CHAPTER 21 Legal and Developmental Issues Involving Horizontal Drilling in The Appalachian ...

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CHAPTER 21
Legal and Developmental Issues Involving Horizontal Drilling in The Appalachian Basin
Rex Burford
West Virginia Oil and Natural Gas Association
with assistance from
John H. Johnston
Robinson & McElwee
Charleston, West Virginia
Synopsis
§ 21.01. Introduction and Overview.
[1]--History.
[2]--Current Interest.
[3]--Interstate Oil Compact Commission Resolution.
[4]--Current Regulatory Status in Appalachia.
[5]--New Regulatory Considerations.
[6]--Additional Technological Advancements.
[7]--Result of Technical Advancements.
§ 21.02. Definitions.
§ 21.03. Physical Factors Affecting Development.
§ 21.04. Legal Issues Involving Private Rights in Appalachia.
[1]--Implied Covenants.
[a]--Covenant of Reasonable Development.
[b]--Covenant to Protect Against Drainage.
[c]--Covenant of Reasonable Care and Due Diligence.
[d]--Summary.
[2]--Surface Trespass.
[3]--Subsurface Trespass.
§ 21.05. Recommendations for Modifications of State Oil and Gas Conservation Statutes and Regulations.
§ 21.06. Existing State Regulations.
§ 21.07. Appalachian Considerations.
[1]--Horizontal Drilling Activity to Date.
[2]--Status of Oil and Gas Conservation Statutes in the Appalachian
Basin States.
[3]--Maximum Drainage of Horizontal Wells.
§ 21.08. Application of Horizontal Drilling to Coal Bed Methane Development.
§ 21.09. Conclusion.
§21A. Appendix -- Summary of State Spacing Regulations for Kentucky, New York, Ohio, Pennsylvania, Tennessee,
Virginia, and West Virginia.
§ 21.01. Introduction and Overview.
"The law is dragged kicking and screaming into the future." This well worn statement is appropriate in the
context of the relationship of the current state of the law in Appalachia to the emerging practice of
horizontal drilling. This Chapter serves two purposes. First, it is a survey of existing eastern state oil and gas
conservation laws pertaining to horizontal drilling. Second, it is meant to be a useful tool to encourage
discussion about horizontal drilling and the developing body of law emerging from this rapidly advancing
technology. Changes in existing state statutes and regulations will be necessary to accommodate the
efficient and rapid assimilation of the new technological advances which are making horizontal drilling a
practical means of producing oil and gas.
Horizontal drilling will require a reorientation of both legal and technical thinking about the process of oil
and gas drilling. Mr. Joe Goetz, Manager of Technical Marketing for Halliburton Services, Inc., in prepared
remarks at a March 1991 Symposium in Houston, Texas, on the subject sponsored by Gas Daily, noted that
the concepts involve "Paradigm Shifts." That is, the "accepted" set of rules by which we operate are not
always correct. A small chart will illustrate the concept under conventional drilling vs. horizontal drilling.(1)
CONVENTIONAL (Vertical) HORIZONTAL
Top Beginning
Bottom End
Up Topside
Down Bottomside
Spacing Orientation
Target Zone Invaded Zone
Attorney Richard A. Counts of Kingsport, Tennessee, at the June 1990 meeting of the Interstate Oil
Compact Commission (IOCC) in Bismarck, North Dakota, aptly stated: "The most exciting technologies in
the world are of no use unless the regulatory framework is in place to allow the development of these
resources."(2) Estimates are that the number of wells drilled horizontally will continue to increase, as
(3)
indicated in Illustration 1.
[1]--History.
The idea of horizontal drilling is not new. One hundred years ago a patent was issued on a machine to
(4)
accomplish what is essentially horizontal drilling. The first successful horizontal well was drilled in Texas
in 1929.(5) Technological innovations in the
Illustration 1.
areas of formation evaluation, well performance, completion, testing, and stimulation have aided the
practical application of horizontal drilling.(6) About 1,200 horizontal wells were drilled in 1990, 900 in the
(7)
United States. This was a four-fold increase over 1989 and a huge increase over the fifty or so wells that
were drilled in 1986.(8)
[2]--Current Interest.
