state-

mandated default participation interest).2533 This type of owner receives a royalty equaling the

lowest royalty of the existing leases in the unit, but not to an amount less than one-eighth.2534 An

integrated royalty owner has no obligation to the well operator or other owners for charges,

taxes, or fees associated with operating the well and is also insulated from claims for personal

injury or property damage related to the drilling and operation of the well.2535

2532 Id. § 23-0901(3)(a)(2). 2533 Id. § 23-0901(3)(a)(3). 2534 Id. 2535 Id.

488

§ 34.01 Analysis of North Carolina Regulatory Framework. [1] – Name of Governing Body.

The North Carolina Department of Environment and Natural Resources (“the

Department”) has the authority to regulate oil and gas production under the state’s Oil and Gas

Conservation Act (“the Act”).2536

[2] – Membership on the Governing Body.

There is little detail available about the membership of the Department relevant to oil and

gas regulation. 2537 In general, the Secretary leads the Department. 2538 The Secretary is

appointed by the Governor and has the power to appoint Deputy Secretaries. 2539 The

Department is organized as the “Secretary's office and staff, administration, divisions, programs,

regional offices, boards, councils and commissions.”2540

[3] – Scope of Authority.

The Act grants the Department jurisdiction and authority “over all persons and property

necessary to administer and enforce” its provisions.2541 The Act specifies its public policy goals

of “prohibiting waste and compelling ratable production[,] and authorizing regulations for the

protection of the environment. 2542 Waste, which is expressly prohibited, 2543 is defined as

“‘physical waste,’ as that term is generally understood in the oil and gas industry.” 2544

2536 N.C. Gen. Stat. § 113-378 (2011).

In

addition, waste includes the following:

2537 Id. § 143B-279.4. 2538 Id. 2539See NCDENR, North Carolina Department of Environment and Natural Resources, http://www.enr.state.nc.us/html/Sec_Freeman.html (last visited June 10, 2011) (discussing the appointment of the current Secretary of the Department). 2540 Id. 2541 N.C. Gen. Stat. § 113-391 (2011). 2542 Id. § 113-382. 2543 Id. § 113-390. 2544 Id. § 113-389(14).

489

(a) The inefficient, excessive or improper use or dissipation of reservoir energy; and the locating, spacing, drilling, equipping, operating or producing of any oil or gas well or wells in a manner which results, or tends to result, in reducing inefficiently the quantity of oil or gas ultimately to be recovered from any pool in this State; (b) The inefficient storing of oil, and the locating, spacing, drilling, equipping, operating or producing of any oil or gas well or wells in a manner causing, or tending to cause, unnecessary or excessive surface loss or destruction of oil or gas; (c) Abuse of the correlative rights and opportunities of each owner of oil and gas in a common reservoir due to non-uniform, disproportionate, and unratable withdrawals causing undue drainage between tracts of land; (d) Producing oil or gas in such manner as to cause unnecessary water channeling or coning; (e) The operation of any oil well or wells with an inefficient gas-oil ratio; (f) The drowning with water of any stratum or part thereof capable of producing oil or gas; (g) Underground waste however caused and whether or not defined; (h) The creation of unnecessary fire hazards; (i) The escape into the open air, from a well producing both oil and gas, of gas in excess of the amount which is necessary in the efficient drilling or operation of the well; or (j) Permitting gas produced from a gas well to escape into the air. 2545

The Department has the authority and the duty to determine whether or not waste exists or is

imminent within its jurisdiction.

2546 Pursuant to waste prevention, the Department may collect

data; investigate, inspect, and examine properties and records; test oil and gas wells; hold

hearings; require the maintenance of records and reports; and any take other action as may be

reasonably necessary to enforce Act.2547

2545 Id.

In particular, the Department may enact and enforce

regulations to govern proper drilling and operating methods, limitation and proration of oil and

gas production, spacing of wells, establishment of drilling units, and the pooling and unitization

2546 Id. §§ 113-391(b). 2547 Id.

490

of oil and gas interests.2548 Although the Act does not specify detailed requirements to obtain a

drilling permit, no well may be drilled for oil or gas without providing notice to the Department

by formal registration in a manner required by the Department.2549

[4] – Process for Pooling & Matters Covered.

[a] – Drilling Units.

In order to prevent waste and avoid the drilling of excessive wells, the Department may,

after notice and a hearing, establish a drilling unit or units for each pool.2550 A “drilling unit” is

that “area which can be efficiently and economically drained by one well.”2551 The Department

has discretion as to the size and shape of each drilling unit and may set such dimensions as

necessary to prevent any producer within the pool from procuring “more than his just and

equitable share of oil and gas.”2552 The Act defines a producer’s “just and equitable share” as

“that part of authorized production from the pool . . . which is substantially in the proportion that

the quantity of recoverable oil and gas in the developed area of his tract . . . bears to the

recoverable oil and gas in the total developed area in the pool.”2553

[b] – Authority to Integrate Production.

When multiple, separately-owned tracts are embraced within an existing drilling unit,

“the owners thereof may agree validly to integrate their interests and to develop their lands as a

drilling unit.”2554

2548 Id. § 113-391(c).

In the absence of such agreement, the Department may “require such owners

to do so and to develop their lands as a drilling unit” in order to prevent waste or avoid

2549 See id. § 113-395; see also 15A N.C. Admin. Code 05D.0104-05 (2011). 2550 N.C. Gen. Stat. § 113-392(c) (2011). 2551 15A N.C. Admin. Code 05D.0103(2) (2011). 2552 N.C. Gen. Stat. § 113-392(c) (2011). 2553 Id. § 113-392(d). 2554 Id. § 113-393(a).

491

unnecessary drilling.2555 A pooling order may only be issued after notice and a hearing and must

provide just and reasonable terms to “afford . . . the owner of each tract the opportunity to

recover or receive his just and equitable share of the oil and gas in the pool without unnecessary

expense; . . . [and] prevent or minimize reasonably avoidable drainage.”2556

Upon the Department’s findings at the public hearing, an order to integrate interests

within a drilling unit or pool must provide the following information: (1) the equitable share of

oil or gas in the pool to be allocated to each owner; (2) the designated operator of the pooled

area; (3) any drilling and operating costs and how such expenses will be equitably distributed

among the owners; and (4) any production penalty the Department chooses to impose upon an

owner who refuses to pay his share of such costs.

2557

[c] – Allocation of Production and Costs.

Under a pooling agreement or order, the portion of production allocated to each owner

within the unit area is considered as if it had been produced from such tract by a well drilled

thereon.2558 As noted above, an order to pool interests within a drilling unit will establish how

production and costs are to be allocated among the various owners within the covered area.2559

The operator designated by the Department “shall have the right to charge to each other

interested owner the actual expenditures required for [drilling and operation] not in excess of

what is reasonable, including a reasonable charge for supervision.”2560

2555 Id.

After the operator has

recovered such costs, he must pay each owner within the pool his ratable share of the production

2556 Id. 2557 15A N.C. Admin. Code 05D.0106(e) (2011). 2558 N.C. Gen. Stat. § 113-393(a) (2011). 2559 15A N.C. Admin. Code 05D.0106(e) (2011). 2560 N.C. Gen. Stat. § 113-393(a) (2011).

492

“calculated at the market price in the field at the time of such production, less the reasonable

expense for operating the well.”2561

[d] – Limitation of Allowable Production.

The Department has a statutory duty to limit production of oil and gas within the state to

that amount, referred to as an “allowable,” that reasonably meets but does not exceed market

demand for each product.2562 Upon establishing a statewide allowable, the Department will fix

an allowable for each pool in the state in a manner that will prevent waste and avoid undue

discrimination among pools.2563 The Department is not required to consider market demand or

purchase offers for any particular pool but may look to any circumstances in determining the

statewide allowable, so long as production is fairly allocated among the various pools.2564

Once the Department has allocated allowable production among pools, it must then

prorate such among the various producers or drilling units within each pool. This proration must

be made on a reasonable basis so that each “will have the opportunity to produce his just and

equitable share,” subject to any conditions to prevent waste.

2565 Once allowable production is

determined, it is unlawful for any person to produce more oil or gas than he is allocated by the

Department.2566

[e] – Royalty Distribution.

Neither the Act nor Department regulations discuss the rights of royalty owners or the

impact of statutory pooling upon their interests. This absence suggests that any royalty owner

with an interest in a tract subject to a pooling order may continue to receive monetary payment

2561 Id. 2562 Id. § 113-394(a). 2563 Id. 2564 Id. § 113-394(b). 2565 Id. § 113-394(c)-(d). 2566 Id. § 113-394(e).

493

under the terms of the applicable lease or similar agreement creating such interest. However, it

is unclear how the Department treats unleased owners subject to compulsory pooling.

[f] – Restraint of Trade.

Under the Act, any voluntary agreement for pooling that is approved by the Department

“shall not be held or construed to violate any of the statutes of [North Carolina] relating to trusts,

monopolies, or contracts…in restraint of trade.”2567

§ 34.02 Types of North Carolina Pooling Statutes.

[1] – Mineral Distinctions.

The Act defines “oil” to include “crude petroleum oil, and other hydrocarbons, regardless

of gravity, which are produced at the well in liquid form by ordinary production methods and

which are not the result of condensation of gas after it leaves the reservoir.”2568 “Gas” is defined

as “all natural gas, including casing-head gas, and all other hydrocarbons not [otherwise] defined

as oil.”2569 There are no significant distinctions made between oil and gas in the Act, except that

the practice of setting allowable production is particular to each as based on current market

demand for the product.2570

[2] – Split by Depth.

North Carolina law makes no statutory or regulatory distinction based upon the depth of a

given well.

[3] – Size & Spacing Rules.

The Department is granted broad discretion to determine unit size and spacing

requirements for any drilling unit or pool in the state. In general, an established drilling unit will

2567 Id. § 113-393(c). 2568 Id. § 113-389(7). 2569 Id. § 113-389(3). 2570 Id. § 113-394.

494

hold a single well thereon, which must be located reasonably close to the center of the unit;

however, there is no specified acreage for the size of drilling units.2571 The Department will not

issue a drilling permit for a proposed well that violates the special rules applicable to that

particular unit, pool, or field.2572 In general, these special rules will establish the (1) minimum

size unit upon which one well may be drilled; (2) method of determining a total allowable for the

pool; (3) method of allocation and distributing total allowable among various separate leaseholds

on pooled units so that correlative rights are protected; and (4) minimum distance required from

separate leaseholds or pooled units and between wells producing from the same reservoir.2573

The Department may grant exceptions to applicable spacing rules upon application and a

public hearing if the applicant shows that an exception will result in increased recovery of oil or

gas.

2574 An exception may also be provided if recovery would be otherwise limited by

topographical or geological conditions or any other factors the Department deems pertinent to

the application.2575

[4] – Minimum Operator Control.

The Act does not specify any percentage of relevant owners required to effectuate an

order for pooling, nor for the establishment of a drilling unit.

[5] – Directional Drilling.

The Department may fix the surface location of any well upon which the penetration of

such well “shall not unreasonably vary from the vertical drawn from the center of the hold at the

2571 Id. § 113-392(c). 2572 15A N.C. Admin. Code 05D.0106(a) (2011). 2573 Id. at 05D.0106(b). 2574 Id. at 05D.0106(c). 2575 Id.

495

surface.”2576 However, the Department may prescribe rules or issue an order governing the

reasonableness of horizontal variation as it sees fit.2577

[6] – Election.

The Act does not discuss election rights or other requirements for the treatment of non-

consenting working interest owners subject to a pooling order.

2576 N.C. Gen. Stat. § 113-393(d) (2011). 2577 Id.

496

§ 35.01 Analysis of North Dakota Regulatory Framework. [1] – Name of Governing Body. The Industrial Commission (hereinafter the “Commission”) is vested with jurisdiction

over oil and gas resources in North Dakota.2578

[2] – Membership on the Governing Body.

The members of the Commission are the Governor, the Attorney General, and the

Agriculture Commissioner of the State.2579 The Governor is the Chairman, and a quorum for the

transaction of business consists of the Governor and one additional member.2580 The Attorney

General serves as general counsel.2581 The Industrial Commission has the authority to appoint a

Director of Mineral Resources who serves at the pleasure of the Commission.2582

[3] – Scope of Authority.

“The Industrial Commission has very broad, general jurisdiction and authority to regulate

production of oil and gas and oil and gas industry in North Dakota.”2583 The Act for the Control

of Gas and Oil Resources (hereinafter the “Act”)2584 vests the Commission with its various duties

and powers.2585

[It is] in the public interest to foster, to encourage, and to promote the development, production, and utilization of natural resources of oil and gas in the state in such a manner as will prevent waste; to authorize and to provide for the operation and development of oil and gas properties in such a manner that a greater ultimate recovery of oil and gas be had and that the correlative rights of all owners be fully protected; and to encourage . . . the greatest possible economic recovery of oil and gas be obtained within the

The Act states that its public policy is as follows:

2578 N.D. Cent. Code § 38-08-01 (2010). 2579 See N.D. Indus. Comm’n, Department of Mineral Resources Oil & Gas Division Home Page, https://www.dmr.nd.gov/oilgas/ (last visited May 28, 2011). 2580 Id. 2581 Id. 2582 N.D. Cent. Code § 38-08-4.2 (2010). 2583 Amerada Hess Corp. v. Furlong Oil & Minerals Co., 348 N.W.2d 913 (1984). 2584 N.D. Cent. Code § 38-08-01 to -23 (2010). 2585 Id. § 38-08-04.

497

state to the end that the landowners, the royalty owners, the producers, and the general public realize and enjoy the greatest possible good from these vital natural resources.2586

North Dakota law also states that the Commission has jurisdiction over “all persons and

property, public and private, necessary to enforce effectively the provisions of [the Act].”

2587

Specifically, it must investigate appropriately to determine whether waste exists or is imminent

or if other facts exist that justify Commission action. 2588

(a) Physical waste, as that term is generally understood in the oil and gas industry.

“Waste” is defined by statute as

follows:

(b) The inefficient, excessive, or improper use of or the unnecessary dissipation of reservoir energy. (c) The locating, spacing, drilling, equipping, operating or producing of any oil or gas well or wells in a manner which causes, or tends to cause, reduction in the quantity of oil or gas ultimately recoverable from a pool under prudent and proper operations, or which causes or tends to cause unnecessary or excessive surface loss or destruction of oil or gas. (d) The inefficient storing of oil. (e) The production of oil or gas in excess of transportation or marketing facilities or in excess of reasonable market demand.2589

The Commission has authority, among other things, to require payment of bonds and fees

conditioned upon compliance with this Act;

2590 to regulate drilling, production, plugging, and

spacing of wells;2591 to limit and allocate production from any pool or field;2592 and to adopt and

enforce rules and orders to effectuate the purposes and intent of this Act. 2593

2586 Id. § 38-08-01.

Finally, the

Commission has the authority to determine market demand and regulate the amount of allowable

2587 Id. § 38-08-04. 2588 Id. 2589 Id. § 38-08-02(16). 2590 Id. § 38-08-04(1). 2591 Id. § 38-08-04(2). 2592 Id. § 38-08-04(3). 2593 Id. § 38-08-04(5).

498

production; 2594 to order the pooling or integration of interests within a spacing unit for

development;2595 and to order unitized management and development of common sources of

supply, 2596 that is, a pool, and from unit sources of supply, which are two or more pools

separated vertically in one field.2597

North Dakota law gives the Commission the authority to regulate, among other gases,

coalbed methane gas, in the same manner as it regulates oil or gas, as far as is practicable.

2598

The statute does not, however, define coalbed methane gas. Finally, the Commission is charged

with resolving any issues between various producers of natural resources, 2599 which term is

defined to include coal, oil, and gas.2600 The procedure the Commission must employ when

resolving such conflicts is one in accordance with the provisions of chapter 38-08 governing the

administration of the Oil and Gas Conservation Act.2601

[4] – Process for Pooling.

[a] Creation of Spacing Units.

In North Dakota, the Industrial Commission controls all aspects of oil and gas

production. Drilling operations may only commence after operators obtain a drilling permit from

the Commission.2602 The Commission establishes spacing units for pools when necessary to

prevent waste, to avoid drilling unnecessary wells, or to protect correlative rights.2603

2594 Id. § 38-08-06.

Spacing

units should be of uniform shape and size, but if necessary a pool may be split into zones with

multiple spacing units, which such units may vary in size and shape from one zone to the

2595 Id. § 38-08-08. 2596 Id. § 38-08-09.3. 2597 Id. § 38-08-09.17. 2598 Id. § 38-08-21. 2599 Id. § 38-15-03. 2600 Id. § 38-15-02(5). 2601 Id. § 38-15-04. 2602 Id. § 38-08-05. 2603 Id. § 38-08-07(1).

499

next.2604 The primary requirement for units’ shape and size is that they result in the efficient and

economical development of the whole pool.2605

Orders that establish spacing units must state the size and shape of all units, as well as the

location of the wells thereon.

2606 The orders establishing units must cover all land underlain by

the pool and should be increased or decreased if the Commission later finds that the pool is

larger or smaller than originally believed.2607 If the Commission finds it necessary to vary the

well location, it may do so, but must also act to prevent production from each unit in excess of a

just and equitable amount.2608 In the absence of an order creating spacing units, the Commission

has promulgated regulations setting forth the default unit size and well location rules,2609 as well

as exceptions to those rules,2610

[b] – Pooling of Interests within Spacing Units.

discussed below.

When a given spacing unit contains more than one separately owned tract or multiple

interests, the owners and royalty owners thereof may decide to integrate, or pool, their interests

in order to better develop and operate said unit.2611 Under the Act, pooling of a spacing unit can

occur two ways: either by parties voluntarily pooling their separately owned tracts or interests or

by an order entered by the Commission.2612 Orders must be made after notice and hearing and

must be on fair and reasonable terms, giving each owner the opportunity to receive his just and

equitable share of production.2613

2604 Id.

The Supreme Court of North Dakota has upheld the authority

2605 Id. § 38-08-07(2). 2606 Id. § 38-08-07(3). 2607 Id. § 38-08-07(4). 2608 Id. § 38-08-07(3). 2609 N.D. Admin. Code 43-02-03-18 (2010). 2610 Id. 43-02-03-18.1 2611 N.D. Cent. Code § 38-08-08(1) (2010). 2612 Id. 2613 Id.

500

of the Industrial Commission to compulsorily pool unwilling mineral owners’ interests. 2614

Specifically, the Court rejected a challenge to one such compulsory pool where the unwilling

mineral owner argued that the Industrial Commission’s Order was an improper subsurface

trespass.2615 The Court relied on a previous case and held that the police powers of the state are

properly exercised when the Industrial Commission orders spacing or compels pooling.2616

Operations on a spacing unit that is subject to a pooling order are considered to be

conducted on each separately owned tract by the several owners thereof, and production

allocated to each tract is considered to have been produced from that tract by a well drilled

thereon.

2617 Additionally, pooled unleased mineral interests are entitled to cost-free royalty

interests equal to the “acreage weighted average royalty interest of the leased tracts within the

spacing unit,” but the royalty may not be less than a one-eighth interest for lands pooled prior to

August 1, 2009.2618 For lands pooled after July 31, 2009, the mineral interest is entitled to a

weighted average royalty interest of all leased tracts in the unit or, at the operator’s election, a

cost-free 16 percent royalty interest.2619 The rest of the interest will be treated as cost-bearing

interest.2620

Pooling orders must include provisions for operations on the well and for payment of

actual costs by interest-holders. Owners who drill and operate, or pay expenses of drilling and

operating for others, are entitled to a production lien for the payment of other owners’

proportionate share of costs.

2621

2614 See Cont’l Res., Inc., v. Farrar Oil Co., 1997 ND 31, 559 N.W.2d 841 (1997).

If an owner elects not to participate in a pooled spacing unit,

2615 Id. 2616 Id. (citing Slawson v. N.D. Indus. Comm’n, 339 N.W.2d 772 (1983)). 2617 N.D. Cent. Code § 38-08-08(1) (2010). 2618 Id. 2619 Id. 2620 Id. 2621 Id. § 38-08-08(2).

501

then the owners who pay for that nonparticipating owner’s share of drilling may recover the

nonparticipating owner’s costs plus a risk penalty.2622

(a) If the nonparticipating interest is derived from a lease or other development contract, the penalty is 200 percent of the nonparticipating owner’s share of reasonable actual costs of drilling and completing the well and may be recovered out of production, exclusive of any royalty or overriding royalty.

The risk penalty is as follows:

(b) If the nonparticipating interest is not subject to a lease or other development contract, the risk penalty is 50 percent of the nonparticipating owner’s share of reasonable actual drilling and completion costs and may be recovered out of production, exclusive of any royalty. (c) The owner paying for the nonparticipating owner’s share of costs may recover from that nonparticipating owner a risk penalty only if the owner has made an unsuccessful, good-faith attempt to have said nonparticipating owner execute a lease or to have that owner participate in the risk.2623

A person to whom such drilling expenses are owed may obtain a lien on the debtor’s interest in

the production by filing with the register of deeds in the county in which the property is located

an affidavit denoting the amount due and the debtor’s interest in production.

2624

[c] – Unitization of Interests within a Pool or Pools.

The Commission is vested with the jurisdiction and authority to order plans of

unitization, “which are fair, reasonable, and equitable and which are necessary or proper to

protect, safeguard, and adjust the respective rights and obligations of the several persons

affected.”2625 A unitization plan containing operating charges which include “any part of district

or central office expense other than reasonable overhead charges” will not be considered fair and

reasonable.2626

2622 Id. § 38-08-08(3).

The Commission must also make and enforce the orders that are necessary and

2623 Id. § 38-08-08(3). 2624 Id. § 38-08-10. 2625 Id. § 38-08-09.2. 2626 Id. § 38-08-09.10.

502

proper for carrying out the section of the code related to unit operations. 2627 That section

contains legislative findings that declare “it is desirable and necessary . . . to authorize and

provide for unitized management, operation, and further development of the oil and gas

properties to which [this section] is applicable, to the end that a greater ultimate recovery of oil

and gas may be had therefrom, waste prevented, the drilling of unnecessary wells eliminated, and

the correlative rights of the owners in a fuller and more beneficial enjoyment of the oil and gas

rights protected.”2628

A party must file a petition to request unitized management. That petition must include a

description of the proposed unit area with a map or plat attached, must allege the existence of the

facts that the Commission is required to find before issuing an order, and must attach a proposed

plan of unitization applicable to the unit area that the petitioner thinks is fair, reasonable, and

equitable.

2629 Upon receiving a petition, the Commission must schedule a hearing. At least 45

days prior to the scheduled hearing, the petitioner must give notice of the hearing and mail a

copy of the application and proposed plan to all affected persons holding an interest in the unit

outline at that person’s last known mailing address.2630

The findings that the Commission must make regarding the petition are as follows: that

unitized management is reasonably necessary to substantially increase the ultimate recovery of

oil and gas from the common source of supply (that is, the pool

2631

2627 Id.

); that one or more methods of

unitized operation are feasible, will prevent waste, and will likely result in increased recovery of

more oil and gas from the common source of supply than would otherwise be recovered; that the

added costs of unitized operation will not be greater than the added value; and that unitization is

2628 Id. § 38-08-09.1. 2629 Id. § 38-08-09.3(4). 2630 Id. § 38-08-09.5. 2631 N.D. Admin Code 43-02-03-01(12) (2010).

503

for the common good, resulting in the general advantage of owners within the common source of

supply or portion thereof.2632

If the Commission makes the required findings, it will issue an order that must be

equitable and reasonable and that is “necessary or proper to protect, safeguard, and adjust the

respective rights and obligations of the several persons affected, including royalty owners,

owners of overriding royalties, oil and gas payments, carried interests, mortgagees, lien

claimants, and others, as well as the lessees.”

2633 The order must define the area of the pool or

portion of the pool and must prescribe a detailed unitization plan.2634

(1) A provision providing for the efficient unitized management of the unit area for the recovery of oil and gas from the common source of supply, including a provision allowing the working interest owners to vote to determine the unit operator.

The unitization plan should

be suited to the needs of the particular unit based on the facts, but must include the following:

(2) A provision determining production allocation among the several tracts so to allow all to receive each party’s fair and equitable share of unit production or proceeds therefrom. The fair portion is the value of each tract for oil and gas purposes and its contributing value to the unit in relation to like values of other tracts in the unit, taking into account acreage, oil and gas quantity recoverable therefrom, probable productivity in the absence of unit operations, and other relevant factors. (3) The manner in which operations will be financed and the basis, terms, and conditions on which the costs will be apportioned among tracts and interests, including a reasonable provision for carrying or financing owners who are unable to meet the upfront financial obligations of unit operations and a risk penalty. The risk penalty is the same as that for pooled spacing units, supra. (4) The basis upon which wells and properties of the lessees in the unit area are to be used for unit operations, including the method of determining compensation or equalizing the investment of the lessees. (5) The creation of an operating committee to have overall management and control of the unit and its business and such other

2632 N.D. Cent. Code § 38-08-09.3 (2010). 2633 Id. § 38-08-09.3(4). 2634 Id. § 38-08-09.4.

504

subcommittees, boards, or officers as may be necessary to manage the unit. (6) The time when the unitization becomes effective. (7) The time when the unit must be or may be dissolved and its affairs wound up.2635

Units created under section 38-08-09.1 through 38-08-09.16 of the Act must be limited to

a single pool.

2636 Section 38-08-09.17 also gives the Commission the authority to promulgate

orders unitizing two or more pools or parts thereof that are separated vertically in one field,

termed a “unit source of supply.”2637 The process for unitizing a unit source of supply is to be

the same as the process to unitize a common source of supply.2638

Orders of the Commission do not become effective until the unitization plan has been

signed or ratified in writing by the persons who will be responsible for at least 60 percent of the

costs of unit operations and by the owners of at least 60 percent of the royalty interests, not

including overriding royalties, production payments, and other interests taken from the working

interest.

2639 In addition, if more than one person is obligated to pay unit costs, at least two

unaffiliated such persons and at least two royalty holders are required to be voluntary parties.

The Commission must then make a finding either in the unit order or in a later order that the

required approval has been given.2640 If the required approval has not been given within six

months from the date the order, it becomes void.2641

Operations conducted on and production obtained from a unit is deemed to be conducted

on and produced from each separately owned tract. Such operations are considered fulfillment

of all oil and gas mining leases on lands included in the unit area. However, if the lease also

2635 Id. 2636 Id. 2637 Id. § 38-08-09.17. 2638 Id. § 38-08-09.17. 2639 Id. § 38-08-09.5. 2640 Id. 2641 Id.

505

covers land partly outside of the unit area, the unit operations are not considered operations

allocated to the lease as to the lands outside the unit area after two years from the effective date

of the unitization order or the expiration of the primary lease term, whichever is later.2642

The Commission may modify the unit area at any time to include adjoining portions of

the same pool or to otherwise amend the original order if done in the same manner and upon the

same conditions and limitations as provided for the creation of the original order.

2643 However,

if the amendment only relates to the rights and obligations as between lessees or the amendment

is necessary to prevent waste and to protect correlative rights, only those persons and owners in

the proposed added unit need to approve the amended order.2644

[d] – Hearing Procedure.

Those royalty owners affected

by the original unitization order, however, are entitled to written notice by mail not more than 50

days nor less than 30 days before the Commission hearing.

Notice required prior to hearings may be given in accordance with chapter 28-32 of the

North Dakota code or by a publication in both a general circulation state capital newspaper and a

general circulation newspaper in the county in which the land is located.2645 Chapter 28-32 of

the code, the Administrative Agencies Practice Act, states that service for adjudicative

proceedings should be given as provided in the North Dakota Rules of Civil Procedure

(N.D.R.C.P.) at least 20 days before the hearing.2646 Notice must, among other requirements,

contain the time and place of the hearing and a brief statement of the hearing’s purpose.2647

2642 Id. § 38-08-09.8.

2643 Id. § 38-08-09.9. 2644 Id. 2645 Id. § 38-08-11(3). 2646 Id. § 28-32-21(3)(b). 2647 Id. § 38-08-11(3).

506

The N.D.R.C.P. asserts that service may be given by hand delivering notice to the person

in need of notification or by leaving it conspicuously at that person’s office or with a person of

suitable age at that person’s home.2648 Additionally, service is complete upon mailing to the

person’s last known address or by sending it via a third-party commercial carrier to the last

known address.2649 For parties with no known addresses, the court may allow the sender to leave

the notice with the clerk of court.2650 Parties may also agree to other forms of notice, e.g.,

electronic notice, if consented to in writing.2651 If the Commission decides to give notice by

personal service, it should be in the manner provided for in the law for service of summons in the

civil action in state court. If the proceeding does not involve a complaint and a specific

respondent, the notice must be given at least 15 days before the hearing.2652

Any party adversely affected by a Commission order may file a written petition for

reconsideration

2653 or may appeal to district court for the county in which the well or the

property or any portion thereof is located.2654 Additionally, a right of appeal was established by

the Legislature providing that any person adversely affected by a unitization order of the

Commission may appeal from such order to the district court of the county in which the land or a

part thereof involved in the unit lies.2655 At the time of filing of the notice of appeal, if an

application for the suspension of the order is filed, the Commission may enter an order

suspending the order complained of and fixing the amount of a supersedeas bond.2656

2648 N.D. R. Civ. P. § II, Rule 5(b)(2)(A)–(B).

Within 10

2649 Id. at § II, Rule 5(b)(2)(C)–(D). 2650 Id. at § II, Rule 5(b)(2)(E). 2651 Id. at § II, Rule 5(b)(2)(F)–(G). 2652 N.D. Cent Code § 38-08-11(3) (2010). 2653 Id. § 38-08-13. 2654 Id. § 38-08-14(1). 2655 Id. § 38-08-09.16. 2656 Id. § 38-08-14(2). Such a bond must run in favor of the Commission for the use and benefit of any person who may suffer damage by reason of the suspension of the order in the event the same is affirmed by the district court. Id.

507

days after the entry of an order by the Commission which suspends the order complained of and

fixes the amount of the bond, the appellant shall file with the Commission a supersedeas bond in

the required amount and with property surety.2657 Upon approval of the bond, the order of the

Commission suspending the order complained of is effective until its final disposition upon

appeal.2658 If the order of the Commission is not superseded, it must continue in force as if no

appeal was pending, unless a stay is ordered by the district court to which the appeal is taken.2659

[5] – Matters Covered.

[a] Number of Wells.

The North Dakota rules and regulations state that no more than one well will be drilled to

the same pool on any drilling unit, except by order of the Commission.2660

[b] Spacing of Wells/Depth.

As previously mentioned, the Industrial Commission has authority to regulate well

spacing. 2661 Spacing units’ size and shape should result in efficient and economical pool

development.2662 The Commission may establish spacing units for a pool, which must be of

uniform size and shape for the entire pool. 2663 In the absence of a Commission order

determining the unit spacing for pools, the N.D. regulations contain default spacing

provisions,2664

[c] Allocation of Production and Costs.

discussed in detail below.

2657 Id. 2658 Id. § 38-08-14(2). 2659 Id. 2660 N.D. Admin. Code 43-02-03-18 (2010). 2661 N.D. Cent. Code § 38-08-04(2)(c)(2010). 2662 Id. § 38-08-07(2). 2663 Id. § 38-08-07(1). 2664 N.D. Admin. Code 43-02-03-18 (2010).

508

Pooling orders must provide for the payment of reasonable actual costs of drilling and

operating on a spacing unit, plus a reasonable charge for supervision.2665 If the parties are unable

to settle the amount of costs, the Commission will make that determination.2666 Owners who

drill or operate, or who pay such expenses on behalf of another, have a lien on those others’

share of production for the payment of those costs. All of the oil and gas produced and subject to

such a lien must be marketed and sold, with the proceeds applying toward payment of those

expenses.2667 Additionally, owners electing not to participate in risk and costs of drilling must

pay their share of operation plus a risk penalty, discussed below.2668

Compulsory unitization orders also must provide for the payment of costs and expenses

of unit operations.

2669 A tract’s fair and reasonable allocation of production must be based upon

the tract’s value for oil and gas purposes, as well as its contributing value to the unit in relation to

like values of other tracts in the unit. The tract’s acreage, quantity of recoverable oil and gas,

location, probable oil and gas productivity without unit operations, burden caused by operations,

and other factors must also be taken into account.2670

Orders must also give provisions providing for unit financing and how costs will be

spread among the tracts and interests.

2671 Additionally, reasonable provisions must be included

to carry owners unable to pay unit costs upfront, which include both reasonable costs and a risk

penalty, discussed below.2672 The unit has a first lien on leasehold production of each tract to

secure the payment of unit expenses charged to each tract.2673

2665 N.D. Cent. Code § 38-08-08(2).

2666 Id. 2667 Id. 2668 Id. § 38-08-08(3). 2669 Id. § 38-08-09.4(2)–(3). 2670 Id. § 38-08-09.4(2). 2671 Id. § 38-08-09.4(3). 2672 Id. 2673 Id. § 38-08-09.7.

509

[d] Royalty Distribution.

Pooling orders require that unleased mineral interests covered by a pooling order prior to

August 1, 2009 are entitled to cost-free royalty interest that equals “the acreage weighted average

royalty interest of the leased tracts within the spacing unit,” but in no event less than a one-eighth

interest.2674 For unleased mineral interests pooled after July 31, 2009, the royalty entitlement is,

at the operator’s election, either “the acreage weighted average royalty interest of the leased

tracts within the spacing unit” or a cost-free royalty interest of 16 percent. The rest of the

unleased interest is to be treated as a lessee or cost-bearing interest.2675

[e] Formation of Units Not Restraint of Trade.

Agreements for unit operation of a field or pool are authorized and may be performed.

They may not be held to violate any state statutes that relate to trusts, monopolies, or contracts

and combinations in restraint of trade if approved by the Commission as being “in the public

interest, protective of correlative rights, and reasonably necessary to increase ultimate recovery

or to prevent waste of oil or gas.”2676 Neither will agreements among lessees or other oil and gas

rights owners, entered with an eye toward unit development and operation, be held to violate

such state statutes prohibiting monopolies or acts, arrangements, agreements, contracts,

combinations, or conspiracies in restraint of trade or commerce.2677

[f] Limits on Production.

The Commission has the authority to limit and to allocate production from fields, pools,

or areas and to establish and define marketing areas in the state. 2678

2674 Id. § 38-08-08(1).

The Commission will

determine market demand for each such district and then regulate the production within each

2675 Id. 2676 Id. § 38-08-09. 2677 Id. § 38-08-09.15. 2678 Id. § 38-08-04(3).

510

district to the amount able to be produced without waste and without exceeding reasonable

market demand. 2679 If the Commission limits the amount produced in a state or marketing

district, the allowable production should be allocated among pools therein on a reasonable

basis.2680 If the production in a pool is limited to less than the amount capable of being produced

from that pool, the Commission should reasonably allocate production allowables among the

wells and properties in that pool so that each property may realize its just and equitable share of

production, subject to the prevention of waste.2681

§ 35.02 Types of North Dakota Pooling Statutes.

[1] – Mineral Distinctions.

The Commission has been vested with the authority to regulate the “exploration,

development, and production” of carbon dioxide, coalbed methane gas, helium gas, and nitrogen

gas in the same manner as it regulates oil or gas.2682 “Gas” is defined in the code as including

“all natural gas and all other fluid hydrocarbons” not included in the definition of oil.2683 “Oil”

is defined in the code as including “crude petroleum oil and other hydrocarbons regardless of

gravity which are produced at the wellhead in liquid form and the liquid hydrocarbons known as

distillate or condensate recovered or extracted from gas, other than gas produced in association

with oil and commonly known as casinghead gas.” 2684 The regulations further state that

casinghead gas to mean “any gas or vapor, or both gas and vapor, indigenous to and produced

from a pool classified as an oil pool by the commission.”2685

[2] – Spacing Rules and Size/Split by Depth.

2679 Id. § 38-08-06(1). 2680 Id. § 38-08-06(2). 2681 Id. § 38-08-06(3). 2682 Id. § 38-08-21. 2683 Id. § 38-08-02(4). 2684 Id. § 38-08-02(8). 2685 N.D. Admin. Code 43-02-03-01(8) (2010).

511

In determining the size and shape of spacing units, the Commission is guided by the

principle that spacing units should be “such as will result in the efficient and economical

development of the pool as a whole.”2686 The order establishing the spacing unit for a pool must,

however, specify the size and shape of each unit and the location of the permitted well thereon in

accordance with a reasonably uniform spacing plan.2687 An order establishing units for a pool

must cover all lands determined or believed to be underlaid by the pool at issue and may be

modified by the Commission from time to time to include additional areas determined to be

underlaid by the pool.2688

In the absence of an order by the Commission setting unit spacing, the North Dakota

regulations provide default spacing requirements, which vary depending on depth by formation,

on whether the well will be horizontal, directional, or vertical, and on whether the well is drilled

for oil or for gas.

2689 No more than one well may be drilled on the applicable lot size, nor may

the lot size vary more than ten percent, except by order of the Commission.2690

For vertical or directional oil wells drilled to a depth not below the Mission Canyon

formation, the drilling unit must be a governmental quarter-quarter section or its equivalent and

not be closer than 500 feet from the boundary of the lot.

2691 For vertical or directional oil wells

of a depth deeper than the Mission Canyon formation, the drilling unit must be a governmental

quarter section or its equivalent, located not less than 660 feet to the boundary of such lot.2692

Gas wells of a depth not deeper than the Mission Canyon formation must be upon a

drilling unit consisting of a governmental quarter section or its equivalent, located not less than

2686 N.D. Cent. Code § 38-08-07(2) (2010). 2687 Id. § 38-08-07(3). 2688 Id. § 38-08-07(4). 2689 N.D. Admin. Code 43-02-03-18 (2010). 2690 Id. 2691 Id. 43-02-03-18(1)(a). 2692 Id. 43-02-03-18(1)(b).

512

500 feet to the boundary of that lot.2693 For gas wells drilled deeper than the Mission Canyon

formation must be on a drilling unit of a governmental quarter section or its equivalent and must

not be within 660 feet of the unit boundary.2694

Horizontal wells with a horizontal displacement of the well bore drilled at least at an 85

degree angle within the productive formation of at least 500 feet, projected to a depth of not

more than the Mission Canyon formation, must be on a governmental section drilling unit or two

adjacent governmental quarter sections within the same section or an equivalent lot. It must not

be less than 500 feet to the outside boundary of the tract.

2695 For such wells drilled deeper than

the Mission Canyon formation, the drilling units must be a governmental section, located not less

than 500 feet to the unit’s outside boundary.2696

Wells drilled within one mile of an established field must conform to that field’s spacing

requirements unless found that such well will not produce from the same source of supply.

2697 If

the Commission finds that a well drilled at the prescribed location, whether the location is set by

rule or order, would not produce in paying quantities, is prohibited due to surface constraints, or

is otherwise likely to cause waste or to reduce the ultimate recovery of oil and gas, the

Commission may hold a hearing and thereafter issue an order to grant an exception to the

location. Said order must include provisions to prevent that well from producing more than its

just and equitable share of minerals from the pool.2698

[3] – Minimum Operator Control.

2693 Id. 43-02-03-18(3)(a). 2694 Id. 43-02-03-18(3)(b). 2695 Id. 43-02-03-18(2)(a). 2696 Id. 43-02-03-18(2)(b). 2697 Id. 43-02-03-18(4). 2698 Id. 43-02-03-18.1.

513

No unitization order of the Commission will be effective until the unitization plan has

been signed, or ratified or approved in writing by those persons who will be required to pay at

least 60 percent of the costs of unit operations, as well as by the owners of at least 60 percent of

the royalty interests, excluding overriding royalties, production payments, and other interests

carved out of the working interest. Additionally, if there is more than one person obligated to

pay unit operation costs, at least two nonaffiliated such persons and at least two royalty owners

must be voluntary parties. The Commission must make a finding, either in the original order or

in a supplemental order, that the necessary approval has been given.2699 If the unit is modified

by the addition of new entries, the same percentage of interests in the new unit must also ratify

the agreement. 2700 If the amendment only affects rights between lessees or is reasonably

necessary to prevent waste and to protect correlative rights, among other things, and if the

interest holders of the portion to be added have given approval, then the royalty owners in the

existing unit area are entitled to written notice of the amendment mailed not more than 40 days

nor less than 30 days before the hearing, but they need not ratify the agreement.2701

If the required approval is not had at the time the order is made, the Commission must,

upon petition and notice, hold additional hearings to find if and when the plan has been approved

by the requisite percentage of interest-holders. If the approval is not had within six months of

the date of the order, said order will cease to be valid and will be revoked.

2702

[4] – Directional Drilling.

When any well is drilled, tests to determine any deviation from the vertical must be taken

every 1000 feet at the least. The Director of Oil and Gas in the Industrial Commission may

2699 N.D. Cent. Code § 38-08-09.5 (2010). 2700 Id. § 38-08-09.9. 2701 Id. 2702 Id. § 38-08-09.6.

514

waive the deviation test for shallow gas wells if the Director is satisfied that waiver is necessary.

Otherwise, if the deviation from the vertical is greater than five degrees, the Director may require

the hole be straightened.2703

Waiver may also be given by the Director when deviation is needed in order “to sidetrack

junk in the hole, straighten a crooked hole, control a blowout, or if the necessity therefor can be

demonstrated to the director’s satisfaction.”

2704 The Director may also grant permits to allow for

directional drilling. If the Director denies the permit request for deviation from the vertical, he

must give reasons therefor, which decision may be appealed to the Commission.2705

[5] – Options.

North Dakota law provides that operators may not receive a risk penalty from

nonparticipating owners unless they first provide such owners the opportunity to participate in

the risk and costs.2706

[a] Pooled Interests.

Owners of interest may not recover the risk penalty allowed under section 38-08-08 of

the code unless the owners give a written invitation to participate in the risk and costs of drilling

to the owners from whom the penalty is sought.2707

(1) The location of the proposed or existing well and its proposed depth and objective zone; (2) An itemization of the estimated costs of drilling and completion; (3) The approximate date upon which the well was or will be spudded or reentered; (4) A statement indicating the invitation must be accepted within thirty days of receiving it; (5) Notice that the participating owners plan to impose a risk penalty and that the nonparticipating owner may object to

The invitation must include the following

information:

2703 N.D. Admin. Code 43-02-03-25 (2010). 2704 Id. 2705 Id. 2706 N.D. Cent. Code §§ 38-08-08(3)(c), -09.4(3)(c) (2010). 2707 N.D. Admin. Code 43-02-03-16.3(1) (2010).

515

the risk penalty by either responding in opposition to the petition for a risk penalty, or if no such petition has been filed, by filing an application or request for hearing with the commission.2708

Also, if the nonparticipating owner’s interest is not covered by a lease or other development

contract, the owner seeking a risk penalty must make a good-faith attempt to have the unleased

owner execute a lease.

2709

Both the invitation to participate and the election must be served personally, by mail

requiring signed receipt or by overnight service requiring signed receipt. Failure to accept such

mail constitutes service.

2710 Elections must be in writing and received by the offering owner

within 30 days of the participating party’s receipt of the invitation. 2711 Elections are only

binding upon the electing party if the well is spudded or reentry operations are commenced on or

prior to 90 days after the date the inviting owner set as the date upon which a response must be

received or prior to the drilling permit expires. If the election lapses, the risk penalty may only

be obtained if the owner again complies with these requirements.2712

[b] Unit Operations.

Owners of interest may not recover the risk penalty allowed under section 38-08-09.4 of

the code unless the owners give a written invitation to participate in the unit expense to the

owners from whom the penalty is sought. 2713

(1) A description of the proposed unit expense, including the location, objectives, and plan of operation; (2) An itemization of the estimated costs; (3) The approximate date upon which the proposal was or will be commenced; (4) A statement indicating the invitation must be accepted within thirty days of receiving it; (5)

The invitation must include the following

information:

2708 Id. 43-02-03-16.3(1) (a). 2709 Id. 43-02-03-16.3(1). 2710 Id. 43-02-03-16.3(1)(c). 2711 Id. 43-02-03-16.3(1)(b). 2712 Id. 43-02-03-16.3(1)(d). 2713 Id. 43-02-03-16.3(2).

516

Notice that the participating owners plan to impose a risk penalty and that the nonparticipating owner may object to the risk penalty by either responding in opposition to the petition for a risk penalty, or if no such petition has been filed, by filing an application or request for hearing with the commission.2714

Both the invitation to participate and the election must be served personally, by mail

requiring signed receipt or by overnight service requiring signed receipt. Failure to accept such

mail constitutes service.

2715 Elections must be in writing and received by the offering owner

within 30 days of the participating party’s receipt of the invitation. 2716 Elections are only

binding upon the electing party if the unit expense is commenced within 90 days after the date

the inviting owner set as the date upon which a response must be received or prior to the drilling

permit expires. If the election lapses, the risk penalty may only be obtained if the owner again

complies with these requirements.2717

An invitation to participate in unit expenses that cover monthly operating expenses will

be effective for all of those monthly operating expenses for five years if the expense identified in

the invitation is commenced within 90 days after the date set as the date upon which a response

must be received.

2718

Finally, the Commission may include in its pooling order requirements that relate to the

invitation and the election to participate. If the Commission does so, the pooling order controls

to the extent it is inconsistent with the rules in Administrative Code section 43-02-03-16.3.

2719

2714 Id. 43-02-03-16.3(2)(a).

2715 Id. 43-02-03-16.3(2)(c). 2716 Id. 43-02-03-16.3(2)(b). 2717 Id. 43-02-03-16.3(2)(d). 2718 Id. 43-02-03-16.3(2)(e). 2719 Id. 43-02-03-16.3(3).

517

§ 36.01 Analysis of Ohio Regulatory Framework.

[1] – Name of Governing Body.

In the Department of Natural Resources, the Division of Mineral Resources management

was created by statute. 2720

The Oil and Gas Commission was created by statute to allow those adversely affected by

an order issued by the Chief to appeal to the Oil and Gas Commission to have that order

vacated.

This Division has the sole authority to regulate the permitting,

locating, and spacing of oil and gas wells and production operations within the state. These rules

shall be administered by the Chief to the Division of Resources Management.

2721 The statute also provides for a Technical Advisory Council which consists of eight

members to be appointed by the governor, with the advice and consent of the Senate.2722

[2] – Membership.

The Chief is not permitted to hold any other public office, nor shall the Chief be engaged

in any business that might interfere or otherwise be inconsistent with the duties of his office.2723

The Oil and Gas Commission consists of five members appointed by the governor for a

five year term.

2724 Three members constitute a quorum, and no action is valid unless it has the

concurrence of at least a majority of the members voting on an action. The governor has the

power to remove any member for inefficiency, neglect of duty, malfeasance, or nonfeasance.2725

On the Technical Advisory Counsel, three members are to be independent oil and gas

producers or operators producing or operating in this state; three members shall be oil and gas

producers having substantial operations in this state and at least one other state; one member

2720 Ohio Rev. Code Ann. § 1509.02 (Lexis 2011). 2721 Id. § 1509.35. 2722 Id. § 1509.38 . 2723 Id. § 1509.02. 2724 Id. § 1509.35. 2725 Id.

518

shall represent the public; and one member shall represent persons having landowners’ royalty

interests in oil and gas production.2726 The term of office shall be for three years, and the

purpose of the council is to hold at least one regular meeting in each quarter and to consult with

and advise the Chief and perform other duties that may be lawfully delegated to it by the

Chief.2727

[3] – Scope of Authority.

The Division has the exclusive authority to regulating the permitting, locating, and

spacing of oil and gas wells, as well as production operations, within the State.2728 The Chief has

the authority to adopt and rescind rules to administer chapter 1509 of the Ohio Revised Code,2729

as well as to enforce the rules, terms, and conditions of that chapter. The Chief is also

empowered to enter into compliance agreements, to issue orders finding an owner has committed

a material and substantial violation, and to suspend drilling and issue other sanctions, including

revoking a permit if certain conditions are met.2730

In addition, the Chief has the authority to issue an order to stop drilling, operating, or

plugging activities without notice; however, notice must be given as soon as practicable. No

later than five days after the order is issued, the Chief must provide the owner an opportunity to

be heard and to present evidence. The owner may appeal an order to the court of common pleas

of the county in which the activity that created the order occurred.

2731

Owners may apply to the Division for an application for a mandatory pooling order,

which the Chief may provide if the application is proper and the order is necessary to effectively

2726 Id. § 1509.38. 2727 Id. 2728 Id. § 1509.02. 2729 Id. § 1509.03. 2730 Id. § 1509.04 (B)(2). 2731 Id.

519

develop resources and to protect correlative rights.2732 Further, the Chief, upon its own motion

or upon application by 65 percent of the owners of land overlying a pool, must hold a hearing to

determine whether unit operation of the pool is necessary. The Chief may issue an order for unit

operations if it finds that unit operation is “reasonably necessary to increase substantially the

ultimate recovery of oil and gas, and the value of the estimated additional recovery of oil or gas

exceeds the estimated additional cost incident to conducting such operation.”2733

[4] – Process for Pooling and Matters Covered.

[a] Permitting Process.

Ohio Revised Code section 1509.05 lists the requirements to obtain a permit to drill,

reopen, convert, or plug back a well. No person is permitted to drill a new well, deepen an

existing well, reopen a well, convert a well to any use other than its original purpose, or plug

back a well to a source of supply different from the existing pool, without a permit. This permit

is issued by the Chief of the Division of Mineral Resources Management. Until the original

permit, or a photocopy, is posted in a conspicuous and easily-accessible place at the well site, the

activities cannot occur. This permit shall be displayed at all times.

Ohio Revised Code section 1509.06 states all of the requirements for filing a permit. The

permit must state the following:

(1) The name and address of the owner and, if a corporation, the name and address of the statutory agent; (2) The signature of the owner or the owner's authorized agent. When an authorized agent signs an application, it shall be accompanied by a certified copy of the appointment as such agent; (3) The names and addresses of all persons holding the royalty interest in the tract upon which the well is located or is to be drilled or within a proposed drilling unit;

2732 Id. § 1509.27. 2733 Id. § 1509.28(A).

520

(4) The location of the tract or drilling unit on which the well is located or is to be drilled identified by section or lot number, city, village, township, and county; (5) Designation of the well by name and number; (6) The geological formation to be tested or used and the proposed total depth of the well; (7) The type of drilling equipment to be used; (8) If the well is for the injection of a liquid, the identity of the geological formation to be used as the injection zone and the composition of the liquid to be injected; (9) For an application for a permit to drill a new well within an urbanized area, a sworn statement that the applicant has provided notice by regular mail of the application to the owner of each parcel of real property that is located within five hundred feet of the surface location of the well and to the executive authority of the municipal corporation or the board of township trustees of the township, as applicable, in which the well is to be located. In addition, the notice shall contain a statement that informs an owner of real property who is required to receive the notice under division (A)(9) of this section that within five days of receipt of the notice, the owner is required to provide notice under section 1509.60 of the Revised Code to each residence in an occupied dwelling that is located on the owner's parcel of real property. The notice shall contain a statement that an application has been filed with the Division of Mineral Resources Management, identify the name of the applicant and the proposed well location, include the name and address of the Division, and contain a statement that comments regarding the application may be sent to the Division. The notice may be provided by hand delivery or regular mail. The identity of the owners of parcels of real property shall be determined using the tax records of the municipal corporation or county in which a parcel of real property is located as of the date of the notice; (10) A plan for restoration of the land surface disturbed by drilling operations. The plan shall provide for compliance with the restoration requirements of division (A) of section [1509.07.2] of the Revised Code and any rules adopted by the chief pertaining to that restoration; (11) A description by name or number of the county, township, and municipal corporation roads, streets, and highways that the applicant anticipates will be used for access to and egress from the well site; and (l2) Such other relevant information as the chief prescribes by rule.2734

2734 Id. § 1509.06 (A)(1)–(12).

521

Every application must also be accompanied by a map, on a scale not smaller than 400

feet to the inch, prepared by an Ohio registered surveyor.2735

The Chief may not issue a permit less than ten days after the filing of the application, but

should issue a permit within 21 days of the filing of the application, unless the Chief waives that

timeline for expedited review.

The Chief will also prepare a

weekly circular for each county to show each drilling site.

2736 If the well is in an urbanized area, the Chief shall not issue a

permit for at least 18 days after the filing of the application.2737 An applicant is permitted to file

a request with the Chief for expedited review if the well is not to be located in a gas storage

reservoir. A request for expedited review will also cost an additional $250.00. If the Chief does

not deny this request, a permit shall be issued within seven days of the expedited application.2738

The Chief is permitted to deny a permit if he believes that there is a substantial risk that

the activities will violate a provision of this chapter or will present an imminent danger to public

health or safety or damage to the environment.

