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
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
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
A Simplified Example
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)
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 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.
A Simplified Example:
A Simplified Example
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)
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 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
A Simplified Example:
A Simplified Example
Ranchette A(Leased to Operator C, Non-
Participating)
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)
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 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)
A Simplified Example:
A Simplified Example
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)
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 A)
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)
A Simplified Example:
A Simplified Example
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)
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 A)
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.
A Simplified Example:
Ranchette A(Leased to Operator C, Non-
Participating)
Vacant, Owner
unresponsive (Unleased)
Ranchette B (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 A)
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
Options for protecting unleased mineral owners
• 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
Options for protecting unleased mineral owners
• 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
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