Spudding Before Forced Pooling

By Stephen Clayman · March 6, 2018

Oklahoma Oil and Gas Interest Owners:

Bruce was a bit pissed when he called up Berlin today. Apparently, his fence line weaning efforts cost him about 6 hours of sleep after he found the fence knocked down and the calves back with their mommas. After he calmed down a bit, he asked why so many operators are spudding their wells before a forced pooling order has issued and what his options are as an unleased Oklahoma oil and gas mineral owner named as a respondent in the pooling proceedings.

There are a few reasons why an Oklahoma operator might spud a well before an Oklahoma Corporation Commission ("OCC") forced pooling order is issued.

1. As Berlin discussed yesterday, the OCC is short staffed and the review and issuance of orders is taking a substantial amount of time and in some cases up to 5 months after the pooling was recommended at the hearing. In order to feed the rig monster, operators must keep drilling their wells. After all, a pooling order is not needed to obtain a permit to drill.
2. If a forced pooled unit is not formed and there is no Joint Operating Agreement or any other voluntary pooling of leasehold interest between the working interest owners in the unit, there is no mechanism to govern the development of the unit. One of the consequences of this action is that there are no mechanisms to handle costs. And if a fellow working interest owner can't pay his costs, the operator will not provide well info. In short, operators will spud a well without a forced pooling order so they will not have to share well information in the short term with their competitors.
3. Forced poolings can be a time suck. Dealing with asinine requests on pre-pooling letter agreements, setting protest dates, and finally the protests themselves are often an exercise in busy work. If an operator has a high working interest in the spacing unit, she might just spud the well and file a pooling application in time to have the order issue before the division order title opinion needs to be rendered.

The rig monster never sleeps, but enjoys purchasing Oklahoma oil and gas mineral rights before a horizontal well is drilled. It increases his NRI and keeps his LPs happy.

The operator incurs a risk when he drills before a pooling order has issued. Hopefully, he has used the time to evaluate the well and if he's made a good well, to lease the offsetting acreage. However, if he had issues drilling or made a marginal well, he is in danger of owning 100% of the working interest as the other working interest parties will have scouted the well and will elect out of the unit when the pooling order issues at a later date. So what are Bruce's options as an Oklahoma oil and gas mineral owner? Once the order issues, he should read the order as it will contain the usual options, however, he should be more strategic as he will have more information available to him.

1. If the operator has made a good well: Bruce's interest will now be substantially more valuable. Bruce could participate in the well if he has completed his diligence on the property and scouted the location. However, Berlin's recommendation is that only professional mineral owners should participate in wells. Still, his mineral interest should command a premium with non-op companies who have other people's money to spend. Bruce should be able to negotiate an oil and gas lease with better terms than those found in the forced pooling order.
2. If the operated drilled a dud, it is unlikely that any non-op will seek Bruce out for his interest unless the non-op just wants to participate with a small amount of acreage in order to obtain well information. In this case, Bruce should just elect the option in lieu of participation under the pooling order that works best for he and his family's situation (ie does he need cash now to buy replacement heifers or maybe more royalty later if an operator decides to density the section).

Berlin hopes she answered Bruce's question. If you have any more questions about forced pooling, or you would like an offer to sell your Oklahoma oil and gas mineral rights. Please drop Berlin a line or comment below.

More to follow,

Berlin