The Effect of Pooling and Unitization upon Oil and Gas Leases

California Law Review, Dec 1957

By Howard R. Williams and Charles J. Meyers, Published on 10/31/57

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The Effect of Pooling and Unitization upon Oil and Gas Leases

The Effect of Pooling and Unitization Upon Oil and Gas Leases HowardR. Williams 0 CharlesJ. Meyers 0 0 Professor of Law, Columbia University; Visiting Professor of Law, University of California at Los Angeles , 1957-58 , USA When all or part of a given leasehold is included in a unit by the terms of a pooling or unitization agreement, the relationship of the lessor and lessee with regard to the express and implied terms of the lease may be affected in important respects. In this paper the effect of pooling and unitization of the leasehold upon the express and implied terms of oil and gas leases will be consideredJ By way of background, we recall that the lessee has no power to affect his contractual duties to the lessor under the lease by pooling or unitization absent consent by the lessor, estoppel, or compulsory process under a valid state statute. In fact, pooling or unitization of a leasehold not binding on the lessor may increase the lessee's duties. Consent to pooling or unitization may be expressed in a pooling clause in the lease instrument, or in a separate agreement or by ratification. Estoppel may arise from the lessor's acceptance of benefits from pooling or unitization. The lessee may pool his working interest without a pooling of the landowner interest.' It is unsettled whether an express prohibition against pooling or unitization in a lease would be effective. Such prohibition might be invalid as a violation of the Rule against Restraints upon Alienation. No - cases have been discovered in which the question was squarely raised; in one case8 which might have presented the problem, its consideration was rendered unnecessary by a construction of the restraint clause as not applicable to unitization. Pooling or unitization of only the working interest by the lessee will not modify the lease terms in important respects. The lessee will continue to be subject to the covenants in the lease; he will be compelled to account to the lessor for a royalty on production from the leased premises; and production from the leased premises will be required to continue the lease in effect during the secondary term of the lease.4 The difficult question which arises in this context concerns conduct of the lessee on portions of the unit other than the leased premises in question. May he engage in operations on the unit-for example, secondary recovery operations which may cause some replacement of wet gas beneath Blackacre by dry gas-for the purpose of maximizing total recovery of hydrocarbons? As indicated hereinafter, pooling or unitization by the lessee without the joinder of the lessor may remove interior boundary lines as between lessees, but they will remain as to lessors, and each lease must be protected against drainage and be given reasonable development. 5 In many instances, of course-those with which this paper is concerned -the lessor will have consented to the pooling or unitization" or compulsory process for pooling or unitization will have bound his interest to the pool or unit. The problems may be analyzed by reference to four generic types of fact situations. Each involves the leasing of a tract of landBlackacre-followed by the creation of a unit under a pooling or unitization agreement. These four fact situations may be summarized as follows: Case I: All of the leased premises-Blackacre-is included in the unit and production is obtained from a well drilled on Blackacre, or drilling operations are prosecuted on Blackacre. Case II: All of Blackacre is included in the unit and production is obtained from a well drilled on the unit or drilling operations are prosecuted 3 Knight v. Chicago Corp., supra note 2. 4 See Ho=ArN, VOLUNTARY POOLING AND UNrTnZATION 197 (1954). 5 See, e.g., Tide Water Associated Oil Co. v. Stott, 159 F.2d 174 (Sth Cir. 1946), cert. denied, 331 U.S. 817 (1947). See discussion following topic heading VI infra. 6 The execution of a joint or community lease by the owners of separate parcels may give rise to the types of problems considered herein. On such leases, see HoTI'AN, VOLUNTARY PooLING AW UNTrIZATiON c. 2 (1954) ; Williams, The Effect of Various Conditions of Ownership on Oil and Gas Transactions,5 UT~Ar L. Rav. 1, 21 (1956). A lessor may under some circumstances be found to have consented to the agreement by ratification or estoppel. Dobbins v. Hodges, 208 La. 143, 23 So. 2d 26 (1945) (ratification by accepting royalty payments); Leopard v. Stanolind Oil and Gas Co., 220 S.W.2d 259 (Tex. Civ. App. 1949, error ref'd nx.e.) (ratification by acceptance of royalty payments and by execution of royalty deed referring to the lease). The signing of a division order and acceptance of royalties may not, however, ratify a pooling agreement entered into by a lessee if the lessor has no notice thereof. Wilcox v. Shell Oil Co., 226 La. 417, 76 So. 2d 416, 3 O.&G.R. 1903 (1954). thereon, but the producing well is not drilled or the drilling operations are not prosecuted on B (...truncated)


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Howard R. Williams, Charles J. Meyers. The Effect of Pooling and Unitization upon Oil and Gas Leases, California Law Review, 1957, Volume 45, Issue 4,