Are The Natural Gas Companies Limited to 640 Acres When Creating Marcellus Shale Production Units?

Is There a Trend Towards Larger Production Units?

Many states have unit spacing requirements that dictate the size of natural gas production units. However, Pennsylvania does not have a statue mandating either the size or shape of Marcellus Shale production units.  Accordingly, unless your Oil and Gas Lease has specific language limiting the size of the production unit (often 640 is stated in leases) the gas company has substantial freedom in determining the size and shape of the production unit.  

Many landowners are fearful that the gas companies' power in forming production units will result in the company manipulating the shape of the unit  or "gerrymandering" the production unit in order to "hold"  as much acreage under lease as possible.  The fear is that the gas company will design a production unit such that it only incorporates a small portion of the landowner's property while the remainder of the property is "held" by the lease.  As we know, landowners (or natural gas rights owners) are only paid royalties on that acreage that is included in the production unit.

Landowners are understandably concerned that larger production units increase the company's ability to gerrymander the design of production units to hold as many leases as possible.  This potential to increase the gerrymandering power of the gas company is an important concern when considering signing an amendment or modification of your Oil and Gas Lease.  However, there are numerous other variables and factors the landowner must consider.

There is a trend in Pennsylvania for gas companies to increase the size of production units.  Although some companies, like Cabot Oil and Gas, are currently keeping the production unit size below 640 acres, most of the unit designation documentation that I receive from various companies involve Marcellus Shale units well in excess of 640 acres.  The standard company selling points are that larger units create less of an environmental impact by reducing the number of well pads, truck traffic and the numerous other "inconveniences" and impacts that accompany natural gas drilling.  These arguments are certainly true.  However, with larger production units comes greater company power to design the shape of the unit and the ability to hold more parcels under lease from even a single well.  Landowners considering unit size modifications often ask for assurances that all or a majority of their property will be unitized or a guarantee of a certain number of wells in future units. Unfortunately, this is a promise that gas companies are very rarely (if ever) willing to make.

It is important to carefully review your Marcellus Shale Oil and Gas Lease language as it relates to unit size.  Landowners often believe they have a production unit size limitation only later to learn they misinterpreted the pooling and unitization language in their lease.  For example, I often see Oil and Gas Lease language to the effect of "the company cannot exceed a 640 acre production unit unless permitted or authorized by law."  Because Pennsylvania oil and gas law does not mandate a maximum production unit size for Marcellus Shale wells, this sample language allows the company essentially unlimited authority when creating production unit.  Of course the gas company is in the business of making profits and they will normally seek to create production units that will maximize the use of their leaseholds.  To that end, we are currently not seeing 2000 acre units, but as drilling technology advances it seems sensible to expect the trend of larger production unit sizes to continue.  

If a landowner’s entire property is "held" within a unit, and production from the far end of the horizontal well is as efficient as the first stage of the well, it certainly makes environmental sense to design the largest production as possible.  However, if you own acreage at the far end of a large production unit and only a handful of your available acres are unitized, the larger units are obviously very distressing.  It once again falls back to education and the accumulation of all relevant information available when considering negotiating the size of a production unit or agreeing to an extension of the unit size currently authorized under your existing lease.

If you are faced with this dilemma and are looking for assistance please feel free to contact our office at 570-307-0702.

Douglas A. Clark, Esq. – Protecting Pennsylvania Landowners