Oil and Gas Pooling
How it works and how forced pooling affects the owner
There are many terms in oil and gas leases that may not be familiar. One of the important clauses in the oil and gas lease is the pooling clause. A quick scan of the provisions and clauses in most, if not all leases, generally will show a pooling clause. It is in the best interest of the production company that leases the property to insert a pooling clause. It can also be in the best interest of the landowner to read and thoroughly understand the pooling clause in the lease. Signing a lease without understanding what rights are included in the lease can generate legal problems for the landowner. Not understanding the pooling clause and being unaware of the pooling terms can also lead to a compulsorily pooling of the leased land under state laws.
Pooling is the consolidation and combining of leased land with adjoining leased tracts. The area is called a pool or a unit. Pooling has the benefit to the production company of uniting all landowners' leases into a common pool under one drilling production company and utilizing one common underground geological reservoir.
There are several types of pooled units. There are voluntary pooled units, forced pooled units, drilling units, proration units, field wide/enhanced recovery units, and specially defined units in lease agreements. Of all these named units, the reality is there are only two real types of pooling that the landowner will experience.
Landowners may find that they are subject to two types of pooling on their leased land. The first and possibly the best situation is voluntary pooling. In voluntary pooling, the landowner gives free consent to the pooling and may reap some benefit by inserting various provisions in the pooling clause. Reading the pooling clause in the oil or gas lease may indicate that the clause sometimes gives unrestricted rights to the production company for the pooling of the leased land. Therefore, it is prudent in the lease terms to set the acreage to be pooled in the leased land to only the minimum acreage necessary for the drilling permit. The landowner should look at the production company's description and the extent of the proposed area to be pooled in the pooling clause. If there is a statutory acreage specified, then the landowner should limit the acreage to that minimum number of acres. If there is no set limitation to the number of acres to be included in the pool, then the production company could extend the coverage area to the entire leased area without any limitation.
The second type of pooling is compulsory or statutory. This type of pooling is compulsory whenever state law has been satisfied for oil and gas leases. Most states have this type of provision for compelling the landowner to enter into a pooling arrangement. In compulsory pooling of leased lands, the production company files a request for a pooling order, which provides for the surrender or sharing of interest by the landowner. When filing a request for a pooling order, the production company must provide a list to the state of all persons reasonably known to own an oil or gas interest in any tract or portion, which is proposed to be pooled. If there are unknown owners of the land, the pooling order and notice of a hearing must be published in a newspaper with the largest circulation in each county where the pooling will take effect. All known owners must be notified and advised of the legal action as well as the time and place of the hearing. After the specified time for landowner notification is reached, the hearing is held before the appropriate state agency. As a result of the hearing, an order can be issued by the state concerning the setting of the cost formula for sharing costs and revenues in the pooled area. The state and the production company usually set the cost formula. Most landowners have very little input in this situation. The landowners may speak in their own behalf at the hearing. This is a compulsory pooling hearing and pooling will take place.
Both types of pooling can change the way the lease is interpreted and how the lease provisions are applied. Before signing a lease, landowners may and should insert a Pugh clause into the lease to protect their interests and the leased land. The Pugh clause states that the lease shall terminate in all non-producing areas when the primary term ends or terminates. The landowner should also read and understand all of the terms of the lease before signing the lease. The landowner should negotiate as effectively as possible before signing the lease. A landowner cannot prevent a statutory pooling; however, in voluntary pooling, there may be ways to insert increased landowner rights and to mitigate the terms to a more satisfactory level for the landowner.
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