2739 The fees associated with a permit, except a

permit to plug back an existing well, are as follows: (a) $500.00 to conduct activity in a township

with a population of 10,000 or less; (b) $750.00 if the township has a population greater than

10,000, but less than 15,000; (c) $1,000.00 if the township has a population of 15,000 or more, a

municipal organization regardless of population. 2740 If the application requires mandatory

pooling, then an additional $5,000 will be added to the fee.2741

2735 Id. § 1509.06 (A)(12).

2736 Id. § 1509.06 (C)(1). 2737 Id. § 1509.06 (C)(2). 2738 Id. § 1509.06 (D). 2739 Id. § 1509.06(F). 2740 Id. § 1509.06 (G)(1)–(3). 2741 Id. § 1509.06 (G)(4).

522

If the issuance of a permit is to be located in an urbanization area, the division must

conduct a site review to evaluate site-specific terms that may be attached to the permit.2742

If an owner of a well has already been issued a permit pursuant to Ohio Revised Code

section 1509.06, then he may submit to the Chief a request to revise an existing track on which

exists a producing or idle well. The Chief shall approve a request unless it would result in a

violation, including the rules governing spacing requirements.

Some

considerations at the site review should be fencing, screening, and landscaping requirements.

This permit shall be valid for 12 months. All other permits are valid for 24 months. A permittee

must notify an inspector at least 24 hours prior to commencement of drilling, reopening,

converting, well stimulation, or plugback operations.

Liability insurance is required pursuant to Ohio Revised Code section 1509.07. This

insurance shall be in an amount not less than $1 million of bodily injury coverage and property

damage coverage. However, if the well is located in an urbanized area, then the amount of

liability insurance required is no less than $3 million. The owner must maintain this coverage

until the wells are abandoned or plugged.

The owner of a well must also file a surety bond conditioned on compliance with the

restoration requirements of this chapter.2743 In lieu of a surety bond, an owner may deposit cash

in the amount of the surety bond or negotiable certificates of deposit or irrevocable letters of

credit issued by a bank.2744

2742 Id. § 1509.06 (H).

Instead of a surety bond, the Chief may accept proof of financial

responsibility in the form of a sworn financial statement showing a net financial worth that is

2743 Id. § 1509.07. 2744 Id.

523

equal to twice the amount of the bond required.2745 An owner of an exempt Mississippian well,

in lieu of any of the above listed requirements, may file a one-time fee of $50.2746

If an owner fails to comply with a non-appealable order, he will forfeit his surety bond

given to ensure compliance.

2747 The Chief also has the ability to force someone who has

forfeited their surety bond to file another bond for $15,000 for one well and $30,000 for two

wells, or $50,000 for three or more wells.2748 All of these forfeited funds will be deposited with

the Oil and Gas Well Fund.2749

Owners are required to restore the land surface within 14 days after the drilling is

completed in urbanized areas or within two months in all other areas.

The Chief is required to spend at least 14 percent of the Oil and

Gas Well Fund per year but is restricted as to how the money is spent.

2750 The owner must grade

or terrace and plant, seed, or sod the area disturbed during production within three months in an

urbanized area, and within six months after the date of completion in all other areas. Within three

months after a well has been plugged in an urbanized area, or within six months in all other

areas, the owner must remove all production and storage structures, equipment, and supplies.

The Chief may extend this period but not more than a six-month extension.2751

An owner may appeal an order by the Chief to the Oil and Gas Commission.

2752

2745 Id. § 1509.08.

When

an owner appeals to the Commission, he will be known as the appellant, and the Chief will be the

appellee. The appeal must be in writing and set forth the grounds upon which the appeal is based.

It must be filed within 30 days after the date the appellant received the notice of the order by

certified mail. The Commission has the power to subpoena witnesses and to request the

2746 Id. 2747 Id. § 1509.071 (A). 2748 Id. 2749 Id. § 1509.06 (B). 2750 Id. § 1509.072(A). 2751 Id. § 1509.072(B). 2752 Id. § 1509.36.

524

production of certain evidence and documentation. If the Commission finds that the order was

lawful and reasonable, it will make a written order affirming the adverse order. If it finds the

order was unreasonable or unlawful, it shall vacate the adverse order and make the order it finds

the Chief should have made. This order is final, unless vacated by the Court of Common Pleas of

Franklin County.2753

[b] Voluntary Pooling.

The owners of adjoining tracts of land may agree to pool their tracts to form a drilling

unit. This unit must conform to the minimum acreage and distance requirements set forth by the

Division of Mineral Resources Management. This agreement must be in writing, and a copy

should be submitted to the Division with the application for permit. Parties will designate one

member as the applicant for the permit.2754

[c] Mandatory Pooling.

If a tract of land is insufficient as to its size and shape to meet the required measurements

for drilling a well, and the owner of the tract who is also the owner of the mineral interest has

been unable to form a drilling unit under an agreement, as discussed above, the owner may apply

to the Division of Mineral Resources Management for a mandatory pooling order. 2755 This

application shall be accompanied by an application for a permit. The Chief will then notify all

landowners within the area to be included in the drilling unit and notify them of their right to a

hearing. 2756

2753 Id. § 1509.37.

After the hearing, or after 30 days from the date of the notice, the Chief may

2754 Id. § 1509.26. 2755 Id. § 1509.27. 2756 Id.

525

determine that mandatory pooling is necessary to protect correlative rights and to provide

effective development and shall issue a drilling permit and mandatory pooling order.2757

The mandatory pooling order shall designate the boundaries for the drilling unit,

designate the production sites, describe each tract pooled by the order, allocate based on a

surface acreage basis a pro rata portion of the production to the owner of each tract pooled by the

order, specify the basis by which each owner will share all reasonable costs, and designate the

person under whom the permit shall be issued.

2758

If an owner of a tract pooled by the order does not wish to participate in the risk and cost

of the drilling and operation, the owner will be a nonparticipating owner in the well on a limited

basis and will be subjected to terms and conditions that are deemed to be reasonable.

2759

[d] Operation of Entire Pool as Drilling Unit.

The

Chief will decide any dispute related to costs of drilling, equipping, or operating a well.

The Chief, either by his own motion, or by application of 65 percent of the owners of the

land area overlying the pool, shall hold a hearing to determine if there is a need for the operation

as a unit of an entire pool.2760 If the chief finds that the operation is reasonably necessary to

increase substantially the ultimate recovery of oil and gas, and the value of the oil and gas

thereby to be produced exceeds the estimated additional cost, the order shall be made.2761

The order must prescribe a plan that includes a description of the unitized area, statement

of the nature of the operations, allocation to the separate tracts of all oil and gas produced, credits

and charges to be given to the owners in the unit area for their respective investments, a

provision providing how expenses shall be determined, a provision for financing if an owner is

2757 Id. 2758 Id. 2759 Id. 2760 Id. § 1509.28(A). 2761 Id. § 1509.28(A)(1).

526

not able to meet the financial requirements, time when the operation shall commence, provision

for the supervision and conduct of operations, and any additional provisions needed.2762

An amendment to the original order may be made pursuant to the same conditions

provided that if the amendment affects only the rights of the owners, the approval of the royalty

owners is not required.

2763 Additionally, no order of amendment shall change the percentage for

allocation of oil and gas established for any separately owned tract, unless the person owning

that tract consents.2764

Oil and gas allocated to a particular tract, and any proceeds, shall be deemed to have

actually been produced from said tract. Additionally, any oil and gas or proceeds from a

particular tract shall be the property and income of the several persons to whom the same are

allocated or payable under the order. No order related to the production from a separately owned

tract shall be terminated by order providing for unit operations. Unless the parties agree, no order

providing for unit operations is construed to result in a transfer of all or part of the title of any

person to the oil and gas rights.

2765

[e] Exception Tracts.

If an owner is unable to produce oil and gas because of minimum acreage or distance

requirements, the owner may make an application for a drilling permit if it can be shown that the

owner is unable to enter into a voluntary pooling agreement and the owner would be unable to

participate under a mandatory pooling order.2766

2762 Id. § 1509.28(A)(2)–(9).

Such tract is known as an exception tract. The

order must set a percentage of the maximum daily potential production. The percentage shall

equal the same as the percentage that the number of acres in the tract bears to the number of

2763 Id. § 1509.28(B)(1). 2764 Id. § 1509.28(B)(2). 2765 Id. 2766 Id. §1509.29.

527

acres in the minimum acreage requirement. However, if the well is located near the boundary,

the percentage may not exceed the percentage determined by dividing the distance from the well

to the boundary by the minimum distance required.2767

Within 10 days after the well is completed, the maximum daily potential production shall

be determine by such drill stem, open flow, or other tests required by the Chief. The Chief must

require such tests at least once every three months.

2768

[f] Hearing Procedure.

Ohio Revised Code section 1509.03 sets out various administrative rules to be followed

by the Chief of the Division of Mineral Resources Management. Any order issued or notice

required by the Chief must comply with chapter 119 of the Revised Code, except that service by

mail may be substituted by personal service.2769 Where notice is required, it may be given either

as prescribed by rule adopted by the Chief or by publication, unless a specific type of notice is

required by law.2770

Any such order is considered an “adjudication order,” as that term is used in chapter 119.

Notice for adjudication hearings is to be given by registered mail, return receipt requested, and it

must include the reason for the action, the law or rule involved, and an informative statement that

tells the party it may request a hearing within 30 days of the time the notice was mailed. If

notice was returned due to failure of delivery, the agency must either make a personal delivery of

the notice or will publish the notice once a week for three consecutive weeks in a general

circulation newspaper in the county of the party’s last known address.

[g] Safety.

2767 Id. 2768 Id. 2769 Id. § 1509.03(B). 2770 Id.

528

No well shall be drilled closer than 100 feet from any inhabited private dwelling house;

closer than 100 feet from any public building which may be used for assembly, education,

lodging, entertainment, or other occupancy by the public; closer than 50 feet to the traveled part

of any public street, road, or highway; closer than 50 feet to a railroad track; or closer than 100

feet from any other well.2771

These restrictions do not apply to a building which is incident to agricultural use of the

land, unless the building is a private dwelling house or business of retail. The Chief may grant

an exception to the rule that no wellhead may be placed nearer than 100 feet from any other

wellhead if the applicant can demonstrate that the requested reduction in spacing is necessary to

reduce impact to the land surface or the owners of the affected land.

2772

All persons engaged in any operations or phase of any well shall conduct such operations

in a manner that will not contaminate or pollute the surface of the land or water on the

surface.

2773 In urbanized areas, the well owner and/or authorized representative must follow the

best management practices for oil and gas well site construction manual.2774

[h] Spacing of Wells.

For pools between zero to 1,000 feet deep, no permit shall be issued unless the tract or

drilling unit is located on one acre or more, not less than 200 feet from any well drilling to,

producing from, or capable of production from the same pool, and not less than 100 feet from

any boundary of the subject tract.2775

2771 Ohio Admin. Code 1501:9-1-05 (2011).

For wells between 1,000 to 2,000 feet deep, no permit will

be issued upon a tract containing less than ten acres, not less than 460 feet from any well drilling

to, producing from, or capable of producing from the same pool, and not less than 230 feet from

2772 Id. 2773 Id. 1501:9-1-07. 2774 Id. 2775 Id. 1501:9-1-04.

529

any boundary of the subject tract.2776 For wells drilled to between 2,000 to 4,000 feet deep, no

permit shall be issued unless the well is located on a tract containing not less than 20 acres, not

less than 600 feet from any other well, and not less than 300 feet from any boundary of the

subject tract. No permit shall be issued for wells drilled to a depth of 4,000 feet or deeper unless

the well is located on 40 acres or more, not less than 1,000 feet from any other well, and not less

than 500 feet from any boundary of the subject tract.2777

In urbanized areas, the wellhead location shall not be closer than 75 feet from any

property not within the subject tract.

2778 This requirement may be agreed to in writing or waived

by the Chief. The Chief, with approval from the Technical Advisory Council, may order

temporary well spacing for wells in the area of a discovery well.2779 The order shall contain the

description of the area, identification of the pool, minimum distance wells may be drilled from

the tract boundaries, minimum distance between wells, and minimum acreage of drilling

units.2780

Another exception exists in the form of offset wells. These exception wells are drilled

before the effective date of this rule, and produce on an adjacent tract located on said adjacent

tract as not to comply with any provisions of this rule. These exceptions may be granted if the

Chief is satisfied that they are required for preventing waste and protecting correlative rights.

2781

§ 36.02 Types of Ohio Pooling Statutes.

[1] – Mineral Distinctions.

2776 Id. 2777 Id. 2778 Id. § 1501:9-1-04(C)(5). 2779 Id. § 1509:9-1-04(D)(1). 2780 Id. 2781 Id. § 1509:9-1-04(E).

530

The provisions of Ohio’s pooling statute make no distinction between oil and gas, and

production of both is equally available for mineral development. The Ohio Code is silent to the

applicability of this statute to, or the characterization of, coalbed methane. “Gas” is defined as

all natural gas and all other fluid hydrocarbons not defined as oil, including condensate. 2782

“Oil” is defined as crude petroleum oil and all other hydrocarbons, regardless of gravity, that are

produced in liquid form by ordinary production methods, but does not include liquid

hydrocarbons that were originally in a gaseous phase in the reservoir.2783 Further, a “pool” is

defined as an underground reservoir containing a common accumulation of oil or gas, or both,

but does not include a gas storage reservoir. Each zone of a geological structure and each zone of

a geological feature that is completely separated from any other zone in the same structure or

feature may contain a separate pool.2784 Moreover, a “field” is defined as the general area under

laid by one or more pools.2785

[2] – Spacing Rules and Size.

The Chief, with the approval of the Technical Advisory Council, may adopt rules relative

to minimum acreage requirements for drilling units and minimum distances from which a new

well may be drilled or an existing well deepened, plugged back, or reopened to a source of

supply different from the existing pool from boundaries of tracts, drilling units, and other wells

for the purpose of conserving oil and gas reserves.2786 The rules relating to minimum acreage

requirements for drilling units must require a drilling unit to be composed of contiguous land.2787

2782 Id. § 1501:9-1-01(14).

Also, the Chief, upon either the Chief’s own motion or upon application of an owner, may hold a

2783 Id. § 1501:9-1-01(20). 2784 Id. § 1501:9-1-01(23). 2785 Id. § 1501:9-1-01(13). 2786 Ohio Rev. Code Ann. § 1509.24(A) (Lexis 2011). 2787 Id.

531

hearing to determine the need or desirability of adopting a special order for drilling unit

requirements in a particular pool different from those established in section 1509.24 of the

Revised Code.2788 The Chief must notify all landowners within the proposed area of the date,

time, and place of hearing and the nature of the hearing 30 days before the hearing date.2789 The

Chief, with written approval of the Technical Advisory Council, will make a special order

designating the area covered by the order and the acreage requirements for well drilled on those

tracts or a drilling unit in the area if the Chief determines that, among other things, the different

requirements are reasonably necessary to protect correlative rights or to provide effective

development, use, or conservation of oil and gas.2790 The order must include minimum setback

requirements from the boundaries and from other wells and must allow exceptions for wells

drilled in a particular pool at the time of filing.2791

In areas covered under a special order from the Chief for pool spacing, those special rules

shall apply; the Chief may also grant exceptions to special requirements if the exception will

protect correlative rights and/or promote conservation by allowing for production where it could

not otherwise be had.

2792 The minimum tract or unit size of a well varies based upon the depth

of the pool formation into which the operator intends to complete its well. For pools located

from the surface down to a depth of 1,000 feet, no permit shall be issued unless the well is

located on a tract of drilling unit of one acre or more, with a proposed well location of at least

100 feet from any existing or permitted well drilled to, producing from, or capable of production

from the same pool, and at least 100 feet from any boundary of the subject tract.2793

2788 Id. § 1509.25.

For pools

2789 Id. 2790 Id. 2791 Id. 2792 Ohio Admin. Code 1501:9-1-04(A)(2). 2793 Id. 1501:9-1-04.

532

located at a depth of 1,000 to 2,000 feet deep, no permit will be issued unless the well is located

upon a tract or unit containing at least 10 acres, the proposed well location is at least 460 feet

from any well drilled to, producing from, or capable of producing from the same pool, and it is at

least 230 feet from any boundary of the subject tract.2794 For pools located at a depth from 2,000

to 4,000 feet, no permit shall be issued unless the well is located on a tract containing at least 20

acres, is spaced at least 600 feet from any existing or permitted well drilled, and is 300 feet from

any boundary of the subject tract.2795 No permit shall be issued, for wells from 4,000 feet or

deeper unless the well is located on 40 acres or more, not less than 1,000 feet from any other

well, and not less than 500 feet from any boundary of the subject tract.2796

In urbanized areas, the wellhead location shall not be closer than seventy five feet from

any property not within the subject tract or unit. This requirement may be agreed to in writing or

waived by the chief. The chief, with approval from the technical advisory council, may order

temporary well spacing for wells in the area of a discovery well. The order shall contain the

description of the area, identification of the pool, minimum distance wells may be drilled (from

the tract boundaries), minimum distance between wells and minimum acreage or drilling units

required.

[3] – Minimum Operator Control.

Orders requiring unit operation do not become effective until the plan provided for by the

Chief is approved in writing by those owners required to pay at least 65 percent of the unit

operation costs. Additionally, the royalty or fee owners of 65 percent of the acreage included in

2794 Id. 2795 Id. 2796 Id.

533

the unit must approve the plan. If the requisite percentage does not approve the plan within six

months from the issuing date of the order, the order is voided and revoked by the Chief.2797

[4] – Directional Drilling.

Ohio regulations provide that wells may not “vary unreasonably from the vertical drawn

from the center of the hole at the surface.” However, the Chief may approve directional drilling,

in which case, the well may deviate from the vertical.2798

[5] – Election Rights.

Mandatory pooling orders must include the basis upon which owners of tracts pooled will

share reasonable costs and expenses of drilling if the owners elect to participate.2799 If an owner

does not elect to participate in the risk and cost of drilling, that owner is designated a non-

participating owner on a limited or carried basis and is thus subject to reasonable conditions as

determined by the Chief. Non-participating owners are not responsible for conduct associated

with drilling. 2800 If an applicant pays for a non-participating owner’s portion of costs, that

applicant is entitled to the non-participating owner’s share of production, exclusive of the non-

participating owner’s royalty interest, until the party has been reimbursed the costs expended

plus an additional percent of the share as the Chief must determine. The total amount receivable

will in no even be greater than 200 percent of the share charged to the non-participating

owner.2801

2797 Ohio Rev. Code Ann. § 1509.28(B) (Lexis 2011). 2798 Ohio Admin. Code § 1501:9-1-02(H) (2011). 2799 Ohio Rev. Code Ann. § 1509.27(E) (Lexis 2011). 2800 Id. § 1509.27(F). 2801 Id.

534

§ 37.01 Analysis of Oklahoma Regulatory Framework.

[1] – Name of Governing Body.

By statute, the Oklahoma Corporation Commission (“Commission”) maintains legal

authority to propose and implement rules regarding the pooling of oil and gas interest in

Oklahoma. 2802 However, the Conservation Division (“Division”) is the Division of the

Commission charged with the administration and enforcement of the rules and regulations

established by the Commission.2803

[2] – Membership of Governing Body.

The Commission consists of three members, who are elected for staggered six-year terms.

If a vacancy occurs in the Commission, the Governor of Oklahoma appoints a new member to

fill the vacancy. The appointee serves until the next general election, at which time the seat is

placed on the ballot and an election is held. The newly-elected member will sit as a member for

the remainder of the unexpired portion of the term. The qualifications to stand for election to the

Commission are fairly minimal, with one important exception. To be qualified to stand for

election, an individual must be at least 30 years old, must have been a resident of Oklahoma for

at least two years, and, most importantly, must not have any direct or indirect interest in any

entity regulated by the Oklahoma Corporation Commission. This final requirement is a

substantial impediment to many potential candidates as the Commission’s jurisdiction extends

well beyond the regulation of oil and gas issues and includes other entities identified as public

utilities in Oklahoma. 2804

2802 Okla. Stat. tit. 52, § 87.1(a) (2010).

With regard to its oversight of the oil and gas industry, the

2803 26 Okla. Reg. 5 (July 1, 2009). 2804 The Oklahoma Corporation Commission is essentially the public utilities commission of Oklahoma and regulates not only oil and gas, but also trucking and railroad companies, telecommunications, water, heat, light, and power companies, and, interestingly, cotton gins. See Okla. Stat. tit. 17, § 1 (2010).

535

Commission has established the Oil and Gas Department to help administer the Commission’s

rules and regulations.2805

The Conservation Division consists of

[a] Director of Conservation, who, in addition to the [foregoing] duties and functions . . ., shall have overall responsibility, supervision and direction of the activities of the Conservation Division and the administration and enforcement of the rules, regulations and orders of the Commission relating to oil and gas conservation and the prevention of pollution. The statutes require that the Director of Conservation be a college graduate with a Bachelor's Degree and needs to have five years of experience in a supervisory capacity in an administrative or personnel management position to get the job.

Additionally, the Division consists of the following members: (1) a manager of pollution

abatement, (2) a manager of field operations, (3) a deputy director of conservation, (4) a manager

of technical services, (5) a district managers, (6) assistant district managers, (7) oil and gas field

inspectors, (8) an assistant manager of field operations, (9) an oil and gas safety specialist, and

(10) an oil and gas inspector supervisor.2806

[3] – Scope of Authority.

The Commission has general authority with regard to the regulation of oil and gas under

Oklahoma Statutes title 52, section 86.1, et seq. Specifically, the Commission has, “[i]n all

matters pertaining to the making, issuing and enforcement of its orders, rules and regulations”

under this Act, the power and authority as follows:

(1) [o]f visitation and of a court of record; (2) [t]o administer oaths; (3) [t]o compel attendance of witnesses; (4) [t]o compel the production of books and records; . . . (6) [t]o punish as for contempt any disobedience or violation of the provisions of this act and of any of its orders, rules, regulations, and judgments made or rendered by it under and in pursuance of the provisions of this act; (7) [t]o enforce the provisions of this act, and compliance with any

2805 Okla. Stat. tit. 52, § 51 (2010). 2806 Id. § 149.

536

of its orders, rules, regulations or judgments by appropriate process, and by shut down orders, ordering and directing the shutting down or discontinuance of production of oil from any well or wells of or operated by the offender with respect to which complaint has been made; and by orders or writs remedial or otherwise necessary or proper, to carry into effect its orders, rules and regulations; [and] (8) [t]o appoint or designate one of its agents or employees or one of the deputies to the Proration Umpire to act as Marshal of the Commission . . . .2807

Waste, within the Act, is prohibited. The Commission has the duty to reduce waste. To

do so, it has the authority to make rules, regulations, and orders for the prevention of such waste.

In addition to its ordinary meaning, waste, “when applied to gas, shall include” the following:

(1) the inefficient or wasteful utilization of gas in the operation of oil wells drilled to and producing from a common source of supply; (2) the inefficient or wasteful utilization of gas from gas wells drilled to and producing from a common source of supply; (3) the production of gas in such quantities or in such manner as unreasonably to reduce reservoir pressure or unreasonably to diminish the quantity of oil or gas that might be recovered from a common source of supply; (4) the escape, directly or indirectly, of gas from oil wells producing from a common source of supply into the open air in excess of the amount necessary in the efficient drilling, completion or operation thereof . . .; (5) the escape, blowing or releasing, directly or indirectly, into the open air, of gas from wells productive of gas only . . .; and (6) the unnecessary depletion or inefficient utilization of gas energy contained in a common source of supply.

In order to prevent waste, the Commission shall “limit the production of gas from wells

producing gas only to a percentage of the capacity of such wells to produce.”2808

upon a proper application and notice . . . and after a hearing as provided in said notice, shall have the power to establish well spacing and drilling units of specified and approximately uniform

To assist in

such, the Commission has the specific authority to regulate and approve pooling and unitization

under Oklahoma Statutes tit. 52, § 87.1, which provides that the Commission,

2807 Id. § 98. 2808 Id. § 86.3.

537

size and shape covering any common source of supply, or prospective common sources of supply of oil and gas within the state of Oklahoma.2809

However, the Commission

may authorize the drilling of an additional well or wells on any spacing and drilling unit or units or any portion or portions thereof or may establish, reestablish, or reform well spacing and drilling units of different sizes and shapes when the Commission determines that a common source of supply contains predominantly oil underlying an area or areas and contains predominantly gas underlying a different area or areas;

and “shall adjust allowable production within [a] common source of supply, or any part thereof,

and take such actions as may be necessary to protect the rights of interested parties.”2810 The

ability of the Commission to grant exceptions to general rules in specific instances has been

upheld by courts on several occasions.2811

The Division has the duty to administer and enforce (1) the statutes of this State; (2) the

rules, regulations, and orders of the Commission relating to (a) the conservation of oil and gas

and (b) the prevention of pollution in connection with, among others, the exploration, drilling,

and production of oil and gas; and (3) enforce the applicable provisions of the Natural Gas Policy

Act of 1978.

2812

The Division, among other rights, duties, and authorities, has the right at all times to go

upon and inspect any “oil and gas properties [or] pipelines . . . for the purpose of making any

2809 Id. § 87.1(a). “It shall not be necessary to publish such order, rule or regulation, after its adoption or promulgation by the Commission, before it shall go into effect, nor shall it be necessary to publish any such order, rule or regulation in each subsequent annual report of the Commission. Provided, that the Corporation Commission shall not under the provisions of this act make any order establishing a well spacing or drilling unit.” 2810 Id. 2811 See, e.g., S. Okla. Owners Ass’n v. Stanolind Oil & Gas Co., 266 P.2d 633 (Okla. 1954). 2812 26 Okla. Reg. 17 (July 1, 2009).

538

investigations or tests to ascertain whether the rules, regulations, and orders of the Commission

are being complied with, and shall report to the Commission any violation thereof.”2813

Additionally, the Division has access to all well records, regardless of where the records

are kept. All companies, operators, drilling contractors, drillers, service companies, or other

persons shall permit any authorized employee of the Commission to come upon any lease or

property operated or controlled by them and to inspect the records of wells.

2814

[4] – Pooling Process.

[a] Drilling and Spacing Units.

All rules of general application are promulgated to prevent waste, assure the greatest

ultimate recovery from the reservoirs of this state, protect the correlative rights of all interests,

and to prevent pollution. The rules shall be effective throughout the State of Oklahoma and be in

force in all pools except as amended, modified, altered, or enlarged in specific individual pools

by orders now in effect or hereafter issued by the Commission.2815

Drilling and spacing units are set by statute. Oklahoma set the condition that for any

person who has the right to drill into and produce from a common source of oil or natural gas

when production from such source can only be obtained under conditions constituting waste or

drainage not compensated by counterdrainage, then such person can produce only as much oil or

natural gas from a well as would be non-wasteful or not cause drainage in relation to the acreage

assigned to each well.

2816

[b] Voluntary v. Involuntary Pooling.

2813 Id. 2814 Id. 2815 Id. Reg. 12. 2816 Okla. Stat. tit. 52, §87.1 (2010).

539

After a spacing order has been entered, each working interest owner2817 within the unit

has the right to drill; however, generally only one well may be drilled within the unit.2818

If a working interest owner proposes to drill within a unit and all parties are not either

(1) leased by the operator proposing to drill or (2) agreeable to the proposed drilling, the

Commission may compulsorily pool the owners’ interests. Thus, the Commission, after

application from an owner and a hearing, shall require such owners to pool and develop their

lands in the spacing unit as a unit to avoid the drilling of unnecessary wells or to protect

correlative rights.

In

Oklahoma, the mineral owners or the Commission may pool the interests or tracts within a unit.

Thus, when there are separately owned tracts of land, undivided interests, or both, embraced

within the unit, the owners of such interests or tracts may validly pool their interests or tracts,

and develop their lands as a unit.

2819

However, should the owners of separate tracts or interests embraced within a

spacing unit fail to agree upon a pooling of their interests and the drilling of a well on the unit,

and should it be established by final, unappealable judgment of a court of competent jurisdiction

that the Commission is without authority to require pooling, then the owner of each tract or

interest embraced within a spacing unit may drill on his separately owned tract. The allowable

production from each tract or interest shall be that portion of the allowable for the full spacing

unit as the area of such separately owned tract bears to the full spacing unit.

2820

[c] Application Process and Hearings.

2817 26 Okla. Reg. 223 (July 1, 2009). “Working interest” means the interest in a well entitling the owner thereof to drill for and produce oil and gas, including but not limited to the interest of a participating mineral owner to the extent set forth in Section 87.1 of Title 52 of the Oklahoma Statutes. 2818 Okla. Stat. tit. 52, § 87.1(a)–(e) (2010). The working interest holder is either a lessee or unleased owner of oil or gas within the unit. 2819 Id. § 87.1(e). 2820 Id.

540

In order to obtain approval for the establishment of a unit and to establish spacing

requirements from the Commission, the Conservation Officer of the State of Oklahoma or a

person or entity must file an application in the form of a petition with the Commission. An

applicant must establish that it (1) “owns an interest in the minerals in lands embraced within

[the] common source of supply” or (2) has “the right to drill a well for oil or gas on the lands

embraced within [the] common source of supply.”2821 An application for spacing in Oklahoma

must include a survey plat showing the intended spacing unit and any adjoining spacing units

that either (1) are proposed or (2) have already been created by order of the Commission.2822

(1) [a]n identification of the applicants and all respondents (i.e. any person or entity having an interest in the property comprising the proposed spacing unit); (2) [a]n allegation of the facts (i.e. a showing of the property ownership and the proposed spacing unit); (3) [t]he legal authority upon which the application for spacing is based; (4) [t]he relief sought (i.e. the desired creation or modification of the spacing unit); and (5) [c]ertification of service upon the respondents.

Additionally, every application must provide the following information:

2823

When an application for a unit and spacing requirements is filed, the Commission shall

give at least fifteen (15) days' notice of the hearing to be held upon such petition by one publication . . . in some newspaper of general circulation published in Oklahoma County, and by one publication . . . in some newspaper published in the county, or in each county, if there be more than one, in which the lands embraced within the application are situated.2824

In order to pool interests, an owner needs to file an application for a hearing with the

Commission. Fifteen days’ notice, by mail, shall be given by the applicant to all the owners

2821 Id. § 87.1(a). 2822 Okla. Admin. Code § 165:5-7-6 (2009). 2823 Id. § 165:5-7-1. 2824 Okla. Stat. tit. 52, § 87.1(a) (2010). “Except as to the notice of hearing on such a petition, the procedural requirements of Sections 86.1 et seq. of this title, shall govern all proceedings and hearings provided for by this section.” Id.

541

whose addresses are known or could be known through the exercise of due diligence, and shall

have a return receipt request. The applicant shall also give notice by one publication, at least

fifteen days prior to the hearing in some newspaper of general circulation published in

Oklahoma County, and in some newspaper published in the county, or in each county, if there be

more than one, in which the lands embraced within the spacing unit are situated.

The applicant shall file proof of publication and an affidavit of mailing with the

Commission prior to the hearing. 2825 An application for pooling must conform to the same

general requirements as an application for spacing.2826 As with an application for a spacing unit,

a pooling application must be served upon all respondents by regular mail.2827 If the proper

notice is made and proof thereof is filed with the Commission, a hearing will be held and the

Corporation Commission may grant a statutory pooling order.2828

Additionally, the Commission may hear such a petition if made by the Conservation

Officer of the State of Oklahoma. Upon filing a petition, the Commission must give at least

fifteen days notice by publication of a hearing on that petition.

2829 An applicant must serve a

copy of the application upon all respondents by regular mail.2830

[d ] Orders and Order Content.

2825 Id. § 87.1(e). 2826 Okla. Admin. Code § 165:5-7-1(2009). 2827 Id. 2828 According to the Commission, the administrative law judge hearing an application for a pooling order will “inquire whether the applicant has made a good faith effort to bargain with the respondents prior to filing the pooling application.” Thus, a spacing unit must be established and an attempt made to lease or otherwise acquire the interests of the owners therein before a forced pooling application can be filed. See Okla. Corp. Comm’n, Pooling, Admin. Proceedings Div., http://www.occeweb.com/ap/pooling.html (last visited April 8, 2011). 2829 Okla. Stat. tit. 52, § 87.1(a) (2010). This notice is to be published in a newspaper of general circulation in both Oklahoma County and the county or counties where the lands subject to the petition are situated. 2830 Okla. Admin. Code § 165:5-7-1 (2009).

542

After a full evidentiary hearing, the Commission can issue a spacing order creating a unit.

If no protest is made at the docket calling for a hearing, the Commission may issue a spacing

order creating a unit without a full evidentiary hearing.2831

All orders requiring such pooling shall be upon such terms and conditions as are just and

reasonable and will afford to the owner of such tract in the unit the opportunity to recover or

receive without unnecessary expense his just and fair share of the oil and gas.

2832

When the pooling order allocates the portion of the production, when produced, to the

owner of each tract or interests included in a well spacing unit, such portion shall be considered

as if produced by such owner from the separately owned tract or interest by a well drilled

thereon. Such pooling order of the Commission shall make definite provisions for the payment

of cost of the development and operation, which will be limited to the actual expenditures

required for such purpose not in excess of what are reasonable, including a reasonable charge for

supervision.

2833 The Commission is specifically authorized to provide that the owner or owners

drilling, or paying for the drilling, or for the operation of a well for the benefit of all, will be

entitled to production from such well which would be received by the owner or owners for

whose benefit the well was drilled or operated, after payment of royalty, until the owner or

owners drilling or operating the well have been paid the amount due under the terms of the

pooling order or order settling such dispute. No part of the production or proceeds accruing to

any owner of a separate interest in such unit shall be applied toward payment of any cost

properly chargeable to any other interest in said unit. 2834

2831 Id. § 165:5-13-3.1.

2832 Okla. Stat. tit. 52, § 87.1(e) (2010). 2833 In the event of any dispute relative to such costs, the Commission shall determine the proper costs after due notice to interested parties and a hearing thereon. 2834 Okla. Stat. tit. 52, § 87.1(e) (2010).

543

In order for the Commission’s unitization and unitization plan order to become effective, it

needs to be signed, or in writing ratified or approved, by lessees of record of not less than 63

percent of the unit area affected by the unitization and by owners of record of not less than 63

percent (exclusive of royalty interests owned by lessees or by subsidiaries of any lessee) of the

normal one-eighth royalty interest in and to the unit area. Additionally the Commission needs to

have made a finding either in the order creating the unit or in a supplemental order that the plan

of unitization has been so signed, ratified, or approved by lessees and royalty owners owning the

required percentage interest in and to the unit area.

Where the plan of unitization has not been so signed, ratified or approved by lessees and royalty owners owning the required percentage interest in and to the unit area at the time the order creating the unit is made, the Commission shall, upon petition and notice, hold . . . additional and supplemental hearings as may be requested or required to determine if and when the plan of unitization has been so signed, ratified or approved by lessees and royalty owners owning the required percentage interest in and to the unit area and shall, in respect to such hearings, make and enter a finding of its determination in such regard. [If the] lessees and royalty owners, or either, owning the required percentage interest in and to the unit area have not so signed, ratified or approved the plan of unitization within a period of six (6) months from and after the date on which the order creating the unit is made, the order creating the unit shall cease to be of further force and effect and shall be revoked by the Commission.2835

[e] Appeals.

A motion for a rehearing may be made by any person within ten days of the entry of an

order by the Commission. Any such motion must show the (1) the part(s) of the order sought to

be set aside or modified or from which relief is sought; (2) the specific modifications or other

relief sought; and (3) the specific grounds relied upon for relief.2836

2835 Id. § 287.5.

After the expiration of this

ten day period, any person may file an application to vacate or modify an order of the

2836 Okla. Admin. Code § 165:5-17-1 (2009).

544

Commission.2837 This application must provide the same information as the motion made within

ten days; however, this application will be treated by the Commission as a new case.2838

If an application to vacate or modify an order of the Commission is denied, the order may

be appealed to the Oklahoma Supreme Court.

2839 Such an appeal will be assigned by the

Oklahoma Supreme Court to a panel of the Oklahoma Civil Court of Appeals, which will then

hear the appeal. All appellate petitions and filings are required to be served on all parties and

upon the general counsel of the Commission.2840

[f] Royalty Interests.

The owner or owners of oil and gas rights in and under an unleased tract of land shall be

regarded as a lessee to the extent of a seven-eighths working interest and a lessor to the extent of

the remaining one-eighth interest therein.

In the event a producing well or wells are completed upon a unit where there are, or may

thereafter be, two or more separately owned tracts, each royalty interest2841

2837 Id. § 165:5-17-2.

owner shall share in

all production from the well or wells drilled within the unit, or in the gas well rental provided for

in the lease covering such separately owned tract or interest in lieu of the customary fixed

royalty, to the extent of such royalty interest owner's interest in the unit. Each royalty interest

owner's interest in the unit shall be defined as the percentage of royalty owned in each separate

tract by the royalty owner, multiplied by the proportion that the acreage in each separately owned

tract or interest bears to the entire acreage of the unit.

2838 Id. 2839 Id. § 165:5-17-5. 2840 Id. 2841 26 Okla. Reg. 13 (July 1, 2009). “Royalty interest” means the entirety of the percentage interest in production or proceeds therefrom:

(A) reserved or granted by a mineral interest owner exclusive of any interest defined as a working interest or a subsequently created interest, or (B) otherwise provided or ascribed to a mineral interest owner by statute, rule, order or operation of law.

545

§ 37.02 Types of Pooling Statutes in Oklahoma.

[1] – Mineral Distinctions.

The statutory framework governing pooling in Oklahoma is the same for oil and gas.

Within the statute and regulations, “‘[o]il’ means crude petroleum oil, and any other

hydrocarbons, regardless of gravity, which are produced at the well in liquid form by ordinary

production methods.” The statute defines “gas” as “all natural gas, including casinghead gas,

and all other hydrocarbons not defined as oil.”2842 The regulations break this meaning down

even further. Within the regulations, gas means “any petroleum hydrocarbon existing in the

gaseous phase.” Further, casinghead gas means “any gas or vapor, or both, indigenous to an oil

stratum and produced from such stratum with oil.” “Dry gas or dry natural gas means any gas

produced in which there are no appreciable hydrocarbon liquids recoverable by separation at the

wellhead.” “Condensate gas means any gas which is produced with condensate as defined as

‘condensate’”. “‘Condensate’ means a liquid hydrocarbon which: (A) [w]as produced as a

liquid at the surface, (B) [e]xisted as gas in the reservoir, and (C) [h]as an API gravity greater

than or equal to fifty degrees, unless otherwise proven.”2843

The regulations define "[c]ommon source of supply" or "pool" as follows:

that area which is underlaid or which, from geological or other scientific data, or from drilling operations, or other evidence, appears to be underlaid by a common accumulation of oil and/or gas; provided that, if any such area is underlaid, or appears from geological or other scientific data or from drilling operations, or other evidence, to be underlaid by more than one common accumulation of oil or gas or both, separated from each other by strata of earth and not connected with each other, then such area

2842 Okla. Stat. tit. 52, § 86.1 (2010). 2843 26 Okla. Reg. 8 (July 1, 2009).

546

shall, as to each said common accumulation of oil or gas or both, shall be deemed a separate common source of supply. 2844

[2] – Depth.

The Oklahoma statute differentiates between the depth of oil and gas wells. Each

different depth will have a maximum unit size (discussed in further detail below). For vertical

oil wells, the depth is split between two different criteria: a total depth of less than 4,000 feet

below the surface or a total depth of more than 4,000 feet but less than 9,000 feet below the

surface. The statute does not set specific depths for horizontal oil wells2845

[3] – Unit Size.

or horizontal and

vertical gas wells.

Within the acreage bounds set forth by the statute, the Commission has discretion in

determining unit size and shape; however, the following factors are to be taken into account in

making such a determination:

(1) [t]he lands embraced in the actual or prospective common source of supply; (2) the plan of well spacing then being employed or contemplated in said source of supply; (3) the depth at which production from said source of supply has been or is expected to be found; (4) the nature and character of the producing or prospective producing formation or formations; (5) any other available geological or scientific data pertaining to said actual or prospective source of supply which may be of probative value to [the Corporation] Commission in determining the proper spacing and well drilling unit therefor [sic], with due and relative allowance for the correlative rights and obligations of the producers and royalty owners interested therein.2846

2844 Id. Reg. 6–7.

2845 In order to qualify as a “horizontally drilled oil well,” an oil well must be drilled in a manner “in which the horizontal component of the completion interval in the geological formation exceeds the vertical component thereof,” and in which the horizontal component extends at least 150 feet in the formation. Okla. Stat. tit. 52, § 87.1(f) (2010). 2846 Id. § 87.1(c).

547

The Commission may also decrease the size of existing units or permit additional wells to be

drilled thereon “upon proper proof [at a hearing] that such modification . . . will prevent or assist

in preventing the various types of waste prohibited by statute . . . .”2847

The regulations further provide that “the drilling and spacing units within any common

source of supply of oil or gas shall be of approximately uniform size and shape.”

2848 In a

combination reservoir, the drilling and spacing units within the oil portion of the reservoir shall

be of approximately uniform size and shape, and the drilling and spacing units within the gas

portion of the reservoir shall be of approximately uniform size and shape; provided, however, the

drilling and spacing units within the gas portion of a combination reservoir along the gas-oil

contact line or transition zone may be of nonuniform size and shape.2849

The Commission has provided that standard drilling units should be either square or

rectangular, with square units containing about 10, 40, 160, or 640 acres apiece, and rectangular

units containing 20, 80, or 320 acres apiece (essentially two adjacent square units).

2850

For horizontal drilling, the appropriate unit

2851 size (see above discussion on unit size) is

determined by the length of the horizontal bore.2852

For a vertical oil well

Additionally, Oklahoma has different unit

requirements depending on the depth, mineral, and type of drilling (i.e. vertical vs. horizontal).

2853

2847 Id. § 87.1(d).

that has a total depth of less than 4,000 feet, the maximum unit area is

40 acres. For a vertical oil well that has a total depth of more than 4,000 feet but less than 9,000

2848 Id. 2849 26 Okla. Reg. 31–32 (July 1, 2009). 2850 Okla. Admin. Code § 165:10-1-22 (2009). 2851 26 Okla. Reg. 57 (July 1, 2009). “Horizontal well unit” shall mean a drilling and spacing unit established by the Commission, after application, notice, and hearing, for a common source of supply into which a horizontal well has been or will be drilled. 2852 Okla. Admin. Code § 165:10-1-37 (2009). 2853 If reservoir dewatering is used to extract oil from “reservoirs having initial water saturations at or above fifty percent (50%),” the maximum unit size is 640 acres. Okla. Stat. tit. 52, § 87.1(d) (2010).

548

feet, the maximum unit area is 80 acres. All horizontal oil wells, as well as all gas wells, can

have a maximum unit area of 640 acres. 2854

Additionally, a horizontal well unit may be established for a common source of supply

for which there are already established non-horizontal drilling and spacing units. The horizontal

well unit may include within its boundaries more than one existing non-horizontal drilling and

spacing unit for the common source of supply. Horizontal well units may also exist concurrently

with producing non-horizontal drilling and spacing units. Horizontal well units shall supersede

existing non-developed non-horizontal drilling and spacing units for the duration of the

horizontal well unit.

2855

Further, the regulatory framework in Oklahoma provides that, if a unit consists of 160

acres or more, no oil or gas leasehold outside of the unit may be considered held by production

from the unit for more than 90 days after the expiration of the primary term of the lease

thereon.

2856

[4] – Spacing.

Thus, although a pooling unit of 640 acres may be approved for natural gas, if a

leasehold is only partially within the unit, all acreage outside the unit must be held by separate

production or will be lost 90 days after the expiration of that lease’s primary term.

The statutory framework for spacing regulations differ between oil and gas; however, the

permitted location for all types of wells will be at or near the center of square spacing units and

at the center of alternate squares of rectangular spacing units.2857

2854 Plus a 10% tolerance. Additionally, if a governmental section contains more than 640 acres, the unit may “comprise the entire section.” Id. § 87.1(c).

The regulations established by

the Commission provide that a well will be deemed to be drilled within a permitted location if it

is the following is true:

2855 26 Okla. Reg. 58–59 (July 1, 2009). 2856 Okla. Stat. tit. 52, § 87.1(b) (2010). 2857 Okla. Admin. Code § 165:10-1-24 (2009).

549

(1) Not less than 165 feet from the boundary of any standard 10-acre drilling and spacing unit or the proper square 10-acre tract within any standard 20-acre [rectangular] spacing unit. (2) Not less than 330 feet from the boundary of any standard 40-acre drilling and spacing unit or the proper square 40-acre tract within any standard 80-acre [rectangular] spacing unit. (3) Not less than 660 feet from the boundary of any standard 160-acre drilling and spacing unit or the proper square 160-acre tract within any standard 320-acre [rectangular] spacing unit. (4) Not less than 1320 feet from the boundary of any standard 640-acre drilling and spacing unit.2858

The regulations further provide that the well spacing requirements generally are as follows:

Any well drilled for oil or gas to an unspaced common source of supply 2,500 feet or more in depth shall be located not less than 330 feet from any property line or lease line, and shall be located not less than 600 feet from any other producible or drilling oil or gas well when drilling to the same common source of supply; provided and except that in drilling to an unspaced common source of supply that is less than 2,500 feet in depth, the well shall be located not less than 165 feet from any property line or lease line and not less than 300 feet from any other producible or drilling oil or gas well in the same common source of supply; provided, however, that the completed depth of the discovery well shall be recognized as the depth of the common source of supply for the purpose of this Section; provided further, when an exception to this Section is granted, the Commission may adjust the allowable or take such other action as it deems necessary for the prevention of waste and protection of correlative rights.2859

The Commission’s regulations provide that a horizontal wellbore,

from its point of entry and along any part of the lateral[,] shall be located not less than the minimum tolerance distance from the boundary of the horizontal well unit as follows: (A) Not less than 165 feet from the boundary of any 10, 20, or 40 acre horizontal well unit; (B) [n]ot less than 330 feet from the boundary of any 80 or 160 acre horizontal well unit; (C) [n]ot less than 660 feet from the boundary of any 320 acre or 640 acre horizontal drilling and spacing unit.2860

2858 Id.

2859 26 Okla. Reg. 31 (July 1, 2009). 2860 Okla. Admin. Code § 165:10-1-37 (2009).

550

Any horizontal wellbore drilled into an unspaced common source of supply may not be

located closer to the lease line or voluntary unit or to another wellbore completed in the same

common source of supply than the tolerance distance prescribed for a well drilled in a standard

horizontal well unit as determined by the length of the horizontal component of the unspaced

horizontal wellbore.2861

The Commission may grant an exception to the standard well placement upon an

applicant showing need for such non-standard placement and after taking into consideration “the

correlative rights of all persons entitled to share in the common source of supply.”

2862

[5] – Operator Control and Participation by Owners.

There is no statutory minimum level of operator control for the acreage within a unit.

The statute provides that an unleased owner will be treated as lessee to the extent of a seven-

eighths working interest and lessor to the extent of a one-eighth royalty interest.2863 As with

most states, owner (i.e., non-operator) participation in Oklahoma appears relatively rare. 2864

Upon development of a unit, the owner of a working interest (either as an actual lessor or as an

unleased owner) may participate in one of two ways. First, the working interest owner may

contract privately with the operator developing the unit to participate by sharing in the

development, operating, and production costs. Second, in a forced pooling situation, the

Corporation Commission may provide in the forced pooling order that the unleased owner shall

be responsible for the owner’s proportional share of the costs of development and operation.2865

2861 26 Okla. Reg. 58-59 (July 1, 2009).

2862 Okla. Admin. Code § 165:10-1-24 (2009). 2863 Okla. Stat. tit. 52, § 87.1(e) (2010). 2864 Okla. Corp. Comm’n, Pooling, Admin. Proceedings Div., http://www.occeweb.com/ap/pooling.html (last visited April 8, 2011). 2865 Okla. Stat. tit. 52, § 87.1(e). The operator of a unit is granted a lien on the minerals of such an owner until the costs of development and operation are paid. Additionally, if there is any dispute over the costs, the Corporation Commission is to resolve such dispute after notice and a hearing.

551

§ 38.01 Analysis of Oregon Regulatory Framework.

[1] – Name of Governing Body.

The Department of Geology and Mineral Industries (the “Department”) oversees oil and

gas law in the State of Oregon.2866

[2] – Membership on the Governing Body.

A five-member Governing Board of citizens (“the Board”), appointed by the Governor

and confirmed by the Senate, oversees the Department. The Board sets policy and oversees

general operations. Every six years it develops a strategic plan to help guide the Department’s

mission and objectives.2867 The State Geologist acts as secretary to the Board.2868

[3] – Scope of Authority.

The Board has jurisdiction and authority over all persons and property, including tidal

submerged and submersible lands of the state necessary to enforce effectively all laws relating to

the conservation of oil and gas.2869 The Department may determine whether waste of oil or gas

exists or is imminent.2870

(a) The inefficient, excessive or improper use or dissipation of reservoir energy of any pool, or the locating, spacing, drilling, equipping, operating or producing of any oil well or gas well in a manner that results or may result in reducing the quantity of oil or gas ultimately recoverable from any pool; or,

Waste, which is prohibited under the Act, is defined as follows:

(b) The inefficient storing of oil and the locating, spacing, drilling, equipping, operating or producing of any oil wells or gas wells in a manner that causes or may cause unnecessary or excessive surface loss or destruction of oil or gas.2871

2866 Or. Rev. Stat. § 520.055 (2010).

2867 Department of Geology and Mineral Industries, Governing Board-Voice of the Public, http://www.oregon.gov/DOGAMI/portoff/GovBrd.shtmlb (last visited Jun. 6, 2011). 2868 Or. Admin. R. 632-010-0006 (2011). 2869 Or. Rev. Stat. § 520.055 (2010). 2870 Id. § 520.045. 2871 Id. § 520.005(15).

552

The Department may collect data; make investigations and inspections; examine properties,

leases, papers, books and records, including drilling records and logs; examine, check, test and

gauge oil and gas wells and tanks; hold hearings; provide for recordkeeping and reporting; and

take such action as may be reasonably necessary to enforce the applicable laws. 2872 The

Department also has the authority to issue drilling permits, which are required prior to

commencing any drilling operations within the state.2873

[4] – Process for Pooling & Matters Covered.

[a] Spacing Units.

If necessary to prevent waste, protect correlative rights, or avoid unnecessary drilling of

excessive wells, the Board will establish spacing units for a pool or field.2874 Under the Act,

“spacing units . . . shall be of uniform shape and size for the entire pool or field, except that when

found necessary . . . the board is authorized to divide any pool or field into zones and establish

spacing units for each zone.”2875 In that event, spacing units may differ in size and shape from

those established in other zones.2876 Regardless of whether zonal subdivision is needed, spacing

units must be set in a manner that will result in “efficient and economical development of the

pool or field as a whole and . . . [each unit] may not be smaller than the maximum area that can

be efficiently drained by one well.”2877

An order to establish spacing units must “specify the size and shape of each unit and the

location of each permitted well thereon in accordance with a reasonably uniform spacing

plan.”

2878

2872 Id. § 520.045.

Any owner may file a petition with the Board for an exception to a spacing order,

2873 Id. § 520.025. 2874 Id. 520.210(1). 2875 Id. 2876 Id. 2877 Id. § 520.210(2). 2878 Id.

553

which may be granted upon a showing that the prescribed location will not allow production in

paying quantities, or that surface conditions pose a significant burden to drilling operations at the

proposed site.2879 The Board must provide notice to adjacent mineral owners, who may move

the Board to hold a hearing prior to granting any exception.2880 Whether or not an exception is

granted, a spacing order must provide any additional provisions necessary to ensure that

production from any unit does not exceed that amount which is “its just and equitable share of

the oil and gas in the pool.”2881

Oregon regulations include specific notice requirements for a hearing to establish spacing

units. Immediately upon the discovery of any pool or at any time after the effective date of the

applicable rule, the Board may prescribe spacing units for each pool and establish special field

rules applicable to that new pool.

