Oil Patch Press
Declaration of Pooled Unit (DPU): Important Components
Every producing state allows voluntary pooling of lands and mineral interests. The lesser grants permissions for voluntary pooling via the pooling clause in the lease. Leases without a pooling clause require separate negotiations on a case-by-case basis with the lessor, often ending with a signed ratification of the pooled unit.
Voluntary pooling creates the equivalent of one big lease covering the entire pooled unit area. All mineral interests inside the pooled area share proportionately in production and revenues based on their respective leases and contracts. The terms and conditions of each individual lease still must be honored.
Voluntary pooling is accomplished with a Declaration of Pooled Unit (DPU). The title on the document can vary, such as Designation of Unit, Declaration of Pooling, etc. But the purpose remains the same, and all pooling documents must contain certain components to make them effective. The DPU is filed by the operator of the proposed pooled unit for this initial well, to establish the pooled unit according to the state’s regulatory agency requirements.
The size and configuration of a DPU is based on state requirements enacted for conservation and protection of the state’s natural resources. In addition, a DPU is needed not only to equitably distribute production revenues from the pooled unit, but to preserve the leases included in it. A valid DPU moves a lease into its secondary term when the primary term expires, or perpetuates a lease already in its secondary term that might have part of its lands producing from other wells that stop producing. Not all DPUs are written the same, however. The precise content and order of that content will vary from operator to operator, DPU to DPU, but all must contain certain components to make them fully effective.
There are six components that the analyst should find in a DPU verifying its validity and effectiveness.
The first component is a statement declaring the party or parties signing it is/are (a) the owner of an interest in any of the leases being pooled by it, (b) the unit is declared for the purpose of exercising the voluntary permissions granted for pooling. It is the language in (b) that will automatically move into its secondary term any of leases still in their primary term when that primary term expires. An Exhibit A list of leases will be referenced here.
The second component is a description of the unit area, often referencing an Exhibit B setting out the metes and bounds legal description, that may, or may not, also include a unit plat referenced as Exhibit C.
The third component is a statement establishing the legal unit name. This is the name that should appear in the official filings with the state’s regulary agency, such as application for drilling permit, etc., and all plats.
The fourth component is a statement reserving the right to dissolve the unit. This statement is important to avoid title problems for mineral interest and leasehold interest owners after production ceases from the unit, and other reasons.
The fifth component is a statement binding all successors-in-interest to the DPU, not just the original signers.
The sixth, and final necessary component the division order analyst should find in an effective DPU is the effective date. The effective date must be prior to the end of the primary term of the earliest-expiring lease listed in Exhibit A, otherwise that lease will expire before its pooling clause can be invoked by the DPU.
There are additional clauses that can appear in an DPU, at the discretion of the operator drafting and filing the DPU. These additional clauses are optional, designed to reduce financial liability for the leasehold owners that signed the DPU.
Next week’s blog will be “Declaration of Pooled Unit: Operator’s Responsibilities Towards Third Party Leasehold Owners.”