Oil and Gas Lease Questions

Mike in Ohio · #1 05/12/10, 06:15 PM

So we are starting to get contacted by folks about acquiring a lease on our land. I know the downsides from fracking, etc. and we aren't entranced but there is a real potential to make some money (we are in the Marcellus shale).

I'm trying to figure out what makes sense and if we were to make a deal how to incent the lessee to drill rather than sit on the lease. My understanding is that 12.5% royalty is pretty standard. I'm wondering what is an appropriate amount of free gas (I will not accept a limitation on "home" use. If we agree to a quantity then if I want to use it to heat a greenhouse or our barn then I figure that is my business, not theirs.) The other question is how much per acre per year for the lease.

Mike

Peace n Quiet · #2 05/12/10, 06:43 PM

Mike,
We are in the Marcellus Shale also, in PA. The leases here vary widely... the early leases were signed as 5 or 10 year leases, paying only $25 - $50 per acre for the upfront "bonus" money. The royalties were around 12.5%. No free gas useage.
About two years later, the bonus money amount began to climb pretty fast as more leasing companies came to town and things started to get competitive. In early 2008, the bonus amount was around $2000/acre and royalty rate was 15%. Now, I think the going rate is $5750/acre, royalties 18%(some may be higher but this is average), five year lease. As far as I know, no one is being offered free gas useage yet.
A few counties over, I recently learned that some of their early leases only gave royalty $$ for the first year of production! Others were actually conveyances... meaning the owner SOLD his O&G rights away - many people did not realize what they were signing and now have regrets.
Be sure to read the lease carefully! And if you aren't familiar with the process, hire an attorney who is capable of protecting your rights.
Good luck.

farmmaid · #3 05/12/10, 07:01 PM

We live near Binghamton,NY, right in the "mother load". We joined a co-op and they hired a lawyer. We are up to over 1200 members and 60,000 acres as a block. The rate here is $6800 per acre to sign for 5 years, 20% and free gas to your home. Have not signed yet, it will go up. Be sure to get an individual lease to cover all the environmental issues, that is what is great about our co-op. Also get $ for pipe laid and right of way on your property, all the extras add up too. If you would put a well on your property that is $30,000 extra.
We have friends that have 4200 acres..........YIKES!!!!!!!!!!!!!!!!!

texican · #4 05/12/10, 09:35 PM

Quote:

Originally Posted by Mike in Ohio

So we are starting to get contacted by folks about acquiring a lease on our land. I know the downsides from fracking, etc. and we aren't entranced but there is a real potential to make some money (we are in the Marcellus shale).

I'm trying to figure out what makes sense and if we were to make a deal how to incent the lessee to drill rather than sit on the lease. My understanding is that 12.5% royalty is pretty standard. I'm wondering what is an appropriate amount of free gas (I will not accept a limitation on "home" use. If we agree to a quantity then if I want to use it to heat a greenhouse or our barn then I figure that is my business, not theirs.) The other question is how much per acre per year for the lease.

Mike

12.5% is not normal. That is 'the normal' fifty years ago... it's pretty much standard boilerplate language still printed on the commercially available leases. Lease royalty rates are negotiable. If you have half an acre your negotiating power is a lot less than if you own a hundred acres. Under no circumstances would I sign for less than 20%. I'd ask for 25%.

In my area (East Texas, with multiple pay zones and two new shale zones) 1000$/acre is good for 'dogs', and good areas are getting back to $6000/acre. Everyone is getting offered 22.5%, most are getting 25%.

If your shooting for free gas, you might have to get a lawyer. Pretty much no one allows a free gas clause in the addendums anymore. If there is an older lease, with free gas clauses, and they drill more wells in the same unit, the free gas is usually still available. "Kicker" is, the gas is usually for only for one home in the unit. So, what I'm saying is, IF, they don't laugh when you 'demand' free gas, accept whatever bones they're willing to throw your way.

The only way I could see someone (at least around here) getting free gas, on a brand new lease, would be to own a lot of land (1/4 or more of the unit) & have a tract that they absolutely have to have, in order to drill. If the wellsite is on your place, you have more bargaining power. If not, you'd have to deal with right of way issues with the neighbors.

