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November 2014

MS Oil and Gas Board Hears Unit Size Arguments

Posted by bernell on November 20, 2014

The Mississippi Oil and Gas Board met yesterday for an extended session. 

The topic du jour was unit sizes in Mississippi.   

I got a second hand report and anyone in attendance wishing to clarify my understanding of the primary points made, feel free to join in the discussion.

Basically, a mineral owner objected to the 2,000 acre unit sizes that are now routinely being granted in Mississippi and, after a lot of testimony by both sides, the Mississippi Oil and Gas Board chose to stay with the 2,000 acre sizes.

The points made by industry was that in order to successfully develop the TMS, large unit sizes would be necessary. 

However, it was admitted by industry that the exact drainage or reach of the fractures was unknown such that anywhere from 8 to 16 wells per 2,000 acres was entirely possible.

So, in essence, industry doesn’t really know how much acreage is needed to be successful today and prefers to ere on the high side.

The argument against the large unit sizes actually agreed with industry in that IF the play was successful it didn’t make a lot of difference in the long run whether unit sizes were 2,000 acres or less.

However, suppose the play is not successful? 

Suppose, only one well is drilled in a 2,000 acre unit and it is determined this well has drained oil from 125 acres.  What then?

Fast forward a few years and this 1 well is plugged and abandoned.  This 125 acres is now open for leasing along with the other 1,875 acres in the unit.  Then, imagine new and more cost effective means are found to drain the shale.

Can a new operator come in and only lease acreage that has not been drained and only pay royalties on that acreage?  Will the owners of the drained 125 acres be able to participate in income from the new wells?  Shouldn’t this question be asked and answered up front rather than the can kicked down the road? 

What of "island" acreage between laterals...acreage too small to be drilled later, but for which no actual production is deemed to have drained/

Based on the second hand report I heard, the Mississippi Oil and Gas Board has decided not to deal with it. 

Let future generations fight it out in court seems to be their response.


But, what of the Mississippi Oil and Gas Board’s responsibility to promote the production of oil and gas in the state? 

Suppose the one well, draining 125 acres out of 2,000, produces for the next 50 years and the oil company operating it has no desire to commit capital to drilling additional wells, yet other operating companies are willing to do so?

Does it make sense to allow a company to hold 1,875 acres for production indefinitely based on the production from 1 well in the unit?

Expanding the thought a little, does it make sense for 36,000 acres within a township and range to be held by nominal production from 18 wells (or fewer in some Wilkinson County areas)? Or, even 200,000 acres with 100 wells?

How does this promote the production of oil and gas in Mississippi?

Again, this question was not answered. 

Or, perhaps it was. 

Perhaps the Mississippi Oil and Gas Board unwittingly has set Mississippi on a course not to produce oil and gas shale within our boundaries.

It appears that King Solomon has not yet shown up at the Mississippi Oil and Gas Board meetings. 

Thinking beyond the immediate issues of the day doesn’t appear to be something of interest to the board.

We hope someone will step forward and offer some solutions. 

What about permanent units? 

What about units only being able to be held by production for a period of say 5 years beyond the original lease term for each well drilled in the unit.  The operators would keep production from any wells drilled, but lose the right to drill more if they have not exercised their rights prior to the expiration of the lease extension.

Bad ideas?  Fine.  Offer better ones.

But don’t ignore the issues.

Otherwise, neither the oil companies, nor the mineral/royalty owners, nor the State of Mississippi will be winners.  Perhaps some attorneys will reap the benefits, but few others.

Though out of context, the Biblical passage, “Where there is no vision, the people perish…” comes to mind for this situation.

What do you think about it?