Written by Richard Champion Reviewed by Judy Moreland, CDOA Denbury CDOA Review March 25 & 26, 2015

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1 Written by Richard Champion Reviewed by Judy Moreland, CDOA Denbury CDOA Review March 25 & 26, 2015

2 Forming the Unit Oil and gas operations in the Rocky Mountain states are primarily governed by each state s oil and gas conservation act. Each conservation act empowers the designated regulatory agency to regulate the spacing the wells. Other purposes of the regulatory agency s mission are: To protect the correlative rights of the owners in a common source of supply of oil and gas to the end that each may obtain a fair share of production To encourage the efficient development of natural resources To protect public and private interests against both physical and economic waste

3 Forming the Unit To provide for the development of an oil and gas pool in such a manner as to maximize ultimate recovery. To encourage voluntary agreements for assisted recovery operations for the benefit of the public The regulatory agency of each state has adopted a rule regulating the location of wells. The rule usually will prohibit the drilling of a well closer than a stated distance to a lease line, a property line, or a surveyed governmental subdivision line. The rule will also establish a minimum distance between wells drilled to a common source of supply.

4 Pooling or Communitization It may be necessary to pool interests together to provide for the sharing of production and possibly the costs for the permitted well. Pooling may be accomplished either voluntarily by agreement of the parties or involuntarily by order of the state regulatory agency after application, notice, and hearing. The majority of fee leases contain a pooling provision and ordinarily pooling may be accomplished by the lessee filing a declaration of pooling pursuant to that provision in the oil and gas lease. The declaration must be filed in the appropriate county records. If one or more of the leases involved does not permit pooling by declaration, a pooling may be entered into by the parties concerned.

5 Pooling or Communitization If federal leases are involved, pooling must be accomplished by means of a communitization agreement. Operations or production under an approved communitization agreement shall be deemed to be operations or production as to each lease committed thereto. While pooling or communitizing leasehold of up to 640 acres is a common practice, serious consideration should be given to federal unitization when the pooled area covers an entire oil and gas field involving at least 10% or more federal leasehold. Unitization in its simplest form means pooling the lessee s and lessor s interests within a given area and sharing the risks and possible benefits of exploration and development.

6 Federal Unitization There are two types of federal units: An exploratory unit is one that is formed prior to drilling the first well. A secondary recovery or enhanced recovery unit is usually formed after the field or unit area is fully developed in order to maximize ultimate recovery from the field by some method of assisted recovery. Congress passed a temporary act authorizing pooling of federal lands in 1930 and in early 1931 a permanent act was passed. The present authority for federal unitization is found in the Mineral Leasing Act. The size of the unit area is determined by the geological feature but is generally limited to 25,000 acres for a one well commitment. An additional well commitment may be required for each additional 10,000 to 15,000 acres.

7 Federal Unitization The purpose of unitization is to conserve natural resources, prevent waste, and secure other benefits only obtainable through exploration, development and operations under a unified plan. Some of the other benefits of operations under a federal exploratory unit: If a unit is proposed, the unit proponent may be able to solicit farmouts, acreage contributions, and dry hold money from other working interest owners within the unit area. Some owners may be anxious to delay lease expirations WI owners may wish to avoid including their leasehold in the chargeability determination Others may be unwilling to bear the cost of exploration alone.

8 Federal Unitization If the unit proponent were to drill a discovery exploratory well without the benefit of unitization, they would be exposed to possible offset well obligations. Under a federal unit, the offset obligation is limited after discovery in paying quantities. The model for Unit Agreement provides that a Plan of Development and Operation will be submitted for approval within 6 months after completion of a well capable of producing unitized substances in paying quantities. The plan must include the number and location of any wells to be drilled and the timing of drilling Prior to the expiration of the approved plan, an additional plan for a specified period must be submitted.