2882 Prior to establishing spacing units or field rules, the Board

must provide notice to certain owners and hold a hearing.2883

(a) In areas of the state with surveyed sections, and where the top of the productive interval in the well is at a depth of less than 7,000 feet below the surface, the Department shall notify mineral owners in the 160 acre quarter section in which the well is located. If the top of the productive interval is located within 250 feet from any 160 acre quarter section line, the Department shall notify mineral owners in the affected adjacent quarter sections;

Notification for such a hearing

must be provided to mineral owners in the area surrounding the discovery well according to the

following:

(b) In the areas of the state with surveyed sections, and where the top of the productive interval in the well is at a depth of 7,000 feet or greater below the surface, the Department shall notify mineral owners in the 160 acre quarter section in which the well is located and in the eight surrounding quarter sections;

2879 Id. 2880 Id. 2881 Id. 2882 Or. Admin. R. 632-010-0156(1) (2011). 2883 Id. R. 632-010-0156(2).

554

(c) In those parts of the state that are without surveyed sections, the Department shall notify mineral owners located within the boundary of a superimposed 640 acre section with the well being centered in the section. Such superimposed section shall be oriented north-south.2884

After a hearing, the Board may grant exceptions to spacing or special rules when

necessary due to geological or topographical conditions, deficient productivity, or environmental

protection.

2885 The Board will notify all mineral owners within the spacing unit or affected by

the proposed exception prior to the hearing, and any mineral owner notified may contest the

proposed exception within 20 days of such notice.2886 Whenever a uniform spacing plan has

been prescribed for any pool, exceptions may be permitted if, after notice and a hearing, the

Board finds that conditions within the pool are such that the special rules would be

impracticable.2887

[b] Authority to Integrate Production.

When two or more separately owned tracts are embraced within a spacing unit or when

there are separately owned interests in all or a part of such spacing unit, then the interested

persons may integrate their tracts or interests for the development and operation of the spacing

unit.2888 In the absence of voluntary pooling, the Board, upon the application of any interested

person, may order the integration of all tracts or interests in the spacing unit for pooled

development, operation, and production from the unit.2889 A pooling order must establish just

and reasonable terms and conditions to provide for the integrated development and operation of

the spacing unit covered thereby.2890

2884 Or. Rev. Stat. § 520.210 (2010); Or. Admin. R. 632-010-0156 (2011).

2885 Or. Admin. R. 632-010-0157 (2011) 2886 Id. 2887 Id. 2888 Or. Rev. Stat. § 520.220(1) (2010). 2889 Id. § 520.220(2). 2890 Id. § 520.220.

555

In the absence of a voluntary integration agreement for the entire spacing unit, the Board

shall enter an order integrating all mineral rights ownership interests in a spacing unit at any time

following the entry of an order establishing the spacing unit for a pool. 2891 A compulsory

integration order shall determine the interest of each mineral rights owner in the spacing unit by

dividing the number of surface acres subject to such owner's mineral rights located in the spacing

unit by the total number of surface acres in the spacing unit.2892

The compulsory integration order shall provide for the drilling, if necessary, and

operation of the well on the spacing unit, for the sharing of production, and for the payment of

costs. It shall also provide that the operator and participating owners shall be treated as an entity.

The operator-participating owners' entity shall be entitled to share production and pay costs, both

in proportion to the total interest of the operator-participating owners' entity in the spacing unit.

The express and constructive agreements between the operator and participating owner(s) shall

control the allocations of production and costs attributable to the operator-participating owners'

entity.

The compulsory integration order shall also provide that each non-participating owner

shall be entitled to a full share in production in proportion to his interest in the spacing unit

subject to his royalty obligations, if any. In addition to the above, the compulsory integration

order shall provide that the operator-participating owners' entity first shall receive from each

non-participating owner's share of production an entitlement in the amount of 300 percent as a

maximum of the amount of drilling costs attributable (pro rata on the basis of interests) to the

non-participating owner's interest; and 300 percent as a maximum of production costs

attributable to the non-participating owner's interest on the same basis. Each such entitlement

2891 Or. Admin. R. 632-010-0161 (2011). 2892 Id.

556

shall be allocated between the members of the operator-participating owners' entity according to

their actual and constructive agreements.2893

In addition to pooling of interests within a spacing unit, owners may execute an

agreement “for the unit or cooperative development and operation of a field, pool or part

thereof.”

2894 If all owners to be included in a unitized area do not agree by contract, the Board,

upon its own motion or the application of any interested person, will hold a hearing to consider

the need for the operation as a unit of any proposed unit area.2895

(a) Unit operation is reasonably necessary to effectively carry on pressure control, pressure maintenance or repressuring operations, cycling operations, water flooding operations, injection operations, or any combination thereof, or any other method of recovery designed to substantially increase the ultimate recovery of oil from the pool or pools; and

Upon such hearing, the Board

will issue a unitization order if it finds that:

(b) The value of the estimated additional recovery of oil or gas exceeds the estimated additional cost incident to conducting unit operations.2896

As these conditions suggest, Oregon provides for compulsory unitization only for those wells

employing secondary recovery or injection methods to enhance ultimate recovery from the pool

produced therefrom.

If the Board determines that unitization is proper, it may issue an order that will prescribe

a plan for unit operations.2897

(1) A description of the pool or pools or parts thereof to be so operated.

The order must include the following:

(2) A statement of the nature of the operations contemplated. (3) An allocation to the separately owned tracts in the unit area of all the oil and gas that is produced from the unit area and is saved,

2893 Id. 2894 Or. Rev. Stat. § 520.230(2). The Act also provides distinct rules for voluntary unitization by lessees of tidal or submersible lands, which are governed by the Department of State Lands. See id. § 520.240. 2895 Id. § 520.260(1). A unit area may include “one or more pools or parts thereof in a field.” 2896 Id. § 520.260. 2897 Id. § 520.270.

557

being the production that is not used in the conduct of operations on the unit area or not unavoidably lost. (4) A provision for the credits and charges to be made in the adjustment among the owners in the unit area for their respective investments in wells, tanks, pumps, machinery, materials and equipment contributed to the unit operations. (5) A provision stating how the costs of unit operations, including capital investments, shall be determined and charged to the separately owned tracts and how these costs shall be paid, including a provision stating when, how and by whom the unit production allocated to an owner who does not pay the share of the cost of unit operations charged to such owner, or the interest of such owner, may be sold and the proceeds applied to the payment of such costs. (6) A provision, if necessary, for carrying or otherwise financing any person who elects to be carried or otherwise financed, allowing a reasonable interest charge for such service payable out of that person’s share of the production. (7) A provision for the supervision and conduct of the unit operations, in respect to which each person shall have a vote with a value corresponding to the percentage of the costs of unit operations chargeable against the interest of that person. (8) The time when the unit operations shall commence, and the manner in which, and the circumstances under which, the unit operations shall terminate. (9) Additional provisions that are found appropriate for carrying on the unit operations, and for the protection of correlative rights.2898

As discussed below, a unitization order and plan issued by the Board will not become effective

until it is approved by owners of a required percentage of relevant interests in the area covered

by the proposed unit area.

2899

[c] Allocation of Production & Costs.

If there is no agreement between the interested parties regarding allocation of production,

the Board shall determine the relative value, from evidence introduced at the hearing, of the

separately owned tracts in the unit area, exclusive of physical equipment, for development of oil

2898 Id. 2899 Id. § 520.290(1). For a discussion of the ownership consent required, see subsection titled “Minimum Operator Control” below.

558

and gas by unit operations.2900 The production allocated to each tract shall be the proportion that

the relative value of each tract bears to the relative value of all tracts in the unit area.2901 That

portion of the unit production allocated to any tract, and the proceeds from the sale thereof, are

the property and income of the persons to whom, or to whose credit, they are allocated or

payable under the order providing for unit operations.2902

All operations, including but not limited to the commencement, drilling, or operation of a

well, upon any portion of the unit area, are considered for all purposes the conduct of operations

upon each separately owned tract in the unit area by the several owners thereof.

2903 The portion

of the unit production allocated to a separately owned tract in a unit area, when produced, is

considered for all purposes to have been actually produced from that tract by a well drilled

thereon. 2904 Operations conducted pursuant to an order of the Board providing for unit

operations constitute a fulfillment of all the express or implied obligations of each lease or

contract covering lands in the unit area to the extent that compliance with obligations cannot be

had because of the order of the Board.2905

[d] Allocation of Gas Pursuant to Special Pool Rules.

Whenever the full production from any pool producing natural gas is in excess of the

market demand for gas from that pool, any operator or interest owner may petition the Board for

a hearing and an order establishing a method of determining the market demand from the pool

and of distributing that demand among the wells producing therefrom.2906

§ 38.02 Types of Oregon Pooling Statutes.

2900 Id. § 520.280(1). 2901 Id. 2902 Id. § 520.280(2). 2903 Id. § 520.330. 2904 Id. 2905 Id. 2906 Or. Admin. R. 632-010-0165.

559

[1] – Mineral Distinctions.

“Gas” means “all natural gas and all other fluid hydrocarbons not defined as oil . . .,

including condensate originally in the gaseous phase in the reservoir.”2907 “Oil” means “crude

petroleum oil and all other hydrocarbons, regardless of gravity, that are produced in liquid form

by ordinary production methods, but does not include liquid hydrocarbons that were originally in

a gaseous phase in the reservoir.”2908

[2] – Split by Depth.

As shown below, Oregon law provides distinct spacing

requirements for oil and gas wells.

As discussed below, the default spacing regulations for Oregon’s Mist Gas Field vary

based on the depth of a given well.

[3] – Spacing Rules.

The Department has enacted general spacing requirements for gas wells only. In the

absence of special field rules, no gas well may be located within 250 feet from the unit boundary

and 500 feet from the nearest well producing gas from the same pool.2909

The minimum spacing for gas wells in the Mist Field shall be 160 acres when the top of

the producing zone is less than 7,000 feet in vertical depth.

2910 The minimum spacing for gas

wells in the Mist Field shall be 640 acres when the top of the producing zone is 7,000 feet or

more in vertical depth.2911 The spacing units are based upon the federal land grid of sections and

quarter sections or projected extensions of the grid if the affected lands are not surveyed.2912

2907 Or. Rev. Stat. § 520.005(3) (2010).

The

completion location of each well permitted to be drilled on any spacing unit in the Mist Gas

2908 Id. § 520.005 (5). 2909 Or. Admin. R. 632-010-0230 (2011). 2910 Id. R. 632-010-0225(2). 2911 Id. R. 632-010-0225(3). 2912 Id. R. 632-010-0225(4).

560

Field shall be the location of the well at the top of the producing horizon.2913 The Board may

grant exceptions to the above field rules after holding a hearing when necessary on the basis of

geology, productivity, topography, enhancement requirements, or environmental protection.2914

[4] – Minimum Operator Control.

The Act requires that a certain proportion of ownership interests is accounted for in the

approval of any unitization order issued by the Board. No unitization order will become

effective until the plan for unit operations has been approved in writing by the following

percentages:

(A) Those owners who, under the board’s order, will be required to pay at least 75 percent of the costs of the unit operation, and (B) Those persons who, at the time of the order of the Board, owned of record legal title to 75 percent of royalty and overriding royalty payable with respect to oil and gas produced from the pool or part thereof over the entire unit area.2915

This required approval must be presented to and accepted by the Board within six months of the

order’s issuance.

2916 If not consented to upon the initial hearing for unit operations, the Board

may hold supplemental hearings as necessary to obtain such approval within that time period.2917

[5] – Directional Drilling.

The Department regulations require specific rules governing horizontal drilling in the

state. A well that is intentionally deviated from the vertical must be surveyed at intervals of no

less than 250 feet to determine the location of the borehole at such intervals.2918

2913 Id.

Horizontal

deviation is permitted without special permission for short distances if done to straighten the

2914 Id. R. 632-010-0235. 2915 Or. Rev. Stat. § 520.290(1) (2010). 2916 Id. § 520.290(b). 2917 Id. 2918 Or. Admin. R. 632-010-0142(1) (2011).

561

hole, sidetrack junk, or correct mechanical difficulties.2919 Unless variation is pursuant to such

conditions, no well may be intentionally deviated from the vertical without a permit from the

state geologist.2920

If drilling has not commenced, an application to deviate a wellbore may be approved as

part of the initial drilling permit.

2921 If drilling is in progress, the operator must notify the state

geologist as soon as practicable of his intent to deviate the hole direction, and file an application

for a permit to proceed with such plans. 2922

(A) Surface location in terms of distances from lease and section boundaries. Plan coordinates of top of producing interval and bottom of hole from surface location;

The application must include the following

information:

(B) Reason for deviation; (C) If the proposed or final location of the producing interval of the directionally deviated well is not in compliance with the spacing or other rules applicable to the reservoir:

(i) List of affected mineral rights owners or evidence that the applicant is the only affected mineral rights owner. For the purposes of this rule, affected mineral rights owners are the mineral rights owners in adjoining or cornering drilling or spacing units toward which the well is to be deviated; (ii) Neat and accurate plat of the lease and of all affected leases showing the names of all affected mineral rights owners and the surface and proposed producing interval locations of the well. The plat shall be drawn to a scale which will allow easy observation of all pertinent data.2923

Prior to approving any proposed deviation, the state geologist will notify all affected

mineral owners in drilling or spacing units toward which the well is being directionally

drilled.

2924

2919 Id.

Any such affected mineral owner may request a hearing to contest the application

2920 Id. R. 632-010-0142(2). 2921 Id. 2922 Id. 2923 Id. 2924 Id. R. 632-010-0142(3).

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within 20 days of receipt of notice; however, the application to deviate shall be granted or denied

at the sole discretion of the state geologist whether or not a hearing is required.2925

If the applicant is the only affected mineral owner or has obtained the right to drill by

lease or waiver, the State Geologist may approve the permit without a 20-day pendency

period.

2926 Further, the state geologist may permit deviation without notice and a hearing if the

deviation is part of an existing and continuous drilling operation.2927

[6] – Election.

Neither the Act nor Department regulations specify terms for carrying or for the

institution of a risk penalty for non-consenting owners subject to pooling or unitization orders.

2925 Id. 2926 Id. 2927 Id.

563

§ 39.01 Analysis of Pennsylvania Regulatory Framework.

[1] – Governing Body.

Oil and gas activities in Pennsylvania are governed by the Oil and Gas Act,2928 codified

in chapter 11 of title 58 of the Pennsylvania Statutes; the Oil and Gas Conservation Law,2929

codified at chapter 7 of title 58; and the Coal and Gas Resource Coordination Act (hereinafter the

“Coal and Gas Act”),2930 codified at chapter 10 of title 58. Both the Oil and Gas Act and the

Coal and Gas Act were enacted in 1984. The Oil and Gas Act gave authority to the Department

of Environmental Services, which has now transferred its duties to the Department of

Environmental Protection (hereinafter, the “DEP”). The Coal and Gas Act also authorizes the

Department of Environmental Protection to carry out its provisions.2931

The Oil and Gas Conservation Law was enacted in 1961 and created the Oil and Gas

Conservation Commission. The purpose of the Commission was to advise and enforce the

provisions of the statute. The Conservation Law was also enforced by the Oil and Gas Division

of the Department of Mines and Mineral Industries. Both the Commission’s and the Division’s

powers and duties were later transferred to the Department of Environmental Resources in

1971,

2932 and then to the Department of Environmental Protection by the Conservation and

Natural Resources Act in 1995.2933 The DEP now has the authority and duty to execute and

carry out the provisions of the Oil and Gas Conservation Law.2934

The DEP appoints and fixes the compensation of additional experts, engineers,

geologists, inspectors, investigators, hearing officers, attorneys, clerks, reporters, and other

2928 58 Pa. Stat. Ann. §§ 601.101–601.605 (West 2011). 2929 Id. §§ 401–419. 2930 Id. §§ 501–518. 2931 Id. §§ 504, 502. 2932 Act of 1970, No. 275, Pub. L. No. 834, § 30 (codified at 71 Pa. Cons. Stat. § 510-103(a) (2011)). 2933 Act of 1995, No. 18, Pub. L. No. 89, § 1 (codified at 71 Pa. Cons. Stat. 1340.503(a) (2011)). 2934 58 Pa. Stat. Ann. § 405(a) (West 2011).

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employees as may be necessary for the proper conduct of the work of the DEP.2935 The DEP and

its employees are subject to all the provisions of “The Administrative Code of 1929,”2936

[2] – Scope of Authority.

which

apply generally to administrative departments and offices.

The Oil and Gas Act brings the development of oil and gas and coal under the jurisdiction

of the DEP and requires a permit prior to commencement of drilling operations.2937 The Oil and

Gas Act is intended to do the following: to allow for the optimal development of Pennsylvania’s

oil and gas resources consistent with health, safety, and environmental concerns; to protect the

safety of those employed in the industries of natural gas or oil or coal mining; to protect those

persons living in areas where those industries operate; and to protect the natural resources and

environmental rights secured by the Pennsylvania Constitution.2938 It sets out the process by

which the Department grants drilling permits, along with various other provisions.2939

The Coal and Gas Act, which the DEP has primary responsibility for enforcing, requires

coordination of gas well operators and coal mine operators.

The Oil

and Gas Act does not restrict its applicability to any depth.

2940 The act applies to all gas wells

that penetrate a workable coal seam, 2941

2935 Id. § 415(a).

which is defined as “a coal seam identified . . . as

2936 71 Pa. Stat. Ann. § 510-1, states that the “Department of Environmental Resources (now known as the Department of Environmental Protection) shall, subject to any inconsistent provision in this act contained, continue to exercise the powers and perform the duties by law heretofore vested in and imposed upon (2) The Department of Mines and Mineral Industries, the Secretary of Mines and Mineral Industries, the Oil and Gas Conservation Commission. . . .” 2937 58 Pa. Stat. Ann. § 601.101–102 (West 2011). 2938 Id. § 601.102. 2939 See, e.g., id. § 601.201. 2940 Id. § 512. 2941 Id. § 503(a).

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capable of being mined by underground methods.”2942 The Coal and Gas Act does not apply to

gas wells permitted under the Oil and Gas Conservation Law or to oil wells.2943

The Oil and Gas Conservation Act defines the term “pool” as “an underground reservoir

containing a common accumulation of oil and gas, or both, not in communication laterally or

vertically with any other accumulation of oil or gas.”

2944 To protect any oil or gas pool, and to

prevent blowouts, cavings, seepages, and fires or the detrimental intrusion of water into any pool,

the DEP is authorized to make investigations and inspections of records and facilities, 2945

including the authority to enter the premises of an oil or gas well for the purposes of inspecting

the drilling, casing, operations, and plugging of the wells. 2946 Along with the authority to

inspect wells, the DEP is permitted to provide for the integration or communitization of interests

within a drilling unit2947 in order to prevent waste. Accordingly, the DEP is also empowered to

promulgate and to enforce rules, regulations, and orders to effectuate the purposes and the intent

of the Act.2948

The Oil and Gas Conservation Law applies to wells that penetrate the Onondaga horizon,

or in those areas in which the Onondaga horizon is nearer to the surface than 3,800 feet, any

wells that exceed a depth of 3,800 feet beneath the surface.

2949

2942 Id. § 502.

The Onondaga horizon is defined

as “the top of the Onondaga formation, except in those areas in which the Onondaga formation is

not present, and in such areas, the term shall be understood to mean either the top of the

stratigraphic horizon first appearing in the interval of the missing Onondaga formation, or where

strata older than the top of the Onondaga are exposed at the surface, then the term ‘Onondaga

2943 Id. § 503(b). 2944 Id. § 402 (10). 2945 Id. § 405(b). 2946 Id. § 405(c)(1)(iii). 2947 Id. § 405(c)(1)(iv). 2948 Id. § 405(c)(3). 2949 Id. § 403(b)(1).

566

Horizon’ shall mean the surface.”2950 After a well has been drilled into a pool of oil or gas, the

statute can be invoked by the well operator, an owner of mineral interests “directly and

immediately affected by the well,” or any other person who owns mineral interests in the

pool.2951

any owner of the right to develop, operate, and produce oil and gas from the pool. In the event that there is no oil and gas lease in existence the owner of the oil and gas rights shall be considered as “operator” to the extent of seven-eighths of the oil and gas in that portion of the pool underlying the tract owned by such owner, and a royalty owner as to a one-eighth interest in such oil and gas. In the event that the oil is owned separately from the gas, the owner of the substance being produced or sought to be produced from the pool shall be considered as “operator” as to such pool.

The Oil and Gas Conservation Law defines “operator” as,

2952

[3] – Process for Pooling.

As an initial matter, an operator must obtain a permit from the DEP to drill a well.2953

All applications must include a plat, approvable bond, a fee, and proof of notification, among

other things.2954 The plat, among other requirements, must state the name of affected surface

owners, surface owners and water purveyors whose water supplies are within 1,000 feet of the

suggested location, and the record owner or operator of all known underlying workable coal

seams; the proposed angle of the well; if the well is to be deviated substantially from the vertical;

and the workable coal seams underlying the tract to be drilled.2955 The permit fee is set by a

table in the regulations.2956

The applicant must forward a copy of the plat to the previously mentioned landowners,

water purveyors, and coal owners or operators by a form of notice deemed appropriate in the

2950 Id. § 402(6). 2951 Id. § 407(1). 2952 Id. § 402(7). 2953 Id. § 601.201(a); id. § 406(a); 25 Pa. Code § 79.11(a)(2011). 2954 25 Pa. Code § 78.15(b) (2011). 2955 58 Pa. Stat. Ann. § 601.201(b) (West 2011). 2956 Id. § 601.201(d).

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statute.2957 If no objections are made by said parties or the DEP within 15 days of notice or of

filing written approval, the DEP will file the notice as a permanent record of the well

location.2958 The DEP otherwise may deny a permit due to, among other reasons, unresolved

objections to the proposed location filed by coal owners or operators.2959

The location of permitted wells must conform with spacing or pooling orders and must be

at least 330 feet from the nearest outside boundary line on the lease on which said well will be

located. However, if the application contains a voluntary unitization agreement of the land on

which the well will be located, along with all lands within 330 feet of the proposed location, the

330-foot requirement will be waived. In the absence of a voluntary unitization agreement, the

DEP may hold a hearing to determine if the exception should be granted, prior to which all

operators owning land within 300 feet of the proposed location must be notified of said

hearing.

2960 The Coal and Gas Act, besides requiring permitting for wells, includes more

spacing requirements,2961

The Coal and Gas Act also requires that, when a proposed gas well is to be placed above

an active coal mine, the coal mine owner may object in writing to the drilling within ten days of

receiving the plat and notice required under the Oil and Gas Act.

covered in detail below.

2962 The coal and gas operators

may try to strike a compromise in the drilling location; if no compromise is reached, the two will

select a three-member panel to determine the spacing issue such that the location will not

endanger coal mine employees and will provide for the greatest recovery of gas and coal

removal. 2963

2957 Id. § 601.201(c).

The panel must weigh additional costs of drilling in an alternative location,

2958 Id. 2959 Id. § 601.201(e)(3). 2960 Id.; 25 Pa. Code § 79.11(b) (2011). 2961 58 Pa. Stat. Ann. § 507 (West 2011). 2962 Id. § 512(a). 2963 Id. § 512(c)–(d).

568

including the value of lost oil or gas, against the cost incurred by the coal owner or operator if

the initially proposed location is used.2964 The panel makes a decision which it submits to the

DEP within ten days of the meeting’s close, at which time the DEP has 20 days to either issue an

order based on the recommendation or order the panel to submit a new recommendation within

ten days.2965 Panel decisions are based on majority vote.2966

The DEP must, upon application, notice, and hearing, promulgate orders that provide for

well spacing and drilling units of approximately uniform shape and size covering each pool.

2967

The statute sets forth procedures for obtaining well spacing and drilling unit orders. After the

drilling of an initial well to establish a pool in a covered horizon, an operator may file an

application, which must include a plat that notes the pool’s latitude and longitude and other

information requested by the DEP, after which the DEP must immediately schedule a

hearing.2968 No application for a spacing order may cover more than ten square miles.2969

Notice of the above-mentioned hearing must be given by the DEP via publication in a

general circulation newspaper in all counties affected by the proposed order, which publication

must occur over two successive weeks. The DEP must also mail a copy of notice to all persons

who have provided the DEP with an address. The first publication and the mailing must be at

least 15 days prior to the hearing date.

2970

In the spacing hearing, the DEP must determine the acreage and shape of each unit, as

well as the area in which wells may be drilled on those units. The DEP may consider the

following information in making its decision: the topography and property lines of the relevant

2964 Id. § 512(d). 2965 Id. § 512(e). 2966 Id. § 512(f). 2967 Id. § 407. 2968 Id. § 407(1). 2969 Id. 2970 Id. § 407(2).

569

land; the proposed well spacing plan; the depth of production found on the land; the nature of the

producing formations, and whether production is of oil or gas; the maximum area that may be

efficiently and economically drained by one well; and any other information that might be of

interest to the DEP in making its determination, including the correlative rights and obligations

of producers and royalty owners thereon.2971

Within 45 days of the filing of the spacing application, the DEP must either promulgate

an order providing for spacing units or dismiss the application. The DEP may issue a temporary

order providing for spacing units until more information is provided to determine the proper size

and shape of the units.

2972 Units must be as nearly as possible uniform in size and shape for the

entire pool. However, the DEP may vary the size and shape if necessary due to other wells in the

area or to account for property lines. Also, if both oil and gas are produced from the pool, the

DEP’s order can provide units of one size for gas wells and of another size for oil wells.2973

Spacing orders must specify minimum distances from the nearest spacing unit boundary

line that may be drilled. The DEP may allow wells to be drilled within that minimum distance if,

after notice and a hearing, it finds such re-locating necessary for production in paying quantities

or to avoid the burden or hazards that would result from drilling according to the original order.

If such an allowance is made, the DEP is authorized to limit production from the well in order to

provide each person within the unit the opportunity to receive his or her just and equitable share

of production.

2974

Orders that establish a pool’s spacing units must cover all lands believed to be underlain

by that pool. The DEP may modify spacing unit orders upon application of an interested

2971 Id. § 407(3). 2972 Id. § 407(4). 2973 Id. § 407(5). 2974 Id. § 407(6).

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operator and upon notice and hearing as required in the issuance of the initial order. Such

modifications may be made if found to require the inclusion of additional acreage or the

exclusion of previously included acreage. Modifications also may provide for the drilling of

additional wells on a uniform pattern at a uniform distance from the nearest unit boundary.2975

No other wells may be commenced between the date of the notice of the hearing and the

date the order establishing spacing units is issued, unless the DEP so orders.

2976 If a drilling

permit for another well is refused due to a pending spacing application, and if the lease on the

location is being drained by a well on adjacent lands, the DEP may, after notice and hearing, shut

in the well to protect correlative rights until the spacing order has been given.2977

When a spacing unit contains two or more separately owned tracts or separately owned

interests, or both, the interested persons may decide to integrate said tracts or interests in order to

develop and operate the spacing unit.

2978 Those parties may voluntarily integrate their interests.

However, if they do not voluntarily integrate, the DEP may make an order, upon application of

an operator with interest in the tract, providing for integration of all tracts or interests in the

unit.2979

As part of the earlier order creating spacing units, the DEP must set out the terms and

conditions upon which, in the absence of a voluntary agreement and without a later order

explicitly integrating those interests, royalty interests in the units will be deemed integrated. The

integration must be on just and reasonable terms and conditions and must come after public

notice and hearing provided for all operators and royalty owners with record interest; such notice

must be given at least 15 days prior to the hearing or by personal service. Notice may be

2975 Id. § 407(7). 2976 Id. § 407(8). 2977 Id. § 407(9). 2978 Id. § 408(a). 2979 Id.

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provided by publication as described above if addresses are unknown. Failure to give notice

does not invalidate hearing proceedings, except that any orders will not be effective as to the

interest of those parties not notified.2980 No unit agreements entered into with an eye toward

unitizing operations will be construed as violating “any statute of this Commonwealth

prohibiting monopolies or acts, arrangements, agreements, contracts, or combinations or

conspiracies in restraint of trade or commerce.2981

All drilling and operations commenced following an integration order is deemed to be

operations conducted on each separate tract by the several owners thereof. The production

portion allocated to each separately owned tract is deemed to have actually been produced from

said tract by a well drilled thereon.

2982

All integration orders must authorize and provide for the operator of the well, prescribe

the time and manner in which all operators may elect to participate in the spacing unit

operations, make provisions for payment by those operators who decide not to participate in the

reasonable actual costs, plus a reasonable supervision charge and interest on past due

accounts.

2983

More generally, the DEP may not issue any order, in the absence of an emergency,

without holding a public hearing upon at least 15 days’ notice. Hearings are to be held at such

time and place as the DEP prescribes. Spacing and integration orders may only be entered upon

Information on election is discussed in more detail below. Orders must also be in

writing, be entered in records to be kept by the DEP, and be available for public inspection

during office hours.

2980 Id. 2981 Id. § 409. 2982 Id. § 408(b). 2983 Id. § 408(c).

572

application of an operator of affected land.2984 Notice must be given, at the DEP’s election,

either by personal service or by two publications: one in a general circulation paper in

Harrisburg and one in the county where the land, or some portion of the land, affected by the

proposed order is located. If personal service is used, it may be given by an officer authorized to

serve process or by an agent of the DEP. Service may also be effectuated by U.S. mail addressed

to the last known address of the operator or royalty owner at issue. Notice must include, among

other requirements, the time, place, and purpose of the hearing. Proof of service should be given

by affidavit if an agent serves notice.2985

§ 39.02 Types of Pennsylvania Pooling Statutes.

[1] – Mineral Distinctions.

The various Pennsylvania statutes that apply to the oil and gas industry each give a

definition for oil and gas. The Oil and Gas Conservation Law defines “gas” as “all natural gas

and all other volatile hydrocarbons not herein defined as oil, including condensate because it

originally was in a gaseous phase in the reservoir.” 2986 The Law defines “oil” as “crude

petroleum oil and all other hydrocarbons, regardless of gravity, produced at a well in liquid form

by ordinary production methods, but does not include liquid hydrocarbons that were originally in

a gaseous phase in the reservoir.”2987 The Coal and Gas Act defines “oil” in the same way, but

simplifies the definition for gas, stating that “gas” is “[a] natural, manufactured or byproduct gas

or any mixture thereof.”2988

2984 Id. § 410(b).

The Oil and Gas Act further changes the definitions of both oil and

gas, defining “gas” as “[a]ny fluid, either combustible or noncombustible, which is produced in a

natural state from the earth and which maintains a gaseous or rarified state at standard

2985 Id. 2986 Id. § 402(3). 2987 Id. § 402(4). 2988 Id. § 502.

573

temperature of 60 degrees Fahrenheit and pressure 14.7 PSIA, any manufactured gas, any

byproduct gas or any mixture of gases” and defining “oil” or “petroleum” as “[h]ydrocarbons in

liquid form at standard temperature of 60 degrees Fahrenheit and pressure 14.7 PSIA.” The

statutes do not expressly define coalbed methane.2989

[2] – Split by Depth.

The Oil and Gas Conservation Law, the only of the above statutes that deals with pooling

and unitization, affects lands in the Commonwealth of Pennsylvania,2990 but applies only to a

well or wells which penetrate the Onondaga horizon or, in those areas in which the Onondaga

horizon is nearer to the surface than 3,800 feet, any well or wells which exceed a depth of 3,800

feet beneath the surface. 2991 The Onondaga formation underlies the Marcellus Shale; 2992

Which statute a well is governed by is determined by the depth of the producing interval

of the discovery well in the pool. If such producing interval is covered by the Conservation Law,

then all wells drilled to such pool are covered by that Law, even though some of the wells in the

pool, if considered alone, would not be covered by it.

therefore the Conservation Law is presumed not to apply to wells drilled into the Marcellus

Shale. (See below for a discussion of the proposed pooling statue that applies to Marcellus

wells.) Presumably, though, the Oil and Gas Act and the Coal and Gas Act do apply to

Marcellus wells.

2993

2989 In Pennsylvania, the Court, in the case of U.S. Steel Corp. v. Hoge, 503 Pa. 140, 468 A.2d 1380 (Pa. 1983), determined that ownership, control and the right to produce coalbed methane was vested in the owner of the coal seam in which in the coalbed methane is situate so long as it remains in the seam.

Gas wells not covered by the

Conservation Law, if drilled through a workable coal seam, come under Coal and Gas Act

2990 58 Pa. Stat. Ann. § 403(a) (West 2011). 2991 Id. § 403(b)(1). 2992 John A. Harper, Devonian, The Geology Of Pennsylvania 111 (Charles H. Schultz ed. 1999). 2993 58 Pa. Stat. Ann. § 403(b)(1) (West 2011).

574

jurisdiction.2994 The Conservation Law does not apply to wells commenced prior to its effective

date, except such wells previously completed in strata above the Onondaga horizon, but

subsequent to the effective date of the law, drilled deeper than the Onondaga horizon, or 3,800

feet, whichever is deeper. Also these existing wells may be considered in spacing and pooling

orders entered by the DEP.2995 The Oil and Gas Conservation Law also does not apply to wells

drilled to inject gas into or withdraw gas from gas storage reservoir.2996

[3] – Spacing Rules & Minimum Operator Control.

The Oil and Gas Conservation Law provides for the integration of interests in spacing

units. As part of the order establishing a spacing unit or units, the DEP prescribes the terms and

conditions upon which the royalty interests in the unit or units shall, in the absence of voluntary

agreement, be deemed to be integrated without the necessity of a subsequent separate order

integrating the royalty interests.2997

The DEP enters orders establishing well spacing and drilling units, the size and shape of

which should be specified in the order and should be approximately uniform for each pool; the

statute does not give a specified size or space for these wells or units, and it is assumed that they

are conducted on a case-by-case basis.

The Conservation Law contains no provision requiring the

proposed operator of the unit to have any minimum level of control of the tracts within the unit.

2998 The orders establishing spacing units will specify the

minimum distance from the nearest boundary of the spacing unit, where a well maybe be

drilled.2999

2994 Id. § 503(b).

2995 Id. § 403(b)(2). 2996 Id. § 403(b)(3). 2997 Id. 2998 Id. § 407. 2999 Id. § 407(6).

575

The location of permitted wells must conform with spacing or pooling orders and must be

at least 330 feet from the nearest outside boundary line on the lease on which said well will be

located. However, if the application contains a voluntary unitization agreement of the land on

which the well will be located, along with all lands within 330 feet of the proposed location, the

330-foot requirement will be waived. In the absence of a voluntary unitization agreement, the

DEP may hold a hearing to determine if the exception should be granted, prior to which all

operators owning land within 300 feet of the proposed location must be notified of said

hearing.3000

The Coal and Gas Act also contains spacing requirements. The Act states that no permits

for covered gas wells may be issued unless the proposed gas well is not less than 1,000 feet from

any “other well,” which is defined as not including oil, gas, or injection wells that do not

penetrate a workable coal seam; oil, gas, or injection wells that have been plugged; nonproducing

oil or gas wells drilled and abandoned prior to 1955; and storage wells.

3001 The applicant and the

coal seam owner may consent to waive the 1,000-foot spacing requirement, but they may not

agree to any distance less than 900 feet.3002 Additionally, where the producing formation is a

vertical distance of 1,000 feet or more from the producing formation of any other well and if the

applicant and coal owner have consented in writing, the DEP may grant an exception to the

1,000-foot spacing rule.3003

[4] – Directional Drilling.

Regarding deviations in drilling, the point at which the well enters the producing

formation “may not unreasonably vary from the vertical drawn from the center of the hole at the

3000 Id.; 25 Pa. Code § 79.11(b) (2011). 3001 Id. § 507(a). 3002 Id. § 507(b). 3003 Id. § 507(c).

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surface.”3004 Deviation is only allowed to straighten, sidetrack, and correct issues encountered

while drilling.3005 Furthermore, no operator may deviate from the vertical intentionally in order

to penetrate the producing horizon outside the area authorized in the spacing order, unless such

deviation is permitted under the Oil and Gas Act. Upon completion of such deviated well, the

operator must file an angular deviation and directional survey with the DEP, along with other

required reports.3006

[5] – Elections.

Integration orders must prescribe the manner and time in which the operators in a spacing

unit may elect to participate in unit operations, as well as provisions for the payment by those

who decide not to participate in the operations of reasonable actual costs, plus a reasonable

supervision charge and interest on past due accounts.3007 If requested, the order should provide

for just and equitable alternatives for operators who do not elect to participate in the risk and cost

of operations to elect to surrender their leasehold interests on a reasonable basis to those who do

elect to participate, which surrender must be given in exchange for reasonable consideration that

the DEP may set if the parties cannot agree. In the alternative, the order could provide for the

election to participate in the operations on a limited or carried basis on just and reasonable terms

and conditions, as determined by the DEP.3008

If operators perform the work of drilling operations or pay for such work to be completed

for the benefit of a nonparticipating party, those operators are entitled to such nonparticipating

operators’ share of production from the unit, exclusive of a one-eighth royalty interest in

production, until the market price of that production equals 200 percent of the share of such costs

3004 25 Pa. Code § 79.16(a) (2011). 3005 Id. 3006 Id. § 79.16(b). 3007 58 Pa. Stat. Ann. 408(c) (West 2011). 3008 Id.

577

payable by or charged to the nonparticipating interests. If parties dispute costs, the DEP may

determine proper costs. If a well is completed before the spacing unit is integrated, production

sharing is only effective from the date of integration, except that nonparticipating parties will

receive credit for the value of their share of prior production from the well.3009

[6] – Proposed New Legislation for Marcellus Operations.

As previously stated, the Oil and Gas Conservation Law does not apply to Marcellus

Shale drilling because it sits above the Onondaga horizon. With the development of the

Marcellus Shale, the gas drilling industry has proposed a new pooling law for Pennsylvania

called the Pennsylvania Unconventional Oil and Gas Fair Pooling Act (the “Fair Pooling

Act”).3010 The Fair Pooling Act would create an “Oil and Gas Fair Pooling Office” within the

Department of Conservation and Natural Resources’s Bureau of Topographic and Geologic

Services. 3011 The Office would “administer the provisions of the act and promote the

development of unconventional oil and gas resources of the Commonwealth in accord with the

best principles and practices of oil and gas conservation, while reasonably protecting the

correlative rights” of affected persons. 3012 A director, who is a civil service employee of

Pennsylvania, would administer the Office and would be required to have experience in the

administration of oil and gas conservation laws, rules, and regulations.3013

The Fair Pooling Act would apply only to wells drilled into and producing from oil and

natural gas reservoirs below the base of the Elk Sandstone or its stratigraphic equivalent. The act

would apply both to vertical and horizontal wells; however, the only portion applying to vertical

3009 Id. 3010 Pa. Unconventional Oil & Gas Fair Pooling Act, available at http://www.marcellus-shale.us/pdf/Forced-Pooling-Act_6-15-10.pdf. 3011 Id. § 5(a). 3012 Id. § 5(b). 3013 Id. § 5(c).

578

wells is a 250-foot setback requirement from lease or unit lines and from other wells seeking

production from the same stratigraphic interval.3014 The Fair Pooling Act would not apply to

“coalbed methane or oil or gas found in tight sandstone reservoirs.”3015

Any person who “owns or controls at least 75 percent of the oil or gas working interest in

a proposed unit” could apply to the Office for an order establishing a drilling unit and integrating

all interests in the unit “for the development and production from unconventional oil or gas

reservoirs.” If a person does not own 75 percent of the proposed unit, but has written evidence

of an agreement with other owners who, in the aggregate, control at least 75 percent of the unit,

then that person can apply for the integration of interests for that unit.

3016 The application must

include a certification that the applicant made a good faith effort to lease or otherwise reach an

agreement with all interest owners in the unit, proof of actual and constructive notice to all

interest owners, and a proposed “joint operating agreement and lease for the unit.” 3017 The

application may be for a “standard unit” or a “special unit.”3018

[A]ny unit that is not more than 640 acres in area plus ten percent (10%) tolerance for possible survey error or other acreage discrepancies and that (absent interference by adjacent pre-existing voluntary unit(s) or unit(s) created under this Act) is configured generally in a regular square or other rectangular form oriented generally with the orientation of one or more horizontal well bores in the vicinity that the Applicant reasonably believes can be developed from a single pad (which may be located on or off the unit); and that includes all interests in and to the oil and gas within the boundaries of the proposed unit. Acreage in excess of the stated 640 acre maximum and 10% supplemental tolerance may be

A standard unit must be as

follows:

3014 Id. § 4. 3015 Id. 3016 Id. § 9(a). 3017 Id. § 9(h). 3018 Id. § 9 (c).

579

included in a standard unit if necessary to avoid the creation of stranded acreage through the creation of the unit.3019

A “special unit” includes all other units of any size or shape that the applicant reasonably

believes can be developed from a single pad located on or off the unit.

3020

The Fair Pooling Act also has a provision regarding the integration of unleased oil and

gas interests. An owner of an unleased oil and gas interest who has not entered into a voluntary

agreement with the applicant or other working interest owner has three options: (1) to be treated

as a lessor under the lease attached to the joint operating agreement for the unit; (2) to be treated

as a non-consenting party, subject to the terms of the joint operating agreement for the unit,

which would entitle them to a proportionate share of profits after being assessed a risk fee

apportioned among all non-consenting parties at the rate of 400 percent of their proportionate

share; or (3) to be treated as a consenting party subject to the joint operating agreement,

requiring a contribution of the costs of drilling the well, and entitling them to a proportionate

share of profits.

3021

The Fair Pooling Act also contains a provision that would prohibit well operators from

conducting surface operations on the surface estate of an involuntarily-pooled mineral rights

owner, unless there was a preexisting right to conduct such operations,

3022 such as an easement

that was previously granted by the current owner or his predecessor. The Fair Pooling Act

would also impose set back requirements on wells that would prohibit perforated segments of

wells from being located less than 250 feet from the boundaries of their drilling units or the

boundaries of leases not included in existing or proposed drilling units.3023

3019 Id. § 9(c)(1).

3020 Id. § 9(c)(2). 3021 Id. § 10(a). 3022 Id. § 9(b). 3023 Id. § 8(c).

580

§ 40.01 Analysis of Rhode Island Regulatory Framework. The state of Rhode Island has not enacted any statute addressing oil and gas conservation.

581

§ 41.01 Analysis of South Carolina Regulatory Framework.

[1] – Name of Governing Body.

The South Carolina Department of Health and Environmental Control (“the Department”)

regulates oil and gas production under the state’s conservation and unitization statute (“the

Act”).3024

[2] – Membership on the Governing Body.

The Department is a non-Cabinet agency supervised by the Board of Health and

Environmental Control (“the Board”).3025 The Board contains seven members: one gubernatorial

appointee named as Commissioner, and one representative from each of the state’s six

congressional districts. 3026 Board members serve four-year terms. 3027

As established by the Board, the Department is comprised of five deputy divisions:

Administration, Health Regulation, Health Services, Ocean and Coastal Resource Management,

and Environmental Quality Control, the last of which administers the Act under authority granted

to the Department.

3028 The Board elects a director every four years to lead the Department, who

has “such authority and perform[s] such duties as may be directed by the Board.”3029

[3] – Scope of Authority.

The Department has statutory authority to enforce the Act and maintains “jurisdiction

over all persons and property necessary for that purpose.”3030

3024 S.C. Code Ann. §§ 48-43-10(B), 48-43-30 (2010).

Its primary goals are to “prevent

3025 Id. § 44-1-20. 3026 Id. 3027 Id. 3028 See S.C. Dep’t. of Health and Envtl. Control, http://www.scdhec.gov/administration/organization.htm (last visited June 6, 2011). 3029 S.C. Code Ann. § 44-1-40 (2010). 3030 Id. § 48-43-30(A)(1).

582

waste of oil and gas, to protect correlative rights[,] and to prevent pollution of the water, air and

land by oil or gas.”3031

[a] Matters Governed.

Although waste and pollution are both expressly prohibited,3032 the Act clarifies that if

Department goals conflict, “the duty to prevent waste is paramount.”3033

Physical waste, as . . . generally understood in the oil and gas industry; . . . inefficient, excessive, or improper use, or the unnecessary dissipation of, reservoir energy; . . . locating, drilling, equipping, operating, or producing of any oil or gas well in a manner that causes, or tends to cause, reduction in the quantity of oil or gas ultimately recoverable from a pool under prudent and proper operations, or . . . unnecessary or excessive surface loss or destruction of oil or gas; . . . production of oil or gas in excess of (a) transportation or marketing facilities; (b) the amount reasonably required to be produced in the proper drilling, completing or testing of the well from which it is produced; . . . and, . . . underground or above ground waste in the production or storage of oil, gas or condensate, however caused . . . .

“Waste” includes, but

is not limited to, the following:

3034

The Department may initiate investigation and establish rules and regulations to

discharge its duties under the Act.

3035 In particular, the Department may require “identification

of [well] ownership; . . . preparing and filing of well logs; . . . furnishing [of] . . . a reasonable

performance bond,” and any other action necessary to prevent waste.3036

3031 Id.

Department authority

includes the power to regulate “the spacing [and] locating of wells; . . . to limit [and allocate] the

production of oil, gas or condensate from any field, pool, area, lease, or well; . . . [and] to

3032 Id. § 48-43-20. 3033 Id. § 48-43-30. 3034 Id. § 48-43-10(A). 3035 Id. § 48-43-30. 3036 Id. § 48-43-30(B).

583

classify and reclassify pools [and wells]” based on the respective hydrocarbon(s) produced

therefrom.3037

[b] Council Procedure.

The Department may not issue any rule, regulation or order “without a public hearing

upon at least twenty days’ notice, exclusive of the date of service.”3038 A public hearing is held

at a time and place chosen by the Department at which “any interested person shall be entitled to

be heard.”3039 The Department may act upon its own motion or any interested person may

petition for a public hearing.3040

Any notice required by this chapter shall be given by the Department. Any such notice, at the election of the Department, may be given by any one or more of the following methods: (a) personal service, (b) publication in one or more issues of a newspaper in general circulation in the state capital or of a newspaper of general circulation in the county where the land affected or some part thereof is situated, or (c) by United States mail addressed, postage prepaid, to the last known mailing address of the person or persons affected. The date of service shall be the date on which service was made in the case of personal service, the date of first publication in the case of notice by publication, and the date of mailing in the case of notice by mail. The notice shall be issued in the name of the State, shall be signed by the chairman, secretary or executive director of the Department, shall specify the style and number of the proceedings, the time and place of the hearing, and shall briefly state the purpose of the proceeding. Should the Department elect to give notice by personal service, such service may be made by an officer authorized to serve process, or by any agent of the Department, in the same manner as is provided by law for the service of process in civil action in the courts of the State. Proof of the service by such agent shall be by the affidavit of the agent making personal service.

The Department must provide notice of a hearing as follows:

3041

3037 Id.

3038 Id. § 48-43-40(A). 3039 Id. Neither the Act nor Department regulations define “interested person.” 3040 Id. § 48-43-40(E). 3041 Id.

584

Any rule, regulation or order must be in writing and entered within 30 days of the

hearing.3042 All entries are maintained by the Department as public record, copies of which are

receivable into evidence in all state courts.3043 Department rules and regulations must also be

filed with the Secretary of State.3044 Notably, the Act requires that “all rules and regulations

adopted by the Department . . . be approved by the General Assembly before they [become]

effective.”3045

Any person who “has a direct interest in the subject matter of any final order” may appeal

to a circuit court within the state.

3046

[4] – Process for Pooling & Matters Covered.

The Act does not prescribe an appropriate venue for such

appeal.

No person may begin drilling without first obtaining a valid permit from the

Department.3047 Drilling permits will only be granted upon application from the proposed well

operator(s).3048 Unless otherwise approved by a municipality, “no well drilling permit shall be

issued within the corporate limits of any municipality.”3049 Further, no permit will be granted to

drill on any beach within the state.3050

The Department may limit and allocate oil and gas production among and within pools as

necessary to prevent waste.

3051

3042 Id. § 48-43-40(D).

A “pool” is “an underground reservoir containing a common

3043 Id. 3044 Id. 3045 Id. § 48-43-100. 3046 Id. § 48-43-60. In most cases, an appeal may be filed in the applicable judicial district in which affected property rests. 3047 S.C. Code Ann. Regs. 121-8.5(A) (2010). 3048 Id. 3049 Id. 121-8.5(D). 3050 Id. 3051 S.C. Code Ann. § 48-43-30 (2010).

585

accumulation” of oil and/or gas; in addition, “each zone of a structure that is completely

separated from any other zone in the same structure is a pool.”3052

Discussion of the Act’s pooling provisions requires attention to its distinction between

ownership interests. An “owner” is that person “who has the right to drill into and produce from

a pool and to appropriate the oil or gas that he produces therefrom, either for himself or for

himself and others.”

3053 This owner is different from the person who qualifies as a “royalty

owner,” which references “the person who[,] pursuant to a lease agreement with another[,] has

the right to receive, free of costs, an allocation of production or payments based upon the value

of production.”3054

[a] Spacing of Wells.

The Department may establish spacing units for a pool after notice and a hearing.3055

Upon such notice, “no additional well shall be commenced for production from the pool [in

question] until the order establishing units has been made.”3056 A spacing order must contain the

size and shape of each unit and the proposed well(s) to be located thereon.3057 In addition, the

order should cover all land “determined or believed to be underlain” by a relevant pool.3058

The Department will establish spacing units of like shape and size within a pool;

however, the Act authorizes sacrifice of spatial uniformity for production efficiency.

3059 For

example, the Department may set “spacing units of different sizes or shapes for different parts of

a pool” and grant exceptions to uniformity “where circumstances reasonably require.”3060

3052 Id. § 48-43-10 (G).

If

3053 Id. § 48-43-10(I). 3054 Id. § 48-43-10(U). 3055 Id. § 48-43-330(A). 3056 Id. § 48-43-330(G). 3057 Id. § 48-43-330(D). 3058 Id. § 48-43-330(E). 3059 Id. § 48-43-330(C). 3060 Id.

586

necessary, the Department may modify spacing units, relocate proposed well sites, or change the

scope of pool coverage.3061 Also, if the Department cannot determine the most effective well

spacing plan at the hearing, it will set temporary spacing units pending investigation to determine

appropriate unit size.3062

The Act allows the Department discretion to propose, establish, and later modify spacing

orders, yet it must adhere by three general standards when spacing wells. First, the proposed

spacing plan must “result in the efficient and economical development of the pool as a

whole.”

3063 Second, each spacing unit must “not be smaller than the maximum area that can be

efficiently and economically drained by one well.”3064 Finally, upon changes to a spacing order,

the Department must adjust allowable production for the pool to ensure that no owner produces

or receives “more than his just an equitable share.”3065

[b] Authority to Integrate Production.

Two or more separate owners within the same spacing unit may agree to pool their

interests.3066 If a voluntary pooling agreement is not reached, the Department may integrate

those interests by compulsory order.3067 A pooling agreement or order will integrate “all tracts

or interests in the spacing unit for the development and operation thereof and for the sharing of

production therefrom.”3068

Upon its own motion or that of any interested person, the Department will hold a hearing

to consider the necessity of unit operations of an area.

3069

3061 Id. § 48-43-330(F).

The Department may enter a

3062 Id. § 48-43-330(B). 3063 Id. 3064 Id. 3065 Id. § 48-43-330(D). 3066 Id. § 48-43-330(B). 3067 Id. § 48-43-340(B). 3068 Id. 3069 Id. § 48-43-350(B).

587

compulsory unitization order if “[integrated] operation is reasonably necessary to increase the

ultimate recovery of oil or gas; and, the value of the estimated additional recovery of oil and gas

exceeds the estimated additional cost incident to conducting such operations.” 3070

No order of the department providing for unit operations shall become effective unless and until the plan for unit operations prescribed by the Department has been approved in writing by those persons who . . . will be required to pay at least seventy-five percent of the costs of the unit operation, and also by the owners of at least seventy-five percent of the production or proceeds thereof that will be credited to interests which are free of cost, such as royalties, overriding royalties and production payments, and the department has made a finding, either in the order providing for unit operations or in a supplemental order, that the plan for unit operations has been so approved.

To be

effective, the Department must obtain formal consent from a proportion of relevant interests in

the unit area. The Act states,

3071

To determine whether the requisite 75 percent thresholds are met, the Act presumes that

the owner of an unleased tract is considered to hold a seven-eighths interest as “owner” and a

one-eighth royalty interest.

3072 The Department may hold supplemental hearings to determine

approval if necessary.3073 Unless owners agree within six months of entry, the proposed order is

“ineffective[] and shall be revoked,” absent good cause to offer an extension.3074

[c] Contents of Pooling & Unitization Orders.

