Forced Pooling

A Well Proposal In Oklahoma - A Boon to the Mailman

A Well Proposal In Oklahoma - A Boon to the Mailman

Berlin's friend Bruce called her up on Friday, and after he finished ranting about planting his tomatoes before the last frost date, he got down to asking about well proposals and why he is receiving them in the mail for his Pittsburg County, Oklahoma mineral rights…

Splitting the Baby and the Pooling Bonus

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... 

Spudding Before Forced Pooling

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...

Four Key Pieces of Correspondence for the Oklahoma Mineral Owner

(This post originally appeared on www.oklahomaminerals.com on November 8,2016)

All,

Landmen are no busier than most professionals during the work day, but it is often stated that company landmen never return the calls of mineral owners. While this might be true of the bottom 10% of the profession, most landmen know that by placing a single call to a mineral owner, he could spend 30 minutes explaining knowledge that could easily be obtained throughsimple internet research. An informed mineral owner, who asks a poignant question, is much more likely to receive the answer he needs than the owner who calls to ask the difference between a spacing application and a well proposal.

Admittedly, if one owns a single tract of minerals or maybe just inherited the minerals, then the inaugural process of leasing and receiving the regulatory paperwork while the company is assembling the drilling and spacing unit would surely baffle most.

In general, there are four key pieces of correspondence that an Oklahoma mineral owner will receive from the landman. These occasions are detailed in brief below.

The Offer to Lease

Often, the first time an Oklahoma mineral owner will be contacted by a landman is when the landman’s company is assembling a prospect. The mineral owner will be contacted by phone and/or mail with an offer to lease their mineral interest. Most landmen will offer at least two options which will differ in the amount of cash bonus per net mineral acre and the royalty.

The Well Proposal

After the landman has made a bona fide effort to reach an agreement with all owners who own the right to drill a well in the proposed unit, he will send a well proposal to the parties with whom he has not yet reached an agreement. The well proposal will offer final terms in lieu of participation in the well and details of the well to be drilled such as location, proposed depth, target formation, estimated depth and cost of the well in the event the party would like to participate. It is important to note that in Oklahoma, an election to participate in the well is not binding until the party elects under the pooling order.

Oklahoma Corporation Commission Applications

Initially one of the most confusing aspects of being an Oklahoma mineral owner is the receipt of Oklahoma Corporation Commission (“OCC”) applications and orders. Some owners ask why they are being sued and others ask to be removed from the mailing list. Owners receive the applications and orders because Operators and applicants are required by law to provide notice of their activities to the owners who their activity affects. These applications are orders are mailed from an attorney who represents the applicant in OCC matters. The three most common applications that an owner will receive are the spacing application, location exception application, and pooling application. These applications will be discussed in detail at a later date, but the pooling application will be the application that will have the largest effect on the mineral owner’s rights and pocketbook. The OCC publishes a handbook for mineral owners that can be found http://www.occeweb.com/og/PubAsst/WebRoyaltyOwnersHandbook3-2015.pdf

The Division Order

If an operator successfully drills and completes a well, the next correspondence the mineral owner will receive from the company is the division order. A division order is an instrument which sets forth the proportional ownership in the produced hydrocarbons. The proportional ownership is communicated to the owner on the instrument in a decimal form. After the division order is signed and curative title issues are completed, the mineral owner should receive their first check within six months from the date of first production from the well.

In conclusion, the four key pieces of correspondence that an Oklahoma mineral owner will receive from the landman and the company, are the offer to lease, the well proposal, Oklahoma Corporation Commission applications and orders and finally, the division order. All four of these topics will be expanded upon in future articles. If there are any other topics you would like to discuss, please mention your ideas in the comment section.

More to follow,

Berlin

The Crystal Ball and Newfield Exploration

All,

Down goes Frazier and Linn Energy, Sandridge Energy, and Chaparral Energy. All in bankruptcy within a month of each other. American Energy Partners are shutting the doors Newfield Exploration is leaving Tulsa. The patch has seen better days.

