Last Updated on If you ever have to sign an oil or gas lease there may be some terms you’re unfamiliar with. It is in the best interest of a landowner to read and thoroughly understand what it is they’re signing. If the landowner signs a lease without understanding what rights are included, it could lead to legal problems further down the line.
One common clause that you’ll find in both gas and oil leases is a pooling clause or pooling arrangement. Misunderstanding or not understanding the pooling clause at all, could lead to a compulsory pooling of the unleased land, according to state laws.
What is a Pooling Clause?
In a few words, a pooling clause is written into a lease. This oil and gas clause allows the leased premises to be combined with other lands to form a single drilling unit.
It’s not uncommon for there to be a pool of oil or gas under numerous parcels of land. Potentially, each of those parcels could be owned or leased by a different person or company.
The fluidity of the oil and gas mean that it could all be removed by one single well. As you can imagine, this could be an issue for the owners of the other adjoining leased tracts of land.
One solution for this type of problem is the pooling of diverse holdings into one or more drilling units. These units are purely for the production of oil or gas.
Proceeds from production anywhere on the drilling unit or oil pool are allocated in accordance with the percentage of the acreage of each tract, divided by the total acreage of the drilling unit.
What is Pooling in the Oil and Gas Industry?
Pooling is a way of forcing interest owners in a spacing unit to collectively decide how the unit should be developed. Interest owners include mineral owners, working interest owners, and leaseholders. Consolidated leased land is called a unit or pool.
What are the Different Types of Pooled Units?
You’ll find a variety of pooled units used in a pooling clause and oil and gas leases. Let’s examine some of the more common ones to help you better understand.
Voluntarily-Pooled Units
Voluntary pooling and voluntary-pooled units are those to which the landowner gives their free consent. It’s possible for the landowner to reap some benefits when various provisions are inserted into the clause.
Sometimes the pooling clause will give unrestricted rights to the production company for the pooling of the leased land. It’s more prudent for the lease terms to specify the acreage to be pooled. It should be the minimum acreage necessary for the drilling permit.
Force-Pooled Unit
Voluntary pooling is one course of action, but another is known as a compulsory or statutory pooling unit. It is compulsory in situations wherever state law has been satisfied for oil and gas leases.
In the absence of a voluntary pooling agreement, the Oil and Gas Conservation Commission can issue a compulsory pooling order over the leased land.
States tend to use this option when they want to force a landowner to enter into a pooling agreement.
The procedure is that a production company files a request for a pooling order. When the request is filed, the production company provides a list to the state of all persons known to own an interest, oil or gas, in a portion of land that is proposed to be pooled.
A hearing is held before the appropriate state agency. The hearing is to decide whether an order can be made by the state concerning the sharing of costs and revenues for the pooled area.
Drilling Units
A drilling unit is a minimum acreage on which one well may be drilled.
Proration Units
A proration unit is an area in a pool that can be effectively and efficiently drained by one well.
Field-Wide/Enhanced Recovery Units
Enhanced recovery units are injection wells used to increase production and prolong the life of an oil-producing field.
Why is the Pooling Clause Important?
The pooling clause is one of the most important clauses in an oil and gas lease. You’ll find it mentioned in most leases, as part of the provisions and clauses section.
The pooling clause is an important part of a lease agreement from the viewpoint of the production company and the landowner.
It is also in the best interest of the landowner to carefully read and make sure they understand the lease terms and what the pooling clause means. If a landowner signs a lease without understanding the pooling language and other rights, it could lead to legal problems further down the line.
What are the Pooling Clause Benefits?
There are a number of benefits to including a pooling clause in an oil and gas lease. It is beneficial for both the lessee and the lessor of leased lands.
At the commencement of leasing, the lessor doesn’t always know whether the lessor’s acreage will be the primary drill site tract.
In the case of pooling, more than one tract or lease will be combined or pooled in order for the drilling of the well to take place.
Operations and productions that are taken from the pooled unit have to be treated as if they are taking place on each tract within that pooled unit.
