The oil and gas leases being used by companies leasing in the Marcellus shale include a provision that allows the gas company to combine, or “pool”, the landowner’s acreage with property from other leased landowners to form a production unit. The production unit defines the area that the company intends to produce gas from by using vertical or horizontal gas wells. In most cases the unit will be developed by drilling multiple horizontal wells, with the potential for six or more wells to be drilled over time. To avoid trespass issues, most operators in the Marcellus want to have all of the contiguous acreage in the unit leased.
The landowners in the unit will all share in the royalties from the wells drilled based on their proportional ownership in the unit. This means that a landowner with 100 acres in a 600 acre unit will receive royalties based on the ratio of 100/600, multiplied by his or her royalty percentage. As the size of the production unit increases, the landowner’s proportional ownership in the unit will decrease, and the landowner’s royalties will correspondingly be reduced.
Because the gas company can fully develop the unit by drilling multiple horizontal wells from one well pad, many landowners in the unit will be entitled to receive royalties even though there is no drilling on their property. However, all of the landowners in the unit will have their leases extended and “held by production” as long as wells on the unit are producing gas in paying quantities.
Many of the older leases that have been signed by Marcellus landowners limit the size of the production unit to 640 acres, or one square mile. Units of this size may have been typical for drilling operations in states such as Texas and Oklahoma. In order to allow greater flexibility in drilling operations, while holding more acreage by production, leases offered to landowners now often have no limit on the size of a production unit.
Before signing a gas lease, landowners should always consult a qualified attorney to ensure that they understand how the pooling provision in their lease will impact the potential royalties they will receive as production units are developed.