POOLING FOR HORIZONTAL WELLS: CAN THEY TEACH

AN OLD DOG NEW TRICKS?

Bruce M. Kramer Of Counsel McGinnis, Lochridge & Kilgore

Austin & Houston, TX Maddox Professor of Law Emeritus

Texas Tech University School of Law Lubbock, TX
s

xx.O1

The HistoricalAntecedents and Basic Definitions

This paper will explore the issues arising from the pooling of mineral, leasehold and
royalty interests for the purpose of accommodating the drilling of a horizontal well.
1

lt will

analyze the history of state well spacing and compulsory pooling statutes and then provide an update of legislative and regulatory changes that have occurred in the past 25 years to dealwith

the problems that horizontal wells create under the traditional paradigm of pooling. The paper will also cover the issues that arise from the voluntary pooling of mineral, leasehold and royalty interests including trespass, surface use and the need for a re-writing of leasehold pooling
clauses to better deal with horizontal wells. "Pooling" or a "pooled unit" will refer to the joining together of small tracts or portions of tracts for the purpose of having sufficient acreage to receive a well drilling permit under the

tThereisasubstantial
??.07 infro.

amountofliteraturegoverninghorizontal drilling. lhaveprovidedalistoftheminsection

relevant state or local spacing or drilling laws and regulations.'The term communitization refers to the pooling of interests where one of those interests is owned by either the federal

government or a federal oil and gas lessee.3 Compulsory pooling refers to the use of the state
police power to combine separately owned interests within a designated spacing and/or drilling

unit. Compulsory pooling arose largely in the context of the development of state spacing
and/or drilling regulation

lAl

Horizontal Drilling for Dummies

Normally a horizontalwell can be broken down into three operational segments: the

vertical section, the build section and the lateral section.a The vertical section is drilled as any
veical well would be depending on the depth and the type of rock that will be encountered. Prior to drilling the engineers will have determined the depth at which the "Kick-Off Point" is

reached. The kick-off point is the depth at which the vertical drilling rig will be replaced by a
horizontal drilling rig. Reaching the kick-off point leads to the build section of a horizontal well.

The build section entails the building of the angle from zero degrees to around ninety degrees at the end of the build section. The subsurface tools needed to conduct the build operation segment include the drill bit, the mud motor, bent subs and the "MWD" or measurement while
drilling devices. ln drilling the build section, bit rotation is not provided by the drill string as in the vertical section but by a mud motor through a series of impellers that are displaced as drilling fluid is pumped down the drill string. Bent subs are then used to provide angle and are usually applied just above the mud motor. During the build section operations a MWD or measurement while drilling device will be used to provide the directional measurements necessary to steer the mud motor and bit along the proper azimuth. The build section t Bruce M. Kramer & Patrick H. Martin,
The Law of Pooting ond unitization 5 L.OZ (3d ed. 2008)[hereinafter Kramer & Martinl. See also 8 Patrick H. Martin & Bruce M. Kramer, Williams & Meyers Oil and Gos Low 820-2i. (2008)[hereinafter Williams & Meyers]. t 2

Oit and Gas Leases 5 18.01t21. Reid & John W. Morrison, "Doing the Lateral Lambada: Negotiating the Technical and Legal Challenges See Taylor

Lo* of Federat

of Horizontal Drilling,"43RockyMt.Min.L. lnst.ch. 16(L997). Seealso PatriciaMoore,"Horizontal Drilling-New Technology Bringing New Legal and Regulatory Challenges ," 36 Rocky Mt. Min. L. tnst. ch.15 (1990).

operations are continued until the inclination of the bit is at or near 90 degrees or the intended production formation is reached. The last operational segment is the lateral section. The same

equipment used in the build section is used in the lateral section although the bent subs
employed are bent less severely. A MWD is employed to continuously monitor the angle and length of the horizontal well bore. The length will be determined by the formation being drilled,

whether or not the horizontalwell bore has to make "doglegs," and appropriate spacing rules. lt is not uncommon for laterals to be 3000-5000 feet in length.

tBl

A Condensed History of Compulsory Pooling Statutes

The domestic oil and gas industry has been in existence for around 150 years.u

Government regulation of the oil and gas industry, including the enactment of compulsory
pooling and unitization statutes has been in existence for only a slightly shorter period of time.6

The need for well spacing and pooling regulation was a direct result of the early and widespread
adoption of the rule of capture as the basic ownership principle for oil and gas.t Because the only protection a mineral owner had under a rule of capture property regime is to drill a well to prevent drainage from a well located on a neighboring tract there is a built-in incentive for such owners to drill as many wells as quickly and as close to the property line as one could.s

Two Kansas municipalities, in response to the threat of over-drilling in urban areas,

enacted the earliest well spacing and pooling ordinances in 1927.e The City of Oxford

The drilling of the Drake well near Titusville, Pennsylvania in 1859 is considered the "birth" of the modern oil and gas industry, although there are published reports of an oil spring existing in Alleghany County, New York as early as 1833 and a productive oil well in Washington County, Ohio that may have been drilled as early as 1814. See 1 Kramer & Martin, 5 1.or; Eugene Kuntz, A Treotise on the Low of oil and Gos 55 L.4-L.6 (2008). See 1 Kramer & Martin, S 1.0L. See generally, A.B.A. Legal History of Conservation of Oil and Gas (L938). Professor Summers identifies Pennsylvania as adopting conservation statutes in 1878, New York in 1879, Ohio in 1883 and West Virginia in 1891. /d. at 1 (n.1). t Bruce M. Kramer & Owen L. Anderson, "The Rule of Capture-An Ol and Gas Perspective," 35 Env'tl 1.899 (200s).
6

t Kramer Martin, &

t

5 2.01. td. aL S 3.02t11. See also 1938 ABA Legal History, note 6 supro aL55-56. The City of Winfield ordinance set a minimum spacing or drilling unit of either 90,000 or 300,000 square feet and then required the drilling permit applicant to prove that she owned or controlled that minimum area because it would issue a permit. The Winfield

ordinance also provided for a pooling of interests within such drilling permit areas in order to qualify for a permit.

ordnance resolved the problem of who would get the one drilling permit allocated per drilling unit or "block:" by using a first-intime procedure but then requiring the permit owner to make pro

rata royalty payments to all mineral owners within the "block" based on a surface acreage formula.r0 The other leasehold interest owners in the "block" would receive their pro rata share of production if they tendered to the permit owner their pro rata share of the costs of drilling and
operating the well.11 Other municipalities in Oklahoma and Texas followed suit with their own

compulsory pooling ordinances.l2

ln 1935, two states enacted compulsory pooling legislation, New Mexicol3 and
Oklahoma.to The New Mexico provison used the proration unit system as the primary
inducement for voluntary pooling but also authorized the state to force-pool separate interests

within the proration unit. The Oklahoma provision used the drilling unit system to both space wells and declared that if there were two or more owners located within a designated drilling
unit, their interests would be pooled on a surface acreage basis.1s The constitutionality of

compulsory pooling was upheld in Patterson v. Stanolind Oit & Gas Co..16 The court's analysis
of the inverse condemnation/regulatory taking claim is superficial at best, merely denoting that all property interests are held subject to the valid exercise of the police power.tT The drillsite royalty owner's claim that its interests had been taken by its dilution to accommodate the other royalty interest owners within the drilling unit was dismissed.
The city of oxford ordinance, on the other hand, combined spacing and pooling into one process, proportionately reducing the royalty to be paid mineral owners within the drilling "block" based on surface acreage. /d. to ld. see generlly, R.M. Williams, "Compulsory Pooling and Unitization of oil and Gas Rights,,, 15 ol & Gos tnst. 223,24'1.-42 (Sw. L. Fdn.1964). tt Kramer & Martin, 3.02t1]. t' Kramer & Martin, 5 5 3.02t11. tt 1935 N.M. Laws, ch.72. see 193g ABA History, note 6 supra at1,o6-a7;2gg-3o2. to 1935 okla.sess. Laws, ch. 59 analyzed in 193g ABA History, noe 6 supra arzog-2Lo. tt Kramer & Martin,S S 3.02[1]; 10.02. tu 1938 OK 138, 182 Okla. 155,77 P.2d 83, app. dism',d,3O5 u.s. 576 (1g3g). constitutional attacks on compulsory pooling statutes are reasonably rare and uniformly unsuccessful. See Waller Brothers, lnc. v. Exxon Corp., g36 F'Supp. 363, !26 o.&G.R. 265 (S.D.Miss.), afld,20 F.3d 469 (5th Cir. 1994); tn re SAM oit, BrT p.2d zgg, rL6 o.&G.R.417 (Utah 1991); Bennion v. ANR Production co.,. 8L9 p.2d343,116 o.&G.R.401 (utah 199L); but cf., Burtner-Morgan-stephens co. v. wilson, 63 ohio st.3d 257, 586 N.E.2d L062, tr} o.&G.R. 484 (Lgg2'). t' 77 P.2d at89.

The interplay between spacing regulation and pooling regulation was recognized in a
series of California cases and legislative amendments that replaced a well spacing system with
a well spacing and compulsory pooling system in order to deal with the inverse condemnation

claims of parties who were unable to receive a well drilling permit.18 The Texas response to the regulatory takings issue was to allow Rule 37 exception well permits so that smalltract owners could get a drilling permit even though they owned substantially smaller tracts than would
otheruvise support the issuance of a Rule 37 well permit.le After enactment of the Mineral

lnterest Pooling Act in 1965, Kansas became the only major producing state that did not have a compulsory pooling statute. ln an article written in 1997, the author concluded that only 4 states
had any active regulation of horizontal wells under their well spacing, proration and/or pooling statutes or regulations.2o Those states included North Dakota, Oklahoma, Texas and Wyoming. To the extent to which horizontal wells were regulated in other jurisdictions those regulations

would typically fall under the deviated or slant hole regulation.2l At the end of this paper I will
provide a short synopsis of state regulation that shows that state conservation agencies are responding to the increase in the use of horizontal drilling operations.

lCl

The Pooling Power

Voluntary pooling has been greatly increased because of the widespread inclusion of
pooling clauses in oil and gas leases.22 Without a pooling clause the lessee could poolthe leasehold interest but would be powerless to pool the royalty interest or the possibility of

reveder. As the Texas Supreme Court noted: "Absent express authority, a lessee has no

Cal.2d 773, 177 P.2d g1l3, g18 (1g471with Hunter v. Justice's Court, 36 Cal.2d 315, 223 P.2d 465 (1-950). The California experience is described in more detail at R.M. Williams, "Compulsory pooling and Unitization," L5 Oil & Gos lnst.223 (Sw. L. Fdn. 1964). tt Kramer & Martin, SS 5.01tal[g]; 5.02[2]tal. 'o'Robert Buettner, "The Compleat Angler: A Survey of Horizontal Drilling Regulation in the producing States," 4g Oil & Gas lnst.8-1,8-20-8-30 (Sw. L. Fdn. 1.997).

'" Compare Bernstein v. Bush, 29

" rd. 2'

For several examples of pooling clauses see Kramer & Martin, S 8.02 and Williams & Meyers, S 66g.

power to pool interests in the estate retained by the lessor with those of other lessors."23 While pooling clauses vary in length and detail, most pooling clauses contain provisions that may hinder pooling for a horizontalwell development. There is some disagreement as to how courts

should interpret pooling clauses. One Texas Court of Appeals took the following approach: Anticipatory provisions in leases for the commitment by the lessee of such lease to unitization, of necessity, must be in general terms. Neither the lessor nor the lessee has any way of knowing at the time the lease is taken the facts with respect to which it will be necessary for the lessee to apply his power. lt is not practicable for the lessee to await the asceftainment of such facts. He knows from experience that because of the possibility of many changes in ownership of the lessor's interest as time goes on, it may be difficult to effect an agreement if the right to unitize is not included in the lease itself.2a
But on the other hand there are decisions that interpret pooling clauses narrowly or strictly hewing closely to the language used by the parties.2s I have taken the position that while the

courts could require strict compliance with any conditions precedent to the exercise of the pooling power, the interpretation of the pooling clause should not construed in light of the purpose of the clause which is to encourage the pooling of interests.26 ln addition to any express conditions or limitations placed on the lessee pursuant to the leasehold pooling clause, courts have imposed upon lessees a duty of good faith fair dealing in the exercise of the pooling power.27 While the cases tend to poorly define this particular duty, sometimes referring to the subjective standard of good faith while at other times referring to an objective standard akin to the reasonable and prudent operator test, coud regularly review the
pooling decision and on occasion will overturn such decisions. lnquiries into why a particular

"

Jones v. Killingsworth, 403 S.W.2d 325,328,24 O.&G.R. 508 (Tex. 1966), citing Brown v. Smith, 1-41 Tex.425,

!74

s.w.2d 43 (1s43).
'o Expando Production Co. v. Marshall, 407 S.W.2d 254,260,25 O.&G.R. 954 (Tex.Civ.App.-Ft. Worth 1966, writ ref'd n.r.e.). ln accord; Young v. Amoco Production Co., 610 F.Supp. '1,479,85 O.&G.R. 376 (E.D.Tex. 1-985);Sabre Oil & Gas Corp. v. Gibson, 72 S.W.3d 8I2,157 O.&G.R. 134 (Tex.App.-Eastland 2002, rev. denied); Tiller v. Fields, 301 S.W.2d 185, 187-88, 7 O.&G.R. 1513 (Tex.Civ.App.-Texarkana 1957, no writ). " See e.g., Mallett v. Union Oil Co., 232 La. ir57, 94 So.2d 16, 7 O.&G.R. a3a $957); Southeastern Pipe Line Co. v. Ticachek, 997 S.W.2d L66,17O,143 O.&G.R. 179 (Tex. 1999); Jones v. Killingsworth, 403 S.W.2d 325,24 O.&G.R. 508 (Tex. 196s).. " 4 williams & Meyers, 5 670. " Kramer & Martin, S 8.00;4 Williams & Meyers, 5 670.2.

lessee pooled leasehold acreage suggest that a good faith standard is being applied and that pooling of acreage merely to hold a lease into the secondary term may constitute bad faith.28

Where a pooling causes financial injury to the lessor and financial benefits to the lessee there
may be a finding of bad faith pooling.2e
S

XX.02

Horizontal Pooling and Trespass lssues

One of the reasons why horizontal drilling creates problems necessitating pooling is because of the potential trespass and surface use issues. The diagram below shows what may be a typical situation with a horizontalwell.

'"

See e.g., Circle Dot Ranch, lnc. v. Sldwell Oil & Gas, lnc., 891 S.W.2d 342, 132O.&G.R. 417 (Tex.App.-Amarillo 1995, writ denied); Amoco Production Co. v. Underwood, 558 S.W.2d 509, 58 O.&G.R. 578 (Tex.Civ.App. 1977, writ ref'd n.r.e.). 2s Coastal Oil & Gas Corp. v. Garza Energy Trust, 268 S.W.3d 1 (Tex. 2008), rev'g on other grounds, Mission Resources, lnc. v. Garza Energy Trust, 166 S.W.3d 301 (Tex.App.-Corpus Christi 2005).

Correlative lnterval

Terminus

The surface location of the well is located on Blackacre. Vertical drilling occurs until the kick-off point is reached at which time the build section operations begin where the well bore is deviated from the vertical. The engineers have determined that the penetration point, or the point at which the well bore enters the correlative interval is to be located under Grayacre. At that point the well bore will within a degree or two of being parallel to the surface and will extend until a terminus is reach. The terminus of the well is located under Whiteacre. This last section of the well is sometimes referred to as the lateral section.
Under this hypotheticalthere are three tracts of land involved.3o lf all tracts are under lease to the same operator no problems will arise. But if there are severed surface estate and

separate leasehold estates numerous problems may arise. Let us presume that Whiteacre and
Grayacre are separately leased to Alpha Oil by different lessors. ln order to locate the lateral

section under both Whiteacre and Grayacre, Alpha Oilwill have to poolthe respective estates.
Depending on the sze of each and the inclusion of a pooling clause in the respective leases

that may be easier said than done. Furthermore, the leases may contain anti-dilution provisions that do not allow for pooling unless the pooled interest is entirely included or remains a majority
interest after the pooling.3l Blackacre, on the other hand, is leased to Beta Oil. The lessor of Blackacre is also the surface owner. Presuming further that Beta Oil does not want to pool Blackacre with Grayacre and Whiteacre where does Alpha Oil go to seek permission to have the surface location on

Blackacre. lt is an axiomatic rule of oil and gas law that: "the use of the surface by a mineral
owner or lessee in connection with operations on other premises constitutes an excessive user

This hypothetical is drawn from an unpublished paper written by H. Phillip Whitworth, Jr. and Richard p. Marshall, Jr. of Scott, Douglass & McConnico of Austin, Texas and called, "Land and Legal Problems Related to Horizontal Drilling, lncluding, Pooling, Trespass and Retained Acreage." I am indebted to them for their insights and understanding of the issues. tt The ssues relating to anti-dilution clauses will be discussed infra at$ XX.03.

30

of his surface easements."32 Thus even if Alpha Oil was the lessor of the minerals under
Blackacre it would not have an implied easement of surface use that would allow it to produce oil and gas from under Grayacre and Whiteacre.t' ln our hypothetical, however, it is clear that

Alpha Oil cannot enter onto the surface of Blackacre without the permission of the surface
owner of Blackacre.to That permission may be denied and thus Alpha Oilwill not be able to place its surface location on Blackacre. Does Beta Oil have any veto power over the surface location since it has been granted

the exclusive right to drill for and produce oil and gas from underneath Blackacre. Note that
under our hypotheticalthe well bore does not reach the correlative interval or common source of supply until it is on Grayacre. The case authority on this issue is divided. ln Humble Oil &

Refining Co. v. L & G Oil Co.,35 the court specifically allowed the lessee of Grayacre to purchase the surface estate of Blackacre and drill a well that would be bottomed on Grayacre over the opposition of the mineral owner of Blackacre. So long as the surface use of Blackacre does not unreasonably interfere with the mineral owner of Blackacre's ability to produce the minerals under Blackacre, the surface owner is free drill a directionalwell.36 But where the mineral owner of Blackacre can show that the proposed surface use would preclude the development of the

See e.g., Russell v. Texas Co.,238 F.2d 636,8 O.&G.R. 22L (grh Cir.1956l, cert. denied,354 U.S. 938 (1957); Robinson v. Robbins Petroleum Co., 501S.W.2d 865,46 O.&G.R. 438 (Iex. 1973). tt Many of the cases involving use of the surface estate for the benefit of other interests involve the injection of brine, salt water and/or produced water from wells not located on the surface estate. See e.g., Corbello v. lowa

tt 1 Wlliams Meyers, & 5 218.6.

Production Co., 850 So.2d 686, 157 O.&G.R. 1120 (La. 2003); Farragut v. Massey, 6125o.2d 325 (Miss. 1992); Grimes v. State, 2005 Tex.App. LEXIS 6963 (Tex.App.-Austn 2005). 'o See e.g., Roberts Ranch Co. v. Exxon Corp.,43 F.Supp.2d 1252, 144 O.&G.R. 1-33 (W.D.Okla. t997); Bordieu v. Seaboard Oil Corp., 48 Cal.App.2d 429,'J.Lg P.2d 973 $9a; Wise v. Tabor, 1949 OK 1-13,?OLOkla.428,206 P.2d 970. There are some cases that suggest a contrary result but those cases are probably wrongly decided. Mountain Fuel Supply Co. v. Smith, 47L F.2d 594, 45 O.&G.R. 321 110'n Cir.1973); Mobil Pipe Line Co. v. Smith, 860 S.W.2d 157,723 O.&G.R.130 (Tex.App.-ElPaso L993, no writ).
2 O.&G. R- L429 (Tex.Civ.App.-Austin 1953, writ ref',d n.r.e.). Atlantic Refining Co. v. Bright & Schiff, 321 S.W.2d 167,10 O.&G.R. 566 (Tex.Civ.App.-San Antonio 1959, writ ref d n.r.e.); Grubstake lnvestment Association v. Coyle, 269 S.W.854 (Tex.Civ.App.-San Antonio 1925, writ dism'd). The basic concept being appled in these cases is that the surface owner while subject to the implied easement of surface use has free use of the surface so long as it does not interfere with the implied easement. Parker v. Texas Co.,326 S.W.2d 579,582 (Tex.Civ.App.-El Paso 1959, writ ref'd n.r.e.).

tt 259 S.W.2d 933,

'"

See also

Blackacre mineral estate than the surface use may be enjoined.3T But as is usually the case in Texas there is a contrary holding. ln Chevron Oil Co. v. Howell,38 the court enjoined a drilling operation on the surface estate of a third party because it concluded that there would be
inevitable damage to the mineral estate where the vertical, non-producing portion of the horizontal well is located. The court apparently relies on a presumption of injury to the mineral estate that appears to be conclusive and is probably not based in fact. lf followed, Howell would require that permission be sought not only from the surface owner of Blackacre but from the mineral owner as

well. ln our hypothetical

where the common source of supply is not even

penetrated underneath Blackacre, the mineral owner of Blackacre should bear the burden of
proof to show that there has been damage done to the common source of supply.

