Drilling and spacing units (hereinafter called “spacing units”) are a component of a comprehensive state regulatory framework put in place to control the exploration for and production of oil and gas. A spacing unit is a legally described boundary designated by a governmental agency (the Oklahoma Corporation Commission (OCC) in the case of Oklahoma)) as a “common source of supply” of oil and gas for purposes of dividing fairly, among the various owners, production from a particular well or wells. The royalties from a well drilled within a spacing unit must be shared between all mineral owners within the unit based on the amount of the mineral owners’ acreage in the unit compared to the total acreage in the unit. For example, take the case of a spacing unit that contains 640 acres (a one square mile “section” of land, the typical size of a spacing unit established in Oklahoma for a gas well). If a particular mineral owner owns 10 acres within the boundaries established for the 640-acre unit, the mineral owner would be entitled to credit for 10/640ths (0.015625) of the production from the spacing unit, no matter where in the unit the well(s) is/are drilled. This decimal is one component of the formula used to calculate a mineral owner’s net revenue interest in a well.
A spacing unit is created when a party desiring to drill a well or wells in a particular location (normally an exploration and production company that has acquired a lease in the area) files an application with the OCC. The application is assigned to an administrative law judge and a hearing is set to consider the application. The interested parties, including the mineral owners, are given notice of the application and the hearing. If the relief requested in the application is considered appropriate by the administrative law judge after reviewing the application and hearing any evidence presented at the hearing, he or she will recommend that the commissioners of the Oklahoma Corporation Commission enter an Order establishing the drilling and spacing unit. The Order is normally issued within a few weeks following the hearing.
Spacing units are the result of advances in the scientific understanding of how oil and gas behave underground. There was a time when it was believed that oil and gas was “migratory” in the sense that these substances flowed in underground streams or otherwise moved from one place to another. It was believed that these substances might be under one piece of land today and another tomorrow. Eventually, advancements in the field of geology led to the understanding that oil and gas were not as “migratory” as once believed. Oil and gas does not flow in underground streams or otherwise move from one place to another, but exists in underground reservoirs. A reservoir is referred to as a “common source of supply” because the oil and gas is contained within a particular geological feature (i.e., the reservoir) and does not escape except by the drilling of a well that penetrates the reservoir.
The mistaken belief that oil and gas is “migratory” resulted in considerable waste as mineral owners rushed to drill wells on their land in order to capture as much of the oil and gas as they could, believing that it would eventually migrate to the land of another. As more was learned about the nature of oil and gas reservoirs, it came to be understood that the over-drilling of a reservoir could actually lower the total amount of the oil and gas that could be recovered. Petroleum geologist can now determine an optimal drilling program to maximize the recovery from a particular reservoir based on its specific characteristics. These discoveries, along with the desire to divide fairly (among the various owners) production from a “common source of supply” resulted in the creation of spacing units.