A pooling order must be “upon terms and conditions that are just and reasonable.”3075

authorize the drilling, equipping, and operation of a well on the spacing unit; . . . provide who may drill and operate the well; . . . prescribe the time and manner in which all owners in the spacing

Each pooling order shall do the following:

3070 Id. 3071 Id. § 48-43-350(D) (emphasis added). 3072 Id. If unleased acreage is state-owned, statutory presumption is five-sixths owner and one-sixth royalty owner. 3073 Id. 3074 Id. 3075 Id. § 48-43-350(C).

588

unit may elect to participate therein; and . . . make provision for the payment by all those who elect to participate therein of the reasonable cost thereof, plus a reasonable charge for supervision and interest.3076

Each unitization order must prescribe a plan for pooled operation which includes the

following information:

(1) A description of the pool or pools or parts thereof to be so operated, termed the unit area; (2) A statement of the nature of the operations contemplated; (3) An allocation to the separately owned tracts in the unit area of all the oil and gas that is produced from the unit area and is saved, being the production that is not used in the conduct of operations on the unit area or not unavoidably lost; (4) A provision for the credits and charges to be made in the adjustment among the owners in the unit area for their respective investments in wells, tanks, pumps, machinery, materials, and equipment contributed to the unit operations; (5) A provision providing how the costs of unit operations, including capital investments, shall be determined and charged to the separately owned tracts and how such costs shall be paid, including a provision providing when, how, and by whom the unit production allocated to an owner who does not pay the share of the cost of unit operations charged to such owner, or the interests of such owner, may be sold and the proceeds applied to the payment of such costs; (6) A provision, if necessary, for carrying or otherwise financing any person who elects to be carried or otherwise financed, allowing a reasonable interest charged for such service payable out of such person's share of the production; (7) A provision for the supervision and conduct of the unit operations, in respect to which each person shall have a vote with a value corresponding to the percentage of the costs of unit operations chargeable against the interest of such person; (8) The time when the unit operations shall commence, and the manner in which, and the circumstances under which, the unit operations shall terminate; and, (9) Such additional provisions that are found to be appropriate for carrying on the unit operations, and for the protection of a correlative rights.3077

3076 Id. § 48-43-340(C).

3077 Id. § 48-43-350(C).

589

As shown in these provisions, the Act recognizes election rights in compulsory pooling

situations, the terms of which must appear in the order. Election is further discussed below.

[d] Allocation of Production and Costs.

If the Department limits production throughout the state, it must “allocate the allowable

production among the pools on a reasonable basis.” 3078 In doing so, the Department “may

consider, but not be bound by, nominations of purchasers to purchase from particular pools or

groups of pools.” 3079 However, the Department will allocate production to “prevent undue

discrimination among pools” resulting from selective purchasing.3080

Subject to needs of waste prevention, the Department must “allocate the allowable

production among the several wells or producing properties in the pool so that each entitled

thereto will have a reasonable opportunity to produce or to receive a just and equitable share of

the production.”

3081 The Department defines “just and equitable share” to mean, “as to each

person, that part of the authorized production from the pool that is substantially in the proportion

that the amount of recoverable oil or gas . . . in the developed area of his tract[s] . . . in the pool

bears to the recoverable oil or gas . . . in the total developed areas in the pool.”3082

All operations incident to oil and gas production which occur upon any portion of pooled

land “shall be deemed for all purposes the conduct of such operations upon each separately

owned tract in the unit area by the several owners thereof.”

3083 As such, the portion of the unit

production allocated to a separately owned tract in a unit area is considered “to have been

actually produced from such tract by a well drilled thereon.”3084

3078 Id. § 48-43-320(A).

In other words, each owner and

3079 Id. § 48-43-320(C). 3080 Id. 3081 Id. § 48-43-320(B). 3082 S.C. Code Ann. Regs. 121-8.2(S). 3083 S.C. Code Ann. § 48-43-340(B) (2010). 3084 Id.

590

royalty owner within a pooled unit is entitled to a production benefit relative to his or her

respective interest in the entire pool.

For oil and gas that is “saved,” or that portion of “production that is not used in the

conduct of operations on the unit area or not unavoidably lost,” owners may contract terms to

dictate allocation.3085 If no agreement exists, the Department “shall determine the relative value

. . . of . . . [each] tract in the unit, . . . and the production allocated to each tract shall be the

proportion that the relative value [that] each tract . . . bears to the [overall] value of all tracts in

the unit area.”3086

Cost allocation within a pool will rest upon the facts of each case, and must be stated in

the order.

3087 As discussed below, the order may provide for certain election rights or prescribe

risk penalties in applicable circumstances.3088

[e] Modification of Pooling Order.

The Department may amend pooling orders under the same terms and conditions needed

to issue the original order, with certain exceptions.3089 First, “if such an amendment affects only

the rights and interests of the owners, the approval of the amendment by the royalty owners shall

not be required.”3090 Second, the Department may not alter “the percentage for the allocation of

oil and gas as established for any separately owned tract by the original order, except with the

consent of all persons owing oil and gas rights in such tract.”3091

3085 Id. § 48-43-350(C)(3).

Third, the Department may not

change the percentage of allocation of cost as established in the original “except with the consent

3086 Id. 3087 Id. § 48-43-340(C). 3088 Id. 3089 Id. § 48-43-350(E). 3090 Id. 3091 Id.

591

of all owners” in the relevant tracts affected. 3092

[f] Characteristics of a Pool.

An amendment to production distribution

requires the consent of “all persons owning oil and gas rights in [the] tract [or tracts affected];”

however, amending allocation of costs requires approval of “all owners in such tract.”

Therefore, reallocation of costs requires approval of only those persons with a working interest

in the oil and gas impacted by the amendment. A change in entitled production requires

approval of all such owners, as well as all royalty owners of the affected tract(s).

The Act states that a pooling order “may provide for unit operations on less than the

whole of a pool.”3093 While inclusion of an entire pool may be most efficient in some cases, the

Department is not bound to extend the coverage of an order so far if “the unit area is of such size

and shape” that a smaller scope is preferable.3094 In addition, the Department may only issue

orders to cover part of a pool if operations thereon “will have no adverse effect upon other

portions of the pool.”3095

The Department may also order unitized operation of an area that embraces all or part of

a tract or tracts which are already subject to pooling under a previous order.

3096 In that event, the

later order “shall . . . treat the unit area previously established as a single tract.”3097 Once a

portion of production is allocated to that “single tract” under the later order, it will then be

distributed among the separate owners within that “single tract” under the terms of the previous

order.3098

[g] Impact of Order on Existing Contracts.

3092 Id. 3093 Id. § 48-43-350(G). 3094 Id. 3095 Id. 3096 Id. § 48-43-350(F). 3097 Id. 3098 Id.

592

Unless otherwise agreed upon, an order issued under the Act “shall [not] be construed to

result in a transfer of all or any part of the title of any person to the oil and gas rights in any tract

in the unit area.”3099 Further, no such order will terminate an existing contract “relating to the

sale or purchase of production from a separately owned tract” within the unit area, which will

remain in force and “apply to oil and gas allocated to such tract” under the contract terms.3100

However, the Act grants a limited “compliance defense” relating to existing contracts:

“operations conducted pursuant to [a pooling] order . . . shall constitute a fulfillment of all the

express or implied obligations of each lease or contract covering lands in the unit area to the

extent that compliance with such obligations cannot be had because of the order.”3101

[h] Royalty Distribution.

As shown in the statutory allocation of production and costs among owners in a pool,

South Carolina maintains a one-eighth royalty for oil and gas royalty owners. For example, an

owner who covers drilling and operating costs for another’s benefit is entitled to that person’s

production “exclusive of a royalty not to exceed one-eighth of the production.”3102

[i] Restraint of Trade.

A voluntary pooling agreement does not violate any state law relating to restraints of

trade if submitted to and approved by the Department “as being in the public interest or

reasonably necessary to prevent waste or protect correlative rights.”3103

3099 Id. § 48-43-350(K).

Department approval

acts as a complete defense to such allegations, but “failure to submit such an agreement to the

3100 Id. § 48-43-350(J). 3101 Id. § 48-43-350(H). 3102 Id. § 48-43-340(C). 3103 Id. § 48-43-360.

593

Department for approval shall not for that reason imply or constitute evidence” that anti-trust

laws are violated.3104

§ 41.02 Types of South Carolina Pooling Statutes.

[1] – Mineral Distinctions.

Under South Carolina law, “gas” encompasses “all natural gas and all other fluid

hydrocarbons not [otherwise] defined as oil, including condensate . . . .” 3105 In turn, “oil”

includes “crude petroleum oil and all other hydrocarbons, regardless of gravity, that are produced

in liquid form by ordinary production methods, but does not include [condensate].”3106

The Department has authority under the Act “[t]o classify and reclassify pools . . . [and]

wells” based on the hydrocarbon to be produced therefrom.

3107 Upon the discovery of any new

oil pool in the State, the Department will classify such in one of the following categories: (1)

Pools on Temporary Allowable; (2) Prorated Pools; or (3) Pools Under Pressure Maintenance or

Secondary Recovery.3108 Gas pools will be classified as either (1) Dry Gas Pools; (2) Gas

Condensate Pools; or (3) Gas Condensate Pools Under Cycling.3109

[2] – Split by Depth.

These classifications will

foster Department action in establishing field rules to dictate applicable spacing and allowable

production standards.

Except in terms of performance bond amount noted below, neither the Act nor state

regulations distinguish amongst various wells by depth. However, nothing in the Act suggests

that the Department is limited in its ability to set depth restrictions by rule or order.

3104 Id. 3105 Id. § 48-43-10(E). “Condensate” includes “liquid hydrocarbons that were originally in the gaseous phase in the reservoir.” Id. § 48-43-10(F). 3106 Id. § 48-43-10(D). 3107 Id. § 48-43-30(B)(4). 3108 S.C. Code Ann. Regs. 121-8.20(A) (2010). 3109 Id. 121-8.20(B).

594

[3] – Spacing Rules.

The Department has authority to regulate the spacing of wells by order or through

establishing field rules, which are spacing and production standards covering one or more

pools.3110 Field rules shall provide for “the establishment of the allowable, the production unit

[if applicable] . . ., well spacing requirements [for the pool(s) covered], and other matters

incidental to hydrocarbon production.”3111 After notice and a hearing, the Department may grant

exceptions to existing or temporary field rules if necessary to prevent waste or to protect

correlative rights. 3112 Such notice and hearing must comply with the requirements outlined

above.3113

The Department has established default spacing requirements for wells not covered by

field rules. No well may be located nearer than 330 feet from any lease boundary.

3114 An oil

well shall not be drilled within 900 feet of “any other well completed in, drilling to, or for which

a permit has been granted to drill to, the same pool.”3115 Similarly, no gas well may be located

within 2,000 feet of any other existing or permitted well within the same pool.3116

In addition to its authority to establish general or “special” field rules, the Department

may grant exceptions to these default spacing requirements upon application.

3117 Any well

excepted from spacing requirements is afforded the opportunity to produce on test basis until the

Department determines appropriate unit dimensions.3118

[4] – Minimum Operator Control.

3110 Id. 121-8.9(A) (2010). A “field” is “the general area underlain by one or more pools.” S.C. Code Ann. § 48-43-10(H) (2010). 3111 S.C. Code Ann. Regs. 121-8.9(B) (2010). 3112 Id. 121-8.9(C). 3113 Id.; see also S.C. Code Ann. § 48-43-40 (2010). 3114 S.C. Code Ann. Regs. 121-8.9(A) (2010). 3115 Id. 3116 Id. 3117 Id. 121-8.9(A)-(B). 3118 Id. 121-8.9(A).

595

To be effective, the Department must obtain formal consent from a proportion of relevant

interests in the unit area. The Act requires that a unitization order is ineffective unless, within

six months of entry, the Department receives written consent of its terms from at least 75 percent

of the working interest ownership, as well as 75 percent of the non-paying royalty interests.3119

To determine whether the sufficient approval exists, the owner of an unleased tract is presumed

to hold a seven-eighths working interest and a one-eighth royalty interest.3120

[5] – Directional Drilling.

As a general rule, “[a]ll wells must be drilled with due diligence to maintain a reasonably

vertical well bore.”3121 However, “upon application by an operator to drill a well that is to be

intentionally deviated and directionally controlled,” the Department may issue a permit for such

variant operation.3122 An application must comply with the terms specified for new drilling

permits and also include adequate survey(s) displaying both surface and proposed bottom home

locations.3123 An operator may likewise apply to receive Department permission to deviate an

existing permitted well, upon which the Department will require maintenance of certain records

concerning direction and production.3124

The Department will not grant a permit for deviated drilling unless “the location of the

deviated well at the depth of the proposed producing zone is in compliance with the applicable

spacing rules.”

3125

3119 S.C. Code Ann. § 48-43-350(D) (2010) (emphasis added).

Again, “proper applications shall be made to obtain approval or exceptions to

3120 Id. § 48-43-350(D). If unleased acreage is state-owned, statutory presumption is five-sixths owner and one-sixth royalty owner. 3121 S.C. Code Ann. Regs. 121-8.17(A) (2010). 3122 Id. 3123 Id. 3124 Id. 121-8.17(B)–(E). 3125 Id. 121-8.17(A).

596

such rules.” 3126 The Department has discretion to grant exceptions, and must afford such

application “the same consideration and treatment as if the well had been drilled vertically.”3127

[6] – Election.

The Act acknowledges election rights for those subject to compulsory pooling. If

applicable, the options available for non-consenting owners and any other terms of election must

be stated in the order itself, which shall provide the following:

one or more just and equitable alternatives whereby an owner who does not elect to participate in the risk and cost of the drilling and operation . . . of a well may elect to surrender his leasehold interest to the participating owners on some reasonable basis and for a reasonable consideration which, if not agreed upon, shall be determined by the Department, or may elect to participate in the drilling and operation, or operation, of the well, on a limited or carried basis upon terms and conditions determined by the Department to be just and reasonable.3128

The Act does not enforce a default “risk penalty” against those owners who refuse to

cover upfront drilling expenses. If an operator or owner(s) pay the costs of operation for the

benefit of others within the pool, those who cover such costs will “be entitled to the share of

production from the . . . unit accruing to the interest of such other [owners], exclusive of a

royalty not to exceed one-eighth of the production.”

3129 However, the right of covering owners

to recoup investment is limited to a non-payer’s production at the market value of respective

costs incurred.3130

3126 Id. 121-8.17(F). 3127 Id. 3128 S.C. Code Ann. § 48-43-340(C) (2010). 3129 Id. 3130 Id.

597

§ 42.01 Analysis of South Dakota Regulatory Framework.

[1] – Name of Governing Body.

The Board of Minerals and Environment (“Board”), as part of the Department of

Environment and Natural Resources (“Department”), is the regulatory body entrusted by the

South Dakota Legislature with specific authority to promulgate rules and issue orders reasonably

necessary to administer the South Dakota Oil and Gas Conservation and Unitization Statute.3131

The Board may delegate to the Secretary of Environment and Natural Resources (“Secretary”)

the authority to enforce any rules or orders promulgated or issued pursuant to this section.3132

Additionally, the Board may delegate enforcement of certain provisions of the law to the State

Geologist.3133

[2] – Membership on the Governing Body.

The Board consists of nine members serving four-year staggered terms. The Governor

appoints the members, and they may not all be from the same political party. For the first board

appointed after July 1, 1981, the terms shall be such that the terms of no more than three and no

less than two members expire in the same calendar year. The Governor has the discretion to

designate those terms. In the event of a vacancy for a reason other than the expiration of a term,

the newly-appointed member will only serve for the time remaining in that term.3134

Composition of the Board must comply with the requirements of section 128 of the Clean

Air Act (“CAA”).

3135

3131 S.D. Codified Laws § 45-9-13 (2010).

The CAA requires boards that approve permits or enforcement orders

under its authority to have at least a majority of membership representing public interests and not

3132 Id. 3133 See, e.g., id. § 45-9-12. 3134 Id. § 1-40-25. 3135 42 U.S.C. § 7428 (2010).

598

drawing a significant portion of their income from individuals subject to those permits. 3136

Potential conflicts must be adequately disclosed. 3137 A quorum of the Board consists of a

majority of members, and the Board should hold meetings either upon request of the chairman or

upon request of a majority of the members, but at least once every three months.3138

The Secretary of the Department of Environment and Natural Resources must be

qualified by training and experience to administer the Department’s programs.

3139 The Secretary

may appoint the Geologist, who must have an advanced degree in geology. No information is

given as to what degree will satisfy this requirement. He or she will act as an advisor to the

Secretary in all matters relating to geology, hydrology, and natural history.3140

[3] – Scope of Authority.

The Board has jurisdiction and authority over “all persons and property, public and

private, necessary to enforce effectively the provisions of this chapter.”3141 The chapter declares

its purpose to be as follows: to prevent waste, to promote “a greater ultimate recovery of oil and

gas,” to fully protect the correlative rights of all owners, and to support the greatest possible

economic recovery of oil and gas within the state so that “the landowners, the royalty owners, the

producers, and the general public realize and enjoy the greatest possible good from these vital

natural resources.”3142

Waste of oil and gas is prohibited.

3143

Physical waste, as that term is generally understood in the oil and gas industry; the inefficient, excessive or improper use of, or the unnecessary dissipation of reservoir energy; the inefficient storing

Waste is defined to include the following:

3136 Id. § 7428(a)(1). 3137 Id. § 7428(a)(2). 3138 S.D. Codified Laws § 1-40-26 (2010). 3139 Id. § 1-40-3. 3140 Id. § 1-40-7. 3141 Id. § 45-9-54. 3142 Id. § 45-9-1. 3143 Id. § 45-9-3.

599

of oil or gas; the drilling of unnecessary wells; the locating, spacing, drilling, equipping, operating, or producing of any oil or gas well or wells in a manner that causes, or tends to cause, reduction in the quantity of oil or gas ultimately recoverable from a pool under prudent and proper operations, or that causes or tends to cause unnecessary or excessive surface loss or destruction of oil or gas; and the underground or above ground waste in the production or storage of oil and gas, however caused, and whether or not defined in other subdivisions of this section.3144

The Board has the authority and duty to investigate as is proper to determine if waste exists or is

imminent or if such facts exist to justify the Board action.

3145 Moreover, authority exists to

promulgate rules and issue orders “reasonably necessary to prevent waste, to protect correlative

rights, to govern the practice or procedure before the board, and otherwise to administer this

chapter.” 3146 The Board may delegate to the Secretary the authority to monitor and enforce

compliance with rules thus promulgated.3147 It may also otherwise regulate the production of oil

and gas from any field, pool, or area where physical waste is created, which authority it may

delegate to the Geologist.3148

The Board also has the authority to promulgate rules to regulate and allow for the

following:

(a) The drilling, producing, and plugging of wells, and all other operations for the production of oil or gas; (b) the shooting and chemical or physical treatment of wells; (c) the spacing or locating of wells; (d) operations to increase ultimate recovery such as cycling of gas, the maintenance of pressure, and the introduction of gas, water or other substances into producing formations; and (e) disposal of salt water and oil field wastes.3149

3144 Id. § 45-9-2(15).

3145 Id. § 45-9-44. 3146 Id. § 45-9-13. 3147 Id. § 45-9-11, -13. 3148 Id. § 45-9-12. 3149 Id. § 45-9-11.

600

The Secretary may, again, be delegated the authority to monitor and enforce rules so created.3150

The rules and regulations promulgated by the Board pursuant to this article can be found in

Chapter 74 of the South Dakota Administrative Rules.3151

In conformity with the law’s overall goals of preventing waste and protecting correlative

rights, the Board may create spacing units for a pool, except for pools which, before July 1,

1961, have been so developed that it would be impracticable or unreasonable to establish a

spacing unit.

3152 A spacing unit is defined as “the minimum area in each pool within which a

well may be drilled.”3153 Also, the Board has the authority to pool all interests in a spacing unit

for the development and operation thereof3154 and to order unit operation after notice and hearing

in the interest of increased recovery of oil and gas.3155

[4] – Process for Pooling.

The Board has the authority to pool interests “when two or more separately owned tracts

are embraced within a spacing unit[] or when there are separately owned interests in all or a part

of the spacing unit.”3156 If the owners and royalty owners agree to pool their interests within the

spacing unit, they may do so voluntarily.3157 If pooling does not take place voluntarily, the

Board may, upon application of an interested person and after proper notice and hearing,

promulgate an order for compulsory pooling for the development and operation of the spacing

unit and for the sharing of production therefrom.3158

3150 Id.

The term “interested person” is not defined

in the statute.

3151 S.D. Admin. R. 74:1 (2010). 3152 S.D. Codified Laws § 45-9-20 (2010). 3153 S.D. Admin. R. 74:10:02:01(29) (2010). 3154 S.D. Codified Laws § 45-9-31 (2010). 3155 Id. § 45-9-31, -37, -38. 3156 Id. § 45-9-30. 3157 Id. 3158 Id. § 45-9-31.

601

The Board, on its own motion may, or upon the petition of any interested person will,

hold a hearing to determine the need for the operation as a unit of any pool or pools or of any

portion thereof within a field. 3159 This process is also referred to as “compulsory

unitization.”3160

Upon the filing of a petition relating to any matter under the Board’s jurisdiction

requiring a hearing, the Board will set a date for the hearing without delay and will require notice

to be given.

3161 Hearings require ten days’ notice.3162 Notice of a hearing on the Board’s motion

must comply with the provisions of chapter 1-26 of South Dakota Codified Laws. 3163 A

petitioner other than the Board must give notice in conformity with the provisions of section 45-

9-58. Such notice must either be served by certified mail or by two publications in the

appropriate newspapers in the state—one in the state capital city and one in a general circulation

paper in the county of the affected land. The applicant must use certified mail, requesting a

return receipt, for notice to any person whose property interests may be affected by the scheduled

hearing. Additionally, the applicant must file an affidavit with the Board affirming that notice

was indeed sent and return receipt received. If the applicant is unable to serve an individual by

certified mail, service by publication will be sufficient.3164

The pooling statute does not contain specific requirements for the contents of notice.

However, South Dakota’s Administrative Procedures and Rules provide requirements for notice

of contested cases. A contested case is defined as “a proceeding, including rate-making and

licensing, in which the legal rights, duties, or privileges of a party are required by law to be

3159 Id. § 45-9-37. 3160 S.D. Admin. R. 74:10:18 (2010). 3161 S.D. Codified Laws § 45-9-57 (2010). 3162 Id. § 45-9-63. 3163 Id. § 45-9-58. 3164 Id.

602

determined by an agency after an opportunity for hearing . . . .”3165

(1) A statement of the time, place, and nature of the hearing;

Such notice should include

the following:

(2) A statement of the legal authority and jurisdiction under which the hearing is to be held; (3) A reference to the particular sections of the statutes and rules involved; (4) A short and plain statement of the matters asserted. If the agency or other party is unable to state the matters in detail at the time the notice is served, the initial notice may be limited to a statement of the issues involved. Thereafter upon application a more definite and detailed statement shall be furnished; (5) A statement of any action authorized by law, which may affect the parties, as a result of any decision made at the hearing, whether it be the revocation of a license, the assessment of a fine or other effect; (6) A statement that the hearing is an adversary proceeding and that a party has the right at the hearing, to be present, to be represented by a lawyer, and that these and other due process rights will be forfeited if they are not exercised at the hearing; (7) Except in contested cases before the Public Utilities Commission, a statement that if the amount in controversy exceeds two thousand five hundred dollars or if a property right may be terminated, any party to the contested case may require the agency to use the Office of Hearing Examiners by giving notice of the request to the agency no later than ten days after service of a notice of hearing issued pursuant to § 1-26-17; [and] (8) A statement that the decision based on the hearing may be appealed to the circuit court and the State Supreme Court as provided by law.3166

The Rules also contain detailed requirements for the information to be included in the

petition. In order for a person to request a contested case hearing, the petition filed with the

Secretary of the Department must include the following:

(1) A statement of the petitioner’s interest in the involved matter; (2) A statement of the departmental recommendation contested, if any, and the relief and decision requested from the board; (3) A statement alleging the relevant facts and issues known to the petitioner upon which the contest or request of the board is based;

3165 Id. § 1-26-1(2). 3166 Id. § 1-26-17.

603

(4) A statement of the legal authority and jurisdiction under which the hearing would be held, if known; (5) A reference to the particular statutes and rules involved, if known; and (6) The signature of the petitioner or the petitioner’s attorney.3167

The petitioner must serve a copy of this petition to all persons known who are affected by the

request and who will be considered parties in the proceeding.

3168

Additionally, pursuant to the established contested case procedure, operators may file

applications to conduct unit operations in a common pool. The applications, submitted to the

Secretary, must contain the following:

(1) The name and address of the operator; (2) The location and type of all existing and proposed wells and the legal description of all land proposed to be operated as a unit; (3) A description of the pool proposed to be unitized; (4) A description of the proposed secondary or tertiary recovery method, including its costs. Information on costs will be held confidential by the secretary and the board if requested by the operator; (5) A list of all operators affected by the application; (6) A plan for unit operations which, at a minimum, addresses the requirements of SDCL § 45-9-39; (7) A statement of how the proposed operation will increase the recovery of oil or gas and the value of the additional recovery. The value will be held confidential if requested by the operator; and (8) A plan of operation of injection wells being proposed in the unit operation.3169

The Board must enter the order within 30 days of holding a hearing.

3170 The final

decision in a contested case will be had by majority vote of a quorum of the Board. The final

decision and resulting order must be signed by the hearing chairman.3171

3167 S.D. Admin. R. 74:09:01:01 (2010).

The hearing chairman

is a member of the Board appointed by the Board’s chairman to be responsible for the conduct of

3168 Id. 3169 Id. R 74:10:07:28. 3170 S.D. Codified Laws § 45-9-57 (2010). 3171 S.D. Admin. R. 74:09:01:18 (2010)

604

the prehearing conference and the hearing. He or she will also rule on all motions regarding the

hearing process. Those decisions are final unless overruled by the Board.3172

For pooling orders covering existing spacing units, the law provides that each order must

“authorize the drilling, equipping, and operations of a well on the spacing unit; shall provide who

may drill and operate the well; shall prescribe the time and manner in which all the owners in the

spacing unit may elect to participate therein; and shall make provisions for the payment by all

those who elect to participate therein of the reasonable actual cost thereof, plus a reasonable

charge for the supervision and interest.”

3173 Finally, each order, if requested, must provide

equitable alternatives for owners who do not elect to participate in the risk and cost of drilling to

surrender his or her leasehold interest to the participating owner for reasonable consideration or

to elect to participate on a limited or carried basis. If terms and conditions are not agreed upon

by the parties, the Board should determine what terms are just and reasonable.3174

Operations on any part of a spacing unit that is covered by a pooling order is deemed to

be the conduct of operations on each separately owned tract in the drilling unit by the several

owners thereof. The portion of production so allocated to each tract is, when produced, deemed

to have been produced from that tract by a well drilled thereon.

3175

As for unitization hearings, if the Board finds that unit operation is “reasonably necessary

to increase substantially the ultimate recovery of oil or gas” and that the value of that estimated

additional recovery is greater than the estimated additional costs corresponding to the unit

operation, it will make an order providing for the unit operation of a pool or part thereof.

3176

3172 Id. R. 74:09:01:08.

3173 S.D. Codified Laws § 45-9-32 (2010). 3174 Id. § 45-9-33. 3175 Id. § 45-9-34. 3176 Id. § 45-9-38.

605

Orders for unit operation must be on just and reasonable terms and must prescribe a plan for such

operations including the following:

(1) A description of the pool or pools or parts thereof to be so operated, termed the unit area; (2) A statement of the nature of the operations contemplated; (3) An allocation to the separately owned tracts in the unit area of the oil and gas that is produced from the unit area and is saved, being the production that is not used in the conduct of operations on the unit area or not unavoidably lost. The allocation shall be in accord with the agreement, if any, of the interested parties. If there is no such agreement, the board shall determine the relative values, from evidence introduced at the hearing, of the separately owned tracts in the unit area, exclusive of physical equipment, for the development of oil and gas by unit operations, and the production allocated to each tract shall be the proportion that the relative values of each tract so determined bears to the relative value of all tracts in the unit area; (4) A provision for the credits and charges to be made in the adjustment among the owners in the unit area for their respective investments in wells, tanks, pumps, machinery, materials, and equipment contributions to the unit operations; (5) A provision providing how the costs of unit operations, including capital investments, shall be determined and charged to the separately owned tracts and how said costs shall be paid, including a provision when, how, and by whom the unit production allocated to an owner who does not pay the share of the cost of unit operations charged to such owner, or the interest of such owner, may be sold and the proceeds applied to the payment of such costs; (6) A provision, if necessary, for carrying or otherwise financing any person who elects to be carried or otherwise financed, allowing a reasonable interest charge for such service payable out of such person’s share of the production; (7) A provision for the supervision and conduct of the unit operations in respect to which each person shall have a vote with a value corresponding to the percentage of the costs of unit operations chargeable against the interest of such person; (8) The time when the unit operations shall commence, and the manner in which, and the circumstances under which, the unit operations shall terminate; and (9) Such additional provisions that are found to be appropriate for carrying on the unit operations, and for the protection of correlative rights.3177

3177 Id. § 45-9-39.

606

The orders by the Board requiring unit operations are not effective until the plan

approved by the Board is also approved in writing by the parties who, according to the order, are

required to pay at least 60 percent “of the production or proceeds thereof that will be credited to

interests which are free of cost, such as royalties, and production payments,” and the Board has

determined that the order has been thus approved.3178 The Board, upon application and notice,

will hold supplemental hearings as may be required to make that determination.3179 If the proper

approval of the order for unit operation does not occur within six months from the date of the

order, the order will be ineffective and revoked unless the Board extends the deadline for good

cause shown.3180

Additionally, the Board may amend orders providing for unit operations by an order

made “in the same manner and subject to the same conditions as an original order providing for

unit operations.”

3181 However, if the amendment only affects rights or interests of the owners,

the royalty owners’ approval is not needed.3182 No order may change the percentage of oil and

gas allocated to each separately owned tract without consent of all persons who own oil and gas

rights in that tract, nor may it change the percentage of costs allocated to tracts except with

consent of all owners in that tract.3183

All operations on any portion of the unit area are deemed for all purposes the conduct of

such operations upon each separately owned tract by the several owners thereof. All production

allocated to each tract shall be deemed to have been actually produced from that tract by a well

drilled thereon.

3184

3178 Id. § 45-9-40.

If the Board later provides for unit operation of a pool or pools or parts

3179 Id. § 45-9-41. 3180 Id. § 45-9-42. 3181 Id. § 45-9-43. 3182 Id. § 45-9-43(1). 3183 Id. § 45-9-43(2). 3184 Id. § 45-9-46.

607

thereof that embrace an already-established unit area, the new order, in providing for production

allocation, will treat the unit area previously established as a single tract. The portion of

production so allocated thereto will then be allocated among the separately owned tracts included

in the previously established unit area in the same proportion as in the prior order.3185 Moreover,

operations conducted under a unitization order constitutes performance of all express or implied

obligations of each lease or contract that covers lands contained in the unit area to the extent

compliance with those obligations are hindered due to the Board’s order.3186

[5] – Matters Covered.

[a] Number of Wells.

The Board has the authority to establish spacing units,3187 the minimum area in each pool

within which a well may be drilled.3188 The size of the spacing units may not be “smaller than

the maximum area that can be efficiently and economically drained by one well.”3189 If the

spacing unit’s size or shape is ineffective to prevent waste or to protect correlative rights, rather

than allowing more wells to be drilled on a single spacing unit, the Board may amend the size

and shape of the unit3190 or may limit production from such unit.3191

[b] Spacing of Wells.

The Board has the authority to determine the spacing and location of wells.3192 In fact,

when it is “necessary to prevent waste, to avoid the drilling of unnecessary wells, or to protect

correlative rights,” the Board “shall establish spacing units.”3193

3185 Id. § 45-9-44.

The Board shall promulgate an

3186 Id. § 45-9-47. 3187 Id. § 45-9-20. 3188 S.D. Admin. R. 74:10:02:01(29) (2010). 3189 S.D. Codified Laws § 45-9-22 (2010). 3190 Id. § 45-9-21. 3191 Id. § 45-9-24. 3192 Id. § 45-9-11(3). 3193 Id. § 45-9-20.

608

order specifying the size and shape of these units, which should be such as will “result in the

efficient and economical development of the pool as a whole” and not “smaller than the

maximum area that can be efficiently and economically drained by one well.”3194 All spacing

units should be roughly uniform in size and shape for the entire pool, unless circumstances

reasonably require otherwise.3195 If the size and shape of a pool needs to be made irregular, the

Board, if necessary, will adjust the allowable production so each person entitled to the

production thereon “will have a reasonable opportunity to produce or receive his just and

equitable share of the production.”3196 The code defines the phrase “just and equitable share of

the production” by stating that it is “as to each person, that part of the authorized production

from the pool that is substantially in the proportion that the amount of recoverable oil or gas or

both in the developed area of the person’s tract or tracts in the pool bears to the recoverable oil or

gas or both in the total of the developed areas of the pool.”3197

In the absence of an order by the Board setting spacing units for a pool, the Board has set

default spacing provisions,

3198 addressed below. Those sections provide procedure for

exceptions,3199

[c] Authority to Integrate Production.

also addressed below.

In the event the owners have not so agreed, the Board has the authority, upon application

of an interested person, to require owners to pool their interests for the development and

3194 Id. § 45-9-22. 3195 Id. § 45-9-21. 3196 Id. § 45-9-24. 3197 Id. § 45-9-2(6). 3198 S.D. Admin. R. 74:10:03:08–09 (2010). 3199 Id.

609

operation of a spacing unit. 3200 Also, as a means to increase the ultimate recovery of gas

substantially, the board may order the unit operation of a pool or part thereof.3201

[d] Allocation of Production and Costs.

South Dakota law sets forth the laws for allocating production revenues and costs. For

pooling orders, an owner who may drill and pay operating costs for the benefit of another person

as allowed for in an order of pooling is entitled to that other person’s share of production,

exclusive of the one-eighth royalty, until the market value of the costs charged have been paid.

The Board may resolve any disputes regarding amount owed.3202 If a well was completed before

the pooling of a spacing unit, production sharing will begin from the effective date of the

pooling. In calculating costs, credit will be given for the value of the owner’s share of any prior

production.3203

For unitization of interests within a spacing unit, the Board must allocate the production

and costs in the order, which may be determined by agreement or, if no agreement, by the

Board.

3204 The production allocated to each tract is to be “the proportion that the relative values

of each tract so determined bears to the relative value of all tracts in the unit area.”3205 Cost

allocation must be prescribed by each plan.3206

[e] Royalty Distribution.

South Dakota law provides some guidance relating to royalty payment.3207

3200 S.D. Codified Laws § 45-9-31 (2010).

As for the

pooling of interests within a spacing unit, owners’ interest in production may be put toward

payment of their share of drilling costs, except that a royalty not to exceed one-eighth of the

3201 Id. § 45-9-37, -38. 3202 Id. § 45-9-35. 3203 Id. § 45-9-36. 3204 Id. § 45-9-39(3), (5). 3205 Id. § 45-9-39(3). 3206 Id. § 45-9-39(5). 3207 Id. § 45-9-35; S.D. Admin. R. 74:10:18 (2010).

610

production must be set aside for that owner. 3208 Additionally, the board may order risk

compensation orders for applicants to recover the risk and cost of drilling in an established

spacing unit;3209

While orders for unitization require cost allocation, no royalty provision is included.

however, risk compensation costs may only be recovered out of the production,

exclusive of the one-eighth royalty provided for in section 45-9-35 of the Code.

3210

However, the Rules provide that in recovering the cost of risk compensation under a compulsory

unitization order,3211 the risk compensation may only be recovered out of production from the

unit, exclusive of a one-eighth royalty.3212

[f] Formation of Units Not Restraint of Trade.

The Code provides that approval by the Board of an “agreement for the unit and co-

operative development or operation of a field, pool, or part thereof,” will be a total defense to a

suit that charges violation of any state statute “relating to trusts and monopolies on account

thereof or on account of operations conducted pursuant thereto.”3213 However, failure to submit

the agreement for Board approval will not, for that reason, imply or be evidence that said

agreement or operations conducted pursuant to that agreement are in violation of trust and

monopoly laws.3214

[g] Limitation on Production.

The Board has the authority, or may delegate to the Geologist the authority, to regulate

production of oil and gas where waste is created.3215

3208 S.D. Codified Laws § 45-9-35 (2010).

When production is thus limited, the Board

will include in its orders establishing spacing units provisions such that each spacing unit may

3209 S.D. Admin. R. 74:10:18:01–03 (2010). 3210 S.D. Codified Laws § 45-9-39(5) (2010). 3211 S.D. Admin. R. 74:10:18:04 (2010). 3212 Id. R. 74:10:18:05–06. 3213 S.D. Codified Laws § 45-9-52 (2010). 3214 Id. 3215 Id. § 45-9-12.

611

not produce more than its just and equitable share of oil and gas from the pool.3216 Also, where

spacing units of non-uniform shape and size exist within a pool, the Board must make

adjustments to the allowable production from wells in that pool so that every person entitled to

production in each spacing unit thereon will have a reasonable opportunity to produce his or her

just and equitable share of the production.3217

§ 42.02 Types of South Dakota Pooling Statutes.

[1] – Mineral Distinctions.

South Dakota law provides a limited number of mineral distinctions.3218 It states that

“gas” is “all natural gas and all other fluid hydrocarbons not defined in subdivision (7) as oil,

including condensate because it originally was in the gaseous phase in the reservoir.”3219 It

defines “oil” as “crude petroleum oil and other hydrocarbons regardless of gravity that are

produced at the wellhead in liquid form, but not liquid hydrocarbons that were originally in a

gaseous phase in the reservoir.”3220

[2] – Split by Depth.

No definition is provided for coalbed methane gas.

South Dakota law does not appear to distinguish based on drilling depth.

[3] – Spacing Rules and Size.

South Dakota law does give authority to the Board to determine the spacing and location

of wells.3221 When it is “necessary to prevent waste, to avoid the drilling of unnecessary wells,

or to protect correlative rights,” the Board “shall establish spacing units.”3222

3216 Id. § 45-9-23.

The Board must

promulgate an order that specifies the size and shape of these units, which should “result in the

3217 Id. § 45-9-24 3218 Id. § 45-9-2. 3219 Id. § 45-9-2(5). 3220 Id. § 45-9-2(7). 3221 Id. § 45-9-11(3). 3222 Id. § 45-9-20.

612

efficient and economical development of the pool as a whole” and may not be “smaller than the

maximum area that can be efficiently and economically drained by one well.” 3223 Unless

reasonably required, all spacing units in a pool should be uniform in size and shape.3224

In the absence of an order by the Board setting spacing units for a pool, the Board has set

default spacing provisions.

3225 Wells drilled for oil must be drilled on either a governmental

quarter-quarter section, a governmental lot corresponding to it, or an arbitrarily designated 40-

acre tract.3226 Such wells must not be closer than 500 feet to a boundary line of another tract, nor

closer than 1,000 feet to the nearest well drilling to, or capable of producing from, the same

pool.3227

Likewise, wells drilled for gas have tract size and spacing requirements.

If the tract contains less than 35 acres, a well may only be drilled thereon with written

permission of the Secretary after use of the notice of recommendation procedure provided for in

chapter 74:10:11.01 of the Rules.

3228 Such well

must be on a governmental section or an arbitrarily designated 640-acre tract. They may not be

closer than 500 feet to any tract, nor closer than 3,750 feet to the nearest well able to produce

from the same pool. If the tract is smaller than 576 acres, a well may not be drilled thereon

without written permission of the Secretary after using the notice of recommendation procedure

noted above.3229

Once oil or gas is discovered in a pool not covered by an order, the operator or other

interested person must file a contested case hearing petition to request a specified spacing

3223 Id. § 45-9-22. 3224 Id. § 45-9-21. 3225 S.D. Admin. R. 74:10:03:08–09 (2010). 3226 Id. R. 74:10:03:08. 3227 Id. 3228 Id. R. 74:10:03:09. 3229 Id.

613

pattern.3230 After notice and hearing, the Board will issue an order to set forth the spacing

pattern with which to develop the pool.3231

[4] – Minimum Operator Control.

Unit operation orders are not effective until the plan approved by the Board is also

approved in writing by the parties who, according to the order, are required to pay at least 60

percent “of the production or proceeds thereof that will be credited to interests which are free of

cost, such as royalties, and production payments,” and the Board has determined that the order

has been thus approved.3232 The Board, upon application and notice, will hold supplemental

hearings as may be required to make that determination.3233 If the proper approval of the order

for unit operation does not occur within six months from the date of the order, the order will be

ineffective and revoked unless the Board extends the deadline for good cause shown.3234

Additionally, the Board may amend unit operation orders by a supplemental order made

“in the same manner and subject to the same conditions as an original order providing for unit

operations.”

3235 If the amendment only affects rights or interests of the owners, the royalty

owners’ approval is not needed.3236 No order may change the percentage of oil and gas allocated

to each separately owned tract without consent of all persons who own oil and gas rights in that

tract, nor may it change the percentage of costs allocated to tracts except with consent of all

owners in that tract.3237

[5] – Directional Drilling.

3230 Id. R. 74:10:03:10. 3231 Id. 3232 S.D. Codified Laws § 45-9-40 (2010). 3233 Id. § 45-9-41. 3234 Id. § 45-9-42. 3235 Id. § 45-9-43. 3236 Id. § 45-9-43(1). 3237 Id. § 45-9-43(2).

614

In order to drill a horizontal well, the drilling party must submit the information required

under section 74:10:03:01 of the South Dakota Administrative Code. Additionally, that party

must submit an application for a permit to drill a horizontal well, which includes the following

information:

(1) Size, weight, and amount of all casing strings; (2) Top of cement behind each casing string; (3) Mud program; (4) Coordinates of the casing shoe; (5) Coordinates of the terminus; (6) Depth of kick-off point; (7) Azimuth of the horizontal segment; (8) Down-hole survey frequency; (9) Name and address of surveying contractor; and (10) Location of cementing tool.3238

Relatedly, operators who desire to conduct directional drilling operations, other than

directional drilling to circumvent debris, to straighten, or to control blowouts, must file a petition

for a contested case with the secretary.

3239 This requirement does not apply to drilling horizontal

holes covered by section 74:10:03:01.01.3240

[6] – Options.

All pooling orders must set forth “the time and manner in which all the owners in the

spacing unit may elect to participate therein and shall make provision for the payment by all

those who elect to participate therein of the reasonable actual cost thereof, plus a reasonable

charge for supervision and interest.”3241

3238 S.D. Admin. R. 74:10:03:01.01 (2010).

If requested, pooling orders should provide for one or

more “just and equitable alternatives” by which an owner electing not to participate in the cost

and risk of drilling may elect “to surrender his leasehold interest to the participating owners on

some reasonable basis and for a reasonable consideration which if not agreed upon, shall be

3239 Id. R. 74:10:03:21. 3240 Id. 3241 S.D. Codified Law § 45-9-32 (2010).

615

determined by the [Board],” or may elect to participate, on a limited or carried basis, on terms

and conditions the Board determined to be just and reasonable.3242

Orders for unit operation must include provisions setting forth how costs, including

capital investments, are to be determined, charged, and paid. The order must also include when,

how, and by whom the costs allocated to a non-participating owner should be paid from

proceeds.

3243 If needed, the order must include a provision for financing any owner who elects

to be carried or financed in the unit operation. 3244 The production allocated to a tract and

proceeds thereof are property of the persons to whose credit the proceeds are payable under the

order.3245

3242 Id. § 45-9-33.

3243 Id. § 45-9-39(5). 3244 Id. § 45-9-39(6). 3245 Id. § 45-9-48.

616

§ 43.01 Analysis of Tennessee Regulatory Framework.

[1] – Name of Governing Body.

The Tennessee Oil and Gas Board (“Board”) is the body charged with regulating the oil

and gas industry in Tennessee.3246

[2] – Membership on the Board.

The Board is composed of the Commissioner of Environment and Conservation who acts

as chair (“Supervisor”), a designee of the Commissioner of Economical and Community

Development, the chair of the Conservation Commission, a member from the oil and gas

industry appointed by the governor, an owner of oil or gas property appointed by the governor,

and a member from the mineral industry3247 appointed by the governor.3248

The member from the oil and gas industry, the oil or gas property owner, and the member

from the mineral industry each serve a four year term.

3249

Any three members of the Board shall constitute a quorum, but three affirmative votes

are necessary for the adoption of any rule or order of the Board.

3250

[3] – Scope of Authority.

The Board has the jurisdiction and authority (1) over all persons and property necessary

to enforce this chapter, (2) to enforce the provisions and rules regulating oil and gas production,

(3) to collect data, (4) to investigate potential violations of the rules regulating oil and gas

production, and (5) to make inquiries to determine whether waste is imminent.3251

3246 Tenn. Code Ann. § 60-1-201 (2010).

Waste, which

3247 “Mineral Industry” is not a defined term in the statute. 3248 Tenn. Code Ann. § 60-1-201 (2010). 3249 Id. 3250 Id. § 60-1-203. 3251 Id. § 60-1-202 (a).

617

is prohibited,3252

(1) underground waste and inefficient, excessive, or improper use or dissipation of reservoir energy of any pool; (2) the locating, spacing, drilling, equipping, operating, or producing of any oil well or gas ultimately recoverable from any pool; (3) surface waste; and (4) the inefficient storing of oil or gas wells.

carries, in addition to its ordinary meaning, the meaning of “physical waste” as

that term is generally understood in the oil and gas industry. It includes the following:

3253

Thus, the Board has rulemaking authority and a statutory duty to (1) prevent the escape of

oil and gas, (2) prevent pollution of fresh water by oil and gas, (3) protect minable coal, and (4)

require bond for the plugging of dry or abandoned wells.

3254

Additionally, the Board has authority to,

(1) require that the Supervisor be notified of someone’s intention to drill any well; (2) require the filing of logs within 30 days following the cessation of drilling operations; (3) prevent wells from being drilled or operated, to prevent drowning by water of any oil and gas stratum in paying quantities; (4) require operation of wells with efficient gas-oil ratios; (5) prevent blow-outs, caving and seepage; (6) prevent fires; (7) identify ownership of oil and gas leases; (8) regulate the shooting and chemical treatment of wells; (9) regulate secondary recovery methods; (10) regulate spacing; and (11) provide for forced integrations of separately owned tracts.3255

[4] – Process for Pooling.

[a] Unitization.

A pooled unit is defined as “two or more tracts of land, of which their ownership may be

different, that are consolidated and operated as a single tract for production of oil and/or gas,

either by voluntary agreement between the owners thereof, or by exercising of the authority of

the Board under the [Tennessee Code].”3256

3252 Id. § 60-1-102.

For the Board to be able to force a volumetric or

3253 Id. § 60-1-101. 3254 Id. § 60-1-202 (a)(4)(A). 3255 Id. § 60-1-202 (a)(4)(A)–(M). 3256 Tenn. Oil & Gas Board, Definition of terms: Rule 1040-1-1-.01 (2010).

618

surface poolwide unit in the absence of a voluntary agreement, the Board must give a 60-day

notice to the owners, and the pool producers who own more than 50 percent of the pool acreage

must request such unitization of the pool. 3257 When such tracts are consolidated by Board

authority, the size of the consolidation tract will not exceed the size, with permitted tolerance, of

a “Drilling Unit” (see below). 3258 If there is not an acceptable plan of unitization by the

operators, the Board must shut in the pool to prevent waste.3259

Additionally, an owner with an interest in a tract of land offsetting production who

cannot comply with spacing rules may make an application for a hearing before the Board to

have the tract, or portion of the tract, included in the production unit.

3260

All drilling and production unit wells shall comply with the rules on spacing between

wells and distance from property lines, see below. The shape and pattern shall be designed to

permit the attendant unit well to economically, efficiently, and equitably drain the unit’s pro-rata

share of the pool’s oil and/or gas and shall be based on available geologic and engineering

parameters. Length of any drilling unit shall not exceed twice its width.

When part of a leased tract is included within a pool or unitized area, drilling or

production anywhere within the unitized area during the primary term of the lease continues the

lease as to the portions of the lease both inside and outside the unit.3261

[b] Permit Application.

3257Tenn. Code Ann. § 60-1-202 (a)(4)(N) (2010). 3258 Tenn. Oil & Gas Board, Definition of terms: Rule 1040-1-1-.01 (2010). 3259 Tenn. Code Ann. § 60-1-202 (a)(4)(O). 3260 Tenn. Oil & Gas Board, Unit Operations: Rule 1040-5-1.02 (2010). 3261 Asberry v. Saint Joseph Petroleum, 653 S.W.2d 412 (Tenn. Ct. App. 1983). The Court determined that the shut-in royalty for an off-lease unit well formed by the lessee under the pooling clause maintained the entire lease even though only a portion of the lease was in the unit.

619

No person is permitted to drill, or conduct any surface disturbances, in preparation for

drilling, unless a permit application has been submitted to the Supervisor. This application must

include the following information:

(1) the exact location of the well; (2) the name and address of the person responsible for drilling; (3) the proposed depth of the well; (4) the locations of all existing roads providing access to the well site; and (5) the location of all blue-line streams within one half mile of the well site or access roads.3262

The application must also contain a provision for erosion control, the prevention of pollution of

surface waters, and reclamation of all areas. No drilling may begin until the application has been

approved. Failure to comply with any plan shall be reason for revocation of the permit and

forfeiture of the bond.

3263

Requests for permits for a voluntary pooled drilling unit, or for two or more leases or

tracts that have been force pooled for exploration or development, shall follow the prescribed

procedure where applicable and shall be accompanied by a notarized affidavit signed by the

operator that has the right to pool these leases to form a drilling unit.

3264

Additionally, after filing an application with the Board for a permit, and prior to any site

preparation, the applicant must give notice, by certified mail to property owner or owners of the

surface of the land to be drilled, or to be affected by the surface disturbances, of the applicant’s

intent to drill on the property.

3265

The notice shall include the following information:

The property owners to be notified under this section shall be

the property owners of record in the property tax assessor’s office in the county where the

property is located.

3262 Tenn. Code Ann. § 60-1-303 (a) (2010). 3263 Id. § 60-1-303 (a) (3)–(4). 3264 Tenn. Oil & Gas Board, Permit Required: Rule 1040-02-02-.02(8) (2010). 3265 Tenn. Code Ann. § 60-1-209 (a)(1) (2010).

620

(1) a well location plat which shows the proposed location of the oil and gas well site; (2) the proposed location of all new ingress and egress; (3) the location of all diversions, drilling pits, dikes, and related structures and facilities; and (4) the location of proposed storage tanks and all other surface disturbances.

The notice shall state that the property owner and applicant have 15 working days from

the date of mailing to discuss the location of surface disturbances in connection with the drilling

operation. It shall also state that if the property owner and applicant are unable to resolve

differences regarding the location of surface disturbances, either or both may request in writing a

hearing before the Supervisor or his designee. The notice shall provide the name and address of

the Supervisor.3266

Notwithstanding any other requirement for a permit to drill, such a permit may only be

issued,

(1) [i]f the applicant submits to the Supervisor statements of no objection signed by all property owners entitled to notice; (2) [i]f a hearing is not requested; or (3) [u]pon the issuing of a final order.

In order to satisfy these requirements of permit issuance, the Supervisor may treat the persons

named in the applicant’s certification of property owners as being all of the property owners

entitled to notice unless the Supervisor has actual notice to the contrary. Additionally, inspection

and approval of all access roads, surface disturbances, and pollution control structures at a

proposed well site by the designated gas and oil field inspector is required prior to the issuance

of any permit.

In the event of litigation over a particular tract of land, or in the event a tract of land is

contested as to the ownership of oil and gas rights, the policy of the Board will be to issue

3266 Tenn. Oil & Gas Board, Permit Required: Rule 1040-02-02-.01(5) (2010).

621

permits in order to preserve the physical integrity of that particular tract without prejudicing any

claimants to the title of that land.3267

[c] Administrative Approval.

The Supervisor may grant administrative approval of certain matters of a routine nature

upon submission of an application showing all pertinent information and data and after due

notice is given to all operators of interest. The application shall be made to the Supervisor with a

copy to each known offset lease owner and such application shall include a statement of reason

and justification for requested relief, a map or sketch illustrating the information pertinent to the

request relief, and a list of names and addresses of all interested persons notified of the

application. 3268

If the application meets the approval of the Supervisor and no written protest is received

by the Supervisor within 15 days following prescribed notice of the application, the Supervisor

may grant the requested relief without the necessity of a public hearing. If the application is

accompanied by a written waiver from all known offset lease owners, the 15-day delay will be

unnecessary. However, if the Supervisor does not elect to approve the application

administratively, or if written protest is received within the 15-day period, the application may be

set for public hearing.