A contrary view to L &G Oilis taken by the California courts. ln Hancock Oit Co.

v.

Meeker-Garner OilCo.,t'the suface owner of Blackacre which is under lease to the plaintiff grants an easement to the lessee of Grayacre to make a surface location on Blackacre for the purpose of drillng a directional well bottomed on Grayacre. The surface location is stipulated by

the parties to not interfere with the existing or contemplated activities of the plaintiff in producing
oil and gas from under Blackacre. Nonetheless the court concludes that while there might not be any direct injury, there would be injury caused by the drainage of oil from Blackacre to

Grayacre. While the rule of capture should govern that issue along with the implied covenant to
prevent drainage doctrine, the court finds somewhat incredulously that the well bore constitutes
a trespass on the mineral estate. That finding is incredulous because in California the mineral

Mid-Texas Petroleum Co. v. Colcord, 235 S.W. 710 (Tex.Civ.App.-Ft. Worth 1921) . See qlso DuLaney v. Oklahoma State Dep't of Health, 1993 OK 113, 868 P.2d 676,127 O.&G.R. 86(use of surface for landfill would necessarily preclude mineral development); Phillips v. Frances, 267 Ky.2O3,LOL S.W.2d 92a Q%7\(use of land for cemetery purposes would preclude use of land for oil and gas development). tt Chevron Oil Co. v. Howell, 407 S.w.2d 525,25 O.&G.R. 342 (Tex.Civ.App.-Dallas 1966, writ ref d n.r.e.). tt 118 Cal.App.2d 379, 257 p.2d988, 2 O.&G.R. 1051 (L953).

"

and leasehold estates are non-possessory in nature so that a trespass action is probably not the
proper way to characterize the injury.ao The Williams and Meyers treatise provides the following recommendations to dealwith

this issue:

(a) The consent of the surface owner should be required for operations on Whiteacre for the purpose of exploring for and developing minerals in Blackacre, whether such operations are a geophysical survey or a surface location of a well. . . (b) Where drainage of oil and gas from Whiteacre or the prevention of drainage of gas to Whiteacre will not be the consequence of the particular operation involved, consent of the surface owner alone should be sufficient, and joinder by owners or operating or nonoperating interests in minerals should not be required. . . (c) Where drainage of oil and gas from Whiteacre or the prevention of drainage from Blackacre to Whiteacre will be the consequence of the particular operation involved, the problem is much more difficult. lt may be argued that severance of minerals by deed or lease debars the sudace owner by implication from such conduct on the premises as will cause drainage from the premises or will impair the mineral owner's right to capture oil
by drainage.al Even though these recommendations were made in an era before the widespread use of

horizontal drilling techniques they are still valid. The issue of drainage that concerned the authors should be minimized because horizontalwells must still comply with the appropriate spacing regulation so that the penetration point in the target depth or correlative intervalwill be far enough away from a property line so that it is unlikely that there will be any drainage.
lf the mineral estate owner of the tract being crossed by a non-producing portion of the

well must consent to the drilling of the well, it is not likely that the owner is going to be willing to give its consent. Voluntary pooling would offer a potential solution to the problem but that would require a re-configuration of the well so that the penetration point is now on Blackacre. Without participation in the well it appears to me to be unlikely that the Blackacre mineral owner would consent to allowing a well to be located beneath the surface of Blackacre. lf the parlies are
unable to come to an agreement regarding the use of the Blackacre subsurface to access the

oo

ot

See also New v. New, L48 Cal.App.2d 372,306 P.2d g87,7 O.&G.R. 2L3 (Ig57). l Williams & Meyers, 5 230.

minerals under Grayacre and Whiteacre and the jurisdiction should follow the California or

Howellapproach then the compulsory pooling process would have to be utilized. Only Kansas,
among the major producing states, does not have a compulsory pooling statute. But in order to pool Blackacre into a pooled unit, the operator will have to show that the common source of supply underlies Blackacre because state oil and gas conservation agencies are loathe to pool areas which might be non-productive.

XX.03

Horizontal Pooling in Light of Vertical Pooling Clauses

As noted above, most pooling clauses contained in oil and gas leases were drafted with
vertical well drilling in mind. ln addition, a number of widely-used pooling clause forms make reference to governmental regulations to govern the maximum size of the area that may be

pooled. Recent leases also may contain anti-dilution provisions that further restrict the power of
the lessee to pool the lessor's interests. Anti-dilution provisions may require that the pooled
acreage not constitute less than a specified percentage of the pooled unit or if that cannot be accomplished than all of the leasehold acreage must be included in the proposed pool. All of

these provisions may have ramifications for a lessee seeking to create a horizontal well pooled
unit.

Some of these issues and the problem of how to deal with an improperly pooled lease in a horizontal pooled unit were analyzed in Browning Oit Co. v. Luecke.a2 The lease contained a pooling clause that had been amended several times after the execution of the lease. One of

the amendments to the pooling clause added the following anti-dilution provision:

o'38

S.w.3d 625, !49 o.&G.R. 127 (Tex.App.-Austin 2000, rev. denied).

Notwithstanding paragraph number four (4) hereof, if any pooled unit is created with respect to any well drilled on the land covered hereby, at least sixty percent (60%) of such pooled unit shall consist of the land covered hereby.a3

Another provision allows the lessor's lands to be pooled even if the lands constitute less than 60% of the pooled unit where all of the lessor's lands are included in the unit or such non-lessor
lands are needed to comply with established field rules. After unsuccessfully seeking to amend

the pooling clause again, the lessee drills two horizontalwells. One horizontalwell crosses through 7 tracts of land and 1 of the 3 tracts that were subject to the lease. The vertical portion
of the horizontal wellbore and a portion of the lateral on located on the lessor's tracl.aa A second

horizontal well crosses the other two lessor tracts although the vertical portion of the well is not located on the lessor tracts.as lt is all but conceded by the lessee that it did not comply with the

anti-dilution provisions of the lease.

ln Texas, a lessee purporting to act pursuant to the pooling power must strictly comply

with any conditions precedent to the exercise of that power.'u Having conceded that the
horizontal pooled units violated the anti-dilution provision, the lessee tried to argue that a reasonable and prudent operator would not have pooled the acreage for a horizontal well using

the 80 acre spacing patterns that the Railroad Commission had adopted. The court rejected the
notion that a lessee may ignore express limitations on the pooling power. The parties'

intentions as expressed in the written instrument will govern their relationship. The fact that the
lessee feels constrained by the limitations does not excuse its compliance with the anti-dilution provision.

o'Id.ar637. 4 ld. a|638.

ot

ot

!d. at638-39.

ld. at 640 relying on Southeastern Pipe Line Co. v. Tichacek, 997 S.W.2d !66,143 O.&G.R. 179 (Tex. 1999); Jones v. Killingsworth,403 S.W.2d 325,24 O.&G.R.508 (Tex. 1966); Pampell lnterests, lnc. v. Wolle,797 5.W.2d392,394, 112 O.&c.R. 145 (Tex.App.-Austin 1990, no writ).

The trial court measured damages based on the traditional rules for the owner of a drillsite tract whose interests have been improperly pooled. That measure of damages would be an undiluted royalty on all production coming through the well bore that is located on the

leased tract.aT Because the second horizontal well crossed two of the tracts under lease, in
theory, the lessor would have received a "double royalty" based on the illegal pooling. ln rejecting this recovery the court articulated the reasons why a different rule should apply to

wrongful pooling of royalty interests in vertical and horizontal wells. lt stated:

Horizontal wells can extend across several tracts of land in a linear configuration to accommodate the length of the horizontal drainhole. Consequently, all the tracts are not

contiguous. Several tracts of land may separate the penetration point of the drainhole
from the terminus point. And each of the tracts traversed by the horizontal drainhole is considered a drillsite tract, which likely includes underlying fractures that are being

drained by the wellbore. Thus, each point along the drainhole is contributing to
production from isolated fractures, and no one drillsite is naturally draining minerals from all of the penetrated tracts. Even though the rule of capture and other principles of oil and gas law would afford the Lueckes royalties on all production if a vertical well were

drilled on their land without valid pooling, these principles have no application in the case of horizontalwells that contain multiple drillsites on tracts owned by multiple owners.
Absent the ability to naturally drain neighboring tracts, the Lueckes are not entitled to production from other lessors'tracts unless there has been a cross-conveyance of

property interests. Because the purported units were invalid, there has been no crossconveyance of interests, and the Lueckes are not entitled to royalties on production from lands they do not own.a8

o'

o"

Browning,33 S.W.3d at 645. The wrongfully-pooled tract is treated as having never been pooled so that it entitled under the rule of capture to 7O0% of the production, or in this case 100% of the Ieasehold royalty.
td. aT 646.

is

The court did not specify exactly what royalties they Lueckes would be entitled to but limited it to

the royalties on production that could be attributed to their tracts. ln Manzano Oit Corp. v. Chesapeake Operating, lnc.,ae a top lessee sought to take
advantage of the fact that a horizontal well was commenced off of the leasehold acreage to claim that a well had not been commenced prior to the end of the primary term. Chesapeake entered into a 3-year primary term lease with Howay. Because of municipal regulations, Chesapeake would need a variance in order to drill a well on a surface location within the boundaries of the lease.5o lnstead of seeking a variance they purchased an adjacent three-acre parcel from which they begin to drill a deviated well. The well is spudded on the adjacent tract prior to the end of the primary term but the wellbore does not enter the leasehold estate until after the end of the primary term. The lateral section of the proposed horizontal well will be entirely within the boundaries of the leasehold estate. The court rejected the claim by the top lessees that since there was no activity on the surface of, or beneath the surface of, the described leasehold estate that the savings provision allowing the lessee to complete a well that has been commenced, but not completed, in the primary term, was not triggered. Even though there was no formal pooling of the three-acre tract with the leasehold estate either by voluntary or compulsory action the court found that the spudding of the well on the three-acre tract is to be

treated as if it was on a "pooled" or "combined" tract which under the express terms of the lease would amount to constructive operations. I don't necessarily agree with the court that the
purchase of the adjacent tract amounts to a pooling or combination so as to trigger the pooling clause, but I would nonetheless have upheld the validity of the lease because the permit to drill clearly called for a horizontal well that would be located the leasehold estate. The fact that the

'n 178 F.Supp .2d 1217,151 O.&G.R. 42 (D.N.M. 200L). to For a discussion of local regulation of oil and gas operations see Bruce M. Kramer, "Local Regulation of Oil and Gas Operations: Don't All Homeowners Want a Pumpjack in Their Backyard," 41 Rocky Mt. Min. I .t. J.2!3 (2OOa); Bruce M. Kramer, "The Pit and the Pendulum: Local Government Regulation of Oil and Gas Activites Returns From the Grave", 50 Ol & Gas lnst.4-1 (Ctr. For Am. & lnt'l L. 1999).

spudding and drilling prior to the end of the primary term had not occurred on the leasehold estate should not prevent the savings clause of the lease from being triggered.
Many pooling clauses have areal limits. Obviously to the extent to which a horizontal pooled unit exceeds those areal limits the lessee will have to seek an amendment to the lease or have the lessor ratify the expanded unit. Most of the areal restrictions will differentiate between the maximum size allowed for oil units, typically 40 acres, and the maximum size allowed for gas units, typically 640 acres. Many of these provisions contain references to state

spacing regulations or "governmental authority" provisions that may allow for the expansion of
the size of the pooled unit if the state conservation agency adopts a larger unit size as part of

either special field rules or changes in statewide spacing rules.sl One specific type of pooling clause language has been narrowly interpreted by the Texas courts so as to limit the authority of the lessee to pool. ln Pioneer NaturalResources USA, Inc. v. W.L. Ranch, Inc.,52 the original leasehold
pooling clause limited the maximum size of the pooled or proration unit to 320 acres. Desirous

of creating a horizontal pooled unit of nearly 380 acres, the lessee negotiated an amendment to the lease authorizing such pooling. As with Manzano, the vertical portion of the well was spudded in 9 days prior to the end of the primary term but the horizontal wellbore did not enter the lessor's lands until after the end of the primary term. The well produced sporadically for about 5 years and was then plugged and abandoned, never having achieved payout.s3 The court applied the traditional rule that operations commenced on lands pooled with the leasehold acreage operate to maintain the lease into the secondary term.sa lt did not discuss the fact that
the wellbore did not cross the lessor's property line because, unlike Manzano, the surface

where the vertical portion of the well was being drilled was pooled with the lessor's acreage.

t'
t'
to

tt td. aTgo4.

See generally Kramer & Martin, 5 8.05. 127 S.w.3d 9oo,1,67 o.&G.R. 56 (Tex.App.-Corpus Christi 2004, rev. denied).

Kramer & Martin, ch. 20 (2008).

ln Jones v. Kittingswotth,ssthe court was interpreting a pooling provision that limited

pooled unit sizes to 40 acres for oil and 640 acres for gas but further stated: [P]rovided that should governmental authority having jurisdiction prescribe or permit the

creation of units larger than those specified, units thereafter created may conform substantially in size with those prescribed by governmental regulations.s6 The Railroad Commission had adopted 80 acre proration units for the Fainruay (James Lime)
Field but also allowed a tolerance allowable credit for an additional 80 acres. The lessee creates a pooled unit for oil of 160 acres. The Texas Supreme Court, however, finds that since

the additional 80 acres allowed by the Railroad Commission was optional and therefore not
prescribed, the pooling clause would be interpreted so as to restrict the lessee's pooling powler to the 80 acres othenryise prescribed by the Commission. This narrow interpretation has been

followed in several other Texas cases.ut Fortunately this type of language does not appear to
have been included in leases outside of Texas, although pooling clauses oftentimes do refer to state conservation agency regulation.5s
S

XX.04 A

Horizontal Pooled Units

The Caselaw

There have been few cases dealing with pooled units for horizontalwells. ln Continental Resources, lnc. v. Farrar Oil Co.,5e the court applied traditional compulsory pooling principles in
dealing with a pooling order issued by the North Dakota lndustrial Commission that created a pooled unit for a horizontal well. After the Commission adopted a temporary rule allowing two horizontal wells in a 640-acre tract, Continentalwhich owned the northwest and southeast

quarter-sections sought and received a Commission order force pooling Farrar which owned the
tt
tu

403 s.w.2d 325,24 o.&G.R. 508 (Tex. 1966).

t'

td. aT3z7.

See e.g., Hunt Oil Co. v. Moore,656 S.W.2d 634,79 O.&G.R.576 (Tex.Civ.App.-Tyler 1983, writ ref'd n.r.e.); Atlantic Richfield Co. v. Hilston , 437 S.W.2d 347 ,32 O.&G.R. 688 (Tex.Civ.App.-Tyler 1969, writ ref'd n.r.e.), cerf.

denied,396
58

U.S.

90s (L969).

tt

See Debetaz v. Chevron U.S.A., lnc., 891 F.2d 5621sth Cir. LggT ND 31, 559 N.w.2d B4L, t36 o.&G.R. 83.

tsso).

other two quarter-sections.oo Even after the Commission entered its force pooling order, Farrar argued that when the lateral sections crossed through its acreage that Continental was committing a trespass. Continental filed this declaratory judgment action seeking to determine

that it had the right to drill its horizontal well in the Farrar leasehold estate.
While the penetration of a lateral line underlying the mineral estate of another would clearly be a common law trespass and not protected by the rule of capture, the adoption of state conservation legislation effectively changes the common law rule of trespass.6l The issuance of

the compulsory pooling order was a proper exercise of the state's police power to prevent waste, protect correlative rights and conserve natural resources. Continentalwas authorized by the Commission to place its lateral drainhole underneath lands owned by Farrar. As such the
horizontal well, even though it crosses through, and produces from, Farrar's leasehold estate is not a trespass because all private property is held subject to the exercise of the police power. lf Farrar is allowed to claim a trespass it would frustrate the compulsory pooling statute, the spacing statute and regulations and effectively make the Commission order "ineffectual."62

Thus Continental is free to act consistent with the Commission's compulsory pooling order
without the threat of a trespass claim.
63

As with Farrar Oil, Egeland v. Continental Resources, lnc.,6a applies traditional

compulsory pooling principles to a case involving a horizontal pooled unit. The parties to two leases had deleted the printed form pooling clause and substituted a clause requiring the lessee

50

Continental had intially sought to voluntarily pool in order to drill the proposed horizontal well but Farrar refsed

to participate. 559 N.W.2d at 843.

u' u'
63

ld. aI844-45 citing both Kramer & Martin and Williams and Meyers. Id. atg46.
ln Egeland v. Continental Resources, lnc., 2000 ND 169, 616 S.W.2d 86L, 145 O.&G.R. 469, the court was dealing

with another compulsory pooling order involving horizontal wells but the fact that horizontal wells were being drilled did not affect the outcome of the litgation. Essentially the court found that a lessee could avoid the restrictions contained in a Pugh clause by seeking a compulsory pooling order since the Pugh clause only dealt with voluntary pooling by the lessor. See Kramer & Martin, at 5 9.06
uo

2ooo ND 169, 616 N.w.2d 861.

to get the lessor's consent prior to any pooling.uu Furthermore the leases contained a Pugh
clause saying that a well or wells will only maintain the lease beyond the primary term to the extent the leasehold acreage is within a producing or spacing unit. The lease is in area where

the lndustrial Commission has created field rules for horizontalwells limiting such wellto two
per 640 acres, just as in Farrar

Oil.

Both of the leases were in excess of 320 acres in size.

