Angela Staples PBPA General Counsel

1. Midland Energy Expo
April 14, 2015

2. Permitting in Texas
• Texas Railroad Commission does not undertake to
adjudicate questions of title or rights of possession.
• Permit should be denied “if it does not reasonably
appear to it that the applicant has a good-faith claim of
ownership in the property. If the applicant makes a
reasonably satisfactory good-faith claim of ownership
in the property, the mere fact that another in good faith
disputes his title is not alone sufficient to defeat his
right to the permit.”

3. Allocation Well
•A horizontal well
•Permitted by the Texas Railroad Commission
•Allows an operator to drill across several tracts of
land
•No clear pooling authority or consent of the
Lessors

4. Wait, wait… WHAT?
• History of Pooling in Texas
• The Rule of Capture:
• Oil recovery in the United States began in Pennsylvania, 1859
• Rule of Capture was developed to protect operators and the growing industry
• Westmoreland & Cambria Natural Gas Co. v. Dewitt, 18 A. 724, Pennsylvania Supreme
Court:
• “Water and oil, and still more strongly gas, may be classed by themselves, if the analogy be not
too fanciful, as minerals ferae naturae. In common with animals, and unlike other minerals,
they have the power and the tendency to escape without the volition of the owner. Their
‘fugitive and wandering existence within the limits of a particular tract was uncertain,’ as said
by Chief Justice Agnew in Brown v. Vandegrift, 80 Pa. St. 147, 148. They belong to the owner
of the land, and are part of it, so long as they are on or in it, and are subject to his control; but
when they escape, and go into other land, or come under another’s control, the title of the
former owner is gone. Possession of the land, therefore, is not necessarily possession of the
gas. If an adjoining, or even a distant, owner, drills his own land, and taps your gas, so that it
comes into his well and under his control, it is no longer yours, but his.”

5. Effect of Texas’Adoption of The Rule of
Capture
• Closely spaced wells
• Dangerous conditions (fire
hazards)
• Excessive drilling (damage to
reservoirs)
• Excessive production
• Price drops
• Lessees drilled and sold for
anything over cost, rather than
allow neighbor to drain

6. Solution - Regulation
• March 31, 1919
The Texas Legislature enacts a statute requiring the conservation of oil and
gas, forbidding waste, and giving the Railroad Commission jurisdiction.
Tex. Nat. Res. Code Ann. '81.051 (Vernon 1978) (original version at 1919 Tex.
Gen. Laws, ch. 155, Tex. Gen. Civ. Stat. art. 6023) (Vernon 1962).
• November 26, 1919
Railroad Commission adopts first Statewide Rule regulating the oil and gas
industry. Texas is the first state to adopt a well spacing rule: Rule 37, which
has a conservation basis, was promulgated primarily to reduce fire hazards,
and to minimize the danger of water percolation into oil stratum from wells
drilled in too great a number or in too close proximity.
Railroad Commission v. Bass, l0 S.W.2d 586 (Tex. Civ. App.- Austin 1928) writ
dism'd, 51 S.W.2d 1113 (Tex. Comm'n App. 1932).

7. Rules 37 and 38
• Regulate Spacing of Wells
• At the time of enactment, wells were to be located no closer than 150 feet from
a lease line, and no closer than 300 feet to the nearest well
• Today, Statewide Rule sets the minimum distances at 467 feet from a lease
line, and 1200 feet from the nearest well completed in the same horizon
• Regulate Density of Wells
• Statewide Rule requires a minimum of 40 acres in a drilling unit
• There GENERALLY cannot be assignment of the same acreage to more than
one drilling unit

8. Practical Problems for Operators with
Spacing and Density Rules
• Operators may not have enough acreage to create a legally drillable
unit
• Smaller operators suffered
• Exceptions had to be granted
Tract D
10 acres
Tract C
10 acres
Tract A
10 acres
Tract B
10 acres

9. Solution: Pooling
Operator combines several adjoining tracts under separate leases in order to have the acreage
required to legally drill a well under the spacing and density rules
• Filing the P-12 with the Texas Railroad
Commission only allows the operator to pool
his interest (the leasehold interest), and to drill
the well.
• The Texas Supreme Court has held that,
“[a]bsent express authority, a lessee has no
power to pool interests in the estate retained
by the lessor with those of other lessors.
• What does that mean?
• It means that the Lessors can enforce the lease as
written:
• If a well is drilled on a tract, pooled with other tracts
only under the P-12, but without pooling authority,
the lessor on the drillsite tract (here Tract A) would be
entitled to its full royalty
• The other lessors (Tracts B, C and D) get no royalty
from the well, and no other well may be drilled on
their tracts, but their leases will not be held by
production
Tract A
10 acres
Tract C
10 acres
Tract B
10 acres
Tract D
10 acres