3269

[d] Hearing.

[i] Permit Hearings.

The applicant and the property owners given notice shall attempt to resolve any

differences between them regarding surface disturbances related to the proposed drilling

3267 Id. 3268 Tenn. Oil & Gas Board, Administrative Approval: Rule 1040-6-1.02 (2010). 3269 Id.

622

operation. If those differences cannot be resolved, then a hearing and order may be obtained as

follows:

(1) Any property owners entitled to notice (or the applicant) may request, within fifteen (15) working days3270

(2) The hearing shall be conducted as a contested case under Title 4, Chapter 5, Part 3 and shall be held before a hearing officer sitting alone. For purposes of the hearing, the Supervisor or his designee shall be the hearing officer. The hearing shall be held within ten (10) working days of receipt of a request for hearing by the Supervisor or his designee, and shall be held in the county of the proposed oil and gas well. Notice of the hearing shall be given to all persons entitled to notice under subparagraph (a) and the applicant.

of the mailing of the notice required in subparagraph (a), that the Supervisor or his designee conduct a hearing. A request for hearing under this paragraph shall be in writing to the Supervisor, and shall be mailed by certified mail, return receipt requested, within fifteen (15) working days of the mailing of the notice required in subparagraph (a) above. The purpose of the hearing will be to minimize the impact of the proposed drilling operation on the surface of the land.

3. The hearing officer shall render a decision within ten (10) calendar days of the hearing. The decision shall be considered a final order not subject to further agency review pursuant to T.C.A. 4-5-315(a)(1).3271

If a request for hearing is not delivered to the office of the Supervisor within 15 working

days plus three additional days after the date notice-of-intent to drill was mailed to each property

owner, as stated in the applicant’s certification of notice, the Supervisor may assume that no

hearing was requested, unless he has actual notice to the contrary.

3272

[ii] Public Hearings.

Public hearings, after legal notice, shall be held by the Board as needed by the Board to

implement its responsibility and upon applications made for such hearings. A notice of public

3270 For purposes of subparagraph (f) above, “working day” means all calendar days excluding Saturdays, Sundays, and legal holidays as designated in T.C.A. 15-1-101, see Tenn. Oil & Gas Board, Permit Required: Rule 1040-02-02-.01(5) (2010). 3271 Id. 3272 Id.

623

hearing as provided by T.C.A. §60-107 shall be given by publishing one notice of the time and

place thereof in at least three newspapers of general circulation in at least three major cities in

Tennessee, and such notice shall be published at least ten days prior to the date of such hearing.

The applicant must pay the cost incurred in publishing legal notices. The time and place for each

public hearing shall be fixed by the Board as soon as reasonably possible and each public hearing

will be conducted by the Board. If more than one hearing is to be held on a particular date, the

Board conducting the hearings shall determine the order in which they will be held.

The Board has the power to subpoena witnesses and to require their attendance to give

testimony.3273 If someone does not comply with a subpoena issued by the Board, the Board may

petition the Circuit Court in the county where the Board is sitting for a motion to compel

compliance with the subpoena.3274

After a public hearing, rule may be made on behalf of the Board. If an emergency arises,

the Board may act without a public hearing, given that the rule enacted by the Board will not

remain in force longer than 15 days after its effective date. All rules and regulations shall be

made in writing and shall be made open to public inspection.

3275

The Board has the ability to assess monetary penalties for any violation of this chapter or

its rules. If a violation is issued to any operator, and that violation is not corrected within the

period of correction, the penalty could be up to $1,000 for each day the violation exists.

3276

3273 Tenn. Code Ann. § 60-1-205 (a) (2010).

Anyone who willfully or repeatedly violates the rules or requirements may be fined up to

3274 Id. § 60-1-205 (b). 3275 Id. § 60-1-204 (a)–(d). 3276 Id. § 60-1-401(c).

624

$10,000 for each violation. Further, the Board may ask the attorney general’s assistance and

bring a suit in the name of Tennessee seeking an injunction of the prohibited behavior.3277

All penalties assessed by the Board shall be put into the state treasury in a separate fund

designated the Oil and Gas Board Reclamation Fund. This fund shall be used for site protection

and reclamation work on land and waters damaged by surface disturbances. This fund shall also

be used for the plugging of dry or abandoned wells.

3278

[e] Orders.

Unit operations shall be ordered only after notice and hearing. The order will provide for

the forced integration of separately owned tracts and other property ownership into drilling,

production, or pool units. An order shall be based on findings that the order is necessary to

prevent waste of oil and gas, is economically feasible, will protect correlative rights of both

landowners and owners of mineral rights, and will conserve the natural resources of the state.3279

The order must also provide for the allocation to each separate tract within the unit a

proportionate share of the unit production, the designation of a unit operator, and the

proportional allocation of cost to the producers. However, the order shall not modify any of the

terms of the written contract evidencing approval. 3280

[5] – Matters Covered.

[a] Directional Drilling.

3277 Id. § 60-1-402. 3278 Id. § 60-1-404 (a)–(c). 3279 Tenn. Oil & Gas Board, Unit Operations: Rule 1040-5-1.01 (2010). 3280 Id.

625

No well shall be drilled in which the well bore deviates laterally a resultant distance

greater than the determined by a five degree angle from a vertical line passing through the center

of the surface location of the well bore, without running a directional survey.3281

§ 43.02 Types of Tennessee Pooling Statutes.

[1] – Mineral Distinctions.

“Gas” is defined as all natural gas and any other fluid hydrocarbons not defined as oil,

including condensate.3282 “Oil” is defined as crude petroleum that was originally in an oil phase

in the reservoir. 3283 Further, a “pool” is defined as an underground reservoir containing a

common accumulation of crude petroleum oil or natural gas, or both.3284 Each zone of the

general structure which is completely separated from any other zone in the structure is covered

by the term “pool.”3285 Moreover, a “field” is defined as the general area which is underlain or

appears by at least one pool, including the pool or pools beneath the area.3286

[2] – Split by Depth.

The Tennessee Code generally splits the depth of oil and gas wells between those drilled

to a depth of less than 2,500 feet and all other wells drilled to produce oil and gas. However, the

Board has provided more specific requirements for oil and gas wells, oil wells, gas wells,

horizontal oil wells, and horizontal gas wells.

Oil and gas well requirements are categorized by wells that have been drilled to a depth

of less than 1,000 feet and ones that have been drilled to a depth of 1,000 feet to 2,000 feet or to

3281 Tenn. Oil & Gas Board, Directional Drilling: Rule 1040-2-8.01 (2010). 3282 Tenn. Code Ann. § 60-1-101(5) (2010). 3283 Id. § 60-1-101(6). 3284 Id. § 60-1-101(10). 3285 Tenn. Oil & Gas Board, Definitions: Rule 1040-1-1-.01 (2010). 3286 Id. § 60-1-101 (4).

626

the base of the Chattanooga Shale, 3287 whichever is deeper. Oil well requirements are then

further split for wells drills at a depth greater than 2,000 feet. Gas wells have two further depth

requirements: one for wells that have been drilled between 2,000 and 5,000 feet and another for

those that have been drilled deeper than 5,000 feet. 3288

The Board further requires that horizontal wells have split depth requirements. As such,

there are separate requirements for oil wells drilled to the top of the Conasauga Group

3289 and for

gas wells drilled either to the top of the Conasauga Group or below the top of the Conasauga

Group. 3290

[3] – Spacing Rules.

The spacing of wells is controlled by and through specific rules. General spacing

requirements have been set for wells drilled in counties that have a designated population. If a

county has a population between 17,550 and 17,650, then oil and gas wells drilled within that

county to a depth of less than 2,500 feet shall not be located closer than 400 feet from any other

well or 200 feet from any property line. 3291

3287 “Chattanooga Shale” is not a defined term in the statute. However, it is located in Eastern Tennessee, Northern Alabama, Southern Kentucky, and Northeast Georgia. The Chattanooga Shale Field is an extension of the Appalachian Basin Devonian Shale, which is known to most as the Marcellus Shale. The productive zone is at a depth between 3,000 and 4,000 feet, and the shale thickness ranges from 80 to 200 feet in Tennessee. It is the stratigraphic equivalent of the Lower Huron found in Eastern Kentucky and West Virginia. Chattanooga Shale Natural Gas Field – Tennessee Shale Formation, http://www.oilshalegas.com/chattanoogashale.html (last visited June 24, 2011).

For any county that has a population between 4,300

and 4,400, or between 7,650 and 7,700, then any oil or gas well drilled within that county shall

3288 Tenn. Oil & Gas Board, Well Spacing: Rule 1040-2-4.01 (2010). 3289 “Conasauga Group” is not defined in the statute. However, in Tennessee it includes the: Maynardville Limestone, Nolichucky

Shale, the Maryville, Rogersville, and Rutledge Formations, Pumpkin Valley Shale, Rome Formation, and Shady Dolomite. The Conasauga Group is about 2,000 feet thick, and is mostly shale, with the secondary rock being dolomite. U.S. Geological Survey, Mineral Resources On-Line Spatial Data, http://tin.er.usgs.gov/geology/state/sgmc-unit.php?unit=TNCAc%3B11 (last visited June 24, 2011). 3290 Tenn. Oil & Gas Board, Directional Drilling: Rule 1040-2-8.01 (2010). 3291 Tenn. Code Ann. § 60-1-106(a) (2010).

627

not be located closer than 400 feet from any other well for which a permit shall have been

granted to drill to the same pool and not closer than 200 feet from any property line. 3292

Thus, if an oil and/or gas well is not drilled within a county with a population of 17,550

to 17,650 and drill to a depth of 2,500 feet or within a county with a population of 4,300 to

4,400, or 7,650 to 7,700, then the well is regulated by Rule 1040-2-4.01, which was established

by the Tennessee Oil and Gas Board. The rules are as follows:

Oil and gas wells drilled to a depth less than 1,000 feet shall not be located closer than

660 feet from any other well and not closer than 330 feet from the property line.3293 Oil and gas

wells drilled from 1,000 feet to 2,000 feet, or at the base of the Chattanooga Shale, shall not be

closer than 660 feet from any other well and not closer than 330 feet from any property line. Oil

wells drilled to a depth greater than 2,000 feet shall not be located closer than 660 feet from

another well and not closer than 330 feet from any property line. Gas wells drilled between

2,000 and 5,000 feet shall not be located closer than 660 feet from another well and not closer

than 330 feet from any property line. Gas wells drilled more than 5,000 feet shall not be located

closer than 1,320 feet from any other well and not closer than 660 feet from any property line.

Additionally, a wildcat well will have its spacing assigned by the Supervisor.3294

For horizontal oil wells and horizontal gas wells drilled to the top of the Conasauga

Group, the surface tract of that portion of the wellbore or any portion of the horizontal drainhole

shall not be located closer than 330 feet from any property line.

3295

3292 Id. § 60-1-106 (b).

For horizontal gas wells

drilled below the top of the Conasauga Group, the surface tract of that portion of the wellbore or

3293 Tenn. Oil & Gas Board, Well Spacing: Rule 1040-2-4.01 (2010). 3294 Id. 3295 Tenn. Oil & Gas Board, Well Abandonment: Rule 1040-2-8.04 (2010).

628

any portion of the horizontal drainhole that penetrates the producing formation, including the

horizontal drainhole end point, shall not be located closer than 660 feet from any property line.

A poolwide unit is exempt from well spacing rules as to the particular unitized pool, but

all wells must be located interior of the unit outline in compliance with the rules for distance

from property lines for this to apply.3296

Additionally, no well shall be drilled closer than 200 feet from a dwelling or closer than

100 feet from a public road.

3297 Further, no well may be drilled within 200 feet of any water well

that is in active use.3298

[4] – Size.

No well may be drilled within 100 feet of any stream, lake or other body

of water.

3299

Oil and gas wells drilled to a depth less than 1,000 feet shall be drilled one per ten-acre

unit.

3300 Oil and gas wells drilled from 1,000 feet to 2,000 feet, or at the base of the Chattanooga

Shale, shall be drilled on 20-acre units. Oil wells drilled to a depth greater than 2,000 feet shall

be drilled on 40-acre units. Gas wells drilled to a depth between 2,000 and 5,000 feet shall be

drilled on 40-acre. Gas wells drilled deeper than 5,000 feet shall be drilled on 160-acre units.3301

[5] – Minimum Operator Control.

3296 Id. 3297 Tenn. Oil & Gas Board, Prevention of Hazards and Pollution: Rule 1040-3-3.01 (2010). 3298 Id. 3299 Upon the completion of a confirmation well to a discovery well (neither of which are defined) the operator of the discovery well must apply for a public hearing before the State Oil and Gas Board for the purpose of establishing temporary drilling and production units. When a pool has had five wells drilled to and completed therein or after one year has elapsed from the completion of the confirmation well in the field, whichever occurs first, the operator or operators of well(s) in the field shall petition the Board for a public hearing for the purposes of establishing field rules and regulations and the creation of drilling and production units for the pools in the field. The right is reserved, however, to any interested party to apply for a public hearing at an earlier date and if the Board finds from an examination of the information furnished that temporary or permanent drilling and production units should be formed, it shall be so ordered. 3300 Tenn. Oil & Gas Board, Well Spacing: Rule 1040-2-4.01 (2010). 3301 Id.

629

The pool producers owning more than 50 percent of the pool acreage must request

unitization of the pool in order for the Board, in the absence of a voluntary agreement, and after a

60-day notice to the owners, to force a volumetric or surface poolwide unit.3302

3302 Tenn. Code Ann. § 60-1-202 (a)(4)(N) (2010).

630

§ 44.01 Analysis of Texas Regulatory Framework. [1] – Name of Governing Body. Pooling of oil and gas is regulated by the state of Texas and, more specifically, by the

Railroad Commission of Texas (“Commission”).3303

[2] – Membership on the Governing Body.

There are three Commissioners on the Railroad Commission of Texas. Railroad

Commissioners are elected to six-year terms with one Commissioner seeking election every two

years. When a Commissioner is appointed by the Governor of Texas to fill an unexpired term,

the appointee serves until the next General Election at which time the appointee may run for the

remainder of the unexpired term.3304

[3] – Scope of Authority.

The Railroad Commission, through its Oil and Gas Division, regulates the exploration,

production, and transportation of oil and natural gas in Texas. Its statutory role is to protect the

correlative rights of different interest owners, prevent pollution, provide safety, and prevent

waste of the state’s natural resources.3305 Waste, which is prohibited,3306

(1) operation of any oil well or wells with an inefficient gas-oil ratio . . .; (2) drowning with water a stratum or part of a stratum that is capable of producing oil or gas or both in paying quantities; (3) underground waste or loss, however caused . . .; (4) permitting any natural gas well to burn wastefully; (5) creation of unnecessary fire hazards; (6) physical waste or loss incident to or resulting from drilling, equipping, locating, spacing, or operating a well or wells in a manner that reduces or tends to reduce the total ultimate recovery of oil or gas from any pool; (7) the unnecessary, inefficient, excessive, or improper use of the reservoir energy . . .; (8) surface waste or surface loss, including the temporary or permanent storage of oil or the placing of any product of oil in

includes the following:

3303 Tex. Nat. Res. Code Ann. § 85.001 (West 2010). 3304 Railroad Commission of Texas, Home Page, http://www.rrc.state.tx.us (last visited May 31, 2011). 3305 Id. 3306 Tex. Nat. Res. Code Ann. § 85.045 (West 2010).

631

open pits or earthen storage, and other forms of surface waste or surface loss including unnecessary or excessive surface losses, or destruction without beneficial use, either of oil or gas; (9) escape of gas into the open air in excess of the amount necessary in the efficient drilling or operation of the well from a well producing both oil and gas; (10) production of oil in excess of transportation or market facilities or reasonable market demand . . .; and (11) surface or subsurface waste of hydrocarbons, including the physical or economic waste or loss of hydrocarbons in the creation, operation, maintenance, or abandonment of an underground hydrocarbon storage facility.3307

In addition, each month the Commission assigns production allowables on oil wells and

gas wells; receives operators’ production reports on oil leases (an oil lease may contain multiple

oil wells) and gas wells; and audits the oil disposition path to ensure production did not exceed

allowables. Allowables are assigned according to factors such as tested well capability, reservoir

mechanics, market demand for production, and past production.

3308

The Commission also regulates oil field injection and disposal wells which include

permitting, annual reports, and tests. Through these program, fluids are injected into either

productive reservoirs under enhanced recovery projects to increase production or into non-

productive reservoirs for disposal. In other pollution prevention activities, waste management is

carried out by permitting pits and landfarming, discharges, waste haulers, waste minimization,

and hazardous waste management.

3309

To prevent pollution of the state’s surface and ground water resources, the Commission

has an abandoned well plugging and abandoned site remediation program that uses funds

provided by industry through fees and taxes. Many wells and sites are remediated with these

funds when responsible operators cannot be found.

3310

3307 Id. § 85.046.

3308 16 Tex. Admin. Code § 3.1 (2011). 3309 Id. 3310 Id.

632

The Oil and Gas Division of the Railroad Commission does have the authority to grant

exceptions to many of its regulations. Exceptions are usually granted when the exception would

further the Railroad Commission’s obligation to prevent waste.3311

[4] – Process for Pooling.

The Commission may, under specific circumstances, establish a unit and pool all of the

interest in the unit to avoid the drilling of unnecessary wells, protect correlative rights, or prevent

waste. The unit shall in no event exceed 160 acres for an oil well or 640 acres for a gas well,

plus 10 percent tolerance.3312

The Commission shall establish a unit and pool all of the interests in the unit within an

area containing the approximate acreage of the proration unit (1) when two or more separately

owned tracts of land are embraced in a common reservoir of oil or gas for which the Commission

has established the size and shape of proration units, whether by temporary or permanent field

rules; (2) where there are separately owned interests in oil and gas within an existing or proposed

proration unit in the common reservoir and the owners have not agreed to pool their interests;

and (3) where at least one of the owners of the right to drill has drilled or has proposed to drill a

well on the existing or proposed proration unit to the common reservoir. However, the

Commission may only do this upon the application of a mineral interest owner.

3313 An owner

can be (1) the owner of any interest in oil and gas in an existing proration unit or with respect to

a proposed unit; (2) the owner of any working interest; or (3) any owner of an unleased tract

other than a royalty owner.3314

3311 Id.

3312 Tex. Nat. Res. Code Ann. § 102.011 (West 2010). 3313 Id. 3314 Id. §102.012.

633

An operator may pool acreage, in accordance with appropriate contractual authority and

applicable field rules, for the purpose of creating a drilling unit or proration unit by filing an

original certified plat delineating the pooled unit and a Certificate of Pooling Authority, Form P-

12 (revised 5/2001), according to the following requirements:

(1) Each tract in the certified plat shall be identified with an outline and a tract identifier that corresponds to the tract identifier listed on the Form P-12. (2) The operator shall provide information on the Certificate of Pooling Authority, Form P-12, accurately and according to the instructions on the form.

(A) The operator shall separately list each tract committed to the pooled unit by authority granted to the operator. (B) For each tract listed on Form P-12, the operator shall state the number of acres contained within the tract. The operator shall indicate by checking the appropriate box on Form P-12 if, within an individual tract, there exists a non-pooled and/or unleased interest. (C) The operator shall state on Form P-12 the total number of acres in the pooled unit. The total number of acres in the pooled unit shall equal the sum of all acres in each individual tract listed. (D) If a pooled unit contains more tracts than can be listed on a single Form P-12, the operator shall file as many additional Forms P-12 as necessary to list each pooled tract individually. The additional Forms P-12 shall be numbered in sequence. (E) The operator shall provide the requested identification and contact information on the Form P-12. (F) The operator shall certify the information on the Form P-12 by signing and dating the form.

Failure to timely file the required information on the certified plat or the Form P-12 may

result in the dismissal of the W-1 application. “Timely” means within three months of the

634

Commission notifying the operator of the need for additional information on the certified plat

and/or the Form P-12.3315

The operator must file the original certified plat and Form P-12 at the Commission’s

Austin office. The operator must also file a copy of the certified plat and Form P-12 with the

appropriate Commission district office or offices. If the operator files electronically through the

Commission’s Electronic Compliance and Approval Process (ECAP) system, the operator is not

required to file additional paper copies in the appropriate Commission district office, because all

Commission offices will have electronic access to the Form P-12 and certified plat.

3316

The operator shall file the Form P-12 and certified plat as follows:

(1) with the drilling permit application when two or more tracts are joined to form a pooled unit for Commission purposes to obtain a drilling permit, (2) with completion paperwork when the pooled unit's acreage is being used or assigned for allowable purposes, (3) to designate a pooled unit formed after completion paperwork has been filed when the pooled unit's acreage is being used or assigned for allowable purposes, or (4) to designate a change in a pooled unit previously recognized by the Commission.

The operator shall file any changes to a pooled unit in accordance with the requirements of 16

Tex. Admin. Code §3.38(d)(3) relating to Well Densities.3317

If a tract to be pooled has an outstanding interest, for which pooling authority does not

exist, the tract may be assigned to a unit where authority exists in the remaining undivided

interest, provided that total gross acreage in the tract is included for allocation purposes, and the

certificate filed with the Commission shows that a certain undivided interest is outstanding in the

3315 16 Tex. Admin. Code § 3.40 (2011). 3316 Id. 3317 Id.

635

tract. The Commission will not allow an operator to assign only his undivided interest out of a

basic tract where a nonpooled interest exists.3318

The nonpooled undivided interest holder retains his development rights in his basic tract

and, should such rights be exercised, authority to develop the basic tract is to be approved by the

Commission. If a well is completed as a producer thereon, then the entire interest in the basic

tract must be allocated to said well, and any interest insofar as it is pooled with another tract

must be assigned to the well on the basic tract for allocation purposes. Splitting of undivided

interest in a basic tract between two or more wells on two or more tracts is not acceptable.

3319

Acreage assigned to a well for drilling and development, or for allocation of allowable,

shall not be assigned to any other well or wells projected to or completed in the same reservoir.

While such duplicate assignment of acreage is not acceptable, this limitation shall not prevent the

reformation of development or proration units so long as no duplicate assignment of acreage

occurs, and so long as such reformation does not violate other conservation regulations.

3320

[5] – Process for Drilling Unit.

[a] General Permitting Provisions.

An application for a permit to drill, deepen, plug back, or reenter any oil well, gas well,

or geothermal resource well shall be made under the provisions of sections 3.37, 3.38, 3.39,

and/or 3.40, Title 16 of the Texas Administrative Code, or as an exception thereto, or under

special rules governing any particular oil, gas, or geothermal resource field or as an exception

thereto and filed with the Commission on a form approved by the Commission. An application

must be accompanied by any relevant information, form, or certification required by the Railroad

Commission or a Commission representative necessary to determine compliance with this rule

3318 Id. 3319 Id. 3320 Id.

636

and state law.3321

An application for a permit to drill shall include the fees required in Section 3.78, Title 16

of the Texas Administrative Code (relating to Fees and Financial Security Requirements) and

shall be certified by a person acquainted with the facts, stating that all information in the

application is true and complete to the best of that person's knowledge.

An application may be made by a form prescribed by the Commission or

through electronic filing.

3322 Any permit to drill,

deepen, plug back, or reenter granted by the commission expires no later than two years after the

date of original approval. 3323

An application to drill, deepen, plug back, or reenter shall be accompanied by a neat,

accurate plat, with a scale where one inch equals 1,000 feet. The plat for the initial well on the

lease, pooled unit, or unitized tract shall show the entire lease, pooled unit, or tract, including all

tracts being pooled. If necessary to show the entire lease, the scale may be one inch equals 2,000

feet. Plats for subsequent wells on a lease or pooled unit shall show at least the lease or pooled

unit line nearest the proposed location and the nearest survey/section lines. The Division Director

or the director's delegate may approve plats with other scales upon request. The plat needs to

include the following information:

(1) the surface location of the proposed drilling site; (2) perpendicular lines providing the distance in feet from two nearest non-parallel survey/section lines to the surface location; (3) perpendicular lines providing the distance in feet from two nearest non-parallel lease lines to the surface location; (4) a line providing the distance in feet from the surface location to the nearest point on the lease line, pooled unit line, or unitized tract line. If there is an unleased interest in a tract of the pooled unit that is nearer than the pooled unit line, the nearest point on that unleased tract boundary shall be used; (5) a line providing the distance in feet from the surface location to the nearest oil,

3321 Id. §3.5. 3322 Id. 3323 Id.

637

gas, or oil and gas well identified by number either applied for, permitted, or completed in the same lease, pooled unit, or unitized tract and in the same field and reservoir; (6) the geographic location information; (7) a labeled scale bar; and (8) northerly direction. 3324

Requirements for plats as provided for in sections 3.11, 3.37, 3.38, and 3.86 of this title

(relating to Inclination and Directional Surveys Required, Statewide Spacing Rule, Well

Densities, and Horizontal Drainhole Wells) may supplement or replace the plat requirements set

out above.

3325

A Commission designee may grant administrative approval if he or she determines that

granting the application will not result in the circumvention of the density restrictions of this

section or other Commission rules and if either written waivers are filed by all affected persons

or no protest is filed within the time set forth in the notice of application.

3326

The well densities per acre requirements are outlined below in the next section under

subsection “Size.” The Commission, or Commission designee, in order to prevent waste or,

except as provided in subsection section 3.38(d)(2), Title 16 of the Texas Administrative Code,

to prevent the confiscation of property, may grant exceptions to the density provisions set forth

in this section. Such an exception may be granted only after notice and an opportunity for

hearing.

3327

A permit issued as an exception to the applicable density provision shall expire two years

from the effective date of the permit unless drilling operations are commenced in good faith

within the two year period.

3328

3324 Id.

3325 Id. 3326 Id. § 3.38. 3327 Id. 3328 Id.

638

Upon receipt of a complete application, the Commission will give notice of the

application by mail to all affected persons for whom signed waivers have not been submitted. If

the Commission designee determines, based on the data submitted, that a permit requiring an

exception to the applicable density provision is justified, then the Commission designee may

issue the exception permit administratively so long as one of the following requirements is

satisfied:

(A) signed waivers from all affected persons were submitted with the application; (B) notice of application was given in accordance with rule requirements and no protest was filed within 21 days of the notice; or (C) no person appeared to protest the application at a hearing scheduled pursuant to rule.3329

If a written protest is filed within 21 days after the notice of application is given, the

application will be set for hearing. If the application is not protested and the Commission

designee determines that a permit requiring an exception to the applicable density provision is

not justified, the operator may request a hearing to consider the application.

3330

When filing an application for an exception to the density requirements, in addition to the

plat requirements in section 3.5, Title 16 of the Texas Administrative Code (relating to

Application to Drill, Deepen, Reenter, or Plug Back) (Statewide Rule 5), the applicant shall

attach to each copy of the application a plat that,

(A) depicts the lease, pooled unit, or unitized tract, showing thereon the acreage assigned to the drilling unit for the proposed well and the acreage assigned to all current applied for, permitted, or completed oil, gas, or oil and gas wells in the same field or reservoir which are located within the lease, pooled unit, or unitized tract; (B) on large leases, pooled units, or unitized tracts, if the established density is not exceeded as shown on the face of the

3329 Id. 3330 Id.

639

application, outlines the acreage assigned to the well for which the permit is sought and the immediately adjacent wells on the lease, pooled unit, or unitized tract; (C) on leases, pooled units, or unitized tracts from which production is secured from more than one field, outlines the acreage assigned to the wells in each field that is the subject of the current application; (D) corresponds to the listing required under subsection (g)(1)(A) of 16 Tex. Admin. Code 3.38; (E) is certified by a person acquainted with the facts pertinent to the application that the plat is accurately drawn to scale and correctly reflects all pertinent and required data.3331

If a permit to drill requires an exception to the applicable density provision, the operator

must also provide the following information:

(A) a list of the names and addresses of all affected persons. For the purpose of giving notice of application, the Commission presumes that affected persons include the operators and unleased mineral interest owners of all adjacent offset tracts, and the operators and unleased mineral interest owners of all tracts nearer to the proposed well than the prescribed minimum lease-line spacing distance. The Commission designee may determine that such a person is not affected only upon written request and a showing by the applicant that:

(i) competent, convincing geological or engineering data indicate that drainage of hydrocarbons from the particular tracts subject to the request will not occur due to production from the proposed well; and (ii) notice to the particular operators and unleased mineral interest owners would be unduly burdensome or expensive;

(B) engineering and/or geological data, including a written explanation of each exhibit, showing that the drilling of a well on substandard acreage is necessary to prevent waste or to prevent the confiscation of property; (C) additional data requested by the Commission designee.3332

An exception to the density provision may be granted only to prevent waste for a well on

a lease, pooled unit, or unitized tract that is composed of substandard acreage and that:

3331 Id. 3332 Id.

640

(A) took its present size and shape after the date of attachment of the voluntary subdivision rule (16 Tex. Admin. Code § 3.37(g) (relating to the Statewide Spacing Rule)); and B) was composed of substandard acreage in the field according to the density rules in effect at the time it took its present size and shape.3333

An exception to the minimum density provision is not required for a well in a unitized

area for which the Commission has granted an entity for density order, if the sum of all applied

for, permitted, or completed producing wells in the field within the unitized area, multiplied by

the applicable density provision, does not exceed the total number of acres in the unitized area.

The operator must indicate the docket number of the entity for density order on the application

form.

3334

[b] Substandard Acreage Permitting.

An application for a permit to drill on a lease, pooled unit, or unitized tract composed of

substandard acreage must include a certification in a prescribed form indicating the date the lease

or the drillsite tract of a pooled unit or unitized tract took its present size and shape.3335 Similar

certification is required for any application for a permit to drill on surplus acreage. 3336

(A) [t]he operator shall file the Form W-1A with the drilling permit application and shall indicate the purpose of filing. The operator shall accurately complete all information required on the form in accordance with instructions on the form;

Certifications required under this subsection shall be filed on Form W-1A, Substandard Acreage

Certification. When filing a W-1A form,

(B) [t]he operator shall list the field or fields for which the substandard acreage certification applies in the designated area on the form. If there are more than three fields for which the certification applies, the operator shall attach additional Forms W-1A and shall number the additional pages in sequence;

3333 Id. 3334 Id. 3335 Id. 3336 Id.

641

(C) [t]he operator shall file the original Form W-1A with the Commission's Austin office and a copy with the appropriate district office, unless the operator files electronically through the Commission's Electronic Compliance and Approval Process (ECAP) system; (D) [t]he operator or the operator's agent shall certify the information provided on the Form W-1A is true, complete, and correct by signing and dating the form, and listing the requested identification and contact information; and (E) [f]ailure to timely file the required information on the appropriate form may result in the dismissal of the application.3337

An exception to the minimum density provision is not required for the first well in a field

on a lease, pooled unit, or unitized tract composed of substandard acreage, when the leases, or

the drillsite tract of a pooled unit or unitized tract either:

(A) took its present size and shape prior to the date of attachment of the voluntary subdivision rule (16 Tex. Admin. Code § 3.37(g) (relating to Statewide Spacing Rule)); or (B) took its present size and shape after the date of attachment of the voluntary subdivision rule (16 Tex. Admin. Code § 3.37(g) (relating to Statewide Spacing Rule)) and was not composed of substandard acreage in the field according to the density rules in effect at the time it took its present size and shape.3338

[c] Surplus Acreage Permitting.

An application to drill a well for oil, gas, or geothermal resource on a drilling unit

composed of surplus acreage, commonly referred to as the “tolerance well,” may be granted as

regular when the operator seeking such permit certifies to the Commission in a prescribed form

the necessary data to show that such permit is needed to develop a lease, pooled unit, or unitized

tract to final density, and only in the following circumstances:

(1) when the amount of surplus acreage equals or exceeds the maximum amount provided for tolerance acreage by special or county regular rules for the field, provided that this paragraph does not apply for a lease, pooled unit, or unitized tract that is completely developed with optional units and the special or county

3337 Id. 3338 Id.

642

regular rules for the field do not have a tolerance provisions expressly made applicable to optional proration units; (2) if the special or county regular rules for the field do not have a tolerance provision expressly made applicable to optional proration units, when the amount of surplus acreage equals or exceeds one-half of the smallest amount established for an optional drilling unit; or (3) if the applicable rules for the field do not have a tolerance provision for the standard drilling or proration unit, when the amount of surplus acreage equals or exceeds one-half the amount prescribed for the standard unit.3339

[d] Drilling Unit Dissolution.

If two or more separate tracts are joined to form a unit for oil or gas development, the

unit is accepted by the Commission, and the unit has produced hydrocarbons in the preceding

twenty years, the unit may not thereafter be dissolved into the separate tracts with the rules of the

Commission applicable to each separate tract if the dissolution results in any tract composed of

substandard acreage for the field from which the unit produced, unless the Commission approves

such dissolution.3340

The Commission shall grant approval only after application, notice, and an opportunity

for hearing. The applicant seeking the unit dissolution shall provide a list of the names and

addresses of all current lessees and unleased mineral interest owners of each tract within the

joined or unitized tract at the time the application is filed. The Commission shall give notice of

the application to all current lessees and unleased mineral interest owners of each tract within the

joined or unitized tract. Additionally, if one or more wells on the unitized tract has produced

from the field within the twelve-month period prior to the application, the applicant shall include

on the list all affected persons (e.g., the operators and unleased mineral interest owners of all

adjacent offset tracts, and the operators and unleased mineral interest owners of all tracts nearer

3339 Id. 3340 Id.

643

to the proposed well than the prescribed minimum lease-line spacing distance), and the

Commission shall give notice of the application to these affected persons.3341

[6] – Horizontal Drilling.

[a] Horizontal Drilling Units.

The maximum diagonal for each proration unit containing a horizontal drainhole well

shall be the horizontal drainhole displacement of the longest horizontal drainhole for the well

plus (A) 2,100 feet for fields that are regulated under statewide rules or (B) the maximum

diagonal allowed for fields where the special field rules specify a maximum diagonal.3342

A single well may be developed with more than one horizontal drainhole originating

from a single vertical wellbore. A horizontal drainhole well developed with more than one

horizontal drainhole shall be treated as a single well. The horizontal drainhole displacement used

for calculating additional acreage assignment for a well completed with multiple horizontal

drainholes shall be the horizontal drainhole displacement of the longest horizontal drainhole plus

the projection of any other horizontal drainhole on a line that extends in a 180 degree direction

from the longest horizontal drainhole.

3343

Acreage may be assigned to each horizontal drainhole well for the purpose of allocating

allowable oil or gas production up to the amount specified by applicable rules for a proration unit

for a vertical well plus the additional acreage assignment as provided in this paragraph.

3344

3341 Id.

Assignment of acreage to proration and drilling units for horizontal drainhole wells must be done

3342 Id. § 3.86. 3343 Id. 3344 Id.

644

in accordance with Statewide Rule 40, section 3.40, Title 16 of the Texas Administrative Code

(relating to Assignment of Acreage to Pooled Development and Proration Units).3345

The maximum daily allowable for a horizontal drainhole well shall be determined by

multiplying the applicable allowable for a vertical well in the field with a proration unit

containing the maximum acreage authorized by the applicable rules for the field, exclusive of

tolerance acreage, by a fraction,

(A) the numerator of which is the acreage assigned to the horizontal drainhole well for proration purposes; and (B) the denominator of which is the maximum acreage authorized by the applicable field rules for proration purposes, exclusive of tolerance acreage. The daily oil allowable shall be adjusted in accordance with Statewide Rule 49(a), 16 Tex. Admin. Code § 3.49(a) (relating to Gas-Oil Ratio), when applicable.3346

All proration and drilling units shall consist of continuous and contiguous acreage and

proration units shall consist of acreage that can be reasonably considered to be productive of oil

or gas. All points on the horizontal drainhole must be within the proration and drilling unit.

3347

[b] Horizontal Drilling Permits.

According to section 3.11, Title 16 of the Texas Administrative Code, “[a]ll wells shall

be drilled as nearly vertical as possible by normal, prudent, practical drilling operations. Nothing

in this section shall be construed to permit the drilling of any well in such a manner that the

wellbore crosses lease and/or property lines (or unit lines in cases of pooling) without special

permission.” Horizontal drilling is permissible upon approval of the proper application.

Any intent to develop a new or existing well with horizontal drainholes must be indicated

on the application to drill. An application for a permit to drill a horizontal drainhole shall include

the fees required by Statewide Rule 78, section 3.78, Title 16 of the Texas Administrative Code

3345 Id. 3346 Id. 3347 Id.

645

(relating to Fees and Financial Security Requirements), and shall be certified by a person

acquainted with the facts, stating that all information in the application is true and complete to

the best of that person's knowledge.3348

In addition to the plat requirements provided for in section 3.5, Title 16 of the Texas

Administrative Code (relating to Application to Drill, Deepen, Reenter, or Plug Back) (Statewide

Rule 5), the plat shall include the following information:

The application to drill a horizontal drainhole shall be

accompanied by a plat.

(i) the lease, pooled unit, or unitized tract, showing the acreage assigned to the drilling unit for the proposed well and the acreage assigned to the drilling units for all current applied for, permitted, or completed oil, gas, or oil and gas wells on the lease, pooled unit, or unitized tract; (ii) the surface location of the proposed horizontal drainhole well, and the proposed path, penetration points, and terminus locations of all drainholes; (iii) two perpendicular lines from the nearest point on the lease line, pooled unit line, or any unleased interest in a tract of the pooled unit, depicting the distance(s) to:

(I) the penetration points; and (II) the terminus location;

(iv) perpendicular lines providing the distance in feet from the two nearest non-parallel survey lines to the terminus location(s); (v) a line providing the distance in feet from the closest point along the horizontal course(s) of the drainhole(s) to the nearest point on the lease line, pooled unit line, or unitized tract line. If there is an unleased interest in a tract of the pooled unit that is nearer than the pooled unit line, the nearest point on that unleased tract boundary shall be used; and (vi) lines from the nearest oil, gas, or oil and gas well, applied for, permitted or completed in the same lease or pooled unit and in the same field and reservoir depicting the distance to:

(I) the penetration point(s); (II) the closest point along the horizontal course(s) of the drainhole(s); and (III) the terminus location(s).3349

3348 Id.

3349 Id.

646

A directional survey from the surface to the farthest point drilled on the horizontal

drainhole shall be required for all horizontal drainholes. The directional survey and

accompanying reports shall be conducted and filed in accordance with Statewide Rules 11 and

12, sections 3.11 and 3.12, Title 16 of the Texas Administrative Code (relating to Inclination and

Directional Surveys Required and Directional Survey Company Report). No allowable shall be

assigned to any horizontal drainhole well until a directional survey and survey plat has been filed

with and accepted by the Commission.3350

The required proration unit plat must depict the lease, pooled unit, or unitized tract,

showing the acreage assigned to the proration unit for the horizontal drainhole well, the acreage

assigned to the proration units for all wells on the lease, pooled unit, or unitized tract, and the

path, penetration point, and terminus of all drainholes. No allowable shall be assigned to any

horizontal drainhole well until the proration unit plat has been filed with and accepted by the

Commission.

3351

If after completion of the horizontal drainhole well, the Commission determines that the

drainhole as drilled is not reasonable with respect to the drainhole represented on the plat filed

with the drilling permit application, an amended drilling permit application and plat shall be

filed.

3352

The Commission may grant exceptions to this section in order to prevent waste, prevent

confiscation, or to protect correlative rights. If a permit to drill a horizontal drainhole requires an

exception to this section, the notice and opportunity for hearing procedures for obtaining

exceptions to the density provisions prescribed in Statewide Rule 38, section 3.38, Title 16 of the

Texas Administrative Code (relating to Well Densities), shall be followed as set forth in

3350 Id. 3351 Id. 3352 Id.

647

Statewide Rule 38(h), section 3.38(h), Title 16 of the Texas Administrative Code (relating to

Well Densities). The Commission presumes that for each adjacent tract and each tract nearer to

any point along the proposed or existing horizontal drainhole than the prescribed minimum

lease-line spacing distance, affected persons that will have to be notified include the designated

operator, all lessees of record for tracts that have no designated operator, and all owners of

record of unleased mineral interests.3353

[7] – Matters Covered.

The Commission has jurisdiction over all common carrier pipelines in Texas, oil and gas

wells in Texas, persons owning or operating pipelines in Texas, and persons owning or engaged

in drilling or operating oil or gas wells in Texas.3354 In addition, the Commission may adopt all

necessary rules for governing and regulating persons and their operations under the jurisdiction

of the Commission, including such rules as the Commission may consider necessary and

appropriate to implement state responsibility under any federal law or rules governing such

persons and their operations.3355

§ 44.02 Types of Texas Pooling Statutes.

The Commission also oversees well spacing, well density, and

royalties, most of which are discussed below.

[1] – Mineral distinctions.

According to the Texas Natural Resources Code, section 85.001, “‘[o]il’ means crude

petroleum oil, crude petroleum, and crude oil, and ‘gas’ means natural gas. These terms shall not

be construed as referring to substances different from those referred to in this chapter and other

3353 Id. 3354 Tex. Nat. Res. Code Ann. § 81.051 (West 2010). 3355 Id. § 81.052.

648

laws as ‘oil and gas’ and these terms mean the same whether used in this chapter or in other laws

relating to the conservation of oil and gas.”3356

[2] – Split by Depth.

Texas law does not appear to regulate wells based on depth.

[3] – Spacing Rules.

The Statewide Spacing Rule states that “[n]o well for oil, gas, or geothermal resource

shall hereafter be drilled nearer than 1,200 feet to any well completed in or drilling to the same

horizon on the same tract or farm, and no well shall be drilled nearer than 467 feet to any

property line, lease line, or subdivision line; provided the Commission, in order to prevent waste

or to prevent the confiscation of property, may grant exceptions to permit drilling within shorter

distances than prescribed in this paragraph when the Commission shall determine that such

exceptions are necessary either to prevent waste or to prevent the confiscation of property.” This

provision also sets forth the procedure for requesting an exception to the spacing rule.3357 It is

important to note that many, if not most, fields in Texas have their own special field rules and

will not be regulated by the standard set forth above.3358

Horizontal drilling regulations can be found in section 3.86, Title 16 of the Texas

Administrative Code. Under this regulation, no point on a horizontal drainhole shall be drilled

nearer than 1,200 feet (horizontal displacement), or other between-well spacing requirement

under applicable rules for the field, to any point along any other horizontal drainhole in another

well, or to any other well completed or drilling in the same field on the same lease, pooled unit,

3356 Id. § 81.051. 3357 16 Tex. Admin. Code § 3.37 (2011). 3358 Jack M. Wilhelm, What Every Landman Should Know About the Railroad Commission of Texas, Tex. Land Inst., 6 (2005), http://blumtexas.tripod.com/sitebuildercontent/sitebuilderfiles/wilhelm.pdf.

649

or unitized tract.3359 No point on a horizontal drainhole shall be drilled nearer than 467 feet, or

other lease-line spacing requirement under applicable rules for the field, from any property line,

lease line, or subdivision line.3360 All wells developed with horizontal drainholes shall comply

with applicable spacing and well density rules.3361

[4] – Size.

Section 3.38, Title 16 of the Texas Administrative Code (relating to Well Densities), sets

forth the standard well densities. This section provides the means for analyzing well density

based on available acreage. The standard drilling unit for all oil, gas, and geothermal resource

fields, absent special field rules, are as follows:

Spacing Rule Acreage Requirement

(1) 150–300 2

(2) 200–400 4

(3) 330–660 10

(4) 330–933 20

(5) 467–933 20

(6) 467–1,200 40

(7) 660–1,320 40

Thus, the minimum requirement for a drilling unit is forty acres per well. The spacing

rules listed in this section are not exclusive. If any spacing rule not listed in this section is

3359 16 Tex. Admin. Code § 3.86 (2011). 3360 Id. 3361 Id.

650

brought to the attention of the Commission, it will be given an appropriate acreage

assignment.3362

[5] – Minimum Operator Control.

The Texas Natural Resources Code does not specify the minimum operator controls.

[6] – Review of Election Rights/Options.

Chapter 102 of the Texas Natural Resources Code is referred to as the Mineral Interest

Pooling Act (“MIPA”). Section 102.051 sets forth the rights in a pooled unit. For the purpose of

determining the portions of production owned by the persons owning interests in the pooled unit,

the production shall be allocated to the respective tracts within the unit in the proportion that the

number of surface acres included within each tract bears to the number of surface acres included

in the entire unit. However, if the Commission finds that allocation on a surface-acreage basis

does not allocate to each tract its fair share, the Commission shall allocate the production so that

each tract will receive its fair share, which for any nonconsenting owner shall be no less than he

would receive under a surface-acreage allocation.3363

As to an owner who elects not to pay his proportionate share of the drilling and

completion costs in advance, the Commission shall make provision in the pooling order for

reimbursement solely out of production, to the parties advancing the costs, of all actual and

reasonable drilling, completion, and operating costs plus a charge for risk not to exceed 100

percent of the drilling and completion costs. If there is a dispute relative to the costs, the

Commission shall determine the proper costs and their allocation among working interest owners

after due notice to interested parties and a hearing on the costs.

3364

3362 Id.

3363 Tex. Nat. Res. Code Ann. § 102.051 (West 2010). 3364 Id. § 102.052.

651

There is no forced pooling in Texas. However, MIPA contains a provision where the

owner of a tract of land can force the tract’s inclusion in a pool. Recently, larger pool operations

have attempted to use MIPA to require smaller units to submit to the pool.

652

§ 45.01 Analysis of Utah Regulatory Framework.

[1] – Name of Governing Body.

In Utah, the oil and gas industry general pooling and unitization and compulsory pooling

and unitization are regulated under Chapter Six of Title Forty of the Utah Code Ann. by the

Division of Oil, Gas, and Mining within the Department of Natural Resources.3365

[2] – Membership on the Governing Board.

Under the statute, the Board of Oil, Gas, and Mining (“Board”) is the “policy making

body” for the Division.3366

(1) two members knowledgeable in mining matters; (2) two members knowledgeable in oil and gas matters; (3) one member knowledgeable in ecological and environmental matters; (4) one member who is a private land owner, owns a mineral or royalty interest, and is knowledgeable in those interests; and (5) one member who is knowledgeable in geological matters.

The Board consists of seven members appointed by the governor

with the consent of the Senate. No more than four members may be from the same political

party. The members must include the following:

3367

The terms are staggered so that approximately half of the Board is appointed every two

years. As terms of current Board members expire, the governor appoints each new member or

reappointed member to a four-year term. When a vacancy occurs in the membership for any

reason, the replacement is appointed for the unexpired term by the governor with the consent of

the Senate.

3368

[3] – Scope of Authority.

3365 Utah Code Ann. § 40-6-6.5 (Lexis 2011); see also id. § 40-6-8. 3366 Id. § 40-6-4. 3367 Id. 3368 Id.

653

The Board has the authority to regulate all operations for and related to the production of

oil or gas.3369 This includes regulation of oil and gas operations on federal lands to the extent that

such regulation does not conflict with Federal law.3370 The Division also has the right to name oil

and gas fields.3371

The director of the Division is appointed by the director of the Department of Natural

Resources with the “concurrence” (presumably meaning the approval) of the Board.

3372 The

director is the executive and administrative head of the Division of Oil, Gas, and Mining and

must be a person “experienced in administration” and “knowledgeable in the extraction of oil,

gas, and minerals.”3373 The director or an authorized agent has the right at reasonable times to

enter and inspect any oil or gas properties and wells to investigate or conduct tests necessary to

determine compliance with the statutes, general rules, special rules, and orders.3374

Prohibition of waste is a chief purpose of the Conservation Act.

3375

[t]he locating, drilling, equipping, operating, or producing of any oil or gas well in a manner that causes reduction in the quantity of oil or gas ultimately recoverable . . . [causing] unnecessary wells to be drilled, or [causing] the loss or destruction of oil or gas either at the surface or subsurface . . . [or] [t]he production of oil or gas in excess of . . . [t]ransportation or storage facilities.”

“Waste” is defined

under the regulations to include, inter alia,

3376

Special rules and orders may be granted by the Board and prevail over general rules.

3377

3369 Id. § 40-6-5.

Exceptions to the general rules may be granted by the director or authorized agent for good cause

3370 Utah Admin. Code r. 649-2-1 (2011). 3371 Id. r. 649-2-7. 3372 Utah Code Ann. § 40-6-15 (Lexis 2011). 3373 Id. 3374 Utah Admin. Code r. 649-2-5. 3375 See Utah Code Ann. § 40-6-3 (Lexis 2011). 3376 Utah Admin. Code r. 649-2-1; see also Utah Code Ann. § 40-6-2 (Lexis 2011). 3377 Utah Admin. Code r. 649-2-1 (2011).

654

shown.3378 General rules may also be suspended by unit orders.3379 Drilling unit orders must be

“just and reasonable.”3380 In addition, all Division orders must be supported by “substantial

evidence.”3381 The Division has the authority to grant exceptions to well location requirements

after receipt of a proper written application for the exception well location and either written

consent from all owners within a 460 foot radius of the proposed well location when the

exception is to the requirements of general siting requirements3382 or written consent from all

owners of directly or diagonally offsetting drilling units when the exception is to an order of the

Board establishing oil or gas well drilling units.3383

[4] – Process for Pooling.

[a] Request for Hearings and Hearings.

Procedures for pooling before the Division are generally conducted by informal

adjudicative proceeding.3384 The procedures and proceedings must comply with the provisions

of the more broadly applicable state Administrative Procedures Act.3385 Presiding officers may

convert an informal proceeding to a formal one if the presiding officer determines it is in the

public interest and there is no prejudice to any party.3386 Pooling proceedings brought by owners

are initiated by a Request for Agency Action (proceedings may also be initiated by the Division

itself) (“Request”).3387

3378 Id.

A Request must be in writing and signed by the person seeking action by

the agency or by his representative and must include the names and addresses of all persons to

whom a copy of the request for agency action is being sent, the agency's file number or other

3379 Id. 3380 Utah Code Ann. § 40-6-6 (Lexis 2011). 3381 See Cowling v. Bd. of Oil, Gas & Min., Dept. of Natural Res. for Utah, 830 P.2d 220, 224 (Utah 1991). 3382 See Utah Admin. Code r. 649-3-2 (2011). 3383 Id. r. 649-3-3. 3384 See id. r. 649-10-1. 3385 Utah Code Ann. § 63-G-4 (Lexis 2011). 3386 Utah Admin. Code r. 649-10-1 (2011). 3387 Id. r. 649-10-3.

655

reference number, if known, the date that the request for agency action was mailed, the legal

authority and jurisdiction under which the agency action is requested, the relief or action sought

from the Division, and the facts and reasons forming the basis for relief or action.3388 The person

requesting agency action must file the request with the Division and send a copy by mail to each

person known to have a direct interest in the requested agency action unless previously waived in

writing by each person entitled to receive notice of the requested agency action.3389

The presiding officer must “promptly” review a Request for Agency Action and must

either notify the requesting party in writing that the request is granted and when the adjudicative

proceeding is to be completed, notify the requesting party in writing that the request is denied, or

notify the requesting party that further proceedings are required to determine the agency's

response to the request.

3390

The Division must mail any required notice to all parties. The notice must state the

division's file number or other reference number, the name of the proceeding, and designate that

the proceeding is to be conducted informally. The notice must also state the time and place of

any scheduled hearing, the purpose for which the hearing is to be held, and give notice that a

party who fails to attend or participate in a scheduled and noticed hearing may be held in default.

If a hearing is required by statute or rule, or if a hearing is permitted by rule and may be

requested by a party with the time prescribed by rule, the notice must also state the parties' right

to request a hearing and the time within which a hearing may be requested under the agency's

rules. If a hearing is scheduled, the notice must give the name, title, mailing address, and

telephone number of the presiding officer.

3391

3388 Id. r. 649-10-2.3.

3389 Id. r. 649-10-2.4. 3390 Id. r. 649-10-2.6. 3391 Id. r. 649-10-2.7.

656

Within a reasonable time after the close of an informal adjudicative proceeding, the

presiding officer shall issue a signed order in writing that states the decisions and reasons for the

decision.3392 An appeal or review must be filed with the secretary of the Board within 30 days of

the issuance of the order.3393 It must state the grounds for review and the relief requested.3394

The Board must review appeals within a reasonable time, and they may require briefing or

hearings.3395 After review the Board must issue within a reasonable time an order stating the

statute or rule permitting or requiring review, a statement of issues, findings of fact, conclusions

of law, and whether the decision of the officer is affirmed, reversed, modified, and whether the

case is remanded for further proceedings.3396

[b] Unitization.