The Newfield exit is a bit baffling. It's not surprising that the management teams of publicly traded companies are notoriously selfish, but to close down the office that deploys 80% of the company's capital budget in order for them to maintain their faux bourgeois existence in the Woodlands is a stretch. Despite a top position in the STACK (Sooner Trend Anadarko Basin Canadian and Kingfisher Counties), it is going to be more difficult for them to compete with locally based companies from their perch in Houston. There is something to be said for a company landman to know the local competition and to be able to drive to El Reno if need be to gather intel at the courthouse. Just as Apache's position is unraveling in the Mid-Continent after their retreat to the swamp that is Houston, Newfield could very well fall in their footsteps. It would be quite a treat to see one of the Oklahoma companies force pool Newfield out of everyone of their 42,000 new acres they recently acquired from Chesapeake.

More to follow,

Berlin

Forced Pooling In Oklahoma

Oklahoma Oil and Gas Mineral and Royaty Owners,

Pooling is the process of combining the interests of two or more tracts in the same spacing unit. The area is called a pool, or a unit. Pooling provides benefits to the operator by combining all owners’ interests in one common pool under one drilling and spacing unit and utilizing one or more common geological formations, commonly referred to as a “common sources of supply” by the Oklahoma Corporation Commission (“OCC”). The primary purpose of pooling is to develop and operate a given formation in order to recover the greatest amount of hydrocarbons that can reasonably be produced, prevent the drilling of unecessary wells, and also to achieve equity among the interest owners by permitting each owner to recover a fair share of hydrocarbons therefrom. There are several types of pooled units, but for today's discusssion only voluntary pooled units and forced pooled units will be discussed.

Owners wishing to propose a well must secure the commitment of other owners in the drilling and spacing unit.  The proposing party, at minimum, should send a well proposal to all other owners in the unit. Most drilling and spacing units for horizontal wells comprise an area of 640 acres or one section. Since Oklahoma minerals rights are often bought and sold, this could mean that there are hundreds of owners in just one section. Closing a deal or even locating all the owners is very difficult. Therefore, the proposing party must file a pooling application through the OCC in order to “force” or secure commitment from all parties. This process is called forced pooling in Oklahoma.  

The pooling application will provide notice to all of the unleased mineral owners or all lessees who will be listed as respondents on Exhibit “A” of the application. The pooling notice is mailed to all respondents having the right to drill and/or participate in the well. The notice sets a time and place for the upcoming hearing and allows any respondent to be present in order to protect his interest.

At the hearing, the landman who attempted to negotiate with all the owners in the unit, will testify under oath that proper notice was given to each of the respondents and also that a good faith effort was made to come to terms with each respondent listed on Exhibit “A”. Testimony by the landman will include the fair market value of the mineral interests in the section and the surrounding eight contiguous sections ("the nine spot"), as it relates to lease bonuses paid and royalties offered within the last year; and may include any competitive single section trades such as farmout agreements or term assignments made in the same area.

After the hearing, the judge will decide whether to issue a pooling order or not.  If a pooling order is issued, the respondent(s) will have 20 days from the issuance of the order to make an election on the options provided. A pooling order typically provides for one of the following two options:

1.  Participate in the well and pay the owners' proportionate share of costs.

2.  Select one of the options presented by the landman. There will usually be two combinations of a cash bonus per net mineral acre (nma) and a royalty. For example, one could selected $200/nma and a 1/8th royalty or $100/nma and a 3/16th royalty.

It is important to note that an owner's selection will govern his unit rights for as long as that unit is producing. There should be provisions in the pooling order to govern subsequent wells. For example, if an owner elects not to partiticpate in the intial well and instead selects the 3/16th royalty, he will not have the option to participate in subsequent wells.

This process is beneficial to the operator as the OCC causes all undecided landowners to make elections pursuant to the pooling order. Oklahoma’s forced pooling process benefits operators, working interest partners and mineral interest owners. It stimulates a competitive market for development of oil and gas, which results in revenues for investors and royalty owners.

There is no minimum ownership percentage to file to pool a section. Even an owner with a small stake in the unit can apply to pool the other owners to force the drilling of the well. This is important because it can push legacy operators out of the way who are not wanting to spend the capital to develop the newly found horizontal horizons.

Most poolings are in force for a year and if the initial well is not spud within this time frame than the order will expire as to the formations that were pooled.

Any questions? More to follow.

BR