Oil and Gas Pooling
The oil and gas industry can seem overwhelmingly complex, with many terms in contracts and agreements that laymen may not be familiar with. Oil and gas pooling may just be one such term that many may not know of or fully understand.
This article looks into pooling in the oil and gas industry. It’s an important term frequently found in oil and gas lease agreements. Landowners, mineral rights owners, or any party interested in the mineral lease and production should know the meaning of the term.
What is Pooling in Oil and Gas?
Pooling refers to the joining of leased land with other leased tracts or adjacent lands. The resulting area is called a pool or unit.
In the oil and gas industry, pooling different land together may be required because of different ownership. There are two types of pooling arrangements: voluntary and statutory (also called forced pooling).
Pooling combines different adjacent lands to create one pool or unit for drilling the oil or gas well. The parties with the mineral interest in the pooled lease get their share of revenue according to the land or mineral acreage.
In the voluntary pooling, the consent of the mineral rights owner or landowner is necessary. Normally, the lease agreements have a clause that says that the lessee can consolidate other unleased mineral tracts with the leased land. Most oil and gas companies add this clause to protect their interest.
Pooling can impact the overall lease arrangement with a mineral owner and, subsequently, the royalties they receive from extraction.
The lease with individual landowners may be different with its unique terms. However, later the company may pool the leases. However, landowners and mineral owners will typically receive revenue based on their original lease terms.
Why is Pooling Needed?
An oil or gas company looking to pool a land with another adjacent land may do so for several reasons.
For one, the whole rock formation underneath the ground may be present under different parts of land with different owners. However, to access those minerals and dig a well, the company must sign a lease with all the owners. So they pool the lease to create one unit.
Secondly, it may become necessary to pool the land together to meet the minimum acreage requirements set by the state for the oil company to drill.
For instance, in your state, the minimum land required to drill a well is 100 acres. However, of those 100 acres, you own 60 acres, and some other person owns the remaining 40 acres. Therefore, the pooling agreement oil and gas company will create would need to include both you and the neighbor to meet the state’s 100 acres minimum lease land requirement.
Even if there’s no minimum area mandate by the state the company is drilling in, oil and gas pooling is generally favorable for the companies. This way, they can consolidate different land to dig a single well operated by a single company.
What is Statutory Pooling?
Statutory pooling, also informally called forced pooling, is needed when voluntary pooling is not an option. For example, a landowner resists giving consent for pooling, or a clause in the lease allows the oil company to pool without restraint. This kind of pooling becomes mandatory when the state law has been satisfied.
For statutory pooling, the company would file a request for a pooling order. In addition, they are required by law to submit all the information about landowners that have an interest in the leased land and the land that will be pooled.
They must also provide details about all the land that is to be pooled. They must also inform all the owners so they can take legal action. Once the hearing is set, the state authority may make pooling mandatory and set the cost for calculating revenue for the different landowners in the pooled lease.
While landowners can file a response and appear in the hearing, they have very little say in the matter in many cases. They may eventually have to surrender their mineral right or agree to the terms set according to their particular share in the land.
What Lessors Should Know About Pooling
Pooling clauses are normal in oil and gas leases. However, lessors should ensure that they read and understand the clause to avoid problems in the future. Sometimes pooling can have a negative impact on the lease and result in surprises that may not be so pleasant.
Here’s what the lessor should keep in mind:
- It’s advisable to agree voluntarily to pool land only to the extent that is necessary to drill a well.
- Do not consent to pool before you fully understand its impact on your land and the royalties you will receive.
- Set how the boundaries will be determined with your land and the land owned by other parties in the pool.
- Consider which minerals are pooling together.
- Ensure the lease agreement has Pugh Clause, especially if you own all the land and lease part of it. (This can ensure the rest of your land doesn’t involuntarily end up in the lease)
- Consult with the experts in oil and gas royalties and leasing and your lawyer about pooling.
Oil and gas pooling is common to ensure the company leases enough land it needs to dig a well and operate it. In some cases, it may be necessary, and in others, it may just be a way to extend the well size and/or production.
Pooling can have a positive or negative impact on the landowners. In most cases, with careful consideration, lessors can avoid any negative impact from pooling by keeping their interests as a priority.
In some cases, forced pooling is implemented, depending on state laws. If you’re involved in a mineral lease in any capacity, read and understand the clause about pooling in the agreement.