3Sep

Railroad Commission Update: Avoiding the Prohibition Against Double-Assignment of Acreage

This article features a portion of the Railroad Commission Update paper presented at the 45th Annual Ernest E. Smith Oil, Gas and Mineral Law Institute and provides an update to the Commission’s prohibition against double-assignment of acreage.

Double-assignment of acreage occurs when a single tract of land is assigned to two different wells in the same RRC field for permitting, proration, and production. Historically, the RRC banned double-assignment of acreage based on the underlying premises that each well develops a single geographic tract of land and that multiple wells on that same tract might cause waste or might harm the correlative rights of operators or owners. The RRC incorporates this as a default regulatory requirement in Statewide Rule 40 to prohibit double-assignment of acreage to a “well for drilling and development, or for the allocation of allowable.” Under Rule 40, if an operator had previously assigned the acreage included in a tract to a well to receive an allowable in a field, then no other well could produce from that same acreage in that same field.

For decades, the RRC’s entire system of regulation has been predicated on this one-tract, one-well concept as a means of protecting operators, owners, and reserves. It was applied to permitting, and it was ingrained in the RRC’s assignment of allowables under its computerized proration system. In recent years, however, the advent of unconventional resource development with horizontal lateral wells and fracture stimulation has brought with it a recognition that the double-assignment prohibition can sometimes be an impediment to development.

The initial problem was that acreage needed for horizontal wells was already assigned to existing vertical wells. The vertical wells continued to produce, so the rule against double-assignment made it difficult, if not impossible, to permit and produce new horizontal wells on the same acreage. In Spraberry (Trend Area) Field, the rules were amended to regulate the assignment of acreage to vertical wells separately from the assignment of acreage to horizontal wells, and this approach was incorporated into the 2016 amendments to the Statewide Rules for designated unconventional fracture treated (UFT) fields. Under this approach, the same acreage can be double-assigned simultaneously to vertical and horizontal wells in UFT fields. Consequently, in Spraberry (Trend Area) field, and in any designated UFT field, it is as though the horizontal wells and the vertical wells do not see each other, which avoids the double-assignment problem for vertical and horizontal wells.

The second problem resulted from the need to develop depth-severed ownerships within thick RRC designated field intervals. In West Texas, active fields have RRC designated field intervals that are thousands of feet thick. For example, this is the situation for Spraberry (Trend Area), Wolfbone (Trend Area), and Phantom (Wolfcamp) fields. These thick field intervals create opportunities for multiple different leasehold ownerships at different depths within a single designated RRC field. For example, an oil and gas lease might contain a requirement for continuous development after the primary term in order to retain acreage and depths, and under that provision, the oil and gas leasehold covering any undrilled depths will terminate, creating a depth severance in the ownership of the right to drill within the designated RRC field. Or, an operator who has drilled some depths within a designated RRC field might elect to farmout or assign its undrilled depths to a new operator, again creating a depth severance of the right to drill in the ownership within the designated RRC field. In these situations, the new operator will need to assign acreage to a well that, although geographically on the same tract of land that the prior operator has already assigned to a well in that designated RRC field, is at different depths within the RRC field interval. It is not uncommon to find at least one depth severance creating a shallow vs. deep situation. And, some tracts in the Delaware Basin are reported to have been depth severed into more than a half-dozen different depth intervals.

Again, the Spraberry (Trend Area) field rules provided an initial solution. For that field, the RRC created a second set of field numbers for use “where the ownership of oil and gas within the designated interval for Spraberry (Trend Area) Field has been divided horizontally.”3 With these field numbers, the RRC provides a mechanism for operators with ownership that is divided into shallow and deep rights.

Although the RRC recently adopted this same two-field-number approach for another field, the two-field-number approach is not considered to be a long term solution.

One advantage to this field-number method is that it works with the RRC’s computerized allowable system, which is old and difficult to re-program. One disadvantage is that it provides for only two ownership depths, shallow and deep. (The RRC has not adopted a three-field-number system, although there is no apparent reason why it could not do that.)

Although the RRC recently adopted this same two-field-number approach for another field, the two-field-number approach is not considered to be a long term solution. With encouragement from operators and the General Land Office (particularly for the Delaware Basin where there are many tracts with multiple depth intervals), the RRC staff initiated informal discussions with industry trade groups and stakeholders to develop amendments to Statewide Rule 40 that would make permissible multiple assignments of acreage in UFT fields where ownership of the right to drill or produce from a tract is divided horizontally. Those discussions, meetings, and exchanges of draft revisions began in 2017 and continued through 2018 and into 2019.

The process toward formal rulemaking has been steady but slow. Much of the discussion has focused on the definition of a horizontal depth severance. The RRC staff suggested a definition specifying that wells will not produce from the same productive horizon. In response, industry representatives suggested a definition that does not include reference to production. Another point of discussion has been whether notification should be sent only to operators or also to mineral interest owners of vertically adjacent intervals. There is apparent consensus, however, that notice would be sent to operators of wells in the field either on or within one-half mile of the applicant’s proposed well.

Meanwhile, one Delaware Basin operator has successfully used contested case applications to request and receive exceptions to Rule 40 for wells on four specific leases. Each application was unprotested, and more importantly, each was supported by the General Land Office, which had leased the State tracts to the operator. The RRC approved the applicant’s suggested definition that the duplicate assignment of acreage be “required because an existing deed, lease, or other contract confines the Operator to a distinct depth interval.” And, the RRC approved the applicant’s suggested notification only to operators and did not require notification to unleased mineral owners.

Takeaways and Insights

Until a more comprehensive approach is adopted, an operator can nonetheless seek relief from the Commission if an exception to Statewide Rule 40 is needed.

Tim George
Tim George practices administrative law and litigation on behalf of oil and gas owners and operators. Tim represents clients before the Railroad Commission of Texas and the Texas General Land Office. He has helped solve complex problems with leasehold permitting and production; special field rules; rulemaking; salt water disposal injection; unitization and enhanced recovery; environmental compliance and remediation; pipeline transportation; common carrier, common purchaser, and gas utility compliance; planning and permitting for underground storage in salt caverns and depleted reservoirs; and surface land use and municipal permitting for oil and gas operations. Chambers & Partners USA has ranked Tim in Band 1, its highest ranking in Energy: State Regulatory & Litigation for Oil & Gas in Texas.

© Copyright 2012-2018, McGinnis Lochridge LLP. All Rights Reserved. DISCLAIMER: The information in this article is for general information purposes only. This article should not be substituted for legal advice and should not be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or reading this article does not constitute, an attorney-client relationship. You are encouraged to contact an attorney for legal advice concerning the information provided in this article.
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