In response to the National Energy Strategy (NES),(9) both the U.S. Department of Energy and the IOCC
have expressed concern with the regulatory aspects of horizontal drilling, as indicated by the following
exchange of correspondence between the Chairman of the IOCC and the Secretary of the U.S. Department
of Energy (DOE):
Dear Mr. Secretary:
The Interstate Oil Compact Commission (IOCC) was gratified that it was able to participate in the evolution
of your recent publication, National Energy Strategy. As you may recall, representatives of the IOCC
testified at several of the hearings and the staff provided additional input from time to time.
The document which was recently published is certainly comprehensive in addressing all of the areas of
potential for achieving greater energy security for the American people. The oil and gas producing states
would have preferred more aggressive initiatives in the area of expanding the resource base in order to
reduce imports. If, however, those recommendations contained in the report are adopted by the Congress it
would represent a valuable first step towards a better policy.
At a recent meeting of the Governors and Official Representatives of the IOCC, we had an extended staff
briefing and discussion of those elements in the National Energy Strategy that were of particular concern. I
would like to share with you the outcome of that discussion.
. . . .
[T]here are two references in National Energy Strategy which I wish to take up with you at this time in
order that we can receive clarification on them or perhaps be of assistance to DOE in the follow-up work to
the document.
Our first area of concern is found on page 82 in a discussion on horizontal drilling, which the states
recognize as the brightest technological evolution occurring in the domestic oil and gas industry today. The
quotation that concerns us is:
However, in some cases State regulations impose barriers that inhibit horizontal drilling. Producers often
cannot undertake otherwise economical projects in States where oil and gas regulations do not take account
of horizontal drilling technology. Accordingly, the National Energy Strategy recommends that those States
modify their regulations, particularly the traditional rules governing minimum well spacing, drilling unit
size, and allowable production.
In accordance with the Strategy, the Department of Energy is evaluating industry and State actions relating
to horizontal drilling. The Department intends to work with industry and producing States to help remove
regulatory barriers. The Department also will promote the transfer of horizontal drilling technology and
information among producers.
The producing states are at somewhat of a loss as to the genesis of this categorical statement that "state
regulations impose barriers that inhibit horizontal drilling." First, all regulations inhibit something; that is the
purpose of regulations. Secondly, if the Department has evidence that undue regulations exist in the states,
as is stated in the report, we would like some citations of specific examples. I am sure you are aware that it
is as much to the states' interest to remove barriers and encourage production within their borders as it is to
the Department of Energy.
. . . .
Should anyone in the Department wish further information or seek greater cooperation with the oil and gas
producing states, ask them to please contact W. Timothy Dowd, the Executive Director, or any member of
the headquarters staff.
You will recall that my predecessor as Chairman, Governor Sullivan of Wyoming, met with you last
September in order that the states could work with the Department of Energy in making certain that as much
production as possible was generated by the states during the Persian Gulf crisis. DOE and the IOCC have a
long history of cooperation, one that we look forward to continuing as the future of the National Energy
Strategy evolves.
Sincerely,
/S/ Norman H. Bangerter,
(10)
GOVERNOR
Dear Governor Bangerter:
I am pleased to respond to your letter of April 5, 1991, regarding two issues raised in the National Energy
Strategy (NES). Specifically, you questioned the basis for the NES initiatives relating to State regulation of
horizontal drilling and natural gas production.
As your letter points out, the NES states that in some cases, State regulations impose barriers that inhibit
horizontal drilling. The NES notes that the Department of Energy (DOE) intends to work with industry and
producing States to help remove those barriers. In addition, the NES refers to State regulation of wellhead
activities pertaining to gas production. The report states that the Department will study the impact of State
regulation on natural gas production.
