2010 Arkansas Code
Title 15 - Natural Resources and Economic Development
Subtitle 6 - Oil, Gas, and Brine
Chapter 72 - Oil and Gas Production and Conservation
Subchapter 3 - Pools and Drilling Units
§ 15-72-305 - Allocation of production and cost following integration order -- Procedure.

15-72-305. Allocation of production and cost following integration order -- Procedure.

(a) (1) The order of the Oil and Gas Commission creating a drilling unit shall provide that effective as of the commencement of the drilling of a well upon the drilling unit or, if a well capable of producing oil and gas in commercial quantities has already been completed upon some part of the lands included within the drilling unit, all royalty, overriding royalty, production payment, or similar interests in the drilling unit shall be integrated without the necessity of any additional order or action by the commission or owners. In the event any unit includes an unleased mineral interest upon the effective date thereof, one-eighth (1/8) of the unleased mineral interest shall be deemed as royalty for the purposes of this subsection.

(2) For the purpose of making distribution to the owners of royalty, overriding royalty, production payment, or similar interests, there shall be allocated to each tract in the established drilling unit that percentage of the total production from such drilling unit, except any part thereof unavoidably lost or used for production or development purposes, which the area of each tract bears to the total area of the drilling unit. The interests shall be paid or delivered to each owner thereof in conformance with the provisions of the appropriate lease, agreement, or contract creating it, but computed upon the production allocated to each tract as hereinabove provided, rather than upon the actual production therefrom.

(3) One-eighth (1/8) of all gas sold on or after the first day of the calendar month next ensuing after March 6, 1985, from any such unit shall be considered royalty gas, and the net proceeds received from the sale thereof shall be distributed to the owners of the marketable title in and to the leasehold royalty and royalty as defined under 15-72-304(d). Marketability of title shall be determined according to principles of real property law governing title to oil and gas interests. Unless all royalty owners within the drilling unit agree to a different method for distribution of the royalty, the distribution shall be coordinated by the operator of the well as follows:

(A) (i) Within thirty (30) days of the receipt of the proceeds from gas sale, each working interest owner shall furnish to the working interest owner designated as operator, in a form acceptable to the operator, the following information:

(a) The names and addresses of all owners of royalty under the working interest owner's leasehold interests;

(b) Each royalty owner's tax identification or social security number and any other information needed to meet the requirements of the Internal Revenue Service or other governmental agencies; and

(c) The fractional or decimal interests in the unit of each tract in which interests are owned and each royalty owner's fractional or decimal interest therein;

(ii) Thereafter, each working interest owner shall notify the operator of any changes of ownership and provide the necessary information to facilitate the necessary changes promptly upon receiving proof thereof;

(iii) If any working interest owner should fail or refuse to discharge its obligation to provide the information outlined in subdivision (a)(3)(A)(i) in a timely manner, to facilitate payments, the operator may, at its option, either:

(a) Notify the working interest owner by certified or registered mail of the name, address, and decimal interests of the royalty owner believed to be entitled to receive payments pursuant to the terms hereof under the working interest owner's leasehold on the basis of the best information then available to the operator. If the working interest owner fails to respond to the notification within thirty (30) days of the receipt thereof, the operator shall be entitled to pay royalty moneys in accordance with its prior notification and usual procedures. Further, the operator's payment in this manner shall constitute a complete defense to any claim or in any legal proceeding or cause of action and the responsible working interest owner shall indemnify and hold the operator harmless from all liability and reimburse the operator for any and all costs and expenses, including attorney's fees, interest, or penalty incurred with respect to the proceeding or action; or

(b) File an application with the commission, setting forth sufficient facts to identify the well concerned and the responsible working interest owner, requesting that the commission issue an order requiring the working interest owner to appear at the next regularly scheduled hearing and show cause with respect to its failure to timely comply with the provisions of this section. Subsequent to the hearing, the commission shall impose upon a working interest owner who has failed to meet its obligations hereunder such sanctions as are reasonably calculated to enforce compliance with this section. These sanctions shall include, but not be limited to, a civil penalty of up to, but not more than, five hundred dollars ($500). The commission shall have the authority to suspend the imposition of any sanction for a maximum period of sixty (60) days in order to allow the noncompliant owner the opportunity to furnish proof to the commission of his or her compliance with any commission order. All civil penalties levied by the commission as a result of this provision shall be collected by the commission and shall be deposited in the State Treasury to the credit of the Oil and Gas Commission Fund. The commission may promulgate such other rules and regulations as it deems appropriate and necessary to carry out the purposes of this section;

