How a production unit is formed?

Hi,
I have a question I know others also don't know the answer too but I'm not sure I'm going to ask it correctly but I'll try.
In a lot of the leases it says 640 acre production unit but most of the wells drilled so far only have one to a few horizontals showing on the odnr which makes them less than the max 640 production unit.
So how does this work if at the time the first well is drilled there is only say 150 acres in that leg. Do only the owners under that leg get royalties? To me that answer is yes but here's where I'm real confused. If a second leg is drilled with another 150 acres off the same pad do the first leg mineral rights owners now become apart of a 300 acre unit and so on until they hit the 640 acre production unit?
If so than didn't the first mineral rights owner benefit the most while the last leg(well off the same pad) mineral rights owners lose out?
Or does the drilling companies make a big circle around the pad where they would know who else in time wiould be In the completed production unit and those royalty owners benefit from the first well drilled (leg) of 150 acres out of 640?
I swear I can't find this answer and everyone I ask said they all wished they knew too :0)
Thank you
Kath

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Permalink Reply by Jim Litwinowicz on March 31, 2012 at 12:28pm

Kath; the second scenario is the correct one. When a unit is declared and a single well drilled, everyone with land in that unit will receive a royalty based on what percentage of the unit's 640 acres they own. So someone with 64 acres in a 640 acre unit will get 10% of the royalty percentage of the unit. One with the same acreage in a 1280 acre unit will get 5%.

And since some people will have a lease with different percentages paid out, the numbers could vary even for people that have the same acreage. One with 12.5% will get less than one with 17.5% even if they have the same acreages.

Here's how it works; a well produces enough product that sells for $100,000 per month. If you have land that covers 20% of the unit, then you will be credited for $20,000 of that production. Then that $20,000 will be multiplied by the percentage royalty in your lease. So if your lease says 15% with no deductions, you will get $3000. If your lease allows deductions, then they will subtract whatever costs they can justify from that $3000.

Thus it is possible and even probable to get paid for a well that is not even near your land in a large unit. And people with land a mile from yours may receive royalties for gas that came from under your land. In the long run, it will all even out as everyone in the unit will share in the royalties.

And the same will happen for everyone in that unit. And this will continue for every well drilled as long as that unit is active. Even wells drilled forty years from now.

Permalink Reply by Drill Pipe on May 5, 2012 at 3:25pm

Jim:  When we signed our Col Co lease, we understood spacing with vertical wells and that implication.

However, with horizontal drilling, how the heck do the drillers determine the drainage area under surface in order to assign portions of ones acreage to the PU?  If a horizontal arm is under my acreage, what determinations are used to calculate the acreage assigned on either side of the arm so as to be included in the PU?

Permalink Reply by Drill Pipe on May 5, 2012 at 4:42pm

thanks Utica....you have really helped me.

Btw, did you see my other question re a request by CHK to amend our lease from a 640 to a 1280 PU ?

Permalink Reply by KFS on July 25, 2013 at 3:38pm

Probably the dumbest question every (I apologize) but what if you receive a DPU and can see on the plat that you are in it - but it extends across only one little tip (say 1 acre) of your total 10 acre parcel. Are you still considered for the entire acreage you own - or only the wee little bit they actually cross? 

I think I know the answer is "the entire acreage." How would they know to "stop" collecting gas past your invisible underground line (like putting a straw in a glass no?) . Yet I'm always loathe to assume common sense is common. :)

 

Permalink Reply by Clinton44 on July 25, 2013 at 3:50pm

It all depends on how your lease is written, If you have a pugh clause stating that all your acreage must be included in the unit yes.

If there is not a pugh clause then no just a portion of your acreage can be included

Permalink Reply by Kathleen on July 26, 2013 at 1:49am
Hi,
My Pugh Claus, says only acreage in the DPU is held. The rest of the acreage will not be held by production.
If you do not have a pugh clause, all, your land is most likely now held, but you only get royalties on the land described in the DPU. The rest would not receive roaylities but would now be held by production.
If you have one or don't have one, you will only receive royalties on the land shown in the DPU.
Permalink Reply by Kathleen on July 26, 2013 at 1:59am
The second part of your question may depend on what state you are in.
In ohio the DPU has to have a 500 feet boundary away from unleased, or acreage not included. Your one acre can be in that 500ft boundary and receive royalties.
That rule is to stop draining of lands not receiving royalties, since its not fully known who the oil and gas moves in the shale after fracking.
Many people think the shales are tight enough, that oil and gas, 300+ ft away from the Fracking, has no chance of migrating over.
In PA the last time I looked they can go right up to your property line (mineral line) and not have you in the DPU. Many owners feel they are being drained.
Permalink Reply by Clinton44 on March 31, 2012 at 12:36pm

Hi Kath,

I don't know how Ohio does it... but in PA the drilling units are formed ahead of when the wells go into production. Declaration of pooled units are filed in the county courthouses where the wells are located, division orders are sent out to royalty interest owners shortly before or after wells go into production.

