Pooling of Oil and Gas - State of Wyoming Legislature

Pooling of Oil and Gas

• What is it?

• Why do we need it?

• How does it work in practice?

Pooling:

What is it?• Statutory process to manage

the fair treatment of fractured mineral ownership.

Pooling:

Why do we need it?

• Facilitation of orderly production

• Prevent waste

• Protect correlative rights

Pooling:

How does it work?

• A drilling and spacing unit is established, and an operator is designated

• Authorization for Expenditure is delivered to all mineral owners and lease holders

Assumptions:• The cost of drilling the well is $10 million. This varies widely.

• The price of oil is $55 a barrel. This varies widely.

• The well production is 250,000 barrels produced. This varies widely.

A Simplified Example

A Simplified Example:

Section 7 Section 8

Pad Location


Rancher D(Unleased)

Pad Location (Operator A)

Rancher A (Leased to Operator A) Rancher B (Leased to Operator B, Participating)

BLM (Leased to Operator A) Rancher C (Leased to Operator C, Non-participating)

Ranchette A(Leased to Operator C, Non-

Participating)

Vacant, Owner

unresponsive (Unleased)

Ranchette B (Unleased)



BLM (Leased to Operator A) Rancher C (Leased to Operator A)

Rancher A owns 25% of the unit• Leased to Operator A for 18% royalty• Begins recovering royalty based on 25% of gross revenue within 6 months of

initial production and for the life of the well• Rancher A nets $618,750• Owes nothing on initial or ongoing cost of production, and is relieved of

plugging and abandoning responsibility

Operator A has a lease interest on this half section, and 50% of the total unit• Pays $7.5 million of the cost (It’s share plus the non-participating shares)• Earns $1.037 million after drilling costs and royalties. • Operator A still hasn’t paid a dime in taxes and has two non-participants in

the unit.



Rancher D(Unleased)



BLM (Leased to Operator A) Rancher C (Leased to Operator C, Non-Participating)


Participating)

Vacant, Owner





BLM (Leased to Operator A) Rancher C (Leased to Operator A)Federal Government owns 25% of the unit

• Leased to Operator A for 12.5% royalty• Federal Government nets $429,687 (48% shared with Wyoming)

Operator A has a lease interest on this half section, and 50% of the total unit• Same as previous




Participating)





Participating)

Vacant, Owner





BLM (Leased to Operator A) Rancher C (Leased to Operator A)Rancher B

• Leased to Operator B for 16% royalty• Begins recovering royalty in same manner as Rancher A• Nets $550,000 and owes nothing for initial or ongoing cost of

production, is relieve of plugging and abandoning

Operator B has a lease interest on this half section, and 25% of the total unit• Participated, and is paying its $2.5 million cost of production• Earns $387,500 after costs and royalty (still owes taxes)



Rancher D(Unleased)





Participating)

Vacant, Owner






Rancher C• Leased to Operator C for 15% royalty• Begins recovering royalty in same manner as Rancher A

and Rancher B because Operator A takes over the royalty obligation of Operator C.

• Nets $257,812 and owes nothing for initial or ongoing cost of production, is relieved of plugging and abandoning responsibility.

Operator C has a lease interest on this quarter section, and 12.5% of the total unit, but elected to not participate• Would have paid $1.25 million in costs to participate.• Would have recovered $210,938 after costs and royalty.• Instead, owes 300% on this well, or $3.75 million.• Pays its entire share to Operator A who nets the

$210,938 (The well wasn’t good enough to pay out, but Operator C can now choose to participate in the second well)



Rancher D(Unleased)



BLM (Leased to Operator A) Rancher C (Leased to Operator C, Non-participating)


Participating)

Vacant, Owner






Rancher D (Unleased)• Treated as a working interest. • Owes 12.5% of the drilling costs, or $1.25 million. • Does not participate, so, like Operator C, is subject to $3.75

million in costs and penalties before earning revenue.• Pays nothing and forgoes revenue as the well did not perform

well enough to recover costs and the penalty.• NOTE: nothing in current law precludes an unleased mineral

owner from receiving a royalty.

Operator A • Pays Rancher D’s $1.25 million on his behalf.• Nets $468,750 before taxes.



Participating)

Vacant, Owner






Rancher D (Unleased)• Treated as a working interest.• Owes 12.5% of the drilling costs, or $1.25 million. • Does not participate, so owes 150% of the costs, or $1.815

million.• Earns 16% (or acreage weighted) royalty during the penalty

phase.• Rancher D pays nothing for initial costs and earns $275,000 in

royalties.• Remains a working interest with shared responsibility of

future costs and reclamation.

Operator A • Pays Rancher D’s $1.25 million cost of initial production.• Nets $193,750 after costs and royalty (still owes taxes).

A Simplified Example: Draft Bill

A Simplified Example: Draft Bill

• Rancher D• Pays $0 for initial production

• “Pays” $193,750 in penalties

• Earns $275,000 in royalties

• Potential costs in the future*

• Operator A• Pays $1.25 million in costs

on behalf of Rancher D

• Pays $275,000 in royalties to rancher D

• Earns $193,750 (before ongoing costs and taxes paid)

Options for protecting unleased mineral owners

• Option 1 – Checks not Bills• Elect to receive the statutory

royalty for the life of the well

• Cannot participate as a working interest • $275,000 in example

• No cost obligations and no penalty


• Option 2 – Risk and Reward• Elect to be an unleased working

interest owner at 150% penalty

• Share in ongoing costs and/or risk premium

• Enjoy the fruits of calculated risk


• Option 3 – North Dakota• Statutory royalty for the life of

the well

• Back in as working interest after payout

Petroleum Association of Wyoming

951 Werner Court, Suite 100 Casper, WY 82601-1351

(307) 234.5333 | FAX: 307.266.2189

THANK YOU

Pooling of Oil and Gas - State of Wyoming Legislature

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