Cross-Unit Drilling for Unconventional Wells in Pennsylvania
On November 7, 2019, “An act regulating the terms and conditions of certain leases regarding natural gas and oil,” was enacted in Pennsylvania. The act permits cross-unit drilling for unconventional wells. Act of Nov. 7, 2019, P.L. 634, No. 85. 58 P.S. § 34.2. The Oil and Gas Lease Act of July 20, 1979, as amended by Act 66 of 2013, was further amended by Act 85. See 58 P.S. § 33, et seq.
Act 85 provides that where there are unconventional wells, if an operator has the right to drill an oil or gas well on separate units, the operator may drill and produce a well that traverses, by horizontal drilling, more than one unit, if:
- The operator reasonably allocates production from the well to or among each unit the operator reasonably determines to be attributable to each unit. The operator may allocate production on an acreage basis for multiple units provided the allocation has a reasonable correlation to the portion of the horizontal wellbore in each unit; and
- The traversing well is not expressly prohibited by the terms of the lease. See 58 P.S. § 34.2.
The spacing requirement or location requirement of 330 feet as prescribed by Section 6 of the Oil and Gas Conservation Law, 58 P.S. § 406, does not apply to unit lines traversed by a conservation well.
Act 85 does not authorize an operator to drill an oil and gas well that is not subject to a valid lease or royalty agreement and neither does it automatically expand or diminish the current surface rights of an operator to include operations related to any existing unit or any well drilled between existing units. See 58 P.S. § 34.2(c).
Accordingly, as of January 6, 2020, cross-unit drilling is allowed in Pennsylvania. As such, an operator may drill and produce a well that traverses by horizontal drilling more than one unit. According to Act 85, this may take place if it is not expressly prohibited by the terms of the lease.
Is Act 85 landowner or royalty owner friendly?
Not many oil and gas leases will have an express prohibition against cross-unit drilling. In addition, it is questionable whether a landowner or royalty owner will be able to prohibit such a provision in an oil and gas lease. As such, the landowner or royalty owner may not have any say in the matter. Further, a disturbing aspect of Act 85 is that Act 85 leaves it up to the operator to reasonably allocate production from the well to or among each unit the operator reasonably determines to be attributable to each unit. Does a landowner or a royalty owner want to leave the allocation up to the discretion of the operator? It would not be surprising if the answer is no. Act 85 does allow for an allocation based on an acreage basis provided the allocation has a reasonable correlation to the portion of the horizontal wellbore in each unit; however, this is not mandatory, and Act 85 leaves it up to the operator to determine what a reasonable correlation is. Does a landowner or royalty owner want the operator to decide what a reasonable correlation is? Again, it would not be surprising if the answer is no.
Another disturbing aspect of Act 85 is that it does not provide the landowner or royalty owner with a remedy if the landowner or royalty owner disputes the operator’s allocation or correlation. If there is a dispute, and the operator does not change its allocation or correlation to the one requested by the landowner or royalty owner, the landowner or royalty owner is left with the costly and time consuming remedy of filing suit or instituting arbitration (should the lease permit arbitration).
Whether Act 85 turns out to be landowner or royalty owner friendly remains to be seen. Based upon what is in Act 85, this may not be the case. For now, however, and for the future, cross-unit drilling is permissible in Pennsylvania. If you have an oil and gas law question, please call (412) 338-1124 or contact us online.