Oil Patch Press
Pooling: Basic Comparisons between Texas, Oklahoma, and Louisiana Horizontal Wells
This week’s blog will focus on the high-level similarities and differences between the pooling processes in Texas, Oklahoma, and Louisiana.
The most important similarity among the three states is voluntary pooling. Statutes, rules and regulations in all three states allow voluntary pooling by contractual agreement. The states differ as to the percentage of ownership that must approve the pooling, but all three states do provide for voluntary pooling.
All three states also provide statutorily for involuntary, or compulsory, pooling, commonly called forced pooling. This form of pooling is allowed under the supervision of the state’s governmental agency authorized to oversee natural resource activities. In Texas, that is the Texas Railroad Commission. In Oklahoma it is the Oklahoma Corporation Commission, and in Louisiana that would be the Louisiana Department of Natural Resources, specifically the Engineering-Administrative Division.
Texas compulsory pooling statutes, rules, and regulations are so expensive, difficult, and time-consuming that operators in Texas general opt for alternative ways of forming a valid pooled unit when required by state law. Generally, as long as 70% of owners within the area to be pooled agree contractually to form a voluntary pooled unit, a Designation of Pooled Unit is filed of record, the proper P forms are filed with the TRC, and the pooling is effective. The remaining 30% ownership is treated as non-pooled and will either wait until 100% well payout to begin receiving revenues as a statutory working interest owner, or never receive revenues, depending on the type of ownership and location of the land in relation to the well site tracts.
Louisiana forced pooling requirements are easier to meet equitably than Texas. The analyst needs to know, however, that there is a difference between compulsory pooling in Louisiana south of the 33° parallel line, and compulsory pooling north of it. Fortunately, the majority of new activity in Louisiana since 2005 has been in North Louisiana.
When compulsory pooling is warranted, the analyst should understand the key differences between Louisiana and Oklahoma.
Louisiana forced pooling allows all mineral rights within the pooled area to be combined for production and revenue distribution purposes, without disturbing or creating leasehold rights, as long as specific requirements are met. In other words, in Louisiana if a mineral interest is unleased, the forced pooling order does not create a lease where none existed before. The order merely allows the mineral rights interest to be proportionately reduced by the size of the unit, for revenue and production distribution purposes. The operator is allowed to recoup 150% of pre-production costs (or more, depending on the Pooling Order) from the non-participating unleased mineral interest before those interests begin receiving revenues. Louisiana’s forced pooling method allows NPRI owners to receive revenues from date of first production from the unit, regardless of their location within the unit, and without a signed ratification as would be required in Texas. It also allows unleased interests to begin receiving revenues after payout, without a signed ratification.
Oklahoma forced pooling, by contrast, creates leases for all unleased interests within the pooled area. The operator becomes the Lessee under the court-ordered leases. The Oklahoma Corporate Commission pooling order will give a set of choices to be made by the owner, as to the combination of royalty rate and the signing bonus per net acre that must be paid by the operator based on the owner’s selection. If the selection is not timely made, one of the selections is designated in the order as the default selection that the operator may apply to the unleased interest. Or, if unleased owners cannot be determined or located, the operator must eventually pay the signing bonus and accrued royalties to the appropriate state as unclaimed property, as it becomes due.
Next week’s blog will be “Division Order Case Study: Correction Deeds.”