Courts Address Important Questions About Allocation Wells in Texas

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The relatively recent drilling of horizontal wells continues to challenge settled Texas oil and gas law in several significant respects. Most recently, Texas courts have been faced with two important issues: (1) the legality of drilling allocation wells, and (2) the appropriate royalty allocation formula for unpooled interests affected by an allocation well. The answers to these issues will have far-reaching consequences for the pooling landscape in Texas.

The term “allocation well” is new to the vernacular of the oil and gas industry and refers to a horizontal well that traverses the boundary between two or more leases that have not been pooled and for which no agreement exists among the royalty owners as to how production will be shared. An allocation well could include: (1) a well crossing two or more tracts of land covered by oil and gas leases, with none of such tracts included in a common pooled unit that is executed and filed of record by the leasehold owners; (2) a well crossing a pooled unit that includes a lease that has been improperly pooled (and, therefore, is not bound by the unit), with the well crossing under such lease and other properly pooled unit tracts; (3) a well crossing two pooled units, valid and binding on owners of production from each unit, but which units are separate from each other and not covered by a single unit agreement as to the entire wellbore; or (4) a well crossing some combination of the foregoing situations.

Originally published in The Texas Lawbook - February 14, 2014. Republished with permission.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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