(iv) The terms of subdivision (a)(3)(A) of this section shall not be applicable to any producing unit or well that produces liquid hydrocarbons only, or liquid hydrocarbons associated with the production of gas, or gas produced associated with the production of liquid hydrocarbons;

(B) (i) Commencing no later than six (6) months after the date of first sale, and thereafter no later than the earlier of thirty (30) days after first payment is received or thirty (30) days after the sixty-day period within which the first purchaser is to make payment pursuant to 15-74-501 and 15-74-601 -- 15-74-603, or a total of ninety (90) days after the end of the calendar month within which subsequent production is sold, each working interest owner or marketing party who has sold gas shall remit or cause to be remitted to the operator one-eighth (1/8) of the revenue realized or royalty moneys from gas sales computed at the mouth of the well, less all lawful deductions, including, but not limited to, all federal and state taxes levied upon the production or proceeds and shall indemnify and hold the other working interest owner free from any liability therefor. However, if any portion of the price received by a marketing party is subject to possible refund to the gas purchaser pursuant to the regulations or orders of any governmental authority, the refundable portion need not be included in the amount remitted to the operator for distribution hereunder until the possibility of refund has terminated. The funds or amounts as so remitted shall be held in trust by the operator for the account of the royalty owner or owners entitled thereto until distributed and paid as provided in this section;

(ii) If any operator should fail or refuse to discharge its obligation to remit revenues in a timely manner as provided in this section, the working interest owner whose royalty owner's obligations have not been paid may, to facilitate payment, either:

(a) File an application with the commission, setting forth sufficient facts to identify the well concerned and the responsible operator, requesting that the commission issue an order requiring the operator to appear at the next regularly scheduled hearing and show cause with respect to its failure to timely comply with the provisions of this section. Subsequent to the hearing, the commission shall impose upon an operator who has failed to meet its obligations hereunder such sanctions as are reasonably calculated to enforce compliance with this section. The sanctions shall include, but not be limited to, a civil penalty of up to, but not more than, five hundred dollars ($500). The commission shall have the authority to suspend the imposition of any sanction for a maximum period of sixty (60) days in order to allow the noncompliant the opportunity to furnish proof to the commission of his or her compliance with any commission order. All civil penalties levied by the commission as a result of this provision shall be collected by the commission and deposited in the State Treasury to the credit of the fund. The commission may promulgate such other rules and regulations as it deems appropriate and necessary to carry out the purposes of this section; or

(b) File a legal proceeding or cause of action to compel the operator's compliance with the terms hereof. The operator shall reimburse the complaining working interest owner for any and all costs or expenses, including attorney's fees, incurred with respect to the proceeding or action;

(iii) The operator shall not be held liable for failure to distribute royalty hereunder where its failure is due to the failure of a working interest owner to timely provide or cause to be provided the information and royalty moneys described in subdivisions (a)(3)(A) and (B) of this section. Each working interest owner shall indemnify and hold the operator harmless for all costs, including reasonable attorney's fees, incurred as a result of the failure;

(iv) The terms of subdivision (a)(3)(B) of this section shall not be applicable to any producing unit or well that produces liquid hydrocarbons only, or liquid hydrocarbons associated with the production of gas, or gas produced associated with the production of liquid hydrocarbons.

(4) (A) Any working interest owner may arrange for the royalty moneys to be remitted directly to the operator by the purchaser to whom the gas is sold but, in that case, shall continue to hold the operator harmless for all costs, including reasonable attorney's fees, incurred as a result of failure to provide or cause to be provided the information and royalty moneys required by subdivisions (a)(3)(A) and (B) of this section.

(B) The terms of subdivision (a)(4) of this section shall not be applicable to any producing unit or well that produces liquid hydrocarbons only, liquid hydrocarbons associated with the production of gas, or gas produced associated with the production of liquid hydrocarbons.

(5) (A) On or before the thirtieth day of the next calendar month following its receipt of the royalty moneys as provided above, the operator shall distribute the moneys to all royalty owners as provided in this subsection. The distribution may be made annually for the aggregate of up to twelve (12) months of accumulated royalty moneys where the aggregate amount due any royalty owner is one hundred dollars ($100) or less. The payment shall be made in a form evidencing the following:

(i) The name of the party entitled to payment;

(ii) Identification of the wells for which payment is being made by well number or division order;

(iii) The time period for which payment is made;

(iv) The decimal interest of the party being paid;

(v) The total production from each well for which payment is being made;

(vi) The gross price received for each unit of production from each well;

(vii) Any and all deductions from the payment which shall be itemized as to the nature of the deduction; and

(viii) An address and telephone number at which additional information may be obtained and questions may be answered.

