Unit Size for Horizontal Wells on 1 Pad

I have a lease with a clause that reads, "...., providing that the unit or pool is not arbitrary and acreage constituting the unit or pool does not exceed 80 acres for a vertical well or 640 acres for a horizontal well and includes all of the leased premises or Lessor has approved such unitization in writing."

My gas exploration company called once to say that they want to make my unit 800 acres, and would I sign an amendment to allow the 800 acres, "since I would then have the opportunity to be included in a unit that includes 4 more wells that they plan to drill in the next couple years."

The gas company called again to say, "Nevermind - their legal department says that since there are two wells on one pad (1H and 2H), that the unit size can be 1280 acres.  No amendment needed." (I would receive royalties based on both horizontal wells on the same pad).

Is there a consensus on how a "horizontal well" is defined?  Would I have a basis to argue that they had to keep my unit at 640 acres?  I will ask my attorney, but I am curious if anyone else has had this experience. It might be helpful for others reading this forum.

Thank you.

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Permalink Reply by Dexter Green on September 11, 2014 at 3:58am

Here's the trick: build a pad, make a 640 acre unit for one well, make another 640 acre unit encompassing a different area for another well.  Same pad, lots of common acreage in both units, no contract violation. CHK has done this in Ohio where they have much smaller unit limitations.   

Permalink Reply by Brad Cellier on September 11, 2014 at 4:11am

Thanks, Dexter.  I have no problem with a "trick," if it's legal and that is how everyone is interpreting it.  Are you saying that they are interpreting my lease language, correctly and/or appropriately?

Permalink Reply by Dexter Green on September 11, 2014 at 4:17am

Can't be 100% sure without all the facts.  But I doubt they'd go out of bounds, especially with the scrutiny the industry is under lately. 

Permalink Reply by Rich on September 11, 2014 at 4:20am
Dexter
My question is how can they do that from the same well pad? Are going in different directions?
Permalink Reply by Dexter Green on September 11, 2014 at 6:28am

Because they can draw the unit(s) however they want.  Look at some of the ones CHK has done and notice the notations on them that read "first takeaway point, last takeaway point".  If they aren't withdrawing hydrocarbons from an area before that point, i.e. the vertical or the footage between the KOP and the pay zone, then they don't have to pay on that if they don't want to.  So they draw the units to accommodate their plans.  If you're not with them then they'll happily make you irrelevant to the process.  People think that they use scare tactics to get what they want.  Well, they do.  But they also donut-hole people just to prove a point. 

Permalink Reply by Barry D on September 11, 2014 at 7:00am

Dexter,

If I understand you correctly the company would not have to pay the landowner that has the well pad correct ? Or am I miss reading your comment ?

Permalink Reply by Dexter Green on September 11, 2014 at 8:14am

I oversimplified.  That was my error.  Imagine the path of the wellbore where actual extraction is taking place.  It's entirely possible--if improbable--that the pad, sitting perhaps on the edge of Landowner A's property, could not be included in a unit due to any number of restrictions.  Again, this is all theoretical and I daresay would be challenged by an attorney for Landowner A, but it is certainly not out of the question.   

Permalink Reply by Barry D on September 11, 2014 at 11:00am

Dexter,

I agree that it is not out of the question because I know of someone who was told by a company that it was possible.

Their property would be used for the pad but they would not receive royalties.

Permalink Reply by James Foster on September 11, 2014 at 4:33am

The unit you are in should still be a 640 acre unit because of your lease.  Did you receive yet a Declaration of Pooled Unit or was it filed in recorders office.  The pad you speak about should have two 640 acre units one nw and one se.  As Dexter said Chesapeake has done this a lot in Ohio because one of the big group leases here had the same terms you mention 640 acre max unit.  Not sure if you are with Chesapeake but based on the numbers 1H and 2H if that were Chesapeake 1H is NW and 2H is SE so one in each direction.  Your company may have a different numbering scheme.  If you see the permit drawings (do the post these on DEP in PA and WV ... in OH they do) you can see which direction each goes.

I would try to verify you are still in a 640 acre unit and not a 1280 although there are pros and cons to both.  If they drill one of these wells in a 1280 acre unit it will hold by production all the acres.  If there are two 640 acre units they must drill both wells.  If you have one well in a 1280 acre unit you will divide the money from that one well amongst all the landowners in the unit even though the well might be under your land.  If the well is mediocre and they don't come back for a long time to drill the others (remember you are held by production now) you may never see any money from the other folks wells.

The pro of a big unit and it will be tough to pre determine this is there is a well near us actually a couple near us that are two 640 acre units and one unit has a lot more oil so the oil people are happy it is not 1280 and the gas people are saying damn we should have signed that paper making it 1280.  We would have got to share in the oil part of this well.

A 640 acre unit in OH can easily support 3 wells in one direction then a second 640 acre unit in the other direction so 3 more wells off one pad.  The numbering scheme goes up to 12H for Chesapeake.  There has been some experimentation with permission from ODNR of placing laterals closer together then 500 feet in a big unit where all the land is leased.  The set back requirement here is 500 feet from unleased land so each well permit is separate even though they are in the same production unit.  At first each well unit was 1000 feet wide with the assumption they could frack and draw from 500 feet on each side.  They are now doing some research to see if they could go 750 or 500 between each lateral with in a unit (still 500 on outside lateral near unleased land) and produce more or just cost more.  I think the verdict on that is still out.

Permalink Reply by Brad Cellier on September 11, 2014 at 8:32am

I appreciate all

Permalink Reply by Brad Cellier on September 11, 2014 at 1:11pm

My last message got truncated, somehow.  I appreciate all the input, so far - I think this is a good discussion.  The specifics are:

This is a ~40-acre property in Southwestern PA near the Armstrong County / Butler County line, and the wells are drilled into the Marcellus.  This is a smaller gas company that is not Chesapeake, but they are well funded, actively developing gas in my area, and I am confident that they will continue to drill wells and get gas to market based on their actions to date.  There is a well pad "A", that has 2 horizontal wells ("A"-1H goes Northwest, and "A"-2H goes Southeast).  The wells are drilled, fractured, and I am told that they opened the gas for sale, today.  They plan to finalize and declare the unit next week.

They emailed me a drawing that shows a proposed ~800-acre unit that includes my property and another well pad, "B," that has yet to be drilled.  That well pad is proposed to have 4 horizontal wells ("B"-1H and -2H heading Northwest, and "B"-3H and -4H heading Southeast).

I have been asked to sign a Ratification to allow a 1280-acre unit, instead of my 640-acre restriction.  My understanding is that if I stick to my 640-acre unit requirement, they would have to "trim" someone else's property in the proposed 800-acre unit to meet the 640-acre requirement in my lease.  My lease requires that they "include all or none of my acreage" in the unit, so I can't be limited.  It sounds like I was the only one with a lease stating a maximum unit size, as well.

The risk is that if I sign the Ratification to 1280 acres, my royalty will decrease until the Well Pad "B" wells come on line.  Even then, it seems like they would include all 6 wells in the 640-acre unit required by my lease.

Would any of you sign the ratification to 1280 acres?  If so, would you ask for something in return?  Better royalty percentage?  No deductions?  Something I'm not thinking of?  If not, why not?

Thanks, again.

Permalink Reply by James Foster on September 11, 2014 at 3:04pm

If your lease is reopened you can always ask for something. I would get some clarification on the second pad. Will both pads be in this one unit. Will you receive royalties on all twelve potential wells. Sorry I dont know anyone who signed ammendment or what it got them. Try searching ammendment, lease ammendemnt, ammending alease and such on here and on google and maybe you can find some additional info.

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