Oil and gas leasing: what is pooling?

The first of a series that will discuss pooling, unitization and a Pugh clause.

There are numerous terms and conditions listed in an oil and gas lease. One is pooling, and it is contained in most leases. In most states, landowners may be subjected to two types of pooling arrangements. One is voluntary and the other is compulsory or statutory. This article will discuss voluntary pooling.

In order for pooling to occur, the mineral rights’ owner must consent. By consenting to a pooling arrangement, the landowner must be careful because the utilization of pooling can materially alter the lease provisions. For example, potential royalties can be significantly reduced because the pooling provisions reduce the number of wells necessary to keep the lease in effect. There are other negative consequences of pooling that will be discussed in future articles.

Most leases will contain some provision giving the lessee (oil and gas company) the right to consolidate the leased premises with adjoining leased tracts. The area formed is called a “pool” or sometimes a “unit.” The reason for establishing such pools is to unite all the landowners having an interest in a common underground reservoir under one operator. Sometimes pooling arrangements are necessary to meet the minimum acreage requirement for a drilling permit under state regulations.

Pooling is the combination of all or portions of multiple oil and gas leases to form a unit for the drilling of a single oil and/or gas well. The unit is generally one or a combination of government survey quarter-quarter sections. Generally the interest owners in the pooled unit share the revenue from the well on the basis of surface acreage or mineral acreage owned by each interest owner in the pooled unit. For example, let’s say that in your area the oil and gas regulations require that 80 acres be under lease to obtain an oil/gas drilling permit. You own 40 acres and your neighbor owns 40 adjacent acres. The oil and gas company can lease these under separate leases and separate terms and then “pool” these parcels to drill the well. Each landowner will receive income based on the terms of their particular lease.

Pooling can impact the lease provisions, which may provide some unpleasant surprises as to the extent it can impact the lease. (We will discuss these in part 2 of this series.) Here are some things landowners might want to keep in mind when granting the rights to pool the leased premises. These can prevent unexpected and negative consequences from granting the right to pool:

  1. Submit to voluntary pooling in the lease only to the extent necessary to get a drilling permit from the state. Otherwise, the landowner’s written consent should be required to pool. Do not consent until the landowner understands the full impact of the pooling arrangement on the lease terms, the full description of the proposed pool area and the details on how the boundaries were determined.
  2. In order to keep a pool from being overly extensive, stipulate in the lease the maximum number of acres a pool may contain. As a rule, limit the acreage to no more than that specified in a statutory or compulsory pool in your state.
  3. Give some thought as to whether the lessee may alter or change the size or shape of the proposed pool after the landowner has consented.
  4. Consider whether the pool is limited to certain producing strata or given for any and all producing     formations which may be encountered. Also consider which substances may be pooled – e.g., oil and gas but not other gaseous substances, coal or valuable stones.

In future articles we will discuss some of the negative aspects of voluntary pooling, the Pugh clause and how it can prevent some of these negative consequences and compulsory pooling in Michigan.

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