The Commission spacing order designated 5 separate spacing units for the two leases. lnstead of seeking consent from the lessor to create 5 pooled units, the lessee applies for compulsory
pooling orders from the Commission for the 5 units. The Commission issues the 5 orders force pooling the interests committed to the 5 units. Plaintiff claimed that the lease expired because no well was drilled on her lease and that

the compulsory pooling order was ineffective as to her interests because she never consented. While it is clear that Continental could not voluntarily pool Egeland's interest, there was nothing
in the lease to prevent Continental from seeking a compulsory pooling order from the lndustrial

Commission. To allow a private party to veto the exercise of the police power by the
Commission would inhibit the Commission's ability to achieve the strong public policy objective of fostering the efficient development of the state's oil and gas resources. Continental's actions in initiating the compulsory pooling process did not breach the pooling clause of the lease.66

ln Samson Resources Co. v. Corporation Commission,67 you have a direct challenge to

the promulgation of Oklahoma Corporation Commission Rule 8-2(H) ut that deals with horizontal
pooled units. Under Rule 8-2(H) the Commission may not create a HorizontalWell Unit that

includes any existing well producing from the same common source of supply unless fifty percent (50%) of the ownership having the right to drill in the spacing unit consent. Samson

6i.6 N.w.2d at 863. "" ld. a1865-66. The court also found that the Pugh clause did not apply so as to terminate the lease as to those portions of the lease that were either not committed to a drilling unit or under active operations relying in part on Kramer & Martin, at 5 9.06. u' tggzoK ctv App 62,831 p.2d 663, 1i-9 o.&G.R. 520. tt occRP Rule 8-2(H).

ut

argued that the Rule was both uitra vires and unconstitutional as an improper delegation of

legislative power to private entities. The ultra vires argument is easily dismissed because the enabling statute,Ge clearly gave the Corporation Commission the power "to promulgate rules necessary for the proper administration of this subsection." The Commission's adoption of this Rule clearly is part of its authority to regulate oil and gas operations through the creation of spacing units. On the issue
of whether or not the consent provision amount to an unconstitutional delegation of legislative authority, the court relies on the approval of the Oklahoma compulsory unitization statute,To

which like most other state compulsory unitization statutes, requires a minimum level of consent from working interest and/or royalty interest owners before the state conservation agency will enter such an order.71 While there are some circumstances where regulatory decisions may not
be subject to either approval or veto by private entities, in general having a consent requirement prior to the exercise of the police power is usually found to be constitutional.T2

Compulsory Pooling Statutes

Compulsory pooling statutes come in all sizes and shapes. Since the 1930s they have
served the tri-partite public policy objectives of preventing waste, conserving natural resources

and protecting correlative rights.Ts Horizontal drilling operations, to date, have been incorporated into the extant compulsory pooling regimes with few complications.Ta As noted at
last year's Annual lnstitute, horizontal drilling operations create more headaches for spacing

Okla.Rev.Stat. tt. 52, 5 87.L(f). okla.Rev.stat. tt. 52 gg 287.1, et seq. tt Palmer Oil Corp. v. Phillips Petroleum Co., 1951 OK78,2O4Okla.543,23tP.2dgg7,app. dism'd,343 U.S.390 (1es2). Kramer & Martin, 5 24.O2lLl. tt Kramer Martin, & ch. 10. See Gee, "Comparative Study of Compulsory Pooling-Enforcement Aganst Owners of Divided lnterests in the Spaced Tracl," 3 Rocky Mt. Min. L. lnst. 241.,242-46 (1956). to The Oklahoma Corporation Commission has scheduled a special meeting to discuss the "emerging spacing and unitization issues related to the application of horizontal drilling technology," for June 30, 2009. See Randy Ellis, Horizontal Drilling Raises Questions About Changes to State Reguatlions," The Oklahoman (May 29,2OO9O).
to

6e

"

regulation than they do for pooling regulation.Tu The nature of horizontal drilling operations,

when combined with spacing and/or density rules designed for vertical wells, will probably
"encourage" operators to use the compulsory pooling process more frequently than in the past.

Therefore one needs to know the types of compulsory pooling statutes that a horizontal well operator may
One of the major issues in dealing with a compulsory pooling regulatory regime is how to afford the working interest owners who have not consented a fair opportunity to participate in

the drilling of the pooled unit well.76 There are three general approaches to resolving this issue
and some states may utilize more than one approach. They are: 1. Surrender of working

interest; 2. Risk penalty, and 3. Free ride. ln some states, such as Oklahoma, the nonconsenting working interest owners are given an election to choose among a number of

different options.TT Such is also the case with a recent amendment to the Virginia compulsory pooling statute.Ts The surrender of working interest approach whereby the state conservation agency requires the non-operator to assign her working interest to the consenting owners in
exchange for compensation in the form of a bonus payment or royalty or a combination of the

two. Among the states using the surrender of working interest approach are Arkansas,Ts
ldaho,8o lllinois,sl Oklahoma,s2 South Dakota,83 and West Virginia.sa The risk penalty approach

is similar to that used in the various model form joint operating agreements for working interest owners who go non-consent, namely that their interest is carried until such time as their pro rata
H. Michael Keller & Thomas W. Clawson, "Know the Chessboard Before You Make Your Move-A Landman's Guide to Well Location and Spacing Regulation," 54 Rocky Mt. Min. L. lnst.6-t (2008). tt These issues are discussed in greater detail in Kramer & Martin, 5 12.01-12.03 . See generolly Bruce M. Kramer, "Compulsory Pooling and Unitization: State Options in Dealing with Uncooperative Owners," 7 J. of Energy L. & Policy 255 (1986). tt Kramer & Martin, 12.03t1][a]. S
S 45.1-361.21. Ark. Code Ann. 5 t5-72-304(b)(4). to ldaho code S 47-322. "' 225lll. comp. Stat. 725/22.2. t' okla.Stat.Ann. tit. 52, g 87.1(e). tt S.D. Codified Laws Ann. 45-9-33. 5 to W.Va. Code 5 22-8-7(bl dealing with deep wells only.

tt

tt va. code tt

share of revenue equal their pro rata share of expenses plus an additional sum as set forth in

the compulsory pooling order.8s States that use this approach include: Colorado,s6 Louisiana,sT
Michigan,ss Mississippi,se Montana,s0 Nebraska,nt New Mexico,e2 New York,e3 North Dakota,sa
Ohio,e5 Texas,e6 Utah,eT Washington,eB and Wyoming.ee The Colorado and Wyoming

compulsory pooling provisions are nearly identical in that the risk penalty is set at

lOQo/o of

the

non-consenting owner's share of certain costs such as surface equipment and operating costs and either
2OOo/o

or 300% of the costs of staking, drilling, reworking, deepening or plugging back

and completion. Even without an express statutory mandate, some state compulsory pooling statutes such as Michigan merely provide that the order shall be on terms that are 'Just and fair"

or'Just and equitable" giving the state conservation agency the dscretion to impose risk
penalties.loo

A number of states provide for a free ride, namely that the non-consenting owner's share
is carried and that owner's pro rata share of expenses are to be recouped from that owner's pro rata share of revenues. There is no additional payment over the actual and reasonable costs that should have been, but have not been, paid up front by the non-consenting owner. ln these

tt Kramer Martin, & 5 12.03[2].

8t
87

Colo.Rev.stat. 5 34-60-L16(7).
La.Rev.Stat.Ann. 5 30.L0(AX2).

tt Mich.Comp.L. 5 319.1-3 does not specifically authorize the use of the risk penalty approach but the Na,tural Resources Commission has interpreted its powers to impose a risk penalty on non-consenting owners. Kramer &
8s

Martin, 5 12.03[2][c].
Mss.Code Ann. S 53-3-7. Mont. Code Ann. g 82-tL-2O2(2). Neb. code S 57-gog(2).

eo

tt

t'
s3

to

N.M.stat.Ann. 5 70-2-J.7(C). N.Y. Env'tl. Conserv. Law. 5 23-090J.(3).

N.D. Cent. Code 5 33-08-08. Prior to 2004, North Dakota was ohio Rev. Code 5 t509.27.
a

tt
e6

free ride state.

Tex.Nat.Res. Code 5 102.052. utah Code Ann. 5 40-6-6. eB Rev.Code Wash. 5 78.52.250(2'). ss Wyo.Stat. 30-5-109(9). too See e.g., Mich.Comp.L. 5 319.13; Ore.Rev.Stat

tt

.5

520.22O.

states voluntary pooling is discouraged because parties who become subject to a compulsory pooling order bear none of the risk of a dry hole or a marginally producing well while sharing in the full benefits of a "gusher." States that incorporate the free ride option include Alabama,lo1
Alaska,l02 and Arizona,
103

Where agencies have discretion, either in terms of the election or in setting the amount of risk penalty, courts usually take a "soft glance" scope of judicial review.loa ln Oklahoma which has the most cases dealing with the election process, the courts review the election
options under a very deferential reasonableness standard.t0s Likewise in South Dakota where a non-consenting owner was given the option of participation or being carried with a 100% risk penalty, the South Dakota Supreme Court both found the imposition of the risk penalty

authorized by statute, but that it was reasonable and therefore valid.106 ln general the courts
have been receptive to state conservation agencies' exercise of the power to impose risk penalties on non-consenting owners.t0T

Another common problem with compulsory pooling orders relates to the effective date of the order. Where the pooling order precedes drilling and production there is usually no difficulty with its effective date. Where the pooling order, however, follows production from the wellthan the effective date can be very important.lo8 The possible effective dates for a pooled unit order can range from the date of first drilling operations to the actual date the state conservation agency issues the order. ln Ward v. Corporation Commlssion,10e the court upheld a commission
pooling order allowing the non-operator to share in production from the date of the spacing
tot tot

Stat. 5 31.05.100(c). Ariz.Rev.Stat. 5 27-505. too See e.g., Waller Brothers, lnc. v. Exxon Corp., 836 F.Supp. 363,126 O.&G.R. 265 (S.D.Miss. 1993); Viking Petroleum, lnc. v. Oil Conservation Commission, 100 N.M. 45'J,,672P.2d28O,79 O.&G.R.57 (1-983). tot See e.g., Wakefield v. State, 1-957 OK 10, 306 P.2d 305, 7 O.&G.R. 291. 106 Application of Kohlman, 263 N.W.2d 674,60 O.&G.R. 402 (S.D. 1978). to' See e.g., Bennion v. ANR Production Co.,8L9 P.2d343 (Utah 1-99L); ln the Matter of SAM Oil, lnc., 817 p.zd2gg, 116 o.&G.R. 417 (Utah 199L). tot These issues are discussed in more depth at Kramer & Martin, 513.03. tot 50r. p.2d 503, 42 o.&G.R. 473 (okta. L97zl.

to'Alaska

Ala.code 9-r7 -13(c).

order, not the date of the pooling order. ln Oklahoma there are statewide spacing rules whch
ipso facto poolthe interests within the spacing unit. Pooling orders are issued to resolve issues between working interest owners who cannot agree to a joint operating agreement. Since the non-operator was prohibited from drilling a well on the spacing unit after the spacing order was entered, the court reasoned that making the pooling order retroactive to the date of the spacing order was required to avoid a regulatory takings issue. A similar type of retroactive order was upheld in North Dakota against an attack by the operator who asserted that it was a regulatory

taking of its property interest by giving the non-consenting owner retroactive rights in the well.1r0

ln Utah a series of cases has held that the effective date of the spacingipooling order cannot be
made any earlier than the date that the spacing order is entered even if production is achieved prior to the entry of the order.111 Because of the potentially larger areas that may need to be pooled for horizontal wells

the likelihood that one may encounter an unleased mineral owner increases. There are several different approaches taken in dealing with such owners. A number of states treat the unleased
mineral owner as a royalty owner and a working interest owner and then apply whatever approaches the state follows as to the working interest share.rt2 ln Louisiana the unleased mineral owner is treated as an 8i8ths working interest owner and given a free ride.113 Colorado, Montana and Utah treat the unleased mineral owner as a royalty owner until payout and then convert the royalty interest into a working interest.lla This approach is very favorable since not only does the unleased owner get a free ride with the potential of sharing in the profits from the

well after payout without a risk penalty but receives payments from the date of first production.

Texaco, lnc. v. North Dakota lndustrial Commission, 448 N.W.2d 62t, t}g O.&G.R. 25 (N.D. 19891. tn occord: Murphy v. Amoco Production Co., 590 F.Supp. 455, 83 O.&G.R. L08 (D.N.D. 1984). ttt S"" Cowling v. Board of Oil, Gas and Mining, 830 P.2d 22O, tt O.&G.R. 582 (Utah 1991); Hegarty v. Board of Oil, Gas, & Mining, 2002 Uf 82,57 P.3d 1042. tt'oklahoma treats the royalty interest as a l-/8'h royalty while North Dakota and Utah will average the royalty in the leases that are committed to the pooled unit. Kramer & Martin, S 12.02.

tto

ttt Kramer Martin, & 912.02.

tto

Colo. Rev. Stat. 5 34-60-LL6(7); Mont Code Ann. g 82-It-202(2)(c); Utah Code Ann. S 40-6-6(7Xb).

XX.05 tAl

Horizontal Pooled Unit Ordersl15 Colorado

l1l

11s

I would like to thank Mary Viviano of Encana Corp., George Mueller of Burns, Wall, Smith and Mueller, Tim George, my colleague at McGinnis, Lochridge & Kilgore and Mark Christensen and Jim George of Crowe and Dunleavy for providing me with the attached orders.

BEFORE THE OL AND GAg CONSERVAT1ON COMMISSON OF THE STATE OF COLOBADO IN THE MATTER OF THE PROMULGATION AND ESTABLISHMENT OF NELD HULES TO GOVERN

CAUEE NO.389 ORDEB NO.3"5 CORRECTED

'opRnnoNs lt THE solo roBo Flt-.

OLORES AND MOi{EZUMA COUNTIS, COLORAOO

FEPORTOFTHECOMMISSION

Thle cauee cmE on lor harhg bsforo the Commlo8lon al g:00 a,m. on January lO, 200b, in Sulo 801; The Chancory Bullding, 1120 Lncoln Street, Donver, Colorado, for an ordei to estabtlsh appi'Orlmate 1?00-acre drllllng and spaclng unltrg lor cerlaln lands ln Townshlps 39 and 40 North, Ranges 17 anit 18:W6sl, N.M;P,M,, and allow up to horlzonhl wells ln eaoh unlt, with ths smind weil to be looatEd no closer'lhn 460 teet to th oulslde boundary, for lhE prcducllon cl iae and assodatd hydrocarbone from ihe Gothlc Shale Fomatlon,

FINDIGS
Tho Commlsslon tlnds as lolws: . BIil Barrtt orporallon ("BBC'), as appllcant heln, ls an intre6ted party ln the sublct mattor ol lhe abovo-rfroncd hearlng.
.

I.

2.
.as toquked by iaw.

Duo notica of lha tlme, place and purposo of lhe hearlng has been gVon ln all rspeclg

3. T.o omrnlsslon ha Jurlsdlcllon ovr tho sublect mallgr embraced In qald Notlc, end ol parths iri!iectodrfhqiotn, nd iurlsdlctlo lq promulgato the horelnaher prescrlbed ordor pursuant to th 4.

Oll.rid Gae Coneairvdtlori AL Rut gte.a, of lh Ruies and Rcgulatlons ol lhs Ol and GaB Consrvatlon Commlsglon fequhs thal wells dilld h sxcsss ot 2,500 tEEt ln dsptli bs locled nol loss than 600 tbi from any ioEss llde, and loctqd not lsss than 1,200 feot fom any olher produclblo or ddlllng oll or gas wll whsn dillng to Jhs samo comm.on sourc of supply. Crtaln lars ln Town8hlps 39 and 40 North, Ranges 17 and l8 Wbst, N.M.P.M. ar sublocl to lhls Rule for tho clothlc Shalo FoTmatlon.'

On.Nvqmber 19, 2008, emended December 2, 2OOA, gBC, Oy lte anorney, llltid wlth the Commleslon a vrlflod appllcqlton for an order toslabllsh epproxlmete 1,26o-acre drllllng nd spaclng untts for lhe below-llstod lands, qllgwng u to elght (8) horzontal wlls to b drllld on each of tho proposed unltB, loi producllon ftri th Gothlc Sha Frmaon: Tonshlo 39 Noth. Ranoe l7 W6st. N.M.P-M.

5.

SBcllon6:

iectno

ln

N?.

Lote

(16.44 acree),

9 (10,26), 10 (16.07), 11 (14.62),

Scllon

Z 17:

12 (38,70), 13 (40.00), 14 (40.00), 1s (40.00), 16 (40.00), 17 (40,00), 18 (40.00), 1q (08.90), 20 (37.10), and 21(37.30), EthSWl/a andSEYt LotB 5 (37.41 acrs), 6 (37.43), 7 (37.45r, 8 137.4n, YzWl and E1k

swins.!!!!e,-8.
S'ctlon

Seon20:

Atl All

Specno Unl No. #3 Sriotlo/r LotE 5 (37.51 acr68),6 (37,67), 7 (37.63), and

'k 1a: Socln 10

I I

(37.69), E'/t W% and

LqlB (37.76 acros),6 (37.S2),7 (37.88), and

E1h

(37.95),Vrwlhanrl

Spaclna Unlt No. ll4 Socton Lots 5 (16.73 acrE), 6 (15.61), 7 (17.31), I (22.71), I (,[0.0o), 10 (40.00), 1 r (40.00), 12 (40.00), t3 (40.00), 14 (40.00), 15 (40,00), and 16 (40.00), S'

1:

Secllon

12:

All

Ectlon?ffigs
r0
Sectlon

SdcinoUnit No. #5

(27-43 acres), 6 (sz. 2s), 7 (07.01 ), (4i.a I ), 9 (40. 0o), (r0.o0), 11 (40.00), 12 (40.00), 13 (40.00), t4 (40.00),

11: 3r 10i 13: 24:

16 (40.00), and 16 (40.00), 8t

All
Lots 5 (6.61 acres), 6 (11.45), 7 (f6.27), I (21.11), 9 (40.00), (40.00), r1 (40.00), 12 (,10.00), 13 (40.00), 14 (40.00), 10 16 (40.00), t6 (40,00), 17 (,t0.00), 18 (40.00), 1s (40.00), nd 20 (40.00). s'

Sctlon

Scon

All

Soaciro Unll No- #7 SBcrlon LolB 1(31.13 acros), 3 (3.07), and 9 (2Z,SA), N!, NW!/ SE%, and Ei6

SE/

Scllon

37: 41i Traot42: Traot 46:

Tracl
Tract Trsc018

Lots 1(26.47 acres),2(lkllraci 42: Lot 2) (t4,gg), 3 (erua Tracl 42: Lot 3) (44,31),4 (a/k/a Trot 42: Lot 4) (29.26), 5 (F/UaTract4l: Lot 6) (13.80), 6 (26.34), 7 (29.10), B(3s.08), 9-(35.33), nd 10 (38.48), Er E' aflt/ Seltlon 13: Lots 2(13.0t acro8) and 4(39.46) anda Secllon lgi lot 6 (12.27 acresanU Sciton 4: Lot s (i g.BO
aores)

s/Ua Secilgn t3: Lors 6 (23.44 aoreg),7 (96.08), and I (12.29) and Secjlori 2lr Lots 3 (14.31 acrs) and 4 (29,26) . lnisolar as t llsswlthlnth6 origlnal surveyof Sctlon 24

Soclno Unlt No. #8 Lot 1 (45.49 acrs),2 (45.5),3 {16.68), I (32.52), and 16 (14.67), NWtzr NW14, NEI NE% Sctlon Lols 11.(22.T7 cres), 12 {31.14), and 10 (94.65) Traol a/lds_Sctlon 14: Lolti 7 (3.69 acrB), I (11.14), 10 (4t.lB), and 11

14r 23: 37; Tract 38:

strfi
Tract 39:

(3p.48) g4y'a Sctlon 14: Lots 4 (3,49 acrss), S (94.69), 6 (t i.06), 12 (14.33), 3 (45.r_8J, and 14 (30.S0) insoJai ae lt llee vultfiln lhe orlglnal survey of Sectlons 1 4 rnd 20

Tract40
Trct 41: Trat 43j Trl 14.:

dl(/a SBctfon t:,Lots.l (23.88 acros) and 17( 35.471 erid Secilon Zg: Lole I (45.01 aclB) andz (30,17)
lnsotar.aG ll lliE wlthJn lhs orlglnal urvey of S6ctlon 23 allda Scon 23: tots 3 (22.q1 acros), 4 (34.62), s (1 .l.83), 6 (t.85), 7145.78)' ild 8 (30.0) lnefr:a8 lt:lles wllhln tho oighcl.suryey ot Secllon N!.iu sttcoh 23: Lots I (94.10 cfes) and 10 (12.10)

Tract43:
Trac't47:

23

SecJlo,

sc,tih-22: Lots l (12,28 actes),2

.

SfiaclnoUnltNo,lg f!: Lots l (4,77 acrs) and 2 (16,22),

.

