I just received a Division Order for a horizontal Production Sharing Agreement (PSA) well that was drilled across 2 Pooled Units which together form the Production Sharing Unit (PSU) outlined in the PSA agreement I signed. I own mineral interests (RI & NPRI) in 1 of the Pooled Units.
The executed PSA agreement states the allocation factor to share production between the Pooled Units will be based on the portion of the length of the Lateral Line Equivalent that lies within a Pooled Unit divided by the total Length of the Lateral Line Equivalent. The Lateral Line Equivalent is defined as a line that begins at the surface location of the well, runs laterally towards the Terminus of the well, and ends at a point directly above the Terminus of the well. By way of additional information, the well’s surface location and FTP are located on the same lease, which is in the Pooled Unit in which I own an interest.
The problem is that the Division Order I received calculates my interest by allocating production to each Pooled Unit based on the length of the Productive Lateral Length from the First Take Point (FTP) to the Last Take Point (LTP), instead of the definition contained in the PSA agreement. This method results in a lower interest for me.
I emailed my point of contact, who I believe is a contract landman working for the Operator, pointed out the error and asked that the Division Order be corrected before I sign it. He responded that the PSA was poorly worded so they used the Productive Lateral Length.
I replied that I was not in agreement, that the PSA is a contract that should be respected, and sent him diagrams that show that calculations based on the definition contained in the PSA can be easily accomplished. After this last communication, my contact has gone silent.
Since the well has been producing since October and I won’t be receiving any royalties until I sign a Division Order, does anyone have any suggestions on how I might get the Operator to correct their calculations in a timely manner? It seems that not paying me royalties isn’t much of an incentive.
As described, the PSA provisions are very unusual. Any interpretation depends on the exact wording of the provisions taken as a whole. I would doubt that the division order department will move off using the first-to-last takepoint calculation without instruction from the legal department. You should have your attorney contact the oil company to discuss the calculation.
Exact PSA Wording:
(1) Grantor shall share in each PSU Well on the basis of such Grantor ownership in the Pooled Unit in which the PSU is located multiplied by an Allocation Factor; such Allocation Factor being defined as a fraction, the numerator of which is equal to the length of that portion of the Lateral Line Equivalent that lies within the existing Pooled Unit under which the Grantor owns an interest in, and the denominator being the total length of the Lateral Line Equivalent. For purposes of the Agreement, the Lateral Line Equivalent is defined as a line that begins at the surface location of a well, runs laterally towards the Terminus of the well, and ends at a point directly above the Terminus of such well. The Terminus is defined as the farthest point in the wellbore from the surface location.
There was a diagram supplied with the PSA agreement illustrating the above, however, it was not an official exhibit of the PSA.
The formula in the PSA is unusual, however, I have found instances where it was used when the Surface Location is located on the same tract as the First Take Point.
I also found this definition of the Lateral Line Equivalent which matches the language of the PSA in the instance where the Surface Location is located on the same tract as the First Take Point.:
The Lateral Line Equivalent is defined as one of the following depending on the Allocation Well’s “as drilled” plat filed with the Agency. If the surface location of the Allocation Well is situated on a tract of land with different mineral ownership than the tract of land where the First Take Point is located then the Lateral Line Equivalent shall be a line that begins at the First Take Point of an Allocation Well, runs laterally towards the terminus of the Allocation Well, and ends at the Last Take Point of such Allocation Well; If the surface location of the Allocation Well is situated on the same tract of land as the First Take Point then the Lateral Line Equivalent shall be a line that begins at the surface location of an Allocation Well, runs laterally towards the terminus of the Allocation Well, and ends at the point directly above the terminus of such Allocation Well; or If the surface location of the Allocation Well is situated on the same tract of land as the First Take Point but the First Take Point is further from the terminus of the Allocation Well than the surface location to the terminus of the Allocation Well, then the Lateral Line Equivalent shall be a line that begins at the First Take Point of the Allocation Well, runs laterally towards the terminus of the Allocation Well, and ends at the point directly above the terminus of such Allocation Well.
I appreciate your advice about having our attorney contact the Operator’s legal department, as it’s probably the best way to get things moving.
Unfortunately, a diagram which is not cited or included as an exhibit in the final document is rarely usable. Your attorney will be able to advise you based on the entirety of the PSA to see if there are other provisions or definitions which affect the calculation. As cited, the Lateral Line Equivalent seems to be be a surface measurement. There could be a problem if the well location for any one PSU well is on an adjacent section because those owners could argue that their minerals are included in the total Lateral Line Equivalent. Similar argument possible if the end of the wellbore somehow was drilled into an adjacent section. Also, what does “runs laterally” mean? Is it a straight line from the well location to the end of the wellbore or does it follow the as-drilled wellbore since those usually curve back and forth sideways underground? What happens when multiple wells are drilled from the same location and the vertical wellbores dog-leg / angle out to where the horizontal wellbore starts? Do you follow the angle and wellbore or do you still draw a straight line from the well location to the end wellbore which will not follow the wellbore at all?