Allocation Wells Raise Questions for Royalty Owners

Austin, TX (Law Firm Newswire) September 17, 2014 – The drilling of horizontal wells has become more common in Texas, creating challenges in oil and gas law and raising questions for royalty owners.

This is particularly true regarding so-called “allocation wells,” which traverse the boundary of two or more leases, where the leases have not been pooled and there is no agreement among the royalty owners about production sharing.

“Allocation wells raise several important legal questions — including whether such wells should be permitted in the first place,” said Gregory D. Jordan, an Austin oil and gas attorney. “If the courts decide that allocation wells can be drilled without a pooling agreement in place, then they will need to decide how proceeds will be shared. There is some analogous precedent the courts can follow, but it is not entirely clear how the question will be answered.”

Allocation wells are currently permitted by the Texas Railroad Commission, but several DeWitt County royalty owners have joined to file a lawsuit against the Commission in Travis County district court, asking the court to reverse a Commission decision permitting such a well. The unpooled royalty owners are also asking the court to declare that a drilling permit should not be granted to a lessee who does not have pooling authority. If the royalty owners’ suit is successful, drillers will have to obtain pooling agreements before drilling horizontal wells when the well will be on more than one tract.

If allocation wells continue to be permitted, then the question of royalty allocation methods will have to be decided. The Austin Court of Appeals and San Antonio Court of Appeals have both addressed the issue previously, but the two courts arrived at two different allocation standards that could be considered to conflict with each other.