N.Y. Environmental Conservation Law § 23-0901: Compulsory integration and unitization in oil and natural gas pools and fields

§ 23-0901. Compulsory integration and unitization in oil and natural gas

pools and fields.

1. Compulsory integration and unitization in oil pools and fields and

in natural gas pools and fields shall be subject to the provisions of

this section with subdivision 3 to be specifically applicable to

integration within individual spacing units, and subdivisions 4 through

12 to be specifically applicable to unit operation of an entire pool or

part thereof.

2. The department shall not make any order requiring the integration

of interests in any spacing unit or requiring the development or

operation of any field, pool or part thereof as a unit unless it finds,

after detailed study and analysis, notice and hearing, that the

integration of interests in spacing units, under conditions then

existing in this state, or in the field or pool to be affected, is

necessary to carry out the policy provisions of section 23-0301 of this

article.

3. In the absence of voluntary integration as permitted by section

23-0701 of this article and after finding as required by subdivision 2

of this section, the department shall make an order integrating all

tracts or interests in the spacing unit for development and operation.

Each such integration order shall be upon terms and conditions that are

just and reasonable and subject to the following:

a. As used in this section or otherwise in this article, to the extent

applicable to oil and gas wells:

(1) "Integrated non-participating owner" or "non-participating owner"

means an owner who elects to reimburse the well operator, out of

production proceeds, for such owner's proportionate share of the actual

well costs of the initial well in a spacing unit and be subject to a

risk penalty, and complies with all of the requirements for integration,

including the terms of integration, as specified in an order of

integration issued pursuant to the compulsory integration provisions of

this section. The non-participating owner shall receive the full share

of production attributable to such owner's proportionate interest in the

spacing unit following the recoupment by the well operator of the

owner's proportionate share of the actual well costs plus a risk penalty

of two hundred percent of the share of the actual well costs allocable

to such owner. In the case of a leased tract, a royalty shall be

deducted from the non-participating owner's share of production, which

shall not be subject to charges or costs, but shall be separately

calculated and paid to the non-participating owner on behalf of the

royalty owner as follows:

(i) During the recovery of the actual well costs, 1/16 or 6.25%,

(ii) During the recovery of the first 100% of the risk penalty, 3/32

or 9.38%,

(iii) During the recovery of the second 100% of the risk penalty, the

lowest royalty fraction set forth in an existing lease in the unit, but

no less than 1/8 or 12.5%.

Nothing in this subparagraph relieves any lessee of its obligation to

pay, from the commencement of production, any remaining royalty and

overriding royalty owed under the terms of its lease.

(2) "Integrated participating owner" or "participating owner" means an

owner who elects to participate in the initial well in a spacing unit,

pays all costs associated with participation and complies with all of

the requirements for participation, including the terms of integration,

specified in an order of integration issued pursuant to the compulsory

integration provisions of this section.

(3) "Integrated royalty owner" means an owner who has either elected

to be an integrated royalty owner or who does not elect to become either

a participating owner or a non-participating owner. The integrated

royalty owner shall receive a royalty equal to the lowest royalty in an

existing lease in the spacing unit, but no less than one-eighth. The

integrated royalty owner shall have no obligation to the well operator

or any other owner for any charges, taxes or fees associated with the

operation of the oil or gas well and, notwithstanding any other law to

the contrary, shall not be liable by reason of the owner's status as an

integrated royalty owner for any claims for personal injury or property

damage suffered by any person relating to the drilling and operation of

the well.

(4) "Risk penalty" means the percentage applied to well costs to

reimburse the well operator for the risk involved with the exploration

for and development of a well or the percentage applied to other costs

that are subject to recoupment and a risk penalty, as provided herein.

At any time during a risk penalty phase, an owner subject to a risk

penalty may pay to the well operator the full amount subject to

recoupment by the well operator, to terminate the risk penalty phase and

be eligible for other opportunities for participation as provided

herein.

