Pooling

Most leases will contain some provision giving the lessee the right to consolidate the leased premises with adjoining leased tracts. The area thus formed is called a "pool" or sometimes a "unit." The rationale for establishing such pools is to unite under one operator all the landowners having an interest in a common underground reservoir. By doing so, the lessee avoids unnecessary drilling, protects the rights of the landowners in the common reservoir and prevents waste. Sometimes pooling arrangements are necessary to meet the minimum acreage requirement for a drilling permit under state regulations.

In most states, landowners may be subjected to two types of pooling arrangements. One is voluntary; the other is compulsory or statutory. The voluntary arrangement requires the free consent of the landowner and is generally found in the context of most lease forms. The statutory arrangement, on the other hand, is mandatory whenever the specified requirements under relevant state law have been satisfied. By entering either type of pooling arrangement, the landowner may find the interpretation and application of the lease provisions materially altered.

Obviously, the landowner can do little to avoid compulsory or statutory pooling. The landowner, however, may find it advisable to exercise caution in granting the lessee the unrestricted right to pool the leased premises. The following suggestions may be helpful in this regard.

1. Submit to voluntary pooling in the lease only to the extent necessary to get a drilling permit from the state. Otherwise, the landowner's written consent should be required to pool. Do not consent until the landowner understands the full impact of the pooling arrangement on the lease terms, the full description of the proposed pool area and the details on how the boundaries were determined.
2. In order to keep a pool from being overly extensive, stipulate in the lease the maximum number of acres a pool may contain. As a rule of thumb, limit the acreage to no more than that specified in a statutory or compulsory pool in your state.
3. Give some thought as to whether the lessee may alter or change the size or shape of the proposed pool after the landowner has consented.
4. Consider whether the pool is limited to certain producing strata or given for any and all producing formations which may be encountered. Also consider which substances may be pooled—e.g., oil and gas but not other gaseous substances, coal, or valuable stones.
5. In all cases, try to negotiate the inclusion of a "Pugh" clause in the lease that provides for the severance of the lease into separate tracts whenever less than all of the premises are included in a single pool or unit. A typical Pugh clause will read, "Upon the pooling of less than all of the leased land, this lease shall be severed and considered as separate and distinct leases. The lease term and all the rights and obligations of the lessee under this instrument shall apply separately to the pooled and unpooled acreage." Without a Pugh clause, leases generally have language which extends the "leased premises" to all areas pooled with the original tract. Thereafter, if production, drilling or re-working operations are commenced on any portion of the pool (whether on the original leased tract or not), they will be construed as being undertaken on the leased land. By thus including a small area of a larger lease tract in a pool, the lessee can effectively eliminate the need for tendering delay rentals, reduce the proportionate share of royalties to the respective landowners, and still maintain the full lease by drilling and possibly establishing production on any part of the pooled area.
6. If possible require all pooling to occur prior to drilling operations and not afterwards.