Drilling and Production Units

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Drilling and Production Units

 

Oil and gas are not like coal, iron, or other hard minerals, because oil and gas will migrate from one location to another. A single oil and gas well under certain conditions can capture oil and gas from adjoining tracts.   Due to the migratory nature of oil and gas, courts of the oil and gas producing states years ago came to recognize the Rule of Capture, which in Alabama is stated as:

‘The owner of a tract of land acquires title to the oil and gas which he produces from wells drilled thereon, though it may be proved that part of such oil and gas migrated from adjoining lands.’  . . . Under this rule, ‘absent negligence, waste, or fraud, the owners of oil and gas rights have no protection against drainage resulting from vertical drilling on adjacent tracts, but under the rule of ‘go and do likewise’ they are not liable if their activities drain oil or gas from adjacent tracts.’ . . . The rule settles disputes over title to migratory mineral resources such as gas and oil. This rule applies to coalbed methane gas, a migratory mineral resource. Thus, so long as the coalbed gas is bound within the coal seam in which it originated, the holder of the coal estate has the right to extract the gas and reduce it to possession. However, once the coalbed gas migrates out of the stratum in which it originated, the right to recover the gas belongs to the holder of the gas estate.

 

NCNB Texas National Bank, N.A. v. West, 631 So.2d 212, 224 (Ala. 1993) (citations omitted).

 

Unbridled application of the Rule of Capture leads to waste and to abuse of the rights of adjoining landowners. The Spindle Top oil field discovered in 1901, four miles south of Beaumont, Texas is an example of such waste and abuse. At Spindle Top, where the Rule of Capture governed, drilling derricks almost touched.  Such high well density can dissipate the reservoir drive energy and lead to the inefficient withdrawal of oil and gas from the underlying reservoir.  Furthermore, the Rule of Capture can lead to the drilling of excessive wells, which wastes money that can be spent elsewhere. Excessive drilling activity can also cause unnecessary environmental waste.

 The Rule of Capture, by itself, could also permit an operator that controls several adjoining well tracts to drill only one well under certain circumstances and drain more than one tract with the single well. This result would not be fair if the  mineral owners in the tracts being drained did not receive compensation for their hydrocarbons.

In response to the effects of the Rule of Capture, both the legislatures and the courts of the oil and gas producing states developed laws to curb the bad effects of the Rule. Alabama has statutes establishing minimum sizes for drilling and production units and directing the Board to allocate production among various units. Ala. Code § 9-17-12 (1975).  The Fifth Circuit Court of Appeals and the Alabama Supreme Court have discussed the implied covenant of an oil and gas lessee to protect the leased premises against drainage in Alabama by drilling an offset well. See Mize v. Exxon Corp., 640 F.2d 637 (5th Cir. 1981); Jones v. Bronco Oil & Gas Co., 446 So.2d 611 (Ala. 1984); Sheffield v Exxon Corp., 424 So.2d 1297 (Ala. 1983); Meaher v. Getty Oil Co., 450 So.2d 443 (Ala. 1984).

The Alabama statutes define a drilling and production unit as “the maximum area which may be efficiently and economically drained by one well.” Ala. Code § 9-17-12(b) (Supp. 1990); Jones v. Bronco Oil & Gas Co., 446 So.2d 611 (Ala. 1984).   As discussed in State Oil and Gas Board of Ala. v. Seaman Paper Co., 235 So.2d 860 (1970), there is another kind of unit allowed under Alabama law, a field-wide unit for secondary recovery. The Seaman case distinguishes between the two types of “units” by calling the drilling and production unit a “tract” and calling the field-wide unit a “unit.” Seaman, 235 So.2d at 862. The effect of the Alabama spacing statutes is to prohibit the drilling of more than one well on a drilling and production unit.

Copyright 2011 by Edward G, Hawkins. All rights reserved.