The purpose of this paper is to acquaint those in our industry and others about the term "proration". I will discuss what it is, why we have it, and how it applies to the regulation of oil and gas production. For most of my professional career, I production. For most of my professional career, I have been employed by Panhandle Eastern working in the area of gas supply. Since I am most familiar with the proration of natural gas, I will have only brief remarks about oil proration and discuss in more detail the aspects of gas proration.
The term proration is derived from the word "prorate" which means to make an arrangement on a basis of proportional distribution. The word proportional is important in this meaning in that proportional is important in this meaning in that to prorate does not necessarily mean to take on an equal basis. There are those in the oil and gas industry who believe to prorate a reservoir means to take or produce at equal rates from all wells in the reservoir regardless of the quality of the wells or the reserves underlying them. The Kansas General Rules and Regulations define proration as follows: "Proration shall mean the regulation of the amount of production which may be produced without waste, and to prevent unratable taking and unreasonable discrimination prevent unratable taking and unreasonable discrimination as between operators, producers, and royalty owners within a common source of supply, and so as to permit each well or developed lease to ultimately produce approximately the amount of gas underlying a developed tract." In other words, under proration, an operator is given the same opportunity to produce its proportionate share of recoverable reserves underlying his lease as other operators in the same source of supply are permitted to produce their proportionate share of recoverable reserves underlying their lease, without uncompensated drainage. Generally speaking, a well with a high reserve should be allowed to produce at a higher rate than a well with a low reserve produce at a higher rate than a well with a low reserve so that each well will recover its reserves in approximately the same period of time.
The primary objectives of proration are (1) to prevent waste, and (2) to protect correlative rights. prevent waste, and (2) to protect correlative rights.
During the industry's early years of development, the only concern for conservation regulation was to prevent surface damages and physical waste of oil and gas. when the capacity of oil wells to produce far exceeded the demand, much of the production was uncontrolled. Wells were produced production was uncontrolled. Wells were produced wide open in an effort to obtain a larger share of the reservoir hydrocarbons resulting in excessive pressure declines, and damage to both the reservoir and the well bore. Oil was collected in pits and often polluted the surrounding land and adjacent streams. When voluntary agreements between operators met with little or no success, martial law was imposed in Texas and Oklahoma in an attempt to control the situation.
Oklahoma was the first producing state to take positive action to enforce conservation by positive action to enforce conservation by regulation. In 1915 the Oklahoma Legislature authorized the Corporation Commission, as a regulatory body, to limit production and allocate it among the wells in a reservoir, if necessary, to prevent waste. Texas was the next state to take action and in 1919 enacted a general waste prevention statute giving broad regulatory powers to the Railroad Commission.
Other producing states either had no regulation or had inadequate control with what little regulation they did have in conserving this irreplaceable natural resource. When it became evident that the states could not effectively control the production, some Washington officials, as well as some industry leaders, saw federal control as the only solution. In 1924 the Federal Oil Conservation Board was created.