Consequences of Increasing the Size of an Existing Pooled Unit

[MarkinTexas]

I have an NPRI interest in a Section (Section-A) in Scurry County that is included in a Pooled Unit (Unit-A) with a horizontal well that is currently producing (Well-1H). I chose to not ratify the Pooling Agreement for Unit-A and have been paid royalties for Well-1H based on an allocation of the productive length of the wellbore located on Section-A, as this method yielded 25% higher royalties than the pooling method.

The Operator is now planning to increase the size of the original Pooled Unit (new unit = “Unit-RA”) in order to drill a second horizontal well (Well-2H) which will traverse a new Section (Section-B) not included in the original pooled Unit-A.

I am one of the lessors (executive mineral right owner) of Section-B that is being added to the original pooled Unit-A acreage. A lease was executed earlier this year for Section-B that allows for pooling, provided that 100% of its acreage is included in the pool. As the Operator intends to include 100% of Section-B in Unit-RA, this is not an issue.

I have the following questions I am hoping someone on the forum might be able to answer:

1. Will the new Pooled Unit-RA, with its increased size and number of included tracts, be used as the new basis for the calculation of future royalty payments for the already producing Well-1H to the original consenting pooled Unit-A mineral owners, even though this may have the effect of diluting their share of total royalties paid?

2. If the answer to “2” above is “yes”, and since the Operator intends to include Section-B in the new pooled Unit-RA based on their rights as contained in the lease, will they have to pay me royalties for existing Well-1H’s future production based on my percentage ownership of Section-B acreage (NMA), divided by the total acreage included in the new pooled Unit-RA, in addition to the Section-A “non-consent” royalties they are already paying me for Well-1H based on an allocation of the productive length of the wellbore located on Section-A?

3. If the answer to “3” above is “yes”, can I ask the Operator for a hybrid “Part Pooled Unit + Part Allocation of Productive Wellbore” allocation method for royalty payments for future Well-2H?

4. If the answers to “2” & “3” above are “yes”, ratifying a new pooled Unit-RA agreement for both the current and future wells (1H & 2H), would actually only result in a very slightly (insignificant) lower royalty payment than using a hybrid method for the two wells. In view of this, once the new pooled Unit-RA is legally established, should I ask the Operator for the opportunity to ratify the agreement for both wells?

5. Am I correct in assuming that changes in overall % royalty ownership in a pooled unit that are caused by its size being increased are only applicable to royalty payments for future production, and are not applied retroactively to royalty payments for prior production?

Any guidance will be greatly appreciated.

Thanks

[TennisDaze]

In general, the answers depend on the specific terms of the DPU or other document. Furthermore, you have a unique situation with an NPRI and non-consent to the original unit. You should consult with an oil and gas attorney to determine your best options and how to achieve your goal of maximizing your royalties. The attorney will need to see plats of how your NPRI tract underlies Section A and where the existing and new wells and units to help you.