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Take Points: Horizontal Drilling – What and Where is the Point?

Posted 6:30 AM, February, 3rd 2015 by Manning Wolfe & filed under Blog, Legal

Definition:  A take point in a horizontal well is a point along a horizontal drainhole where oil or gas can be produced from the reservoir or defined field.  A horizontal well is tantamount to a series of vertical wells drilled along the linear path of the horizontal wellbore.  Each take point is the equivalent of the production point at the bottomhole of a vertical well. The first take point may be at a different location than the penetration point and the last take point may be at a location different than the terminus point. Spacing is an issue with horizontal wells, as the surface location of the well or penetration point may not define the point of production.

State Rules:  In Texas, and many other states, each tract penetrated by a horizontal wellbore is considered a drill-site tract.  Production is allocated to the owners of the mineral estate in the tract where minerals are captured by the wellbore, unless there is a pooling or allocation agreement designating otherwise. Under field rules regulating where horizontal wells are drilled, take points must comply with special spacing requirements.  Segments of the wellbore containing no perforations are called NPZs or non-perf zones.

Also, Texas designates that fractures from the offset wells extending beneath the lease are protected under the rule of capture. Claims that arise are usually from a situation where production from all take points is captured within a single drainhole.  As usual, a lessee has an implied duty to manage and administer a lease for the mutual benefit of both parties.  Therefore, failure by an operator to specifically tailor allocation to the geological and engineering conditions surrounding a particular well can result in liability.

In Pennsylvania, there is no compulsory pooling. Therefore, pooling is purely a contractual matter and must be included in the lease. As no standard has yet developed, evolving leases in that jurisdiction use a variety of clauses to allow for pooling.

Evolving Lease Concepts:  Horizontal drilling practices have introduced new issues that the traditional vertical lease was not drafted to address. The concept of pooling is vitally important.  Geologic formations such as the Marcellus Shale do not follow or parallel surface boundaries.  The Marcellus is known as a tight formation, meaning that the gas is trapped in impermeable rock and does not migrate.  Gas operators must often pool separate leased parcels together in order to form a larger unit. The lack of permeability in this target formation is resolved through the use of long lateral wellbores and hydraulic fracturing. These long lateral wellbores inevitably cross surface boundaries. Each tract in which the horizontal wellbore is drilled through is considered a drill site and must be under lease and addressed when pooling.  In order to engineer and drill these lateral wellbores, the gas operator must first have the contractual right to pool the various leased parcels into a unit.

Pooling and Royalty Allocation:  Many landowners, when executing a lease, fail to appreciate or realize the impact pooling will have on their royalty calculations. The principal effect of pooling is that operations or production occurring on one tract located within the pooled unit will be regarded as having occurred on each and every tract in the unit. In other words, if there are 25 separate parcels in the unit, a well pad site drilled on one parcel will hold the leases of the other 24 parcels. Also, the royalty negotiated by those 24 landowners in their leases may not be as lucrative as initially thought. Instead of receiving a straight production royalty on all production from the well, the landowner receives a royalty based on his pro rata share of acreage in the overall unit, thus diluting the royalty. An Anti-Dilution Clause can mitigate the dilution brought about by pooling.

There are two alternative methods for allocating production in a pooled unit. The relative bore length method allocates the production royalty based on the length of the horizontal wellbore within a particular parcel in relationship to the total horizontal length. In other words, the royalty is based on how many linear feet of the wellbore actually pass underneath the leased parcel.

Similarly, the take point method allocates the production royalty based on how many wellbore take points or open perforations are located within a particular tract in relationship to the total number of take points along the entire producing lateral wellbore. These methods place greater emphasis on the actual location of the lateral wellbore as opposed to the acreage of the surface premises.

Horizontal Pugh and Retained Acreage Clauses:  One of the practical effects of pooling is that gas production from any tract located within the unit maintains all of the leases in the unit. This concept may disappoint landowners who have only a small portion of their overall leased acreage in the unit. The resolution of conflict depends on whether the underlying lease contains a Horizontal Pugh Clause, which releases non-pooled and non-producing portions of the leased premises at the end of the primary term.

Typically, a Pugh Clause severs leaseholds along vertical planes, which are measured on the surface. The Horizontal Pugh, unlike its vertical counterpart, operates to sever the lease based on the depth of producing strata along horizontal layers at different subsurface depths. Such clauses often provide that the lease will terminate automatically “as to all horizons situated 100 feet below the deepest depth drilled” from which a well is producing hydrocarbons in paying quantities.

Closely related to the Pugh is the Retained Acreage Clause, which will terminate the lease as to acreage outside the drainage pattern of a producing well. The acreage surrounding the producing well will remain subject to the lease but the remaining acreage is released depending on the terms of the lease. Unlike the Pugh Clause, the retained acreage clause does not require pooling in order to become effective. The retained acreage clause in a traditional lease, however, often does not carry out the intent of the landowner and may be revised to reflect the issues of horizontal drilling. In order to release deeper, unexplored horizons, the lease may provide that “the lease shall terminate as to all depths and horizons lying more than 100 feet below the stratigraphic equivalent of the Named Formation from which production in paying quantities is then being had…” at the end of the primary term.

In addition, horizontal drilling may require examination of other traditional clauses, for example, the continuing operations clause, the shut-in royalty clause and the drilling commitment clause.

 


Comment:  This article is an introductory and superficial look at take points and evolving spacing and pooling requirements.  See the websites of governing bodies in your jurisdiction, as well as case law, for further, and more detailed information.

For additional background in Texas, see:

  1. RRC of Tex., Application of EOG Resources, Inc. to Amend and Make Permanent the 
Field Rules for the Eagleville (Eagle Ford-2) Field, De Witt, Karnes, Lavaca and Live Oak Counties, Texas, Oil and Gas Docket No. 02-0274324, Apr. 5, 2012; and further to Amend and Make Permanent the Field Rules for the Eagleville (Eagle Ford-1) Field, Atascosa, Dimmit, Gonzales, La Salle, McMullen, Wilson and Zavala Counties, Texas, Oil and Gas Docket No. 01-0274323 , Apr. 5, 2012.
  2. RRC of Tex., Application of Murphy Expl. & Prod. Co.-USA to Adopt Temporary Field Rule Nos. 5 and 6 for the Eagleville (Eagle Ford-2) Field, De Witt and Karnes Counties, Texas, Oil and Gas Docket No. 02-0271345, July 21, 2011.
  3. RRC of Tex., Application of EOG Resources, Inc. to Establish the Eagleville (Eagle Ford-1) Field and to Adopt Temporary Field Rules for the Proposed Eagleville (Eagle Ford-1) Field, Atascosa, Gonzales, La Salle, McMullen and Wilson Counties, Texas, Oil and Gas Docket No. 01-0266450, Oct. 5, 2010.
  4. RRC of Tex., Application of EOG Resources, Inc. to Establish the Eagleville (Eagle Ford-2) Field and to Adopt Temporary Field Rules for the Proposed Eagleville (Eagle Ford-2) Field, De Witt and Karnes Counties, Texas, Oil and Gas Docket No. 02-0266475, Oct. 5, 2010.
  5. RRC of Tex., Application of EOG Resources, Inc. to Consider a New Field Designation for the Eagleville (Eagle Ford-1 Sour) Field and to Adopt Temporary Field Rules for the Proposed Eagleville (Eagle Ford-1 Sour) Field, Atascosa and McMullen Counties, Texas, Oil and Gas Docket No. 01-0266477, Oct. 5, 2010.

All available at http://www.rrc.state.tx.

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