applied to their final pooled decimal. Whereas, this lateral-length allocation would take the place of the usual tract factor for unpooled interests. Allocation Wells: Allocation wells are drilled across multiple tracts which have neither been pooled nor been included in a production sharing agreement. Without certainty regarding the proper payment of revenue under this circumstance, payments are generally based on lateral length. Additionally, only the owners whose tracts are traversed by a wellbore will receive revenue payments. In allocation wells, the acreage under a given tract is irrelevant, and the proportionate lateral length is used in lieu of a traditional acreage-based tract factor. As with PSA wells, the exact methodology for measuring the wellbore can vary, but the standard method is based on the productive wellbore from first take point to last take point. The formula for royalty and overriding royalty owners will be their traditional royalty interest on a tract basis, but instead of applying a tract participation factor based on acreage, the allocation factor is determined by the lateral length of the wellbore which traverses the tract divided by the total lateral length of the wellbore. The decimal interest of royalty and overriding royalty owners will change on a well-by-well basis; however, the working interest calculations under an allocation well can be on a fixed or floating basis. Please note, this terminology should not to be confused with the classification of non-participating royalty interests as “fixed or floating” in the traditional sense as defined through years of Texas jurisprudence. While the terminology is similar, the context is quite different. Fixed Working Interest: Working interest owners may choose to have a consistent expense decimal by contractually pooling their working interest under a Joint Operating Agreement. For a fixed working interest, the gross working interest will be computed in the traditional manner and will be stated in the Exhibit A to the JOA, and nonoperators will be responsible for paying drilling and completion costs, even if the well doesn’t cross a tract under which they own. As such, the owners must agree on the allocation of revenues. This is especially important if there are variations to the contributed burdens or if the working interest owners do not have an interest in all tracts under the contract area. A separate agreement or a provision in Article XVI
of the JOA can memorialize the understanding of the parties, and each working interest owner should receive the proportionate share of each wellbore’s burdens. Under this style of JOA, the expenses are constant for any wells drilled under the contract area, but the revenues will change on a well-by-well basis. Floating Working Interest: Working interest owners may choose to pay only when a well crosses their tract. For working interest owners who decide not to contractually pool their interest, they may choose to enter into either a JOA which covers only the wellbore or a JOA where the Exhibit A is updated upon the completion of successive wells. In this case, the gross working interest will be based on the record title interest of each leasehold owner in a tract multiplied by the lateral length allocation factor, and the net revenue interest will be proportionate to the burdens which they contributed. For a floating working interest, the expenses and revenues will change on a well-by-well basis.
PSA Examples:
Acreage-based PSA Pooled Unit Foxtrot (comprised of 640 acres) is Tract A under the All-American PSA, and Pooled Unit Whiskey (comprised of 641 acres) is Tract B under the All- American PSA. The participation factor will be calculated as follows: • 640 acres (Tract A) / 1,281 acres (All-American PSA) = 49.96096% participation factor • 641 acres (Tract B) / 1,281 acres (All-American PSA) = 50.039032% participation factor Productive Wellbore PSA Pooled Unit Foxtrot is Tract A under the Screaming Eagle PSA, and Pooled Unit Whiskey is Tract B under the Screaming Eagle PSA. The Army #1 well is drilled under the Screaming Eagle PSA. The as-drilled plat shows 7,500’ from first take point to last take point, with 5,000’ from first take point to boundary line of Tract A and 2,500’ from boundary line to last take point under Tract B. The participation factor will be calculated as follows: • 5,000’ (Tract A) / 7,500’ (Total Productive Length) = 66.666667% participation factor • 2,500’ (Tract B) / 7,500’ (Total Productive Length) = 33.333333% participation factor
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G r o w t h T h r o u g h E d u c a t i o n - A p r i l / M a y / J u n e 2 0 2 0
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