At the outset, I would like to emphasize that by including these initiatives in the NES, we did not intend to
imply that States are deliberately creating barriers to horizontal drilling and natural gas production. Oil and
gas producers have reported to DOE that they are generally pleased with the cooperation they are receiving
from State regulatory bodies.
In the public hearings held as part of the NES process, producers informed the Department that widespread,
increased use of horizontal drilling technology will require even more cooperation by State regulatory
bodies. The need is for revised drilling rules that more effectively accommodate this particular technology.
Producers claim that State regulations have not evolved parallel with either horizontal drilling technology or
the pace of drilling. To generate the investment needed to drill the greatest number of horizontal wells,
producers contend that they need faster revision of field rules for spacing and production rates so that the
economic opportunities can be maximized. For example, I am advised that the State regulatory bodies in
Montana, Louisiana, and Colorado grant hearings on proposed horizontal well locations on a case-by-case
basis. Thus, if a company plans a drilling program of 10 wells in a particular reservoir, it must request a
separate hearing for each horizontal well. The reluctance of some States to issue temporary or permanent
state-wide rules, which would eliminate the need for individual hearings, occasionally results in drilling
start-up delays of 3 to 12 months. These delays add substantially to the cost of drilling programs.
Another regulatory problem faced by producers relates to the process used to determine well spacing. For a
vertical well, the operator calculates a drainage area within a few months after commencement of
production. Based on that information and the applicable drilling rules, the State then issues a well spacing
determination. However, this procedure is not suitable for horizontal wells. They physical length of
horizontal well bores, and the greater volumes of oil drained, create the need for larger well spacing.
Producers usually need at least 12 to 18 months of production to be able to provide the State with
calculations showing the full extent of the larger drainage area. I am advised that some States do not provide
this additional time to operators before issuing decisions on well spacing. In addition, producers claim that
some States are hesitant to grant a larger drilling unit for only one horizontal well because those States
traditionally would have required the operator to drill additional wells on that unit. Producers contend that
they should not be required to drill additional wells prematurely in order to hold the acreage, particularly
when the additional wells may not be economical. Producers are requesting that the States initially grant
larger drilling units containing one horizontal well. If a second well is warranted, it can be drilled later.
. . . .
I appreciate the participation of the IOCC in the development of the National Energy Strategy, and I look
forward to your continued involvement in the implementation of the NES. Sincerely,
/S/ James D. Watkins, Admiral,
U.S. Navy (Retired).(11)
In this correspondence between the IOCC and the Department of Energy, reference is made to the fact the
National Energy Strategy contains statements that some existing state regulatory structures enacted prior to
the introduction of this technology inhibit the development of horizontal drilling.
[3]--Interstate Oil Compact Commission Resolution.
At the mid-year meeting of the Interstate Oil Compact Commission held in Bismarck, North Dakota, on
June 17-20, 1990, the following resolution was adopted:
WHEREAS, the Interstate Oil Compact Commission has previously supported of [sic] the utilization of
horizontal drilling methods to enhance production of this country's oil and gas reserves; and
WHEREAS, the Interstate Oil Compact Commission has urged the states to review their statutes and
conservation regulations to make certain they do not impede the utilization of horizontal drilling; and
WHEREAS, many of the states have been or are in the process of reviewing their existing conservation
codes and regulatory provisions so as to encourage and accommodate horizontal drilling while continuing to
prevent waste and protect correlative rights;
NOW, THEREFORE, BE IT RESOLVED that the Interstate Oil Compact Commission hereby:
1. Encourages its member States to adopt changes to present statutory and regulatory provisions, as
necessary, to provide the oil and gas industry with the opportunities to further develop the rapidly advancing
technology of horizontal drilling; and
2. That the IOCC, working in conjunction with the state regulatory agencies, document the knowledge
gained through experience by operating and service companies in their horizontal drilling operations and
establish a common data base that can be utilized by producing states.