10. Solution: Pooling Clauses
Lessors grant Lessee the right to pool their lands with other lands in order to form a legally
drillable unit.
• If all owners grant pooling
authority, they will all share in
the production from the well on
Tract A, proportionate to their
acreage contributed to the unit
• E.g. 10 ac/40ac
• Drillsite Tract owner is
necessarily proportionately
reduced, but unless he grants
pooling authority, would not
likely get a well drilled
Tract A
10 acres
Tract C
10 acres
Tract B
10 acres
Tract D
10 acres

11. Taking it to the Next Level
• In the 90s, horizontal well drilling exploded
• Definition:
• Texas law and courts have defined a horizontal well as "[a]ny well that is
developed with one or more horizontal drainholes having a horizontal
drainhole displacement of at least 100 feet." 16 TEX. ADMIN. CODE §
3.86(a)(4) (2013).
• Like vertical wells, horizontal wells are initially drilled vertically down to a
formation suspected of holding hydrocarbons. Browning Oil Co., Inc. v.
Luecke, 38 S.W.3d 625 (Tex. App.—Austin 2000, pet. denied) at 634. At a pre-
determined point, the drill stem proceeds horizontally into the formation. Id.
Horizontal wellbores can extend across several leased tracts each having
different owners and contain multiple production points along the drainhole.
Id. at 632.

12. Do Vertical Well Pooling/Allocation Rules
Apply to Horizontal Wells?
• Non-Apportionment Rule –
• Production is allocated according to the ownership of the minerals at the
location from which the production is obtained.
• Hard to show with reasonable certainty the production from each tract in horizontal wells
• Owners refuse to authorize or consent to pooling
• Owners demand their full share of production from the entire length of the
horizontal wellbore
• Without pooling agreements (or production sharing agreements) an operator
could be made to pay the owners of each tract that the wellbore traverses
royalty on 100% of the production from the well (the rule applied in vertical
wells).

13. Browning Oil Co., Inc. v. Luecke
• Rejected applying the rules related to allocation of royalty used for
vertical wells, holding that found it was more appropriate to
calculate the royalty share of production attributable to the interest
holder's tract with reasonable certainty. Id. at 634.

14. The Changing Definition of “Drillsite Tract”
• "Each tract traversed by the horizontal wellbore is a drillsite
tract, and each production point on the wellbore is a drillsite."
Id. at 634.
• Today, any tract penetrated by a horizontal wellbore is
considered a drillsite tract. Id. at 634.
• A horizontal wellbore that penetrates multiple tracts creates
the possibility of having multiple drillsite tracts within a
horizontally pooled unit. See id. at 638 (discussing a
horizontal well that crossed seven separate tracts of land each
containing different royalty interest owners).

15. Browning Oil Co., Inc. v. Luecke
• Facts:
• In 1979, the Luecke’s executed 3 oil and gas leases covering
about 420 acres. Browning Oil Company eventually acquired
these leases. The leases allowed pooling, but limited to 80
acre proration units, and contained anti-dilution language that
required that each pooled unit contain at least 60% of the
Luecke’s acreage. In 1994, Browning asked the Luecke’s to
amend the pooling language to allow for larger pooled units
because Browning wanted to drill horizontal wells. The
Luecke’s refused. Without pooling authority, Browning drilled
two horizontal wells crossing Luecke’s tracts and several other
tracts.

16. Browning Oil Co., Inc. v. Luecke
• The Luecke’s sued, claiming violation of the leases’
pooling authority.
• At the trial, the Luecke’s claimed royalty on 100% of
the production from the wells even though only about
25% of the horizontal wellbore was located on acreage
in which Luecke owned an interest.
• The jury held for the Luecke’s.

17. Browning Oil Co., Inc. v. Luecke
• On appeal, court agreed that the pooling provision had been violated,
but reversed the damages.
• The Court of Appeals noted that the jury charge and Luecke’s royalty
calculations failed to take into account that substantial portions of
producing wellbore were located on lands with which Luecke had not
been pooled.
• Luecke’s would be paid for production from tracts they did not own.
• The Court ruled that Luecke’s royalty was limited to the production
that can be attributed to their tracts with reasonable certainty.
• Therefore, the Luecke’s were entitled to royalty on 25% of the total
production from the well.