Nk,SWlu', and NWt SE'/ (12.70), 3 (13.07),4 (35.64),8nd

Trc1

Tfact

39: 43i Trct 4n

picno Unlt

ln8bfqr as lt lies wlthln lhe orlginal suryy of Socilons t6 and 22 in8ofat e lt lles wllhln ths orlgnal.urvy of Sec{ion8 1 and 22 a p,oil o! ths N' a/Ua Secllon 22: Lot 6 (22.6'l acrss)

Ti^rnshlp 40 Nnh: Hahoe

No. #19

lz Wesl.N.M.P.M,

seclln3o:

Socton

31:

(40.00), E' Lole.s {40.00 acrs),6 (40.00), 7 (40.00), I (29.48), I (s1.84, 10 (4oQ0), 1r (40.00), 12 (10.00), 13 (40.00), 14 (40.00), '!,5 (40.00), J6 (33,8s), 17 (36.04), 18 (40.00), 1s (40.00), 2 (40.00); Ei!

Lot 5 (10.00 cre), 8 (40.00), 7 (40,00), I (20,85), I (22.98), 10.(40.00),1l (40.00), 12 {40.00), 13 (40.00), 14 (40.00), 1E (0.00), 16 (26.12), 17 127.251, l8 (40.00), 19 (10.00), and 20

.2'

(0901-SP{|1380.5

'

Spiacng Unlt No. #11 Lols 1 (17.87 acr6), 2 (15.57), A (3.2n,4 (16.70), and 5 (2.79) Wl ltll/t/lz and NW'| SW% Secllon Lols 1 (9.59 aclos), 2 (22.01, 3 125.50), 4 (43.18), 5 (3s.80), 8(14.70),7 (18.68), I (19.24),e(40.04),10 (18.8s), rr (18.05),12

Secllon

25: 36:

(18.68), and l3 Tqct 96

(1

8.41 )

Tract9T
Tract 98 Tract 99 Trsct 100
Tr,act 101
Th'-

Tial 1074 nd toTD E! oi Tract 1094 and 1098

Tict 10C and 109D Tiact 1104, 1108, nd llOC Trqct I 114, 1118, 1 l1C, 9nd
'scllon
goaclno

rll

s+itono*
Tract

26:

tlnlt

No. #!2

All

Tr8ctl0TBandl7c lrqct l08B

"ir'.1'tll;i'1'"?5on':f.i)i'.f'ffft''lf,?l;ih''[l1it' "
alkla $scllon 35: Lot 10 (40'02 acres)

108:

The.Wr olTracl logA and'1098 Tiacrli6A, 1 160, 116E, and l16F

siliqunNe, * SecUsn'?Z All

l-ot6 1 (40.00 cr8), 2 (40.00), 3 (19.76), 4 (12.38), 5 (7.46), 6 (1.25), Wt SW7, SE/ SW%, and SWlz SE% Trat 1 154, 1 168, 115C, 1 160, 1 16E, 1 16F, 1 16G, nd 1 l 6H Tragt 1168 and llC

Scllon

34

That Fs:lo each horizontal ,vsll vrilhln a giwn approximte 1,280-acr drilllng nd pacing unil, lh urfaco locdlin fbr-lhe wll may be locatod anywhere upon tfie drllllng unll (or adolnlng lands to the unlt) proideti lhal ili hqrlzo.tal leg iirto the Golhic Shls Formallon shBll nl bs closer than 460 feet to tho olslcl boundery o-f,the dnlling Vnit and lhe tofminu8 ol tho horlzontal lg shall nol b6 any closer lhan 460 lgot to tho outslde.4i!,ndar oi th drilllng unn wlhout excgptlon behg granted by the Droctor of th oil end Oas Consatlon Comnlpglon.

!1,200

lnto and producd fiom a glvn proxlmt pads located on the surfac'r of such unit or dlolrilng,lands to lh unlt. ll fs provded, however, lhat BBC, ln clrcumstances whg topographlo and surface.owner bp.ptoval conditlons permlt, wlll underlke reasonble florts lo ttlllz evn lewor pads by localing lt pads ngi ths center of a gfuen drilllng and spdng unlt,

That

ac ddlllng and gpaclng.unli such wsll6 will be drllled from no more lhan

ai to tne horzanl.wells to b drlled

0. On r abo.t December , 2008, Joanne Babln fllod proteEl to the appllcatlon alleglng aulace ooncems rgairdlng envkonmental snd wlAlll lssusB. Du6 to lhs fack ot conlact lnfoimatlon set oul

ln sald prqtg8t, lhE l'larlng Offlcsr6 wro unablg to contact Ms, Babln to schodulo a prehearing conleronco to addrss the pioiest. ''O. pecebr 3f, 2008, a pr.hearlng conlerence wg hEld to address said protest, ari llie Hearlng.Ofllbere found tfral sald protBt dld not provlde a fac'tul or legal basls for the prot8t or stlBfy ths lsgal iquliement gvhg the prolsstanl slandng under ths Hulss. Consequenlly, the prolest llled by Ms. Babln was dlgmlsged, Dgoorhber 31, ?008, pio.harlng confience was convensd toaddrBs sald proteet, however, Ms, Taylor

7..

On oi about qcember 30, 28, Leslle Taylor.lllod a protst lo tho pplicalon. On

dld nof atlnd the pre.headng bonfeience after having boen notifiod of lhg dat, llmo and dac of said confernco. Conequnlly, tho rolesl liled by 16. Taylor was dlsmloged ln accordancs with Rulo 527.f. On or abut Decmbr 30, 2008, Karen P. Schtom flled a protosl lo fhe appllcatlon- On ecBmbgr 31, 2008, a pr+hbarlng conference was convend lo addtoss 6aid prctts8t, howevr, Ms. Schlom ltld not attnd th pr;har{ng cnferencs after having been nollfled ot lh dlo, tmB and place ot sad conlgrnca. Oonsequently, ih roresr lld by MB. Schlom was digmissd n aocordance wilh Rulo 527.1.

8.

.1

t
1

on Decmbr 31, 2008, an admlnlstrallvg hgadng w'as convoned whereln sworn lsllmony and suporllng axhlblls ware prsenled by BBC h suppon ot the ppllcalion.
(o8ot.sP.or5)

I'

fO. lesllmony and sxhlblte prssnted al lhe a&rlnlstrallvE hearing showed that BBC b thg mqlorlty lsasshold owner for lho appllcallon landB. Addnlqnal teFrlmony showed that, ln most chcunslancs, county roads are localed sssllonB and lhat 8BC uill attempt to locat drllllng pads c,tose to ose county roads whch would have lhe effct of. llmitng sulace usage lo approxlmatly zo psr sectlon, and lht a nuriber of eurlaoe u6o agreamenl8 had alrady bEn ntered lnto for lhs locallon ol peds on tho spdlcallon lends.
11. Tostlmony and xhlblle prosonted l th adminlshatve hsaring showed that the development of shalo gas re8ourc68 16 En entiraly n6w sourco of nalural gqs ln tho Unltod States mads toaslble. by naw appllcalions of horizonlal drllling and cornpleilon lochnologry. Addltlonal tsstlmony showd lhal typlolly shale gae accumulalons are \ry large and conllnuous ovr xlndd areaa, an thel lhe re8rvolrs.oxhlblt lowgr posltlos and mlcro- to nanodarcy prmgabllllls with generally low water eaturalion8 nd lhe gaB storags octurlng aB Bllhr lrss ga8 ln the rock pores and a9 dsorbd 96 on ths sufas ol orgnlc mttsr. Further tosllmony lndlcalsd lhat lhe Oolhlc Shqls Formallon undrlyng ths .8ppltlon lnd8 i8 t lts thickost and reprssntis a largs dsvlopble gas resourco, and le bouned and sealld_b_y th Lowr lrmy Formaflon above, and lh Desrt creek Formatlon blow'. Tetlmony showed that BBC ha underlaken an explratory program lo determlne lhe dvlopmnt potentlal ol the Golhlc Shals Fomatlon by.ddlllng slx wells, lhrs ot whlch wro tostod and lwo ot whkrh wr cored, of whlch lwo are now connected to salss,

_.

lz.Tetltnony and exhlblts prBntd t th admlnfratlve hoarlng showed e slmulallon md|, basod on lTold and laortory tests, produollon dat, and lhs gsologlcal modsl, uas propard to prdic! pootmance of h6 lypical Golhic Shale Fomaton well, whlch prd-lctd n lnlttal sis rte of S MMOF pr dqy docllnlng to 100 MCF per day al tho eoonomlo llmlt attor 2 years of productloi. Addonal . lBllmony, bffed or lhe slmulallon mod|, showed lhl thr rould be no ressure deptellon beyond the ', bou.ndarles 9f ihe 1,280:ac ddlllng and gpaclng unlt wllh up lo lght horlzotal rslls crtited therern, wtrtctr wo1ldirdsult ln no vlolltgn ot corrlallve rlghls through tlr llfe expcncy of tho wstl. Futher tesmony ' lndlcsted tlat, basgd upon currnt drllllng and complollon costs, stlmte oprallng xpenees, expecte pclng, irnd lh g.lmulated produclbn fors0asl, lh drllllng and produclng of hilzontal Qothlc'Shsle .Fgrma!194.wlls.would be a vlabto economc vnlur on lhe sppllcation lande. Teslimony lndlcalod that th Gothlc Shale Formllon well deelgn and complollon B contlnully volvlng procels whkh lncludes proi,eclon of al,knoiriii aqullers, eore of which li 1,b00t below tts rriacs ei ttr arr, wnttiio srrtnga ot sld,lcslng; bor of whhh are cemented lrom sttlng dpth to surface, and lhat 8BC would try to llm[ the numbar ol drllling pads lo les than four por sectlon as surfaco usa agreements and topogrirp'hy allow.

13. Ttlmony and exhlblts presBnld at tho admlnlslratlvo headng showed lht nuerous
oulrd'eqh ictlvnls h4d bian undertaken by BBC.in Delores and Monlezuma CountlE ovr lhe pa6t throo years aD.q pilorta qny drilllng cllvlty by BBO.

14, .The above-refsrnced tesllmony and xhlblts show lhat lhs proposed spacing and ptoposed wll dnsty wlll aliW more efllclent reeervolr dralnage, wlll prvenl wst, ill aesuie a gleater ullmat ro@vory ol g6s, and wlll not vlolel cordelfve rlghts.

15.

Bll Barrett Corporation agreed to be bound by oral order ot lhe Commlsslon.

.tornation.

e Ptslds boundary, fot th producllon of gas and aesodaled hydrocaons trom rh Oothl Shale
9FBER
NoW, THBEFORE. lT.lS ORDEFED, that approxlmsle 1,280-aare drllllng and spactng unltg; aro hroby stabllgheq, for ths betow-tt8td lands, altoidng up to lght (B) hortoni-al wes ro bs drllled on ah of th prpod unlt6, for produiflon from the corhb Shate Formallon:
Tou4rship 39 North. Fano 17 West. N.M.P.M3

vvhlh were dlqmlosod.at lhe pre-harlng contsrnc, eno uaoed n tn H;arilg fucers hing conduc-t an admhlslrallvg h-serlng,-th Commlsslon shouH enler sn order lo slallsh approxlmate 128$.acre drilllng and sacirrg unllrg lor cdriln lnde in Townehs BO and 40 North, Farrges lziro ie riCr, ...rc.. ano allow up to hlzontal wllB ln ach unll, wlth lho psmlttod rrvll to be locled no cloSor than 460 fegt to

Scton6:

SoF.lna Unlt No.

#l

S9ctlon

7: 17:

(18,14 acros)i (16.25), iO (16,07). (14.52), 12 (38.701, 13 140.00), T4 (40.00), 15 (40.00), 16 (40.00), t7 (40.00), 18 (40.00), 19 (90,90), 20 (37 - l 0), and 21 (37.3{1, Et/z SWt and Sl/ Lols 5 (37.41acro6), 6 (37.43), 7 (37.461,8(52,4,yzwyzandgyz

Lote

lt

siwzllp4dp.z
Silctlbq
ll {osot.8P{l/9895)

Secdon

20:

Al

t8: 'Eh Sec,tlon 19 ts 5 (37.75

Sclt
y

Sclno Unlt No. #3 tots 5 (37.6f acree), 6 (37.67), 7 (37.tr1)' and acre), 6 (37.82), 7 (S7.8S), and

I I

{37'09)' El W} and
(37 '961.

Evcwk and

Town8hip 39 Noh. Rano 18 Wst. N.M.P.M.

spadnd lJntt

$etllon
Sectlon

1:

No.

12: Z

Lots 6 {15.7t acros), 6 (15.61), 7 (17'31), I (22,71), I (!0.00)' 19 (40.00), I 1 (4'().00), 12 (40.00), 13 (40.00), 14 (4o.o0), 15 (40.00), and r6 {40.00), St/

i4

All

Spactno lJnlt No.,#5

SeAloit

Loti s (ez.g acres), 6 (32'23), 7 (37'Ol),

(41.81)'

(40.00)'

l0 (49.00)'
All

1 (40'00). 12 (40.00)' 13 (40'00)' 14 (10.00)'

Stlo4

11: 3:

15 (40,00), qnd 16 (40.00), St

Spacino unli Ni, #,6 LtC:5 (6.61 acres), 6 (11..45), 7 (18.27), I (21.1 I), I (40'00)' secrlon 10'(49,00), 11 (40.00), 12 (40,00), 13 (40:00), 14 (40.00)' r6 (40.00i; 1q (40.00), 17 (40.0o)t 18 (40.00)' 19 (t0'00)' and 20 {40.00), s! Sqc'tlon.tO: All

Sffifrl3: Ssct{on 24:

Tracl 37: Tract 41:

SlnoAnl.No,

gl27.O2l,NV2' NWV ll1.6:1(31.13 aor6), 3 {0.07}, nd

t-ois..t (0.Z acres), 2 (/k/a Tract 42: Lot 2) (14.99)'

*7

SE/' and Er

'sEv

io'l3i (44.31);4 (ada T:rsl4ztLt4\ 129.26\, ,1: Lor 5 (allaTrcct4l: Lot 6i (r3,80).6 (26.34), 7 (29.1O), 8(35.08), ialdiTracr41: Lot (r3,80),6 r0 (38.48), E!!c I (35:a3), and 10 (38 4(30.16) 3:.Lokl- 23.01 acr8) a/k/a Seollon 13: Lots 2(13.01 acree) and 4(09.16) a/.lda Sclln 13: !:qt 5. (12.27 acree) and Secllon 24: Lol 5 (13'80
s (aiw,Tiaa42: acres) a/B/a Soctlon 13: Lot86 (23.42 acre8), 7 (36,08)' and I (12'29) and sdtlon 24: Lote 3 (44,3t acrs) ahd 4 (29'26) nilr as lt llas wfihln the orlglnal suruy of Sebllon'24
.

42: Trct 45: Tracl4

Tracl

14: Soc{lon 23: mct 37;

Sction Trecl 38: Trct 39: Traal 40 Tracl 41: Tract 43: Traol 44:

Sacna lJntft No. #8

r.(!a.7), NW'/ NWlzr' NEtz NEt/ Lti 11 .(, 17 acres), 12 (q4.14), ahd 13 (34.65)

Lols'1 (4.49 acrs). ? (45.s6)' 3 (16'68),

(32.52), and

a/i Sscllon 14: Lots 7 (23.69 aclee), I (11'14), 10 (41'16), and 11 (30..r8) anda Sitiqn 14t Lots 4 (23.4 aores), 5 (34.68), 6 (1 r.06), 12 (14.33), 13 (t5,18), End l4 (30'90) lnsolar as ll iles ithln lho origlnal Survey of Secllons '14 and 23

Tracl45: Tract 47:

arua Section l4r Lols 16 (23.89 acros) and 17( 35.44 and Section 23: Lols 1 (45.01 actas) and 2 (30.17) lnsofar as it lies wllhln the orlglnal survey ot Seclon 23 a/lua Sdction 23: Lor 3 (22.51 acres), 4 (4.52), 5 (r1.83), I (1s.85),7 (4.78), nd I (30.02) lneofar ae ll lles wlthln lhe otlglnalurvy of Sctlon 23 Nt a/Ua Soclion 23: LolE I (34,10 acre8) and 10 (12.10)

(0r.sP4r380-5)

Spgcno Unlt No. #9 Lors 1 (46.2 acrs) and2 (1.22), N,, SW!4, and NW% SE/ Sc{in Lots 1 (t2.26 acres), 2 (t2.201, 3 (13.02}, 4 (05.64), and

Ssctlon

15: 22:

rrct
Tact

49: Tct47: '

se:

rh6 orrsrnarsurvey or ssruonE 15 and lnsotar as it lls withln tha orlgfnal suruey of Secflons lS and 22 a porton ot the Nt a/k/a Seoton 221 Lot 6 (zZ.St acrss)

i"[ll;?i'13r *hin

Towrshlp 40 North. Ranoo 1ZWegt. N.M.P.M.

S.ppetna Unt No. #tO Ssctlon LorBS (40.00 acrs), I 19 {40.00), r1 (40.00), 16 {40.00}, 16 (2s.12), (40.00), Er Sectlon Lots 6 (40.00 acrs), 6 r0 (4r.00). I 1 (40.00),

30: 31:

(40.00),7 (40.00), I (20.85),9 (22.98), 12 (40.00), 13 (40.00), 14 (4o.), 17 (27.26), f I (40.00), te (40.rr)i, and 20

(40.00), Z (40.00), I (29.4S), 9 (si.67), 12 (40.00), t3 (40,00), 14 (,to.00), !q (4g.qg), 16 (33.85), t7 (36.04), rs (40.00), 1 (40.00), (lo'00)' E,u 20

Iwnshlb 40 North. Fano i.q W6st. N.M.p.M.

'

Seclin2:
Sectlon

Soaclng Untt No.

*tt (a5.60), \ 12 I

38:

Tract Trt oz Tracl gB

96

!_olsJ (!7.s7acrs),2(1s,57),O(13,27),4(16.70),and6{2.29). Wl ltl!ll and NW7 SW% Lots t (9.6s acros) ,2 ln.O6l, s (26.60), 4 (4s.18), 6 g.!1._i0), 7.(18.66), I Oe.24), e (40,04), 1 0 (1s.8s), 1 t (18:05), (18'60)' and 13

(18.41)

Tr.act 99 Jracl 100 Tral lol

Trgp! 107Aand 107

Th,14'olTraq logAand 1098

Iiacl

1OC and IODD

Trc't 1104,

lloB, and
1

Tfqq{ t11A; 1t18,

T10C 11C, nd 111D

, :

scno:Unt No. fitA Secllon 261 .All Scllon Lbls 1 (10.s0 cros), z (4.o1), 3 (s6.0U!,4 llo..p), qgo.oo),6 (is.4S),

35:

7(14.86),I(28.91),andg(24.10),El

Tract 1078 nd TfeA a/a Soctlon 3o: Lot t0 (40,02 Tract 1088 Th W gf Trag! lOgA and 10eB Tract 1 164. lTgD,116i and 110F

loq,

107C

NVt/+.Wy NE!.NE14 NEtz+

acrs)

Sbae//l, Unll No. -s-eclton

#13

. SclFn:2z All '

::. . 6{1,28),WlSWlzr,SEVSWt/a,andSWt/rS-E/r .TrgctrgA, tr6gi 1160,115D, f16E, ti5F, t16O;and 11SH '

34

Lots 1 (4O.OO acres), 2 (4O.OO), 3 09,7'6), 4 (12.38), 5 (7.461.

