If you are not familiar with the term fraclog or fracventory, go here to read a bit on it.
If I were representing a client in today's environment, I would consider a clause that requires that the Operator drill and complete any well drilled in a manner as a reasonably prudent Operator would do under the same or similar circumstances.
What we have is a tremendous (estimated over 5500 wells) backlog of wells waiting to be completed. Why the wait? It is always money. Either the Operator does not have the money to complete his wells or he is evaluating the wells that he wants to complete first to maximize his investment.
How do you place your property in or close to the head of the line to be completed when market conditions are right? The only way that I can think of is a monthly penalty of some sort for each month the well is not completed after perhaps 3 months of the drilling rig being released. What would the monthly penalty be? Something akin to a shut in royalty penalty. Currently, I am negotiating $50-75 per acre, pro-rated to a monthly basis for shut in royalty payments. This penalty would apply to wells drilled within and without the primary term.
This clause is in conceptual form only and I am eager to hear from both mineral owners and industry professionals alike.
Best,
Buddy Cotten
Buddy,
My only criticism with this concept is that I, the mineral owner, might not mind for the Oil Co. to wait for pricing to improve. I understand that a bird in the hand might be worth two in the bush, but if the Oil Co. can go ahead and drill 2 months ago (at under $50/BBL oil), but wait to complete until now (at $60/BBL oil) or 6 months from now (at maybe $70/BBL oil?), I would personally be happy to wait and not penalize them for their prudence. As we all know, with shale wells, most of the production comes in the first few months/first year, so it is incredibly important to have the highest commodity prices during that time. I would personally not want to disincentivize an Oil Co. from waiting on more favorable prices. And if the Oil Co. doesn't complete before the end of the primary term, the lease is released or extended (although, again, I personally might be willing to extend the lease to potentially mutually benefit both parties if oil prices are rising or are expected to rise). All just my opinion, but it is a good concept.
Thanks!
Excellent logic by both Buddy and Texas Tea. The lease could create the obligation if the prices are higher than specific amounts, but there is no drilling.
Since this was indeed an excellent observation, there might be other challenges like legal, title and regulatory obstacles.
Bob Malone, Oil and Gas Auditor
When I talk with my clients I actually suggest that they allow the company to shut in the wells indefinitely without pay for so long as gas prices are below a certain price adjusted for inflation. Most of them agree that they don't want to give gas away. We also make sure to try to get a shut-in limit, like two years consecutive and three years in five. For some mineral owners, though, I can see wanting production regardless of price. Most of my clients have small net mineral acreage. Someone with a large net might prefer the consistent income as it would be rather large.