06/08/2020

Utah Board of Oil, Gas & Mining Amends Force Pooling Rules

Effective June 1, 2020, the Utah Board of Oil, Gas & Mining (the "Board") approved significant revisions to the state's force pooling rules. The prior rules gave an operator little certainty and direction on how to force pool interests in Utah. The new rules include procedures for handling disputes over the governing terms of the imposed operating agreement, treatment of unidentifiable or unlocatable owners, and application of the initial force pooling order to subsequently drilled wells.

Definitions for "Authority for Expenditure,"1 "Joint Operating Agreement,"2 and "Notice of Opportunity to Participate"3 are now included in Section R649-1-1. Importantly, the definition for "Notice of Opportunity to Participate" contains a list of 10 items that must be included in the written notice of opportunity to participate provided to each "owner."4

The newly adopted Section R649-2-8a replaces most of Section R649-2-9 and sets forth conditions under which an owner will be deemed to be a "nonconsenting owner" or "consenting owner" for the drilling and operation of a well. An owner will be deemed to be nonconsenting if, within 30 days from the date the notice of opportunity to participate is received, the owner does not execute and return to the operator the proposed AFE and JOA. The new rule allows for the owner to object to certain provisions contained in the proposed JOA and still be deemed consenting if they execute and return the proposed AFE to the operator and provide written objections, in good faith, specifying the provisions they find objectionable and proposing modifications or alternative provisions. Similar to above, this must be done within 30 days from the date the notice of opportunity to participate is received by the owner or such later date as specified in the notice or separate written agreement; otherwise, the owner will be deemed to be nonconsenting. The new rule further provides that an objecting owner, or an operator who in good faith rejects the owner's proposed modifications to the JOA, may request the Board to determine the disputed terms of the JOA (and also challenge costs charged, if applicable). If no request is timely filed within the stated deadlines, the JOA terms proposed by the operator in the notice of opportunity to participate will govern and the actual costs incurred will be deemed to be reasonable. Moreover, Articles VII.A through D of the standard, unmodified A.A.P.L. Form 610-2015 Model Form Operating Agreement are deemed to be just and reasonable under all circumstances, provided the "risk penalty" will be set by the Board. If these provisions are contained in the proposed JOA without modification, any objection to them will be summarily rejected by the Board. Lastly, a nonconsenting owner is subject to the Board's determination of a risk compensation award.

The prior rules did not address the treatment of owners that are either not identifiable or not locatable. Under the terms of newly adopted Section R649-2-9a, an operator can file a motion, concurrent with a force pooling request, to provide notification by publication to such owners that are not identifiable or not locatable. The notice must be acceptable to the Board and contain certain minimum specified information. Additionally, the operator must file an affidavit outlining its efforts to identify and locate these owners, which the Board must determine to be reasonable, diligent, and in good faith. If these requirements are met and no response from any such owner is received by the operator before the force pooling hearing, the owner will be deemed to be nonconsenting.

When determining a risk compensation award, newly adopted Section R649-2-9b directs the Board to consider certain factors, which pursuant to statute can range from 150% to 400%. Among other factors, the Board should consider the "geologic and engineering uncertainties and difficulties in drilling the well, the availability of information from prior and current drilling and development in the area, and the unique specified costs of the well."

Finally, newly adopted Section R649-2-13 specifies that the initial force-pooling order for a drilling unit (including the terms and conditions of a JOA as adopted by the Board) will apply to any subsequently drilled well in the drilling unit, subject to compliance with the specified procedure. This procedure includes, for example, the operator filing a motion to modify the initial order and executing an affidavit containing, among other information, a description of the proposed, subsequent well, and identifying which owners are consenting and nonconsenting for the subsequent well. A party may object to this motion within 30 days after a copy of the motion is mailed to all alleged nonconsenting owners. If so, the Board will hold a hearing to address the objections. If no objections are received, the Board may enter an order extending the initial force-pooling order to the subsequent well.

For full details of the recent changes, the entire text of the revised rules should be reviewed. As of the drafting of this article, the online Utah Administrative Code has not been updated with the adopted changes.5 However, a copy of the final proposed rules, redlined against the previous rules, can be found at the following:
https://rules.utah.gov/publicat/bull_pdf/2020/b20200415.pdf (see pages 115 through 125).


1"Authority for Expenditure" or "AFE" is a detailed written statement made in good faith by an operator memorializing the total estimated costs to be incurred in the drilling, testing, completion, and equipping of a well for oil and gas operations.

2 "Joint Operating Agreement" or "JOA" is an agreement for the exploration, development, and production for oil, gas, or other minerals between parties entitled to participate pursuant to the ownership of said minerals or leaseholds covering said minerals, which are subject to the contract area, which may be inclusive of a drilling unit, described therein.

3 "Notice of Opportunity to Participate" means the written notice of opportunity to participate in a well for oil and gas operations required under Section 40-6-2(11) to be provided to an owner and which includes an offer to lease if the owner is an unleased owner, and an offer for the owner to directly participate financially, in proportion to the owner's interest in the drilling, testing, completion, equipping, and operation of the subject well and which includes:

  1. the approximate surface and bottom hole location of the subject well by county, township, range, section, quarter-quarter section, or substantially equivalent lot, and footages from directional section lines;
  2. the proposed well name;
  3. the proposed total distance from the surface of the ground to the terminus measured along the vertical and lateral components if the well is a horizontal well;
  4. the proposed total depth;
  5. the objective productive zone and the approximate depth and locations of producing intervals in the borehole;
  6. the approximate date upon which the subject well was or will be spud;
  7. a joint operating agreement proposed in good faith by the operator for operation of the drilling unit upon which the subject well is to be drilled;
  8. an AFE for the subject well;
  9. a statement that a refusal to agree to either lease or participate in the subject well may result in the imposition of the statutory risk compensation award allowed under Section 40-6-6.5(4)(d)(i)(D) of between 150% and 400% as determined by the board; and
  10. a statement that any initial compulsory pooling order may apply to subsequent wells within the drilling unit including any statutory risk compensation award imposed under Utah law pursuant to Section 40-6-6.5(12).

We note the reference to Utah Code Ann. Section 40-6-2(11), which defines "natural gas liquids," is presumably intended instead to be a reference to Section 40-6-2(12), which defines a "nonconsenting owner" as "an owner who does not, after written notice and in the manner and within the time frame established by the board in rule, consent to the drilling and operation of a well or agree to bear the owner's proportionate share of the costs." (emphasis added)

4 An "owner" is defined as "the person who has the right to drill into and produce from a reservoir and to appropriate the oil and gas that he produces, either for himself or for himself and others." Section R649-1-1.

5 Available at: https://rules.utah.gov/publicat/code/r649/r649.htm.

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