Donald G. Hill, Ph.D.
Consulting Petrophysicist
The World is My District
California Registered Geophysicist 170
California Registered Geologist 6043
Kentucky Registered Professional Geologist 1624
Texas Licensed Professional Geophysicist 6289
Petrophysics, Borehole Geophysics, and Subsurface Geology
Planning, Oversight, and Interpretation
1012 Hillendale Ct. Office: (925) 437-5748
Walnut Creek, CA 94596 FAX: (309) 420-7354
e-mail: dgh@hillpetro.com Cell: (925) 437-5748
http://www.hillpetro.com
http://www.hillpetrophysics.com
Memorandum Memorandum
Subject: Unitization Revised: September 22, 2014
ABSTRACT
Exploration/Production Units are formed to simplify bookkeeping, protect the
interests of the individual landowner and producer members of the Unit, allocate costs
and revenues, and to achieve maximum efficient resource (oil and/or gas) recovery.
INTRODUCTION
Oil and gas fields do not always honor property, lease, or concession boundaries.
Consequently, they may not have sole owners and/or operators. When an oil and/or gas
field has multiple owners and/or operators, the following problems arise:
How to protect the asset rights of the individual property owners and/or
operators.
How to maximize the efficient production of the oil and/or gas reserves.
How to equitably allocate the revenue generated by the hydrocarbons
produced between all of the owners and/or producers.
How to allocate field development and production costs between various
operators.
Figure 1. Signal Hill Field, circa. 1923 (after: Wikipedia Website).
The solution to all of these issues, developed initially in the US, where the
landowner often holds mineral rights, is to form exploration and/or production units. The
improved conservation and ultimate recovery achieved by these production units has lead
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to their spread throughout the world. In many jurisdictions, production units are
mandatory, when more than one operator and/or mineral rights owner is involved. They
are also mandatory, when fields straddle international borders.
BCKGROUND
In most of the world, governments own the rights to minerals (including oil and
gas) below the surface (i.e., Property of the Crown). In the US and some other
countries, mineral rights may also be held by the individual states or provinces. In the
onshore US, onshore Newfoundland (but not the rest of Canada), and a few other
countries, surface landholders may often control the rights to minerals below the land that
they own. If an exploration company wishes to explore for oil and gas in these places it
must first obtain mineral rights leases from the mineral rights and/or land owners. If
commercial oil and/or gas reserves are found, these exploration leases usually dictate
how the landowner will be compensated (normally 1/8 of the value of the produced
hydrocarbons) for the removal of the produced hydrocarbons.
Figure 2. Otsego Lake Michigan, Showing Hill Parcel of Gas Production Unit (from the Author)
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Lease terms do not usually specify how the oil and gas reserves are to be
produced. Early developers often produced the reserves as rapidly as possible, in order to
generate cash flow. This practice often resulted Derrick Forests so dense (see figure 1)
that a person could literally step from one derrick to the next, without touching the
ground.
If oil and/or gas is discovered on one land owners property, lease holders for all
neighboring properties are obligated to drill offsetting wells to protect the other land
owners from having their hydrocarbon resources drained by their neighbors well(s). In
the early days of the petroleum industry, this obligation often resulted in rows of parallel
wells being drilled on each side of property lines.
Both of these practices often resulted in expensive development costs, inefficient
hydrocarbon recovery and, often, premature depletion of fields. This became particularly
obvious when many small and/or narrow land parcels were involved. If a single
developer were involved, they would often attempt to get the individual land owners to
agree to pool their land holdings into a production unit with any revenues generated by
subsequent hydrocarbons recovered divided according to the relative acreage of each
member of the unit.
ILLUSTRATIVE EXAMPLE
Figure 2 helps to illustrate just how this works. Otsego Lake is approximately 1
mile wide, by 4 miles long and located within the Pinnacle Niagran Reef Trend and
Antrim (gas) Shale areas in Northern Michigan. While the Antrim Shale is extensive, the
Niagran reefs are very small and can usually be drained by 1 3 wells. My family owns
a small (100 ft x 50 ft, or: 30 m x 15 m) lake front lot, which is part of a large gas
production and storage unit encompassing essentially most of the lake and surroundings.
The mineral rights for all lake front property (including my familys lot) extend to the
center of the lake. I am not entirely certain just where the gas reservoir(s) are, but my
family has been receiving a modest royalty income, for several years, because they are
part of the Unit.
MULTIPLE LEASE HOLDERS
If multiple lease-holders (i.e., operators) are involved in a unitized filed, the same
concept is extended to development and operations costs, as well as revenues. In fact,
many government units (e.g., Alberta) require unitization of all oil and gas fields, with
multiple operators.
PTE-461 SECTION 1 HOMEWORK: EQUITY DETERMINATION PROBLEM.
This problem is based loosely on several equity determination cases that I know,
at least, a little about.
Surface acreage and/or reservoir footprint, may satisfy landowners, but oil and
gas producer agreements tend to go into more detail. Their unitization agreements
usually are based on reserves and/or reservoir quality. Equity disputes and
redeterminations for giant and super giant fields, such as the Yates and Kelley-Snyder
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Fields, of West Texas, Prudhoe Bay Field on the North Slope of Alaska, or the Ninian
Field, in the North Sea, have gone on for years, with periodic adjustments, and often end
in arbitration.
Equity determinations are based upon hard facts, most often involving
Petrophysical models. The petrophysical models are based upon laboratory (fluid,
routine and special core analyses) and wellsite (mud log, sample descriptions, core
descriptions, wireline or MWD/LWD log, and formation test) information. Because
petrophysics is as much a subjective art as a science, different petrophysicists may, and
often do, develop different petrophysical models.
Negotiations and/or arbitrations that go into Equity Determination involve just
how these facts are defined. In many cases participants to these negotiations will have
installed mini Petrophysical and Reservoir Engineering, offices at the site of the
negotiation, to support their arguments. While negotiators are discussing the validity of
various petrophysical models and parameters, to determine the equity distribution of the
reservoir in question, their support teams will be conducting nearly continuous parameter
sensitivity evaluations to determine just how these different models and parameters will
affect their organizations equity.
The section 1 homework assignment is designed to give you a feel about just how
important small changes in petrophysical model parameters can be. Because of the
volumes involved, for the entire field, many equity disputes have hinged upon
disagreements over as little as 0.1 (%) porosity or saturation unit.
REFERENCES
No hard copy references, at this time.
WEBSITES
http://library.findlaw.com/2003/Jan/30/132512.html
http://www.blm.gov/mt/st/en/prog/energy/oil_and_gas/reservoir_management/unitization.html
http://www.michigan.gov/cgi/0,1607,7-158-12540_13817_13818-31011--,00.html
http://library.findlaw.com/2002/Sep/23/132513.html
http://en.wikipedia.org/wiki/Signal_Hill,_California
http://www.consrv.ca.gov/dog/photo_gallery/historic_mom/Pages/photo_02.aspx