The Board’s authority to issue drilling unit orders in a pool (drilling units being a

subsection of a pool with one well) is provided for under Section 40-6-6. Within each drilling

unit, only one well may be drilled for production from the common source of supply, except as

noted below.3397 Although there is no mandated unit acreage, a drilling unit may not be smaller

than the maximum area that can be efficiently and economically drained by one well and it shall

be of uniform size and shape, except when it must differ for geologic or geographic reasons.3398

Drilling unit orders must specify the unit borders and well location and may be modified to

change well location, unit boundaries, or provide for additional wells.3399

3392 Id. r. 649-10-4.

3393 Id. r. 649-10-6. 3394 Id. 3395 Id. 3396 Id. 3397 Utah Code Ann. § 40-6-6 (Lexis 2011). 3398 Id. 3399 Id.

657

The Board’s authority to issue pool or field unit orders is provided for under Code

Section 40-6-8. An order prescribing a plan for unit operations must include the following

information:

(1) a description of the unit; (2) a description of the planned operations; (3) an allocation of the production to the separate tracts within the unit, consistent with any voluntary agreements between owners; (4) a provision for allocation and adjustments to production rights of non-royalty owners based upon their cost contribution, including investment in physical assets and service of the unit operations; (5) a designation of a unit operator; (6) a timeline for unit operations; and (7) any necessary financing arrangements if an owner elects to be carried.3400

An application for an exception to general rules or a Board drilling unit order must state

the reasons why such an exception is necessary or desirable and be accompanied by a plat

showing:

(1) the location at which an oil or gas well could be drilled in compliance with general siting requirements or a Board drilling unit order; (2) the location at which the applicant requests permission to drill; (3) the location at which oil or gas wells have been drilled or could be drilled in accordance with general siting requirements or a Board drilling unit order directly or diagonally offsetting the proposed exception; and (4) either the names of owners of all lands within a 460 foot radius of the proposed well location when the exception is to the requirements of general siting requirements, or the names of owners of all directly or diagonally offsetting drilling units when the exception is to an order of the Board establishing oil or gas drilling units.3401

No exception may prevent any owner of adjacent land from drilling a well at locations permitted

by general siting requirements; and the Board or Division may take action to offset the advantage

3400 Id. § 40-6-8(3). 3401 Id.

658

obtained by the party seeking the exception over other producers by reason of the exception

location.3402

[c] Compulsory Pooling.

Compulsory pooling within a drilling unit is provided for under Section 40-6-6.5.

Compulsory pooling is unnecessary if there is a written agreement between all owners.3403 Under

compulsory pooling, non-consenting operators are paid their share of profits, minus their share of

drilling costs, plus a penalty of 150 percent to 300 percent of drilling costs (as determined by the

Board).3404 Unleased landowners receive the average landowner's royalty attributable to each

tract within the drilling unit.3405

§ 45.02 Types of Utah Pooling Statutes.

[1] – Mineral and Depth Distinctions.

In Utah, the pooling and unitization statutes (including the compulsory pooling section)

do not make any distinction between oil and gas, and coalbed methane is defined as natural gas

under the Conservation Act. 3406

[2] – Spacing Rules.

Pooling and unitization are not expressly restricted to any

particular strata or depth.

The Board has the authority to regulate the spacing of wells.3407

3402 Id.

The Board’s default well

spacing rules are provided for at Utah Administrative Code rule 649-3-2. Thus, in the absence of

special orders of the Board establishing drilling units or pool-wide rules, each oil and gas well

shall be located in the center of a 40-acre quarter-quarter section, or a substantially equivalent lot

3403 Id. § 40-6-6.5(2). 3404 Id. § 40-6-6.5(4)(d). 3405 Id. § 40-6-6.5. 3406 Id. § 40-6-6 (providing for the creation of drilling units); id. § 40-6-6.5 (providing for compulsory pooling); id. § 40-6-8 (providing for pool and field wide unitization); see id. § 40-6-2 (defining “natural gas” to include coal bed methane); see also Utah Admin. Code r. 649-1 (2011). 3407 Utah Code Ann. § 40-6-5 (Lexis 2011).

659

or tract or combination of lots or tracts as shown by the most recent governmental survey, with a

tolerance of 200 feet in any direction from the center location, a “window” 400-foot square.3408

Wells cannot be drilled or completed within 920 feet of another well in the same pool.3409 The

Division may restrict well locations adjacent to existing drilling units to ensure orderly

development.3410 Default horizontal well spacing units are 640 acres.3411 Horizontal wells must

be no closer than 660 feet from a drilling unit or spacing unit boundary,3412 and must be no

closer than 1,320 feet from any vertical well completed in the same formation.3413

The Division has the authority to grant exceptions to well location requirements after

receipt of the following from the proposed operator:

(1) proper written application for the exception well location; (2) written consent from all owners within a 460 foot radius of the proposed well location when such exception is to the requirements of general siting requirements;3414 or (3) written consent from all owners of directly or diagonally offsetting drilling units when such exception is to an order of the Board establishing oil or gas well drilling units.3415

An application for an exception to general rules or a Board drilling unit order must state

the reasons why such an exception is necessary or desirable and be accompanied by a plat

showing the following information:

(1) the location at which an oil or gas well could be drilled in compliance with general siting requirements or a Board drilling unit order; (2) the location at which the applicant requests permission to drill; (3) the location at which oil or gas wells have been drilled or could be drilled, in accordance with general siting requirements or Board drilling unit order, directly or diagonally

3408 Utah Admin. Code r. 649-3-2. 3409 Id. 3410 Id. 3411 Id. 3412 Id. 3413 Utah Admin. Code r. 649-3-2 (2011). 3414 See id. 3415 Id. r. 649-3-3.

660

offsetting the proposed exception; (4) the names of owners of all lands within a 460 foot radius of the proposed well location when such exception is to the requirements of general siting requirements; or (5) the names of owners of all directly or diagonally offsetting drilling units when such exception is to an order of the Board establishing oil or gas drilling units.3416

No exception may prevent any owner of adjacent land from drilling a well at locations permitted

by general siting requirements; and the Board or Division may take action to offset the advantage

obtained by the party seeking the exception over other producers by reason of the exception

location.

3417

[3] – Size.

There is no statutorily-mandated field unit size.3418 Utah expressly rejects the Texas

cross-conveyance theory of pooling. 3419 Yet a drilling unit may not be smaller than the

maximum area that can be efficiently and economically drained by one well and it shall be of

uniform size and shape, except when it must differ for geologic or geographic reasons. 3420

Neither is there any statutorily-mandated field unit size, although of course any determination

(like all Division orders) must be supported by “substantial evidence.”3421 No express pooling

provisions are applicable to horizontal wells except for the spacing rules stated above.3422

[4] – Minimum Operator Control.

In Utah, there is no mandated ownership percentage for an operator to request a

compulsory pooling order on a drilling unit. However for pool-wide unitization orders, 70

3416 Id. 3417 Id. 3418 See id. 3419 See Utah Code Ann. § 40-6-8(11) (Lexis 2011). 3420 Id. § 40-6-6. 3421 See id. § 40-6-8; see also Cowling v. Bd. of Oil, Gas & Min., Dept. of Natural Res. for State of Utah, 830 P.2d 220, 224 (Utah 1991). 3422 There are some non-pooling regulatory provisions applicable to horizontal wells, such as the permit diagramming requirement under Utah Admin. Code r. 649-3-4 and the well log filing requirement under Utah Admin. Code r. 649-3-21.

661

percent of production owners and cost providers must approve any order before it can take

effect.3423

[5] – Review of Election Rights/Options.

Under compulsory pooling, nonconsenting operators are paid their share of profits, minus

their allocated share of drilling costs, plus a penalty of 150 percent to 300 percent of drilling

costs (as determined by the Board).3424 Unleased landowners receive the average landowner's

royalty attributable to each tract within the drilling unit.3425

3423 Utah Code Ann. § 40-6-8 (Lexis 2011). 3424 Id. § 40-6-6.5. 3425 Id.

662

§ 46.01 Analysis of Vermont Regulatory Framework.

[1] – Name of Governing Body.

The Vermont Natural Gas and Oil Conservation Act (“Act”) gives the Natural Gas and

Oil Resources Board (“Board”) jurisdiction over pooling and unitization issues. 3426

[2] – Membership on the Governing Body.

The Board consists of five members who are appointed by the Vermont governor

(“Governor”) with the advice and consent of the state senate. Appointments are for a term of

three years and, in the event of death or resignation, the successor will serve out the term of the

deceased or resigned member. The terms of members initially appointed are set so that not more

than two terms will expire in the same year. Annually, in February after new appointments, the

Governor will designate a chairman of the Board. 3427

In order for the Board to function in the best interests of the people of the state,

Board members should have knowledge of (1) geology; (2) engineering; (3) law; (4) state and

local government; (5) economic development; (6) environmental protection; (7) regional

planning; (8) agriculture; or (9) related fields of knowledge.

3428

A person may not be a member of the Board if that person is one of the following:

(1) employed or holds any official relation to any company that is subject to the supervision of the Board; (2) engaged in the management of such company; (3) owns stock, bonds or other securities in the company; or (4) in any manner, connected with the operation of such company in Vermont. 3429

3426 Vt. Stat. Ann. tit. 14, § 505 (2011).

3427 Id. § 504. 3428 Id. 3429 Id.

663

A member cannot participate in any action of the Board that involves himself or any

person engaged in oil and gas development in which he has a financial interest. 3430 And each

prospective appointee or member of the board shall have the affirmative duty to disclose any

actual or potential conflicts of interest to the other members of the Board. 3431

[3] – Scope of Authority.

The Board has the authority over all lands and over all oil and gas resources to fulfill the

purposes of the Act. The purposes of the Act are to do the following:

(1) encourage oil and gas exploration and production; (2) protect property rights and interests of all citizens; (3) prevent long-term harm to the environment and other resources that might occur through oil and gas activities; (4) protect correlative rights; (5) prevent undue waste of oil and gas; and (6) promote the greatest ultimate recovery of oil and gas, consistent with technology and economic conditions. 3432

The Board has the authority to prevent the waste of oil and gas, promote conservation,

protect correlative rights, and otherwise administer and enforce the Act. In the event of a

conflict, the Board’s duty to prevent waste is paramount.

3433

(1) inefficient, excessive, or improper use or the unnecessary dissipation of reservoir energy; (2) inefficient storing of oil or gas; (3) locating, drilling, equipping, operating, or producing of an oil and gas well in a manner that causes or tends to cause reduction in the quantity of oil or gas which would be ultimately recoverable from a reservoir under prudent and proper operations, or that causes or tends to cause unnecessary wells to be drilled, or that causes or tends to cause surface or subsurface loss or destruction of oil or gas; and (4) unauthorized flaring of gas produced from an oil and condensate well after the Board has found that the use of gas is, or will be, economically feasible within a reasonable time on terms that are just and reasonable.

Waste includes the following:

3434

The Board, without limiting its general authority, may, among other rights:

3430 Id. 3431 Id. 3432 Id. § 502(b). 3433 Id. § 505(a). 3434 Id. § 503(27).

664

(1) require identification of ownership of oil and gas wells, producing leases, tanks, processing plants, structures, and facilities for the transportation or refining of oil and gas; (2) require the making and filing of well logs, directional surveys, and reports on well location, drilling and production; (3) provide that all such records marked “confidential” shall be kept confidential for two years after their filing, unless the owner gives written permission to release them at an earlier date; (4) require the drilling, casing, and installation of proper equipment and facilities, operating, and plugging of wells . . .; (5) require the testing of wells used in connection with the production of oil and gas . . .; (7) require that production from wells be separated into gaseous and liquid hydrocarbons; (8) require that wells be operated at efficient gas-oil or water-oil ratios or that production be limited from wells with inefficient gas-oil or water-oil ratios; . . . (12) require the filing of reports, plats, and other data related to matters within the Board's jurisdiction; (13) regulate the drilling, testing, equipping, completing, operating, producing, and plugging of wells, and all other operations for the production of oil or gas; . . . (15) regulate the spacing or locating of wells; . . . (18) determine the amount of oil or gas that may be produced without waste from any unit, reservoir, or field, and allocate the allowed production to and among the wells in such fields or reservoirs; . . . (20) identify reservoirs and classify or reclassify them as oil or gas reservoirs, and classify or reclassify wells as oil or gas wells; and (21) adopt rules and make and enforce orders reasonably necessary to prevent waste, to protect correlative rights, to govern the practice and procedure before the Board and otherwise administer this chapter.3435

[4] – Process for Pooling.

[a] Establishment of Drilling and Pooling Units.

The Board will regulate the spacing and location of oil and gas wells by the establishment

of drilling units whenever reasonably necessary to prevent waste and to protect correlative

rights.3436

3435 Id. § 505(b).

The drilling units that the Board can establish are known as development drilling

units. “Development drilling unit” means the area attributed by the Board to a well drilled or to

3436 Id. § 522(a).

665

be drilled in a known reservoir, for the purpose of allocating production so as to prevent waste

and protect correlative rights. 3437

An order establishing development drilling units for a reservoir will cover all lands

believed to be underlain by that reservoir, and may be modified by the Board from time to time

based on additional geological and engineering information. The Board may grant exceptions to

the size and shape of any development unit or units, or may change the size or shape of any

development unit or units. Additionally, the Board may permit the drilling of additional wells if

such actions are reasonably necessary to prevent waste or to protect correlative rights. No well

shall be commenced into that reservoir after the date of the notice of hearing called to establish

development units in a reservoir, unless expressly authorized by the Board, until an order

establishing development drilling units has been adopted.

3438

The Board may also establish an exploratory drilling unit whenever a well is to be drilled

to test for the existence of a reservoir.

3439 “Exploratory drilling unit” means the area attributed

by the Board to the first well drilled or to be drilled to test for a reservoir, for the purpose of

allocating production so as to prevent waste and to protect correlative rights.3440

The order establishing the exploratory drilling unit will specify the size and shape of the

exploratory unit. If insufficient geological and engineering information is available to establish

the proper unit size, the Board may establish a temporary unit to ensure orderly development of

the reservoir pending the availability of additional information.

3441

In addition to the authority for the establishment of drilling units for individual wells, the

Board may establish field-wide drilling units comprised of one or more reservoirs or parts

3437 Id. § 503(4). 3438 Id. § 522(c). 3439 Id. § 522(a). 3440 Id. § 503(6). 3441 Id. § 522(b).

666

thereof and including one or more wells.3442 This is referred to as unitization. “Unitization”

means the combining of tracts and interests necessary to establish a field-wide area for the

cooperative development or operation of all or part of a reservoir.3443 After adequate geological,

engineering, and other information has been required through development of the reservoir, the

Board, on its own motion or upon application of any owner, will hold a hearing to consider the

need for cooperative development or operation as a field-wide unit.3444

After drilling units have been established, the Board or the persons owning tracts or

interests within the drilling units may pool the separate interests or tracts. Thus, when two or

more separately owned tracts are embraced within an exploratory or development drilling unit, or

when there are separately owned interests in all or part of a unit, the persons owning such tracts

or interests may voluntarily pool their tracts or interests. Or, in the absence of voluntary pooling

and upon application by any person owning a tract or interest within an exploratory or

development drilling unit, the Board may enter an order pooling all tracts and interests within the

unit.

3445 Production and costs associated with a pooled unit shall be allocated among the owners

in the same proportion each owner's acreage in the unit bears to the total acreage in the unit or in

any other manner agreed to by the owners and approved by the board.3446

Whether the interests or tracts are part of a drilling unit or pooling unit, all the operations,

including, but not limited to, the commencement, drilling, operation, or production of a well

upon any portion of a pooled unit or drilling unit will be deemed for all purposes the

commencement, drilling, operation, or production of a well upon each separately owned tract or

upon each separately owned interest in the unit by the several owners. That portion of the

3442 Id. § 525(a). 3443 Id. § 503(26). 3444 Id. § 525(a). 3445 Id. § 523(a). 3446 Id. § 523(d).

667

production allocated to a separately owned tract or separately owned interest included in a unit

are to be deemed to have been produced from such tract or interest. 3447 Operations conducted

pursuant to an order of the Board providing for unit operations shall constitute fulfillment of all

the express or implied obligations of each lease or contract covering lands in the unit area to the

extent that compliance with those obligations cannot be had because of the order of the

Board.3448

[b] Request for a Hearing.

An agreement for the unit or cooperative development or operation of a field, reservoir,

or part thereof, may be submitted to the Board for approval as being in the public interest or

reasonably necessary to prevent waste or to protect correlative rights. Approval by the Board

will constitute a complete defense to any suit charging violation of any statute of the state

relating to trust and monopolies on account of the agreement or on account of operations

conducted pursuant to such agreement. The failure to submit such an agreement to the Board for

approval will not imply or constitute evidence that the agreement or operations conducted are in

violation of laws relating to trusts and monopolies. 3449

Additionally, an interested person may request the Board to rehear a matter.

3450

[c] Hearings.

The Act

does not specify the procedure an interested person should use to request a rehearing.

Hearings may be held either by the Board or by one or more examiners, who are

appointed by the Board. The examiners may conduct hearings with respect to any matter

3447 Id. § 203(b). 3448 Id. § 525(h). 3449 Id. 3450 Id. § 511(b).

668

properly coming before the Board and may make reports and recommendations to the Board.3451

To enable this, the Board needs to, but has yet to, adopt rules with regard to hearings to be

conducted before examiners. After the examiner hears an issue, the Board may enter orders

based upon the reports and recommendations it receives from its examiners.3452

Although the Board has not done so, it also needs to promulgate rules to provide

procedures for rehearing before the Board and times within which requests for a rehearing must

be made. Upon request of an interested party, the Board will hold a rehearing.

3453 At any

rehearing, the parties shall have the right to present additional testimony and documentary

evidence. 3454

The Board has the ultimate authority to hear any matter or proceeding if the following

occurs:

(1) it desires to hear the matter; (2) the matter is initiated on the motion of the Board and is for the purpose of enforcing, amending, establishing, or revoking a statewide rule, regulation, or order; or (3) any person who may be affected by the matter or proceeding files with the board, more than ten days prior to the date set for the hearing, a written objection to the hearing before an examiner.3455

In any matter properly before it, the Board may compel the attendance of witnesses and

the production of documentary evidence. A party shall be entitled to the issuance of subpoenas

by making a written request. In all other respects, the Vermont Rules of Civil Procedure are to

apply to the proceedings before the Board.3456

3451 Id. § 511(a).

3452 Id. § 511(c). 3453 Id. § 511(b). 3454 Id. § 512(b). 3455 Id. § 512(a). 3456 Id. § 513(a).

669

An appeal from a decision of the Board will be to the Vermont Supreme Court. The

provisions of the Administrative Procedure Act shall apply to the extent they are not inconsistent

with the provisions of this chapter.3457

[d] Orders and Order Content.

Orders may be issued either the by an examiner, after a hearing, or by the Board. An

order granted by an examiner at the request of an applicant, if no objection has been made or

filed before or during the hearing, will become effective immediately. If an order denies the

request of the applicant, in whole or in part, or if a timely protest to the granting of an application

is made or filed, the order will not become effective until such time as all interested parties have

waived their right to rehearing or the time to request a rehearing has expired.3458

After an order based on a hearing before an examiner has become effective, it shall have

the same force and effect as if the hearing had been conducted before the Board. If a timely

request for rehearing is made, the Board may deny rehearing or affirm, revoke, or modify the

order.

3459

The Board will enter an order establishing drilling units whenever necessary to prevent

waste and to protect correlative rights. To this end, the Board may issue orders for exploratory

drilling units, development drilling units, and field-wide drilling units. A field-wide drilling unit

order maybe issued only after a hearing.

3460

The Board will enter an order for unit development or operation of a reservoir or part of a

reservoir if it finds that (1) such operation will increase the ultimate recovery of oil or gas; (2)

the value of the estimated additional recovery of oil and gas exceeds the estimated additional

3457 Id. § 514. 3458 Id. § 511(c). 3459 Id. § 511(d). 3460 Id. § 522(a).

670

cost incident to conducting such operations; and (3) the development or operation is reasonably

necessary to prevent waste.3461

The order will be upon terms and conditions that are just and reasonable and shall include

a prescribed plan for unit operation, which must contain the following information:

(1) a description of the reservoir, reservoirs, or parts thereof to be operated as a unit, termed the unitized area; (2) a statement of the nature of the operations contemplated; (3) an allocation of production and costs to the separately owned tracts in the unitized area. The allocation will be in accord with the agreement, if any, of the interested parties. If there is no such agreement, production shall be allocated in a manner calculated to ensure that each owner within the unitized area receives his or her just and equitable share of production. Costs shall be allocated on a just and reasonable basis; (4) a provision, if necessary, permitting any owner who has involuntarily unitized to pay his or her share of costs out of his or her share of production, plus a supervision, risk, and interest assessment not to exceed 300 percent of that owner's share of the costs; (5) a provision for the supervision and conduct of the unit operations, in respect to which each owner will have a vote with a value corresponding to the percentage of the costs of unit operations chargeable against its interest; (6) the time when the unit operations will commence and the manner in which, and the circumstances under which, the unit operations will terminate; and (7) such additional provisions as are found to be appropriate for carrying out the unit operations.3462

An order of the Board providing for unit operations will not become effective until the

plan for unit operations has been approved by the appropriate persons, and the Board has made a

finding, either in the order providing for unit operations or in a supplemental order, that the plan

for unit operations has been approved.

3463

If the plan for unit operations has not been approved at the time the order providing for

unit operations is made, the Board, upon application and notice, will hold supplemental hearings

to determine if and when the plan for unit operations has been approved. If the required persons

3461 Id. § 525(b). 3462 Id. § 525(c). 3463 Id. § 525(d).

671

do not approve the plan for unit operations within a period of six months from the date on which

the order providing for unit operations is made, or within such additional period or periods of

time as the Board prescribes, the order will be unenforceable and will be withdrawn by the

Board. 3464

An order providing for unit operations may be amended by Board order. The amended

order will be made in the same manner and subject to the same conditions as an original order

providing for unit operations as long as the approval is granted by the appropriate persons.

3465

The Board can order the unit operation of a reservoir or parts thereof that include a

unitized area established by a previous order of the Board. In providing for the allocation of unit

production, the order will first treat the unitized area previously established as a single tract. The

portion of the new unit production will then be allocated among the separately owned tracts

included in such previously established unit area in the same proportions as those specified in the

previous order.

3466 The portion of the unit production allocated to any tract and the proceeds

from its sale will be the property and income of the several persons to whom, or to whose credit,

they are allocated or payable under the order providing for unit operations.3467

No division order or other contract relating to the sale or purchase of production from a

separately owned tract shall be terminated by the order providing for unit operations, but will

remain in force and apply to oil and gas allocated to that tract until terminated in accordance with

the provisions of the order.

3468

Except to the extent that the parties affected so agree, no order providing for unit

operations will be construed to result in a transfer of all or any part of the title of any person to

3464 Id. § 525(e). 3465 Id. § 525(f). 3466 Id. § 525(g). 3467 Id. § 525(i). 3468 Id. § 525(j).

672

the oil and gas rights in any tract in the unit area. All property, whether real or personal, that

may be acquired in the conduct of unit operations will be acquired for the account of the owners

within the unit area and will be the property of those owners in the proportion that the expenses

of unit operations are charged.3469

For a pooling order, the Board needs to specify which owner will drill, complete and

operate a well on the pooled unit. All owners shall share in the reasonable costs of drilling,

completing, and operating the well. Any owner whose tract or interest has been involuntarily

pooled is permitted, at his or her option, to pay his or her share of costs out of production, plus a

supervision, risk, and interest assessment not to exceed 300 percent of that owner's share of the

costs.

3470

[e] Royalty Interest.

Neither the Act nor any other promulgated rules discuss the royalty interest rate.

§ 46.02 Types of Vermont Pooling Statutes.

[1] – Mineral Distinctions.

“Gas” means all natural gas, whether hydrocarbon or nonhydrocarbon, including

hydrogen sulfide, helium, carbon dioxide, nitrogen, hydrogen, casinghead gas, and all other fluid

hydrocarbons not defined as oil. “Oil” means crude petroleum, oil, and all hydrocarbons,

regardless of specific gravity, that are in the liquid phase in the reservoir and are produced at the

wellhead in liquid form. “Oil and gas” means both oil and gas, or either oil or gas, as the context

may require. “Field” means the general area underlain by one or more reservoirs. “Reservoir”

means an underground accumulation of oil or gas which is a common source of supply or several

such accumulations which by rule or order of the Board are allowed to be produced on a

3469 Id. § 525(k). 3470 Id. § 523(c).

673

commingled basis and are treated by the Board as a common source of supply.3471

[2] – Split by Depth.

The Act does

not specify the meaning of coalbed methane.

The Act does not differentiate between depths.

[3] – Spacing Rules.

Wells, except those drilled or being drilled at the time a notice of hearing was issued, will

be located on a development drilling unit in accordance with a reasonably uniform field-wide

spacing pattern, if consistent with available geological and engineering information. If the Board

finds that a well drilled in a uniform spacing pattern would not be likely to produce in economic

quantities, or that surface conditions would substantially add to the burden or hazard of drilling

the well, or for other good cause, the well may be drilled at another location.3472

[4] – Size.

There are no

further spacing requirements in the Act.

An exploratory drilling unit shall be based upon the available geological and engineering

information and shall be no smaller than the area expected to be drained by the exploratory well

and no larger than the expected total area of the reservoir. However, if there is insufficient

information available, the Board may establish a temporary unit to ensure orderly development

of the reservoir pending the availability of additional information.3473

The Board may establish the size and shape of development drilling units in known

reservoirs based upon available geological and engineering data. The size of a development

drilling unit shall be the area that can be efficiently and economically drained by one well. If

insufficient information is available to permit such a determination to be made, the board may

3471 Id. § 503. 3472 Id. § 522(c). 3473 Id. § 522(b).

674

establish a temporary development unit pending the availability of the necessary information. In

order that all owners are accorded substantially equal treatment, development units shall be of

approximately uniform size if consistent with available geological and engineering

information.3474

[5] – Minimum Operator Control.

The Act does not provide any additional information on size.

If an order of the Board that provides for unit operations is to become effective, then the

unit operation plan needs to have been approved in writing by the owners who, under the Board's

order, will be required to pay at least 60 percent of the costs of the unit operation, and also by

those persons who own at least 60 percent of the royalties.3475

(1) if the amendment affects only the rights and interests of the owners, the approval of the amendment by the owners of interests free of cost will not be required; (2) the order of amendment will not change the percentage established in the original order for the allocation of oil and gas as established for any separately owned tract, except with the consent of all persons owning oil and gas rights in the tract; and (3) the order of amendment will not change the percentage established in the original order for the allocation of cost as established for any separately owned tract, except with the consent of all owners in the tract.

Additionally, an amended order

that provides for unit operations, under particular circumstances, needs to be approved by the

required persons. These circumstances and persons are as follows:

3476

3474 Id. § 522(c). 3475 Id. § 525(d). 3476 Id. § 525(f).

675

§ 47.01 Analysis of Virginia Regulatory Framework.

[1] – Name of Governing Body.

The Virginia Gas and Oil Act (the “Act”) was enacted by the 1990 Session of the General

Assembly. The 1990 Act regulates the exploration for and development, production, utilization

and conservation of the Commonwealth’s gas and oil resources. 3477 The 1990 Act and the

regulations promulgated thereunder significantly revised the predecessor Oil and Gas Act

adopted in 1982 and consolidated the Virginia Well Review Board and the Virginia Oil and Gas

Conservation Board into the Virginia Gas and Oil Board (the “Board”).3478

The Board was established with statewide jurisdiction as the governing body within the

Department of Mines, Minerals and Energy, Division of Gas and Oil (the “Division”) for the

purpose of administering and interpreting the statutory provisions of the Act directed toward

regulating the Commonwealth’s gas and oil resources.

3479

[2] – Membership of the Governing Body.

As such, the Board is an

administrative agency of the Commonwealth.

The Board is composed of seven members, the Chairman and six additional members

appointed by the Governor and confirmed by the General Assembly as follows: (1) two

members for an initial term of two years; (2) two for an initial term of four years; and (3) three

for initial terms of six years.3480 At all times, the Board shall consist of the following qualified

members: (1) the Director3481

3477 Va. Code Ann. § 45.1-361.3 (2010).

or his designee; (2) one but not more than one individual who is a

representative of the gas and oil industry; (3) one but not more than one individual who is a

3478 See Va. Att’y Gen. Op. No. 09-023 (June 10, 2009). 3479 Va. Code Ann. § 45.1-361.13(A) (2010) (establishing Virginia Gas and Oil Board). 3480 Id. § 45.1-361.13(B). 3481 4 Va. Admin. Code § 25-160-10 (2010). (defining “Director” as the Director of the Department of Mines, Minerals, and Energy or his authorized agent).

676

representative of the coal industry; and (4) four other individuals who are not representatives of

the gas, oil, or coal industry. 3482 In the event of a vacancy, the Governor, subject to the

confirmation of the General Assembly, must fill the seat for the unexpired term within 60 days of

the occurrence of said vacancy.3483 Further, as the member terms expire, the Governor must

appoint qualified persons whose terms are for six years from the day on which their immediate

predecessor expired.3484 The Governor must endeavor to appoint persons who reside in localities

with significant oil or gas production or storage.3485

[3] – Scope of Authority.

Pursuant to section 2.2-2813 of the Virginia

Code Ann., each Board member is entitled to receive compensation and expenses for their

services.

The 1990 Act delegated broad statutory authority to the Board. “The Board shall have

the power necessary to execute and carry out all of it duties specified in [Chapter 22.1—The

Act].”3486

B. Without limiting its general authority, the Board shall have the specific authority to issue rules, regulations or orders pursuant to the provisions of the Administrative Process Act (§ 2.2-4000 et seq.) in order to:

Furthermore, the Act provides that:

… 12. Take such actions as are reasonably necessary to carry out the provisions of [Chapter 22.1 – The Act].3487

In executing its broad authority, the Board has a duty to (1) foster, encourage and

promote the safe and efficient exploration for and development, production and conservation of

the gas and oil resources located in the Commonwealth; (2) administer a method of gas and oil

conservation for the purpose of maximizing exploration, development, production and utilization

3482 Va. Code Ann. § 45.1-361.13(B) (2010). 3483 Id. 3484 Id. 3485 Id. 3486 Id. 3487 Id. § 45.1-361.15(B)(12).

677

of gas and oil resources; (3) administer procedures for the recognition and protection of the

rights of gas or oil owners with interests in gas or oil resources contained within a pool; (4)

promote the maximum production and recovery of coal without substantially affecting the right

of a gas owner proposing a gas well to explore for and produce gas; and (5) hear and decide

appeals of Director’s decisions and orders issued under Article 3 of [Chapter 22.1—The Act].3488

In addition to its general discretionary powers, the Board is delegated the specific

authority to regulate the pooling of oil and gas interests. The Virginia Code Ann. defines a “gas

or oil owner” as any person who owns, leases, has an interest in, or who has the right to explore

for, drill or operate a gas or oil well as principal or lessee.

3489 The authority granted under the

Act allows the Board to issue rules, regulations, or orders in order to (1) prevent waste through

the design spacing, or unitization of wells, pools, or fields; (2) protect correlative rights; (3) enter

spacing and pooling orders; (4) establish drilling units; (5) establish maximum allowable

production rates for the prevention of waste and for the protection of correlative rights; (6)

provide maximum recovery of coal; (7) classify pools and wells as gas, oil, gas and oil, or

coalbed methane gas; (8) collect data, make investigations and inspections, examine property,

leases, papers, books, and records, and require or provide for the keeping of records and the

making of reports; (9) set application fees; (10) govern practices and procedures before the

Board; and (11) require additional data from parties to any hearing.3490

As an illustration of the expansive powers of the Board, in 2009, the Office of the

Attorney General of the Commonwealth of Virginia issued an advisory opinion in accordance

with section 2.2-505 of the Virginia Code Ann. regarding the authority of the Board to issue

3488 Id. § 45.1-361.15(A)(1)–(5). 3489 Id. § 45.1-361.1 (defining “gas or oil owners”). 3490 Id. § 45.1-361.15(B)(1)–(11).

678

compulsory pooling3491 orders pursuant to the Act.3492 The issue presented a situation in which a

gas owner failed to make an election under a compulsory pooling order of the Board. 3493

Pursuant to § 45.1-361.21(E) of the Act, “[a]ny person who does not make an election under the

pooling order shall be deemed to have leased his gas or interest to the gas or oil well operator as

the pooling order may provide.” Furthermore, section 45.1-361.22(6) provides that “[a]ny

person who does not make an election under the pooling order shall be deemed to have leased his

gas or interest to the coalbed methane gas well operator as the pooling order may provide.” The

question presented whether the Board’s authority to deem that the gas owner has leased his

interest in the gas to the unit operator arises out of the Commonwealth’s police power and

whether the Board’s action is a valid exercise of such police power.3494

The advisory opinion recognizes that the “deemed lease” language recited in sections

45.1-361.21(E) and 45.1-361.22(6) is mandated by the General Assembly and is not within the

Board’s general discretionary authority to alter.

3495 Therefore, the Board must include such

language in its pooling orders. Reciting the extensive list of duties and responsibilities outlined

in section 45.1-361.15, the advisory opinion concluded that the “Board is authorized and, in fact,

is mandated to issue compulsory pooling orders to deem that unleased interests are leased when

gas owners fail to elect to participate in the operation of the well . . . and that such action by the

Board is a valid exercise of the Commonwealth’s police power.”3496

[4] – Administrative Process.

3491 4 Va. Admin. Code § 25-160-10 (2010) (defining “Pooling” as the combining of all interests or estates in gas, oil, or coalbed methane drilling unit for the development and operations thereof. Pooling may be accomplished either through voluntary agreement or through a compulsory order of the Board). 3492 See Va. Att’y. Gen. Op. No. 09-018 (2009) (noting that the term “compulsory pooling” is not defined in the Code; however, the opinion defined the term as the pooling of interests within a drilling unit pursuant to § 45.1-361.21 or § 45.1-361.22). 3493 Id. at 2. 3494 Id. 3495 Id. at 3. 3496 Id. at 10.

679

The Board is scheduled to meet on the third Tuesday of the month at a time and place

designated by the Chairman. However, if no petition for action has been filed prior to the

scheduled meeting, the meeting may be cancelled by written notification by the Chairman at

least five days in advance.3497 In order to transact any business before the Board, a quorum must

be present. Four members constitute a quorum and all determinations of the Board are made by

a majority vote of the quorum present.3498

A. Any person who applies for a hearing in front of the Board pursuant to the provisions of § 45.1 – 361.20, § 45.1 – 361.21, or § 45.1 – 361.22, [discussed hereinbelow], shall simultaneously with the filing of such application, provide notice by certified mail, return receipt requested, to each gas or oil owner, coal owner, or mineral owner having an interest underlying the tract which is the subject of the hearing, and to the operator of any gas storage field certificated by the State Corporation Commission as a public utility facility whose certificated area includes the tract which is the subject of the hearing. Whenever a hearing applicant is unable to provide such written notice because the identity or location of a person to whom notice is required to be given is unknown, the hearing applicant shall promptly notify the Board of such inability.

All hearings scheduled before the Board are required

to comply with the notice provisions for publication pursuant to section 45.1 – 361.19 of the

Virginia Code Ann. which provides as follows:

B. At least 10 days prior to a hearing, the Board shall publish its agenda in newspapers of general circulation that are widely circulated in the localities where the lands that are subject of the hearing are located. The agenda shall include the name of each applicant, the localities where the lands that are the subject of the hearing are located, the purpose of the hearing, and the date, time and location thereof. C. The Board shall conduct all hearings on applications made to it pursuant to the formal litigated issues hearing provisions of the Administrative Process Act (§ 2.2-4000 et seq.). The applicant and any person to whom notice is required to be given pursuant to the provisions of subsection A of this section shall have standing to be heard at the hearing. The Board shall render its decision on such applications within thirty days of the hearing’s closing date and

3497 Va. Code Ann. § 45.1-361.14(A) (2010). 3498 Id.

680

shall provide notification of its decision to all parties to the hearing pursuant to the provisions of the Administrative Process Act.3499

The Board can establish deadlines for filing materials for meetings or hearings scheduled

on other than the third Tuesday of each month.

3500 All applications, petitions, appeals, or other

requests for Board action must be received by the Division at least 30 calendar days prior to the

regularly scheduled meeting of the Board.3501 If a completed application is not filed by the

aforementioned deadline, then it will be carried over to the next scheduled meeting of the Board.

Incomplete applications received by the Division will not be considered or scheduled until the

application is complete.3502 When required, two copies of (1) an affidavit demonstrating that due

diligence was used to locate and serve persons in accordance with section 45.1 – 361.19 of the

Virginia Code Ann. and section 25-160-40 of the Virginia Administrative Code and (2) proof of

notice by publication in accordance with section 25-160-40(D) of the Virginia Administrative

Code must be filed with the Division at least seven calendar days prior to the regularly scheduled

meeting with the Board for the application to be considered complete.3503 Once a completed

application is filed, the Division then assigns a docket number to the application and notifies the

applicant of the docket number. 3504

In addition to the above requirements, each application for a hearing before the Board

must contain the following caption headings: (1) “Before the Virginia Gas and Oil Board”; (2)

the name of the applicant; (3) the relief sought; and (4) the docket number assigned by the

Any materials submitted regarding the application or

petition shall reference the docket number.

3499 See generally 4 Va. Admin. Code § 25-160-40 (2010) (“Notice of Hearings”). 3500 Id. § 25-160-30. 3501 Id. § 25-160-30 (B)(1). 3502 Id. § 25-160-30 (C). 3503 Id. § 25-160-30 (B)(2). 3504 Id. § 25-160-30 (D).

681

Division. 3505 The application must be signed by the applicant, an authorized agent of the

applicant, or an attorney for the applicant, certifying that “[t]he foregoing application to the best

of my knowledge, information and belief is true and correct.”3506 Any Exhibits attached thereto

are identified by the docket number and an exhibit number.3507 Ten sets of each application and

exhibits submitted and each person offering exhibits into evidence must also have available a

sufficient number of exhibits for other persons who are subject to the provisions of sections 45.1

– 361.19 and 45.1 – 361.23 of the Virginia Code Ann. and are expected to be in attendance at

the hearing. 3508 A nonrefundable fee of $130, payable to the Treasurer of Virginia, must

accompany applications submitted for the establishment of units, spacing or pooling.3509

[5] – Applications for Field Rules.

In an effort to preserve the Commonwealth’s natural resources, Virginia has created field

rules and drilling units for wells. Field rules are rules established by order of the Board that

define a pool, drilling units, production allowable, or other requirements for gas or oil operations

within an identifiable area.3510 A drilling unit is defined as the acreage on which one gas or oil

well may be drilled.3511

(1) The name and address of the applicant and the applicant’s counsel, if any;

An application filed pursuant to section 45.1 – 361.20 of the Virginia

Code Ann. to establish or modify a field rule, a drilling unit, or drilling units requires the

following information:

(2) In the case of an application to vacate or amend an order, identification of the order to be vacated or amended; (3) A statement of the relief sought and the proposed provisions of the order or a proposed order;

3505 Id. § 25-160-30(E)(1). 3506 Id. § 25-160-30(E)(2). 3507 Id. § 25-160-30(E)(3). 3508 Id. § 25-160-30(E)(4). 3509 Id. § 25-160-30(F). 3510 Va. Code Ann. § 45.1-361.1 (2010). 3511 Id.

682

(4) Citations of statutes, rules, orders and decided cases supporting the relief sought; (5) In the case where a field rule is proposed to be established or modified:

(a) A statement of the type of field (gas, oil or coalbed methane gas); (b) A description of the proposed formation or formations subject to the petition; and (c) A description of the pool or pools included in the field, based on geological and technical data, including the boundaries of the pool or pools and field, shown in accordance with the Virginia Coordinate System of 1927, as defined in Chapter 17 (§ 55-287 et seq.) of Title 55 of the Code of Virginia, also known as the State Plane Coordinate System. The boundaries of the pool or pools and field shall also be located by taking the measured distance in feet from the unit to the nearest 2.5 minute longitude line to the east and the nearest 2.5 minute latitude line to the north on the 7.5 minute (1:24,000) topographic map, with a notation of the 7.5 minute topographic map name and series;

(6) In the case where a drilling unit or units are proposed to be established or modified:

(a) A statement of the acreage to be embraced within each drilling unit; (b) A description of the formation or formations to be produced by the well or wells in the unit or units; and (c) The boundaries of the drilling unit or units shown in accordance with subdivision (5)(c) of this section;

(7) A statement of the amount of acreage to be included in the order; (8) A statement of the proposed allowable production rate or rates and supporting documentation, if applicable; (9) Evidence that any proposal to establish or modify a unit or units for coalbed methane gas will meet the requirements of § 45.1-361.20(C) of the Code of Virginia; (10) An affidavit demonstrating that due diligence was used to locate and serve persons in accordance with § 45.1-361.19 of the Code of Virginia and § 25-160-40 of the Virginia Administrative Code; and (11) When required, proof of notice by publication in accordance with § 25-160-40(D) of the Virginia Administrative Code.3512

[6] – Applications for Exceptions to Minimum Well Spacing Requirements.

3512 4 Va. Admin. Code § 25-160-50 (2010).

683

Virginia requires certain statewide spacing of wells depending on the type of well (i.e.,

oil, gas, or coalbed methane) drilled. The details regarding the spacing requirements are

discussed hereinbelow. However, in order to file an application for an exception to the statewide

spacing requirements the following information must be provided:

(1) The name and address of the applicant and the applicant’s counsel, if any; (2) In the case of an application for an exception to spacing established in a field rule, identification of the order governing spacing in the field; (3) A statement of the proposed location of the well in relation to wells permitted or for which a permit application is pending before the Division at the time of filing within the distances prescribed in § 45.1-361.17 of the Code of Virginia; (4) A description of the formation or formations to be produced by the well proposed for alternative spacing and the wells identified in subdivision 3 of this section; (5) A description of the conditions justifying the alternative spacing; (6) An affidavit demonstrating that due diligence was used to locate and serve persons in accordance with § 25-160-40 of the Virginia Administrative Code; and (7) When required, proof of notice by publication in accordance with § 25-160-40(D) of the Virginia Administrative Code.3513

[7] – Applications to Pool Interests in a Drilling Unit: Conventional Gas or Oil or

No Conflicting Claims to Coalbed Methane Gas Ownership.

An application filed pursuant to section 45.1 – 361.21 of the Virginia Code Ann. to pool

interests in a drilling unit for conventional gas or oil or for coalbed methane gas where there are

no conflicting claims to ownership of the coalbed methane gas requires the following

information:

(1) The name and address of the applicant and the applicant’s counsel, if any; (2) In the case of an application to vacate or amend an order, identification of the order to be vacated or amended;

3513 Id. § 25-160-60.

684

(3) A statement of the relief sought and the proposed provisions of the order or a proposed order; (4) Citations of statutes, rules, orders and decided cases supporting the relief sought; (5) A statement of the type of well or wells (gas, oil or coalbed methane gas); (6) The permit number or numbers, if any have been issued; (7) A plat showing the size and shape of the proposed unit and boundaries of tracts within the unit, shown in accordance with the Virginia Coordinate System of 1927, as defined in Chapter 17 (§ 55-287 et seq.) of Title 55 of the Code of Virginia, also known as the State Plane Coordinate System. The proposed unit shall also be located by taking the measured distance in feet from the unit to the nearest 2.5 minute longitude line to the east and the nearest 2.5 minute latitude line to the north on the 7.5 minute (1:24,000) topographic map, with a notation of the 7.5 minute topographic map name and series. Also included shall be the names of owners of record of the tracts, and the percentage of acreage in each tract, certified by a licensed land surveyor or a licensed professional engineer and attested by the applicant as to its conformity to existing orders issued by the Board; (8) A description of the status of interests to be pooled in the unit at the time the application is filed; (9) For an application to pool a coalbed methane gas unit, a statement of the percentage of the total interest held by the applicant in the proposed unit at the time the application for the hearing is filed; (10) A statement of the names of owners and the percentage of interests to be escrowed under § 45.1-361.21(D) of the Code of Virginia for each owner whose location is unknown at the time the application for the hearing is filed; (11) A description of the formation or formations to be produced; (12) An estimate of production over the life of the well or wells, and, if different, an estimate of the recoverable reserves of the unit; (13) An estimate of the allowable costs in accordance with § 25-160-100 of the Virginia Administrative Code. (14) An affidavit demonstrating that due diligence was used to locate and serve persons in accordance with § 45.1-361.19 of the Code of Virginia and § 25-160-40 of the Virginia Administrative Code; and (15) When required, proof of notice by publication in accordance with § 25-160-40(D) of the Virginia Administrative Code.3514

3514 Id. § 25-160-70(A).

685

Amendments may be filed after the order pooling interests in a drilling unit by written

stipulation of the affected persons. In such case, the application is not required to contain the

above specified information, but must contain the proposed amendment.3515 The unit operator is

required to file an affidavit with the Board after the time for election provided in any pooling

order has expired stating whether any elections were made. If any elections were made, the

affidavit must name each respondent making an election and describe such election. If no

election was made or if any response was untimely, the affidavit shall state this information.3516

[8] – Applications to Pool Interests in a Drilling Unit: Conflicting Claims to

Coalbed Methane Gas Ownership.

In addition to the information required for applications for pooling interests when there

are no conflicting claims of ownership to the coalbed methane gas, applications filed pursuant to

section 45.1-361.22 of the Virginia Code Ann. to pool interests in a drilling unit for coalbed

methane gas where there are conflicting claims to ownership require a description of the

conflicting ownership claims and the percentage of interests to be escrowed for the conflicting

claims of ownership.3517 Also, a plan for escrowing the costs of drilling and operating the well

or wells and the proceeds from the well or wells attributable to the conflicting interests must be

contained within the application.3518

§ 47.02 Types of Virginia Pooling Statutes.

[1] – Mineral Distinctions.

The Va. Code Ann. defines “oil” as natural crude oil or petroleum and other

hydrocarbons, regardless of gravity which are produced at the well in liquid form by ordinary

3515 Id. § 25-160-70(B). 3516 Id. § 25-160-70(C). 3517 Id. § 25-160-80. 3518 Id.

686

production methods and which are not the result of condensation of gas after it leaves the

underground reservoir.3519 “Gas” or “natural gas” is defined as gas, whether hydrocarbon or

nonhydrocarbon or any combination or mixture thereof, including hydrocarbons, hydrogen

sulfide, helium, carbon dioxide, nitrogen, hydrogen, casinghead gas, and all other fluids not

defined as oil.3520 “Coalbed methane gas” is defined as occluded natural gas produced from

coalbeds and rock strata associated therewith.3521 A “pool” is an underground accumulation of

gas or oil in a single and separate natural reservoir and is characterized by a single natural

pressure system so that production of gas or oil from one part of the pool tends to or does affect

the reservoir pressure throughout its extent. A “coalbed methane pool” is an area which is

underlain or appears to be underlain by at least one coalbed capable of producing coalbed

methane gas.3522

[2] – Voluntary Pooling of Interests.

Virginia acknowledges the validity of voluntary pooling agreements. The Virginia

statute speaks generally to the agreements between gas and oil owners, as opposed to coalbed

methane operators. When two or more separately owned tracts are embraced within a drilling

unit, or when there are separately owned interests in all or a part of such drilling unit, the gas or

oil owners owning such interests may pool their interests together for the development and

operation of the drilling unit by voluntary agreement.3523 The agreements may be based on the

exercise of pooling rights or rights to establish drilling units which are granted in any gas or oil

lease.3524

3519 Va. Code Ann. § 45.1-361.1(2010) (defining “oil”).

3520 Id. (defining “gas” or “natural gas”). 3521 Id. (defining “coalbed methane gas”). 3522 Id. (defining “pool”). 3523 Id. § 45.1-361.18(A). 3524 Id.

687

[3] – Field Rules and Drilling Units for Wells.

Unlike most states, Virginia does not have unitization by legislation. The legislature has

not dictated unit sizes and locations. Instead, field rules and drilling units, along with orders for

the pooling of interests in drilling units, are created upon application as the development occurs.

In order to prevent the waste of gas and oil resources, the Board has the authority, on its own

motion or upon application of the gas or oil owner, to establish or modify drilling units.3525 To

the extent possible, drilling units shall be uniform in shape and size for an entire pool.3526 Gas,

oil, or royalty owners may also apply to the Board for the establishment of field rules and the

creation of drilling units for the field. 3527 At the hearing of the Board regarding the

establishment or modification of drilling units, the Board shall determine (1) whether the

proposed drilling unit is an unreasonable or arbitrary exercise of a gas or oil owner’s right to

explore for or produce gas or oil; (2) whether the proposal would unreasonably interfere with the

present or future mining of coal or other minerals; (3) the acreage to be included in the order; (4)

the acreage to be embraced within each drilling unit and the shape thereof; (5) the area within

which wells may be drilled on each unit; and (6) the allowable production of each well.3528

In establishing or modifying a drilling unit for coalbed methane gas wells, the Board

requires that the drilling units conform to the mine development plan, if any, and if requested by

the coal operator, well spacing shall correspond with mine operations, including the drilling of

multiple coalbed methane gas wells.

3529

3525 Id. § 45.1-361.20(A).

If an order to establish or modify a drilling unit will

allow a well to be drilled into or through a coal seam, the coal owner within the area to be

covered by the drilling unit may object, and the Board must make its determination in

3526 Id. 3527 Id. 3528 Id. § 45.1-361.20(B). 3529 Id. § 45.1-361.20(C).

688

accordance with the provisions of section 45.-361.11 and 45.-361.12 of the Virginia Code

Ann.3530

Temporary orders establishing provisional drilling units and field boundaries may be

entered by the Board subject to further investigation and the gathering and taking of additional

data and evidence.

3531 Once the application for a hearing to establish or modify drilling units or

pool boundaries has been filed, no additional wells are permitted in the pool until the Board’s

order establishing or modifying the pool or units has been entered.3532 After the field or pool

spacing order has been entered by the Board, should a gas or oil owner apply for a permit or

indicate his/her desire to drill a well outside of such drilling units or pattern of drilling units, the

Board may, on its own motion or the motion of any interested person, require that the well be

located and drilled pursuant to the provisions of the order affecting the pool.3533

[4] – Pooling of Interests in Drilling Units.

Prior to 1990, the Oil and Gas Act did not define coalbed methane or include provisions

regarding coalbed methane in the drilling unit or compulsory pooling statutes. The current Act

significantly revised the 1982 Oil and Gas Act to encourage the production of coalbed methane

gas.

Upon application from any gas or oil owner, the Board shall enter an order pooling all

interests in the drilling unit for the development and operation thereof when (1) two or more

separately owned tracts are embraced in a drilling unit; (2) there are separately owned interests in

all or part of such drilling unit and those having interests have not agreed to pool their interests;

3530 See generally id. § 45.1-361.11 (“Objections by Coal Owner’). 3531 Id. § 45.1-361.20(E). 3532 Id. § 45.1-361.20(F). 3533 Id. § 45.1-361.20(G).

689

or (3) there are separately owned tracts embraced within the minimum statewide spacing

requirements.

