Comparison of Oil Proration Methods in the Various States
Authors: Ballou A.R. , Dutton Granville 
Published: December 2007

Introduction

As discussed in this paper, proration methods refer to those procedures by which the allowable production of oil is controlled by a state agency or an agency recognized by the state. In many states such allowable production is dependent upon, or determined by, the acreage assigned to the well or wells in question; therefore, spacing, drilling-unit pooling and fieldwide unitization regulations are included in this discussion. In addition, a brief description of special allowables granted by some states to cover certain situations is included.

The most significant distinction between proration methods is whether or not they are founded upon market demand statutes. In view of this fundamental distinction the discussion is divided into two basic sections. The first section deals with those states practicing statutory market demand-proration with respect to oil, the second with proration procedures in the other producing states.

Market Demand States

Eleven of the 32 oil-producing states have market-demand statutes. These market demand states include five of the seven largest producers. During 1961 these five state-Texas, Louisiana, Oklahoma, New Mexico and Kansas-produced 67.9 per cent of the domestic oil production. The other six states, Alabama, Arizona, Florida, Michigan, North Dakota and Washington, contributed another 2 per cent to make the total production subjected to market-demand proration approximately 70 per cent. Four of these are not applying market-demand allocation proration, North Dakota has such allocation in its Marketing District 1 (from which approximately 60 per cent of that state's production is taken) and Alabama has subjected is Citronelle field to market demand.

Market Demand Oil Proration

The method of determining the market demand for oil is similar in all states currently using market demand as the basis for oil allocation. In this method the various purchasers in the state submit nominations indicating the amount of crude oil they are willing to purchase in each field during a given month or months. These nominations are totalled for the state or marketing districts within the state. The regulatory agency considers these totals along with various inventories of stocks and forecasts of market demand in order to determine what they consider to be the market demand for the month or months in question. These data are received into evidence at statewide hearings called for the purpose of ascertaining market demand at either monthly or bimonthly periods.The agency also bas available the total waste-free production that the wells in the state are capable of producing. This waste-free production is classified into proratable and non-proratable categories. The non-proratable classification applies to wells incapable of producing the volumes they would receive under the allocation procedure and to wells exempted from proration by some type of special allowable.

Regular Allowables

The non-proratable production is subtracted from the market demand and the remainder is allocated to the prorated wells or properties. There are two general methods of allocating to the proratable wells-the percentage method and the normal unit allowable.In the percentage method, the per cent of the total capacity of all proratable wells represented by the remainder is the market demand percentage. This percentage is applied to the individual allowables to determine the permissible production rates. In the unit-allowable system the basic unit allowable is set so that the total allowable, which involves applicable adjustments for depth, acreage and location, equals the remainder.The allowables to which the market demand percentage is applied are determined by two different standards within the market demand states. Texas theoretically uses a system whereby the maximum efficient rate (MER) of production is determined for each field in the state, usually on the basis of a rate to be applied to the top allowable wells in the field.

JPT

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