TraottlOBand'{60

I. lS FURTHEB OFOEFD, tha! as lo sach horzonlgl cll wllhln a gven pproximate l,z@apre ddlilng and pachg unll tho ur{ac locatlon lor ths wll shali be locared s-nywter upon tho drllllng unh.(or erolig landa..to lh unlt) provdd lht th horizontql leg into tho Gothi Shate Foimalion shall :nof be oldp;,lhqr 460 lsl lo th oulid oundry of tho drilllng untt and..the tmlnu6 of lhE hqdzcinll lg aljdtl ngt be drii bloser lhan 460.lel lo lhe outsid boundary ol lh drlllng untt wtthout xcoptio{r beino grahted bylhe Dkactr of the Oil and Gag Conservallon Cmmlsslon.
fiom

spaclg unlt,

lli9 lniHtR OrDa"=o, ,n", to thg horfzontal rvplls to be dltrd tnto and poJuced<,. " I glvgn app-toximaterl;280 acrg drlllir and spaclng unit, such uells ihall b drlild Irom no rors thdn 8> elght(8)padslocatdolhslaceptFcfi.unltoradjolnlnglandetolhenll. ltlsprovided,hotover,tat BBC; ln crcufflBtnqg8 iryl!9ro:.topggraph dnd ulac ownr approval condltlonB prmll, wlll undsi{ak raoanabl eflons td ullze ewn fw6r ads by lqcallng lts pads neAr lhe cenler 0f a giyn drilllng and
(0o1.sP{lt89l

efleclive lorlhwlth.

lT l$ FURTHER OBDERED, lhat the provislons contalned ln the above ordor shall bocome

II.JS FURTI{ER OBRED, lhal lhe Commlssion xprssly reoerves lls rlght, ftr notlce I .. 'and hgarlng, lo allof, qmend or fpaat qny and/or all of lhe abow orddrs.

lT lS FURIHEH ORDERED, that undr th Stls Aditilhlstratlve Prpcedure Act th Commlsslon consldrs lhi ordor to bo llnal agsncy- action foi.purposea o, Judlclal revew withln ttlrry tOi ' days aflr lh6 dat thls order ls malled by tho Commlgslon.
lT TS FURTHER O8ERED, lhat ao appllcallon for rconsldratlon by tho Commisslon of thls ordr ls not quhed prlor to lhe tting for ludcJat revtsw.
ETEHED thls 3: dy ot Jnuary, 2009, as ot January 19, 2009.

COFEGD

rhl

s 'l 16 - y

otebruary t{NtO, a9 of .lf,nuary ts, zoo9.

OIL AD:GA9 CONSERVATION COMMISSION

oF IHEqTATE qF cOr,pFADO

\Datd at Suite 801 /'1120 Llncoln Seet Denver, Oolorado 80203 Fbruary 18,2009

(090r.6Pr/38s.

t2l BEFORE THE OIL AND GAS CONSERVATION COMMISSION OF THE STATE OF COLORADO IN THE MATTER OF THE PROMULGATION AND ESTABLISHMENT OF FIELD RULES TO GOVERN OPERATIONS IN THE PLATEAU FIELD, MESA COUNTY, COLORADO

) )
) )

CAUSE NO. 166

oRDER NO. 166-28

REPORT OF THE COMMISS]ON This cause came on for hearing before the Commission at 8:00 a.m. on July 15, 2008, in Ballroom B of the Brown Palace Hotel, 321 Seventeenth Street, Denver, Colorad, for an orderto establish a 640-acre drilling and spacing unit consisting of Section 1, Township 10 South, Range 96 West, 6th P.M., with the permitted well to be located no closer than 600 feet from any lease line absent an exception from the Director of the Commission, for the production of gas and associated hydrocarbons from the Niobrara Formation.
FINDINGS

The Commission finds as follows:

1- EnCana Oil & Gas (USA) lnc. ("EnCana"), as applicant herein, party in the subject matter of the above-referenced hearing. interested

is

an

2. Due notice of the time, place and purpose of the hearing has been given in all respects as required by law. 3- The Commission has jurisdiction over the subject matter embraced in said Notice, and of the parties interested therein, and jurisdiction to promulgate the hereinafter prescribed order pursuant to the Oil and Gas Conservation Act. 4. Rule 318.a. of the Rules and Regulations of the Oil and Gas Conservation Commission requires that wells drilled in excess of 2,500 feet in depth be located not less than 600 feet from any lease line, and located not less than 1,200 feet from any other producible or drilling oil or gas well when drilling to the same common source of supply. Section 1, Township -Formation. 10 South, Range 96 West, 6th P.M. is subject to this Rule for the Niobrara 5. On May 23, 2008, EnCana, by its attorney, filed with the Commission a verified application for an order to establish a 640-acre drilling and spacing unit consisting of Section 1, Township 10 South, Range g6 West, 6th P.M., for production from the Niobiara Formation. EnCana plans to drill one horizontal well in the application lands from the existing Niobrara Formation and Dakota Formation well pad in the SE% of said Secton 1, allowing th proposed horizontal well to penetrate the productive formation no closer than 600 feet from any lease line and with an intenruell setback of not less then 250 feet from any producible well in the Niobrara Formation without exception being granted by the Director of the Commission.

6. On July 2,2008, EnCana, by its attorney, filed with the Commission a written request to approve the application based on the merits of the verified application and the supporting exhibits. Sworn written testimony and exhibits were submitted in support of the
application.

7. Testimony and exhibits submitted in support of the application showed that EnCana is the leaseholder for the Niobrara Formation in the application lands.
Additional testimony showed that original gas-in-place ("OG|P") for the Niobrara Formation in the application lands is approximately 50 BCF per section. Further testimony showed that core data for an area well indicated that the Niobrara Formation has an average porosity of 6.0% and average permeability of 0.008 millidarcies.

the Niobrara Formation is a common source of supply underlying the application

8.

Testimony and exhibits submitted in support of the application showed that

lands.

9. Testimony and exhibits submitted in support of the application showed that a horizontal well will have an estimated ultimate recovery ("EUR') of 2.0 to 3.0 BCF from an OGlp of 85 BCF per section. Additional testimony showed that future production data from the proposed horizontal well on application lands will be required to validate the EUR calculations for the requested 640-acre spacing. 10. The above-referenced testimony and exhibits show that the proposed drilling and spacing unit will allow more efficient reservoir drainage, will prevent waste, will assure greater ultimate recovery of gas, and will not violate correlative rights.
Commission.

11. EnCana Ol & Gas (USA) lnc. agreed to be bound by oral order of

the

12. Based on the facts stated in the verified application, having received no protests, and based on the Hearing Officer review of the application under Rule 511.b., the Commission should enter an order to establish a 640-acre drilling and spacing unit consisting of Section 1, Township 10 South, Range g6 West,6th P.M., for production from the Niobrara Formation, allowing a proposed horizontal well to penetrate the productive formation no closer than 600 feet from any lease line and with an interuvell setback of not less than 250 feet from any producible well in the Niobrara Formation without exception being granted by the Director of the Commission. ORDER
NOW, THEREFORE lT lS ORDERED, that a 640-acre drilling and spacing unit is hereby established consisting of Section 1, Township 10 South, Range g6 West, 6th p.M., for the production of gas and associated hydrocarbons from the Niobrara Formation.

lT lS FURTHER ORDERED, that one horizontal well shall be approved to be drilled in the application lands from the existing Niobrara Formation and Dakota Formation well pad in the SE% of said Section 1, allowing the proposed horizontal well to penetrate the productive formation no closer than 600 feet from any lease line and with an interuvell setback of not less than 250 feet from any producible well in the Niobrara Formation without exception being granted by the Director of the Commission. lT lS FURTHER ORDERED, that the provisions contained in the above order shall become effective forthwith.

lT lS FURTHER ORDERED, that the Commission expressly reserves its right,

after notice and hearing, to alter, amend or repeal any and/or all of the above orders.

lT lS FURTHER ORDERED, that under the State Administrative Procedure Act the Commission considers this order to be final agency action for purposes of judicial review within thirty (30) days after the date this order is mailed by the Commission.

lT lS FURTHER ORDERED, that an application for reconsideration by the Commission of this order is not required prior to the filing for judicial review.
ENTERED

this

day of July, 2008, as of July 15, 2008.

OIL AND GAS CONSERVATION COMMISSION OF THE STATE OF COLORADO

By

Patricia C. Beaver, Secretary Dated at Suite 801 1120 Lincoln Street Denver, Golorado 80203 July 21, 2008

lBl

Oklahoma

BEFORE THE CORPORATION COMMISSION OF OKLAFIOMA

APPLICANT: MONXCO, L.L.C.

RELIEF SOUGHT: POOLINC
200s01 96s

)
)

) )

CAUSE

CD

NO.

LEGAL DESCzuPTION: S/2 OF SECTION 4(FIORIZONTAL ) WELL LINIT) AND SI//4 OF ) SECTTON 4 (REGULAR UNIT), ) ALL IN TOWNSHIP 7 NORTH, ) ORDERNO. RANGE 10 EAST, HUGTIES ) COLTNTY, OKLAHOM )

oRDER OF I'rE CO$MrS_SrON lfhis cause came on for hearing before Ane George, Administrative Law Judge for the Corporation Commission of Oklahoma, on the lOth day of May, 2005, in a Commission Courtroom,2l0f N. Lincoln Blvd., Jim Thorpe Building, Oklahoma City, Oklahoma, for the purpose of taking testimony and reporting to the Commission.
James W. George, Attorney, appeared for the Applicant, and Michel L. Decker, Deputy General Counsel for Conservation, filed notice ofppearnce.

recommending that
oders as follows:

The Adminstrative Law Judge heard the cause and has fled her report

the application be granted. The Commission concludes that

the

recommendation of the Administrative Lau' Judge should be adopted and, therefore, finds ad

FINDINGS
1 . 1'his is an application of Monexco, L.L.C. for an oder adjudicating the rights and equities and pooling all interests in various common sources of supply underlying the regular unit described in the caption and in the llatshome common source of supply underlying the horiz-ontal well unit described in the caption, and designating the Applicant or some other party

as operator,

The Commission has jurisdiction over the subject matter herein, and notice has respecls as required by the larv and the rules of the Commisson. An adjudicative inquiry was conducted by the Commission into the sufficiency of the search to ascertain the whereabouts of parties served solely by publication. Upon an examination of the ecord and proofs of publication, the Commission finds the process to be proper and upon an adjudicative inquiry into the factual issue of due diligence. the Commission finds that Applicant conducted a meaningful search of all reasonably available sources at hand to ascertain the wheeabouts of those entitled to notice but who were served solcly by publication. In this connection, the Commission approves notice by publication orrly to the following respondents:
been given

2.

in all

The unknown heirs, devisees, executors, administrators, trustees, success and assigns, immediate and remote, of Roy Loftis, deceased, and Thomas E. Vr'illiams, if living, or if deceased, his unknown heirs. devisees, executors, administrators. trustees, successors and assigns, immediale
and remote.

3. By Order No. 506087, issued in Cause CD No. 200502786, the Corporation Commission established the horizontal well unit describcd in the caption hereof ("the l-Iorizontal
Well Unit") for the Hartshorne common souce of supply ("the Florizontal Well
Formation").
Spaced

4. By Order No. 506086, issued in Cause CD No. 200502785, the Corporation Commission established the regular unit described in the caption hereofas one 160-acre drilling and spacing unil ("the Regular Unit") for the Calvin, Thurman, and Bartlesville common solrces of supply, and by Order No. 97070, the Corporation Commission established the Regular Unit t'or the Booch common source of supply, \4'ith the Calvin, Thumran, Bartlesville and Booch beng referred to herein as "the Regular Unit Spaced Fonnations".

5Applicant is the owner ofan interest in the right to drill into and produce from the Regular Unit Spaced Formations underlying the Regular Unit and in the Horizontal 'Well Spaced Formation underlying the Horizontal Well Unit by virtue of oil and gas leasehold rights owned by Applicant covering various lands and interests within both units. Applicant has proposed to all other owners in both the Regular Unit and in the Horizontal Well Unit the drilling of a rnit well, said unit $,ell to be drilled to a lotal vertical depth of approximately 2626 feet and to a total measured depth of approximately 5,877 feet, with said unit well to be drilled first 1o test the Regular Unit Spaced Formations and, then, to be drilled into the Horizontal r/ell Spaced Formation for the purposes of then. drillng a horizontal well in the Horizontal Well Unit. The owners of the remaining lands and interests in both unils are either the respondents named in the application filed in this cause or owners with r'hom Applicant has heretofore reached private
agreement.

6. Applicant, after proposing the drilling of the unit rvell, has been unable to reach agreement with the respondents so that all owners may pool their interests and develop their lands as a unit. Applicant exercised due diligence to locate each ofthe respondents and a bona fide effrrt was made to reach ari agreement with each such respondent as to horv both units should be developed.
just and reasonable method which will afford to each of the owners the opportunity to recover or receive, without unnecessary expense, its or his just and fair share of the oil and gas from both units is to permit each owne to participate in the drilling of the unit well by paying his or its
a

7.

.\ll owners should be required to pool and develop their inteests in both rnits and

proportionate share of the costs thereof and in the event any owner does not desire to participate in the drilling of the unit well, such owner may elect to relinquish to Applicant all of his or its interest in the Regular Unit, as to thc Reguar Unit Spaced Formations, ancl in rhe Horizontal lVell Unit, as to the Horizontal Well Spaced Formation only, for the present fair market value thereof.

Ordering paragraph 3 below fxes the costs of the drilling of the proposed unil costs are reasonable estimates of the projected actual costs of the unit well and the Commission retains jurisdiction in this cause to resolve any disputes between the owners over such costs.

well. The Comnission finds that said

8.

L The present fair market. value for an interest to be relinquished in both Units in lieu ofparticipating therein is as set forth in ordering paragraph 4 below10. Ordering paragraphs 4 through 12 below set forth various time periods for requiring acts to be performed or accomplished. 'l-he Commission finds that such time periods are all fair and reasonable. ll. In the interest of encouraging development n the area, securing the greatest ultimate recovery from the pool and protecting correlative rights, this application should be
granted.

ORDER

IT IS THEREFORE ORDERED by the Corporation Commission of Oklahoma

follows:

as

1. Pooling of Units. The lands and interests of Applicant and all owners named in Exhibit A to this order in the SW4 of Section 4, Township 7 North, Range l0 East, Hughes County, Oklahoma ("the Regular Unit") are hereby pooled for the Calvin, Thurman, Bartlesville,
ad Booch separate common sources of supply ("the Regular Unit Spaced Formations"). The lands alrd interests of z\pplicant and all owners named in Exhibit A to this order in the S/2 of Section 4, Townslrip 7 North, Range l0 East, Hughes County, Oklahoma ("the Horizontal V/ell Unir") are hereby pooled for the Hartshome common source of supply ("the }:lorizontal Well Spaced
F'ormation").

2. Unit Opertor. Monexco, L.L.C. is hereby tesignated operator of both units and permitted and authorized to drill and operate the unit wells.

Estmated Well Costs- For the purposes of this order, the sum of $530,475 is 3fixed as the cost of drilling the unit well to total depth, without a completion altempl. The sum of $643=335 is fixed as the cost of drilling, cornpleting and equipping the unit well from the Horizontal Well Spaced lrormation. Said sums are intended to include a reasonable charge for supervision. In this connection, inasmuch as the ownershp within the Regular Unit is no! the same as the ownership in the Horizontal Well Unit, there must be a method for attributing the total costs of the wcll between the owners in thc Regular Unit who elect to participate and the owners in the Horizontal Vr'ell Unit who elect to participate. To this end, the Commission finds that it u,ill be a relatively simple procedure for the operator to maintain a running total of the costs of the rvell as they are incurred to the base of the Booch, it being the deeper of the Regular Unit Spaced Formations. Thus, of the lotal costs incurred in dritling the well to thcbase of the. Booch, the Regular Unit owners shall pay 50%o of those total costs and the Florizontal Well Unit owners shall pay 507o ofthose lotal costs incurred to the base ofthe Booch. AII costs incurred in drilling the well from the point of time that it is drilled below the base of the Booch shall be paid, solely, by the owners in the Horizontal Sr'ell Unit- With respect to the completion costs, if the well is completed n a Regular Unit Spaced Formation, said completion costs shall be paid solely by the owners in the Regular Unit. If rhe well is completed in the Horizontal Well Spaced

In the event there is a dispute

Formation, those complete costs shall be paid solely by the owners in the Horizontal Well Unit. as to such costs after the unit well has been completed, the Commission retains jurisdiction of this cause for the purpose of re-determining such costs.

4. Options for Develooment of Units, To enable the unit well to be drilled, to avoid drilling of urinecessary wells and to protect coelative rights, each owner named in Exhibit A hereof must elect the following methods of affecting the committng of his or its interest in the development of the units, it being understood that an olrer may elect one method s {o aportion of his or its interest and another nrethod or methods as to the remaining portion or portions, to-wit:
the

4.1 Particiate. To participate in the drilling of the unit well. Any owner w'ho elects to participate in the drilling oithe unit well shall be required to pay to the designated operator his or its pro rata share of actual costs of drilling, completing and equipping the unit well and, in lhe event ofproduction, ofall acluai operatng costs, plus a reasonable charge by the designated operator for supervision. 4,l.l Paving or Securing Well Costs. V/ithin 20 days from the date of this order, any owner who elects to participate must pay the designated opetor such owner's pro rata share of the estimated completed well costs as set out in paragraph 3 above or, in lieu of such payment, fumish evidence, satisfactory to Applicant, of such owner's ability to pay such estimated cost. The "pro rata share" of the estimated completed well costs for those ouners in the Regular Unit who elect to participate shall be 25o/o ol the estimated completed well costs, or eacb such owner in the Regular Unit shall pay or secure their pro rata share of $160,833.75. Moreover, the pro rata share of each owner in the Horizontal Well Unit who elects to panicipate shall be his or its pro rat share of the remaining 75Vo of the total complered well costs, or his proportionate share of $482,501 .25.
4.1.2 Failure to Pay or Secue Well Costs. In the event any ownewho makes a timely election to participate fails, within said period of 20 days, to either pay such owner's pro rata share of the estimated completed well cosls or furnish evidence stisfctory to the designated opeator of such oqner's ability to pay such costs, such owner's election to participate shall bc considered void and such owner shall be treated as if he or it had made no election, as set forth in paragraph 5 below; OR

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4.2 Crsh Bonus Plus Resewed Overriding Rovaltv. To relinquish to Applicant his or its interest in the entire legular Unit, as to the Regular Unit Spaced Formations, and in the entire Horizontal Weil Unit, as to the Horizonal 'Well Spaced Formation, subject to the statutory l/8th royalty, for a cash bonus of$I-00 per mineral are covered by the relinquished interest plus a proportionate, cost-free (except applicable taxes) overriding royalty equaling I/16 of 8/8 ofall production, said factional overriding royalty to be reduced, however, to absorb any now existing non-operating interests in excess of the normal 1 /8 royalty; provided, however, this option shall not be available to any owner whose interesf is burdened u'ith royalty, overriding royalty or othe non-operating interests in excess of a proportionaTe 3/16 of all production. Provided, however, the Commission finds that the relative value between the Regular Unit Spaced Formations and the Horizontal Weli Spaced Formation is equal. Accordingly, of the $1O0 cash bonus, $50 per mineral acre shall be attributable to each owner's interest in tbe Horizontal Well Spaced Formation underlying the Horizontal Wel Unit and $50 per mineral ace shall be attributable to each owner's interest in the Regular Unit Spaced Formations underlying the Regular Unit; OR 4.3 Reseved Overridins Rovlty. To relinquish to Applicanr his or its interest in the entire Regular Unit, as to the Regular Unit Spaced Formations, and in the entire Horizontal Well Unit, as to the Horizontal l/ell Spaced Formation, subject to the stalutory l/8th royalty, for a propofionate cost-free (except applicable taxes) overriding royalty equaling l/8 of 8/8 of all production, said fractional overriding royalty to be reduced, however, to absorb any now existing non-operating ifterests in excess of the normal 1/8h lessor's royalty. 5. Time for Election: Failure to Elect. Eacl owner named n Exhibit A hereof is hereby required to elecr within 15 days fiom the date of this order as to which of the three alternative methods set forth in paragraph 4 above he or it desires to pursue in the development of both units. Such election shall be in writing and shall be mailed or delivered to Applicant at:
Monexco, L.L.(. 2701 State Street

Dallas,'IX
A failure to make

752O4

a timely electon shall act as an eiection to tke the Cash Bonus Plus Reserved Overriding Royalty descibed in paragraph 4.2 above; provided, however, as to any owner whose working interest is burdened with non-operating interests in excess of 3/16 of all oil and ga-s, such faiiure shall act as an election to take the Reserved Overriding Royalty described in

paragraph 4.3 above.