All pooling orders entered by the Board pursuant to section 45.-361.21 shall do the

following:

(1) Authorize the drilling and operation of a well, including the stimulation of all coal seams in the case of a coalbed methane well when authorized; (2) Include the time and date when such order expires; (3) Designate the gas or oil owner who is authorized to drill and operate the well; provided, however, that except in the case of coalbed methane gas wells, the designated operator must have the right to conduct operations or have the written consent of owners with the right to conduct operations on at least 25% of the acreage included in the unit; (4) Prescribe the conditions under which gas or oil owners may become participating operators or exercise their rights of election under subdivision 7 hereinbelow; (5) Establish the sharing of all reasonable costs, including a reasonable supervision fee, between participating operators so that each participating operator pays the same percentage of such costs as his acreage bears to the total unit acreage; (6) Require that nonleasing gas or oil owners be provided with reasonable access to unit records submitted to the Director or Inspector; (7) Establish a procedure for a gas or oil owner who received notice of the hearing and who does not decide to become a participating operator may elect either to (i) sell or lease his gas or oil ownership to a participating operator, (ii) enter into a voluntary agreement to share in the operation of the well at a rate of payment mutually agreed to by the gas or oil owner and the gas or oil operator authorized to drill the well, or (iii) share in the operation of the well as a nonparticipating operator on a carried basis after the proceeds allocable to his share equal the following:

(a) in the case of a leased tract, 300% of the share of such costs allocable to his interest; or (b) in the case of an unleased tract, 200% of the share of such costs allocable to his interest.3534

A gas and oil owner is deemed to have elected to lease his/her interest to the gas or oil

operator at a rate to be established by the Board if he/she remains unknown or unidentified after

3534 Id. § 45.1-361.21(C).

690

the establishment of the pooling order.3535 An escrow account will be established by the Board

and the unknown lessor’s share of the proceeds shall be paid to the account and held for his/her

benefit. If the identity and location of any unknown owner subject to escrow is determined, the

designated operator shall, within 30 days, file with the Board a petition for disbursement of funds

to be considered at the next available hearing.3536 Otherwise, the unclaimed escrow proceeds

shall be disposed of under the Uniform Disposition of Unclaimed Property Act.3537

Any person who does not make an election under the pooling order shall be deemed to

have leased his gas or oil interest to the gas or oil well operator as the pooling order may

provide.

3538

Any royalty or overriding royalty reserved in any lease which is deducted from a

nonparticipating operator’s share of production shall not be subject to charges for operating costs

but shall be separately calculated and paid to the royalty owner.

3539

[5] – Pooling of Interests for Coalbed Methane Gas Wells: Conflicting Claims to

Ownership.

The 1990 revisions added specific provisions to the compulsory pooling statute dealing

with problems concerning coalbed methane gas wells.3540

3535 Id. § 45.1-361.21(D).

When there are conflicting claims to

the coalbed methane gas ownership, the Board, upon application from any claimant, must enter

an order pooling all interests or estates in the unit for the development and operation thereof. In

addition to the provisions of section 45.1 – 361.21, hereinabove, the following provisions are

required:

3536 Id. 3537 Id. 3538 Id. § 45.1-361.21(E). 3539 Id. § 45.1-361.21(G). 3540 27 Energy & Min. L. Inst. ch. 7 (2007).

691

(1) Simultaneously with the filing of such application, the gas or oil owner applying for the order shall provide notice pursuant to the provisions of § 45.1 – 361.19 to each person identified by the applicant as a potential owner of an interest in the coalbed methane gas underlying the tract which is subject of the hearing. (2) The Board shall cause to be established an escrow account into which the payment for costs or proceeds attributable to the conflicting interests shall be deposited and held for the interest of the claimants. (3) The coalbed methane gas well operator shall deposit into the escrow account any money paid by a person claiming a contested ownership interest as a participating operator’s share of costs pursuant to the provisions of § 45.1-361.21 and the order of the Board. (4) The coalbed methane gas well operator shall deposit into the escrow account one-eighth of all proceeds attributable to the conflicting interests plus all proceeds in excess of ongoing operational expenses as provided for under § 45.1-361.21 and the order of the Board. (5) The Board shall order payment of principal and accrued interest, less escrow account fees, from the escrow account to conflicting claimants only after (i) a final decision of a court of competent jurisdiction adjudicating the ownership of coalbed methane gas as between them; (ii) a determination reached by an arbitrator pursuant to § 45.1-361.22:1; or (iii) an agreement among all claimants owning conflicting estates in the tract in question or any undivided interest therein. Upon receipt of an affidavit from conflicting claimants affirming such decision, determination, or agreement, the designated operator shall, within 30 days, file with the Board a petition for disbursement of funds on behalf of the conflicting claimants. The petition shall include a detailed accounting of all funds deposited in escrow that are subject to the proposed disbursement. The amount to be paid to the conflicting claimants shall be determined based on the percentage of ownership interest of the conflicting claimants as shown in the operator’s supplemental filing made part of the pooling order that established the escrow account, the operator’s records of deposits attributable to those tracts for which funds are being requested, and the records of the escrow account for the coalbed methane gas drilling unit. The petition for disbursement shall be placed on the first available Board docket. Funds shall be disbursed within 30 days after the Board decision and receipt by the Department of all documentation required by the Board. The interests of any cotenants that have not been resolved by the agreement or by judicial decision shall remain in the escrow account.

692

(6) Any person who does not make an election under the pooling order shall be deemed, subject to a final legal determination of ownership, to have leased his gas or oil interest to the coalbed methane gas well operator as the pooling order may provide.3541

An additional provision added to the 1990 Act allows claimants to arbitrate conflicting

claims of ownership if certain statutory requirements are met.

3542

[6] – Statewide Spacing of Wells.

With respect to well spacing, the Act differentiates between the type of well being drilled

(i.e., gas, oil, or coalbed methane gas). Unless prior approval has been received from the Board

or a provision of the field or pool rules so allows, the oil and gas well spacing requirements are

as follows: (1) wells drilled in search of oil shall not be located closer than 1,250 feet to any well

completed in the same pool; (2) wells drilled in search of gas shall not be located closer than

2,500 feet to any other well completed in the same pool, or closer than 2,500 feet to any storage

well within the boundary of a gas storage field certificated by the State Corporation Commission

prior to January 1, 1997, if the well to be drilled is to be completed within the same horizon as

the certificated gas storage field; (3) a well shall not be drilled closer to the boundary of the

acreage supporting the well, whether such acreage is a single leasehold or other tract or a

contractual or statutory drilling unit, than one-half of the minimum well spacing distances.3543

Coalbed methane gas wells shall not be located closer than 1,000 feet to any other

coalbed methane gas well, or in the case of coalbed methane gas wells located in the gob, such

wells shall not be located closer than 500 feet to any other coalbed methane gas wells located in

the gob.

3544

3541 Va. Code Ann. § 45.1-361.22 (2010).

A well shall not be drilled closer than 500 feet, or in the case of such well located in

3542 See generally id. § 45.1-361.22:1. 3543 Id. § 45.1-361.17(A). 3544 Id. § 45.1-361.17(B)(1).

693

the gob, not closer than 250 feet, from the boundary of the acreage supporting the well, whether

such acreage is a single leasehold or other tract or a contractual or statutory drilling unit.3545

Wells drilled in search of oil and coalbed methane gas are subject to the provisions of

section 45.1-361.12 of the Virginia Code Ann., which provides as follows:

A. If the well operator and the objecting coal owners present or represented at the hearing to consider objections to the proposed drilling unit or location are unable to agree upon a drilling unit or location for a new well within 2,500 linear feet of the location of an existing well or a well for which a permit application is on file, then the permit or drilling unit shall be refused. B. The minimum distance limitations established by this section shall not apply if the proposed well will be drilled through an existing or planned pillar of coal required for protection of a preexisting well drilled to any depth, and the proposed well will neither require enlargement of the pillar nor otherwise have an adverse effect on existing or planned coal mining operations.

3545 Id. § 45.1-361.17(B)(2).

694

§ 48.01 Analysis of Washington Regulatory Framework.

[1] – Name of Governing Body.

The Department of Natural Resources (“Department”), through the Division of Geology

and Earth Resources (“Division”), regulates drilling and related activities under the Oil and Gas

Conservation Act (“the Act”) and the rules of the Department of Natural Resources. The

Department designates a State Oil and Gas Supervisor (“Supervisor”). Previously, there had

been an Oil and Gas Conservation Committee (which is still referenced in the statutes); however,

it was dissolved by the legislature in 1994, and its regulatory responsibilities were assigned to the

Department.3546

[2] – Membership of the Governing Body.

The head of the Department is an elected official, referred to as the Commissioner of

Public Lands. Under the Act, the Department is given the authority to employ all personnel

necessary to carry out its provisions.3547

[3] – Scope of Authority.

However, further information on how the Department is

structured and the membership is not available.

The Department has authority to adopt rules and regulations and to issue orders, and has

jurisdiction, power, and authority over all persons and property, public and private, necessary to

enforce its duties under the Act.3548 The Department also issues drilling permits.3549

3546 Wash. Rev. Code Ann. § 78.52.030 (Lexis 2011); Wash. Admin. Code § 3440-12-035 (2011); see also Wash. State Dep’t of Natural Res., Oil & Gas Geothermal Regulation, http://www.dnr.wa.gov/BusinessPermits/Topics/MiningEnergyResourceRegulation/Pages/energy_regulation.aspx (last visited Jun. 22, 2011).

Any person

desiring or proposing to drill any well in search of oil or gas must first apply to the Department

upon such form as the Department may prescribe. The Department shall require sufficient

3547 Wash. State Dep’t of Natural Res., Peter Goldmark: Washington State Commissioner of Public Lands, http://www.dnr.wa.gov/AboutDNR/Pages/commissioner.aspx (last visited Jun. 3, 2011). 3548 Wash. Rev. Code Ann. § 78.52.040 (Lexis 2011). 3549 Id. § 78.52.120.

695

safeguards to minimize the hazards of pollution of all surface and ground waters of the state. If

safeguards acceptable to the Department cannot be provided, the drilling permit shall be

denied. 3550 The Department is also authorized to make such investigations as it may deem

proper to determine whether waste exists or is imminent or whether other facts exist which

justify action by the Department.3551

[4] – Process.

[a] Drilling Permit Applications.

A permit applicant must notify the surface landowner, the landowner's tenant, and other

surface users in the manner provided by regulations of the Department that a drilling permit has

been applied for by furnishing each such surface landowner, tenant, and other users with a copy

of the application concurrent with the filing of the application. Within 15 days of receipt of the

application, each surface landowner, the landowner's tenant, and other surface users have the

right to inform the Department of objections or comments as to the proposed use of the surface

by the applicant, and the Department shall consider the objections or comments.3552

The Department shall issue a permit if it finds that the proposed drilling will be consistent

with Washington’s oil and gas laws and is not detrimental to the public interest. The Department

shall impose conditions and restrictions as necessary to protect the public interest and to ensure

compliance with the law. A person shall not apply to drill a well in search of oil or gas unless

that person holds an ownership or contractual right to locate and operate the drilling operations

upon the proposed drilling site. A person shall not be issued a permit unless that person prima

3550 Id. 3551 Id. § 78.52.150. 3552 Id.

696

facie holds an ownership or contractual right to drill to the proposed depth, or proposed horizon.

Proof of prima facie ownership shall be presented to the Department.3553

If drilling will be conducted through or under any surface waters of the state, the

applicant shall prepare and submit an environmental impact statement upon such form as the

Department of Ecology (which oversees environmental matters) shall prescribe at least 120 days

prior to commencing drilling. Within 90 days after receipt of an environmental statement the

Department of Ecology shall prepare and submit to the Department of Natural Resources a report

examining the potential environmental impact of the proposed well and recommendations for

Department action thereon. If after consideration of the report the Department determines that

the proposed well is likely to have a substantial environmental impact the drilling permit for such

well may be denied.

3554

[b] Pooling of Interests.

When two or more separately owned tracts are embraced within a development unit, or

when there are separately owned interests in all or a part of the development unit, then the

owners and lessees thereof may pool their interests for the development and operation of the

development unit. In the absence of this voluntary pooling, the Department, upon the application

of any interested person, may enter an order pooling all interests, including royalty interests, in

the development unit for the development and operation thereof. Each such pooling order shall

be made after notice and hearing. The applicant or applicants shall have the burden of proving

that all reasonable efforts have been made to obtain the consent of, or to reach agreement with,

other owners.3555

[c] Allocation of Production.

3553 Id. 3554 Id. § 78.52.125. 3555 Id. § 78.52.240.

697

A pooling order shall be upon terms and conditions that are fair and reasonable and that

afford to each owner and royalty owner his or her fair and reasonable share of production.

Production shall be allocated as follows:

(1) For the purpose of determining the portions of production owned by the persons owning interests in the pooled unit, the production shall be allocated to the respective tracts within the unit in the proportion that the surface acres in each tract bear to the number of surface acres included in the entire unit. (2) Notwithstanding the above, if the Department finds that allocation on a surface acreage basis does not allocate to each tract its fair share, the Department shall allocate the production so that each tract will receive its fair share.

[d] Development Units Authorized for Known Pools.

When necessary to prevent waste, to avoid the drilling of unnecessary wells, or to protect

correlative rights including those of royalty owners, the Department, upon its own motion or

upon application of interested persons, shall establish development units covering any known

pool. Development units shall be of uniform size and shape for the entire pool unless the

Department finds that it must make an exception due to geologic, geographic, or other factors.

When necessary, the Department may divide any pool into zones and establish development

units for each zone, which units may differ in size and shape from those established in any other

zone.3556

[e] Development Units to be Prescribed for Pooling after Discovery—Temporary

Development Units.

A hearing shall be held within 60 days after the discovery of oil or gas in a pool not then

covered by an order of the Department, and the Department shall issue an order prescribing

development units for the pool. If sufficient geological or other scientific data from drilling

operations or other evidence is not available to determine the maximum area that can be 3556 Id. § 78.52.200.

698

efficiently and economically drained by one well, the Department may establish temporary

development units to ensure the orderly development of the pool pending availability of the

necessary data. A temporary order shall continue in force for a period of not more than 24

months at the expiration of which time, or upon the petition of an affected person, the

Department shall require the presentation of such geological, scientific, drilling, or other

evidence as will enable it to determine the proper development units in the pool. During the

interim period between the discovery and the issuance of the temporary order, permits shall not

be issued for the drilling of direct offsets to a discovery well.3557

[5] – Matters Covered.

[a] Limitation of Production to “Gas Allowable”—Proration.

Whenever the total amount of gas that all of the pools in the state can currently produce

in accordance with good operating practice exceeds the amount reasonably required to meet the

market demand, the Department shall limit the gas that may be produced to an amount,

designated as the “gas allowable,” which will not exceed the reasonable market demand for gas.

The Department shall then prorate the “gas allowable” among the pools on a reasonable basis,

avoiding undue discrimination among the pools, and so that waste will be prevented, giving due

consideration to location of pipe lines, cost of interconnecting such pipe lines, and other pertinent

factors. In determining the reasonable market demand for gas as between pools, the Department

must give due regard to the fact that gas produced from oil pools is to be regulated in a manner

that will protect the reasonable use of gas energy for oil production and promote the most or

maximum efficient recovery of oil from such pools.3558

[b] Limitation of Gas Production from One Pool.

3557 Id. § 78.52.205. 3558 Id. § 78.52.290.

699

Whenever the total amount of gas that may be produced from all of the pools in the state

has not been limited to “gas allowable,” and the available production from any one pool

containing gas only is in excess of the reasonable market demand or available transportation

facilities for gas from such pool, the Department shall limit the production of gas from that pool

to an amount that does not exceed the reasonable market demand or transportation facilities for

gas from that pool.3559 Whenever the Department limits the total amount of oil or gas that may

be produced from any pool to an amount less than that which the pool could produce if no

restrictions were imposed (whether incidental to, or without, a limitation of the total amount of

oil which may be produced in the state) the Department shall prorate the allowable production

for the pool among the producers in the pool on a reasonable basis, so that each producer will

have opportunity to produce or receive his or her just and equitable share, subject to the

reasonable necessities for the prevention of waste, giving, where reasonable under the

circumstances, to each pool with small wells of settled production allowable production which

prevents the premature abandonment of wells in the pool.3560

All orders establishing the “oil allowable” and “gas allowable” for the state, and all

orders prorating such allowables, and any changes thereof, for any month or period shall be

issued by the Department on or before the 15th day of the month preceding the month for which

such orders are to be effective, and such orders shall be immediately published in some

newspaper of general circulation printed in Olympia, Washington. No orders establishing such

allowables, or prorating such allowables, or any changes thereof, shall be issued without first

having a hearing, after notice. However, when in the judgment of the Department, an emergency

requiring immediate action is found to exist, the Department may issue an emergency order that

3559 Id. § 78.52.300. 3560 Id. § 78.52.310.

700

has the same effect and validity as if a hearing had been held after due notice. The emergency

order permitted by this section shall remain in force no longer than 30 days, and in any event it

shall expire when the order made after due notice and hearing with respect to the subject matter

of the emergency order becomes effective.3561

[c] Unit Operations of Separately Owned Tracts.

To assist in the development of oil and gas in Washington, persons owning interests in

separate tracts of land may validly agree to integrate their interests and manage, operate, and

develop their land as a unit, subject to the approval of the Department.3562

[d] Unit Operation of Pools.

The Department shall, upon the application of any interested person or upon its own

motion, hold a hearing to consider the need for the operation as a unit of one or more pools or

parts of them in a field. The Department may enter an order providing for the unit operations if

it makes the following findings:

(1) the unit operations are necessary for secondary recovery or enhanced recovery purposes, where enhanced recovery means that oil or gas or both are recovered by any method, artificial flowing or pumping, that may be employed to produce oil or gas, or both, through the joint use of two or more wells with an application of energy extrinsic to the pool or pools. This includes pressuring, cycling, pressure maintenance, or injections into the pool or pools of a substance or form of energy. This does not include the injection in a well of a substance or form of energy for the sole purpose of (i) aiding in the lifting of fluids in the well, or (ii) stimulation of the reservoir at or near the well by mechanical, chemical, thermal, or explosive means; (2) the unit operations will protect correlative rights; (3) the operations will increase the ultimate recovery of oil or gas, or will prevent waste, or will prevent the drilling of unnecessary wells; and (4) the value of the estimated additional recovery of oil and/or gas exceeds the estimated additional cost incident to conducting these operations.

3561 Id. 3562 Id. § 78.52.330.

701

The Department may also enter an order providing for unit operations, after notice and

hearing, only if the Department finds that there is clear and convincing evidence that all of the

following conditions are met:

(1) in the absence of unitization, the ultimate recovery of oil or gas, or both, will be substantially decreased because normal production techniques and methods are not feasible and will not result in the maximum efficient and economic recovery of oil or gas, or both; (2) the unit operations will protect correlative rights; (3) the unit operations will prevent waste, or will prevent the drilling of unnecessary wells; (4) there has been a discovery of a commercial oil or gas field; and (5) there has been sufficient exploration, drilling activity, and development to properly define the one or more pools or parts of them in a field proposed to be unitized.

Notwithstanding any of the above, nothing shall be construed to prevent the voluntary

agreement of all interested persons to any plan of unit operations. The Department shall approve

operations upon making a finding consistent with the statute. The order shall be upon terms and

conditions that are fair and reasonable and shall prescribe a plan for unit operations that includes

the following information:

(1) a description of the pool or pools or parts thereof to be so operated, termed the unitized area; (2) a statement of the nature of the operations contemplated; (3) an allocation of production and costs to the separately-owned tracts in the unitized area. The allocation shall be in accord with the agreement, if any, of the interested parties. If there is no agreement, production shall be allocated in a manner calculated to ensure that each owner's correlative rights are protected, and each separately-owned tract or combination of tracts receives its fair and reasonable share of production. Costs shall be allocated on a fair and reasonable basis; (4) a provision, if necessary, prescribing fair, reasonable, and equitable terms and conditions as to time and rate of interest for carrying or otherwise financing any person who is unable to promptly meet his or her financial obligations in connection with the unit, such carrying and interest charges to be paid as provided by the Department from the person's prorated share of production; (5) a provision for the supervision and conduct of the unit operations, in respect to which each owner shall have a vote with a value corresponding to the percentage of the costs of unit operations chargeable

702

against the owner's interest; (6) the time when the unit operations shall commence, the timetable for development, and the manner and circumstances under which the unit operations shall terminate; and (7) additional provisions which are found to be appropriate for carrying out the unit operations and for the protection of correlative rights.

No order of the Department providing for unit operations may become effective until the

plan for unit operations approved by the Department has been approved in writing by the

appropriate persons.

Finally, the Department must find either in the order providing for unit operations or in a

supplemental order that the plan for unit operations has been approved. If the plan for unit

operations has not been approved at the time the order providing for unit operations is made, the

Department shall, upon application and notice, hold supplemental hearings as may be required to

determine if and when the plan for unit operations has been so approved. If the persons owning

required percentages of interest in the unitized area do not approve the plan for unit operations

within a period of six months from the date on which the order providing for unit operations is

made, or within such additional period or periods of time as the Department prescribes, the order

will become unenforceable and shall be vacated by the Department.

An order providing for unit operations may be amended by an order made by the

Department in the same manner and subject to the same conditions as an original order.

However, if such an amendment affects only the rights and interests of the owners, the approval

of the amendment by those persons who own interests that are free of costs is not required. Also,

no such amending order may change the percentage for the allocation of oil and gas as

established for any separately-owned tract or combination of tracts by the original order, except

with the consent of all persons owning oil and gas rights in the tract, and no such order may

change the percentage for the allocation of cost as established for any separately-owned tract or

703

combination of tracts by the original order, except with the consent of all persons owning an

interest in the tract or combination of tracts. An amendment that provides for the expansion of

the unit area shall comply with the statute described below.

The Department, by order, may provide for the unit operation of a reservoir or reservoirs

or parts thereof that include a unitized area established by a previous order of the Department.

The order, in providing for the allocation of unit production, shall first treat the unitized area

previously established as a single tract and the portion of the new unit production allocated

thereto shall then be allocated among the separately owned tracts included in the previously-

established unit area in the same proportions as those specified in the previous order.3563

§ 48.02 Types of Washington Pooling Statutes.

[1] – Mineral Distinctions.

"Gas" means “all natural gas, all gaseous substances, and all other fluid or gaseous

hydrocarbons not defined as oil [by the Washington Revised Code], including but not limited to

wet gas, dry gas, residue gas, condensate, and distillate, as those terms are generally understood

in the petroleum industry.” 3564 "Oil" means “crude petroleum, oil, and all hydrocarbons,

regardless of gravity, that are in the liquid phase in the original reservoir conditions and are

produced and recovered at the wellhead in liquid form.”3565

[2] – Split by Depth.

The statutes do not provide any depth requirements.

[3] – Spacing Rules.

[a] Exploratory Well Locations.

3563 Id. § 78.52.330. 3564 Id. § 78.52.010. 3565 Id.

704

No exploratory well, or any part of the bore, casing, or drill site, shall be located closer

than 500 feet (152 meters) to the external boundary of those lands on which the operator and/or

their partners hold a contiguous mineral interest. Upon written request to the Supervisor, the

Department may grant exceptions to the exploratory well setback requirements for good cause

shown, provided that all owners of oil and gas and surface rights within a 500-foot radius of the

well consent in writing to the proposed location.3566

[b] Development Units.

As determined by competent geological, geophysical, engineering, or other scientific

testimony, data, and evidence, the Department shall fix development units for a pool. No

development unit in a pool deemed by the Department to be an oil reservoir shall be larger than

160 acres (65 hectares) nor shall the well be located closer than 500 feet (152 meters) to the lease

line, nor closer than 1,000 feet (305 meters) to the nearest well drilling to or capable of

producing from the same pool. The Department shall have the right to waive these limits.

No development unit in a pool deemed by the Department to be a gas reservoir shall be

larger than 640 acres (261 hectares) nor shall the well be located closer than 1,000 feet (305

meters) to the lease line nor closer than 2,000 feet (610 meters) to the nearest well drilling to or

capable of producing from the same pool. The Department shall have the right to waive these

limits.

If upon application, and after notice and hearing, the Department finds that a well drilled

at the location prescribed by any applicable rule of the Department would not produce in paying

quantities or that surface conditions would substantially add to the burden or hazard of the well,

3566 Wash. Admin. Code § 344-12-043(2011). The regulation says “Committee,” yet, the Oil and Gas Conservation Committee was abolished in 1994. The statutes and regulations have not been thoroughly cleaned up. A telephone conversation with staff in the Department of Natural Resources confirms to substitute the words “Supervisor” and/or “Department of Natural Resources” for “Committee” anywhere it still appears.

705

the Department may enter an order permitting the well to be drilled at a location on which the

applicant prima facie owns an ownership or contractual right to drill other than that prescribed

and shall include in the order suitable provisions to prevent the production from that well of

more than its just and equitable share of the oil and gas in the pool.

Applications for exceptions shall set forth the names of the lessees or owners of

contiguous or cornering properties and shall be accompanied by a plat or sketch map drawn to

the scale of not smaller than one inch equaling 2,000 feet (610 meters) or as otherwise required,

accurately showing to scale the property for which the exception is sought and accurately

showing to scale all other completed and drilling wells on this property and accurately showing

to scale all contiguous or cornering surrounding properties and wells. The application shall be

verified by some person acquainted with the facts, stating that all facts are within the knowledge

of the affiant are true and that the accompanying plat is accurately drawn to scale and correctly

reflects pertinent and required data. Upon the filing of an application, the Department shall give

notice by certified mail to all lessees and owners of lands towards whom the well is being

moved, if closer to the proposed well than offset distances set forth above.

In filing an application to drill, redrill, or deepen, the surface distance must be shown

between the proposed location and other wells within a radius of 1,000 feet (305 meters) for oil

tests and 3,000 feet (914 meters) for gas tests.

An order establishing development units for a pool shall specify the size and shape of

each area and the location of the permitted well thereon in accordance with a reasonable uniform

spacing plan. Upon application and after notice and a hearing, if the Department finds that a well

drilled at the prescribed location would not produce in paying quantities, or that surface

conditions would substantially add to the burden or hazard of drilling the well, the Department

706

may enter an order permitting the well to be drilled pursuant to a permit at a location other than

that prescribed by such development order; however, the Department shall include in the order

suitable provisions to prevent the production from the development unit of more than its just and

equitable share of the oil and gas in the pool.3567

[4] – Size.

The size and the shape of any development units shall be such as will result in the

efficient and economical development of the pool as a whole, and the size shall not be smaller

than the maximum area that can be efficiently and economically drained by one well as

determined by competent geological, geophysical, engineering, drilling, or other scientific

testimony, data, and evidence. The Department shall fix a development unit of not more than 160

acres for any pool deemed by the Department to be an oil reservoir or of 640 acres for any pool

deemed by the Department to be a gas reservoir, plus a ten percent tolerance in either case to

allow for irregular sections. The Department may, at its discretion, after notice and hearing,

establish development units for oil and gas in variance of these limitations when competent

geological, geophysical, engineering, drilling, or other scientific testimony, data, and evidence is

presented and upon a finding that one well can efficiently and economically drain a larger or

smaller area and is justified because of technical, economic, environmental, or safety

considerations.3568

The Department may establish development units of different sizes or shapes for different

parts of a pool or may grant exceptions to the size or shapes of any development unit or units.

Where development units of different sizes or shapes exist in a pool, the Department shall, if

necessary, make adjustments to the allowable production from the well or wells drilled thereon

3567 Wash. Rev. Code Ann. § 78.52.220 (Lexis 2011). 3568 Id. § 78.52.210.

707

so that each operator in each development unit will have a reasonable opportunity to produce or

receive his or her just and equitable share of the production.3569

[5] – Minimum Operator Control.

No order of the Department providing for unit operations may become effective until the

plan for unit operations approved by the Department has been approved in writing by those

persons who, under the Department's order, will be required to pay at least 75 percent of the

costs of unit operations and the plan has been approved in writing by those persons such as

royalty owners, overriding royalty owners, and production payment owners, who own at least 75

percent of the production or proceeds thereof that will be credited to interests that are free of

costs. 3570

[6] – Vertical vs. Horizontal Drilling.

Before beginning directional drilling, other than sidetracking due to hole conditions, the

operator shall file a request and obtain approval from the Supervisor. Such request shall state the

following information:

(1) name and address of operator, (2) well name and number, (3) drilling permit number, (4) exact surface location of well bore, (5) the proposed direction of deviation, (6) the proposed horizontal distance between bottom of the hole and the surface location, (7) the reason for directional drilling, and (8) a list of direct offset operators towards whom the well is being drilled, if any.

Within sixty days after completion of the work, an accurate and complete copy of the directional

survey shall be filed with the Supervisor.3571

[7] – Review of Election Rights/Options.

3569 Id. 3570 Id. § 78.52.335. 3571 Wash. Admin. Code § 344-12-078 (2011).

708

Each pooling order shall make provision for the drilling and operation of a well on the

development unit and for the payment of the reasonable actual cost thereof by the owners of

interests required to pay such costs in the development unit, plus a reasonable charge for

supervision and storage facilities. Costs associated with production from the pooled unit shall be

allocated in the same manner as is production in Washington Revised Code Ann. section

78.52.245. In the event of any dispute as to costs, the Department shall determine costs.

As to each owner who fails or refuses to agree to bear his or her proportionate share of

the costs of the drilling and operation of the well, the order shall provide for reimbursement of

those persons paying for the drilling and operation of the well of the nonconsenting owner's

share of the costs from, and only from, production from the unit representing that person's

interest, excluding royalty or other interests not obligated to pay any part of the cost thereof. The

Department may provide that the consenting owners shall own and be entitled to receive all

production from the well after payment of the royalty as provided in the lease, if any, applicable

to each tract or interest, and obligations payable from production, until the consenting owners

have been paid the amount due under the terms of the pooling order or order settling any dispute.

The order shall determine the interest of each owner in the unit and shall provide that

each consenting owner is entitled to receive, subject to royalty or similar obligations, the share of

the production of the well applicable to the owner's interest in the unit, and, unless the owner has

agreed otherwise, his or her proportionate part of the nonconsenting owner's share of the

production until costs are recovered as provided in this subsection. Each nonconsenting owner is

entitled to receive, subject to royalty or similar obligations, the share of production from the well

applicable to the owner's interest in the unit after the consenting owners have recovered from the

nonconsenting owner's share of production the following:

709

(1) in respect to every such well, one hundred percent of the nonconsenting owner's share of the cost of surface equipment beyond the wellhead connections, including but not limited to, stock tanks, separators, treaters, pumping equipment, and piping, plus one hundred percent of the nonconsenting owner's share of the cost of operation of the well, commencing with first production and continuing until the consenting owners have recovered these costs, with the intent that the nonconsenting owner's share of these costs and equipment will be that interest which would have been chargeable to the nonconsenting owner had he or she initially agreed to pay his or her share of the costs of the well from the beginning of the operation; (2) one hundred and fifty percent of that portion of the costs and expenses of staking the location, well site preparation, rights-of-way, rigging-up, drilling, reworking, deepening or plugging back, testing, and completing, after deducting any cash contributions received by the consenting owners, and also 150 percent of that portion of the cost of equipment in the well, up to and including the wellhead connections; and (3) if there is a dispute regarding the costs, the Department shall determine the proper costs and their allocation among working interest owners after due notice to interested parties and a hearing on the costs.

The operator of a well under a pooling order in which there are nonconsenting owners

shall furnish the nonconsenting owners with monthly statements of all costs incurred, together

with the quantity of oil or gas produced and the amount of proceeds realized from the sale of this

production during the preceding month. If and when the consenting owners recover from a

nonconsenting owner's relinquished interest the amounts provided for in subsection (2) of this

section, the relinquished interest of the nonconsenting owner shall automatically revert to him or

her, and the nonconsenting owner shall own the same interest in the well, the production from it,

and be liable for the further costs of the operation as if he or she had participated in the initial

drilling and operation.

A nonconsenting owner of a tract in a development unit which is not subject to any lease

or other contract for the development thereof for oil and gas shall elect within 15 days of the

issuance of the pooling order or such further time as the Department shall, in the order, allow:

710

(1) to be treated as a nonconsenting owner as provided above and is deemed to have a basic landowners' royalty of one-eighth, or twelve and one-half percent, of the production allocated to the tract, unless a higher basic royalty has been established in the development unit. If a higher royalty has been established, then the nonconsenting owner of a nonleased tract shall receive the higher basic royalty. This presumed royalty shall exist only during the time that costs and expenses are being recovered, and is intended to assure that the owner of a nonleased tract receive a basic royalty free of all costs at all times. Notwithstanding anything herein to the contrary, the owner shall at all times retain his or her entire ownership of the property, including the right to execute an oil and gas lease on any terms negotiated, and be entitled to all production as set forth above; (2) to grant a lease to the operator at the current fair market value for that interest for comparable leases or interests at the time of the commencement of drilling; or (3) to pay his or her pro rata share of the costs of the well or wells in the development unit and receive his or her pro rata share of production, if any.

A nonconsenting owner who does not make an election as provided in this subsection is

deemed to have elected to be treated under (a) of this subsection.3572

3572 Wash. Rev. Code Ann. § 78.52.250 (Lexis 2011).

711

§ 49.01 Analysis of West Virginia Regulatory Framework. In West Virginia, multiple statutes govern the oil and gas industry. The Office of Oil and

Gas is established in West Virginia Code sections 22-6-1 to 22-6-41, which provides that the

Secretary of the Department of Environmental Protection (“Secretary”) has the powers and

duties to permit well work, drilling, and fracturing, among other things.3573 The Shallow Gas

Well Review Board (“Review Board”) was formed by statute to hear objections by coal owners

regarding placement of shallow well location. 3574 Shallow gas wells are those drilled and

completed above the uppermost member of the Onondaga Group, with an allowance of 20 feet

into the Onondaga for logging and completion operations, but in no event may they produce

therefrom.3575 Deep wells are those drilled and completed in a formation at or below the top of

the uppermost member of the Onondaga Group.3576 The Review Board may also create drilling

units and pool the interests within those drilling units in limited circumstances,3577

The West Virginia Oil and Gas Conservation Commission (“Commission”) is a body

created by statute with the authority to regulate deep well spacing to make and enforce

reasonable rules and orders that are necessary to prevent waste and to protect correlative

rights.

although the

Board has yet to use this authority.

3578 The Commission holds the authority to approve or deny applications for new well

permits, to establish drilling units or special field rules, and to approve or deny applications for

the pooling of interests in a drilling unit.3579

3573 W. Va. Code § 22-6-2 (2011).

3574 Id. § 22C-8-1(b). 3575 Id. § 22-6-1(r). 3576 Id. § 22-6-1(g). 3577 Id. §§ 22C-8-7 to -11. 3578 Id. § 22C-9-4(f). 3579 Id. § 22C-9-4(h).

712

The West Virginia Code also provides a statute regulating the permitting of coalbed

methane (“CBM”) drilling, establishment of CBM drilling units, and pooling of those units.3580

The Chief of the Office of Oil and Gas (“Chief”) is the state permitting authority for all matters

relating to CBM, 3581 much like the Secretary is for the permitting of conventional oil and gas. In

the event that a coal owner files an objection to the drilling location of a CBM well, the Coalbed

Methane Review Board (“CBM Review Board”) will hold a hearing to resolve the issue.3582

The requirements of each statute and the powers of the associated Boards or

Commissions created by those statutes are described in more detail below.

[1] – Analysis of Regulatory Framework: Shallow Gas.

[a] Governing Body.

West Virginia Code sections 22-6-1 to 22-6-41 gives to the Secretary of the West

Virginia Department of Environmental Protection (“WVDEP”) the state permitting authority for

oil and gas wells. 3583 The statute uses the term “division” interchangeably with

“department,” 3584 as well as the term “director” interchangeably for “secretary.” 3585 The

Secretary may hire such employees as is necessary to help carry out the provisions of the

Environmental Resources statute.3586

West Virginia Code sections 22C-8-1 to 22C-8-19 details the laws governing the

development of shallow gas resources in West Virginia.

3587

3580 Id. §§ 22-21-1 to -29.

This Code chapter establishes the

Shallow Gas Well Review Board, describes its power, authority, and jurisdiction, and details the

process and requirements for pooling shallow gas interests for development in West Virginia.

3581 Id. § 22-21-4(b)(2). 3582 Id. § 22-21-13 3583 Id. § 22-6-2(c)(12). 3584 Id. § 22-1-2(4). 3585 Id. § 22-1-2(3). 3586 Id. § 22-6-2(c)(6). 3587 Id. § 22C-8-1.

713

West Virginia Code section 22C-8-1 provides that it is the public policy of West Virginia and in

the best interest to “[s]afeguard, protect and enforce the correlative rights of gas operators and

royalty owners in a pool of gas to the end that each such gas operator and royalty owner may

obtain a just and equitable share of production from such pool of gas.”3588

The Legislature declared further in section 1 that,

it is in the public interest to enact new statutory provisions establishing a shallow gas well review board which shall have the authority to regulate and determine the appropriate placing of shallow wells when gas well operators and owners of coal seams fail to agree on the placing of such wells, and establishing specific considerations, including minimum distances to be allowed between certain shallow gas wells, to be utilized by the shallow gas well review board in regulating the placing of shallow wells; that in order to encourage and ensure the fullest practical recovery of coal and gas in this state and to protect and enforce the correlative rights of gas operators and royalty owners of gas resources, it is in the public interest to enact new statutory provisions establishing a shallow gas well review board which shall also have authority to establish drilling units and order the pooling of interests therein to provide all gas operators and royalty owners with an opportunity to recover their just and equitable share of production.3589

[b] Membership of Governing Body.

The Secretary is the chief executive officer of the Department and may appoint a deputy

secretary, assistants, and employees, among other persons, who are necessary for the

Department’s operation.3590 The WVDEP is broken into a number of offices, one of which is the

Office of Oil and Gas.3591

The Review Board is composed of three members: (1) the Commissioner of the West

Virginia Department of Environmental Protection (WVDEP) Office of Oil and Gas; (2) the Chief

of the WVDEP Office of Oil and Gas and; (3) a “registered professional who has been

3588 Id. § 22C-8-1(a)(3). 3589 Id. § 22C-8-1(b). 3590 Id. § 22-1-6(a). 3591 Id. § 22-1-7(4).

714

successfully tested in mining engineering, with at least ten years practical experience in the coal

mining industry and shall be appointed by the governor, by and with the advice and consent of

the Senate.”3592 If there is a vacancy in the appointed seat on the Board, the West Virginia

Governor must select a new appointee within 60 days after the seat becomes vacant.3593

[c] Scope of Authority.

The Secretary has the duty of supervision the execution and enforcement of all matters

related to oil and gas set out in the Environmental Resources statute.3594 Among a host of duties

that deal with the organization of the WVDEP, the Secretary is charged with performing “all

duties as the permit issuing authority for the state in all matters pertaining to the exploration,

development, production, storage and recovery of the state’s oil and gas.”3595

As for the Shallow Gas statute, the provisions of that law apply to “all lands located in

this state under which a coal seam . . . is located.”

3596 The Shallow Gas Well Review Board has

no authority or jurisdiction over (1) deep wells; (2) oil wells and enhanced oil recovery wells

associated with oil wells; (3) any shallow well as to which no objection is made under section

22-6-17;3597 (4) wells defined in section 22-9-1(4)3598; or (5) free gas rights.3599

3592 Id. § 22C-8-4(a).

The Review

Board is predominately an appellate body that decides whether to issue drilling or fracturing

permits when the locations or conditions of such permits have been challenged by the coal seam

owner.

3593 Id. § 22C-8-4(b). 3594 Id. § 22-6-2(a). 3595 Id. § 22-6-2(c)(12). 3596 Id. § 22C-8-3(a). 3597 West Virginia Code section 22-6-17 is titled, “Objections to proposed drilling of shallow gas wells; notice to chair of review Board; indication of changes on plats; issuance of permits.” 3598 The term “well” means a borehole drilled or proposed to be drilled within the storage reservoir boundary or reservoir protective area for the purpose of or to be used for producing, extracting or injecting any gas, petroleum, or other liquid but excluding boreholes drilled to produce potable water to be used as such. 3599 W. Va. Code § 22C-8-3 (2011).

715

The Board does not have the authority or power to limit production or output from any

well, prorate production from any gas well, or to fix prices of gas.3600

(1) take evidence and issue orders concerning applications for drilling permits and drilling units; (2) promulgate reasonable rules of practice and procedure before the Board;

The Board’s authority, in

furtherance of its review of an objection filed by the coal owner or the Director is limited to the

following actions:

3601 (3) make investigations of records and facilities; and (4) issue subpoenas for the attendance of and sworn testimony by witnesses and subpoenas duces tecum for the production of any books, records, maps, charts, diagrams and other pertinent documents, and administer oaths and affirmations to such witnesses.3602

[d] Pooling Process and Matters Covered.

All persons who wish to commence well work3603 must obtain a well work permit from

the Secretary.3604 Every well work application must contain, among other things, the names and

addresses of the well operator, all persons that the applicant must notify by statute, and every

coal operator operating coal seams under the tract of land on which the well is or may be located,

and the coal seam owner and lessee entitled to notice, if any, if the owner or lessee is not yet

operating the coal seam.3605

3600 Id. § 22C-8-5(d).

No later than the date the application was filed, the applicant must

deliver copies of the application, a well plat, and an erosion and sediment control plan by

personal service or certified mail, return receipt requested, to the record owners both of the

surface tracts where the well is to be located and of the surface tracts overlying the oil and gas

3601 The rules of procedure before the Board must be implemented in accordance with and pursuant to the West Virginia Administrative Procedures Act. See id. § 29A-1-1. 3602 Id. § 22C-8-5(e). 3603 “Well work” is defined as the “drilling, redrilling, deepening, stimulating, pressuring by injection of any fluid, converting from one type of well to another, combining or physically changing to allow the migration of fluid from one formation to another or plugging or replugging any well.” Id. § 22-6-1(v). 3604 Id. § 22-6-6(a). 3605 Id. § 22-6-6(c)(1)–(2).

716

leasehold proposed to be used for roads or other disturbances.3606 The plat accompanying the

application must be sufficient to show all wells within 1,200 feet of the subject well.3607 In the

case of a shallow gas well application with a depth of 3,000 feet or more and that penetrates a

coal seam, the plat must be sufficient to show all wells within 2,400 feet of the subject well.

Each shown well must be distinguished as oil, gas, liquid injection, or underground storage well

and as having an active, abandoned, or drilling status.3608 The plat must also show water wells

within 200 feet of the well being sought, except for liquid or waste disposal wells, in which case

the plat must show water wells within 1,000 feet of the well.3609 Finally, the plat must also show

dwellings within 200 feet of the well, in addition to streams, roads, and railroads.3610

The applicant must certify to the Secretary that the required notice has been given prior to

issuance of the well work permit.

3611 Those persons may file comments as to the location or

construction of the proposed well work within 15 days of the filing of the application with the

Secretary, 3612 who must review the applications and determine whether or not to grant a

permit.3613 A permit will not be issued less than 15 days after filing unless the applicant both

certifies that all persons entitled to notice have received notice and files written statements of no

objection by all such persons.3614

3606 Id. § 22-6-9(a).

The permit will not be issued if the Secretary determines that

the proposed work will be a human safety hazard, the plan for soil erosion and sediment control

3607 W. Va. Code R. § 35-4-9.2(j) (2011). 3608 Id. 3609 Id. § 35-4-9.2.1.1. 3610 Id. § 35-4-9.2.1.2–.5. 3611 W. Va. Code § 22-6-10(b) (2011). 3612 Id. § 22-6-10(a). 3613 Id. § 22-6-11. 3614 Id.

717

are inadequate, that publicly owned lands or resources would be damaged, or the work does not

protect fresh water resources.3615

Upon review of application and comments, the Secretary may issue a well work permit.

If no objection is made, the permit will be issued.

3616 Any such permit will expire automatically

unless the permitted well work is commenced within 24 months of the permit date.3617 Permits

may not be extended to authorize work after the expiration date, nor may they be transferred to

other parties.3618

Before drilling a well, or before fracturing or stimulating a well, the operator must

prepare a plat detailing the location and work to be done. If the location is underlain by one or

more coal seams, copies of the plat must be forwarded by registered or certified mail to each coal

operator who operates those coal seams and is filed at the Office of Miners’ Health, Safety, and

Training, and to coal seam owners and lessees, if they are not yet operating the coal seams. The

same plat and information should be sent to the Secretary, also.

3619 If no objections are made by

the coal interests or by the Secretary within 15 days of the Secretary’s receipt of the materials,

the Secretary must file the information to become permanent record of the operations.3620

The coal seam owner may, however, within 15 days of the director’s receipt of the plat

and notice, file written objections to the drilling location or fracturing conditions with the

Secretary, setting out the grounds for those objections. If the proposal affects a shallow gas

drilling site above a coal seam or seams, the Secretary must immediately mail, by registered or

certified mail, the Review Board Chair, a notice that the objection to the proposed operations has

3615 Id. 3616 Id. 3617 W. Va. Code R. § 35-4-5.2(g) (2011). 3618 Id. § 35-4-5.2(g)–(h). 3619 W. Va. Code § 22-6-12(a) (2011). 3620 Id. § 22-6-12(b).

718

been filed, along with a copy of the objections, the application, and the plat.3621 No further

action will be taken on the drilling permit application until the Board issues an Order.3622

If the parties are unable to reconcile as to location or conditions, the Review Board must

hold a hearing to consider the application for drilling permit. At the hearing for an objection

filed by the coal owner or the Director, the Board must consider the following:

(1) whether the drilling location is above or in close proximity to any mine opening or shaft, entry, travelway, airway, haulageway, drainageway or passageway, or to any proposed extension thereof, in any operated or abandoned or operating coal mine, or any coal mine already surveyed and platted but not yet being operated; (2) whether the proposed drilling can reasonably be done through an existing or planned pillar of coal, or in close proximity to an existing well or such pillar of coal, taking into consideration the surface topography; (3) whether the proposed well can be drilled safely, taking into consideration the dangers from creeps, squeezes or other disturbances due to the extraction of coal; and (4) the extent to which the proposed drilling location unreasonably interferes with the safe recovery of coal and gas.3623

The objecting party has the burden of proving its case by a preponderance of the

evidence.

3624 However, if the Department is the objecting party or if the proposed well is

to be drilled to a depth of 3,000 feet or more and the drilling location is less than 2,000

feet from the nearest existing well, the burden of proof is on the gas operator.3625

The written order of the Board shall contain findings of fact and conclusions

based thereon concerning the following:

(1) the extent to which the proposed drilling location will unreasonably interfere with present or future coal mining operations on the surface including, but not limited to, operations subject to the provisions of article three, chapter twenty-two of this code; (2) the feasibility of moving the proposed drilling location to

3621 Id. § 22-6-17. 3622 Id. 3623 Id. § 22C-8-7(c). 3624 W. Va. Code R. § 51-1-5.8(a) (2011). 3625 Id.

719

a mined-out area, below the coal outcrop, or to some other location; (3) the feasibility of a drilling moratorium for not more than one year in order to permit the completion of imminent coal mining operations; (4) the methods proposed for the recovery of coal and gas; (5) the distance limitations established in section eight of this article; (6) the practicality of locating the well on a uniform pattern with other wells; (7) the surface topography and use; and (8) whether the order of the Board will substantially affect the right of the gas operator to explore for and produce gas.3626

The Board’s order will instruct the Director of WVDEP to,

(1) refuse a drilling permit; (2) issue a drilling permit for the proposed drilling location; (3) issue a drilling permit for an alternate drilling location different from that requested by the well operator; or (4) issue a drilling permit either for the proposed drilling location or for an alternate drilling location different from that requested by the well operator, but not allow the drilling of the well for a period of not more than one year from the date of issuance of such permit.3627

Pooling under the Shallow Gas provisions of West Virginia law is extremely limited. In

order to submit an application for pooling, there must first be an objection filed by an affected

coal owner or by the Director of WVDEP.

3628

An application for a shallow drilling unit in West Virginia is submitted to the West

Virginia Shallow Gas Well Review Board and must include the following:

Outside of these two limited circumstances,

pooling is unavailable. The Shallow Gas Well Review Board has never actually issued a single

pooling order.

(1) the name and address of the applicant; (2) a plat prepared by a licensed land surveyor or registered professional engineer showing the boundary of the proposed drilling unit, the district and county in which such unit is located, the acreage of the proposed drilling unit, the boundary of the tracts which comprise the proposed drilling unit, the names of the owners of record of each such tract, the proposed well location on the proposed drilling unit, and the proposed well location for which the division refused to issue a

3626 W. Va. Code § 22C-8-7(c) (2011). 3627 Id. §§ 22C-6-17, -8-7(b). 3628 Id. § 22C-8-9(a).

720

drilling permit; (3) the names and addresses of the royalty owners of the gas underlying the tracts which comprise the proposed drilling unit; (4) the names and addresses of the gas operators of the tracts which comprise the proposed drilling unit; (5) the approximate depth and target formation to which the well for the proposed drilling unit is to be drilled; (6) a statement indicating whether a voluntary pooling agreement has been reached among any or all of the royalty owners of the gas underlying the tracts which comprise the proposed drilling unit and the gas operators of such tracts; (7) an affidavit of publication of the notice of intent to file an application to establish a drilling unit as required in subsection (c) of this section; and (8) such other pertinent and relevant information as the Board may prescribe by reasonable rules promulgated in accordance with the provisions of section six of this article.3629

Prior to filing the application, the applicant must publish a Class II legal advertisement

providing notice of its intent to file an application to establish a drilling unit. This notice must

provide information identifying the proposed location of the unit and state that written protests

and objections can be filed with the Board until ten days after the application submission date.

This notice must be published in the county or counties in which the proposed drilling unit is to

be located.

3630

At the time an application is filed, the applicant must mail a copy of the completed

application by registered or certified mail to each and every person identified on the application

as a royalty owner

3631 or gas operator.3632 This mailing must include a notice of hearing to all

those parties within the proposed unit who have not previously agreed to voluntary pooling.3633

3629 Id. § 22C-8-9(b).

3630 Id. § 22C-8-9(c). 3631 “Royalty owner means any owner of gas in place, or gas rights, to the extent that such owner is not a gas operator as defined in subdivision (13) of this section.” Id. § 22C-8-2(20) (internal citation omitted). 3632 “Gas operator means any person who owns or has the right to develop, operate and produce gas from a pool and to appropriate the gas produced therefrom either for such person or for such person and others. In the event that there is no gas lease in existence with respect to the tract in question, the person who owns or has the gas rights therein shall be considered a ‘gas operator’ to the extent of seven eighths of the gas in that portion of the pool underlying the tract owned by such person, and a ‘royalty owner’ to the extent of one eighth of such gas.” Id. § 22C-8-2(13) (internal citation omitted). 3633 Id. § 22C-8-9(d).

721

If all of the royalty owners and operators within the proposed unit agree to voluntarily

participate in the proposed unit, the applicant must appear on the date provided for in the notices

described above. 3634 At that time, the applicant must present proof that the drilling unit

boundaries have been agreed upon by all affected parties and the coal seam owners have agreed

upon and consented to the well location(s). If all of the foregoing is demonstrated to the Board,

the Board will issue a written Order establishing the unit.3635

If all of the parties cannot agree upon the boundary of the proposed unit, the Board will

hold a hearing

3636

(1) the surface topography and property lines of the lands comprising the drilling unit; (2) the correlative rights of all gas operators and royalty owners therein; (3) the just and equitable share of production of each gas operator and royalty owner therein; (4) whether a gas operator or royalty owner objecting to the drilling unit has proved by clear and convincing evidence that the drilling unit is substantially smaller than the area that will be produced by the proposed well; and (5) other evidence relevant to the establishment of the boundary of a drilling unit.

to consider the application to establish a drilling unit. Within 20 days of the

hearing, the Board shall issue a written order establishing the unit or dismissing the application.

When considering whether or not to establish a drilling unit during a hearing where all of the

parties could not agree upon the boundary of the proposed unit, the Board must consider:

3637

In order for the Board to grant an application to establish a drilling unit or approve a

drilling unit, they must find that:

(1) the applicant has proved that the drilling location on the drilling unit has been agreed to by all of the owners of the coal seams underlying such drilling location; (2) the director has previously refused to issue a drilling permit on one of the tracts comprising the drilling unit because of an order of the Board; (3) the drilling

3634 Id. § 22C-9-10(a). 3635 Id. 3636 All hearings conducted by the Board are to be conducted in accordance with and pursuant to the West Virginia Administrative Procedures Act. See id. § 29A-1-1. 3637 Id. § 22C-8-10(b).

722

unit includes all acreage within the minimum distance limitations provided by section eight of this article, unless the gas operators and royalty owners of any excluded acreage have agreed to such exclusion; and (4) the drilling unit includes a portion of the acreage from under which the well operator intended to produce gas under the drilling permit which was refused.3638

The burden of proof in a proceeding to establish drilling units is on the party initiating the

proceeding, which burden must be met by a preponderance of the evidence.

3639

Once the Board establishes a drilling unit, the order establishing such drilling unit shall

include an order pooling the separately owned interests in the gas to be produced from such

drilling unit.

