Applying Familiar Concepts to New Technology: Under the Traditional Oil and Gas Lease, a Lessee Does Not Need Pooling Authority to Drill a Horizontal Well That Crosses Lease Lines [reprint, first published 2017]

Oil and Gas, Natural Resources, and Energy Journal, Jul 2017

By Ernest E. Smith, Published on 07/31/17

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Applying Familiar Concepts to New Technology: Under the Traditional Oil and Gas Lease, a Lessee Does Not Need Pooling Authority to Drill a Horizontal Well That Crosses Lease Lines [reprint, first published 2017]

andEnergyJournalbyanauthoirzededitorofUniversityofOklahomaCollegeofLawDigitalCommons.Formoer information firs t published 2017] Ernest E. Smith Mineral Law Commons Recommended Citation ErnestE.Smith,ApplyingFamiliarConceptstoNewTechnology:UndertheTraditionalOilandGasLease,aLesseeDoesNotNeedPooling AuthoritytoDrillaHorizontalWellThatCrossesLeaseLines[reprint,firstpublished2017],3Oil&Gas,Nat.Resources&EnergyJ. 553(2017), http://digitalcommons.law.ou.edu/onej/vol3/iss2/9 Part of theEnergy and Utilities Law Commons; Natural Resources Law Commons; and theOil VOLUME 3 NUMBER 2 APPLYING FAMILIAR CONCEPTS TO NEW TECHNOLOGY: UNDER THE TRADITIONAL OIL AND GAS LEASE, A LESSEE DOES NOT NEED POOLING AUTHORITY TO DRILL A HORIZONTAL WELL THAT CROSSES LEASE LINES* [reprint, first published 2017] ERNEST E. SMITH** I. The Proliferation of Horizontal Wells in the Shale Has Raised the Question Whether a Lessee Without Pooling Authority Is Authorized to Drill an “Allocation Well” ........................................................................ 554 II. The Standard Oil and Gas Lease Grants to the Lessee Authority to Drill a Horizontal Well That Crosses Lease Lines ............................................ 558 III. A Lessee Does Not Need Pooling Authority to Drill a Horizontal Well That Crosses Lease Lines.......................................................................... 560 * This article was originally published in the Texas Journal of Oil, Gas, and Energy Law (“TJOGEL”). See Ernest E. Smith, Applying Familiar Concepts to New Technology: Under the Traditional Oil and Gas Lease, a Lessee Does Not Need Pooling Authority to Drill a Horizontal Well That Crosses Lease Lines, 12. TEX. J. OIL GAS & ENERGY L. 1 (2017), available at http://sites.utexas.edu/kbhenergycenter/files/2017/04/12TexJOilGas EnergyL1.pdf. The Journal would like to thank Professor Smith and the editorial staff of TJOGEL for their permission to republish the article. For more information about TJOGEL, visit http://tjogel.org/. An earlier version of this article was featured in the Spring 2016 Section Report of the Oil, Gas & Energy Resources Law section of the State Bar of Texas. ** Ernest Smith is a Professor of Law and the Rex G. Baker Centennial Chair in Natural Resources Law at The University of Texas School of Law; he is also the co-author of the Texas Law of Oil & Gas treatise. Professor Smith is also a faculty advisor to the TEXAS JOURNAL OF OIL, GAS, AND ENERGY LAW. 553 A. Drilling a horizontal well that crosses lease lines is not pooling because the horizontal well does not result in a cross-conveyance of royalty interests or change the allocation of production....................... 560 B. The Browning decision illustrates the difference between pooling and drilling a horizontal well that crosses lease lines.................................. 562 C. The Browning decision indicates why a lessee may prefer to exercise pooling authority when drilling a horizontal well that crosses lease lines563 D. In the Klotzman case, the Railroad Commission concluded that, even though the lessee lacked pooling authority, the lessee had a good faith claim to title to obtain a permit for drilling a horizontal well across lease lines ...................................................................................................... 565 E. The common usage of Production Sharing Agreements suggests that pooling authority is not required for a lessee to drill a horizontal well that crosses lease lines ................................................................................. 566 F. The public policy of Texas supports interpreting the typical oil and gas lease to allow a lessee to drill a horizontal well that crosses lease lines, even where the lessee lacks pooling authority ............................ 567 IV. Because a Lessee Does Not Engage in Pooling by Drilling a Horizontal Well That Crosses Lease Lines, a Lessee Does Not Engage in Any Wrongful Conduct by Drilling Such a Well Absent Pooling Authority ... 567 A. A drilling permit should not be set aside, and production should not be enjoined, if, absent pooling authority, the lessee seeks a permit for or drills a horizontal well that crosses lease lines ..................................... 568 B. The lessee does not engage in tortious conduct if, absent pooling authority, the lessee drills a horizontal well that crosses lease lines .... 569 C. The lessee is not exposed to exemplary damages if, absent pooling authority, the lessee drills a horizontal well that crosses lease lines .... 569 V. Conclusion ........................................................................................... 570 I. The Proliferation of Horizontal Wells in the Shale Has Raised the Question Whether a Lessee Without Pooling Authority Is Authorized to Drill an “Allocation Well” Oil and gas development in Texas has witnessed a proliferation of horizontal wells that often must cross lease lines to be eco (...truncated)


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Ernest E. Smith. Applying Familiar Concepts to New Technology: Under the Traditional Oil and Gas Lease, a Lessee Does Not Need Pooling Authority to Drill a Horizontal Well That Crosses Lease Lines [reprint, first published 2017], Oil and Gas, Natural Resources, and Energy Journal, 2017, Volume 3, Issue 2,