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Horizontal Payout Wells: Multiple Payouts Division of Interest Basics

Many horizontal wells are subject to multiple payouts, both contractually and statutorily. A new division of interest is required for each one, as they occur.

In Texas, for example, a working interest owner can be subject to the non-consent clause of the JOA, and that clause could include escalating non-consent penalty percentages based on the number of wells drilled subject to it. At the same time, that well can be subject to the statutory 100% payout for non-ratified unleased or non-participating royalty (NPRI) owners otherwise entitled to share in production proceeds.

In Louisiana, by comparison, the same JOA non-consent penalty can apply, but Louisiana has a couple of important statutory twists. First, the statutes allow for 100%, 150%, or 200% payout penalties, depending on the specific situation. Second, Louisiana statutes now exempt an unleased owner from any payout penalty if that owner requests, in writing, a payout statement and it is not furnished within the required amount of time (La. R.S. 30:103.2).

Farmout Agreements, Joint Operating Agreements, and other, custom agreements between leasehold working interest owners typically have payouts included in them. For the farmout, an override often is reserved, convertible to a percentage of the working interest farmed out. Some farmouts have a “bucket payout” clause, meaning all wells drilled under the farmout agreement must pay out before back-in can occur for all of the wells at the same time.

A well drilled subject to a JOA will have a payout if any of the signatory parties to that JOA non-consents the drilling or completion of that well. The non-consent clause can provide for anywhere from 100% to 1000% risk penalty, depending on well location and circumstances. The term “non-consent” applies only to contracts, not statutes. A working interest not signatory to the JOA is a “non-participating” interest under compulsory pooling statutes, if the leasehold owner fails to pay its share of pre-production costs.

As for compulsory pooling statutes, these vary among producing states, but fall into three categories among the states with compulsory pooling statutes.

The first category of compulsory pooling statutes is “costs only”. In these states (Alaska, Arizona, Indiana and Missouri), the non-participating owner is liable for only for costs of drilling, completing, and equipping the well, only if the operating results in production. Only 100% of pre-production costs can be recouped, no risk penalty percentage added.

The second category is the “risk-penalty” compulsory pooling statutes. Texas, Louisiana, New Mexico, Ohio, North Dakota and Wyoming are among the many states falling into this category. In addition to actual costs incurred to obtain production, a risk penalty percentage also may be recouped. The risk-penalty percentages vary from 150% to 500% depending on the state and circumstances, with the most common being 200% payout for a given well.

The final category is the “options-given” statutes used in states such as Arkansas, Oklahoma, Pennsylvania and South Dakota. This compulsory pooling scheme allows non-participating owners to choose from a list of options and alternatives best suited to their situation. This type of statute always provides for an automatic default choice if the owner fails to elect by the deadline given in the compulsory pooling order.

It is not uncommon for a horizontal well to have multiple levels of payout, due to contracts and statutes applying to different owners in the well. Each payout level must have an APO revenue DOI and APO JIB deck for each payout level as it is reached.

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