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Of Production Sharing Agreements, Allocation Wells, and Horizontal Wells (Blog No. 302)


A West Texas oil well pumpjack

The age of horizontal wells has revitalized the great Texas oil and gas industry. However, it is arguably an “open issue” as to how revenues from horizontal well production will be “shared” when the horizontal wellbore traverses two or more separate tracts of land or two or more pooled units. My best guess is that a court will allocate the production between the two separate tracts or units based on some sort of formula that considers the total length of the wellbore and the amount of the wellbore length on each separate tract or unit.


What to do? What to do?


Well, a popular approach is just to bury one’s head in the ground, drill the allocation wells, and pray (fervently) that if sued a sympathetic court will allocate the production amongst the various competing tracts. The problem is, are you ready to “bet the ranch?”


A second popular approach is to prepare a four to five page Production Sharing Agreement and ask all of the lessors to execute it (or at the least the big ones). That approach is okay, but remember the longer the agreement, the more likely the lessor will want additional compensation or will have it reviewed by a local attorney. And you can bet the local attorney will have changes (hey, you have to justify yourself somehow). So, this can be expensive, time consuming, and impracticable.


Here’s a third approach, why not seek a one paragraph contract amendment. In the past, we’ve amended leases that didn’t have pooling clauses to add pooling clauses – these amendments tended to be short, simple, and sweet. Why not do the same thing for horizontal wells that traverse multiple tracts? Why not do this in the due diligence process when there is going to be a sale of horizontal wellbores?


Why not? Why not?


Well, with that in mind, I put together a paragraph that could be a “Sharing Well Addendum.” It is one paragraph, and I’d appreciate your telling me what you think. I also through in a couple of pugh clauses and depth release clauses, which you could offer up front or consider offering if the landowner balks at the sharing well addendum.


So here goes – the rest is up to you:


Sharing Well Addendum

(with Unit and Sharing Well Pugh Clauses and Depth Release Clause)


__. Sharing Well. Lessees are authorized to drill, produce and operate Sharing Wells. A Sharing Well is a Horizontal Well in which the productive drainhole length is located on the Lease Acreage and other separate tracts. The Lessor shall share in the proceeds of production from a Sharing Well on the basis of such Lessor’s ownership in the Lease Acreage multiplied by an allocation factor. The allocation factor is defined as a fraction, the numerator of which is equal to the length of the portion of the productive drainhole length that lies within the Lease Acreage, and the denominator of which is the total productive drainhole length of the Share Well. Operations on or production from each Sharing Well shall be treated as actual operations on or production from the Lease Acreage. If the Lease Acreage has been pooled with other acreage (Pooled Unit), for the drilling of gas or oil wells, and the Sharing Well traverses the Pooled Unit, then operations from such Sharing Well shall be treated as actual operations on or production from the Lease Acreage. If this occurs, Lessor’s share of production shall be equal to Lessor’s interest in the Pooled Unit multiplied by the allocation factor.


(Unit and Sharing Well Pugh Clauses and Depth Release Clause)

Optional


PUGH CLAUSE (Unit Operations). Production from or operations on a Pooled Unit or units including a portion or portions of the Lease Acreage will maintain this Lease in force only as to the acreage included in the Pooled Unit or units. On acreage not included in a unit or units, the Lease may be maintained by any of its other provisions.


PUGH CLAUSE (Sharing Wells). Production from or operations on a Sharing Well or wells that traverse a portion of the Lease Acreage will maintain the Lease in force only as to the acreage traversed by the Sharing Well and adjacent acreage (Retained Acreage), in the form of a rectangle, not to exceed an amount based on the following table:


Horizontal Drainhole traversing Lease Acreage, feet Retained Acreage, acres


100 to 585 60 acres

586 to 1,170 80 acres

1,171 to 1,755 100 acres

1,756 to 2,340 120 acres

2,341 to 2,925 140 acres

2,926 to 3,510 160 acres

etc. - 585 ft increments etc. 20 acre increments


(DEPTH RELEASE; two options):


At the end of the primary term or the continuous development period, whichever is later, this lease shall lapse as to all depths deeper than one hundred feet (100’) below the deepest the producing formation.


OR


At the end of the primary term or the continuous development period, whichever is later, this lease shall lapse as to all formations but for formations from which production is then being obtained.


by Jack M. Wilhelm


Edward Wilhelm and Jack Wilhelm provide assistance to buyers and sellers of oil and gas properties.


THE WILHELM LAW FIRM, 5524 Bee Caves Road, Suite B5, Austin, Texas 78746; (512) 236 8400 (phone); (512) 236 8404 (fax); www.wilhelmlaw.net


DISCLAIMER: The information on this site is not intended to and does not offer legal advice, legal recommendations or legal representation on any matter. You need to consult an attorney in person for legal advice regarding your individual situation.

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Wilhelm Law Firm, 5524 Bee Caves Rd., Ste B-5, Austin, TX 78746 (512) 236-8400