Lease Analysis: Advanced Tracting in a Lease Record
Three skills essential for a senior-level lease analyst are (1) title analysis, (2) lease clause interpretation for data extraction, and (3) tracting the legal description within the lease record in the database. This week’s blog will focus on the advanced skill of tracting a producing lease’s data record.
The lease contains a legal description which describes the land covered by the lease, the specific piece or pieces of land in which the mineral owner’s right to explore, drill, equip and produce from that land are transferred temporarily from the mineral owner (Lessor) to the oil company (Lessee). The lease can cover a large number of gross acres comprised of one large tract or several small tracts grouped into the lease.
“Tracting” means the breaking apart of the legal description into smaller components, each having exactly the same attributes. With that foundational premise in mind, the legal description in the lease needs to be divided into pieces if the lease analyst determines that all gross acres at all depths do not share exactly the same characteristics.
First, a tract set up in the lease data record must have mineral ownership uniform throughout. Example: John and Mary Doe sign a lease covering 160 acres in Washington County, Texas. The 160 acres are described in two tracts: Tract One contains 100 acres, and Tract Two contains 60 acres. According to the Mineral Ownership Report (MOR), John and Mary own 100% of the mineral rights in Tract One, but own only 50% of the mineral rights in Tract Two. Their son, Jake, owns the other 50% mineral rights in Tract Two. Automatically, the lease analyst knows that the mineral ownership is not uniform throughout the entire 160 acres covered by the lease. The lease data record must be set up, therefore, to contain two tracts: one covering the 100 acres, and the other covering the 60 acres.
In the initial setup of the lease data record in the database, the analyst will create two tracts. The first will show the lease covers 100% of the mineral estate in that tract, and the second tract will show that the lease covers only 50%. Both tracts will be given the status of “non-producing” or “undeveloped” depending on the coding used by ABC Oil Company in their database.
The second rule is that all of the acreage, surface and depth, in a tract set up in the lease data record must have the same lease status. Example: ABC Oil Company took the lease from John and Mary, then drilled an oil well 8,000 feet deep on Tract One. No pooling was necessary, because only 80 acres were required around the well by Texas RRC rules. ABC filed a Texas RRC P-16 (Acreage Designation) form, designating an 80-acre square around the wellbore, out of the 100-acre tract. Tract 1 in the original lease setup must now be revised.
Among the many revisions (updates) to the lease data record required when an undeveloped lease begins to produce, the tracting must be revised. The tract with the well on it must be isolated and given a status of “producing” or “developed”. The 80 acres must be carved from the 100 acres in Tract One. Example: ABC Oil Company uses a tract numbering scheme that uses a single- or double-digit number (up to 99) for initial setup or setup of undeveloped (UND) portions of original tracts after first production.
When the 100-acre undeveloped tract began producing, the producing acres must be set apart using a 3-digit number beginning with “1” since this is the first well drilled on the lease. In the database lease record, Tract One is split into an 80-acre tract (coded as “producing,”) and a 20-acre tract (coded “undeveloped”). The 80-acre tract is numbered Tract 101. Tract 101 will be cross-referenced to the well number assigned to the new oil well. To capture the remaining 20 acres, the original database Tract 1 is changed to reduce its acreage from 100 down to 20 but its status remains “undeveloped” because this lease contains both a horizontal and a vertical Pugh Clause.
A new Tract 102V, with non-producing status, will be set up to cover only the 80 acres at depths below 8,000 feet, because of the vertical Pugh Clause. ABC uses a “V” designation to prevent the gross and net acres reflected in this tract from being counted twice in acreage reports. This 100 acres is already reported by Tract 1 (20 acres, all depths) and Tract 101 (80 acres, surface to base of producing depth, 8000 feet).
Lease Tract Two, lease data record Tract 2, containing 60 acres will not change because of the horizontal (surface) Pugh Clause and vertical (depth) Pugh Clause. The Pugh Clauses will expire these 60 acres at the end of the primary term if another well involving the 60 acres is not drilled before then. Only an “UND” code in the database allows acreage to expire when the end of the primary term is reached.
Now let’s say that a year later, with two years remaining on the 5-year lease primary term, ABC Company is approached by XYZ Resources to farmout this lease out to them to drill a deep, horizontal gas well. An 800-acre unit must be formed for the proposed horizontal well, and all of the 160 acres of the Doe lease will be included. ABC farms out to XYZ and the well is completed as a producer. XYZ Resources earns an assignment of 75% leasehold WI when the well is completed. But the assignment is limited to production from the Austin Chalk Formation only, between 13,500 and 14,000 feet. The analyst at ABC Oil Company now has a whole new set of revisions required for the lease data record.
