Scoop & Stack

Why Operators Spud Wells Prior to Pooling The Unit.

It has become a regular occurrence in Oklahoma that many operators are spudding their wells before a forced pooling from the Oklahoma Corporation Commission (“OCC”) order has issued. There are a handful of reasons why this is the case, but the three most common are:

  1. The OCC is short staffed and the review and issuance of orders is taking a substantial amount of time and in some cases up to 5 months after the pooling was recommended at the hearing. In order to feed the rig monster, operators must keep drilling their wells. After all, a pooling order is not needed to obtain a permit to drill.
  2. If a forced pooled unit is not formed and there is no Joint Operating Agreement or any other voluntary pooling of leasehold interest between the working interest owners in the unit, there is no mechanism to govern the development of the unit. One of the consequences of this action is that there are no mechanisms to handle costs. And if a fellow working interest owner can’t pay his costs, the operator will not provide well info. In short, operators will spud a well without a forced pooling order so they will not have to share well information in the short term with their competitors.
  3. Forced poolings can be a time intensive. Dealing with requests for pre-pooling letter agreements, setting protest dates, and finally the protests themselves are often an exercise in busy work. If an operator has a high working interest in the spacing unit, he might just spud the well and file a pooling application in time to have the order issue before the division order title opinion needs to be rendered.

The operator incurs a risk when he drills before a pooling order has issued. Hopefully, he has used the time to evaluate the well and if he’s made a good well, to lease the offsetting acreage. However, if he had issues drilling or made a marginal well, he is in danger of owning 100% of the working interest as the other working interest parties will have scouted the well and will elect out of the unit when the pooling order issues at a later date. So what are the options as an unleased oil and gas mineral owner or non-operated working interest owner? Once the order issues, he should read the order as it will contain the usual options, however, he should be more strategic as he will have more information available to him.

  1. If the operator has made a good well, the interest will now be substantially more valuable. The mineral owner could participate in the well if he has completed his diligence on the property and scouted the location. However, it the author’s recommendation that only professional mineral owners should participate in wells. Still, the mineral interest should command a premium with non-op companies who have other people’s money to spend. The mineral owner should be able to negotiate an oil and gas lease with better terms than those found in the forced pooling order.
  2. If the operated drilled a dud, it is unlikely that any non-operator will seek out the mineral owner for his interest unless the non-op just wants to participate with a small amount of acreage in order to obtain well information. If nobody approaches the mineral owner, he should just elect the option in lieu of participation under the pooling order that works best for he and his family’s situation (ie does he need cash now or maybe more royalty later if an operator decides to density the section).

If you have any more questions about forced pooling, please comment below. Thanks for reading.

Stephen T. Clayman is a Petroleum Landman with an independent horizontal operator. He began his career in the oil and gas industry working worm’s corner and lead tongs for Cactus Drilling Company. Prior to his entry into the oil and gas industry, he served in the United States Marine Corps. He left the service as a Captain after two deployments in support of the Afghan War. He is a native Oklahoman and a graduate of the University of Oklahoma. He and his wife reside in Tulsa.

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