Splitting the Baby and the Pooling Bonus

Oklahoma Oil and Gas Mineral Owners:

The Oklahoma Corporation Commission has been regulating on the fly as to rule changes on multi-unit horizontal wells. One of the recent changes is that applicants now must offer a formation election if the applicant desires to force pool more than one common source of supply. Berlin thinks that this effects the unleased Oklahoma mineral owner more than the commissioners had originally intended.

 Your call Sol...splitting the pooling bonus for the Oklahoma oil and gas mineral owners.

Your call Sol...splitting the pooling bonus for the Oklahoma oil and gas mineral owners.

Old World for the Mineral Owner:

The Commission effectively put a stop to applicants pooling from the surface to granite, instead allowing the the applicant to only pool her target formation and the formation directly uphole and directly downhole. For example, if the applicant proposed a Woodford well, she would have been allowed to pool the Mississippian, Woodford, and Hunton. For simplicity's sake, if my man Bruce was an unleased Oklahoma mineral owner and did not want to participate in the Woodford well with his 10 net mineral acres, he would elect out of the initial well and thus have given up his ability to participate in any Mississippian, Woodford, or Hunton wells while the forced pooling order was in effect. If the only option in lieu of participation was $1,200 per net mineral acre and a 3/16 royalty, Bruce would receive $12,000 from the applicant. 

New World for the Mineral Owner:

The situation has now changed with formation elections. The applicant now has to testify to the perspective value of a well in each formation she expects to pool in order to proportionally allocate the bonus amount. If she testifies that the Mississippian, Woodford, and Hunton are equally perspective, they would receive 1/3 of the allocated bonus each. Now if Bruce elects not to participate in the drilling of the initial Woodford well, he will only receive $4,000 from the applicant ($1,200/nma * (1/3) * 10). If the applicant does not propose a Mississippian or Hunton well during the primary term of the forced pooling order, Bruce will never have an opportunity to make an election and thus will never be compensated for his Mississippian and Hunton formations being pooled for a year.

Now many of you will shout "Berlin, you're a goon, Bruce's Mississippian and Hunton will be open after the primary term of the order." And that is true. Bruce will most likely be open in a year where he could lease or even propose his own well. But Berlin would argue that after a horizontal operator has drilled a Woodford well in the unit, the chances of another operator paying Bruce a premium for his Mississippian and Hunton rights would be unlikely unless better wells are eventually made in the the Mississippian or Hunton.

As there are pros and cons to formation elections for the Oklahoma mineral owner, there are also pros and cons for the applicant/operator. Pro: Her pooling bonus will be lower in the short term, in the case above 1/3 of what it would have been under the old regime. This will be even more advantageous for the operator who is pooling (as opposed to leasing) a greater amount of acreage. Con: Many companies are now valued on their net acres in multiple formations. So now if the operator pools more acreage and initially only drills Woodford wells, her Mississippian acreage count will not see a benefit from the pooling proceedings. This should be somewhat intuitive, she didn't pay for it, she doesn't own it (unless she can convince a bigger fish with someone else's money to pay her for the Mississippian acreage if it is during the primary term of the pooling order).

Conclusion:

Berlin predicts that these rules will change at some point in the future and that an Oklahoma mineral owner will again be permitted to elect out of all formations held by the pooling order in order to receive 100% of the pooling bonus from the outset (TVM, even if they don't call it that...).  

If you have any more questions on split bonus payments under Oklahoma Corporation Commission forced pooling orders or you would like to sell your Oklahoma mineral rights and royalties, please contact Berlin.

More to follow,

Berlin