Unitizations and Pooling
Let me begin by first explaining that I am not an attorney, nor am I a landman. I have been involved with several unitizations and poolings, and I have relied heavily on the advice of attorneys and landmen during these procedures. The purpose of this entry is to give an overview of unitizations and poolings, their purpose, pros and cons, and things to consider should you find yourself faced with either.
Basically, the purpose of both unitizations and poolings is to combine individual leases into a single entity for the purpose of development. Pooling is usually associated with drilling a well when the individual lease size is smaller than the required statutory well spacing. For example, if there are several contiguous 10 acre leases and an operator wants to drill a well which requires 40 acres, then the operator will pool four of the smaller leases together to form a 40 acre pool on which to drill. The purpose is to prevent waste since drilling a well on a lease smaller than the expected drainage area would require each adjacent lease owner to drill a competing well to prevent drainage—in this example four wells would need to be drilled instead of one.
In pooling, as described above, the resulting “pool” is not intended to represent the entire reservoir (sometimes a reservoir is unfortunately called a pool). This is where unitization differs from pooling. Typically the purpose of unitization is to combine all the leases in a given reservoir or field for the purpose of enhancing the field’s recovery. This is usually necessary in the cases where a flood (waterflood, steamflood, CO2 flood, etc) will be pushing oil and gas around and may cause hydrocarbons to cross lease lines. It is much more efficient to design and operate a flood without having to worry about keeping lease A’s fluids from crossing over to lease B.
In both cases the most important thing is for everyone to get their fair share of the resulting production. In the case of pooling this is commonly done based on acres contributed—if your 10 acres are pooled into a 40 acre pool, then you get 25% of the pool. This is usually the case because the leases are small and the producing formation probably doesn’t vary much between the leases, and if there hasn’t been any drilling yet there usually isn’t much data available to argue about. This is not always the case however, and you can imagine if your lease is sitting on top of a structure and you are being pooled with down-dip leases you may feel you are entitled to a bigger portion.
Unitizations are usually much more complicated. This is because they are typically much larger, involve several wells, often with different operators, and since they are usually in preparation to flood a reservoir there is much more data available to argue about. Also, when converting a field from primary lease-based production to a unitized enhanced recovery flood often some producing wells will be converted to injection and the associated loss in production will take time to recoup. This means the cash flow being generated will be reduced at the same time capital investments are required to install the flood; which usually increases the anxiety in the room.
Several different parameters are typically used to determine each lease’s equitable share in a unitization. Since the primary purpose is to recover remaining hydrocarbons, the original hydrocarbon pore volume and remaining recoverable hydrocarbons per tract are usually very important parameters, as are the current production rates, usable wells, and sometimes acres and cumulative production are used. The goal is to get all the parties (operators and mineral owners) to agree on one formula that divides up the future production and share of the costs (for the working interests). Usually a lot of negotiating is required and sometimes very creative unitization formulas are the result.
Both pooling and unitizations have their purpose in developing an oil and gas reservoir and both have been used for years as a means to prevent waste and increase recovery. As with most everything there have been abuses and inequities in the past and there will no doubt be more in the future. The most important thing to remember is to be sure to understand what is going on, what your lease allows and what options you have available to you, because these things will be very important to you when you’re sitting in a conference room negotiating for your piece of the pie.
