Oil and gas are incredibly important commodities for economies worldwide, especially those that are large producers of these resources. In many countries, it’s a highly regulated and competitive industry. Unitization oil and gas deals with the production of oil and gas in a cooperative capacity.
Unitization of oil and gas wells is common in the US, where absolute private ownership of minerals is allowed. It’s not as common in other countries where minerals, by default, belong to the state.
So if you’re in the US and have mineral rights, you should know about unitization.
What is Unitization in Oil and Gas?
Unitization oil and gas refers to combining two or more wells from the same reservoir. More specifically, unitization is the joint development of oil, gas, or other hydrocarbon wells across multiple contracts or licenses to maximize and optimize the production of the minerals.
As a result of unitization, each license or contract party agrees to aggregated contract areas, which are called a unit. Each party then gets a unit interest or percentage interest, according to their share in the unified production.
Unitization was developed in the US, where the ‘rule of capture’ was applied before unitization. To understand the rule of capture, you first need to know the property framework of the US.
In the US, land, and mineral rights are treated separately, and private ownership of minerals is allowed. Therefore, there can be many landowners/mineral owners with a mineral interest in an oil or gas reservoir. Similarly, different oil and gas companies may be operating the wells from the same reservoir.
It’s possible that the minerals present in a well originated from adjacent land. In the landmark case of Brown vs. Spillman, the Supreme Court ruled that when a landowner drills into his land and finds minerals that originated from the neighboring land, he becomes the owner of those minerals.
This ruling resulted in highly competitive drilling practices, and landowners and companies started drilling multiple wells to get their hands on the minerals, regardless of where they originated from initially. Unitization was introduced to combat this situation, so oil and gas production as a whole does not suffer from the over-competitiveness of mineral rights owners and drilling companies.
Reasons Behind Unitization Oil and Gas
We have already discussed the history behind the practice of unitization and the main reason why it started. However, the practice of unitization in the oil and gas industry has even more implications.
Unitization’s primary purpose is to limit the impact of competitive drilling and production in places where one reservoir has multiple wells belonging to different parties. Since such a situation results in a conflict of interest, and minerals may be extracted unfairly, the industry started using the consolidation of wells to ensure the multiple parties don’t embroil themselves in conflict and get their due share of the revenue from the extracted minerals as per their share in the mineral acres.
However, the underlying purpose of unitization is to maximize the mineral production from a field or reservoir, which is in the interest of parties with mineral interests, oil and gas companies, and the state.
Unitization can be voluntary or compulsory. In the latter case, it’s mandated by the state. However, in most cases, unitization is voluntary.
A unitization agreement usually occurs between two or more parties with existing wells in an oil or gas field.
When mineral interest owners and drilling companies decide to pursue unitization, there are typically two types of documents.
The first document is called the unit agreement. It is signed between the holders of the title of the property or mineral deed, i.e., the mineral owners. This document specifies the conditions and terms for the formation of the unit and what percentage of the unit belongs to which mineral owner.
The second document is called the unit operating agreement. This document is a contract between the companies operating the different unit wells. This contract is similar to the unit agreement in that it specifies the extent of the reservoir to be considered a unit. It also includes the provisions for the expansion of the unit when necessary and the removal of an operator when necessary. It also includes the date for the start of the agreement.
The unit operating agreement is very detailed as it also outlines important clauses such as voting rules, arbitration procedures, reporting procedures, accounting procedures, and grievance procedures and formulates a committee to supervise the unit’s operations.
In simple words, this document defines the relationship between two or more companies operating on the same unit.
Unitization vs. Pooling
Unitization shouldn’t be mistaken for pooling, as both the practices are pretty different in the oil and gas industry. Pooling involves joining adjacent land to increase acreage, for instance, to get enough acreage for a drilling permit. The lands are pooled to drill a single well.
On the other hand, unitization combines existing wells and oil fields over the same reservoir. As compared to pooling, unitization involves much bigger land and is a lot more complex than pooling. However, like pooling, unitization can be voluntary or forced.
The agreements for unitization and pooling are also quite different. Pooling normally focuses on a single well and is often taken on as a result of state regulations. Unitizations involve multiple agreements that combine different wells, so the documentation has a different language.
Impact of Unitization on Oil and Gas Lease
The unitization agreement can create a situation where the operating companies find it hard to fulfill their obligations for prior agreements, mainly the mineral lease. In many cases, the unitization agreement may take precedence over the initial lease agreement between a company and mineral owners.
So it’s imperative for mineral owners to consult with experts before signing a unit agreement. Since unitization can be quite complex, an expert can help determine whether the new agreement creates a conflict with the lease.
Unitization has become increasingly common, especially in the US, for the purpose of optimizing the production of minerals. However, it’s a complicated procedure involving many documents. Other countries, where private ownership of minerals does not exist, also practice unitization between different license groups and even with other countries.