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Pooling, Unitization, and Joint Leases

Generally, there may be a pool of oil under several tracts of land with each tract having a different ownership, yet all of the oil might be removed by a single well on one of the tracts as a result of its fluidity.  Needless to say, this will be detrimental to the interests of the owners of the other tracts.  Pooling of diverse holdings into one or more drilling units for the production of oil is a common solution to this problem.

The term “pooling” refers to “the bringing together of small tracts of land for the granting of a well permit within an established drilling unit.”  The primary legal consequence of pooling oil and gas leases is that production and operations anywhere on the pooled unit are considered as if they have taken place on each tract within the unit.

Pooling can be done voluntary or through regulation by a statutory authority.  Voluntary pooling agreements are binding only upon the persons who execute them, or their heirs, successors, assigns, and legal representatives and the holders of mineral or royalty interests in the field may refuse to sign the agreement.

In the absence of a voluntary pooling agreement, the Oil and Gas Conservation Commission is authorized to issue a compulsory pooling order.  In such a case, each pooling order has to be made after notice and hearing and must be upon just and reasonable terms.  Compulsory pooling and unitization statutes have to be within the police power and should not violate due process requirements.

Operations incident to the drilling of a well upon any portion of a unit covered by a pooling order is deemed to be the conduct of such operations upon each separately owned tract in the unit by the several owners thereof[i].  Although frequently used interchangeably, the terms “pooling” and “unitization” refer to separate procedures.  While pooling involves the combination of several small tracts of land to meet the spacing requirements for a single well, unitization refers to field-wide or partial field-wide operation of a producing reservoir involving multiple adjoining land tracts.

Unitization is the unit based operation of an oil pool by consolidating or merging the entire field or a substantial part of it as a single entity and designating one or more of the parties as operator.  The unitization is done without regard to surface boundary issues and merges all the involved gas and oil leases into one contract.  Following unitization of an oil field, the royalty clause of a oil and gas lease is modified and the lessor becomes entitled to a royalty based on a pro rata share of the production attributable to its land, regardless of whether production is from that land or another tract included within the unit[ii].  For a consolidated or a unitized entity to exist, it must be made up of two or more leases that are in full force and effect.

Separately-owned tracts can be combined in a single unit either by voluntary unitization by contract or through forced unitization by a regulatory authority.  The unitization clause of an oil and gas lease grants the lessee the power to unitize the lessors’ interest without further consent by the lessor.

Another arrangement of concerted oil extraction is by way of joint leases.  In such a case, the owners of different tracts of land may execute a joint or community lease under which the lands involved are developed and operated as a unit and the resulting royalties are divided among the lessors on the basis of the relative acreages.  It is to be noted that a joint or community lease can be formed without the joinder of the owners of all the interests.  Such a lease differs from the usual joint lease by separate owners of land in that the lease of the latter type may not expressly provide for the sharing of royalties upon the basis of acreage and may not expressly provide for the development of the land as a unit[iii].

An oil and gas lessee has no power to pool without the lessor’s express authorization which is usually contained in the pooling clause of the lease.  Beyond the express terms of an oil and gas lease, a lessor has no power to direct a lessee in its good-faith pooling decisions or to revoke its authority to join in pooled units[iv].

In other words, the lessors’ land may be pooled only to the extent stipulated in the lease and for pooling to be valid, it must be done in accordance with the method and purposes specified in the lease[v].  A unitization which does not strictly comply with the terms of the lease is invalid[vi].

The parties to a unitization agreement are considered joint venturers who stand in a fiduciary relationship to each other.  Hence a party is prohibited from acquiring new leases if s/he learns of defects in the other venturer’s leases without becoming a constructive trustee.

The general view is that in the ordinary pooling or unitization agreement, the parties do not intend to convey their real property interests to each other, but intend merely to share the results of the operation under the agreement, without effecting any cross-transfers of the oil and gas in place or of their real property interests.  However, some courts are of the view that the signing of a unitization agreement vests in all the lessors in the unitized block a joint ownership in all the unitized reserves in the unit proportionate to the relative acreages owned by such lessors[vii].

The general rule is that an oil, gas and mineral lease is indivisible by its nature.  Thus, production from any part of a consolidated or pooled unit perpetuates all leases within the unit, even as to ununitized acreage, unless the leases provide to the contrary.  Hence, leases often contain a “Pugh clause,” which is designed to prohibit lease continuation beyond the primary term as to nonproducing areas not included within a productive unit[viii].  In the absence of Pugh clause, the normal lease with a pooling clause provides that the entire lease tract will be considered held by production, whether that production is on the pooled area or on some area of the tract that has not been unitized[ix].  Pugh clauses terminate all acreage not included within a productive consolidated area on the expiration of the primary term in the absence of production on the excluded area.

[i] Union Pac. Resources Co. v. Texaco, 882 P.2d 212 (Wyo. 1994).

[ii] Amoco Production Co. v. Heimann, 904 F.2d 1405, 1411 (10th Cir. N.M. 1990).

[iii] Leonard v. Barnes, 75 N.M. 331 (N.M. 1965).

[iv] Southeastern Pipe Line Co. v. Tichacek, 997 S.W.2d 166 (Tex. 1999).

[v] Tittizer v. Union Gas Corp., 171 S.W.3d 857, 860 (Tex. 2005).

[vi] Pampell Interests, Inc. v. Wolle, 797 S.W.2d 392 (Tex. App. Austin 1990).

[vii] Whelan v. Placid Oil Co., 198 F.2d 39 (5th Cir. 1952).

[viii] Rogers v. Westhoma Oil Co., 291 F.2d 726 (10th Cir. Kan. 1961).

[ix] Friedrich v. Amoco Production Co., 698 S.W.2d 748 (Tex. App. Corpus Christi 1985).

Inside Pooling, Unitization, and Joint Leases