6. Pavment of Cash Bonuses: Escrow Account. Any owner who makes a timely election to accept the cash bonus or, by silence, has been deemed to have elected the cash bonus, shall be paid the amount due such owner within 30 days from the date of this order. If any payntent of bonus due and owing under this order cannot be nrade because the person entitled thereto cannot be located or is unknown, then said bonus shall be paid into an escrow account within ninety (90) days after the date of this order and shall not be commingled rvith any f'unds of the Applicant or Operator. Any royalty payments or other pay'rnents due 1o such person shall be paid into an esclow account by the holder of such funds, Responsibility for filing reports with the Commission as required by law and Commission rule as to bonus, royalty or other payments deposited into escrow accounts shall be with the applicabie holder. Such funds deposited in said escro\r'accounts shall be held for the exclusive use of, rnd sole beneft o( the person entitled thereto. It shall be the responsibility of the Operator to notify all other holders of ths provision and of the Commission rules regarding unclaimed monies under pooling orders. ,4,ttacbed hereto as Exhibit A is a list ofall parties or interests w'hch are unknown or cannot be located, together with such parl:ies' last known addresses, if available. Also included in Exhibit A is a list of all parties or interests whose present addresses are known, and the respective mailing address of
each. If any payment of bonus due and owing under this order carinot be made due to
a

questionable title or for any other reason, then such bonus shall be paid into an escrow account and shall not be commingled with any funds of the Applicant or Operator. A.rry royalty payments or other payments due 10 such person shall be paid into an escow account by rhe holder of such funds. Commencement of Well- Applicant shall commence operations for the drilling of 7. the unit well within 180 days from lhe date of this order and continue the drling thereof with

-4-

due diligence to compltion or the provisions hereof shall be inoperative and this order null and void except for the obligation to pay the cash bonuses as provided in paragraph 6.

8.

Subsequent Orrerations.

Proposed Operalions, This section 8 slrall apply to my additional wells be drilled on the Regular Unit tbr tJ.e purposes of testing one or more of the Regular Unit Spaced Fomations" and to any horizonfl q,ell on the {orizontal Well Unit for purposes of testing the llorizonral Well Spaced Formation, as wcll as any 'cll which an thc omer proposes to plug back, deepen, sidetrack or re-ork in one o more of the Regular lJnit Spaced Formations or in he llorizontal \/ell Spaced Fomations. The tem "sidetrack" as a subsequcnt operation shall not include or cover any sidetrack operation in a *'ell when said sidetrk peration is conducted only to straighten the hole or to drill around junk in the hole or to overcome meclrical difficulties. 1lose types of sidetacking shall be conducted at ttre discretion ofthe operator and shall be binding upon all participating owners. This section shal.l provide for a mner md nethod for owners who had participated in the drilling of all previous wells, including the initial unt well which is the subject of this order, to particpate in the subsequent opcrations. Once an owner has elected not to prticipate ir the drilling oF a well, including ihe non-participation n the initial unit wcll which is the subject of this order, tlt omer sball no longer bc entitled to participate in any subscquenf operations- Should a party who has participated in all prewious wells drilled on eilber unit pursuant to the rder desire to drill an additional well on either unit or lo re-work, deepen" sidetrack or plug back an existing well on either unit, such party shall give witten notice to all omers who hawe participated in all previous operations of the proposing party's desire to drill, re-work, cleepen, sidetrack or plug back such a well, speci$ing the work to be performed, th location, the proposed depth, objective formation. and including a witten estimared cost of the operation (.F.8.). The parties receiwirrg such rotice shall have 30 dys aff.er receipt of same within which to notify the proposing party, in writirrg" whether the recipients elect to participate in the cost of the proposed operati<>n. If a drilling rig is on location, notics of a proposal to re-wrk, deepen, sidctrack or plug back may be given by telephone or telecopy and the response period shall be limited to 48 hours, exclusiwe ofSaturday, Sunday and legal holidays. !-ailure ol'a party receiving such notice to reply within the period above Jixed, shall constilufe m election by that party not to participate in the cost of the proposed operation. Provided, however, without the witten consent of all then

which are proposed

8.1

prticipants in the well, no well rvhich is then producing iD commercial qutities may be re-worked, plugged back. sidetracked or deepened. Provided, further- in the event a well is then producing on either unit from one or more of the pooled comnron sources, an additional well to be prorluced fTom the same producing common source may not be proposed until such time as the Crportion Commission has issued a final order authorzing such increased density well. Provided, further, no well may be proposed to be drilled et n ofT-pttern location for either unit util the Corportion Commission h issued a final order authorizing such location exception.

8-2 Pavment or Securinq of Well Costs by Consentinq Parties. Any owner who timcly elects to pilticipate in any proposed operation, as refened to in the preceding paragraph. witlrin lO days aftcr expiration of the notice period of 3O days shall pay the then designated unit operalor such owner's pro rafa she of the estimated costs, as set out in the A.F.E- which was included with the notice. or, in licr of such pyment, t'umish security, satisfactory to the operator. for such owner's sbare of such eslimated costs. In the evnt ny owner who makes a timely election to pafiicipate fails, e'ithin said period of LO days, 10 either pay such owner's pro rata share of the estimated costs or to fumish security satisfactory 1o the operator for such olvner's share of such costs, such orwe/s election lo participate shall be considered woid and such orwner shall be treated as ifhe or it had made no election, as set folh in puagraph 8-3 below- Provided, in the evel the drilling rig is on location, ry owner who timely elects to participate in the re-work, sidctrack, rcomplelion, pltrg back or deepening shall be timly obligatcd to pay his or its share of the estimated costs as such costs arre incune<l d billed
to such electing owner by operator.

8.3 Result of Non-Consent Elections- l\ny owner 'ho elects, or is deemed to have elected, not to participatc in any opertion under the tems of ths section 8, shall be deemed to have relinquished to the party who proposed the operation his or its interest in the entirc unit, as to the pooled common sources cowered thereby orrly. less d except, and reseroing to said owner, all inierest in the wellbore of anr well n which said oMer trad prewiously pticipted, subject 1o the sttutory 1/8th royalty, and reseruing unto such ormer the Reserved Overriding Royalty described in paragraph 4.3 above. Provided, however, if ttre

-5-

proposed operation is for the re-working, deepening, sidetracking or plugging back ofan existing well, such relinquishment shall include, rather than reseve, the wellbore of such existing well.

8.4 Commencement olSubsequent Operations. The then designated operator must commence the propgsed operation referred to in the preceding paragraph within 90 days after expiration of the notice period of 30 days. Follorving commencement of the proposed operation within the time required, the designated operator must complete sarne with due diligence at the risk and expcnse of the parties who elected to participate in the proposed operation. If the actual operation has not been cornmenced wirhin the time provided and if a pafy still desires to conduct said operation, written notice proposing same must be re-submitted to the same pafies in accordance with the provisions hereof as if no prior proposal had been
made-

9. Continued Juiisdiction Over Well Costs. In the event of any dispute relative to the costs ofany well drilled, re-worked, deepened, sidetracked or plugged back pursuant to the terms of this order, the Commission shall determine the proper costs after due notice to interested parties and a hearing thereon. 10. Lien ofOoerator. The designated operator, in addition to any other right provided by this order, shall have a lien on the mineral leasehold estate or rights ormed by each of the respondents who participate in any well drilled, re-worked, deepened, sideuacked or plugged
back pursuant to this order and upon their shares of production from both units to the extent that costs incrred in the development and operation upon said unit are charge against such interest pursuant to this order or by operation of [aw. Such lien shall be separable as to each seprte owner within the Unit and shall remain liens unti the operator has been paid the amount due under the terms of this order. The designated opertor shall be entitled to production from any stch well attributable to any ownet or o\\'ners, after payment of royalty, until such owner or owners have paid the operator the amount due under the terms <lf this order, or any order settling any dispute over costs.

Il. Special Findines as to Poolinq of Horizontal Well Unit. The Commission specifically finds that fhe Horizontal Well Unit being pooled by this order does not overlie
existing production from the same common source of supply as the Horizontal Well Unit.

l0 days t.rom the date of this order stating that a true copy of this order was mailed within 3 days from the date of this order to each owner whose interest was pooled
Corporation Commission within

12,

Mailing of Order. Applicant, or its attorney, shall file an affidavit witb the

-6-

by the order and who could be served. The name and address ofeach such owner shall be set out in rhe affidavit, ifknovn.

CORPORATION COMMISSION
OKLAHOMA
Bob Anthony, Chairman Jeff Cloud, Vice Chairma Denise A. Bode, Commissioner DONE AND PERFORMED this
day

OF

of

2005

BY ORDER OF THE COMMISSION:

Peggy

Mitchell, Commission Secretary

REPORT OF THE ADMINISTRATIVE LAW JUDGE

The foregoing findings and order are the report and recommendatons of the Administrative Law Judge.
APPROVD:
Anne George, Date

Administrative Law Judge

Reviewer
Date

EXHIBITA
The following is a list of all parties or inrcrests whose present addresses are
known and the respective mai.ling addresses of each:

Valery Ann Hendry, Trustee

Under

N.E. 33704 charrotte Ann Rhoads 4159 E. 49th Tulsa, OK 74135 -/illiam H. Warren, Jr. 73013 Kathryn LaVeme Carter
Edmond, OK Route
2704 Cactus Drive

the John L. Vy'arren Trusl 1508 Eden B1vd., St. Petersburg, FL

Seminole, OK 7496g Bob L. Lois I 12 E. Cart Albef Parkway

McAlester' oK 74501

Billy Jack Norman J. Norman Oil Company RR I, Box I2lA Sasakwa, OK74g67

Bill

Bobby Bunch 1024 S. Oak

l, Box 253-W

Holdenvlle, OK 74g4g

located, rogether with each party's last known address,

The following is a list of all paies or inteests which are unknown or cannot be

ifavailable:

The unknown heirs, devisees, executors, administratorsr truslees, successors and assigns, immediate and remote, of Roy Loftis, deceased c/o Bob L. Loftis I l2 E. Carl Albert Parkway McAlester, OK 74501 The unknown heirs, devisees, executors, administrators, trustees, successors and assigns, immediate ard remote, of Roy Loftis, deceased
Addresses Unknown

Thomas E. Willams, if living, or if deceased, his unknown heirs, devisees, executors, administrators, trustees, successors and assigns, immediate and remote Address Unknown Respondents listed for curative purposes:

NONE

-9-

lcl

Texas

MrcrA-EL

WILIjM s, CrrarRMA

IJNDL C. Fo\pr.ER, JE-, cEtEAL CoulrsgL CoIlN K. LINBBBRRY, D rRBcroR

EI.tARtNcs SECaTaN

Rmnoeo CoulrssroN
July 30, 2008 Service List Attached:

oF TEXAS

OTpTcB oF GENF,RAL CoTTNSEL

MTfrTIXFD
AppucAloN oF
cHEsApEAKE OIL AND

Re:

Oil and Gas Docket No. 09-0253880;

THE

TExns' FINAL oRDER To the Parties:

MONTAGUE, PALO PINTO, PNKEn, SovpRVELL, TARRANTj YoUNGANDWisecouruTIes;

Gns oprRRrlruG, lNc. To AMEND THE F|ELD RuLEs FoR THE NEWARK, EAsr (BARNETT sHALE) FTELD, BosouE, cooKE, ELLIs, ERATH, DEr'ror, JossoN, HiLL, nobo,.lc

refertotheattachedFinalorderforthetermsanddate,ofsuchaction.

The Railroad Commission of Texas has acted upon the above-referenced case. please

granted, the order will be set aside and the casewill be subject to further action by the Commission at that time or at a later date.

lf a Motion for Rehearing s tmely filed, this order will not be final .ff"oiive until such Motion is overuled' A Motion for Rehearing should state the reasons you"d utieve rehearing should be granted, ncluding any errors,that you believe exist n the commission's order. tf th Motion is

This order will not be final and effective until at least 23 days after the date of this letter.

the docket number, the tifle of the document, and the format of the document

PLUS-TIIIRTEEN copies of the Motion for Rehearing shall be submitted the hearings examiner. PLEASE Do Nor srApLE coplEs. one cop must be sent to each party. rn addition, if practicable, parties are tequested to provide ihe examiners with a cpy of the Motion for Rehearing on a diskette in Word orWordPerfectfqrmat, The diskette should be labeled

To be timely, a Motion for Rehearing must be received by the Commission,s Docket services (see letterhead address) no later than s:oo p.m. n ttre0fl'r oy you are notified of the entry of ths order. You will be presumed to have been notified of tfrs"n. mr.ee orer oays atti the date of this letter' This deadline cannot be, extended because it is set by law. Fax transmissions will not be aenepted without prior approvalfrom the hearings examner. ORIGINAL

with

Sinceilely, ,r)
Doha K. Chandler, Technical Examiner

^,lau^tZ,.{{a

DKC/sck

Attachment
Richard Varela - RRC, Austin

Tommie Sei - RRC, Austin Debbie LaHood - RRC, Austin Wichita Falls Dstrict Office - 09
Compliance Analyst - 09

Service List:
1701 NoRTH CoNGREss TDD 80G?35-2989 OR TTtY

posr VENUE * stL463-12e4

OFFCE

Box 12967
AN

Eeue OproRntw

Ausnu, TAs ?gm_2967

burroye

pnoB: Sn/463-6g14 F/|xt slzl4eu6ggg

hrtP://9w,rc.6brc,B.

Oil & Gas Docket No. 09-0253880 July 30,2008

Page2

Service List:

Johnson Flip Whitworth Hallman Scott, Douglass & McGonnico LLp lnc. Representing EOG Resources, lnc. 2000 One American Center 78701 600 GongressAve., l5th Floor Austin, Texas 78701'3234 Brian sutivan McElroy, Sullivan & Miller LLP David Gross Representng Devon Energy Production Co, L.P. Representing XTO Energy lnc. P.O.Box12127 12400wy Zl West Austin, Texas 7871 1 Ste 350-230 Austin' Texas 78738 Jamie Nierson R-epresenting Burlington Resources O &G Co Lp Tim George 7000 North Mo-Pac Expressway McGinnis, Lochridge & Kilgore Second Floor One American Center Austin,Texas 78731 600CongressAvenue,Ste2100 Austin' Texas 78701 Mary Patton Representing Range Production Company Cary McGregor 100 Throckmorton, Suite 1200 Platt, Sparks & Associates Fort Worth, Texas 76102 9254 Capitol of Texas Highway, Suite 200
Glenn Kelly, Hart & Representing Chesapeake Operating, 301 Congress Ave. Ste Austin, Texas Austin, Texas 78746

ji

RAILROAD COMMISSION OF TEXAS OFFICE OF GENERAL COUNSEL HEARINGS SECTION

OILAND GAS DOCKET

NO.09-0253880

IN THE NEWARK, EAST (BARNETT SHALE)

FIELD, VARIOUS COUNTIES, TEXAS

FINAL ORDER AMENDING THE FIELD RULES FOR THE NEWARK, EAST (BARNETT SHALE) FIELD BOSQUE, COOKE, ELLIS, ERATH, DENTON, JOHNSON, HILL, HOOD, JACK, MONTAGUE, PALO ptNTO, PARKER, SOMERVELL, TARRANT, YOUNG, AND wlSE COUNTIES, TEXAS

The Commission fnds that after statutory notice in the above-numbered docket heard on January 9, 2008, the presiding examiners have made and filed a report and proposal for decision containing findings oifact and conclusions of law, whch was served on all parties of record; that the proposed applcaton is in compliance with all statutory requirements; and that this proceeding was duly submitted to the Railroad Commission of Texas at conference held in its offices in Austn, Texas.
The Commisson, after review and due consderation of the examiners' report and proposalfordecision, the findings of fact and conclusions of law contained theren, and any

exceptions and replies thereto, hereby adopts as its own the findings of fact and conclusions of law contained therein, and incorporates said findings of fact and conclusions of law as f fully set out and separately stated herein except for Findings of Fact 7 and 9 and Conclusion of Law 6 for which the following amended findings and
conclusion are adopted: Finding of Fact 7: Amendment of the special field rules to allow off lease penetration points is appropriate where the operator can establish it provided notice by certified mail, return receipt requested, to the mineral owner of any offsite
tract where the wellbore will penetrate the mineral forrnation or,

after exercising due diligence, the operator was unable to locate the mineral owner and then publshed notice pursuant to the Gommission's Rules of Practice and Procedure.
Finding of Fact lf a wellbore will penetrate the mineral formation on property where the operator has not secured a lease, or the property is not included within the unt identified for the proposed well on the drilling permit application, the permit for the well cannot be granted unless the operator can establish it provided notice by certified mail, return receipt requested, to the mineral owner or, after exercising due

9:

OL AND GAS DOCKET NO. 09.0253880 diligence, the operatorwas unable to locate the mineral owner and then published notice pursuanttothe Commssion's Rules

Page 2

of Practice and Procedure. Conclusion of Law

Supreme Court

6: Pursuant to the decision of the Texas in Magnolia Petroleum Co. v. Railroad

Commission,lTO S.W.2d 189, 191 fl-ex. 1943) if a proposed wellbore will penetrate the mineral formation on properly where the operator has not secured a lease or the property is not
included within the unit identified for the proposed well on the drilling permit application, the permit for the well cannot be granted unless the operatorcan establish it provided notice by certified mail, return receipt requested, to the off lease mineral owner or, after exercising due diligence, the operator was unable to locate the mineral owner and then published notice

pursuant
Procedure.

to the Gommission's Rules of

Practice and.

Therefore, it is ordered by the Railroad Commission of Texas that Rules 2 and 3 of the field rules for the Newark, East (Barnett Shale) Field is amended. The field rules for the Newark, East(BamettShale) Field, Bosque, Cooke, Ellis, Erath, Denton, Johnson, Hill, Hood, Jack, Montague, Palo Pinto, Parker, Somervell, Tarrant, Young and Wise Counties, Texas are set out in their entirety as follows: RULE 1: The entire correlative interval from6,672 feetto 7,166 feet as shown on the log of the Mitchell Energy Corporation - W. C. Young Well No. 2, API No- 497-32613, W. Ritchey Survey, A-704,Wse County, Texas, shall be designated as a single reservoir for proration purposes and be designated as the Newark, East (Barnett Shale) Field. RULE 2: No wellshall hereafter be drilled nearer than THREE HUNDRED THIRry (330) feet to any propefi line, lease line, or subdivision line. No minimum between well spacing requirement shall apply in this field. The aforementioned distance in the above rule is a minimum distance to allow an operator flexibility in locating a well, and the above spacing rule and the other rules to follow are for the purpose of permitting only one well to each drilling and proration unit. Provided however, that the Commission will grant exceptions to permit drilling within shorter distances and drilling more wells than herein prescrbed whenever the Commission shall have determined that such exceptions are necessary either to prevent waste or to prevent the confiscation of property. When exception to these rules is desired, application therefore shall be filed and will be acted upon in accordance with the provisions of Commission Statewide Rules 37 and 38, which applicable provisions of said rules are incorporated herein by reference. Provided, however, that for purposes of the lease line spacing reguirement for horizontal wells, the following shallapply:

olL AND eAS DOCKET NO. 09-0253880

Page 3

1-

Where the horizontal portion of the well is cased and cemented back above

the top of the Barne Shale formation, the distance to any property line,
lease line or subdivision line will be calculated based on the distance to the nearest perforation in the well, and not based on the penetration point or terminus. Both the penetration point and the uppermost or first perforation point in the wellbore shall be dentified on the drilling permit application and
plat.

