Hi, all. I am in the process of negotiating a lease for our minerals in Richland Co, MT. We have a couple of offers going, but I am leaning towards the oil co that is very active in the area. They sent us a lease, which I gave to an O&G atty. His addendum was extensive, of course. I know we will need to give up some of the clauses he proposed, to get the oil co to take the lease. How important are Hazardous Waste Liability, and Free Royalty clauses? Are these commonly accepted?
Thanks,
Mark
Forgot to ask......what is the value of a Vertical Pugh Clause if all the drilling is horozontal?
Thanks!
Mark,
The Hazardous waste is important if you are the surface owner. The free royalty is extremely important to your income if production is established. If you have water wells and are dependent on them for ag income, you need to establish liability if they are lost or compromised chemically. Pugh clauses are important to you for future potential in multiple producing zones if they are expected to exist. You are right to go with a production company in the area. They have heard your stories before and would like to have you as an ally for long term relationships. Stick to your guns you are on the right track.
The verticle pugh clause serves to release unexploited formations above and below the producing zone after the primary term (the allowable delay) expires. In leasing you are leasing the right to produce your minerals, why should formations that a current lessee have made no effort to produce be tied up past the end of the primary lease term? If your lessee has made no effort to produce more than a single zone you should be free to lease these other zones, if any, to some company that would like to produce them. I think mineral owners often forget that the essence of the lease is the company’s desire to produce your minerals, not to produce one zone and stockpile the rest so they can assign your unused minerals to someone else at a huge profit a decade or two in the future. Personally I think you would spend the proceeds from assigning these other formations better than a lessee, but if you would rather your lessee get the money, then pugh clauses don’t matter. I think it likely that you will agree with me that you personally, would spend the money better. As to your other questions, I think they should shoulder hazardous waste liability, after all, you have no control over their actions in extracting, storage or transport of oil and gas. A cost free royalty with no fees and deducts, should be easy to negotiate, but that isn’t usually the case. Production costs, transport costs and the conditioning of gas for sale affect your bottom line. It’s much akin to buying a new truck, the dealership is going to try to make money on the back side of the deal in the contract. I would expect a much lower royalty% offer for cost free with no deducts. I highly recommend all of Buddy Cottens blogs, and you should pay special attention to the one about gas produced and sold. The operator will charge you for the machinery to dehydrate, filter, separate, compress and God knows what else gas from wells on your lease and use without paying you, the gas from your well to power the machines to process not only your gas but theirs as well. I would want to be paid for gas produced and saved, not just produced and sold. I think free use of gas over 30 years time could mount up. If nothing else you could use it as a point to gain a concession elsewhere. Good luck with your lease.
Mark Presley said:
Forgot to ask......what is the value of a Vertical Pugh Clause if all the drilling is horozontal?
Thanks!
Thanks to both RW & Gary...I appreciate your input. We do not own the surface rights, and I suspect a major oil company has the prudence & good sense to carry Hazardous Waste Liability Insurance of their own, so we could probably omit that from our addendum. We are being offered 20% royality, so I think asking for free Royalty may be excessive as well with the 20% in mind. I also see a clause which seems restrictive to the oil co, and that is a surface use provision which states " Lessee shall not utilize, enter upon, touch or disturb the surface of the leasehold in any manner for any reason" Again, since we do not own the surface, this seems excessive.
Thoughts here?
I don't think people know how much, or possibly little, they will actually net after deducts and taxes. If you are worried that you are asking too much, you could stipulate that your royalty rate rise 2.5% or so after the well returns double the operators investment or 2.5% if the price of oil rises above $150 per barrel, or both. You don't want to starve the operator out of business, but if good fortune happens to appear, you want to share in it also. I would consider that very reasonable and hard to argue against without the operator appearing greedy, it's something to think about anyway. You don't want to sell yourself short. Remember, the operator is going to be physically removing property to sell, and when it's gone, it's gone, so make the best bargain you can.
Actually, the 20% was in their initial basic terms to me. I was just concerned that asking for free royalty ON TOP of the 20% might be too much. This landman stated that “80% of your addendum would never be accepted by the oil company” so I am wondering why I paid $1100 to an attorney to draft a set of addendums which is being summarily thrown out. I am trying to figure out which of the 29 clauses in the addendum are the least important, and so to delete them to get a deal done, but still leave myself a bit of beneficial terms in the lease. I should have known, when the landman started complaining about our attorney “putting in a bunch of unreasonable clauses in the addendum” before I even got it back!
Some clauses, like the pugh clauses, cost the operator nothing, really. If the operator wants to keep other spacings or zones, all he has to do is drill them, which is what they claimed to want to do from the beginning. If they have a problem with pugh clauses, then they don't really intend to produce all of your minerals in a timely prudent manner, and just want to get a well in and produce some and stockpile the rest. That way your valuable appreciating asset becomes their appreciating asset. Is it okay with you that they produce only a part of your minerals and delay any chance of producing the rest for possibly 30 years or more ? If they need more time than the delay in the first lease and they treated you right in the first lease, I'm sure they could lease the other zones / undrilled acres from you again. The lessee is supposed to be renting from you and part of the rent is that they get your minerals into production. If it takes more than 1 well to drain your minerals, a prudent operator would put in more wells to do that, unless you let them off the hook for it. I'm willing to bet that if you don't get more than 1 well when they first drill, if more than 1 well is necessary to drain your pooled acres, that it will be a decade or more before you get a second one. I have a couple of single wells on 1280's that are going on 5 years since they first produced, sitting on multiple formations, with no infil wells in sight. I think you ought to keep the clauses that hold the lessees feet to the fire, or get good explanations why they are trying to get out of them before they even start. Look up the duties of a prudent operator. Good luck with your lease.