The gas might be free........... but they can require a heckuva lot of equipment (safety, monitoring, stinkpots, valves, etc.) be installed, and at your expense. My father worked for a Gas Exploration Co. He was able to get free gas, but he did have to pay around 4K (this was back in the 80's) for all the 'parts'. He was able to get some of his hands to install it for free.

Good luck. Hope you get 25%, >5k/acre, and free gas.

Make sure you spell out all of your potential future concerns, in addendums to the lease. Fences, damages, water usage, dust, noise abatement, (hospital zone compressor if near your dwelling), etc... it's easier to get something done, before it's happened.

Have any questions, hollar... (this is how I make my living).

Oh, most important... IF you don't feel comfortable understanding the superfine print, spend 200$ on a lawyer, and let them make sure your concerns are covered.

fordy · #5 05/12/10, 09:48 PM

................Make the term of the lease for 3 years , and require them too drill atleast One Well , during that time frame . The longer the term of the lease the longer they have too fiddle and diddle without actually drilling a well . , fordy

anniew · #6 05/12/10, 10:39 PM

I am in the same area as Peace n Quiet. I was offered 5750 and 21 percent just a couple weeks ago. When I met with the landswoman, she said the map had been redrawn and I was no longer in their leasing area. It will come back, however, as they are doing seismic on my neighbor's land...unless they find nothing which is doubtful since the county has loads of operating wells now...with problems, of course. They also offer money to cover what would be a certain amount of gas instead of giving you free gas...some leases are for 200,000 ???(unit) and some are for 350,000.
You can ask for anything you want, but unless your parcel is what they really want, you may not get your wants, but it is certainly better than older leases.
We have polluted water wells in the area, and a second gas worker was killed just this week when working on a gas well. Traffic is terrible and roads are literally falling apart.
Yet, there is nothing to stop them, so get the best lease you can using a lawyer who is versed in gas leasing, and be prepared to move if they mess up your water well.

Mike in Ohio · #7 05/13/10, 05:23 PM

They sent me a copy of their proposed lease agreement. Extremely unattractive. They want the sun the moon and the stars. I feel sorry for any landowner who signed such a lease. Unrestricted right to build whatever they want including gas transport lines for gas not taken from our property. Right to dispose brine. Right to inject and store gas from other properties. Not paying based on the sale/market price - deducting "less the cost to transport, gather, dehydrate, compress, market, meter, treat and process the gas and any losses in volumes to point of measurement....". Why should I eat their transportation and marketing costs? Those sorts of things are their problem not mine. They could make those costs whatever they want. Talk about a boondoggle.

All sorts of other unfavorable clauses.

Here is a useful document for evaluating lease terms - http://www.tlma.org/oilgasleasechecklist.pdf

Mike

FreightTrain · #8 05/13/10, 07:11 PM

i say sign on with a landowner group.. that way, you will have a better lease and wont have the risk of getting "lockd-out" .. plus u wont have to drop A mint to hire your own lawyer to go over lease.
I was with the friendsville group here in PA at one time over 40,000 + acres, the group hired a lawyer to draw up our own lease @ $25 per parcel of land. Weve heard we have the most landowner friendly lease out there. We singed @ 5500 w 20% royalities for 5 yrs w 3 yr option. we are right inside the pool for one well and might be in on a nother going up on the other side of us.

Soon as we were signing, another company was offering 5750 but it was their lease , not ours.

Mike in Ohio · #9 05/13/10, 07:37 PM

FreightTrain,

Can you explain getting "lockd-out"?

TIA.

Mike

FreightTrain · #10 05/13/10, 08:38 PM

weve heard of individuals who held out for mo money with mostly or all surrounding properties leased... getting locked out. meaning there is no point in the companies leasing their rights and they go unsigned. I believe it mostly happens with smaller properties..

say, cabot moves in and signs properties, then leaves area, then fortuna, then the next, the companies send the landmen in in waves.. sooner or later it does not pay for them to do so for a few small properties here n there..

and landmen are snakes in the grass! weve had one try n lowball us for 250 an acre when we knew for a fact at the time the going rate was 2200!! I laughed in his face which ticked him off good.. he told us all the stories, your gonna get locked out if you dont sign, blah blah, we were with a landowners group and laughed harder.. then the global meltdown happened and we stopped laughing.. lol now, we laugh again!