The Resolution was adopted after a lively discussion concerning the advances in the Bakken Shale in North
Dakota and the Austin Chalk in Texas. Enthusiasm was prevalent throughout the meeting. Since that time,
development of regulatory modifications which will accommodate horizontal drilling has been minimal in
the twenty-nine member states and six associate states of the IOCC. Exceptions have been Texas,
Oklahoma, North Dakota, Wyoming, and Michigan.
[4]--Current Regulatory Status in Appalachia.
Of the states in Appalachia, only Tennessee has any laws specifically addressing horizontal drilling. Several
Appalachian states do have statutes and rules regulating well spacing and oil and gas conservation, but these
were designed for more traditional drilling techniques.(12)
[5]--New Regulatory Considerations.
New regulations for horizontal drilling require careful evaluation of the potential technical aspects of the
technology to prevent the waste of oil and gas, to protect correlative rights, and to protect environmental
concerns.(13)
As a cogent body of statutes, rules, and regulations are developed for this rapidly expanding technology, the
law and technology should advance together.(14) Often in the past, the law has taken too long to catch up
with technological change. As a matter of national energy policy and overall efficiency, the potential returns
from horizontal drilling technology are so much greater than from conventional vertical drilling that all
reason dictates an expedited approach to its implementation. Cooperation in the field between the technical
disciplines involved ­ geologists, engineers, and drilling contractors ­ has provided a more united effort. On
the regulatory side, mechanisms must be established rapidly to accommodate new technologies developed
for horizontal drilling.
[6]--Additional Technological Advancements.
The following areas of potential technical advances will require consideration in any new regulatory
scheme:
Enhanced Reservoir Understanding. Enhanced reservoir understanding will bring concomitant legal
complexities in determining units and spacing parameters.(15)
Long Term Hole Sealing Technologies. Long term sealing technologies are relatively crude by vertical
drilling standards. As completion techniques become more sophisticated, producing areas will increase.(16)
Horizontal Extensions Over 5,000 Feet. Horizontal extensions over 5,000 feet have been made in the Austin
Chalk formation in Texas.(17) Any regulatory scheme needs to contemplate the possibility of increased
lateral extension.(18)
Steerable Drilling Systems. Steerable drilling systems will increase in capacity and capability and allow
unique drilling possibilities.(19)
Multiple Laterals. Multiple laterals that fork from a common center or on legs from the primary vertical
borehole offer new opportunities for both new wells and recompletions.(20) Any regulatory approach should
contemplate the various geometric configurations possible with horizontal drilling.
Illustration 2.
Air Drilling. The application of air drilling (pneumatic) for horizontal wells in Appalachia will be of
increasing importance as it historically has been for vertical wells. The EMWD (electronic measurement
while drilling) technology for air drilling is still being perfected.(21) Because development to date in the
Austin Chalk formation in Texas has emphasized mud drilling systems rather than air systems, the MWD
instruments primarily in use are for mud drilling systems. These mud measuring systems presently do not
work very well in air drilling applications.(22) Development of air drilling technologies for use in horizontal
drilling applications will help spread the use of this type of drilling throughout Appalachia and necessitate
new laws to accommodate its use.(23)
SRMs (Short Radius Motors). SRMs enable the drilling process to turn to horizontal in increasingly shorter
distances, currently within 200 feet.(24) The distance dedicated to the radius has an effect on any regulatory
scheme. Regulatory solutions which contemplate only longer radii will place inalterable conditions on
spacing patterns and result in condemned acreage and wasted resources.(25)
Hydraulic Fracturing Systems. Hydraulic fracturing systems will be developed to accommodate the advent
of long drain holes.(26) Enhancement of the areas to be drained by fracturing improvements will also
mandate contemplation of increased drainage possibilities.
[7]--Result of Technical Advancements.
Technical advancements in horizontal drilling will reorient thinking concerning oil and gas wells. This will
affect the existing common law interpretations of what has heretofore been settled "mining law" and
necessitate changes to accommodate the new advances.(27)
For example, horizontal drilling may be applicable to removing coal bed methane gas. The Honorable Nick
Joe Rahall II (W. Va.) has recently introduced House Resolution 1078 which would divide the ownership of
this resource equally (1/3 share each) among the oil and gas estate, the coal estate, and the surface estate,
absent some form of state action determining ownership disputes.