Where an external casing packer is placed in the well and cementis pumped above the external casing packerto a depth above the top ofthe correlative interval for the field, the distance to any property line, lease line or subdivision line will be calculated based on the location of the external casing packer orthe closest open hole section in the Barnett Shale, and not on the penetration point. However- if perforations are added above the external casing packer, the perforations must comply with the spacing provisions, as described in paragraph number 1 of this Rule 2.
3.

For any well permitted n this field configured as the above described wells,

the penetration point need not be located on the same lease, pooled unit, unitized tract or production sharing agreement tract on whch the well is permitted and may be located on an Offsite Tract. When the penetration
point s located on such Offsite Tract the applicant for such a drilling permit must give 21 days notice by certified mail, return receipt requested to the mineral owners of the Offste Tract. Forthe purposes of this rule, the mineral owners of the Offsite Tract are (1) the designated operator; (2) alllessees of record forthe Offsite Tractwhere there is no designated operator; and (3) all owners of unleased mineral interests where there is no designated operator or lessee. ln providing such notice, applicant must provide the mineral owners of the Offsite Tract with a plat clearly depicting the projected path of the entire wellbore. ln the event the applicant s unable, after due diligence, to locate the whereabouts of any person to whom notice is requred by this rule, the applicant must publish notice of this application pursuant to the Commission's Ru les of Practfce and Procedure. lf the mineral owners of the Offsite Tract object to the location of the penetration point, the applicant may request a hearing to demonstrate the necessity of the location of the penetraton point of the well to prevent waste or to protect correlative rights. Notice of Offsite Tract penetration is not required if (a) written waivers of objection are received from all mineral owners of the Offsite Tract; or, (b) the applicant is the only mineral owner of the-Offsite Tract. To mitigate the potential for well collisons, applicant shali promptly provide copie of any directional surveys to the parties entitled to notice under this section, upon request.

OIL AND GAS DOCKET NO.

09-0253880

Page 4

ln appfying this rule, the general order of the Commission with relation to the subdivision of property shall be observed.
RULE 3: The acreage assigned to the individual gas well for the purpose of allocatihg allowable gas production thereto shall be know as a proraton unii. The standard drlling and proration units are established hereby to be THREE HUNDRED TWENTY (320) acres. No proration unit shall consist of more than THREE HUNDRED
TWENTY (320) acres; provided that, tolerance acreage of ten (10) percentshallbe allowed for each standard proration unit so that an'amount not to exceed a maximum of THREE HUNDRED FlFry-TWO (352) acres may be assigned. Each proration unit containing less than THREE HUNDRED TWENW (320) acres shall be a fractional proration unit. All proration units shall consist of acreage whch can be reasonaby be considered to be productive of gas. No double assignment of acreage will be accepted.

An operato at his option, shall be permitted to form optional drilling units of TWENW (20) acres. A proportional acreage allowable credit will be given for a gas well
on a fractisnal proration unit. No maximum diagonal requirement shall apply in this field. The standard drilling unit for oil wells shall remain 40 acres,
For the determination of acreage credit in this field, operators shall file for each well this field a Form P-15 Statement of Productivity of Acreaqe Assioned to Proration Units. On that form or an attachment thereto, the operator shall list the number of acres that are
in

being assigned to each well on the lease or unit for proration purposes. When the
allocation formula in this field is suspended, operators in this field shall not be required to fle plats with the Form P-15. When the allocation formula is in effect in this field, operators shall be required to file, along with the Form P-15, a plat of the lease, unit or property; provided that such plat shall not be required to show individual proration units. Provided further, that if the acreage assigned to any well has been pooled, the operator shallfurnish the Commission with such proof as it may.require as evidence that interests in and under such proration unit have been so pooled. Operators in this field are exempt from the requirements of Rule 86(f)(3) entitled Proration Unit Plat; however operators must, foreach horzontal drainhole, file a plat showing the as-drilled path, penetration point, terminus and, if applicable, perforations or external casing packer, for that horizontal dranhole and, for wells treated as stacked laterals, operators must file the plats required by paragraph number 6 of Rule 5. All plats referred to in this paragraph may be either a surveyor's plat or a certified plat, at the operator's optionForthe purpose of assigning additional acreageto a horizontalwell pursuantto Rule 86, the distance from first perforation to last perforation in the horizontal drainhole shall be used in such determination, in lieu of the distance from penetration point to terminus. RULE 4: The daily allowable production of gas from individual wells completed in a non-associated gas reservoir of the subject field shall be determined by allocating the allowable production, after deductions have been made for welJs which'are incapable of

OILAND GAS DOCKET NO.09.0253880

Page 5

producing their gas allowables, among the individual wetls in the proportion that the acreage assigned such wellfor p.rgraton purposes bears to the summation of the acreage with respect to all proratable wells producing from the same reservoir.
The allocation formula for the field is curently suspended. The allocation formula may be reinstated administratively if the market demand for gas in the Newark, East (Barnett Shale) Field drops below 100% of deliverabitity. RULE 5: For oil and gas wells, Stacked Lateral Wells within the correlative interval for the field that are drilled from different wellbores may be considered a single well for regulatory purposes, as provided below:

1-

A horizontal drainhole well qualifies as a Stacked Lateral Well under the

following conditions:

a) There are two or more horizontal dranhole wells on the same lease or pooled unit within the correlative interval for the field;
b) Each horizontal drainhole is drilled from a different surface locaton on the same lease or pooled unit;
c) There shall be no more than 200 feet between the surface locations of horizontal drainholes qualifying as a Stacked Lateral Well,

d) Each point of a stacked Lateral well's horizontal drainhole shall be no 'more than 200 feet in a horizontal direction from any point along any.other horizontal drainhole of that same stacked Lateral well. This istnce is measured perpendicular to the orientation of the horizontal drainhole and
can be illustrated by the projection of ech horizontal drainhole in the stacked Lateral well into a common horizontal plane as seen on a location
plat; and

e)
2.

There shall be no maximum or minimum distance limitations between horizontal drainholes of a stacked Lateral well in a vertical direction.

shall be considered as a single well for density and allowable purposes.

3.

Each horzontal drainhole drilled as a stacked Lateral well must be gegitted separately and assigned an Apl number. A stacked Lateralwell, including all horizontal drainholes comprising such stacked Lateral well,

the plat any other existing, or applied for, horizontal drainholes compriiing the Stacked LateralWell being permifted.

ln permitting a proposed stacked Lateral well, the operator shall identi7 in the "Remarks" of the Form w-1 drillng permit application that the horizontal drainhole is to be a stacked Lateral well. The operator shallalso identi7 on

OIL AND GAS DOCKET NO. 09-0253880

4.

Fage 6

To be a regular location, each horizontal dranhole of a Stacked Lateral Well must comply with (i) the field's minimum spacing distance as to any lease,

pooled unit or property line, and (ii) the field's minimum between well spacng distance as to any different well, including all horizontal drainholes of any other Stacked Lateral Well, on the same lease or pooled unit in the field. Operators may seek exceptions to Rules 37 and 38 for Stacked Lateral Wells in accordance with the Commissionls rules.
5.
For each Stacked Lateral Well, the operator must file Form G-1 or Form W2 for the Commission's Proration Department to build a fictitious 'Record" wellforthe Stacked LateralWell. This Record Wellwill be identified with the words "SL Record" included in the lease name. This Record Well will be assigned an API number and Gas Well lD or Oil lease number.

Operators shall file separate completion forms, including directional surveys,

for each horizontal drainhole of the Stacked Lateral Well. Operators shall also file a certified plat for each horizontal drainhole'of a Stacked Lateral Well confirming the well's qualification as a Stacked Lateral Well and showing the maximum dstances n a horizontal direction between each
horizontal drainhole of the Stacked Lateral Well.
7.

Each horizontal drainhole of a Stacked LateralWell will be listed on the proration schedule, but no allowable shall be shown for an individual horizontal drainhole. Each horizontal drainhole of a Stacked Lateral Well shall be requred to have a separate G-10 orW-2 test and the sum of all horizontal drainhole test rates shall be reported as the test rate for the
Record well. Operators shall report all production from horizontal drainholes included as

a Stacked Lateral Well on Form PR to the Stacked Lateral Record Well.

Production reported for a Stacked Lateral Record Well is the total production from the horizontal drainholes comprising the Stacked Lateral Well.

status should be removed, the Commission's Proration Department shall assign a single gas allowable to each Stacked Lateral Record Well classified as gas well. The Commission' s Proration Department shall also assign a single oil allowable to each Stacked Lateral Record Well classified as an oil well. The assigned allowable may be produced from any one or all of the horizontal drainholes comprising the Stacked LateralWell.
Operators shallfile an individual Form W-3A Notice of lntention to Plug and Abandon and Form W-3 Form Plugging Report for each horizontal drainhole comprising the Stacked LateralWellas required by Commission rules.

lf the field's 100% AOF

10.

oILAND GAS DOCKET NO. 09-0253880

Page 7

11'

An operator may not file Form P-4 to transfer an individual horizontat drainhole of a Stacked Lateral Well to another operator. P=4's filed to
change the operatorwill only be accepted forthe Record well if accompanied by a separate P-4 for each horizontal drainhole of the Stacked LateralWell.

notexpresslygranted herein of law which aiJnot expressly adopted herein are denied. All pending motions and requests for relief not priousty granted or granted herein are denied. This order will not be final and effective until 20 days after a party is notified of the Commission's order. A party is presumed to have been noiified of th Commission's order three days after the date on which the notice is actually mailed. lf a timely motion for rehearing is filed by any party at interest, this order shail not become final and effective until such motion is overruled, or if such motion is granted, this order shall be subject to fq.r'theraction by the comm ission. Pursuant to TEX. Gov'T coD E 2oo1 .1 46(e),th time S allotted for Commission action on a motion for rehearing in this ase prior. its Ueing overruled by operation of law, is hereby extended until g0 days from the date the order i served on the parties.
Done this 29th day of Juty, 2008.

Each examners'proposalfordecision - ovenuled. exception to thefindings of fact and conclusions is AII requested

RAILROAD COMMISSION OF TEXAS

tDl

Wyoming

IILE COP
BETORE THE

OIL.ND GAS CONSERVTION COMMISSION

OF THE STATE OT'WYO}ING

wr/zB\/z, rolvNsHrp 42 NoRrH, 1!:_JLl?,!{EsT, 6TH p.M., RANGE 64

CT'RR8NILY LOCATED

TI'RNER EORMATION CONSISTING

ORDER ERCI'I THE CCE,'MISSION AUTHORTZING 8o_ACRE.IORIZONTIJ SPACTNG TJNIT FOR TIIE

TN THE I{ATTER OF A HEARING BROUGH ON EY THE PPLICATION OF BLACK HILLS EXPLORTION .ND PRODUCTION, INC, FOR .EN OF
SECTION

APPLICATION TS .AN EXCEPTION ?O

IN SAID SECTION, WITH lHE I.OqTION OF ?HE HORIZONTL IfERI NO C&OSER TITAN 540' 1O THE LEASEHOTD BOUNDARTES OT THE SPCING UNIT, .A}TD NO CT,OSER THAN 540' TO rY OTHER EXISTING \IERTICAT TIELL BORES IN THE SPCING ITNi' IN lHE EINN-SHURLEY FTELD OR FOR SUCH OTHER .AI{D ET'RTflER REIIEF S THE COIT MISSION D.EEirSt .,PPROPRIATE, THE 3t sEcTroN 2 or THE RULES
CHAPTER ND

ONE HORIZONTL IJATERAIJ TO BE DRTTLED EROM N EXISTING VERTIC WEIL BORE

IqESTON COtNTy; IIYOMING ID LLOIgING FOR THE DRITLING OF CAUSE

ORDER

DOCKET

NO. 1 NO. 1 IO, 238-2003

NJEGI'ITIONS OF THE CoIIIMISSION.

APPER.ANCE

'
and

Mr. Bob Despain, Attorney for BLack llills Exploration production, Inc,
Others 1n attendance: Black Htlls Exloration Product,on, Inc.
and

Don Cardlnal Bill Allen llen , parrent

Bureau

of

Land Managenenb

Dave Chase

State of

Wyonfng

Richard D. Marvel

REPORT OF TI{E EXMJNER

Oll and Gas at approxlmately 9:36 a.m, on the 10th day of June, 2003 tn the Confetence Roon of the Office of the State Oil and cas Supetvisor, 777 lvest Eirst Street, Casper, Wyoning, after due and legal notice was given as requi.red. by law and as reguLred by th Rules and Regnlations of t}e Conmlssion, to consider the natter brought. on by the application of Btack Hirs
Conservation Comnission

Thla caus cane on regnlrarry for hearing befo.re Richard Marvel, duly appointed Hearlng ExarLiner of the Wyom_tng

D.

Exploratlon and Production/ Inc., (herelnafter ..Black Hills,,), for

an order fEom the Conission authorizing a 4go_acte .horizontal spacing unLh for the Turner Fornation conslgting of section 1?:
w1/2, w1/2EL/2, Townshtp 42 Noth, Range 64 west,.6th p,,f., lileston

of one horizont.a l-ateral to be drilLed froln an exit1ng vertlcal wel bore currentry .Located fn sid section, rrith the rocatlon of the horzontaL .lateral no closer than S40, to the leasehoLd boundaries of the spacing unit, and no croser than s4o' to any other existing vertical weII bores tn the spcing unit n the ,inn_Shurley Field, or for such other and further rolief ae the Cornrission deena appropriate. the apptlcation rs an exceptlon to chapter 3, Section 2 of the Rules and Regulabions of the connlssion. After hearing testimony from the lritnesses and havlng . considered the evidence presented., the Exaniner males the following Findlngs of Fact, concLusions of taw and. recomrnend.ed
Order:
FINDINGS OF FACT

Courty, WyonlDg and alowing for the drlllhg

1. BLack $il_ls le the ovrner. of certaln operatng rights and woxkihg j,nterests in the Turne.r Fornation undetlying the following described tands Ln the Finn-Shurley Field, feston County, Wyonlng, (hereinafter .'subject lands.) :
Tor,rnship 42

s""t10rr

Black HilJ_s is rnaklng appJ-ication to drill a proposed. reentry horlzontal Lateral from an existing well bore currentty located in the subJect Lands.

2.

3. The existing prescrbed location .for the drflung of a horizotl Lateral wlthin the above_described tract is governed under Chapter 3, SectLon 2 of the RuLes ancl Regulations of the Conmlssion and provides f,or a temporary 640_acte spaclng unit,
REPOR! OF
ISOGCC

Docket 238-A003

IE

EiXI,IINER

pursuant to Chapter 3, Section Z (e) (iv) of the Commlsslon Rutes and Regulations, alL existing vertical wells

4.

wlthln the proposed horizontal well spacing unit shall be subjct to the existlng spacing unis set by the conmission for sarcr vertlcal 5.
vJel,Is.

A reenEry horlzontaL lateral in the previously described

locatlon wiII not draln six hundred and foxty acte6 and requests

the Comnlsston cteate a horiznEat spacing un.lt for the Turner Eonnation to be comprised of 4go_acres consisting of Sectlon 1?: llL/2 and, Wl/2vf/z, Towship 42 North,. Range 64 Jest, 6th p.M.,
leston county' wyomrng, with the locatlon of the
propooed

horlzontI laEeral not cloex than 540, to the leaseholat boundaries of the spaclng unlt, and not closer hhan 540, to any othet exlsting vetical r.rellbote in the spacing unlt, 6. That the Turner Formatlon underlfes Subject lands nd
tha 480 acres J.s no snaller than the maxinun area which can be efflciently dralned by one (1) well producing oit, 9sr and
associated hydrocar.bons in the spacecl area. That in ordr for
a

prudent operator to. properly d.evefop the oil and. gas undetlylng the lands descibed above, the drilling unit nust be establlshecl as requested to prvent waste and protect corteLat,ive rights.

7-

No one appeared

in protest of Black Hills, applicatlon.

CONCIJUSIONS OF I,W

1. Due and legal notice of tlme, place, and. purpose of this hearing has been afforded to . al.l inetested, paxties ln alf respects as is required by law, 2. The cornission has Jurisdrction over thrs matter and over a.I.l parttes interestedr and has jurisdictj_on to nake and pomulgate the order herelnfter set forth.

REPORT OF

Itc Docket.

EIMINER 23A-ZOO7

3, This hearing r,a6 cond.ucted fn sec*ons 13 and 1s or .". ;;"

Conml.ssion

ac

hearlDgs conducted by examiners.

and 530_5_10S, t{yoning statues ":":;::"jr:: (ZOOI:I. governing

2003)

;;:i;

4. sectlon 30_s_104(d) (ivl, !!yo. stat. (exisNexis specjfically proyides that the
llhen required
Comnissjon has the authority:
or,r.r"r an--opo"tlra" for and prodce , prua.l-oir"aor,to drilt far as ir is r.eason"iv p-J".ibl.e and so "" to do so rdirhout was-te, his_ :r"t-.*Jabre share of the oir or sas or b."rh il." :i . ,

.1n rive rshls,. ro oder to protect coreLa_ "iili 'irrrrnn unrrs effordins e"..r,

section 30-s-t09(b) Wyo. stat. (LexisN{is 2003) states;

In etabtishlin dritting unit, rhe crease :.. ff"ir"H:..d- withln ;; ;',."d rhe shape determined by the comnissin from the "il-l-" but sharl .#i-:":,1r.i:ff .f,: can be erricienriy -i" by one n) ;:ii.

**.n;:#

Four hundred and eighty {4BO) acres ls not snaller than the maximm

to the Tuner Forrnation undel.ying subJect lancls.

ORDER

area that can be effectively drained by one well drilled

established for the Tutner Formatioh underlying the foLowing deecribed lands, to. wft:
Townsp__4?

By rHE CO{MTSSION that an approxfmate 4go_acre Horzontal dil-l.ing and spacing unlt be

rT fS

THEREToRE HEREBY ORDERED

{glt,_Rnge g4-Hggt,

6h p.M.

IT IS EIIRTHER ORDERED that th pernltted reentry horlzontal lateal is to be fron an existlng vetical rellboe suent.Ly located in Sectlon 17, Township 42 Notth' Ranse 64 irest, 6rh p.M., weston counry, -"oo,;,--;;;n-. the locaton of the hoieontal lateral belng no closer than 540, to the exterior boundary of the drilting and spacJ.ng unit, provided that no part
REPORT OF THE EXIINER wOcCC Docket 23_ZOO3
4

of the lateral be closer than S4O, from any otheli existing vertlcaL wel.I boes; that the CommlssLon shall retain Jurisdlctfon in this natter to take such add.itional action, if any,
FTRTHER ORERED,

IT IS

as the coEn'ssion

deems

neceasary and approriate.

.Augus, 2003,

DATED

thls 4th day of

WYOI.IING

OIL ND

coNsERlTroN Co4MISSION

GS

Lance 1. cook r.ance w.-E AcIng Chalman-Conmissioner

vr.
Mr. Richad

/s/

/s/ Riqhard o, lfarvel

D.

MS- Irynne Boogaarden, Comhi6sioner

lls/,

lyrle_Eeengaarden

Mr. Robert .A. Klng,

Connissioner

l"s/' Robett A. King

./s/ Mr.

r}onaLd qasko

Donald Basko, Corissioner

FPORT OA TE IMINER

IlOGcc Doclet 238-AOO3

5

XX.06

An Annotated List of State Statutes and Conservation Agency Regulations

The following list of statutory and regulatory provisions is designed to point out how particular states deal with horizontal or deviated wells from a spacing perspective since only a

few states have dealt with the impact of horizontal wells on the compulsory pooling process.
commend you to review an article presented at last year's Annual lnstitute which provides a more detailed review of state spacing rules.116

tAl

Arizona

Arizona has statewide spacing rules for oil and gas.ttt There are special rules for wells that have horizontal segments. Such segments shall be located at least 330 feet from the
boundary of a spacing unit in the case of an oil well and at least 1660 feet from the boundary of a spacing unit in the case of a gas well.ltB

lBl

Arkansas

Arkansas deals with horizontal wells with specific rules designed to dealwith such

operations."n Well location for a horizontalwell is determined by the estimated productive

portion of the lateral, projected to the surface. The well location is the entire perforated length of

the lateral section as shown on a directional survey."o Spacing rules attach to the entire
perforated section of the lateral line so that at no point in the lateral may the relevant spacing rules be violated.

tcl

Colorado

he recently adopted Colorado Oil and Gas Conservation Commission rules do not
define the term "horizontal well" but do deal with horizontal drilling in a number of ways. There

ttt

t'"
ttt

H. Michael Keller & Thomas W. Clawson, Know the Chessboard Before you Make your Guide to well Location and Spacing Regulation, 54 Rocky Mtn.Min.L.tnst. S 13.06 (200s). "' Ariz. Admin. code R12-7-107.

