Replies to This Discussion

Permalink Reply by Ann Ticopa on June 28, 2012 at 1:02pm

Never heard of it, but did find a short description.  Did an example to see if it is your understanding of the law. 

Say, a leased parcel is 60 acres.  It is then subdivided into three 20 acre parcels, A, B, and C.   A 600 acre unit is declared which includes all of A (20 acres), half of B (10 acres), and none of C ... the royalty is on 5% of the unit's  production.   Assume that works out to be $1,200.  

Normally, A would get $800 and B $400.  But does the Apportionment Rule apply to only the subparcels that have a portion included in the unit (A and B both get $600), or do A, B, and C all get $400?

Or is it "none of the above"

It may not be as bad as it looks at first.  Won't owners shorted with the first unit get "more than their fair share" when the rest of the original parcel is included in a unit(s)?    The law could have benefited a retired farm couple who wanted to fairly subdivide their land for their heirs.   With a conventional well in a rule of capture state, one heir could have hit the jackpot and the others got nothing. 

Permalink Reply by Robin Jackson on June 28, 2012 at 4:20pm

I understand what you are saying..but am I understanding your being paid for what you actually own rather than what was owned at the time of signing the lease?

Permalink Reply by Doug Pierson on June 29, 2012 at 1:02am

As I searched Google yesterday, I never saw an example of how we do things today with a unit.  But, I saw a couple examples which used a well itself drilled on one of the subdivided parcels.  And in essence, all share the royalties based on their respective acreages.  A, B and C all get a share. So, looking at today's way of doing business, my royalty is apportioned twice.  The first time, it's apportioned based on my acreage in the unit.  Then it's apportioned again, based on my acreage with respect to all the owners of subdivided parcels from the original land.  The guy next door also has to share his royalty with me, but the problem is that the guy next door has 73 acres and we have 11, so he gets a big piece of our pie and we only get a sliver of his.  The actual well pad is on a completely different property - we're both just part of the unit.  It boggles my mind.

Definition found on-line - "Apportionment rule as applied in oil and gas law refers to a minority doctrine that royalties accrued under an oil-and-gas lease on land that is subdivided during the lease term must be shared by the landowners in proportion to their interests in the land. Only few states like California, Mississippi, and Pennsylvania follow this rule."

 

The analyst I talked to from Shell was very courteous and professional, even sympathetic, but they sincerely believe that Pa. law requires this.  I haven't been able to confirm that, yet  but I haven't had a chance to find a web copy of the original oil and gas act from the 80's and do a word search. I'll probably want to find an attorney in Wellsboro or Mansfield and get a second opinion from them.  Any suggestions on a firm?  I was thinking of see Tom Owlett.

Permalink Reply by Golddigger on June 29, 2012 at 5:35am

Doug,

I think your situation has already been checked into when it comes to Apportionment in Pa. I believe the property that you are referring to is on Johnson Hill and was purchased by Shell (surface rights only) and now back on the market again. I am not sure if any of our local attorneys understand it very well, so you may be wasting your money if you are paying them for their advice. Not an attorney, just think you may have to check with an attorney who has extensive experience in this field, and I haven't found any in this area.

Permalink Reply by Doug Pierson on June 29, 2012 at 12:24pm

Right on all accounts G.  I sent emails to Owlett and Lewis via their web site and also to a firm in Williamsport that advertises knowledge in the oil and gas area.  We'll see who is interested in this subject.  I suspect it will work out that Shell's math is correct and it is what it is. Just a shock to suddenly discover that we have to give 87% of our royalty to the guy next door solely because a farm was subdivided 10 years ago.

Permalink Reply by Ann Ticopa on June 29, 2012 at 4:13pm

Doug, I'm still not understanding this.  Assume an 84 acre leased parcel within a 600 acre unit.   Also, to simplify the calculation, assume that all the royalty terms within the unit are the same.  If $10,000 in royalties to all the landowners is generated, the 84 acre parcel would be allocated $1,400 (84/600 x 10,000).  Under apportionment (with an entireties clause), the 73 acre subdivision would receive $1,216.67 (73/84 x 1,400) and the 11 acre subdivision $183.33 (11/84 x 1,400).  These are the same amounts that "stand-alone" 73 acre (73/600 x 10,000 = 1,216.67) and 11 acre (11/600 x 10,000 = 183.33) parcels in the unit would receive. 

.

Permalink Reply by Doug Pierson on June 30, 2012 at 3:13am

Well, the key is two things that I could have made clearer at the beginning.  The 84 acre parcel doesn't exist anymore; legally, it's now a 73 acre parcel and an 11 acre parcel, each with its own PIN number.  So, when you go back to the pooling document, they will each have their own respective percent share of the unit based on their acreage in the unit.  Now, as long as both parcels are completely in the unit, the math pretty much ends up being a wash.  But, in our real life case, only 9 acres of the 73 acre parcel are in the unit; the rest is idle at this point.  And it's my understanding that even if the 73 acre piece wasn't even in this unit, or any unit for that matter, we'd still have to apportion our royalty because we were once subdivided and still under the common original lease.  Does that help?

Permalink Reply by Ann Ticopa on June 30, 2012 at 5:33am

But, unfortunately, the 84 acre lease does still exist. Google this string: Pooling Unitization - MLBC-AAPL Beginning ~page 30, there is an explanation of apportionment and the entireties clause. Redoing my example, it looks like - instead of the $183.33 you would expect with a regular lease - you would get either $166.66 (equal apportionment) or $43.65 (entireties clause). Ouch!

Permalink Reply by Doug Pierson on June 30, 2012 at 7:29am

Yeah, ouch is where we're at right now.  I don't know where I missed the opportunity to see this coming since I never heard of this in the first place, but wish I had.  Shell had come to us a couple of times to do amendments - just routine stuff - and I could have researched and maybe got a non-apportionment clause put in.

There's some gas field scuttlebutt about maybe drilling a Fish 302 well.  The rumored location would pick up the rest of the 73 acre piece.  But that's a long ways off since I don't think all of the property owners are leased nor do they want to be.  So in the mean time, our annual losses are pretty big.

That old lease does have a clause in it addressing title transfers.  It doesn't read exactly like a common entireties clause, not does it read like a common non-apportionment clause, either.  It's really written for back in the day when it was only vertical drilling.  I don't know if in todays world, having a horizontal leg going UNDER your property might mean the same as the old wording referring to having a well ON your property.  If it does, then that wording says that I should receive ALL royalties. So, I need to get it reviewed.

Permalink Reply by Doug Pierson on July 10, 2012 at 2:54am

For those who are interested, Talked to Greevy and Associates in Williamsport. He was knowledgeable on the subject and reviewed everything. Yes, Pa. does have apportionment and Shell's interpretation and math is correct. So, pretty much the only way to avoid something like this is to try like heck to terminate these old leases somehow if you have one, and get a single stand alone lease on your property. The only consolation is that when the rest of the 73 acre parcel goes into production, we'll get a boost in royalty from the other guy's gas. His work didn't take up much of his time so there was no charge. Seemed like a good guy.

Permalink Reply by Ann Ticopa on July 10, 2012 at 3:53am

Thanks for the reply.  Not the outcome you would have liked, but at least you know where you stand.