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On Nov. 7, Pennsylvania Gov. Tom Wolf signed into law Senate Bill No. 694 that permits cross-unit drilling for unconventional oil and gas wells. This new law takes effect on Jan. 6, 2020. A cross-unit well (also known as an allocation well) is a lateral wellbore that crosses between two or more pooled units.
Benefits of Cross-Unit Wells
Standard oil and gas lease forms commonly contain acreage limitations regarding the maximum size of a pooled unit within which development can occur. As a result, prior to the passage of this new cross-unit well legislation, operators in Pennsylvania faced inefficiencies in the form of limitations on the length of laterals and required additional surface locations to develop the entirety of the resource. Operators may desire to utilize cross-unit wells because the wells can increase drilling efficiencies and allow for more strategic operations. Landowners also benefit from cross-unit wells because the use of longer lateral wellbores reduces the surface impact of horizontal drilling by limiting the number of surface locations and vertical wellheads needed to produce from the various units. Lawmakers hope this bill will allow operators to maximize the benefits of drilling technologies and practices. Additionally, legislators believe the passage of the bill will increase tax revenue and reduce the workload on the Department of Environmental Protection.
What Does the Law Do?
Senate Bill No. 694 amended the act of July 20, 1979 (P.L. 183, No. 60—known as The Oil and Gas Lease Act) by adding Section 2.2 that expressly allows an operator to drill a cross-unit well if two conditions are met. First, an operator may drill and produce a cross-unit well if the operator reasonably allocates production from the well to or among each unit the operator reasonably determines to be attributable to each unit. The operator may allocate production from the cross-unit well on an acreage basis if the allocation has a reasonable correlation to the portion of the horizontal wellbore in each unit. Second, an operator may drill a cross-unit well as long as the well is not expressly prohibited by the terms of a lease.
Further, the bill mandates that the 330-foot spacing requirement of the Oil and Gas Conservation Law (the act of July 25, 1961-P.L. 825, No. 359), which requires that a well be located at least 330 feet from an outside boundary line, shall not apply to unit lines traversed by a cross-unit well. The bill also explicitly states that it does not authorize an operator to drill an oil and gas well without a valid lease or royalty agreement. Additionally, the bill does not impact the current surface rights of an operator to include operations related to any existing unit or any well drilled between existing units.
Future Trends and Considerations
The production allocation language in Senate Bill No. 694 is likely to be the most significant portion of the law. Prior to Senate Bill No. 694, there was limited authority in Pennsylvania as to the appropriate production accounting method since no Pennsylvania court or legislative body had fully addressed how cross-unit royalties should be allocated. Senate Bill No. 694 attempts to provide operators with guidance on cross-unit production accounting.
The new law employs a reasonableness standard by emphasizing that the operator must be able to “reasonably” allocate the production that it reasonably determines to be attributable to each unit. Senate Bill No. 694 further states that an operator may allocate production on an acreage basis for cross-unit wells, provided the allocation has a reasonable correlation to the portion of the horizontal wellbore in each unit.
Based upon the law’s usage of the word “may,” it appears that an operator could potentially use accounting methods not necessarily tied to acreage. However, aside from applying the “reasonable” standard to production allocation, the new law does not specifically explain any other nonacreage based accounting methods that an operator could utilize. Senate Bill 694 provides operators with the freedom to determine how best to reasonably allocate production between the units.
The new law eliminates any question as to whether Pennsylvania permits cross-unit wells. Although operators may still have to decide how best to allocate production from cross-unit wells, the ability to drill cross-unit wells should lead to increased efficiencies that will benefit both operators and landowners. As the industry’s technological evolution continues, it is likely that cross-unit wells will be a new tool for future oil and gas operations in Pennsylvania.
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Reprinted with permission from the December 12, 2019 edition of The Legal Intelligencer © 2019 ALM Media Properties, LLC. All rights reserved.