Transcript www.dallasbar.org

Dealing with Missing Persons and
Holdouts: Using Rule
37 and MIPA for Urban Gas
Development
Presented By:
Eric C. Camp
WHITAKER, CHALK, SWINDLE & SAWYER, LLP
301 Commerce Street, Suite 3500
Fort Worth, Texas 76102
[email protected]
(817) 878-0529 (direct line)
Introduction
• Units with hundreds of small tracts
• Drilling and completion costs of $2-4 million
per well
• Laterals of up to 5,000 to 8,000 feet
Statewide and Field Rules
Governing Horizontal Wells
• Statewide Rule 86:
– Entire “horizontal drainhole” (portion of the
wellbore in the correlative interval) must comply
with Rule 37 spacing requirements
• Special Field Rules:
– Only “take points” (perforated intervals) along the
horizontal drainhole must comply with Rule 37
spacing requirements (adopted in Barnett,
Haynesville, and Eagle Ford fields)
Rule 37
• Statewide Rule 37: Wells must be at least
467 feet from property and lease lines
• Barnett Shale Special Field Rules: Wells
must be at least 330 feet from property and
lease lines
4
Rule 37 Exception Permits
• Will not allow an operator to drill through an
unleased tract
• From 1919 – 2005, RRC granted 12,000 Rule
37 Exception Permits
• In the Barnett Shale formation alone, the RRC
granted almost 3,000 Rule 37 Exception
Permits through March 2, 2010
5
1.
2.
3.
4.
5.
6.
7.
8.
Steps for Obtaining a Rule 37
Exception Permit
File a drilling permit with the RRC with a list of “affected
parties”
RRC serves “affected parties” with Notice of the Application
(1st class mail, no plat, includes Notice of Intent to Protest)
Affected parties have 21 days to file their protests to the
Application with the RRC
If no affected party protests or protestants waive their
objections, RRC administratively grants the permit
If protest is filed, RRC schedules a hearing on the Application
At the hearing, Applicant bears the burden of proving it needs
the exception permit to prevent waste or confiscation
If applicant wins, it gets the permit (good for 2 years) and can
drill the well and pay affected parties nothing
If applicant loses, RRC will not hear another Rule 37 exception
application for the same well absent “changed circumstances”
6
Preventing Waste
• Operator must show that:
– The exception well will recover substantial O&G
that wells in the field would not otherwise
recover; AND
– “unusual underground conditions” exist such that
a closer spacing of wells is essential to recover
additional O&G
– The “unusual underground conditions” must be
peculiar to the subject tract, as opposed to
equally applicable elsewhere in the field
7
Preventing Confiscation
• Operator must show that without the applied for well, it will be
denied a reasonable opportunity to recover its fair share of O&G
currently in place under the lease
• Requires proving that:
- Drilling a regular well would not afford the operator a fair and
reasonable opportunity to recover its fair share of O&G
currently in place; AND
- The proposed irregular location is reasonable
• Denying a party a fair and reasonable chance to recover O&G
under its property is “confiscation”
8
What about Economic Waste as
Confiscation?