(5) "Well costs" means the costs incurred or estimated to be incurred

by the well operator in relation to the drilling, completion, and the

installation of surface equipment, other than as described in item E of

clause (ii) of subparagraph 1 of paragraph c of this subdivision,

including, without limitation, surveying, drill site preparation,

leasing of surface rights and access roads pertinent to the drill site,

construction of access roads, permitting, drilling, stimulation,

testing, well logging, drilling insurance, plugging and abandonment of

the well, environmental mitigation costs associated with drilling and

any other costs associated with the foregoing that the operator has

incurred or anticipates incurring, including a reasonable charge for

supervision of the foregoing activities.

b. If upon issuance of a well permit by the department, the well

operator does not control all owners within the spacing unit, either

through lease or voluntary agreement, the department shall schedule an

integration hearing.

c. The well operator shall, no later than thirty days prior to the

date of the integration hearing scheduled by the department, provide

actual notice of the hearing to all uncontrolled owners wholly or

partially within the spacing unit and shall provide notice by

publication in a form and manner prescribed by the department. Prior to

or contemporaneously with such notice, the well operator shall provide

to the department the well operator's estimate of those well costs that

the owners electing to participate shall be required to pay to the well

operator prior to or at the integration hearing based on each owner's

proportionate share of such costs and a list of each tract wholly or

partially within the spacing unit, the acreage attributable thereto, the

percentage interest of the total spacing unit of each tract, an

indication of whether the tract is controlled by the well operator and

the names and addresses of the uncontrolled owners. If applicable, such

list shall also identify each tract where the owners remain unknown or

cannot be located after diligent efforts by the well operator. To the

extent an owner cannot be determined after diligent efforts by the well

operator and such owner is integrated as an integrated royalty owner,

the well operator shall hold the royalty percentage payable to such

integrated royalty owner in an interest bearing account for such

integrated royalty owner until the owner is located or the property is

deemed abandoned, whichever comes first.

(1) The notice of hearing to each uncontrolled owner shall be made in

a form prescribed by the department, and shall include:

(i) An election form, as prescribed by the department, granting the

uncontrolled owner the right to elect to be integrated into the spacing

unit as an integrated participating owner, an integrated

non-participating owner or an integrated royalty owner. Such form shall

set forth the well operator's good faith estimate of those well costs

which the owners electing to be integrated as participating owners will

be responsible for paying to the well operator prior to conclusion of

the integration hearing, based on each owner's proportionate share of

such costs, and confirm that if an uncontrolled owner does not make a

timely election and does not timely comply with all of the requirements

to be either a participating owner or a non-participating owner, that

such uncontrolled owner shall be integrated into the spacing unit as an

integrated royalty owner.

(ii) A copy of the proposed order of integration, which shall include

the proposed terms of integration applicable to integrated participating

owners and integrated non-participating owners. The proposed order of

integration shall include the following terms in addition to any

applicable risk penalty:

A. The owner shall be liable for its proportionate share of all costs

and expenses, including taxes, and claims of third parties related to

the well, operations thereon and in conjunction therewith, and shall be

entitled to its proportionate share of all benefits therefrom. If an

owner's share of production is subject to a risk penalty, the well

operator shall establish a risk penalty account for such owner and all

costs, expenses and benefits attributable to such owner shall be

reflected in the penalty account;

B. The well operator shall hold any funds paid by the owner or

recouped through the risk penalty attributable to the plugging and

abandonment costs of the well, as estimated prior to the drilling of the

well, in an interest bearing account until such funds are required and

utilized for such purpose;

C. The owner shall be liable for and shall indemnify all other persons

participating in the development of the well, whether participating

owners, non-participating owners or otherwise, including the well

operator, from and against all claims arising out of the owner's

non-payment of rentals, royalties and other payments or burdens on the

oil and gas rights that such owner contributes to the spacing unit and

from and against all claims associated with the loss or failure of title

to the oil and gas rights the owner contributes to the spacing unit;

