Sunday, September 27, 1998

Texas oilmen consider unitization

By SCOTT SCHOLTEN

Staff Writer

When Albany oilman A.V. Jones advocated the pro side of a compulsory unitization debate 30 years ago, a West Texas oilman opposing the proposal called Jones "a Communist".

"Well Jones, all you are is a Communist wanting the government to take over our properties," Jones said the oilman told him.

"Influential producers in West Texas were able to stop the unitization bill from going forward at that time," Jones said.

At issue is a movement, spearheaded by Permian Basin oil operators, to push a proposal through the Texas Legislature making compulsory unitization the law for the first time in Texas.

Texas is the only oil-producing state that without a forced unitization law.

In its current form, the compulsory unitization proposal says if 80 percent of the aggregate working interests and 90 percent of the aggregate royalty interests of a determined collection of leases want the whole area to participate in advanced oil recovery, dissenting leaseholders would be required to participate. That is what oil producers across Texas are weighing.

Dissenters' interests would be arbitrated or the unit's other leaseholders would have the option to buy the lease.

Once a unit is formed, a unit-wide operator is designated. Who is entitled to which portion of the production is negotiated among lease operators and royalty owners. Advanced recovery fees also would be determined in a similar fashion.

Advanced recovery, sometimes referred to as secondary and tertiary recovery, is oil production gleaned from a lease by using water or carbon dioxide floods.

Water floods, which re-establish formation pressure after initial production has tapered, are typically called secondary recovery. Carbon dioxide injections are sometimes called tertiary or advanced recovery though both water or carbon dioxide injections are forms of advanced recovery, Jones said. Like water injections, carbon dioxide injections also increase formation pressure, which pushes oil into the well bore.

Since oilmen began seriously talking about compulsory unitization 30 years ago, the political climate has changed little Property rights concerns were higher on the oil industry's list of priorities, then, and energy issues were an especially hot spot in the Cold War.

But it is the political topography that is rather different, and the dialogue less shrill. Majors no longer operate as extensively on-shore as they did 30 years ago, leaving onshore production to independents and small-scale operators.

Property rights no longer seem absolute -- at least not with regard to the prospect of improving a well's productivity.

Though it was widely expected members of the West Central Texas Oil and Gas Association would vote at their fall meeting whether the organization would endorse compulsory unitization proposal, the committee sifting through the proposal decided it would postpone a decision.

Jones said the absence of objections to delay a decision on the compulsory unitization proposal indicates WeCTOGA members believe other oil and gas industry issues, such as various shades of federal and state tax reform, are more important.

Four of Texas's six oil producer organizations already approved drafts of the legislation that could be presented to Texas Legislators this spring. The WeCTOGA and the Panhandle Producers and Royalty Owners Association are the remaining two.

All this is not to say, though, that the industry is unconcerned with property rights.

Two Bass Enterprises representatives invited to a September WeCTOGA luncheon presented the con side of the forced unitization proposal. They often grounded their objections in property rights.

Speaking for the pro side, Joseph O'Neil, a unitization advocate from the Permian Basin, said an 80-percent majority constituted a "huge" majority, while also saying "The burden is on us to convince (oilmen of the merits of compulsory unitization) since we want to change the status quo. This subject is dear to our hearts and reasonable people can disagree.

"Texas is the only place on earth that has no policy requiring maximization of minerals," O'Neil said. "People squabble over all voluntary unitization efforts today. If you don't have such a bill, the field doesn't get water flooded."

O'Neil said one can be sued today for injecting if the flood affects a nearby lease operator who wasn't interested in advanced recovery.

"In 10 years we won't have to be debating this bill because it will be too late. The price of oil is so low we have to act now," O'Neil said.

O'Neil said approximately 2 billion barrels of oil have been left in the ground since Texas has failed to make a compulsory unitization law.

Frank McCreight, Bass Enterprises' vice president-land, said his company disagrees with the proposal on three main points.

"We have serious problems with the economics of it, the motives of some of the people advocating it, but the biggest problem is with the compulsory aspect of it," McCreight said. "This is about people coming into your 100 percent-owned lease."

McCreight further argued compulsory unitization is overkill -- that units are readily formed under Texas' current voluntary unitization policy.

"There's only been one application on file with the Railroad Commission in Austin that has been denied," McCreight said.

McCreight also criticized the suggestion in the proposal's current draft that a unit's dissenting lease owners be required to sell the lease.

McCreight said flood proposals would be a way to buy out neighboring leases, that compulsory unitization would mean lease owners would lose their option on when they want to sell, and that others would effectively be setting the price for which they want to buy a lease.

"There are also some people one might not want to be in business with," McCreight said.

Moreover, "There are varying degrees of pay quality," McCreight said, and that some people are going to get a disproportionately high return on their investment.

This is especially the case if an unit interest owner also has an interest in an advanced recovery company.

Also, "There are people that will not want to buy a lease with the threat of unitization," and that unitization could cause a "fire sale" rate for leases.

"We're not in the business to sell out," McCreight said.

McCreight summarized by saying: "No law is better than a bad law."

Scott Scholten may be contacted at (915) 676-6737, or scholtens@abinews.com.