18. Production Sharing Agreements
• Browning Oil Co. v. Luecke court noted that “punitive damages for a lessee’s
failure to comply with applicable pooling provisions could result in the
curtailment of horizontal drilling.” Id. at 646-47.
• Pooling authority unnecessary for horizontal wells?
• Using the logic in the Luecke case, Devon Energy asked the Railroad
Commission to issue permits if a majority of the Mineral and Working interest
owners had entered into Production Sharing Agreements.
• Agreements, signed by the interest owners, combine units or unpooled tracts
and allocate production of the horizontal well based upon the length of the
lateral under the tract.
• Since late 2007, the Railroad Commission has issued such permits based upon
the operator’s representation that at least 65 percent of the interest owners of
each tract agreed.

19. A Step Further
• 2010, Devon submitted an application for a permit to drill a
horizontal well in which they did NOT have either pooling
authority or a PSA, calling it an Allocation Well.
• Colin K. Lineberry (a representative of the Railroad
Commission) issued a letter to Devon Energy approving
Devon Energy’s application for an Allocation Well.
• “… it appears that a 100 percent interest in each of the leases is a sufficient
colorable claim to the right to drill a horizontal well as proposed to authorize
the removal of the regulatory bar and the issuance of a drilling permit by the
Commission, assuming the proposed well is in compliance with all other
relevant requirements.”

20. Post Lineberry Letter
• Devon’s representation that it held leases covering 100% of the
minerals met the minimum good faith claim to title threshold
showing merit to process the application.
• The Commission also noted that the permit did not endorse the
proposed allocation, leaving that issue to the Courts.
• Railroad Commission has issued many Allocation Well permits,
and has not required the previous minimum amount of interest
owners’ execution of Production Sharing Agreements.
•

21. RRC Disclaimer
• Commission Staff expresses no opinion as to whether a 100% ownership interest in each of the
leases alone or in combination with a “production sharing agreement” confers the right to drill
across lease/unit lines or whether a pooling agreement is also required. However, until that issue is
directly addressed and ruled upon by a Texas court of competent jurisdiction it appears that a 100%
interest in each of the leases and a production sharing agreement constitute a sufficient colorable
claim to the right to drill a horizontal well as proposed to authorize the removal of the regulatory
bar and the issuance of a drilling permit by the Commission, assuming the proposed well is in
compliance with all other relevant Commission requirements. Issuance of the permit is not an
endorsement or approval of the applicant’s stated method of allocating production proceeds among
component leases or units. All production must be reported to the Commission as production from
the lease or pooled unit on which the wellhead is located and reported production volume must be
determined by actual measurement of hydrocarbon volumes prior to leaving that tract and may not
be based on allocation or estimation. Payment of royalties is a contractual matter between the
lessor and lessee. Interpreting the leases and determining whether the proposed proceeds allocation
comports with the relevant leases is not a matter within Commission jurisdiction but a matter for
the parties to the lease and, if necessary, a Texas court of competent jurisdiction. The foregoing
statements are not, and should not be construed as, a final opinion or decision of the Railroad
Commission.

22. EOG Resources v. Klotzman
• 2012 - EOG application for Klotzman (Allocation) Well No.
1H
• No pooling authority in leases
• Klotzman’s refused to consent to pooling for horizontal
development
• Klotzman’s protested permit
• Permit issued

23. Spartan Texas Six Capital Partners, Ltd., et. al v.
EOG Resources, Inc.
• No pooling authorized.
• EOG filed pooled unit designations covering several tracts.
• Computed royalties “based upon a reasonable allocation of the
total production attributable to the lands covered by the […]
leases.”
• The Plaintiff mineral owners claim they should be paid royalties
based upon 100% of the production from the well.
• Settled.

24. Legislative Resolution?
• SECTION 1. Section 85.046, Natural Resources Code, is
amended by adding Subsection (d) to read as follows:
• (d) In order to prevent waste, promote conservation, or protect
correlative rights, the commission may issue a permit to an
operator or lessee to drill an oil or gas well that traverses multiple
tracts. If there is not an agreement with one or more owners of
royalty or mineral interests in the tracts traversed by the well
regarding the manner in which production from the well shall be
allocated among the tracts, the operator or lessee shall allocate to
each of those tracts its share of the aggregated production from the
well as determined by the operator or lessee with reasonable
probability.

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educational session.
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