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Compliance: Existing oil & gas leases may not be what they seem with new technology

Fracking has thrown a wrench to older, vertical-well oriented oil and gas leases

The process of extracting energy from rocks in places like Pennsylvania, Texas, Ohio, Indiana, North and South Dakota and Illinois using hydraulic fracturing is capturing a great deal of attention lately — not only in this space, but also in the movies and in the popular press. Fracturing rock is not a new process. Indeed, that is what a drill bit does. High volume hydraulic fracturing in vertical wells is a somewhat newer technology, but it too has been used in the United States as a method of extracting energy from rock for years.

What is new is the process of horizontal drilling, or rather, the conventional process of drilling vertically for several hundred (or thousand) feet below ground surface, and then turning the drill bit ninety degrees and drilling horizontally for several hundred (or thousand) more feet. That vertical then horizontal boring has made it possible, and economically feasible, to extract energy from rock buried deep below the surface of the earth. Because horizontal drilling has made extracting energy from rock feasible and profitable, the process is being employed in more locations and is attracting more and more attention. Illinois recently passed the Illinois Hydraulic Fracturing Regulatory Act, and the process is gaining a lot more attention here.

Springer argued for the plain meaning of the lease. That is, Springer was entitled to all of the royalties because the well head, “meaning the visible location on the land from which hydrocarbons exited,” was on its land. According to Springer, the plain meaning of the lease provided that the well head was relevant point to determine the right to receive royalty payments, because the lease specifically provided that the royalty rights were to be determined “without reference to any production unit on which such well or wells are located.”

Sullivan argued to the contrary. According to Sullivan, the “productive portions” of the well at issue were actually “situated on” both the Springer land and the Sullivan land, and the royalties should be apportioned according to the relative “productive portions” of the well “situated on” each parties’ property. It is clear that the lease itself only contemplated vertical wells and production from vertical wells.

Contributing Author

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William J. Anaya

Bill Anaya is an environmental Lawyer licensed in Illinois and Indiana and heads Arnstein &...

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