Aliquot Apportioning of Royalty Payments. The aliquot apportioning of royalty payments will no doubt
become much more vexatious because of disputes involving the physical location of the source of
production and the increasingly reliable ability to define physical reservoir boundaries. A participation
formula allocating production on a basis other than surface acreage could occur. A formula based, for
example, upon the actual physical parameters of the producing formation would result in increasing
complexity. One commentator cautions that good sense here dictates avoiding trouble by leaving well
enough alone.(28)
Surface Owner Damage Statutes. The surface owner damage statutes enacted in several jurisdictions provide
tacit approval of the surface owner's rights in modern drilling ventures and, in part, serve as a device to
blunt direct attacks on the lessee's authority.(29) Whether the scope of these statutes will cover this new
technology remains to be seen.
Virginia Oil and Gas Law. Virginia oil and gas law, as recently reenacted,(30) and pertaining to coal bed
methane development in particular,(31) gives further credence to the changing emphasis on the privileges
still inherent in the coal estate.(32) Coal development may be enhanced. Horizontal drilling removes the
need to maintain as many coal pillars as is required with conventional vertical well development. This can
reduce the potential number of vertical penetrations of the coal seam. Realization of this potential by coal
operators means demands on oil and gas operators for fewer wells and further restrictions on the exercise of
general common law rights for drilling in and through coal seams.
Existing Oil and Gas Lease Applicability. Perhaps most important is whether or not existing oil and gas
leases even permit the use of horizontal drilling technology. Could an adventurous lessee with fresh leases
who is prepared to cope with the new technical and environmental burdens placed on the mineral estate by
horizontal drilling effect an ouster of the present lessee?
At least one recent case indicates old leases in mature areas are a vanishing breed. A $29 million dollar
judgment was rendered against Columbia Gas Transmission Corporation in the Circuit Court of Kanawha
County, West Virginia, where production in paying quantities under a drill or pay lease was found to have
ceased before the expiration of the primary term.(33) A cancellation this dramatic, even if under almost
certain appeal, and even if not directly applicable, will open the gates for more litigation and will provide
new opportunities for those adventurous enough to seize them.
§ 21.02. Definitions.
The definitional aspects of this technology are of particular importance. Many new and challenging
definitions, mostly derived from the technological changes, are necessary to describe horizontal drilling.
These terms will eventually become legal "words of art."
Horizontal drilling is almost a self-descriptive term. A well is drilled vertically then turned and drilled
horizontally through the producing interval. Horizontal drilling should not be confused with "slant" or
"deviated hole" drilling. Horizontal drilling essentially turns the wellbore to an approximate 90 degree angle
to vertical and drills along the path of the producing formation. Slant drilling is more conventional; the
existing wellbore deviates from a true vertical path. A horizontal well bore can deviate as the producing
formation deviates and, in effect, "porpoise" to follow the desired formation. Another term, "high angle," is
used for wells drilled close to a 90 degree angle. Other terms are described in Illustrations 3 and 4.
The following definitions should facilitate an understanding of the process of horizontal drilling:
Horizontal Well (horizontal drainhole well). A horizontal well or "horizontal drainhole well" is not
conceptually difficult to imagine. Horizontal wells are typically classified by the radius of turn of the
wellbore. Generally, three variations are recognized: "Short radius" wells have build rates (the angle of turn
per length of arc) of 1.5 to 3 degrees per foot and horizontal extensions of
Illustration 3.
