The Oklahoma Bar Journal May 2024

Mr. Nesbitt wrote that a pool ing order “specifies the individual formations pooled and the well cost ordinarily is calculated to the deepest formation to be tested.” 29 Though that remains broadly true, when a unit is batch drilled, calcu lations of well cost in the pooling order must take into account all of the planned wells at the outset. On the other hand, batch drilling generally results in significant cost savings on the whole, an additional consideration today’s pooling orders must consider. Horizontal drilling and the creation of multiunit horizontal wells have also changed the way royalties are allocated. When a multiunit horizontal well crosses a section line, the amount of royalty allocated to royalty owners in a section corresponds to the propor tion of the completion interval – the segment of a horizontal pipe that is perforated to allow for the flow of hydrocarbons – in the lateral in that section. So, for example, if a hypo thetical horizontal well cuts across two units and three-fourths of the completed lateral portion of the well is in one unit and one-fourth is in the adjacent unit, royalties and costs alike would be allocated in equivalent proportions (75% and 25%, respectively). Another novel issue that did not exist before the introduction of horizontal drilling is the practice of drilling the downhole portion of the well by starting outside the unit. This presents the question of whether or not it is necessary to lease some part of the minerals drilled offsite and the question of whether information learned from the offsite hole is the property of the mineral owner(s) to whom none of the well’s actual produc tion will be attributed. This matter

Because of the complexity involved in horizontal drilling and, in many cases, efforts to curtail the parent-child effect, the relative competence of an operator is a more important consideration today than it was in the days when wells were only drilled vertically.

the law likewise are not considered when determining FMV. The mechanics of horizontal drilling have also led to a change in what exactly is pooled in a pool ing order. In a vertical well – which is to say all wells in Mr. Nesbitt’s day – all the subsurface spaced and named zones in the pooling above the deepest point of the well (uphole zones) are included in the pooling, and the operator is thus able to complete whatever uphole portions of the well they choose to. But horizontal wells work differently. They are rarely, if ever, constructed in a manner such that it is technically feasible to complete for production the uphole zones from the target zone of the lateral component of the well. Thus, in a pooling for a hori zontal well, operators are only per mitted to pool, at most, the target zone and the zones directly above and below it. Unlike the opera tors in Mr. Nesbitt’s day, today’s operators do not get to hold all the uphole zones in a well. Because a pooling order for a horizontal well

remains unresolved but is likely to be taken up by courts in the coming years. Fair market value (FMV) as a legal term has the same meaning it did when Mr. Nesbitt defined it as “the bonus which would be paid for a lease between willing contracting parties, neither under compulsion.” 30 However, the advent of multisection units has necessi tated changes in how FMV is calcu lated. For instance, the sheer size of today’s spacing units encom passes more units in the calcula tion. Traditionally, FMV takes into consideration the amounts paid to mineral owners in a unit and the surrounding units in the past year. Larger spacing units have a larger perimeter, which means there are more surrounding units to bring into the calculus. Multiunit transactions are excluded from the determination of FMV, as are transactions made by third parties for lands in the unit to be pooled after the filing of the pooling. Any transactions that do not qualify as “arm’s-length transactions” under

Statements or opinions expressed in the Oklahoma Bar Journal are those of the authors and do not necessarily reflect those of the Oklahoma Bar Association, its officers, Board of Governors, Board of Editors or staff.

12 | MAY 2024

THE OKLAHOMA BAR JOURNAL