D. The well operator shall have a first lien on the production of the

owner to pay any outstanding costs, expenses or claims and the well

operator shall be entitled to withhold and retain for the purposes of

set off any revenue or production owed or due to the owner under an

order of integration. Nothing in this paragraph shall affect the well

operator's right to collect any outstanding amounts incurred nor the

right of any fee owner of oil and gas interests to collect any amounts

owed under the terms of any lease from such owner. The exercise of any

remedy shall not preclude the well operator from seeking any other

remedies available under the law;

E. Whether or not the owner is subject to a risk penalty, the well

operator shall submit to the owner a written authority for expenditure

of the estimated costs associated with the construction of any

facilities not included in well costs beyond the surface equipment at

the wellhead to the first point of interconnection with other facilities

that commingle production from a group of wells that includes the well,

including, but not limited to, pipe, compression, processing, treating,

dehydrating or separating equipment, fixtures, related buildings and

other equipment. The owner shall have thirty days to elect to

participate and pay its proportionate share of such estimated cost, the

failure of which shall be deemed to be an election by the owner not to

participate. If the owner elects not to participate or is deemed to have

elected not to participate, the well operator shall be entitled to

retain for its own account all of the owner's share of production from

the well until the well operator has recouped from the net proceeds of

the owner's share of production the owner's share of the actual costs of

the facilities, plus a risk penalty of one hundred percent of such

costs. Any such amounts shall be added to the risk penalty account for

such owner;

F. If the owner is not subject to a risk penalty, the owner shall have

the right to take its share of gas or oil production in kind and shall

be responsible for its transportation and marketing arrangements

downstream of the facilities constructed pursuant to item E of this

clause. The owner's election to take in kind must be conveyed to the

well operator no later than fourteen days prior to first production from

the well or upon seventy-five days written notice to well operator at

any time following first production from the well subject to the

expiration of any existing contracts;

G. If the owner is not subject to a risk penalty and does not take its

share of gas or oil production in kind, the well operator shall market

the owner's share of production from the well ratably with its own share

of production from the well for the account of the owner. The well

operator shall pay the owner based on the price received by the well

operator for production in the general area less (I) the owner's

proportionate share of all costs incurred by the well operator for

transporting, treating, processing, or otherwise making the production

marketable, and (II) a marketing fee not to exceed five percent of the

sales price of the production;

H. The well operator shall be entitled to propose and conduct a

subsequent operation on a well, meaning any reworking, sidetracking,

deepening, re-completing or plugging back of the well or the drilling of

a lateral or an infill well in the formation for which the unit was

created. Owners shall be provided with a written authorization for

expenditure of the estimated costs of the subsequent operation. An owner

shall not be entitled to participate in a subsequent operation as long

as the owner is in a risk penalty phase. If a subsequent operation is

proposed while an owner is in a risk penalty phase, the owner's

proportionate share of the actual cost of the subsequent operation plus

two hundred percent of such actual costs shall be added to the risk

penalty account for such owner. The owner not in a risk penalty phase

shall have thirty days to elect and pay its proportionate share of the

estimated costs, unless a drilling rig is on location, in which event

notice of a subsequent operation may be given by telephone and the owner

shall have forty-eight hours, exclusive of Saturday, Sunday and legal

holidays, to make an election and thirty days to pay the owner's

proportionate share of costs. The failure of any such owner to elect and

pay in a timely manner shall be deemed an election by the owner not to

participate in the subsequent operation. If such owner elects or is

deemed to have elected not to participate in the subsequent operation,

the well operator shall be entitled to retain all of the owner's

proportionate share of production from the well until the well operator

has recouped the proportionate share of the actual costs of the

subsequent operation attributable to such owner, plus two hundred

percent of such actual costs;

