Navigating PSA and Advanced Title Calculations for Texas Wells By: Eli Murray, CDOA, CPLTA
Lateral-based PSA: For a lateral-based PSA, the revenue decimals will be calculated on a well-by-well basis, and the tract factors will be identified on an as-drilled plat. Each tract under a lateral-based PSA will be identified on an Exhibit to the PSA, and an owner will receive revenue proportionate to the amount of the well which traverses his or her tract. As a restatement, a tract may be either an unpooled interest or a properly pooled unit, and the exact methodology of calculating the participation factor can vary to cover 1) productive wellbore, 2) perforations, or 3) penetrated zone. For example: 1. Productive wellbore: The portion of the lateral that crosses a tract from either a) first take point to the boundary line of the next tract, b) tract boundary line to tract boundary line, or c) tract boundary line to last take point, is the “ Tract Productive Length .” The distance of a wellbore from first take point to last take point is the “ Total Productive Length .” For a productive-lateral PSA, the Tract Productive Length will be the numerator, and the Total Productive Length will be the denominator. 2. Perforations: The number of perforations under a given tract is the “ Tract Perforations .” The total number of perforations included in a wellbore is the “ Total Perforations. ” For a perforation-based PSA, the Tract Perforations will be the numerator, and the Total Perforations will be the denominator. 3. Penetrated zone: The portion of the lateral that crosses a tract from either a) penetration point to the boundary line of the next tract, b) tract boundary line to tract boundary line, or c) tract boundary line to the bottom hole location, is the “ Tract Lateral Length. ” The distance of a wellbore from penetration point to bottom hole location is the “ Total Lateral Length .” For this PSA, the Tract Lateral Length will be the numerator, and the Total Lateral Length will be the denominator. For a lateral-based PSA, regardless of the methodology, the revenue decimal an owner receives will differ on a well-by-well basis. In instances where a tract is a pooled unit, the participation factor is an additional calculation
In decades past, determining the expense and revenue decimals for an owner in an oil or gas well was standardized across the industry and through either case law or statutory rulings. By the early-2000s, horizontal drilling had flourished, and wellbores began crossing multiple contract areas. Unfortunately, the methodology used to handle these longer laterals was left open to interpretation due to a lack of case law or statutory ruling. Accordingly, this paper discusses the methods which have been utilized by oil and gas companies in an attempt to comply with the language of the contracts in the wake of this technological revolution. The two methods and variations discussed are Production Sharing Agreements and Allocation Wells. Production Sharing Agreements: There are two standard approaches to calculating a Division of Interest which are subject to a Production Sharing Agreement (“PSA”), and the calculation is, generally, based on either surface acreage or lateral length. For methods using the lateral of the wellbore, there are a few variations, being: 1) productive wellbore, 2) perforations, or 3) penetrated zone. The PSA is used to govern revenue payments for wells which will traverse either multiple pooled units or unpooled mineral interests. For instances where a well will cross multiple Pooled Units which have been properly designated in the county records, the PSA tract factor will be applied to each revenue owner under the Pooled Unit as an additional participation factor. For the PSA that covers unpooled interests, the participation factor will take the place of a normal tract factor under a pooling agreement. Acreage-based PSA: For an acreage-based PSA, the tracts will be identified in an Exhibit under the PSA. Each tract will include an acreage designation and the sum of all tracts will be the total PSA area. Wells drilled under an acreage-based PSA will have a consistent revenue decimal. These are treated as super-units, and each tract will be a numerator and the total PSA area will be the denominator. Again, for every well drilled under an acreage-based PSA, the revenue decimal for each owner should not change.
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N a t i o n a l A s s o c i a t i o n o f D i v i s i o n O r d e r A n a l y s t s
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