When there is a pooling clause in a lease, products is shared among the leases and tracts. Typically, it will be in proportion to the size of the acreage in terms of how it contributes to the pooled unit as a whole.
Here is a list of some more benefits of including a pooling clause:
- Cost efficiencies
- Patches can be created that are large enough to obtain a drilling permit
- The life of a lease is extended for as long as production continues
- No worrying about property lines
- Starting a well excuses payment of delay rentals
Common Pooling Problems/Issues
Pooling is a very fundamental concept within oil and gas law. The definition sounds simple enough, but it’s often misunderstood.
The most common definition of pooling is “the combining of two or more tracts of land into one unit for drilling purposes. It is accomplished voluntarily or through compulsory pooling.”
It doesn’t sound too complicated, but there are some common issues that arise.
The Pooling Provision
While there is a representative pooling provision that’s commonly found in oil and gas leases, pooling provisions can, and almost always do, vary from lease to lease. The wording of individual pooling provisions depends on the express requirements needed for a lessee to exercise its pooling power. In addition, there might also be limitations on when such power can be utilized.
Variables include but are not restricted to the following:
- The circumstances under which a lessee can pool
- The specific size of the pooling units that can be formed
- When the formation of a unit becomes effective
- Whether or not a lessee can reform a unit
- The effect of a classification change of a well on a pooled unit
- Whether the leased premises can be included in a unit that already has a producing well on it
Requirements to Exercise the Pooling Power
In general, courts tend to interpret pooling provisions in the broadest of terms, particularly in relation to the extent of the grant of the pooling power.
However, it’s also usual for courts to require strict compliance with any express limitations or conditions contained within the lease.
In addition, courts often place certain implied sites on the lessee’s right to exercise their pooling power. The implied duty has been described in various ways, which does complicate issues. However, in essence, it boils down to a “fair dealing” or “good faith” standard.
Contractual Limitations
Pooling leases premises has one important consequence which is the potential impact it has on a lessor’s royalty interest. If a lessor owns the entire mineral estate a well is drilled on, they are entitled to a negotiated royalty percentage on the whole product from the well.
However, if the well is drilled on leased premises that have been pooled with other lands, any royalty for the lessor becomes diluted. The lessor will only be paid a portion of production depending on the size of the unit.
Such a distribution is usually referred to as the “pro-rate portion of the oil and gas . . . produced from the pooled unit which the number of surface acres covered by [the] lease (or in each such separate tract) and included in the pooled unit bears to the total number of surface acres included in the pooled unit.”
It is therefore not uncommon, for more savvy landowners involved in lease negotiations to include a more stringent set of limitations. These limitations of the lessee’s right to pool might include:
- The size and composition of the units
- What portions of the lease are maintained by production or operations from pooled units (these are often referred to as a Pugh clause)
- Anti-dilution lease provisions
- The acreage of pooled units allowed under the lease which are typically distinguished by the type of the well and its depth
Declaration of a Pooled Unit
There are times when the pooling lease provisions of a gas and oil lease stipulate that the lessee must file a document of record designating the pooled unit boundaries. Such a document delineates what portions of the leases are included in a unit.
It also places third parties on notice. According to the terms of the leases, any production from the wells in the pooled unit must maintain underlying leases or portions if this is applicable.
Conclusion
Now you know a little bit more about the pooling clause oil and gas lease, you’re in a better position should you need to be a party to a lease with an oil and gas company.
FAQs
What is pooling vs unitization?
It’s not uncommon for pooling clause and unitization clause to be used interchangeably. However, they are not the same thing.
A pooling clause places separately owned interests or leasehold interests into a single entity. The entity will have sufficient acreage to receive a drilling permit under relevant local or state regulations.
A unitization agreement, on the other hand, relates to the combination of separately owned leasehold or mineral interests. These relate to a common supply, for example, a reservoir or a field creating a joint operation that maximizes production and optimizes operations. The areas involved are usually much larger than pooling. Another difference is that a unitization clause is chosen for the purposes of resource conservation.
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