New Legal Precedent Set for Multi-Unit "Commencement of Operations" on Off-Site Unit
by Madison Cataudella
Recently, the Oklahoma Court of Civil Appeals took on the question of whether commencement of drilling operations in one section will satisfy the commencement clause of a lease in another section for a multiunit well. Lawson v. Citizen Energy II, 2021 OK CIV APP 1.
Previously, Kuykendall v. Helmerich & Payne Inc. focused on the effect of a spacing application on an oil and gas lease. 1987 OK 51. Although a well had not been drilled at the end of the primary term, the leased lands were included in a pending spacing application before the Corporation Commission before the subject lease expired. Id. Within the lands included in the spacing application a well had been commenced and that same well was intended to be established as the unit well. Id. Pursuant to the purposes of the Corporation Commission, including to reduce waste, the court observed that the intent of the legislature was that within a single unit only one well be drilled to a common source of supply. Id. Kuykendall further established that the actual spudding of a well is not necessary to be qualify as “commencement” under an oil and gas lease. Id. In Kuykendall, the Oklahoma Supreme Court established that statutory provisions paired with the commencement clause in an oil and gas lease have the legal effect of perpetuating a lease when drilling operations have commenced to a common source of supply within a spacing application before the Commission. Lawson, 2021 OK CIV APP 1, p. 8 (citing Kuykendall, 1987 OK 51, p. 20). This framework provided guidance to the Lawson Court in determining whether a lease included in a multi-unit horizontal well had been perpetuated. 2021 OK CIV APP 1
In Lawson v. Citizen Energy II, Citizen had commenced to drill a horizontal well, the McWirther 1H-14-11, from Section 14 into Section 11. 2021 OK CIV APP 1, p. 2-4. The application for the McWirther named the Woodford and the Mississippian as the targeted formations, alleging both underlie the subject sections. Id. at p. 14. The subject lease (“Lawson Lease”) is located within Section 11 and later became a part of a 640-acre horizontal unit. Id. at p. 2-4. After the multi-unit well was approved by the Corporation Commission, commencement of the well took place in the neighboring 640-acre spacing unit in Section 14 before the expiration of the Lawson Lease; however, the lateral did not pierce the unit boundary of Section 11 until after the Lawson Lease had expired. Id.
The court established that the activities of the McWirther well in Section 14 would satisfy the “commence to drill” language of a lease with a spudding date of May 29, 2017. Id. p. 9. However, whether the operations would satisfy the Lawson Lease which contemplated drilling on acreage pooled within Section 11 required a closer look at legislative intent. Id. p. 11-14. In Lawson, the Court noted the vast advancement in drilling abilities since Kuykendall issued in 1987. 2021 OK CIV APP 1, p. 11. Referring to the applicable statutes, the Court stated that the Legislature recognized the drilling and spacing unit rules do not support the industrial advances that have been made in drilling. Id. p. 12. The court found that the Legislature intended to modernize the spacing and drilling regulations pursuant to advancements made in the industry. Id. at p. 15. These advancements allow for longer laterals which provide for more efficient production which in turn help eliminate waste. Id.
The court focused on 52 O.S. § 87.8 which authorizes multi-unit horizontal wells. Lawson, 2021 OK CIV APP 1, p. 13. Specifically, the court looked to subparagraph (B)(3) in beginning its interpretation, “a multiunit horizontal well shall be treated as a well in each of the affected units and shall be subject to all of the rules otherwise applicable to any other well in any of the affected units.” Lawson, 2021 OK CIV APP 1, p. 13; 52 O.S. § 87.8(B)(3) (emphasis added). The court defined “affected unit,” as used in the statute, to include units penetrated within a well’s completion interval as well as a unit listed in a multi-unit horizontal well application. Lawson, 2021 OK CIV APP 1, p. 13; 52 O.S. § 87.8(B). Multi-unit applications must provide the projected location of the unit well in each of the affected units and include the calculations for cost, production, and proceeds based on the allocation factor. Id.
Pursuant to 52 O.S. § 87.8, Citizen’s multi-unit application appropriately proposed a horizontal well that would encompass both sections. Lawson, 2021 OK CIV APP 1, p. 14. Specifically, the application anticipated one surface location in Section 14 with and an elongated lateral from Section 14 into Section 11. Id. at p. 15. The court found that “Sections 11 and 14 are affected units,” as defined under the statute. Id. The court reasoned if the sections within the multi-unit are considered affected units, then if a multi-unit horizontal well is drilled in one unit it is treated as a well in the accompanying unit. Id. Therefore, the commencement of operations in Section 14 during the Lawson Lease’s primary term extends the lease. Id.
Although the holding of the Lawson Court provides precedence for maintaining leases under multi-unit operations, it does not guarantee the same outcome for every situation. Leases should be drafted to ensure protection to the operator and the mineral owner. The Lawson decision provides additional protection for leases that are approaching expiration. However, reliance on this holding for maintaining leases is not recommended. Rather, consult with your Corporation Commission attorney for the best steps to take to ensure your leases can be maintained in your particular circumstances.
About the Author:
Madison Cataudella is an Attorney at CharneyBrown, LLC. Mrs. Cataudella focuses her practice on Oil & Gas, Mineral and Energy Law, as well as Estate Planning and Probate.