Spacing Order Information
The owner of an oil and gas mineral interest, no matter how small or large that interest might be, has the right to drill a well and produce as much oil or gas as exists under the property. Let's assume for example, you own minerals under a 10 acre tract. You have the right to drill a well on this tract and produce as much oil and/or gas as is under your property. If you drilled a well on your 10 acres, it would not be long before there would be at least four other wells offsetting your boundaries pumping hydrocarbons from the same source of supply. This is because your neighbors would not want you to drain the hydrocarbons outside your 10 acres. This would result in waste because more wells would be drilled than required to produce all of the hydrocarbons that are in the common source of supply. The gas pressures would also be squandered, leaving hydrocarbons which could not be produced. In order to avoid this waste, spacing the common sources of supply into units was invented. Only one well in a unit is permitted unless it is later established by good geologic evidence that one or more additional wells are necessary to prevent waste.
If hydrocarbons are thought to be under an area, an application is filed with the Corporation Commission (Commission) to space the identified common sources of supply into a unit. Notice is required to all owning the right to share in production from the mineral estate in the area affected by the application. The determination of the size and characteristics of the spacing unit will occur as a result of public hearing before an Administrative Law Judge.
Example: Let's say that a geologist recommends a spacing unit be created on a 640-acre basis for the purpose of drilling and producing hydrocarbons from a common source of supply. Also assume that you own a 10-acre tract within this area with minerals intact or you own all of the minerals under a 10 acre tract. Your mineral interest is differentiated between the retained "royalty interest" equal to a one-eighth's share of production, and a "working interest" equal to a seven-eighth's share of production. The Commission's spacing order will "unitize" the retained one-eighth and any existing leases covering the mineral interests in the unit area. All the royalty owners in the unit will share in production from a producing well completed in a formation spaced by the order. If you are an unleased mineral owner, the spacing unit will have the impact to change your royalty interest from a one-eighth interest in ten acres to a one-sixty-fourth interest in 640 acres. If you are a leased mineral owner, then your royalty interest in the ten acre tract will be similarly affected through the change to the ratio of the ten acre tract to the 640 acre unit. Unless you have leased your mineral interest, you will still own a working interest of seven-eighths in the ten acres, but your royalty interest has been unitized into a smaller ownership of a larger area. The values are equivalent.
A royalty interest owner is entitled to receive his proportional interest of one-eighth, or the royalty defined by a lease, from any oil or gas produced from the unit, no matter where the well is drilled in the 640 acre unit, and to receive that interest without having to participate in payment of drilling or operating costs. Spacing orders also establish the permitted locations for wells in the unit. In a 640 acre unit a well can be drilled not closer than 1320 feet from any boundary.
As with any of the applications on the Commission's Conservation Docket (CD), the Spacing Order will be issued after notice and a hearing before the Administrative Law Judge (ALJ). If there is no protest to the spacing application, the ALJ will require the applicant to prepare a Spacing Order and submit it for review and signature of the ALJ and the full Commission. If any party objects to a spacing application, they will be able to present their case at hearing before an ALJ and a report will issue recommending the case be granted or denied. That report can be appealed to the Referee who will issue a report recommending the report be approved or overturned or modified. This can also be appealed to the Commission en banc who will then grant or deny the case. Upon issuance of a Spacing Order from a protested application, the order can be appealed to the Oklahoma Supreme Court.
As a working interest owner you also have a right to drill a well in the unit. However, if you decided to drill a well on your own, you would be required to pay for all of the drilling expense. If you did not own all of the other working interests, then you would be fronting all the costs to see if there was oil or gas. Therefore, you would want all the other owners to join with you or lease you their rights. That way you would match your risk with your possibility of reward. If you could not get the other owners to agree, a "forced pooling order" would be required.
In summary, a "spacing order" does the following:
- Establishes the size of the unit.
- Names the formations which are included within the unit.
- Divides the ownership of the unit for the formations into the "royalty interest" (1/8) and the "working interest" (7/8).
- Puts all the owners of royalty interest (whether leased or unleased) into one community.
- Establishes that each unleased "working interest" (7/8) owner has the right to drill within the unit, and
- Establishes an area within the unit where the well may be drilled.
A spacing order does not put the owners of the working interests into one community. For that the parties must either agree privately or there must be a "forced pooling" process. This is a separate statutory application, notice, and hearing procedure brought before the Commission.
Learn more about:
- Forced Pooling
- Increased Density
- Location Exception