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NY Compulsory Integration Law

NY Compulsory Integration Law

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Published by: James "Chip" Northrup on Sep 22, 2012
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01/14/2013

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N.Y. ENV. LAW § 23-0901 : NY Code - Section 23-0901: Compulsory integration and unitization inoil and natural gas pools and fields
Search N.Y. ENV. LAW § 23-0901 : NY Code - Section 23-0901:Compulsory integration and unitization in oil and natural gas pools andfieldsComments in
red italic:
1. Compulsory integration and unitization in oil pools and fields and in natural gas pools andfields shall be subject to the provisions of this section with subdivision 3 to be specifically applicable to integration within individual spacing units, and subdivisions 4 through 12 to bespecifically applicable to unit operation of an entire pool or part thereof.2. The department shall not make any order requiring the integration of interests in any spacingunit or requiring the development or operation of any field, pool or part thereof as a unit unlessit finds, after detailed study and analysis, notice and hearing, that the integration of interests in spacing units, under conditions then existing in this state, or in the field orpool to be affected, is necessary to carry out the policy provisions of section 23-0301 of thisarticle.3. In the absence of voluntary integration as permitted by section 23-0701 of this article andafter finding as required by subdivision 2 of this section, the department shall make an orderintegrating all tracts or interests in the spacing unit for development and operation. Each suchintegration order shall be upon terms and conditions that are just and reasonable and subject tothe following:a. As used in this section or otherwise in this article, to the extent applicable to oil and gas wells:(1)
"Integrated non-participating owner" or "non-participating owner"means an owner who elects to reimburse the well operator,
out of  production proceeds
, for such owner's proportionate share of the actual well costs of the initial well in a spacing unit and be subject to
a risk penalty
,
and complies with all of the requirements for integration, including theterms of integration, as specified in an order of integration issued pursuant to thecompulsory integration provisions of this section.
The non-participating ownershall receive the full share of production attributable to such owner'sproportionate interest in the spacing unit following the recoupment by the well operator of the owner's proportionate share of the actual wellcosts plus a risk penalty of 
two hundred percent 
of the share of the actual well costs allocable to such owner.
 
 
This election allows the compelled working interest owner to pay the expenses on thewell in arrears- from the proceeds from the well 
if any, but subject to a deduction of the actual costs allocated, plus a risk penalty of 200% percent 
meaning the costsallocated to the compelled working interest party are 300% of the actual costs. As a practical matter, this would make most wells uneconomic for the compelled party to participate in.
 Some operators will use this provision “to operate the partners todeath” –
meaning run up expenses to try to force them out of the well.
In the case of a leased tract, a royalty shall be deducted from the non-participatingowner's share of production, which shall not be subject to charges or costs, butshall be separately calculated and paid to the non-participating owner on behalf of the royalty owner as follows:(i) During the recovery of the actual well costs, 1/16 or 6.25%,(ii) During the recovery of the first 100% of the risk penalty, 3/32 or 9.38%,(iii) During the recovery of the second 100% of the risk penalty,
the lowestroyalty fraction set forth in an existing lease in the unit,
but no less than1/8 or 12.5%. Nothing in this subparagraph relieves any lessee of its obligationto pay, from the commencement of production, any remaining royalty andoverriding royalty owed under the terms of its lease.
The compelled party, since they are by definition a mineral rights owner, are entitled to a royalty interest on the well, but at a reduced rate, as described above, as long asthey are paying their working interest cost share in arrears
 
 from the well’s
 proceeds (if any).
 (2)
"Integrated participating owner" or "participating owner" means anowner who elects to participate in the initial well in a spacing unit,
 paysall costs associated with participation
and complies with all of therequirements for participation,
including the terms of integration, specified inan order of integration issued pursuant to the compulsory integration provisions of this section.
This election means that the compelled interest owner is paying their pro-rata shareof drilling and fracking
 
as those costs are incurred. Therefore no “risk penalty” is
assessed against them, but they are rolling the dice that the well will be economical.Or they will lose their investment in the well.
(3) "Integrated royalty owner" means an owner who has either elected to be anintegrated royalty owner or who does not elect to become either a participatingowner or a non-participating owner.
The integrated royalty owner shallreceive a royalty equal to the lowest royalty in an existing lease in thespacing unit, but no less than one-eighth.
The integrated royalty owner shall
 
have no obligation to the well operator or any other owner for any charges, taxes orfees associated with the operation of the oil or gas well and, notwithstanding any other law to the contrary, shall not be liable by reason of the owner's status as anintegrated royalty owner for any claims for personal injury or property damagesuffered by any person relating to the drilling and operation of the well.
 If the compelled owner does not participate in the pro-rata share cost of the well, theyget the lowest royalty of any of the participating owners (that made up the 60%
majority) or at least “an eigth” = 12.5%. But no “signing bonus” or case of beer. As a
 practical matter, this is the only viable option for most compelled owners, since thereis not fourth choice
they cannot opt out of participating in the well. The DEC will  force them to take one of the three participations.
(4)
"Risk penalty" means the percentage applied to well costs to
reimburse the well operator 
for the risk involved with the explorationfor and development of a well or the percentage applied to other costs
 that are subject to recoupment and a risk penalty, as provided herein. At any timeduring a risk penalty phase, an owner subject to a risk penalty may pay to the welloperator the full amount subject to recoupment by the well operator, to terminatethe risk penalty phase and be eligible for other opportunities for participation asprovided herein.
The wording here is a bit misleading. The risk penalty is just that 
a penalty. It does
more than “reimburse the well operator” –
it penalizes the compelled party bycreating a deduction from their share of proceeds from the well (if any), by as muchas
 300% of the amount of the expenses, like a “cash call” in a partnership, that they
 failed to make.
(5) "Well costs" means the costs incurred
or estimated to be incurred 
by the well operator in relation to the drilling, completion, and theinstallation of surface equipment, other than as described in item E of clause (ii) of subparagraph 1 of paragraph c of this subdivision,including, without limitation, surveying, drill site preparation, leasingof surface rights and access roads pertinent to the drill site, constructionof access roads, permitting, drilling, stimulation, testing, welllogging, drilling insurance, plugging and abandonment of the well,environmental mitigation costs associated with drilling and any othercosts associated with the foregoing that the operator has incurred oranticipates incurring,
including a reasonable charge for supervision of the foregoing activities.
 

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