Tract 101 covering the 80 acres does not change. This acreage is already held by ABC’s oil well. These 80 acres will now be held from the surface down to the base of the Austin Chalk. The vertical Pugh Clause states that all depths below 100 feet below the deepest depth drilled will expire one year after the end of the primary term. However, the tract status between the surface and the top of the Austin Chalk is no longer uniform. The oil well holds the surface down to 8,000’ as producing, but the interval from 8,000 ft. to the top of the Austin Chalk is now HBP per the terms of the Pugh Clauses due to the new gas unit well.
The analyst needs to set up a new tract, Tract 102V, to cover only the depth from 8,000 feet down to the top of the Austin Chalk, where leasehold ownership changes after that. Tract 102V will have the status “HBP”. It will cross-reference the new gas well because the new gas well extended the protected depth down to a total of 14,000 feet. Tract 102V will show ABC owning 100% leasehold WI. The expiration date will be ABC’s never-ending date, 12/31/2099.
Next, a new tract for the producing depth dedicated to the new gas unit well is created, Tract 201V, covering the entire 100 acres of the original Tract 1, since all of the 100 acres are included in this pooled unit. But the depth is limited from the top of the Austin Chalk to the base of the Austin Chalk. Tract 201V will be coded “PR” and cross-referenced to the new gas unit well. The leasehold ownership data will show ABC with 25% WI and XYZ with 75% WI. Remember, ABC uses a “V” designation to prevent the gross and net acres reflected in this tract from being counted more than once in acreage reports. This 100 acres is already being reported by Tracts 1 and 101 combined. Tract 201V will begin with a “2” because the gas unit is the second producing area affecting this 100-acre lease tract.
This leaves all the depths below the base of the Austin Chalk in the entire 100 acres not captured for status and ownership. So the next new tract needs to be Tract 3V to contain all of the 100 acres at depths below the Chalk. The status is undeveloped (UND) and this depth WI is owned 100% by ABC. That concludes all tracting needed for the 80-acre piece of the original lease tract of 100 acres. Now the 20-acre piece needs revision.
Lease record Tract 1 contains these 20 acres. The depth needs to be changed to restrict the acreage to only surface down to the top of the Austin Chalk. Revised Tract 1 is given a status of HBP without cross-referencing it to the gas well (because these are the reported 20 acres), and will credit ABC with 100% leasehold WI.
The gas unit producing depth under this 20 acres was captured in Tract 201V covering the entire 100 acres. Likewise, the depths below the base of the Austin Chalk have already been captured in Tract 3V, designated UND and crediting ABC with 100% WI. All depths are now captured and coded correctly for the entire 100 acres of original lease Tract One.
Next, lease Tract Two, Tract 2 in the lease data record, containing the previously undeveloped 60 acres will be revised. The depths in Tract 2 will be changed to read “surface down to top of the Austin Chalk”. Remember, none of this 60 acres is involved with ABC’s oil well. Tract 2 status will be changed to HBP, but this time the well number for the gas unit well should be cross-referenced due to its connection with the vertical Pugh Clause. When that well finally stops producing, this shallow depth will expire along with the producing interval. This shallow depth credits ABC with 100% WI. The expiration date will be change to 12/31/2099 per ABC database policy.
Next for lease Tract Two, a new Tract 202V will be created to cover only the producing interval for the new gas unit well. The status will be “producing” (PR) and ownership will be credited to ABC 25% WI and XYZ 75% WI. Again, the expiration date will be 12/31/2099.
The very last new tract to be created as a result of the new gas unit well will be Tract 4V, given a status of “undeveloped” (UND) and crediting ABC with 100% WI. The depth will be limited to all depths below the base of the Austin Chalk.
As shown in the attached PDF diagram, here are all of the tracts in the lease data record for the Doe lease after all revisions have been made:
Lease Tract One: (Originally 100 acres, John & Mary Doe 100% MI)
Tract 101: 80 acres; surface down to 8,000 ft.; x-ref to oil well; status PR; ABC 100% WI
Tract 102V: 80 acres; 8,001 ft. to top of Austin Chalk; no x-ref; status HBP; ABC 100% WI
Tract 1: 20 acres; surface down to top of Austin Chalk; x-ref gas well; HBP; ABC 100% WI
Tract 201V: 100 acres; from top to base of Austin Chalk; x-ref gas well; PR; ABC 25% WI, XYZ 75% WI
Tract 3V: 100 acres; all depths below Austin Chalk; no x-ref; UND; ABC 100% WI
Lease Tract Two: (60 acres, John & Mary Doe 50% MI, Jake Roe 50% MI)
Tract 2: 60 acres; surface down to top of Austin Chalk; x-ref gas well; HBP; ABC 100% WI
Tract 202V: 60 acres; from top to base of Austin chalk; x-ref gas well; PR; ABC 25% WI, XYZ 75% WI
Tract 4V: 60 acres; all depths below Austin Chalk; no x-ref; UND; ABC 100% WI
See the attached PDF for a complete visual of all of the tracts after DOFS from the gas unit well.