Illustration 4.
short distances due to torque and drag limitations on the equipment; "medium radius" wells have build rates
generally of 8 to 20 degrees per 100 feet; and "long radius" wells have build rates of 2 to 6 degrees per 100
per feet.(34)
A "horizontal well" as defined in Wyoming's rules and regulations is "a wellbore drilled laterally at an angle
of at least eighty (80) degrees to the vertical with a horizontal projection exceeding one hundred feet
measured from the initial point of penetration into the productive formation through the terminus of the
lateral in the same common source of hydrocarbon supply."(35)
In Rule 86 of the Texas Railroad Commission, a "horizontal drainhole" is defined as "[t]hat portion of the
wellbore drilled in the correlative interval, between the penetration point and the terminus."(36)
The Oklahoma Corporation Commission's proposed definition of a "horizontal well" is "a well drilled,
completed or recompleted, in a manner in which the horizontal component of the completion interval in the
geological formation exceeds the vertical component thereof and which horizontal component extends a
minimum of one hundred fifty feet in the formation."(37)
The following definitions, unless otherwise noted, are those used in the Texas Railroad Commission's Rule
86.
Correlative Interval. "[T]he depth interval designated by the field rules, by new field designation, or, where
a correlative interval has not been designated by the commission, by other evidence submitted by the
operator showing the producing interval for the field in which the horizontal drainhole is completed."
Horizontal Drainhole Displacement. "[T]he calculated horizontal displacement of the horizontal drainhole
from the penetration point to the terminus."
Penetration Point. "[T]he point where the drainhole penetrates the top of the correlative interval."
Terminus. "[T]he farthest point required to be surveyed along the horizontal drainhole from the penetration
point and within the correlative interval."
Directional Survey. "[T]hat survey or report showing the location of any point of the wellbore as it relates to
the surveyed surface location from the surface to the terminus of each lateral."(38)
Date of First Production. "[T]he date hydrocarbons are first produced from the horizontal well, whether or
not production occurs during drilling, completion or through permanent surface equipment."(39)
Gas-Oil Ratio. The number of cubic feet of gas produced per barrel of oil produced.(40)
§ 21.03. Physical Factors Affecting Development.
Various physical factors affect the development and productive capability of horizontal drainholes. Among
those considerations are:
(1) Length of lateral,
(2) Radial vs elliptical reservoir patterns,
(3) Irregular reservoirs (thickness),
(4) Orientation of well bore (direction),
(5) Vertical radius of well bore, and
(6) Developing dimensions, including
(a) Multi-drainholes (multi-branched or legs),
(b) Dual Leg or Layered Drainholes (See Illustration 5),
(c) Dogleg drainhole, and
(d) Communicating drainholes (two-surface locations connected by two horizontal drainholes).
§ 21.04. Legal Issues Involving Private Rights in Appalachia.
As an obvious caveat, the language of any lease should be examined in light of horizontal drilling
technology.
[1]--Implied Covenants.
Oil and gas leases are interpreted to contain implied covenants. The covenants typically include (1) the
covenant to drill an initial exploratory well, the covenant to protect the leasehold from drainage, the
covenant to reasonably develop the premise, the covenant to further explore the premises, the covenant to
market the product, and the covenant to conduct all operations on the leasehold that affect the lessor's
royalty interest with reasonable care and due diligence.(41) Several of the implied covenants ­ especially the
covenants of reasonable development, protection against drainage, and diligent and proper operation of the
lease ­ can be operate in the application of horizontal drilling technology to existing leases in Appalachia.
[a]--Covenant of Reasonable Development.
The covenant of reasonable development is premised upon an economically motivated operator fully
developing the lease within
Illustration 5
a reasonable time. Developing the lease provides the lessor with royalties. The lessee is under no duty to
develop, however, unless a reasonable expectation of profit exists.(42) The covenant is concerned with
further drilling in known producing formations(43) and applies only after production has been obtained.(44)
Even though horizontal wells cost more than twice as much as a traditional well, one horizontal well can
"tap five times the amount of reserves" of a conventional vertical well.(45) The ability of horizontal wells to
increase production and reserves holds the potential to set a new standard for the covenant of reasonable
development. Many areas of Appalachia contain known areas of production and dwindling reserves. The
potential for a horizontal well to make these older areas economically feasible once again is not difficult to
imagine.