Pooling is a fundamental concept within oil and gas law, but one that is often misunderstood. Pooling is most commonly defined as “the combining of two or more tracts of land into one unit for drilling purposes … accomplished voluntarily, or through compulsion.”1 In other words, it is how a lessee is able to extend a lease without physically drilling on the lease. For private (fee) oil and gas leases, the ability of the lessee to pool the lease is typically addressed in the lease provisions. These provisions are known as the pooling clause. This article provides some practical tips in dealing with the issues that arise from pooling clauses.
The first question that should be asked is if there is an existing spacing order in place for the lands and formation(s) involved. Many pooling clauses provide that the lease can only be pooled in conformity with a spacing order from the applicable state regulatory agency. If you encounter such a clause, you will need to check for a state spacing order, and if an order is not already in place, you will need to initiate the required steps to obtain an order. There may also be an order in place that does not match your proposed operation. If so, a new order would need to be obtained modifying the existing order. If spacing is governed by statewide spacing, you will want to double check the language in the pooling clause to confirm that statewide spacing is sufficient.
If the proposed well will be a horizontal well, there are special considerations that need to be addressed. Some lease provisions specifically address horizontal spacing. Many states have special statewide rules that are in place for horizontal wells. Particular attention should be paid to any total acreage limitation included in the pooling clause of the lease, for example, the lease cannot be included in a pooled unit for oil greater than 160 acres. If the lease has this limitation, an amendment to the lease may be the best option to eliminate this conflict.
The next question when reading a pooling clause is what role, if any, the lessor will have in the pooling process. The most common oil and gas lease terms allow the lessee to pool the lease without obtaining any additional consent from the lessor. In some cases, if the lessor desires to retain this right, they will strike out the pooling provision in the entirety, or add a specific lease provision requiring their consent. If the lease does not have a pooling clause, or if the pooling clause is stricken, the lease can only be pooled with the express consent of the lessor. This consent would be expressed by having the lessor execute a pooling agreement. The pooling agreement should be recorded to provide third parties with notice of the terms of the agreement. If obtaining consent is not an option, compulsory pooling by the governing state agency would be the alternative.
Some leases require that notice of the pooling be provided to the lessor in order for the pooling to be effective. If the pooling clause requires that notice be mailed to the lessor, an effort should be made to locate both the last address of record and a current address, utilizing online resources. If a more recent address is discovered, the notice should be mailed to both the address of record and the new address that was located. More commonly, the lease requires that for it to be properly pooled, a proper declaration of pooling needs to be executed and recorded by the lessee in the applicable county. Care should be taken in drafting the declaration of pooling. It should be signed by all parties owning a working interest in the lease. In order to be recorded, the signatures will need to be originals and it will need to be notarized. It should describe the specific lease(s) being pooled, including the recording information (Book/Page, Entry No.) for each lease. It should cite the authority to pool contained in the lease, for example: “Pursuant to Paragraph 10 of the lease.” It should define the pool, the total lands included and the formation(s) covered. If the lease covers more lands than what is being pooled, the declaration should describe all of the lands covered by the lease. This is particularly important in states that utilize a tract index recording system. If the pooling is in conformity with a state spacing order, it should be noted. If the party executing the declaration was not the original lessee, a statement as to the succession (Book/Page, Entry No. of the document transferring the interest in the lease) should be included. If the operator is drilling the well to earn an interest in the lease from another party, for example under a farmout agreement, it is recommended that the declaration be executed by both the record title owner and the party that is to earn the interest. Doing this would avoid any dispute as to the correct party to execute the declaration. Once executed, confirmation should be made that the declaration of pooling is properly recorded and, if it is a tract index state, that it is has been properly indexed against the lands.
Confirmation should be made that the effective date of the pooling is either the date of, or prior to the date, of first production. The effective date should also be prior to the termination date of the lease. Most lease provisions provide that the declaration of pooling must be prior to lease expiration. In the event the well was drilled prior to lease expiration, but the declaration of pooling was not timely recorded in order to avoid any issue, the lessor should execute a pooling declaration which includes a statement that the lease was properly pooled prior to the expiration date of the lease.
Finally, after reading the specific pooling provisions in the leases to be pooled, a broader examination of some additional issues raised by pooling the lease should be conducted. Confirmation should be made that all of the leases to be pooled are private leases. If the pool includes either federal, Indian, or state leases, additional steps will be needed to pool these leases. As to state leases, various state agencies have adopted different rules and procedures regarding private pooling agreements. As to federal and Indian leases, there are two ways to pool them: a federally approved unit or communitization agreement. The nuances of federal unitization and communitization will be further explored in a subsequent article in this series