• “Economic waste” is when an operator seeks a Rule 37 Permit
because producing the reserves from regular locations would be
uneconomic
• Split in authorities on whether “economic waste” can be
considered in Rule 37 preventing confiscation cases (Pre-August
2010 vs. Post-August 2010)
9
Recent Developments: Controversy with
Economic Waste as “Preventing
Confiscation
• The Frank Reed 117 Lease Case (RRC 1995), Green Gas Unit Case
(RRC 2008), and Ramey Case (RRC 2009)
– Economic Waste not a ground for granting a Rule 37 Exception Permit to
prevent confiscation
• The Eden Eastside Case (RRC 2010), Carter SE Case (RRC 2010), and
TWU B Case (RRC 2010)
– Used economic waste as a ground for granting Rule 37 Exception Permits to
prevent confiscation
10
Recent Developments: Urban
Permitting Processes
1. File NPZ plat
2. Remove NPZ’s and send Rule 37 Notices
3. If protests, amend plat to have NPZ’s only
around the protestants’ tracts
4. Repeat steps 2 and 3
11
Recent Developments: Proposed
Changes to Statewide Rules 79 & 86
12
Recent Developments: Proposed
Significant Changes to Statewide Rule 86
• Allows NPZ wells
• RRC will treat NPZ wells as exceptions to Rule 37 and
require a $200/NPZ/application fee
• “Deviation Box”
• Notice to affected parties by certified mail, return
receipt requested with plat of proposed well
• Operators must contact district offices 24 hours
before perfing a NPZ well and must submit perf logs
for NPZ wells
13
MIPA
• Enacted in 1965 to protect small tract owners after the
Normanna case invalidated prorationing formulas that
favored small tract owners
• Smith & Weaver’s Texas Law of Oil & Gas “Traditionally,
the MIPA has been construed … to protect small tracts
rather than a broad act designed to protect correlative
rights generally or as an act allowing owners of large
tracts more flexibility in development”
• Plain language of the statute has no such limitations
14
Limitations on Invoking MIPA
• Does not apply to reservoirs discovered and produced
prior to March 8, 1961
• Oil unit can be no larger than 160 acres; gas unit can be no
larger than 640 acres; with 10% tolerances allowed for
both
• Tracts large enough to support their own standard well
cannot be pooled together
• Can only pool acreage “that reasonably appears to lie
within the productive limits of the reservoir”
• Does not apply to lands owned by the State of Texas
15
MIPA Requirements
•
•
•
•
2 or more separately owned tracts
Lying within a common reservoir
For which field rules have been established
Separately owned interests are in an existing or
proposed proration unit
• Interest owners have not agreed to voluntarily pool
their interests
• At least one interest owner has drilled or proposes to
drill a well within the proration unit
• The applicant must make a fair and reasonable offer
to pool before submitting its MIPA Application
16
MIPA Unit Once Formed
• Cannot be modified or dissolved without
consent of all mineral interest owners
affected, except as necessary to enlarge the
unit under MIPA’s muscle-in provisions
• Automatically dissolves (1) one year after
effective date if no production or drilling has
occurred; (2) six months after the completion
of a dry hole; OR (3) six months after
production ceases
17
Applicant’s Fair & Reasonable Offer
to
Pool
• TX SC: Offer must take into consideration those
relevant facts, existing at the time of the offer,
which would be considered important by a
reasonable person entering into a voluntary
agreement concerning oil and gas properties
• Debate over amount of the bonus when it varies
greatly from leased tracts in the proposed unit
• Apparent Rule: Lease offer is “fair and reasonable”
if the bonus and royalty are consistent with the
prevailing market terms in the area at the time the
offer was made
18
Size of a MIPA Unit
• Applied for Barnett Shale MIPA wells have varied
from 96.32 acres to 312.9 acres for the cases where
the RRC has issued a proposal for decision (RRC has
approved unit sizes ranging from 96.32 acres to
254.53 acres)
• Examiners trying to include only acreage that can be
“effectively and efficiently” drained from the
proposed well (Commissioners have so far refused
to adopt this standard)
• Texas Steel B case resulted in the RRC proposing a
MIPA Unit that was 500 feet wide on either side of
the wellbore. Operator withdrew the application
because it was not interested in such a unit.
19
Economic Terms on Which Small
Tracts are Pooled
• Very little statutory guidance – each owner gets “fair share” of
production
• RRC’s formula:
– No bonus
– Prevailing royalty
– Carried working interest for remaining interest
– Zero Risk Penalty
• Is the RRC’s formula fair?
Multiple Wells in a MIPA Unit?
• Finley did not limit the Unit to a single well
• Rosen Heights: Limited to a single well
• Texas Steel B: Effectively limited to a single
well because of the RRC’s re-drawn unit
• RRC’s rational for limiting MIPA Units to a
single well is that it is only authorized to
approve a MIPA Unit where necessary to
prevent the drilling of unnecessary wells,
prevent waste, and protect correlative rights
Conclusions
• Increased press coverage will likely lead to increased scrutiny
of RRC decisions, possible legislative actions, and further RRC
rule revisions
• Both Rule 37 and MIPA need to be revised to protect
correlative rights and promote development – current system
has too many problems and uncertainties for both operators
and unleased mineral interest owners