(B) In the event that the operator stops the royalty payments for a period of more than sixty (60) days for any reason, the operator shall send a letter of explanation.

(C) If a royalty interest owner requests information or answers to questions concerning a payment made pursuant to this subdivision and the request is made by certified mail with return receipt requested, the party making payment must respond to the request by certified mail with return receipt requested not later than forty-five (45) days after the request is received.

(D) (i) If a royalty interest owner fails to receive an answer to his or her request for information or to his or her questions, the royalty interest owner may file a complaint with the commission on a form provided by the commission describing:

(a) The information requested or the questions to be answered;

(b) The party responsible for making the royalty payments;

(c) The date the information or answers were requested; and

(d) The date the requested information or answers were due from the paying party.

(ii) Upon the filing of the complaint form, the commission shall issue an order requiring the party making the payments to appear at the next regularly scheduled hearing and to show cause for its failure to respond to the royalty interest owner's request for information or answers.

(iii) If the party making the payments fails to respond to the royalty interest owner's inquiry after the complaint is filed or fails to show just cause for its failure to respond at the hearing, the commission shall impose such sanctions as are reasonably calculated to enforce compliance with this provision.

(iv) These sanctions shall include, but not be limited to, a civil penalty of up to, but not more than, five hundred dollars ($500). The commission shall have the authority to suspend the imposition of any sanction for a maximum period of sixty (60) days in order to allow the noncompliant party the opportunity to furnish proof to the commission of his or her compliance with any commission order.

(v) All civil penalties levied by the commission as a result of this provision shall be collected by the commission and shall be deposited in the State Treasury to the credit of the fund.

(E) The commission may promulgate such other rules and regulations as it deems appropriate and necessary to carry out the purposes of this section.

(F) The terms of subdivision (a)(5) of this section shall not be applicable to any producing unit or well that produces liquid hydrocarbons only, liquid hydrocarbons associated with the production of gas, or gas produced associated with the production of liquid hydrocarbons.

(6) (A) Payment of one-eighth (1/8) of the revenue realized from the sale of gas as provided in this section shall fully discharge all obligations of the operator and other working interest owners with respect to the payment of one-eighth (1/8) leasehold royalty or royalty as described under 15-72-304(d).

(B) The terms of subdivision (a)(6) of this section shall not be applicable to any producing unit or well that produces liquid hydrocarbons only, liquid hydrocarbons associated with the production of gas, or gas produced associated with the production of liquid hydrocarbons.

(7) (A) The operator shall be entitled to reimbursement from each working interest owner, whether or not that party is marketing gas, the party's fair and equitable share of the costs of distributing the one-eighth (1/8) royalty required by this subsection. The amount of these charges shall be based upon the reasonable cost of administering these provisions and shall be subject to review by the commmission upon application of any working interest owner.

(B) The terms of subdivision (a)(7) of this section shall not be applicable to any producing unit or well that produces liquid hydrocarbons only, liquid hydrocarbons associated with the production of gas, or gas produced associated with the production of liquid hydrocarbons.

(8) (A) Any gas taken in kind shall be excluded from royalty gas for which payment shall be made pursuant to this section, but the operator shall be promptly provided with written notification of the intent to exclude the gas.

(B) Additionally, any gas taken by a working interest owner to correct an imbalance in production between the working interest owners, which was created or existed prior to April 1, 1985, shall also be excluded from royalty gas for which payment shall be made pursuant to this subsection.

(C) Nothing contained in this section shall affect the obligations of working interest owners with respect to the payment of royalties, overriding royalties, production payments, or similar interests in excess of the one-eighth (1/8) royalty required to be distributed under this section.

(b) All operations, including, but not limited to, the commencement, drilling, or operation of a well upon any portion of a drilling unit for which an integration order has been entered shall be deemed for all purposes the conduct of operations upon each separately owned tract and interest in the drilling unit by the several owners thereof. The portion of the production allocated to the owner of each tract or interest included in a drilling unit formed by an integration order shall, when produced, be considered for all purposes as if it had been produced from the tract or interest by a well drilled thereon.