Mike in Ohio · #11 05/13/10, 09:31 PM

That's what I thought you meant.

I'm not overly concerned on that front at this point in time. We are above the Ohio minimum for putting in a well on our property and many of the surrounding properties are too small and even if combined would have issues (many cut up into 5 acre shotgun residential properties).

I think things will heat up in the next year or so in my area.

Here is a link to a more favorable lease to landowners. http://www.homelandenergyventures.co...itruslease.pdf

The other thing I need to get up to speed on is units and pooling.

Mike

texican · #12 05/13/10, 09:55 PM

I know quite a few people that have been left out of leases ('locked out'). Too many unreasonable demands, wishy washy want this today, want something else later, and something else... yada yada yada.

I'm on both sides of this issue... I'm a landowner, with an active gas well, and I see the leases being offered daily...

There are some pretty amazing plat maps out there, and if you look at all the gas units, you'll find small and large tracts 'in between' the units. Folks wanted more than their neighbors, and thought they could gain something by holding out... they did indeed gain something. They kept their pride. That and 3 bucks will get you a coffee at Starbucks (or so I'm told)! Exploration companies can and will drain your property dry, legally, if you don't sign the lease. If the wellsite is on a persons land, they have to be leased. If the horizontal drilling route is under your land, they need the lease... otherwise, if a person isn't cooperative, they'll just stop asking, draw the unit without your tract, and your bank account and heirs will suffer.

My clients right now have almost six pages of addendums, spelling out every possible thing that can go wrong, and what the response will be in the future.

Landmen(women) either work for someone or for themselves. If they work independently, they'll purchase a lease, for as little as they can, bonus wise and royalty wise. They make their living assigning these leases to exploration companies for more money and usually retain the difference between the leased royalty rate, and 25%. So, if I paid 1K/acre and 18% royalty on say a hundred acres, and sold to Evil Gas Co. for 5K/acre, I'd pocket 400K, and I'd retain 7% override. If I put an entire unit together, getting the same terms, I could earn hundreds of thousands a year, off that one well. If the landman (women landmen down here still like the title Landman) works for a company, they have a lot less 'wiggle' room.

So, you can see, the incentive IS there, for independents to get a lease for as little as possible.

**clovis** · #13 05/13/10, 10:50 PM

This is an interesting thread!! I have enjoyed reading about this topic!!!!

Mike in Ohio · #14 05/13/10, 10:57 PM

Texican,

Doing even a little research and checking around indicates that apart from the outrageous terms, the bonus offered was off by orders of magnitude compared to what is happening in the general area. I have to feel sorry for the landowner who sees $4k of money on the table and doesn't realize that they might actually have (reasonably) gotten $50k or even $100k. At least in my area I think a lot of folks are at a disadvantage because there hasn't been a lot of activity until recently.

I've spoken with some other folks in the area and we are going to look into forming a landowners group.

Mike

Mike in Ohio · #15 05/13/10, 11:43 PM

A couple of interesting links I turned up:

http://www.gomarcellusshale.com/

http://www.pagaslease.com/index.php

Allen W · #16 05/14/10, 08:35 AM

Texican

Are you saying for instance that if a well is on 640 acre spacing and a royalty owner won't cooperate that the spacing can be changed to say 600 acres? Here in Oklahoma they will force pool an uncooperative royalty owner to maintain the spacing requirements. Usually if you hold out until they drill you will still get what ever they were leasing for any way. You also get the option if you don't lease of paying for your share of the well.

