Once you’ve started talking with a landman about an oil and gas lease or a modification or amendment of an old oil and gas lease, it usually won’t take long before the term “pooling” or “pool” or “unit” or “unitization” comes up.  A lot of landmen will throw the word out, just expecting you to understand it.  They use the term all the time, so they might not even realize that they just said something that doesn’t make any sense to you in context.  “What does a swimming pool have to do with my oil and gas rights?” you think to yourself, but the landman is moving on to something else and you just move right along with him.  It never really gets explained sometimes.

A good landman will explain the term because he/she will know that people don’t understand what a pool or unit is, but not all the landmen out there are experienced enough to 1) realize that you don’t know what they’re talking about and 2) be able to explain it well.

A lot of people use the terms pooling and unitizing interchangeably, but they are technically two different things.  Here in West Virginia we primarily use pools, though the argument could be made that what we are doing is a little more like unitization than pooling.  Here are my Oil and Gas Law in a Nutshell definitions.  Pooling: bringing together small tracts for the drilling of a single well.  Unitization: combining leases and wells over a producing formation for field-wide operations.

UNITIZATION

Unitization is most often used to describe the situation where you use some of the wells in the area to inject fluids into the formation that you’re trying to get oil or gas out of, and the rest of the wells to extract the oil and gas.  The fluids you inject increase pressure or do other things to make the oil and gas flow better.  Without the fluids, you wouldn’t get much or any production.  It wouldn’t be fair to use some guy’s property to inject the fluids and not compensate him in some way, so the injection wells and the extraction wells are “unitized” and they share the royalties.  This is more common in oil production than in gas production.  The following graphic from Oil and Gas Journal is by far the best illustration that I could find online.  I hope they don’t mind me using it.

The dots represent wells that are intended for production, and the dots with arrows on them are wells that are intended for injection, in this case “flooding” with water.  The blue areas are owned by someone who doesn’t want to participate, but that’s way off topic.

Unitization is often done when the field is ending it’s productive life, so wells that were previously used for production are converted to injection, and contribute to the efficiency and profitability of the field.

POOLING

Pooling is when you’re using multiple properties together to develop a well or, as we are doing here in West Virginia, a group of wells that all start from one well pad.

A Marcellus Shale Drilling Unit from Antero Resources in Doddridge County, WV.

On this map, the well pad would be in the center of the pool, about where D1 is, and wells would extend out to the northwest and southeast.

WHY THEY USE POOLING

The big plays here in West Virginia are the Utica and the Marcellus shales.  To develop these shale plays efficiently, we use horizontal fracturing.  The company will drill down to just above the Marcellus shale (or the Utica if that’s what they’re after), then bend the well and run it horizontally through the formation.  The horizontal part of the well will extend out from half a mile to more than a mile.  There are very few individual tracts of land in West Virginia that can encompass an entire one-mile long horizontal leg.  This one fact is one half of the reason behind pooling.

The other reason is that oil and gas leases are in competition with each other.  Let me explain.

West Virginia law recognizes a rule called the Rule of Capture.  It means that if something enters your property, it’s yours.  It was developed a long, long time ago in England to determine who owned an animal that was wounded by a hunter, ran onto someone else’s property, and died there.  The courts decided the animal belonged to the property owner.  The courts applied the same rule to oil and gas.

Since you could own any oil that came onto your property, you could drill a well right next to the property line and suck the oil out from under your neighbor’s property.  If your neighbor didn’t drill a well on his side of the property line (it’s called an offset well) he would just lose all his oil.  It wasn’t nice, but it was legal.

If your neighbor had leased his oil rights to someone, he could request that the lessee drill an offset well.  If the lessee wouldn’t your neighbor could cancel the lease and lease the property out to someone else.

Leases were in competition with each other, and they still are.  That’s why an oil and gas lease has to include the right to pool, it’s the right to use your property together with other properties to develop the oil and gas.

So now you know what pooling is, and why you’re being asked to include the right to pool in that lease you’re looking at.  There’s quite a bit more about the pooling clause that we could talk about, but this post is already pretty long so we’ll save that for another day.

If you’re finding yourself confused by all the legalese in an oil and gas lease, or if you’re intimidated by the thought of trying to negotiate with someone who does negotiation every day, give us a call at Nuttall Legal.  Our number is 304-473-1403.

If a person were to skim through your standard, run-of-the mill oil and gas lease, that person would probably come to the conclusion that the lease was intended for the production of oil and gas.  He or she would not jump to the conclusion that there was anything else allowed by the lease.

That person couldn’t be any more wrong.

It’s not that there aren’t leases out there that limit themselves to only oil and gas production; there are some.  However, the majority of oil and gas leases also provide for a number of other things the company can do with the property besides produce oil and gas.

We’ve written about storage wells in the past, and you can read up about them here.  Most leases include provisions which allow the company to use the property for storage.

Very similar to storage wells are disposal and injection wells.  Like storage wells, they are usually in formations that have been fully produced, or in other words, all the gas has already been sucked out of them.  The company will then truck in waste water and inject it into the formation.  They can put from a few thousand to tens of thousands of gallons of water per day into one of these wells.  Continuing the similarity to storage wells, the royalty that you’ll be paid (if any) on a disposal or injection well is tiny.  The end result is that what you thought was a lease for oil and gas production and good royalties becomes a lease that doesn’t pay you much at all.  Most leases include provisions which allow the company to use the property for disposal or injection.

Pipeline easements are also often part of an oil and gas lease.  All leases allow for some pipelines, of course.  In order to produce gas from the property you have to be able to run a pipeline from the well to the gathering system.  We’re not talking about that kind of pipeline, though.  We’re talking about a pipeline run across the property that is transporting gas from someone else’s property to a gathering system, or even an interstate pipeline.  This kind of pipeline is not going to benefit your property or you in any way.  And yet, there it is in your lease.  The company can run a pipeline across your property and if it does, it’s using the lease for one of the purposes specified in the lease, and so the lease can be kept alive without benefiting you in any way.

So once again the moral of the story is to read your lease very carefully.

We also hope that you’ll seek out competent counsel.  If you do, give us a call at 304-473-1403 and one of our well-trained and extremely competent staff will help you out.  We can explain what your lease does in plain English, and negotiate for better terms.

An Ohio court has determined that an Ohio lease cannot be terminated in spite of the company not making royalty payments.  The well was drilled.  We don’t have any information regarding whether the well was produced or even hooked up to a pipeline, but there is definitely a well there.  That’s probably enough under most leases to keep the lease alive.  But without production, there aren’t going to be any royalties paid.

You would think that in a situation like this the lessor would be able to cancel the lease, but that’s not the way Ohio law is.  It’s also not the way West Virginia law is.  In West Virginia you have to have what’s often called forfeiture language in your lease.  If you don’t, the only thing you can ask for is money damages.

For most of the people that we talk to here, money is all they’re ever going to get out of one of these leases.  There won’t be free gas, there won’t be benefits to the surface tract, there won’t be anything but money coming their way.  It doesn’t make sense to allow leases to be kept in place when money is not being paid.  But that’s the way the law is.

Make sure that you talk to a competent oil and gas attorney before you sign a lease.