I. The well operator, on behalf of the owner, shall be entitled to

conduct all acts associated with the well and necessary facilities

related thereto, including without limitation: conducting title

examination and curative work on the tracts included in the spacing

unit; arranging for contract services or employees of the well operator,

at the customary salaries, wages and benefits of such employees, to

oversee the operation and maintenance of the well and the facilities in

the production unit associated with the well; arranging for and

maintaining required financial security for well bonds and insurance;

discharging litigation, claims of third parties and disputing tax

assessments; developing and implementing emergency responses and dealing

with catastrophic events; and arranging for the storage, transporting

and disposal of produced water, by-products or refuse associated with

production and maintenance facilities; and

J. Other terms may be included in the order of integration if the

department determines such terms are reasonably required to further the

policy objectives of section 23-0301 of this article.

(2) Within twenty-one days of receiving notice of the integration

hearing, each uncontrolled owner shall provide to the well operator and

the department its election as to whether it chooses to be integrated as

a participating owner, a non-participating owner or an integrated

royalty owner. Failure of an uncontrolled owner to elect to be

integrated as a participating owner, a non-participating owner or an

integrated royalty owner and to pay the amount specified in the notice

by the date of the hearing, or to make any election, shall result in the

owner being integrated as an integrated royalty owner. Nothing contained

in this section shall preclude any person from entering into a lease or

other voluntary agreement at any time prior to the hearing.

d. If substantive and significant issues are raised during the

integration hearing, the department shall schedule an adjudicatory

hearing.

e. If no substantive and significant issues are raised at the hearing,

the department shall issue a final order of integration confirming the

status of all uncontrolled owners in the spacing unit as participating

owners, non-participating owners or integrated royalty owners; the terms

of integration; the acreage attributable to each owner and the

proportion such acreage bears to the entire spacing unit; and the

royalty applicable to each integrated royalty owner. Such order shall be

recorded by the well operator in the office of the county clerk in the

county or counties where the spacing unit is wholly or partially located

and such order shall be final and binding upon the well operator, all

owners and their heirs, successors and assigns.

f. All operations including, but not limited to, the commencement,

drilling, or operation of a well or the existence of a shut-in well upon

any portion of a spacing unit covered by an order of integration shall

be deemed for all purposes the conduct of such operations upon each

separately owned tract in the spacing unit by the owner or several

owners thereof. That portion of the production allocated to each tract

included in a spacing unit covered by an order of integration shall,

when produced, be deemed for all purposes to have been produced from

such tract by a well drilled thereon.

4. The department upon its own motion may, and upon the application of

any interested person shall, hold a hearing to consider the need for the

operation as a unit of an entire pool or part thereof.

5. The department shall make an order providing for the unit operation

of a pool or part thereof if it finds that such operation is reasonably

necessary to increase substantially the ultimate recovery of oil and

gas, and the value of the estimated additional recovery of oil or gas

exceeds the estimated additional cost incident to conducting such

operation. The order shall be upon terms and conditions that are just

and reasonable and shall prescribe a plan for unit operations that shall

include:

a. A description of the unitized area, termed the unit area.

b. A statement of the nature of the operations contemplated.

c. An allocation to the separately owned tracts in the unit area of

all the oil and gas that is produced from the unit area and is saved,

being the production that is not used in the conduct of operations on

the unit area or not unavoidably lost. The allocation shall be in accord

with the agreement, if any, of the interested parties. If there is no

such agreement, the department shall determine the value, from evidence

introduced at the hearing, of each separately owned tract in the unit

area, exclusive of physical equipment, for development of oil and gas by

unit operations, and the production allocated to each tract shall be the

proportion that the value of each tract so determined bears to the value

of all tracts in the unit area.

d. A provision for the credits and charges to be made in the

adjustment among the owners in the unit area for their respective

investments in wells, tanks, pumps, machinery, materials, and equipment

contributed to the unit operations.

e. A provision providing how the expenses of unit operations,

including capital investment, shall be determined and charged to the

separately owned tracts and how said expenses shall be paid.

f. A provision, if necessary, for carrying or otherwise financing any

person who is unable to meet his financial obligations in connection

with the unit, allowing a reasonable interest charge for such service.

g. A provision for the supervision and conduct of the unit operations,

in respect to which each person shall have a vote with a value

corresponding to the percentage of the expenses of unit operations

chargeable against the interest of such person.

h. The time when the unit operations shall commence, and the manner in

which, and the circumstances under which, the unit operations shall

terminate.

i. Such additional provisions as are found to be appropriate for

carrying on the unit operations, and for the protection or adjustment of

correlative rights.

