Pooling vs. Allocation | Russell T. Rudy Energy LLC
Marsha Breazeale with Contango Oil Company made an excellent presentation on this topic at the April meeting of the Houston Association of Division Order Analysts. The following is taken from her remarks, and is a simplified overview. As such, this is not intended to serve as legal advice or accounting policy. Rather, the intent here is to explain the concept of allocation for horizontal wells at a very superficial level.
Traditionally, most oil wells have been drilled vertically, perpendicular to the surface of the earth. There had been exceptions of course, but these were usually in cases where the costs to move a rig were quite high or there was no practical alternative for reaching the target zone. However, these cases often involved offshore or overseas operations where concessions were large and horizontal wells were still within the same area of ownership. Further, the technology did not exist for drilling very long lateral legs of horizontal wells. All that changed in the 1990s as horizontal drilling technology evolved and the resulting horizontal well production performance proved the economic benefit of drilling long lateral horizontal wells.
As the operating environment changed, so did the legal, regulatory and accounting practices. Two solutions evolved for equitably distributing oil and gas revenues to owners; pooling and allocation. Pooling has been used for many years to aggregate enough acreage for a proration unit, i.e. to meet the minimum requirements for a drilling permit from the state regulatory agencies. Owners of adjoining acreage would contribute all or part of their mineral rights, to meet the regulatory threshold. The contributing owners then participated in the revenues generated by the well, usually on the basis of acreage. This worked reasonably well, but with ever-increasing lengths of lateral legs, wells can now cross property lines below the surface of owners who have chosen not to participate in a pooling agreement. Consequently, allocation has become an accepted practice for distributing revenues to participating owners.
As the wellbore is drilled horizontally through the reservoir it can cross several properties with different ownerships within each of them. The production from a horizontal allocation well is distributed based on the perforations in the wellbore into the formation which allow hydrocarbons to be captured and produced. The owners of the area from the first take point (perforation) to the last take point along the length of the lateral leg will receive a portion of the proceeds from the sale of hydrocarbons based on a certified allocation method. The allocation method is proposed by a competent geologist or petroleum engineer and approved by the owners. In developing the allocation method, the number of perforations, composition, porosity and structure of the reservoir are all considered in an attempt to come up with a fair and equitable allocation method. The amount of surface acreage involved is irrelevant. The principle here is similar to the determination of tract participation factors used in secondary recovery units, in that revenues are to be allocated to the individual properties based upon their relative contribution to gross production.
Once revenues have been allocated to properties involved with a horizontal well, these revenues are then distributed to the owners in each property.
Hopefully this will provide a basic understanding of the principles involved with horizontal well allocations. As previously stated, this a very simplified overview of the concept. The mechanics of implementation are much more complex. For a more thorough discussion of the topic, please contact Marsha Breazeale at www.emailher.com.