FlagWaver · #17 05/14/10, 09:43 AM

It's well worth the money to have a gas/oil only attorney go over any lease prior to signing. Landmen/gas companies lie and lie very very well. Get everything in writing.

fordy · #18 05/14/10, 10:35 AM

...................Article in the bus. section of Ft.Worth Star Telegram said Chesapeake was going too pursue more oil production since future forcasted oil market prices would remain higher , and natural gas was supposed too remain lower . , fordy

texican · #19 05/14/10, 10:20 PM

Quote:

Originally Posted by Allen W

Texican

Are you saying for instance that if a well is on 640 acre spacing and a royalty owner won't cooperate that the spacing can be changed to say 600 acres? Here in Oklahoma they will force pool an uncooperative royalty owner to maintain the spacing requirements. Usually if you hold out until they drill you will still get what ever they were leasing for any way. You also get the option if you don't lease of paying for your share of the well.

Texas has loosened it's unit size drastically over the years. It use to be you had to have a minimum of 640 acres as a standard. You could get variances of this (smaller was a little more difficult, larger was easy) but it took time.... Now, permits are approved in less than a week, if you follow all of the filing procedures and you have everything correct in the paperwork.

Oklahoma may still have minimum 640 acre units. I've never worked there, so really can't 'bet any body parts on it'

. But, I imagine if they wanted, they could still get their 640 by getting 40 acres somewhere else, if someone had 40 acres and was being recalcitrant.

A unit doesn't have to be square. It can look like an octopus, with tracts spreading out everywhere.... the drillsite has to be under lease... if a horizontal drill, the entire path of the borehole must be under lease, and the final location (where the drilling stops) must be leased. There are minimum distances from the edge of the lease. As long as they can get a drill location, spaced x feet away from the lease boundary, and all the bore, and final location are spaced correctly, they're golden.

IF they absolutely have to have a tract, thats when the forced pooling comes in... some recent Tx Supreme Ct. ruling has put the fear of 'not getting leased' under a lot of people. The fear of having to pay a proportional cost of drilling, and all other costs, is scary.

One of my clients in Shelby County has over 4k acres of minerals. They have several tracts that are 'orphans'... A few years back, before they started acting in a businesslike fashion, one heir would work against another heir, and left a sour taste with some gas exploration companies. Those tracts are wedged between producing units. IF the tracts were over 80 acres, they could get a well drilled (minimum unit size is now 80)... but most of them are smaller... trying to get into a unit, after it's producing, is hard... the company has no incentive to include someone (especially if they were scorned earlier).

Fortunes are being made in the o&g industry. If I had an extra 500K in capital, I'd be a multimillionaire within three years. (knowing a unit is being put together, and strategic tracts will be leased... buy em, sell em, and keep an override...) Override's are licenses to print money.

With the advent of addendums, there's little reason not to lease anymore. Small tracts can get No Surface Occupancy stipulations... I recommended to one of our local HT'ers that was getting land leased to seek a NSO... the company agreed, they were happy, the company was happy.

Michael W. Smith · #20 05/15/10, 08:36 PM

Back about 12 years ago, I signed a lease. Back then I think we were getting $5.00 / acre in "bonus" money. They REALLY wanted my property then as they wanted to use a gas line that goes through it.

When I signed, I got 350,000 cubic feet of free gas per year for one well, and then with each additional well, I got 150,000 cubic feet of gas. They ended up drilling 5 wells, so I have lots of "free" gas. The only thing I can't use the gas for is a "commercial" venture, such as a greenhouse for selling plants, or building a hotel, etc.

The lease I signed was for 6 months. If they didn't drill within 6 months, the lease was null and void. (Like I said, they REALLY wanted my land.)

(And looking back, I should have held out for more.)

But in that lease, they had to drill a well every two years or if they didn't any land they didn't use (within a 500' radius of any well they put in) reverted back to me.

About a month ago, I got contacted again because now they are interested in the marcellus gas. I made all kinds of changes to their "standard" lease, and the guy picked it up and I haven't heard anything back - yet.

One of the changes I made with this new lease lets them drill down to the marvellus gas formation (not to the center of the earth) as their original lease stated. There could be more gas formations we don't know about under the marcellus.

I have 140 acres plus an additional 40 acres. If they don't respond back, I'll wait for the next gas landman to arrive.