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 Kathleen on April 1, 2012 at 9:47am
Thanks
So can they put the first wells into production without the final production unit filed?
Permalink Reply by Clinton44 on April 1, 2012 at 10:29am

Hi Utica, That is not quite true as least here in PA.. We are in two producing units one has a DPU filed, the other that has been in production with five wells since Nov. of 2011still does not have a DPU filed.

 Called the driller about the missing DPU said they are still in process of getting it filed, courthouse confirmed that as well, said sometimes they get paperwork to be filed where  notarized statements received from drilling partners in the ventures are over a year old...  

Permalink Reply by Clinton44 on April 2, 2012 at 3:00am

Hi Utica,

I agree... Thought there would be a system in place requiring a legally binding pooling agreement especially since most leases allow for them to change pooled unit dimensions at will.

The driller filed one DPU that we are in in a timely manner, however the one I stated as missing none of that paperwork is at recorders office still in drillers possesion.

The division orders that are issued and executed bind the company to pay the decimal percentage interest agreed upon in the order. So I assume if they change dimensions of drilling unit and cut you out or reduce your decimal interest new division orders would have to be executed.

So yes it would be a good idea to see what Ohio's regulations are regarding these paperwork issues... 

Permalink Reply by Drill Pipe on May 4, 2012 at 5:36pm
Utica......we had a call from a curative agent for CHK asking us to amend the PU clause in our Columbiana Co lease, wanting to increase the unit size from 640 A to 1280 A. I asked if this was a mandate via the State of Ohio but told it was a request ONLY. Also was told that if we did not allow for the change CHK would procede to drill (indicated we are on CHKs drawing board and drill schedule ), but then we would only reap royalty from any production from the NW horizontals, the pad location planned just off our property to the SE. So, dilute our acreage/%age and increase acreage exposure to the south, vs maintain %age royalty of production from under us???

Any thoughts or experience you could share would be most appreciated. Having my lawyer review all.
Permalink Reply by Drill Pipe on May 6, 2012 at 2:16am

Utica  ........again thanks for your quick analytical response. As you say, all is out of our hands except the possible voluntary decision to amend our lease and join a larger PU.

My philosophy re income and taxes is pretty simple.  Income earned today will most likely be at a lower tax rate than in the future, and the buying power of the dollar earned will continue to decline.

Permalink Reply by Frank Walker on April 1, 2012 at 9:30am

Kathleen

I agree with the other posts here which explain how drilling units work and how you are paid.

It might be worth mentioning, though, that here in Bradford County, PA, we are seeing instances of drilling unit "splitting".  The units are split in half, generally N/S.  I've only heard of this happening.  It has not happened to me personally, and I hope it does not, because:

Generally this is not the greatest time to get drilled, gas prices being so low and all.  If a unit is split, and if you are on the producing side of the split, it means you will be getting paid at today's lower gas prices, and not have the advantage of possibly selling gas in future, from the other side of the split, when we all hope prices might be higher.  That's JMO, of course.  Some folks probably would like to get money right away, even at today's low gas price, and even if it means giving up the possibility of getting more money later following (what we all hope will be) a recovery in gas prices.  

Permalink Reply by Kathleen on April 1, 2012 at 9:49am
I hope ng goes up. The price the other is the lowest I've seen so far. It's unbelievable almost.
Permalink Reply by Clinton44 on April 1, 2012 at 10:07am

I agree, Kathleen, sure can't go much lower they will be giving it away... They need to get busy compressing it and shipping it over seas to get higher prices!!

Permalink Reply by Little Cougar on April 3, 2012 at 7:53am

even if you are drilled now and receiving royalties based on today's NG price, when the cost goes up, so will your royalty check you are presently receiving for wells producing now.  So it makes no difference when you are drilled, your royalty will be based on the current NG market price...your royalty check will always fluxuate from month to month because of that...

lc

Permalink Reply by Clinton44 on April 1, 2012 at 10:05am

Hi Frank, Just curious how big were the units they split??

Permalink Reply by Kathleen on April 1, 2012 at 10:07am
To anyone new reading this all these answers are wonderful and so helpful but I just found a post by Utica shale on the fowler well update that breaks it down so even a dummy like me gets it now. It seems what size unit you are in is up to your drilling company and of course your lease.
Here's the link to that post
http://gomarcellusshale.com/forum/topics/fowler-well-update?groupUr...

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