9 Federal Unitization Generally, all fee and state leases which cover interests that are committed to the unit are extended for the life of the unit. Federal leases are not extended unless production is obtained in paying quantities in the unit prior to the expiration of the term of the lease. If a unit well, drilling over the initial expiration date of the federal lease will extend the lease or leases for a period of two years or as long as oil or gas is produced. A federal lease may receive only one extension by drilling. A lease extension resulting from segregation from a unit or lease extension resulting from a unit termination are considered extensions by drilling.

10 Federal Units If there is more than one WIO, the owners enter into a Unit Operating Agreement which provides the basis for sharing of costs and production from the unit wells. The basis of sharing by the WI owners does not have to be the same as the basis provided for in the unit agreement, but the UOA cannot alter or modify the terms and provisions of the UA. In the event of conflict between the UA and the UOA the Unit Agreement controls. RI owners on a committed tract are paid based on the percentage of production allocated to that tract but the WI share may be divided in any manner the parties agree on, as set forth in the UOA.

11 Federal Units After the completion of the discovery well as a well capable of producing oil or gas in paying quantities, the sharing of costs and benefits is dependent upon participating areas. Any acreage committed to a federal unit is not counted against chargeability. No entity can control more than 246,080 acres of federal oil and gas leases in any one state at any one time. No more than 200,000 acres may be held under option. The State of Alaska has a different chargeable lease limit. In the event the initial exploratory well drilled in the unit area is a dry hole, the UA provides that the unit operator must continue drilling one well at a time, allowing not more than 6 months between completion of one well and the beginning of the next well until a well capable of producing in paying quantities is completed.

12 Federal Units The unit agreement will automatically terminate if the operator fails to commence any such well within the time allowed. If the first well has been completed as a dry hole, the unit may be terminated by not less than 75% (on a surface acreage basis) of the committed working interest with the approval of the BLM. The operator, with the approval of 75% of the WIO s, can request voluntary termination of the unit agreement, effective as of a date just prior to the date of the expiring lease or leases. All federal leases in effect at the effective date of the termination will continue in effect for the original term of the lease, or for 2 years after termination, whichever is longer, and so long thereafter as there is oil or gas in paying quantities.

13 Federal Units Developing wells on a unit basis minimizes surface disturbances. Separate storage facilities are not needed for each lease. Separate gathering lines, roads, ROW s and trucking activity is not needed for each lease. Separate development tends to reduce rather than increase the maximum ultimate recovery from a field by eliminating self-preservation of each lessee s position.

14 Federal Units The standard form of unit operating agreement has a provision pertaining to secondary recovery and pressure maintenance. The unit operator is not permitted to undertake any program of secondary recovery or pressure maintenance with the consent of the parties. The consent required varies from 80 to 90 percent of the committed working interests on an acreage basis. The time needed to negotiate a participation formula for allocation of costs should be considerably shortened because of this provision in the exploratory unit operating agreement.

15 Federal Unit Pressure maintenance and fluid or gas injection programs may be commenced prior to primary depletion, resulting in greater ultimate recovery. The parameters most commonly used in determining secondary recovery participation are acre feet, cumulative production, current production, original oil in place, and remaining primary production. The ideal objective in secondary recovery is to establish that each owner s share of production from the unit is in exact proportion to the contribution which he makes to the unit.

16 Federal Units Recap of Benefits Conservation of natural resources Orderly development Spreading the risks and costs among several owners Minimizing damage to the environment Maximizing administrative efficiency through delegation to one operator Relief from federal acreage limitation Extensions of leases by timely drilling of discovery of a well in paying quantities Ease of institution of secondary recovery operations or pressure maintenance when needed Increasing ultimate recovery Providing a better rate of return on investment

PLANS OF DEVELOPMENT, EXPANSION, OR UNIT CONTRACTION

PLANS OF DEVELOPMENT, EXPANSION, OR UNIT CONTRACTION I. INTRODUCTION 1 II. PLANS OF DEVELOPMENT 1 A. Generally 1 B. Timing 1 C. Contents 2 D. Supplements 3 E. Unit Operating Agreement Procedures 3 F. Available