3640 If a voluntary pooling agreement has been reached between all persons owning

separate operating interests in the tracts comprising the drilling unit, the order of the Board shall

approve such agreement.3641 If no voluntary pooling agreement is reached prior to or during the

hearing, then at such hearing the Board shall also determine the pooling of interests in the

drilling unit.3642

Any order of the Board pooling the separately owned interests in the gas to be produced

from the drilling must be upon terms and conditions which are just and equitable and shall

authorize the production of gas from the drilling unit.

3643

3638 Id. § 22C-8-10(c).

The order shall (1) designate the

applicant as the operator to drill and operate such gas well; (2) prescribe the procedure by which

all owners of operating interests in the pooled tracts or portions of tracts may elect to participate

therein; and (3) provide that all reasonable costs and expenses of drilling, completing, equipping,

operating, plugging, abandoning and reclaiming such well shall be borne, and all production

therefrom shared, by all owners of operating interests in proportion to the net gas acreage in the

3639 W. Va. Code R. § 51-1-5.8(b) (2011). 3640 W. Va. Code § 22C-8-11(a) (2011). 3641 Id. § 22C-8-11(b). 3642 Id. § 22C-8-11(c). 3643 Id. § 22C-8-11(d).

723

pooled tracts owned or under lease to each owner. The order must also make provisions for

payment of all reasonable costs thereof, including all reasonable charges for supervision and for

interest on past-due accounts, by all those who elect to participate therein.3644

Upon request, any such pooling order shall provide an owner of an operating interest an

election to be made within ten days from the date of the pooling order to participate in the risks

and costs of the drilling of the well or to participate in the drilling of the well on a limited or

carried basis on terms and conditions which, if not agreed upon, shall be determined by the

Board.

3645 If the election is not made within the ten-day period, such owner shall be

conclusively presumed to have elected the limited or carried basis. Thereafter, if an owner of

any operating interest in any portion of the pooled tract shall drill and operate, or pay the costs of

drilling and operating, a well for the benefit of such nonparticipating owner as provided in the

order of the Board, then such operating owner shall be entitled to the share of production from

the tracts or portions thereof pooled accruing to the interest of such nonparticipating owner,

exclusive of any royalty or overriding royalty reserved with respect to such tracts or portions

thereof, or exclusive of one-eighth of the production attributable to all unleased tracts or portions

thereof, until the market value of such nonparticipating owner’s share of the production,

exclusive of such royalty, overriding royalty of one-eighth of production, equals double the share

of such costs payable by or charged to the interest of such nonparticipating owner.3646

[2] – Analysis of Regulatory Framework: Oil and Deep Gas Development.

[a] Governing Body.

West Virginia Code sections 22C-9-1 to 22C-9-16 details the laws governing the

development of oil and deep gas resources in West Virginia. This Code chapter establishes the

3644 Id. 3645 Id. § 22C-8-11(e). 3646 Id.

724

Oil and Gas Conservation Commission (“Commission”), describes its power, authority, and

jurisdiction, and details the process and requirements for pooling and unitizing oil and deep gas

interests for development in West Virginia. West Virginia Code section 22C-9-1 provides that it

is the public policy of West Virginia and in the best interest to:

(1) foster, encourage and promote exploration for and development, production, utilization and conservation of oil and gas resources; (2) prohibit waste of oil and gas resources and unnecessary surface loss of oil and gas and their constituents; (3) encourage the maximum recovery of oil and gas; and (4) safeguard, protect and enforce the correlative rights of operators and royalty owners in a pool of oil or gas to the end that each such operator and royalty owner may obtain his just and equitable share of production from such pool of oil or gas.3647

[b] Membership of Governing Body.

The West Virginia Oil and Gas Conservation Commission is composed of five members.

The Secretary of the WVDEP and the Chief of the WVDEP Office of Oil and Gas are permanent

members of the Commission. The remaining three members are appointed by the Governor with

the advice and consent of the Senate. 3648

(1) an independent producer; (2) a member of the public that is not engaged in any activity under the jurisdiction of the West Virginia Public Service Commission or the Federal Energy Regulatory Commission; and (3) an individual who has a degree from an accredited college or university in petroleum engineering or geology and is a registered professional engineer with particular knowledge and experience in the oil and gas industry, which individual shall serve as chair of the Commission.

None of the three appointed members can be

employees of the WVDEP and must represent respectively:

3649

Commission members appointed by the Governor sit on the Commission for overlapping

six-year terms. There is no limit to the number of terms a Commission member can serve, and a

3647 Id. § 22C-9-1(a). 3648 Id. § 22C-9-4(a). 3649 Id.

725

new appointee must be named by the Governor in 60 days in the case of a vacancy on the

Commission. Commission members can be removed for (1) incompetency, (2) neglect of duty,

(3) gross immorality, or (4) malfeasance. A provision also exists which requires dismissal of an

appointed Commission member who fails to attend three consecutive meetings.3650

[c] Scope of Authority.

The Commission has authority over all persons and property necessary for the

implementation of West Virginia Code sections 22C-9-1 to 22C-9-16, subject to a number of

exceptions.3651 The Commission has the authority to regulate spacing of deep wells.3652 The

Commission is also authorized to issue or deny permits, establish drilling units or special field

rules, and approve or deny applications for the pooling of interests within a unit. 3653 Any

exception to field rules or spacing rules and any application for pooling the interests in a drilling

unit must be brought before the Commission for a hearing.3654 In furtherance of all of these

powers the Commission can make investigations of records and facilities; issue subpoenas; and

make and enforce reasonable rules to prevent waste, protect correlative rights and govern the

practice and procedure before the Commission.3655

3650 Id. § 22C-9-4(b).

3651 Id. § 22C-9-3(b). “This article shall not apply to or affect: (1) Shallow wells other than those utilized in secondary recovery programs; (2) Any well commenced or completed prior to March 9, 1972, unless such well is, after completion, deepened subsequent to that date to a formation at or below the top of the uppermost member of the “Onondaga Group”; or involved in secondary recovery operations for oil under an order of the Commission entered pursuant to section eight of this article; (3) Gas storage operations; (4) Free gas rights. The Commission does not have power to: Limit production or output, prorate production or fix prices of oil or gas.” Id. 3652 Id. § 22C-9-4(f). 3653 Id. § 22C-9-4(h). 3654 Id. § 22C-9-4(i). 3655 Id. § 22C-9-4(e)–(f).

726

An important policy note is that the statute specifically provides that “[i]n the event of a

conflict between the duty to prevent waste3656 and the duty to protect correlative rights, the

Commission’s duty to prevent waste shall be paramount.”3657

(1) physical waste, as the term is generally understood in the oil and gas industry; (2) the locating, drilling, equipping, operating or producing of any oil or gas well in a manner that causes, or tends to cause a substantial reduction in the quantity of oil or gas ultimately recoverable from a pool under prudent and proper operations, or that causes or tends to cause a substantial or unnecessary or excessive surface loss of oil or gas; (3) the drilling of more deep wells than are reasonably required to recover efficiently and economically the maximum amount of oil and gas from a pool; (4) substantially inefficient, excessive or improper use, or the substantially unnecessary dissipation of, reservoir energy; (5) inefficient storing of oil or gas; and (6) other underground or surface waste in the production or storage of oil, gas or condensate.

Waste means:

3658

[d] Pooling Process and Matters Covered.

Procedural rules before the Commission are codified in the Code of State Regulations

Title 39 Series 2. These rules are quite general and simply provide that a majority of the

Commission is necessary for any decision to be rendered and also generally describe attorney

conduct before the Commission. Otherwise, the rules of practice and procedure before the

Commission are governed by the West Virginia Administrative Procedures Act.3659

Before an operator can file an application to establish a pool, it must drill a discovery

well into the formation or formations where it seeks to establish the pool or pools. Upon the

While the

rules and regulations do not specifically state what must be included in an application for the

establishment of a drilling unit or the pooling of interests within a unit, the statute does

specifically provide the factors that the Commission must consider before issuing a final order.

3656 Id. § 22C-9-6 specifically states that, “Waste of oil or gas is hereby prohibited.” 3657 Id. § 22C-9-4(e)–(f). 3658 Id. §22-6-1(t). 3659 Id. § 29A-1-1.

727

filing of an application to establish drilling units, the Commission must provide notice to all

interested parties.3660 Each notice must include a description of the affected area, the time, date

and place of a hearing, and must include a statement that any party has a right to a hearing before

the Commission upon request. Any request for hearing must be filed with the Commission

within 15 days of receipt of notice. If no request for hearing has been received within the 15 days

following receipt of the notice, the Commission may proceed to process the application.3661

Before issuing an order establishing a drilling unit or units, the Commission must

determine the acreage to be included in each unit, the spacing of the unit(s), and the distance

from the outside boundary of a unit at which a deep well may be drilled.

3662

(1) the surface topography and property lines of the lands underlaid by the pool to be included in such order; (2) the plan of deep well spacing then being employed or proposed in such pool for such lands; (3) the depth at which production from said pool has been found; (4) the nature and character of the producing formation or formations, and whether the substance produced or sought to be produced is gas or oil or both; (5) the maximum area which may be drained efficiently and economically by one deep well; and (6) any other available geological or scientific data pertaining to said pool which may be of probative value to the Commission in determining the proper deep well drilling units therefore.

In making these

determinations, the Commission must consider the following factors:

3663

The Commission shall, within 45 days after the filing of an application to establish

drilling units for a pool, enter an order establishing such drilling units, dismiss the application, or

for good cause, continue the application process.

3664

3660 Id. § 22C-9-7(1)–(2).

As part of the order establishing a drilling

unit, the Commission shall prescribe just and reasonable terms and conditions upon which the

3661 Id. § 22C-9-7(a)(1)–(2). 3662 Id. § 22C-9-7(a)(3). 3663 Id. § 22C-9-7(a)(3). 3664 Id. § 22C-9-7(a)(9).

728

royalty interests in the unit shall, in the absence of a voluntary agreement, be deemed to be

integrated without the necessity of a subsequent order integrating the royalty interests.3665

If a hearing has been held on an application, the order shall be a final order. If no hearing

has been held, the Commission shall issue a proposed order and shall provide a copy of the

proposed order, together with notice of the right to appeal and request a hearing, to all interested

parties. Any party aggrieved by the proposed order may appeal the proposed order to the full

Commission and request a hearing. Notice of appeal and request for hearing shall be made in

accordance with section 10 of this article within 15 days of entry of the order. If no appeal and

request for hearing has been received within 15 days, the proposed order shall become final.

3666

When two or more separately owned tracts are included within a drilling unit, or when

there are separately owned interests in all or a part of a drilling unit, the interested persons may

pool their tracts or interests for the development and operation of the drilling unit.

3667 In the

absence of voluntary pooling and upon application of any operator having an interest in the

drilling unit, the Commission shall set a hearing and provide notice to all interested parties.3668

After the hearing, the Commission shall enter an order pooling all tracts or interests in the

drilling unit for the development and operation thereof and for sharing production therefrom.3669

Each such pooling order must include terms and conditions which are just and reasonable; and

under no circumstances can drilling be initiated on the tract of an unleased owner without the

owner's written consent.3670

3665 Id. § 22C-9-7(a)(10).

3666 Id. § 22C-9-7(a)(11). 3667 Id. § 22C-9-7(b)(1). 3668 Id. 3669 Id. 3670 Id. Requirement are reiterated in West Virginia Code section 22C-9-7(b)(4), which also states that valuable consideration must be given in exchange for the consent and an easement therefore.

729

Any pooling order issued by the Commission shall authorize the drilling and operation of

a deep well for the production of oil or gas from the pooled acreage.3671 The order must also

designate the operator to drill and operate such deep well, prescribe the time and manner in

which all owners of operating interests in the pooled tracts or portions of tracts may elect to

participate therein; and provide that all reasonable costs and expenses of drilling, completing,

equipping, operating, plugging and abandoning such deep well shall be borne, and all production

therefrom shared, by all owners of operating interests in proportion to the net oil or gas acreage

in the pooled tracts owned or under lease to each owner. 3672 The order must also include

provisions for payment of all reasonable costs of operating and drilling the well(s), including a

reasonable charge for supervision and for interest on past-due accounts, by all those who elect to

participate therein.3673

The Conservation Commission also has authority over secondary recovery of oil. The

Commission must set a hearing and provide notice to all interested parties upon application of an

operator in a pool that is productive of oil.

3674

(1) The order is reasonably necessary for the prevention of waste and the drilling of unnecessary wells;

After hearing, the Commission may enter an order

requiring unit operation of the pool in connection with secondary recovery of oil and unitizing

the separately owned tracts and interests within such pool. Such an order may only be made if

the Commission makes the following findings:

(2) The proposed plan of secondary recovery will increase the ultimate recovery of oil from the pool to such an extent that the proposed secondary recovery operation will be economically feasible;

3671 Id. § 22C-9-7(b)(3). 3672 Id. 3673 Id. 3674 Id. § 22C-9-8(a).

730

(3) The production of oil from the unitized pool can be allocated in such a manner as to ensure the recovery by all operators of their just and equitable share of such production; and (4) The operators of at least three-fourths of the acreage . . . and the royalty owners of at least three fourths of the acreage . . . in such pool have approved the plan and terms of unit operation to be specified by the commission in its order, such approval to be evidenced by a written contract setting forth the terms of the unit operation and executed by said operators and said royalty owners, and filed with the Commission.3675

The order providing for unit operation will designate one operator in the pool as unit

operator and will include provisions for the proportionate allocation to all operators of costs and

expenses of unit operation, including reasonable charges for supervision and interest on past-due

accounts, which allocation shall be in the same proportion that the separately owned tracts share

in production from the unit.

3676 If no agreement can be reached regarding costs, the Commission

will provide for the sharing of costs, so long as any operator who has not consented to unitization

is not required to contribute to the costs and expenses of unit operation or to the cost of capital

investment, except out of the proceeds from the sale of that owner’s proportionate share of

production.3677

[3] – Analysis of the Regulatory Framework: Coalbed Methane Development.

[a] Governing Body.

West Virginia Code sections 22-21-1 to 22-21-41 details the laws governing the

development of coalbed methane (CBM) resources in West Virginia. The Chief of the Office of

Oil and Gas is primarily responsible for carrying out the chapter.3678

3675 Id.

This Code chapter also

establishes the West Virginia Coalbed Methane Review Board (“CBM Review Board”),

describes its power, authority, and jurisdiction, and details the process and requirements for

3676 Id. § 22C-9-8(a)(4). 3677 Id. 3678 Id. § 22-21-4(a).

731

pooling and unitizing CBM interests for development in West Virginia. West Virginia Code

section 22-21-1 provides that it is the public policy of West Virginia and in the best interest to:

(1) preserve coal seams for future safe mining; facilitate the expeditious, safe evacuation of coalbed methane from the coalbeds of this state, and maintain the ability and absolute right of coal operators at all times to vent coalbed methane from mine areas; (2) foster, encourage and promote the commercial development of this state's coalbed methane by establishing procedures for issuing permits and forming drilling units for coalbed methane wells without adversely affecting the safety of mining or the mineability of coal seams; (3) safeguard, protect and enforce the correlative rights of coalbed methane well operators and coalbed methane owners in a pool of coalbed methane to the end that each such operator and owner may obtain his or her just and equitable share of production from coalbed methane recovered and marketed under this article; (4) safeguard and protect the mineability of coal during the removal of coalbed methane, as permitted under this article; (5) create a state permitting procedure and authority to provide for and facilitate coalbed methane development as encouraged by the Energy Policy Act of 1992; and (6) seek the deletion of the state of West Virginia from the list of affected states by the secretary of the United States department of the interior as provided for in the Energy Policy Act of 1992.3679

[b] Membership on the Governing Board.

The Coalbed Methane Review Board is comprised of seven members. All three members

of the West Virginia Shallow Gas Well Review Board are also on the Coalbed Methane Review

Board. The chair of the Shallow Gas Well Review Board also serves as the chair of the CBM

Review Board. The other members include (1) the West Virginia state geologist; (2) a

representative of the United Mine Workers of America; (3) an employee of the gas industry; and

(4) the Director of the Office of Miners' Health, Safety, and Training.3680

3679 Id. § 22-21-1(b).

A majority of the

3680 Id.

732

CBM Review Board constitutes a quorum and a quorum is required in order for the Board to

decide any issue before it.3681

[c] Scope of Authority.

The Chief of the Office of Oil and Gas has the duty “of issuing permits and otherwise

supervising the execution and enforcement of the provisions of this article.”3682 The Chief is

further authorized to enact rules necessary to carry out the purpose of the article and to perform

“all duties as the permit issuing authority for the state in all matters pertaining to the exploration,

development, production and recovery of coalbed methane.”3683

The CBM Review Board is an appellate body much like the Shallow Gas Well Review

Board and has jurisdiction and authority over all persons and property necessary for the

implementation of Article 21. The Board does not, however, have the authority to fix the price

of coalbed methane gas.

3684

(1) take evidence, conduct hearings and issue orders concerning applications for drilling permits and coalbed methane gas drilling units and the pooling of the interests therein; (2) promulgate, pursuant to the West Virginia Administrative Procedures Act,

The Board is specifically granted the power to do the following:

3685 and enforce reasonable rules necessary to govern the practice and procedure before the Board; (3) propose legislative rules pursuant to the West Virginia Administrative Procedures Act necessary to implement the powers and duties of the Board; (4) make relevant investigations of records and facilities it considers proper; and (5) issue subpoenas for the attendance of and sworn testimony by witnesses and subpoenas duces tecum for the production of any books, records, maps, charts, diagrams and other pertinent documents in its own name or at the request of any party.3686

[d] Pooling Process and Matters Covered.

3681 Id. § 22-21-5(c). 3682 Id. § 22-21-4(a). 3683 Id. § 22-21-4(b)–(c). 3684 Id. § 22-21-5(d). 3685 Id. §§ 29A-1-1 to - 4. 3686 Id. § 22-21-5(f).

733

The Chief of the Office of Oil and Gas acts in the same capacity regarding CBM wells as

the Secretary of the WVDEP does regarding conventional oil and gas wells. Namely, any entity

wishing to commence, operate, deepen, or stimulate any CBM well, to drill a horizontal CBM

well, or to convert any existing well to a CBM well must first obtain a permit from the Chief.3687

Permits must contain the names and addresses of the well operator, every person entitled to

notification, and each coal operator of record of any coal seam that is to be penetrated, that is

within 750 horizontal feet of any part of the proposed well bore or that is within 100 vertical feet

of the coal seam to be stimulated, unless the permit is for conversion of a ventilation hole to a

gob well.3688 In addition to other requirements, permits must specify the depth to which the well

should be drilled, the coal seams to be penetrated and to be completed by the well, and the means

proposed for stimulation of the well.3689

All CBM well permit applications must be accompanied by sufficient bond, an

application fee, an erosion and sediment control plan, consent and agreement of certain coal

seam owners, a plat with certain specifications, and certification that the notice requirements

have been satisfied.

3690 Also, before filing the application, the applicant must deliver by

personal service or by certified mail, return receipt requested, copies of the application, well plat,

and erosion and sediment control plan to owners of the surface of the tracts both on which the

well is to be located and on which the surface is to be used for roads or other land

disturbance.3691

3687 Id. § 22-21-6(a).

Owners and lessees and each operator of natural gas surrounding the well bore

3688 Id. § 22-21-6(b)(1)–(2). A “gob well” is defined as a “well drilled or vent hole converted to a well pursuant to this article which produces or is capable of producing coalbed methane or other natural gas from a distressed zone created above and below a mined-out coal seam by any prior full seam extraction of the coal.” Id. § 22-21-1(l). 3689 Id. § 22-21-6(b)(2)–(3). 3690 Id. § 22-21-6(c). 3691 Id. § 22-21-9(a)(1)–(2).

734

and existing formations above the top of the uppermost member of the Onondaga Group or less

than 6,000 feet deep, whichever is shallower, are also entitled to notice.3692

The coal owner consent requirement in section 7 of article 21 states that the CBM well

applicant must receive consent by each coal owner and operator of any workable seam in the

state that is 28 inches or more thick that is within 750 horizontal feet of the proposed well bore

and (1) which coal seam the applicant plans to stimulate or (2) which coal seam is within 100

vertical feet above or below a coal seams the applicant plans to stimulate.

3693 If the applicant

already has a contract or lease with the coal owner or operator for the development of CBM, that

contract constitutes a waiver of the consent requirements.3694

(1) A statement that a coal owner or operator as described in subsection (a) of this section has refused to provide written authorization to stimulate the well; (2) A statement detailing the efforts undertaken to obtain such authorization; (3) A statement setting out any known reasons for the authorization not being provided; and (4) A statement or other information in addition to that provided pursuant to subdivision (5), subsection (b), section six of this article necessary to provide prima facie evidence that the proposed method of stimulation will not render the coal seam unworkable, or considering all factors, impair mine safety.

If the required consent is not

given, the applicant may submit a hearing requires to the Coalbed Methane Review Board along

with an affidavit including the following:

3695

Besides merely not providing consent, a coal owner may also file a written objection of the

proposed drilling with the Chief within 15 days of receipt of notice and must explain the reasons

for the objection.

3696

3692 Id. § 22-21-9(a)(4).

3693 Id. § 22-21-7. 3694 Id. 3695 Id. § 22-21-7(b). 3696 Id. § 22-21-11.

735

The Chief will review permit applications. No permit may be issued within 15 days of

the filing date, in order to provide time for comments or objections, unless the applicant certifies

that all persons entitled to notice have been properly served and have written statements of no

objection to the well and access road locations. 3697 Permits that are issued will expire

automatically unless well work is commenced within 24 months of the permit date; no permit

may be extended to authorize the well work after the permit expires.3698

If comments or objections are filed, the Chief will provide to the Chairman of the CBM

Review Board a copy of the objection or comment, along with the permit application in question,

the corresponding plat, and other related information.

3699 The CBM Review Board will

promptly schedule a hearing, for which it will provide 15 days’ notice to any person that

submitted comments or objections, to any person entitled to notice of the application, and to any

applicant. In making its decision, the Review Board must consider the issues raised, including

surface topography and use and, among other aspects, must consider the ability to mine any

affected coal seam safely and to protect the future mining of such seams.3700 The applicant has

the burden of proving by clear and convincing evidence that stimulation of the workable coal

seam of 28 inches thick or more will not render that seam or any other seam of that or greater

thickness unmineable or unsafe for mining.3701

3697 Id. § 22-21-12.

The CBM Review Board must then make a

decision and file an order with the Chief, directing him to either refuse a permit, issue a permit

for the same or an alternate drilling location, issue a permit for the same or an alternate location

3698 W. Va. Code R. § 53-3-4.7.e (2011). 3699 W. Va. Code § 22-21-13(a) (2011). 3700 Id. § 22-21-13(b). 3701 Id. § 22-21-13(c).

736

but not allow drilling for a period of not more than one year from date of issuance of permit, or

to issue a permit without consent, while requiring evidence of sufficient financial security.3702

In the absence of a voluntary agreement, an operator, owner or other party claiming an

ownership interest in the coalbed methane may file an application with the Chief to pool (1)

separately owned interests in a single tract; (2) separately owned tracts; (3) separately owned

interests in any tract; and (4) any combination of (1), (2) and (3) to form a drilling unit for the

production of coalbed methane from one or more coalbed methane wells.

3703

(1) the identity of each well and operator as set out in the well permit application; (2) each well number, if one has been assigned; (3) the acreage of the proposed unit, the identity and acreage of each separate tract to be included in the proposed unit and, where parts of tracts are included, the acreage of such parts; (4) the district and county in which the unit is located; (5) the names and addresses of all persons to whom notice must be provided.

An application for

the creation of a drilling unit and pooling of the interest therein can be filed concurrently with a

permit application or filed later as a supplement to the permit. An application for the creation of

a drilling permit must contain the following:

3704

3702 Id. § 22-21-13(d).

When any coal seam is separately owned, the list of names shall identify such separate ownership giving the names of the separately owned seams; (6) statement describing the actions taken by the applicant to obtain a voluntary agreement from each interest owner or claimant named in the application to whom notice must be provided or any other owner or claimant who has notified the applicant of a claim from which agreement has not been obtained;

3703 Id. § 22-21-15(a). 3704 West Virginia Code section 22-21-16(a) provides that, “At least thirty days prior to the date set for hearing, the applicant shall deliver by personal service or by certified mail, return receipt requested, notice to the following:

(1) Each coal owner of record and coal operator of record of any coal seam underlying any tract or portion thereof which is proposed to be included in the unit;

(2) Each owner and lessee of record and each operator of natural gas surrounding the well bore and existing in formations above the top of the uppermost member of the “Onondaga Group” or at a depth less than six thousand feet, whichever is shallower. Notices to gas operators shall be sufficient if served upon the agent of record with the Office of Oil and Gas; and

(3) Any coalbed methane owner to the extent not otherwise named which interest arises from a deed, lease, contract, will, inheritance or other instrument of record wherein a person or entity identified in subdivision (1) or (2) of this section or the predecessor in title to such person or entity, expressly granted, leased, reserved or conveyed coalbed methane.

737

and (7) other pertinent and relevant information as the chief may prescribe by rules.3705

In addition to the information detailed above, the applicant must also provide the

following for the Board:

(1) A plat prepared by a licensed land surveyor or registered professional engineer showing the location of the coalbed methane well or wells, or proposed well or wells, the boundary and acreage of the proposed drilling unit, the boundary and acreage of each tract contained in the unit and, where parts of tracts are included, the boundary and acreage of such parts, a name identification of each tract and the district and county in which the unit is located. All boundaries must be shown with courses and distances; (2) A permit application fee of $250; (3) A certificate by the applicant that the notice requirements of section sixteen of this article were satisfied by the applicant. Such certification may be by affidavit of personal service, or the return receipt card, or other postal receipt, for certified mailing; (4) An estimate of the cost, or the actual cost if known, of drilling, completing and equipping, operating, plugging and abandoning any well or wells in the proposed unit.3706

After submitting the application, the Board sets a hearing date and issues notice to all

required parties. Prior to the time set for hearing, the Board must also set a time and place for

the applicant and all person to whom notice is required and who have not yet entered into a

voluntary agreement to hold a conference, at which time those parties may enter into a voluntary

agreement.

3707

(1) the area which may be drained efficiently and economically by the proposed coalbed methane well or wells; (2) the plan of development of the coal and the need for proper ventilation of any mines or degasification of any affected coal seams; (3) the nature and character of any coal seam or seams which will be affected by

If such agreement was not reached, the hearing will take place, at which time the

Board must take evidence and make a record thereof. Prior to issuing an order on the

application, the Board is required to consider:

3705 Id. § 22-21-15(b). 3706 Id. § 22-21-15(b)–(c). 3707 Id. § 22-21-17(a).

738

the coalbed methane well or wells; (4) the surface topography and property lines of the lands underlaid by the coal seams to be included in the unit; (5) evidence relevant to the proper boundary of the drilling unit; (6) the nature and extent of ownership of each coalbed methane owner or claimant and whether conflicting claims exist; (7) whether the applicant for the drilling unit proposes to be the operator of the coalbed methane well or wells within the unit; and if so, whether such applicant has a lease or other agreement from the owners or claimants of a majority interest in the proposed drilling unit; (8) whether a disagreement exists among the coalbed methane owners or claimants over the designation of the operator for any coalbed methane wells within the unit and, if so, relevant evidence to determine which operator can properly and efficiently develop the coalbed methane within the unit for the benefit of the majority of the coalbed methane owners; (9) if more than one person is interested in operating a well within the unit, the estimated cost submitted by each such person for drilling, completing, operating and marketing the coalbed methane from any proposed well or wells; and (10) any other available geological or scientific data pertaining to the pool which is proposed to be developed.3708

The Board shall take into account the evidence introduced, comments received and any

objections at the hearing, and if satisfied that a drilling unit should not be established, it shall

enter an order denying the application.

3709

(1) establish the boundary of the proposed unit, making such adjustment in the boundary as is just; (2) authorize the drilling and operation of a coalbed methane well or wells for production of coalbed methane from the pooled acreage; (3) establish minimum distances for any wells in the unit and for other wells which would drain the pooled acreage; (4) designate the operator who will be authorized to drill, complete and operate any well or wells in the unit; (5) establish a reasonable fee for the operator for operating costs, which shall include routine maintenance of the well and all accounting necessary to pay all expenses, royalties and amounts

If the Board is satisfied that a drilling unit should be

established, it shall enter a pooling order establishing a drilling unit. Such pooling order shall do

the following:

3708 Id. § 22-21-17(b). 3709 Id. § 22-21-17(c).

739

due working interest owners; (6) and such other findings and provisions as are appropriate for each order.3710

The operator designated in the final pooling order shall be responsible for drilling,

completing, equipping, operating, plugging and abandoning the well, shall market all production

from the well, shall collect all proceeds, and shall distribute such proceeds in accordance with

the division order issued by the review Board.

3711 All operations on a drilling unit for which a

pooling order has been entered are deemed operations on each separately owned tract in the unit

by the several owners thereof. The production allocated to each separately owned tract is

likewise deemed to be produced from those tracts.3712

§ 49.02 Types of Pooling Statutes in West Virginia.

[1] – Mineral Distinctions.

In West Virginia, oil, gas, and coalbed methane (“CBM”) are defined and regulated

according to several separate statutes. The coverage of the respective statutes for traditional

natural gas is determined by depth. Production from shallow natural gas formations is regulated

by the Secretary of the WVDEP and the West Virginia Shallow Gas Well Review Board and

must be developed and produced in accordance with West Virginia Code sections 22C-8-1 to

22C-8-19. The West Virginia Code defines a shallow well as:

any well drilled and completed in a formation above the top of the uppermost member of the “Onondaga Group”: [p]rovided that in drilling a shallow well the operator may penetrate into the “Onondaga Group” to a reasonable depth, not in excess of twenty feet, in order to allow for logging and completion operations, but in no event may the “Onondaga Group” formation be otherwise produced, perforated, or stimulated in any manner.3713

3710 Id.

3711 Id. § 22-21-17(d) (2011). 3712 Id. § 22-21-18. 3713 Id. § 22C-8-2(21).

740

The Code defines a deep well as “any well, other than a shallow well, drilled and completed in a

formation at or below the top of the uppermost member of the ‘Onondaga Group.’” 3714

Coalbed methane production and development is administered by the Chief of the Office

of Oil and Gas and by the West Virginia Coalbed Methane Review Board and must be developed

and produced in accordance with West Virginia Code sections 22-21-1 to 22-21-29. “Coalbed

methane” is gas which can be produced from a coal seam, the rock or other strata in

communication with a coal, a mined-out area, or a gob well. A “coalbed methane well” is any

hole or well sunk, drilled, bored, or dug into the earth for the production of coalbed methane.

Production of oil and from deep natural gas formations is regulated by the Secretary and by the

West Virginia Oil and Gas Conservation Commission and must be developed and produced in

accordance with West Virginia Code sections 22C-9-1 to 22C-9-16.

3715

[2] – Depth/Size and Spacing.

By statute, the Secretary of the WVDEP does not explicitly have authority to set spacing

for oil and gas wells. However, the Secretary does hold the authority to perform all duties as the

state permitting authority.3716 While no spacing laws or regulations have been promulgated for

initial well permits, the plat that a well work permit applicant must submit must show all wells

within 1,200 feet of the subject well, unless the application is for a shallow gas well with a depth

of 3,000 feet or more which penetrates a coal seam, in which case the plat must show all wells

within 2,400 feet of the subject well. 3717

[a] Shallow Gas Wells.

Presumably this information is considered by the

Secretary in determining whether to grant a permit.

3714 Id. § 22-9-2-(a)(12). 3715 Id. § 22-21-2. 3716 Id. § 22-6-2. 3717 W. Va. Code R. § 35-4-9.2(j) (2011).

741

For shallow gas wells, the Shallow Gas Review Board oversees the spacing requirements.

By statute, there are no minimum spacing requirements if the coal seam owner(s) underlying the

well or unit do not file an objection to the proposed well location. If the gas operator and coal

seam owner cannot agree on a location, then statute provides that the Board must direct the

Secretary to refuse to issue a drilling permit unless the following spacing provisions apply.3718

For all shallow wells with a depth less than 3,000 feet, there shall be a minimum distance

of 1,000 feet from the drilling location to the nearest existing well.

3719 For shallow wells drilled

to a depth of 3,000 feet or more, there must be at least 1,500 feet from the drilling location to the

nearest existing well.3720 If a coal owner objects to a well location that is between 1,500 and

2,000 feet from the nearest existing well, the gas operator has the burden of establishing the need

for the drilling location less than 2,000 feet from such nearest existing well. When the distance

between a proposed well location and the nearest existing well is greater than 2,000 feet, a coal

owner cannot file an objection based on spacing.3721

These minimum distance limitations do not apply if the proposed shallow well will be

drilled through an existing or planned pillar of coal required for protection of a preexisting oil or

gas well and the proposed well will neither require enlargement of such pillar nor otherwise have

an adverse effect on existing or planned coal mining operations.

3722

[b] Oil and Deep Natural Gas Wells; Coalbed Methane Wells.

3718 W. Va. Code § 22C-8-8(a) (2011). 3719 Id. § 22C-8-8(a)(1). "Existing well" means (i) any well not plugged within nine months after being drilled to its total depth and either completed in the same target formation or drilled for the purpose of producing from the same target formation, and (ii) any unexpired, permitted drilling location for a well to the same target formation. Id. § 22C-8-8(b). 3720 Id. § 22C-8-8(a)(2). 3721 Id. § 22C-8-8(a). 3722 Id. § 22C-8-8(c).

742

For oil and deep natural gas wells, the Oil and Gas Conservation Commission has

authority to regulate spacing.3723 There are no statutorily defined spacing requirements like

those for shallow wells. However, the Commission has promulgated rules that apply to location

of wells.3724 With an eye toward preventing waste, and “in the absence of an application for

special field rules or special field rules ordered by the Commission establishing drilling units or

authorizing different deep well spacing or location patterns for a particular field or pool or parts

thereof,” deep wells should not be less than 3,000 feet from any permitted deep well location or

any deep well drilling to or capable of producing hydrocarbons from the objective pool of the

deep well.3725 No such well should have less than a 400-foot setback from any unit or lease

boundary.3726 The Commission has the authority to determine deep well pattern locations for

deep wells located adjacent to any area governed by special field rules where enough evidence

exists to show that the pool spaced by such special field rules may extend beyond the spacing

order boundary and where uniformity in the spacing pattern is necessary for orderly development

of the field.3727 The rules also provide the Commission with the authority grant exceptions to

well locations, which exceptions may not prevent any operator from drilling a deep oil or gas

well on adjacent lands, directly or diagonally offsetting the exception, at locations allowed by the

applicable special field rules that the Commission has ordered.3728

The spacing of CBM wells is specifically provided for in West Virginia Code section 22-

21-20. No CBM well may be drilled closer than 100 feet from the outermost boundary of the

CBM tract, leased premises, or unit from which CBM will be produced, unless all owners and

3723 Id. § 22C-9-4(f)(1). 3724 W. Va. Code R. § 39-1-4.2 (2011). 3725 Id. 3726 Id. 3727 Id. 3728 Id. § 39-1-4.3.

743

operators of “any affected workable coal seams3729 agree in writing.”3730 Spacing will otherwise

be that provided by pooling order issued by the Chief, an order establishing special field rules, or

an order issued by the CBM Review Board.3731

Neither the shallow gas well nor the CBM statutes discussed above provide for a stated

maximum or minimum acreage for any pooled unit. West Virginia Code section 22C-9-7(a)(5)

and (7) establish a minimum and maximum size for oil and deep gas units. No drilling unit

established by the Commission may be smaller than the maximum area that can be drained

efficiently or economically by one deep well.

3732 However, if there is not enough evidence to

determine the area that can be drained efficiently and economically by one deep well, the

Commission may enter a temporary order until the requisite information is obtained to make

such a determination.3733

An order that establishes drilling units must specify setback requirements from the

nearest outside boundary of the drilling unit in which a deep well may be drilled.

3734 The

minimum distance should be the same in all drilling units with exception for deep wells drilled at

the time the application was filed.3735

3729 “Affected workable coal seams” for purposes of this section shall be those which will be penetrated or those seams more than twenty-eight inches in thickness from which production is targeted. W. Va. Code § 22-21-20 (2011).

The Commission may make an order allowing deep wells

to be drilled at locations within the minimum prescribed distance when a well drilled in

conformity with those provisions would not be likely to produce in paying quantities, would

encounter burdensome or hazardous surface or drilling conditions, or the location is prohibited

3730 Id. § 22-21-20. 3731 Id. 3732 Id. § 22C-9-7(a)(5). 3733 Id. 3734 Id. § 22C-9-7(6). 3735 Id.

744

by law.3736 If such exception is granted, the Commission may decide to restrict production so

that each person may recover his or her just and equitable production.3737

Drilling units must cover all lands determined to be or believed to be underlain by the

reservoir that the unit covers; the order may be modified as the Commission sees fit in order to

add lands or exclude lands to make the coverage more accurate.

3738 Also, the modification may

allow for additional deep wells drilled in a reasonably uniform pattern at uniform minimum

distances from the nearest unit boundary. Drilling units established by order may not exceed 160

acres for oil wells or 640 acres for gas wells.3739 However, the Commission may exceed the

acreage limitation by ten percent if the applicant demonstrates that the area would be drained

efficiently and economically by a larger drilling unit.3740

[3] – Election Options.

All of the statutes also provide election options for parties whose interests are

involuntarily pooled by the applicable Board or Commission. Pooling orders establishing

shallow gas units must provide an owner of an operating interest with an election option whereby

the party has ten days to either elect to (1) participate in the risks and costs of the drilling of the

well or (2) to participate in the drilling of the well on a limited or carried basis on terms and

conditions that are either agreed upon by the parties or established by the Board. Any owner

failing to make an election shall be presumed to have elected the limited or carried basis.3741

3736 Id.

The election options for owners of operating interest in oil and deep gas wells and/or

units are similar to those provided for shallow gas well owners. Any owner who does not elect

3737 Id. 3738 Id. § 22C-9-7(7). 3739 Id. 3740 Id. § 22C-9-7(a)(7). 3741 Id. § 22-8-11(e).

745

to participate in the risks and costs of the well must be given two options. The first option is for

the owner to surrender his or her interest or a portion thereof to the participating owners for

reasonable consideration, which, if not agreed upon, shall be determined by the Board.3742 The

second option is to participate in the costs and risks associated with drilling the deep well on a

limited or carried basis upon terms and conditions, which, if not agreed upon, shall be

determined by the Commission.3743

Pooling orders for CBM units provide three options for a coalbed methane owner

regarding participation in the unit:

(1) an election to sell or lease its interest to the operator on such terms as the parties may agree, or if unable to agree, upon such terms as are set forth by the Board in its Order; (2) an election to become a working interest owner by participating in the risk and cost of the well; or (3) an election to participate in the operation of the well as a carried interest owner.

A party that fails to make an election within 30 days of the issuance of the pooling order shall be

deemed to have elected to sell or lease their interest pursuant to the first option.3744

[4] – Minimum Operator Control

The West Virginia Code only provides for minimum operator controls in one instance, in

the unit operation of secondary oil recovery under the authority of the West Virginia

Conservation Commission.3745 In that case, the Commission must find that operators of at least

three-fourths of acreage and that the royalty owners of at least three-fourths of the acreage in the

pool have approved the plan and terms of unit operations to be specified in the Commission’s

order prior to the Commission’s issuance of said order.3746

3742 Id. § 22C-9-7(b)(5)(A).

3743 Id. § 22C-9-7(b)(5)(B). 3744 Id. § 22-21-17(e). 3745 Id. § 22C-9-8. 3746 Id. § 22C-9-8(a)(4).

746

§ 50.01 Analysis of Wisconsin Regulatory Framework.

[1] – Governance.

Wisconsin law devotes little space in its legislative material to regulation of oil and gas

production. The Wisconsin Oil and Gas Act (“Act”),3747 which contains only four statutory

sections, does not mention pooling or unitization. The Act grants authority to the Department of

Natural Resources (“Department”) to establish a licensing procedure for oil and gas

exploration,3748 as well as to promulgate rules to prevent waste in such exploration.3749 The Act

goes on to define “oil” as “naturally occurring liquid hydrocarbons”3750 and “gas” as “naturally

occurring gaseous hydrocarbons.”3751

The Department of Natural Resources is under the direction and supervision of the

Natural Resources Board (“Board”).

3752 The Board consists of seven members appointed for

staggered six-year terms.3753 At least three of those Board members must be from the territory

north, and at least three shall be from the territory south, of a line running east and west through

the southern limits of the city of Stevens Point.3754 No person appointed to the Board may have

received within the last two years or may currently receive a “significant portion of his or her

income directly or indirectly” from persons who hold or apply for permits3755 or from persons

who are subject to enforcement orders.3756

[2] – Procedure.

3747 Wis. Stat. § 295.31–37 (2011). 3748 Id. § 295.35(1). 3749 Id. § 295.35(3). 3750 Id. § 295.31(4). 3751 Id. § 295.31(3). 3752 Id. § 15.34(1). 3753 Id. § 15.34(2)(a). 3754 Id.§ 15.34(2)(b). 3755 Id. § 15.34(2)(c). 3756 Id. § 15.34(2)(d).

747

The Act provides that no person, meaning “an individual, owner, operator, corporation,

limited liability company, partnership, association, municipality, interstate agency, state agency

or federal agency,”3757 may engage in oil and gas exploration or production without a license

issued from the Department.3758

(a) Submit any information that the department considers necessary to determine whether the applicant is competent to conduct oil and gas exploration, production and site reclamation and to determine whether the requirements of sub. (5) are satisfied;

The licensure procedure to be established by the Department for

oil and gas exploration and production must require that the applicant do the following:

(b) Submit any information necessary for the department to determine whether the proposed exploration, production and site reclamation comply with this subchapter and rules promulgated under this subchapter; (c) Pay fees to cover the costs of plan review and licensing; [and] (d) File with the department a bond conditioned on the faithful performance of all of the requirements of this subchapter and rules promulgated under this subchapter.3759

Additionally, no person may commit waste in the exploration or production of oil and

gas.

3760 The rules promulgated by the Department for the prevention of waste in the exploration

for or the production of oil and gas must include rules related to, among other things, the spacing

of wells and the regulation of well production, including the allocation of allowable production

in any field or pool.3761

Although the Department has the authority to promulgate the aforementioned rules, no

rules regarding production of oil and gas have been so promulgated. To date, the only rules

created relate to exploration for oil and gas.

3762

3757 Id. § 295.31(8).

3758 Id. § 295.33(1), (2). 3759 Id. § 295.35(1). 3760 Id. § 295.33(3). 3761 Id. § 295.35(3). 3762 Wis. Admin. Code NR § 134.01–13 (2011).

748

§ 51.01 Analysis of Wyoming Regulatory Framework.

[1] – Name of Governing Body & Membership on Board.

The Wyoming Oil and Gas Conservation Commission regulates the production and

exploration of oil and natural gas within the state of Wyoming.3763 The statute’s goal is to

eliminate waste of the state’s oil and natural gas reserves.3764 Membership on the Commission

consists of (1) the governor; (2) the director of the Office of State Lands and Investments; (3) the

state geologist; and (4) two members of the public.3765 There is a residency requirement for the

two citizens who serve on the Commission.3766 Additionally, those citizens must be qualified to

serve within the oil and gas industry.3767

The terms of service for each member on the Commission vary. The governor is elected

by the citizens of the state and can serve a maximum of two four year terms in office. The

director of the Office of State Lands and Investments has no term limit.

3768 The state geologist

has a statutorily imposed six year term of service.3769 The two state citizens appointed to the

Commission serve for a two-year term.3770

[2] – Scope of Authority.

The Commission has very broad powers to regulate the development of Wyoming’s oil

and gas reserves.3771

3763 Wyo. Stat. Ann. § 30-5-101 (West 2011)

Its authority derives from Wyoming Oil and Gas Conservation Law which

grants to the Commission “jurisdiction and authority over all persons and property, public and

3764 Id. 3765 Id. 3766 Id. 3767 Id. 3768 Id.. § 9-2-2015. 3769 Id. § 9-2-803. 3770 Id. § 30-5-101. 3771 Id. § 30-5-104.

749

private, necessary to effectuate the purposes and intent of this act . . . .”3772 Pursuant to that

authority, the Commission implements regulations for the permitting of oil and gas wells.3773

[3] – Pooling Process.

[a] Permitting Process; Matters Covered by Permit.

No person may commence drilling a well without first applying for and obtaining a

permit. 3774

(1) detailed information regarding the proposed well site, (2) an accurate plat showing the location of the proposed well together with the proposed depth to which it will be drilled, (3) the type of drilling tools used in its drilling, (4) the identification of all water supply wells permitted by the Wyoming Office of the State Engineer which are located within one-quarter mile of the drilling and spacing unit together with the depth of the water to be appropriated, (5) the depth of the formation, and (6) any information known regarding useable groundwater underlying the drilling or spacing unit.

That application, submitted to the Commission, must contain the following

information:

3775

In addition, the person applying for the permit must attempt to secure the permission of

the surface owner for its drilling activities and provide compensation to that owner for damage

caused to the surface in connection with drilling activities.

3776 In lieu of such consent, the

applicant can provide for a bond which will compensate the surface owner for any and all

damages occasioned by its drilling.3777

In addition to ensuring the surface owner is properly compensated for damage to the

surface, the applicant for a well permit must also provide the owner of the surface no less than 30

3772 Id. 3773 055-003 Wyo. Code R. § 1 (Lexis 2011). 3774 Id. § 8. 3775 Id. 3776 Wyo. Stat. Ann. § 30-5-104 (West 2011). 3777 055-003 Wyo. Code R § 8 (stating that application for drilling permit must contain certification that person requesting permit to drill has complied with Wyo. Stat. Ann. section 30-5-402, which requires notice to and compensation for the owners of the surface before conducting drilling activities on their property).

750

days’ advance notice of the date it intends to commence drilling.3778 The applicant for a drilling

permit and the owner of the surface must attempt to negotiate a surface use agreement.3779 That

agreement covers the scope of drilling activities which are permitted for the oil and gas operator

on the surface. Either party to that surface use agreement has the right to have any dispute

resolved through mediation or arbitration.3780

The procedure for drilling a horizontal well is largely the same as for a vertical well. The

only significant difference is that certain additional information is required to permit a horizontal

well. An applicant for a permit proposing to drill a horizontal well must also provide the

following information:

a diagram clearly showing the wellbore path from the surface through the terminus of the lateral. A horizontal well's number shall be appended with an “H” suffix, denoting horizontal, in Block 8 of Form 1. If more than one lateral borehole extends from the same vertical wellbore, each such lateral must be permitted as an individual horizontal well with an “H” suffix. The surface location and the proposed footage locations of both the initial penetration into the productive formation and the terminus of the lateral shall be entered under “Location.” If the application is for a permit to drill a horizontal well, notice of the application shall be given by certified mail to all Owners within one-half mile of any point on the entire length of the horizontal wellbore, from the surface location through the terminus of the lateral. In the absence of any special Commission order, notice is not required for horizontal wells in federally supervised units or in API units provided that no portion of the horizontal interval is closer than six hundred sixty feet (660′) from a drilling or spacing unit boundary or any uncommitted tract.3781

[b] Voluntary vs. Involuntary Pooling.

If a drilling unit contains two or more separately owned tracts of land, persons who own

such tracts may voluntarily pool their interests for the development of oil and gas operations on

3778 Wyo. Stat. Ann. § 30-5-402 (West 2011). 3779 Id. § 30-5-402. 3780 Id. 3781 055-003 Wyo. Code R. § 8 (Lexis 2011).

751

the unit.3782 If such parties cannot voluntarily agree to pool their interests, the Commission,

upon application and hearing, may force the non-consenting party to pool.3783

Notice and a hearing are required before a party is forced to pool.

3784 Operations on any

part of the unit are deemed operations on any part of an interest forcibly pooled into that unit.3785

The portion of production allocated or applicable to each tract forcibly pooled in a unit is deemed

to have been produced from the tract as if by a well drilled on that tract.3786

A pooling order shall provide for reimbursement for the costs of drilling and operating

the well on each unit.

3787 After paying the landowner’s royalty and other obligations payable out

of production, the party(s) that drills the well is entitled to receive out of the production from that

well the costs incurred in drilling and operating the well.3788 Any dispute regarding whether

those costs are reasonable is resolved by the Commission.3789

Where there are multiple owners of the right to drill within a unit, the Commission will

determine each owner’s proportionate interest in the unit.

3790 If each such owner agrees to share

in his or her proportionate share of the expense incurred by the party(s) in drilling and operating

the well, that owner is entitled to his proportionate share of production, from the well on the

unit.3791

3782 Wyo. Stat. Ann. § 30-5-109(f) (West 2011).

However, if an owner does not agree to share in such expenses, that non-consenting

owner is only entitled to receive his proportionate share of production after the person(s) who

has drilled and is operating the well recovers:

3783 Id. § 30-5-109. 3784 Id. 3785 Id. 3786 Id. 3787 Id. 3788 Id. 3789 Id. 3790 Id. 3791 Id.

752

(i) One hundred percent (100%) of each such nonconsenting owner’s share of the cost of any newly acquired surface equipment beyond the wellhead connections (including, but not limited to, stock tanks, separators, treaters, pumping equipment and piping), plus one hundred percent (100%) of each such nonconsenting owner’s share of the cost of operation of the well commencing with first production and continuing until each such nonconsenting owner’s relinquished interest shall revert to it under other provisions in this section, it being intended that each nonconsenting owner’s share of such costs and equipment will be that interest which would have been chargeable to each nonconsenting owner had it initially agreed to pay its share of the costs of said well from the beginning of the operation; and (ii) Up to three hundred percent (300%) of that portion of the costs and expenses of drilling, reworking, deepening or plugging back, testing and completing, after deducting any cash contributions received and up to two hundred percent (200%) of that portion of the cost of newly acquired equipment in the well, to and including the wellhead connections, which would have been chargeable to the nonconsenting owner if he had participated therein.3792

Moreover, until the above described expenses are recouped, the other owners of the right

to drill within the unit, who have agreed to share in the expenses of drilling and operating the

well, may share proportionately in the share of production the non-consenting owners would

have been entitled to had it also shared in the expenses of drilling and operating the well.

3793

There is no minimum operator control required. Nor are there different restrictions based on

whether the well drilled is vertical or horizontal. Finally, coverage under the Wyoming

Conservation Act is not restricted according to the depth of a well drilled.3794

§ 51.02 Types of Wyoming Pooling Statutes.

[1] – Mineral Distinctions.

3792 Id. 3793 Id. 3794 055-003 Wyo. Code R § 2 (Lexis 2011).

753

The statutory and regulatory framework governing pooling applies to only oil and gas

and does not extend to cover any other organic or inorganic material.3795

[2] – Split by Depth.

The statute and regulatory framework governing pooling applies to both vertical and horizontal

wells. However, it does not distinguish depth.3796

[3] – Size and Spacing Rules/Size and Spacing Hearings.

Wyoming has mandatory spacing rules. The Wyoming Conservation Act requires that no

unit covering a pool is smaller than the maximum area necessary to drain one well.3797 Each unit

shall contain only one well.3798 All wells must be spaced on 40-acre tracts with the well at its

center. 3799

However, the Commission has the power to vary from these mandatory spacing rules

when it declares a pool and forms drilling units to cover that pool.

3800 The size of the pool and

the number of units it covers is determined by the Commission at a hearing.3801

If party requests a hearing to determine if a well, which is requested for permitting,

should be included within a unit, the permit for the well is stayed until after that hearing.

3802

(i) Owner has the right or obligation under the terms of an existing contract to drill said well; and

However, the applicant for the well may be issued a permit if it provides that the

(ii) Owner has a leasehold estate or right to acquire a leasehold estate under said contract which will be terminated unless he is permitted to commence the drilling of said well before the matter

3795 Id. 3796 Id. 3797 Id. 3798 Id. 3799 Id. 3800 Id. 3801 Wyo. Stat. Ann. § 30-5-109 (West 2011). 3802 Id.

754

of spacing can be fully heard and determined by the Commission.3803

If at a hearing to determine the size, existence, and shape of any pool, a pool is declared,

the Commission shall determine its size and number of drilling units which will cover that

pool.

3804

[4] – Minimum Operator Control.

Neither the statutes nor the regulations specify any minimum operator control.

3803 055-003 Wyo. Code R § 8 (Lexis 2011). 3804 Wyo. Stat. Ann. § 30-5-109 (West 2011).