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Declaration of Pooled Unit: Operator’s Responsibilities Towards Third Party Leasehold Owners

As discussed in previous blogs, the Declaration of Pooled Unit (DPU) pools the leases within a geographical area that are owned or controlled by the signer of the DPU. The operator of the proposed initial well, for which the DPU is created for regulatory and other purposes, drafts, signs, and files the DPU into the county public records where the lands are located.

If there are leases listed in Exhibit A of the DPU in which the operator owns no interest, each is included under one of three scenarios, two of which are contractual, the other statutory.

Any lease owned by a partner in the joint operating agreement (JOA) covering the unit area must be included in the DPU per the terms of the JOA. Furthermore, the JOA will state whether the operator is required to pay burdens (royalties and overriding royalties) on behalf of the JOA partners and remit to the JOA partner only their net revenue interest (NRI) if the partner is selling in the operator’s sales stream (under the operator’s purchaser contract).

The analyst must read the terms of the JOA to determine of the partners’ burdens should be included in the initial division of interest (DOI) setup. The analyst also might need confirmation from the production marketing accountant that the partner is selling their share of production under the operator’s purchaser contract, or taking in kind (TIK) to their own purchaser contract.

The second contractual scenario involves a leasehold owner in the unit area that is not a party to the JOA, but has chosen to ratify the DPU and pay their share of all well costs based on their proportionate share of ownership inside the unit area. These are non-JOA participating partners in the well. Under this scenario, most commonly that partner will receive their gross share of production revenues and must pay their burdens out of it each month. The operator is not responsible for distributing those burdens, unless a specific contract between operator and partner states otherwise. The analyst will place this partner in the revenue DOI with their gross decimal, the same decimal as appears in the joint interest billing DOI (JIB).

The final scenario involves leases listed in the DPU owned by non-JOA, non-participating leasehold owners. These are leasehold owners who did not sign the JOA, and have chosen to not pay their share of pre-production costs. These are not non-consenting partners because the term “non-consenting” can apply only to a JOA partner under Article VI of the JOA. Non-JOA partners who decline to participate in a proposed well involving their leasehold are called “non-participating.”

Under this statutory scheme, the operator (and JOA partners, if the JOA terms permit) must “carry” the pre-production costs for the non-participating leasehold owner. In Texas, this leasehold owner is carried until 100% of those costs have been recouped from the sale of production. During the payout period, the non-participating leasehold owner is responsible for paying their lease burdens out of their own pocket in accordance with the terms of the lease. In Louisiana and New Mexico, the carry can be 150% or more statutorily, depending on the circumstances, when forced pooling does not apply. The statutes in other states also can vary beyond the 100% threshold in Texas. After the payout period, the non-JOA, non-participating leasehold owner is added to the APO (“after payout”) revenue and JIB DOIs, if Cimarex v. Anadarko dos not preclude doing so.

More on this new Texas court case in next week’s blog, “Cimarex v. Anadarko: Declaration of Pooled Unit Case Study.”

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