Oil, Gas, and the Electoral College

An illustration from my profession, petroleum engineering, might shed some light on the Electoral College, and what the founders were trying to accomplish when they designed it.

So please indulge me. Don’t sweat the details. I promise I’ll keep it understandable and try to make a point.

Welcome to Cowlick County

Oil has been discovered in a remote corner of Cowlick County! In fact, eight wells have been drilled to date: There are five producers making 500 barrels per day total, and three dry holes that define the limits of the oil reservoir.

There are 25 farms of equal size in the vicinity. Each farm is a square tract owned by a different farmer. In the diagram below, green circles represent producing wells, black circles dry holes, and the large green oval delineates the extent of the accumulation.

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How lucky for the farmers who own tracts B2, C2, B4, D4 and E4! All the other farmers within the outline can’t wait to have a well on their property, as shown below:

Drill, baby, drill!

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The problem is, this scenario benefits no one, as a shiny-pants reservoir engineer has determined that the five original wells are all draining a common supply and should be quite sufficient to recover the estimated 1 million barrels of so-called”primary” reserves. The 14 additional wells simply compete with each other; each additional well guarantees that everyone ends up with a smaller slice of the same-sized pie. But you can hardly blame the owners of B3, C3, D5 et al for wanting a piece of the action.

The reservoir engineer has a better plan

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The reservoir is better managed with a secondary recovery project. In this case, a single new well is drilled for purposes of water injection. Water will sweep oil toward producing wells while it maintains high pressure in the reservoir. The producing rates of the wells doubles, and we project that recovery of oil-in-place may be as high as 25%, 2.5x the recovery with no injection.

Pretty fantastic for Farmers B2, C2, B4, D4 and E4, eh, what!

Except that it’s not as easy as all that. Obviously, the owners of the wells can’t just traipse onto land they don’t own, in this illustration Tract C3, and take it over for their own . . . pursuit of happiness.

That’s where Unitization comes in.

In this simplified illustration, it is obviously to the benefit of the landowners (and their oil company lessees), and to the regulatory jurisdiction to cause a water injection project to happen.

Most states enjoy considerable economic benefit, direct and indirect, from oil production, in the form of income and severance taxes. The state’s oil and gas regulatory body (Dept of Natural Resources, Corporation Commission, Railroad Commission, etc.) has rules that are designed to:

  • Protect the resource and optimize its use;
  • Protect the environment;
  • Prevent waste (including preventing unnecessary wells from being drilled).

State rules generally support and sanction a project like the one illustrated above, but the affected landowners must agree on how they are going to split up the “pie”.  Typically a supermajority (~85%) is required to “pool” acreage; that means that owners of 85% of the area within the green outline must agree on how to share costs and revenues. By doing so, they create a larger entity — the Unit — from many smaller pieces. Once formed, each participating tract owner owns an undivided share of the whole.

This process is called “Unitization”. It is designed to balance the disparate interests of parties and to give each a share of the “pie” that can be deemed to be fair.

It works because all parties benefit from an agreement. Absent an agreement, nearly everyone is worse off.

The Formula.

In the illustration, the owners of the tracts where producing wells have been drilled are in the catbird seat. They have a stream of revenue, except that, absent an agreement, that stream is threatened if more drilling happens.

The owners of the undrilled tracts are needed if ever an agreement is to be reached. They need just compensation for not drilling a well.

A typical unit participation formula balances the value of current income against the ownership of the resource. In the example above, Tract E4 had 30% of “current income” but maybe only 5% of the total acreage in the reservoir. A simple formula might weight these factors 20%/80%, resulting in a 10% equity share of a much bigger pie for that tract. (20% of 30% is 6%; 80% of 5% is 4%; total 10%.)

With an agreement, Tract E4 ends up with 10% of 2.5 million barrels, or 250,000 barrels.

With an agreement, non-producing Tract C4 gets 8% of the same pie (20% of 0% plus 80% of 10%). That’s 200,000 barrels, without having to drill a well. Not bad.

So what does that have to do with the Electoral College?

The Electoral College came about in much the same way as an oil unit: Both involve previously separate and distinct entities with disparate, even unique, interests, but each of them perceive it is in their common interest to join forces.

The benefits of joining in union far outweigh any party’s individual benefit of going it alone. That was the deal in 1787; the dynamics work today to balance the interests of small and large states, resource-rich and resource-poor states.

A supermajority is required to reach an agreement. Supermajorities protect the rights of the outnumbered in a democracy. That’s why the Senate has a filibuster. That’s why we don’t amend the Constitution by a simple majority; instead it takes 3/4 of the States.

The Electoral College is not something that merely happened by chance. The Founders were savvy and sophisticated dealmakers. The contract they drafted to form our remarkable union of states has survived the stress of 230 years. Some would call the Constitution an anachronism; I call it a miracle.

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