All royalty interest owners are then paid accordingly based on how much of their acreage is included in the drilling unit at the royalty percentage agreed upon in the terms of the lease. 

All owners in the units in PA share in the royalties of all the wells in the unit, even if the horizontals do not go underneath their property.

Hope that helps, I am sure some of the Ohio members will chime in with some advice and correct any misinformation in my post. 

Permalink Reply by Kathleen on March 31, 2012 at 1:11pm
Thanks. Two more question.
What If the oil company only submits for one leg of a 150 production unit off a pad than later adds more?
Second. What If they drill the first leg than they decide not to drill another one which would mean they never completed the full production unit.
I'm pretty sure I've seen an odnr production unit of around 150 than months later they added another similar size well off the same pad. This would mean it was in the works the whole time but the odnr only showed the one leg permitted but there is a copy somewhere with the full 640 drawn out? Or at least a proposal?
I'm so glad you guys understand my question :0)
Permalink Reply by Little Cougar on March 31, 2012 at 2:04pm

Hi everyone...

I'm in PA and have 2 wells in Greene County producing now...as all you older members know.  The lease was a modified lease because of HBP...the modification filed in Greene County had a unit of 602 acres.  The O&G's try to form a rectangular formation when pulling a unit together.  Everyone that has land included in that unit will receive royalties based on the amount of acres they own in that unit and even if the first wells don't go under their surface, as Jim stated above.  However, later on wells may be drilled that will go under their land too.  This modification that was ratified and filed with the state indicates all the wells by a number which can be used to search on the PA DEP website to see if they have approved permits to drill for each of those wells.  Each well does have a permit issued but that doesn't necessarily mean they will drill all those wells immediately or ever. They drill north first and then will drill south after that.  And I personally was not notified when they were going to drill or even when they finished the 2 wells that were drilled and went online and I presently am receiving royalties.  It just so happened I received a royalty check for 5 months of back royalties for those 2 wells and ever since then receive my monthly check for the 2 horizontal wells.  However, the portion of the unit that I am receiving royalties for is part of  legacy of my maternal great grandparents farm and I did not have executor rights, i.e., negotiating rights for the modification...only royalty rights, so the executor may have been notified. I do know they have started drilling 2 more wells but the PADEP indicate drilling finished but well not yet completed.  Frankly, don't quite know what that means and just haven't bothered to hound them about it.  Like surprises...but am keeping my eye on them.

 I recently modified another HBP lease for over a hundred acres and know that the O&G are including some of my acres in another unit formation and they plan on using the remaining acres for a third unit to drill further north...but they would not, absolutely refused to put that in writing.  It could be that those of you that are leased and are not HBP were able to negotiate being notified when they start to drill but I haven't seen a lot of evidence of that on this site.  Just my two cents...

Lil Cougar

 

p.s.  they could make more then one unit out of those remaining acres I have in the second modification...frankly the more the merrier...they aren't about to tell me more then they have to. 

Permalink Reply by Clinton44 on March 31, 2012 at 2:19pm

Is there any way you can check your county courthouse to see if they filed declarations of pooled units? might answer some of your questions as the DPU's at least in PA show all acreage as well as the percentages

Permalink Reply by Little Cougar on March 31, 2012 at 2:36pm

I did...there is a filed declaration for the present 2 wells and the other 4 wells they plan and have started to drill from that pad.  However for the modification I recently negotiated for the other acres I own,  does not indicate a unit yet.  The first modificaton includes all the other parties in the unit, the percent of acres they will receive royalties for and also includes a map of the unit which shows each individual's location in the unit and how many acres they own that are included in the unit.  I once a month go to the website, do a search to see what is going on...and if I find something, then I pay a fee to get copies of those on record.  You sign up and set up an account.

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