Move-A Landman's

Ariz. Admin. code R1-2-7-L07(D). Ark. oil & Gas comm. Rule B-3. '2o ld.

is a general requirement that unless authorized by the rule dealing with directional drilling all

wells must not be deviated.121 Rule 321 provides that is an operator intends to drill a horizontal
or deviated wellbore, the permit to drill application must include additional information showing both surface and bottom hole locations.t2' ln addition, within 30 days of completion the operator must submit the Drilling Completion Report with a copy of the directional survey coordinate

listing and wellbore deviation plots. The Report must show the location of the wellbore from the
base of the surface casing to the kick off point and from that point to total depth. The operator must ensure that the wellbore complies with the setback requirements contained in Rule 31g

that requires all wells drilled to

depth of 2500 feet or greater to be setback at least 600 feet

from any lease line and 1200 feet from any producible or drilling oil or gas well.

lDl

Florida

Florida imposes an 1840 foot spacing rule from all other wells on all "productive

sections" of a horizontal well.123 All

1O

acre blocks whose nearest boundary is within g20 feet

from the productive section of a horizontal well must be included in the drilling unit. Likewise, horizontal wells within productive sections penetrating the 400 foot square in the center of a routine, verticalwell, must include the entire 160 acre drilling unit. The regulations further provide that productive horizontal wells are to be "unitized" as soon as possible after testing is

completed.l2a Horizontalwell operators must also comply with the special requirements for nonroutine drilling units including a showing why the horizontal well will prevent waste or protect

correlative rights.

IEI

lllinois

The lllinois regulations specifically deal with the drilling of horizontalwells and the appropriate spacing. A horizontalwell is one where the lateral length is at least twice the

,ro

t" coGCC Rule 3L7(b). t" rd.Rule32t. t" Fla. Reg. 62c-26.0o4.
Id.

thickness of the reservoir.l2u The regulations further allow for multiple horizontal drainholes from a single well. Depending upon whether the horizontal well is designed for primary or enhanced recovery purposes the spacing requirements will differ.126 The operator must also
provide additional information both prior to getting the permit to drill and upon the filing of the required well completion and well drilling reports.127

tFl

Kansas

Under the regulations of the Kansas Corporation Commission, a horizontal well "may be

permitted by the commission only after application to the conservation division and notice
pursuant to K.A.R. 82-3-135a. The application may be set for hearing by the commission."r2s

There is a statewide drilling unit size of 10 acres for both oil and gas wells and a spacing
regulation that does not allow for wells to be drilled within 330 feet of any lease or unit boundary
line.12e

lcl

Kentucky

Kentucky has two parallel rules relating to horizontalwells, one dealing with coalbed methane wells and the other dealing with all other wells.tto Both rules apply to directional and horizontal wellbores. The horizontal wellbore must in either case must satisfy the spacing requirements for the well in terms of distance from the lease line and from other producing

wells. There are special platting requirements imposed on the permit application to ensure
compliance with the applicable spacing rules. The CBM rule imposes additional requirements relating to the coal seams that are to be intersected

tHl

Louisiana

t" 62rlcs 240.455. t'"

ld.

"' 62 rAC s 24o.24s. t"

t"
tto
K.A.R.

s2-3-103a (b).

K.A.R. sS 82-3-207;82-3-312. fs

805 KAR 1:140 (Non-CBM wells);805 KAR 9:tO7o(CBM wells).

ln 1998, the Department of Natural Resources, Office of Conservation promulgated

Statewide Order No. 29-S which regulates the drilling of horizontalwells in the "Austin Chalk Formation.Dl3l A horizontalwell is defined as one where the lateral section is drilled at an angle

of at least 80 degrees to the vertical with a horizontal displacement of at least 50 feet from the penetration point into the Austin Chalk Formation. The regulations exempt horizontal wells from the statewide well spacing rules. Where no special or field rules have been created for Austin Chalk Formation horizontal wells, spacing rules require that the lateral section shall not encroach into a "rectangle formed by drawing north-south lines 3,000 feet east of the most easterly point and 3,000 feet west of the most westerly point and east-west lines 100 feet north
of the most northerly point and 100 feet south of the most southerly point of any horizontal well

completed in, drilling to, or for which a permit shall have been granted. . . 1132 The othenruise
applicable gas proration rules also do not apply to horizontal wells which are to be given an

allowable based on the Maximum Efficient Rate (MER) of the

well.

The size and shape of

horizontal spacing units are to be based on the proposed design of the well. The regulations

fufther provide that the party who owns or controls a majority working interest in a drilling unit for a horizontal well shall have the right to be designated the operator of the unit.133 The normal
requirements for the running of a directional survey for all directional wells may be waived as to

the requirement to run it for the entire length of the lateral section by the Office of
Conservation. tto

tll

Michigan

Michigan has no special rules for horizontalwells but does regulate directional drilling

and re-drilling operations. "u

/d. s 4305(6). Id. g 4305(7). Statewide Order No. 29-B sets forth the requirements for surveys for intentionally deviated wells. ttt Mich.Reg' 324.202;324.421. ln 1997, Michigan studied the issue of directional and horizontal drilling under Lake Michigan and conclude that the risk of contamination of the lake was de minimis although there were some
tto

t" La. Admin. code tit. 43, subpart "' rd., g 4303(2). t"

i-g, ch. 43.

tJI

Montana

Montana, in 1995, adopted a specific rule relating to how horizontal wells are to comply

with the otheruvise applicable spacing regulations. lnitially, the "projected depth" of the well as used in the spacing regulation to determine the relevant restrictions is to be based on the
"projected true vertical depth of the deepest horizontal drainhole.""u The minimum distance

requirements must be met at the penetration point and along the entire lateral line untilthe

terminus. A horizontal well operator is given the discretionary power to designate an optional
drilling unit, containing between 2-4 contiguous drilling units of the size and shape otherwise
applicable to a vertical well. The horizontal well operator has 30 days after completion of the well to file an accurate directional survey showing location, direction and length of each horizontal drainhole.

tKl

Nebraska

Nebraska has no special rules for horizontal wells but does regulate directional drilling through the permitting process.137 Compliance with the statewide spacing rules requiring 40 acre drilling units and requiring well locations for deeper wells to be no closer than 500 feet from
a boundary line would otheruvise be applicable.l3s

tll

Nevada

Nevada has no special rules for horizontal wells but does require wells that are intentionally deviated from the vertical to be approved by the Division of Minerals of the

Commission on Mineral Resources prior to the commencement of operations.l3e After completion a directional survey of the well must be submitted to the Division.

tMl

New Mexico

cautionary recommendations relating to surface location and its impact on the lake environment and other uses of the surface. ttu Mont. Admin. Reg. 5 g0.22.703. The general spacing regulations are set forth in 5 36.22.703. Montana has a default statewide spacing rule and then individually set field rules. "' 2G7 Neb. Admin. code ch. 3,oL4. t'" rd. ch.3, !3.o2. tt' Nev. Admin. Code 522.275- The spacing restrictions are located at Nev. Admin. Code 5 522.235. 5

The Oil Conservation Division has in the past few years been engaged in substantial and substantive changes to its oiol and gas regulations. The new compulsory pooling regulations
authorize the OCD to impose a risk penalty relating to the cost of drilling or re-entering a well.

Parties may contest what is a reasonable cost under a compulsory pooling order.1a0 Well spacing is determined by either county-specific rules, field rules or by statewide rules.lat The director of OCD may grant permits to drill at unorthodox locations after a notice and hearing.la2 The new regulations do not use the term horizontalwell, but do define the term "directional well" as a "well bore that is intentionally deviated from vertical with an intentional azimuth."lat The regulations also use the standard defintions for kick-off point, lateral, penetration poin and producing interval.laa For directional well bores, the approval process differs when the well bore
is entirely within a producing area, as defined by the regulations, or outside of the producing
atea.tou Typically a party will file a communitization order for approval from the Oil Conservation

Division that is not specifically tied to a horizontal or directional well which will give the operator

the permission to produce from the horizontal well. ln addition, directional surveys are required for directional well bores. No allowable is to be assigned to a directional well bore until the survey has been submitted.la6

lMl

North Dakota

North Dakota has extensive rules relating to spacing for existing and wildcat wells.la7 They have a specific rule for horizontalwells which are drilled at an angle of at least 80 degrees within the productive formation and are at least 500 feet in length. Horizontal wells must be drilled upon a full governmental section or upon two adjacent quafter sections. The horizontal

too

tot

NMAc 19.15. r.3.8, 19.15.13. r.3.

td. rg.L5.t5.8, 19.15.15.9, 19.15.15. 10. 'o' rd. Lg.L5.!s.13.

'o' rd.,19.t5.t6.7.

t*

ld.

'ot ! d., 19.:-5.16. i-4(b).

tou

tot

td., tg.r5.!6.L4.
N.D. Admin. code S

43-oz-03-t.

well must be no closer than 500 feet to the outside boundary of the tract and no more than

horizontal well may be drilled to the same pool on any such tract without the permission of the lndustrial Commission.
1as

tNl

Oklahoma

Oklahoma also has a specific rule dealing with horizontal wells.lae lnstead of the term penetration,point as is used in Texas, Oklahoma uses the term "point of entry" to describe the point where the drainhole intersects the top of the common source of supply.lso For a horizontal

wellthat is not drilled within an established horizontalwell unit, no allowable will be assigned
until the operator submits a downhole survey showing the location of each lateral for purposes of compliance with the spacing rules applicable to that location.l51 Horizontal wells can be

drilled on any drilling and spacing unit and a horizontal unit may be created after notice and
hearing.152 Because Oklahoma has statewide spacing, the regulations recognize that a

horizontal well unit may be established for a common source of supply for which there may already exist a non-horizontal drilling and spacing unit. Horizontalwell units may exist concurrently with producing non-horizontal drilling and spacing units. The regulations further provide that all laterals in the same common source of supply shall constitute a single wellbore

as long as one of the laterals is greater than 150 feet in length.ls3 As with Texas and most other
states, compliance with the spacing requirements is determined at the point of entry to the

terminus along any and all lateral lines that are drilled.lsa For wells drilled deeper than 2500 feet the laterals must be at least 600 feet from any other producible or drilling oil and gas well that will be bottomed in the same common source of supply. Likewise for horizontal wells, the

!d. Horizontal wells may qualify for certain tax incentives otherwise provided for by North Dakota. See N.D, Admin. Code 55 43-02-1.1-0L et seq. tot okla. Admin. code S 165:10-3-28. tto ld., s 165:10-3-28(b)(3). "' ,d., s 165:10-3-2g(c). tt' ,d., 165-10-3-28(e). E ttt rd., s 165-10-3-28(f). tto ,d., g L65-Lo-3-tg(g).

tag

spacing requirements from other horizontal well units depend on the size of those units. For example, a lateral may not be located less then 330 feet from the boundary of any 80 or 160 acre horizontal well unit. As with Texas, the regulations provide for "bonus" allowable for horizontal well unit production.

tol

Oregon

Oregon has no special rules for horizontal wells but does regulate directional drilling through the imposition of additional permit disclosure requirements and directional surveys upon completion of the directional well.155

tPl

Pennsylvania

Pennsylvania has one of the most active shale plays in the United States called the Marcellus Shale Formation. The Pennsylvania Department of Environmental Protection regulates oil and gas operations in the state. While the Department acknowledges the existence of horizontalwell operations in the Marcellus Shale there are no specific statutory or regulatory provisions that specifically relate to horizontal wells. Horizontalwells must be permitted under the Oil and Gas Act.156 The regulation dealing with deviated wells merely requires a well drilling permit and an angular deviation and directional survey of the well.157

tO1

South Carolina

South Carolina has no special rules relating to horizontalwells but merely has a regulation relating to directional drilling with additional reporting requirements attached to such operations.lss

lRl

Texas

Texas had through the end of 2005 issued Rule 37 permits for nearly 12,000 wells. That
number has clearly increased in the feverish activity that occurred in the Barnett Shale play in

ttt or.Adm.Rule ttt

632-o1o-0142.

ttt ttt S.c. code of Reg. 5 12t-8.17.

58 Pa.stat. 55 601.10i.-.605; pa. Reg. 5 79.11. Pa. Reg.5 79.16

the ensuing years. The Railroad Commission has adopted specialfield rules, including rules for

the Barnett Shale or Newark, East Field as it is called, for about 40 different fields. Texas was
one of the first states to adopt rules relating to horizontal drilling when it promulgated Rule 86 in
1990.15e Rule 86 applies to all horizontal wells drilled in the state, except for those drilled in

areas where special field rules are applicable. Many of the definitions contained in Rule 86 have become the standard definitions used to describe horizontal drilling. For example, Rule 86 defines the "penetration point" as "The point where the drainhole penetrates the top of the

correlative interval."160 The penetration point will normally be uphole from the "kick-off point," depending on the sharpness of the angle used to move from the build section to the lateral

section. The term "terminus" is defined as "The farthest point required to be surveyed along the
horizontal drainhole from the penetration point and within the correlative interval."161

Horizontalwells must comply with the othenruise applicable spacing regulations dealing with distances from lease lines and other wells as to every point as measured from the lateral
line in the correlative interval.162 lt there is any point where the spacing and/or distance rules are violated the operator must seek a Rule 37 exception well permit.t63 Because horizontal

drainholes are expected to produce more than would be expected from a vertical drainhole,
Rule 86 rewards horizontalwell operators through the proration/allowable system. Rule 86

contains a chart which provides for additional acreage assignment for proration/allowable purposes based on the field's density rule.tuo For example, in fields with a density rule of 40 acres or less and with a horizontal drainhole displacement (lateral section) of between 586 and
1170 feet, the operator is entitled to an additional 40 acres of allowable acreage. Essentially for each segment of horizontal drainhole displacement the operator gets an additional 20 acres. ttt
Tex. Admin. Code S 3.86.

tto/d.,S3.86(aXa).
tut /d., s 3.86(aX6). t"' ,d.,9 3.g6(b). t"t ,d.,9 3.86(bX3). t* s 3.86(d).

Thecorrelativeinterval isthevertical interval betweenthetopandbaseoftheproductive

).

reservoir as defined by the Railroad Commission. ld., 5 3.86(aXf

'd.,

Likewise, in fields with a density rule greater than 40 acres and with a horizontal displacement of between 828 and 1654 feet, the operator has earned an additional 80 acres towards his

allowable. ln these larger-spaced fields the increments go up by 40 acres for each of the
designated segments. Finally, Rule 86 provides that multiple horizontal drainholes may be drilled from a single verticalwellbore.r6u Where this happens the multiple wellbores are treated as a single well and the acreage assigned for allowable purposes is determined by measuring the longest of the lateral sections.166

ttt /d., s 3.s6(e).

tut
Rule 86 also imposes a directional survey requirement to insure compliance

with

Rules 1-1 and t2lhaTdeal with

directional wells. /d., 5 3.86(f).

ISI

Utah

Utah has adopted special spacing rules for horizontal wells. A statewide rule creates a

temporary 640-acre unit for all horizontal wells consisting of the governmental section upon which the well is drilled.167 The surface location may be anywhere on the lease precluding the option of placing it off of the leasehold estate. Any portion of the lateral section may not be within 660 feet of any lease boundary or drilling unit boundary. No portion of the lateral section may be within 1320 feet of any verticalwell producing in the same formation that is being targeted by the horizontal well. The Board of Oil, Gas and Mining may grant exceptions to any
of the horizontal well spacing requirements. The directional, deviation or MWD surveys that are

required during the drilling of a horizontal well must be filed with the Board within 30 days of completion of the horizontal well.168

ITI

Wyoming

Wyoming is one of the few states to adopt extensive separate regulations for horizontal
wells.16s The regulations define a horizontal wellwhere the wellbore is at an angle of at least 80

degrees to the vertical and with a lateral section of at least 100 feet as measured from the penetration point through the terminus.lTo The surface location can be anywhere on the leased

premises. There is no mention of having a surface location off of the leased premises. There
are additional disclosures required in the application for a permit to drill for a horizontal
well.171

ln the absence of special spacing rules no porlion of the lateral section of the horizontal well

may be closer than 660 feet to a drilling or spacing unit boundary, a federal unit boundary, an uncommitted mineral interest or lease boundary line. As to certain formations in the Powder River Basin the spacing distance is increased to 1320 feet. No lateral section of a horizontal ttt utah Admin. code R649-3-2.
/d. SS R649-2-LZ; R64g-3-21. 3 Wyo. Code oil Gen. R. ch.2,9 2(f). "o rd. ch. i. S 2(x). "' !d., ch.2, s s(f1ii).
tut tt8

well can be within 1320 feet of an existing, producing vertical wellbore. There is also established a temporary 640 acre spacing unit consisting of the governmental section where the
horizontal well is located. Horizontal wells located in federally supervised or API units are exempt from some of the spacing regulations.tt' Where padies entitled to notice of spacing unit

orders object to a horizontal well spacing unit, the permit to drill and spacing unit may be created upon a finding that to do so will prevent waste or protect correlative rights. The horizontalwell operator is also burdened by additional reporting requirements, including a MWD
survey to be filed within 30 days of completion of the lateral section and different plugging
requirements.lT3
S

XX.07

Selected Bibliography

Robed Buettner, The Compleat Angler-A Survey of Horizontal Drilling Regulation in the
Producing States, 48 Sw. Legal Fdn. Oil & Gas lnst. 8-1 (1997); Laura A. Burney & Norman J. Hyde, Hydraulic Fracturing: Stimulating Your Well or Trespassing Theirs? 44 Rocky Mtn.Min.L.lnst. 19-1 (1998); Rex Burford, Legal and Development lssues lnvolving Horizontal Drilling in the Appalachian

Basin, 12 E.Min.L.Found. ch.21 (1991); Stephen Dennis, Browning Oil Co. v. Luecke: Has Texas llluminated a Dark Distinction Between Vertical and Horizontal Drilling, 34 St.Mary's L.J. 215 (2002);

J. Robert Goldsmith, Jr., Pooling for Horizontal Wells, 1992 State Bar of Texas Advanced Oil,
Gas and Mineral Law Program;
Natalie Jefferis & Joel Symonds, Thinking Horizontally in a VefticalWorld: Practical Considerations for Horizontal Development in the Marcellus and Big Sandy Fields, 29 E.Min.L.Found. ch. ? (2009Xto be published);

t" t"

rd. ch.2, S 2(eXvii). rd. ch.2, ss18(d), 2J-(c).

Patricia A. Moore, "Horizontal Drilling-New Technology Bringing New Legal and Regulatory

Challenges,36 Rocky Mtn.Min.L.lnst. ch. 15 (1990);

Michael D. Reese, The Evolution of Horizontal Drilling Regulations in Texas, 5 Tex. Oil & Gas J.
1 (1eeo);

Taylor Reid & John Morrison, Doing the Lateral Lambada: Negotiating the Technical and Legal
Chaltenges of Horizontal Drilling, 43 Rocky Mtn.Min.L.lnst. ch. 16 (1997);

Christy M. Schweikhardt, Horizontal Perspective: Texas Oil and Gas Law in Light of Horizontal
Drilling Technology, 34 S.Tex.L.Rev. 329 (1993); Arthur Wright, Horizontal Wells: Technical and Legal lssues, 28 E.Min.L.Found. ch. 14 (2007).