HORIZONTAL WELLS POTENTIAL PROBLEMS AND PRACTICAL SOLUTIONS

Transcription

1 Presented: 36 TH Annual Ernest E. Smith Oil, Gas & Mineral Law Institute April 9, 2010 Houston, Texas HORIZONTAL WELLS POTENTIAL PROBLEMS AND PRACTICAL SOLUTIONS CHARLES W. GORDON, IV JOE W. CHRISTINA, JR. Author Contact Information: Charles W. Gordon, IV Joe W. Christina, Jr. Porter, Rogers, Dahlman & Gordon, P.C. Corpus Christi, Texas (361)

2 TABLE OF CONTENTS SCOPE OF PAPER...1 I. IMPLIED COVENANTS...2 A. Development Covenant Failure to Develop Large Acreage Block Failure to Develop Multiple Depths Within the Productive Zone...5 B. Drainage Covenant...7 C. Prudent Management and Administration Covenant Existing Lease Held By Production Lease Too Small To Drill Horizontal Well...11 II. TRESPASS AND BOUNDARY ISSUES...12 A. Trespass by Fracing Operations...12 B. Boundary Issues Non-Contiguous Acreage Improperly Drafted Right-of-Way...18 C. Necessity of Surface Leases and/or Subsurface Easements No Take Points on Surface Location Tract No Pooling No Take Points on Surface Location Tract But Surface Location is Pooled...21 III. EXPRESS OIL AND GAS LEASE PROVISIONS...23 A. Obligatory Horizontal Well Problem...23 B. Pooling Clause Problems Good Faith Versus Bad Faith Pooling Older Pooling Clause Further Restrictions in Pooling Clause Pooling Formation of Unit Prior to Commencement of Drilling Pooling Royalty Sharing Problems...35

3 HORIZONTAL WELLS POTENTIAL PROBLEMS AND PRACTICAL SOLUTIONS Horizontal well drilling programs are not new in Texas. However, with improved horizontal drilling technology and the rapid development of shale plays in Texas over recent years, such as the Barnett Shale, the Haynesville Shale and, now, the Eagle Ford Shale, horizontal drilling programs have increased dramatically over the last few years. The initial production averages for horizontal wells in these shale plays generally range from 1 to 25 Mmcfe per day and the expected ultimate recoveries per well are expected to be between 2 and 10 Bcfe. The large numbers of dollars associated with these horizontal shale wells will naturally breed litigation over the various legal issues encountered. Many of the legal problems depicted in this presentation are not applicable only to horizontal drilling situations. However, as stated above, with production from horizontal wells being so prolific, it is believed that the magnitude of the revenues in dispute will enhance the probability of litigation over the potential problems depicted herein. Although disputes related to horizontal drilling have been addressed by the Texas courts to some extent over the last 20 years, litigation involving horizontal drilling will probably continue to expand, and the case law on these issues will likely continue to be refined and clarified by the courts. It is hoped that reviewing these potential problems will increase awareness of the various potential legal issues, so that these potential problems areas can be recognized and avoided or solved prior to potentially large damages being incurred. With the limited time allotted, it is not possible for this paper to include an exhaustive legal analysis of all of the various potential legal issues that may be faced when engaging in horizontal drilling programs. However, we note that the following papers collectively point out and discuss many more legal issues of which you and your clients should be aware when conducting horizontal drilling programs: 1. Brian R. Sullivan, Horizontal Pooling & Co-Tenant Accounting Permian Basin Oil & Gas Law 2010 Midland, Texas (February 19, 2010); 2. Lisa Vaughn, New Facets Of Old Alternatives For Unleashed Mineral Interests 16 Tex. Wesleyan L. Rev. 113 (2009); 3. Kevin Michael Beiter, Oil Is Where You Find It Leasing And Exploration For Minerals In And Around Cities University of Texas Oil, Gas and Mineral Law Seminar (February 25, 2009); 4. H. Philip Whitworth, Horizontal Drilling In Urban Areas And Particularly The Barnett Shale State Bar of Texas 25 th Annual Advanced Oil, Gas and Energy Resources Law Course (October 4-5, 2007); 5. H. Philip Whitworth and Joe Sanders, Recent Developments At The Railroad Commission And General Land Office The University of Texas School of Law 32 nd Annual Ernest E. Smith Oil, Gas and Mineral Law Institute (March 31, 2006); 6. William G. Bredthauer, Fort Worth Rocks The University of Texas School of Law 31 st Annual Ernest E. Smith Oil, Gas and Mineral Law Institute (April 1, 2005); 1