6. No order of the department providing for unit operations shall

become effective unless and until the plan for unit operations

prescribed by the department has been approved in writing by the owners

of sixty percent or more in interest as the costs of such unit

operations are shared under the order of the department, and by owners

of record of a like percentage of a one-eighth royalty interest in and

to the unit area, and the department has made a finding, either in the

order providing for unit operations, or in a supplemental order, that

the plan for unit operations has been so approved by the required number

of owners and royalty owners. If the plan for unit operations has not

been so approved by owners and royalty owners at the time the order

providing for unit operations is made, the department shall upon

application and notice hold such supplemental hearings as may be

required to determine if and when the plan for unit operations has been

so approved. If the owners and royalty owners, or either, owning the

required percentage of interest in the unit area do not approve the plan

for unit operations within a period of six months from the date on which

the order providing for unit operations is made, such order shall cease

to be of force and shall be revoked by the department.

7. An order providing for unit operations may be amended by an order

made by the department, in the same manner and subject to the same

conditions as an original order providing for unit operations, provided

a. if such an amendment affects only the rights and interests of the

owners, the approval of the amendment by the royalty owners shall not be

required, and

b. no such order of amendment shall change the percentage for

allocation of oil and gas as established for any separately owned tract

by the original order, except with the consent of all persons owning

interest in such tract.

8. The department, by an order, may provide for the unit operation of

a pool or a part thereof that embraces a unit area established by a

previous order of the department. Such order, in providing for the

allocation of unit production, shall first treat the unit area

previously established as a single tract, and the portion of the unit

production so allocated thereto shall then be allocated among the

separately owned tracts included in such previously established unit

area in the same proportions as those specified in the previous order.

9. Oil and gas allocated to a separately owned tract shall be deemed,

for all purposes, to have been actually produced from such tract, and

all operations, including, but not limited to, the commencement,

drilling, or operation of a well upon any portion of the unit area shall

be deemed for all purposes the conduct of such operations upon each

separately owned tract in the unit area by its several owners. The

operations conducted pursuant to the order of the department shall

constitute a fulfillment of all the express or implied obligations of

each lease or contract covering lands in the unit area to the extent

that compliance with such obligations cannot be had because of the order

of the department.

10. Oil and gas allocated to any tract, and the proceeds from the sale

thereof, shall be the property and income of the several persons to

whom, or to whose credit, the same are allocated or payable under the

order providing for unit operations.

11. No division order or other contract relating to the sale or

purchase of production from a separately owned tract shall be terminated

by the order providing for unit operations, but shall remain in force

and apply to oil and gas allocated to such tract until terminated in

accordance with the provisions thereof.

12. Except to the extent that the parties affected so agree, no order

providing for unit operations shall be construed to result in a transfer

of all or any part of the title of any person to the oil and gas rights

in any tract in the unit area. All property, whether real or personal,

that may be acquired in the conduct of unit operations hereunder shall

be acquired for the account of the owners within the unit area, and

shall be the property of such owners in the proportion that the expenses

of unit operations are charged.

13. Any person taking title by operation of law to any oil and gas

interests integrated into a spacing unit pursuant to an order of

integration, shall take such interests subject to the terms and

conditions of the final order of integration issued by the department

duly recorded in accordance with the provisions of this section and

shall be subject to all liabilities and benefits associated therewith,

unless such person, within sixty days of the taking of such interest,

elects to be an integrated royalty owner and notifies the well operator

of such election.