4 7. Christy M. Schweikhardt, Horizontal Perspective: Texas Oil & Gas Law In Light Of Horizontal Drilling Technology 34 S. Tex. L. Rev. 329 (1993); 8. J. Robert Goldsmith, Jr. and C. Barry Osborne, Pooling For Horizontal Wells Advanced Oil, Gas and Mineral Law Course (September 17-18, 1992); 9. Albert D. Hoppe, Horizontal Drilling A Compilation Of History, Facts And Comments Regarding Horizontal Drilling In Texas The Landman (July/August 1992); 10. Philip (Flip) Whitworth, Practical Problems Encountered In Horizontal Drilling Prospects Involving Standard Form Oil And Gas Leases The Landman (November/December 1991); and 11. James. N. Cowden, Surface-Subsurface Rights And Obligations Incidental To Exploration, Drilling And Production Operations State Bar of Texas Advanced Oil, Gas and Mineral Law Course (August 1987) An important caveat is that the renewed horizontal drilling boom has developed so rapidly, that current statutory, regulatory, and common law may not necessarily afford Lessees a definite answer or solution to all of the developing legal problems that may arise. For example, as seen by the Supreme Court s ruling in the case of Coastal Oil & Gas Corp. v. Garza Energy Trust, 268 S.W.3d 1 (Tex. 2008) frac operations, where materials are intentionally injected into the reservoir, cross property lines and enhance drainage from the neighboring property is now generally not considered a trespass, absent extenuating damage circumstances. We therefore cannot be certain how the courts will rule when faced with legal problems relating to horizontal drilling. Consequently, reading the cases cited in this paper and in the above referenced papers may not necessarily afford you or your client complete assurance as to the legal outcome of the newly encountered issues they face as they proceed with their horizontal drilling programs. The problem areas selected for this discussion can be grouped into four general topics which are addressed in the following order: I. Implied Covenants; II. Trespass and Boundary Issues III. Express Oil and Gas Lease Provisions; IV. Regulatory This paper discusses the first three topics and Doug Dashiell s companion paper 1 discusses the fourth topic concerning regulatory issues. I. Implied Covenants An area which deserves constant attention during all operations due to the magnitude of the potential damages relates to the implied covenants contained in oil and gas leases. The three implied covenants recognized by Texas courts create potential problems which loom on the horizon for horizontal well operators. The three implied covenants are: (a) the Covenant of Reasonable Development; (b) the Covenant to Protect the Lease from Drainage; and (c) the Covenant to Manage and Administer the Lease. 1 Doug J. Dashiell, Texas Railroad Commission Regulations of Horizontal Drilling in Texas Potential Problems and Practical Solutions, 36 th Annual Ernest E. Smith Oil, Gas & Mineral Law Institute (April 9, 2010). 2

5 Find the full text of this and thousands of other resources from leading experts in dozens of legal practice areas in the UT Law CLE elibrary (utcle.org/elibrary) Title search: Horizontal Wells: Potential Problems and Practical Solutions Also available as part of the ecourse Horizontal Drilling: Potential Problems and Practical Solutions First appeared as part of the conference materials for the 36 th Annual Oil, Gas and Mineral Law Institute session "Horizontal Drilling: Potential Problems and Practical Solutions"