Mark,
Twenty nine clauses sounds like a lot, though 15 to 20 isn't uncommon. Yet remember your attorney's job is to protect his client, you. The landman's job is to protect his client, the oil company. So of course he will be trying to loosen the terms as much as possible.
I'd suggest you go ahead and submit the addendum as your attorney wrote it. Within a week or so you will quickly find out which clauses the oil company objects to. Then, at that point, you can decide which of those are worth fighting for. Plus you may be surprised at which clauses the company does not object to.
My experience has been they typically try to change your counter (in some fashion) regardless of if you proposed 29 clauses or 9. So toss it out there and see where you're at before trying to reduce your own expectations. It is a negotiation process. Go negotiate, and don't assume the oil company will run away just because you're asking for protection in the lease. You may not get everything, but without submitting it you know you'll not get any of it. Good Luck.
Thanks, RW for helping me at least put the Pugh clauses in perspective....this has been of great help!
E Montana, thank you as well, I am going to assume nothing from here on, I am suspecting that the OC landman is trying to scare me into thinking that they are ready to walk.......I am also thinking that the landman alone may not have total authority for the acceptance of our addendum items, so I am going to wait them out for a while and see want comes out of them next. My last e-mail to him asked for specific items they object to, so we'll see.
Thanks again, gentlemen, your insight is much appreciated!
Mark,
Some people I know in Texas got 25% royalty and cost free, so 20% royalty and cost free is not unreasonable at all. I would ask for 22.5 % cost free royalty and see where it goes. Just remember that the company's first offer is not the final deal. I have heard the same story from landmen that no company is going to accept this lease or these addendums. It is just part of their posturing in trying to get the mineral owner to accept less. In the end, most of the addendums were accepted. Personally, I would want the hazardous waster clause in my lease. The operator should be responsible for any contamination, etc. Good luck with your lease.
Mark and everyone,
When a mineral owner is able to get a 1/4 free royalty on a lease you are doing real good. If you don't ask for it you won't get it! There are parts of the Haynesville Shale and Barnett Shale, where owners got up to 32.5% a few year's ago. Bonus money was $25,000 per acre. This was in The Shreveport, Louisiana area. If you get an attorney I would suggest that you get someone who is board certified in your States Oil and Gas Law.
6th Generation Texan said:
Mark,
Some people I know in Texas got 25% royalty and cost free, so 20% royalty and cost free is not unreasonable at all. I would ask for 22.5 % cost free royalty and see where it goes. Just remember that the company's first offer is not the final deal. I have heard the same story from landmen that no company is going to accept this lease or these addendums. It is just part of their posturing in trying to get the mineral owner to accept less. In the end, most of the addendums were accepted. Personally, I would want the hazardous waster clause in my lease. The operator should be responsible for any contamination, etc. Good luck with your lease.
Mark, the pugh clauses are just an example of clauses that reinforce what is already an express covenant of the lease. A prudent operator would drill more wells if they were needed to to get all of your minerals producing. Because it’s a covenant, the only way you can force the operator to do what he should do anyway is to sue him and have a court determine that the lessee is not living up to their unstated but express duties. These types of clauses, that spell out the consequence of the lessee not living up to their express duties, would be really handy if you have to go to court because the lessee isn’t doing what they should. Once again, this type of clause costs the lessee nothing if they hold up their side of the bargain. If you have a clause that says that royalty must be paid within a certain amount of time, as long as there is no cloud on your title, it won’t cost the lessee anything if they do what they should, but will remove the grey area if the lessee is in the wrong. A clause saying that you do not warantee title may be needed to back up the payment clause because the lessee can become pretty inventive when it wants to find a cloud in a chain of title. I’m betting several of your 29 clauses are simply reinforcements of covenants and I wouldn’t like to give them up. All they do is turn actions that the lessee should do, into actions that are conditions of the lease so they must do them. I know some people think I’m a bit oversuspicious of oil companies, but I have had 9 wells starting ( producing ) from March of 2008 and I’m a few thousand dollars in the hole from legal fees. I’m hoping that I can get into the black on these wells later this year. Maybe I’m suspicious because I know them ? Good luck with your lease.
Mark Presley said:
Thanks, RW for helping me at least put the Pugh clauses in perspective....this has been of great help!
E Montana, thank you as well, I am going to assume nothing from here on, I am suspecting that the OC landman is trying to scare me into thinking that they are ready to walk.......I am also thinking that the landman alone may not have total authority for the acceptance of our addendum items, so I am going to wait them out for a while and see want comes out of them next. My last e-mail to him asked for specific items they object to, so we'll see.
Thanks again, gentlemen, your insight is much appreciated!
Thanks, again RW.....my atty has clarified things a bit with a "tip sheet" explaining the ramifications of the clauses in plain english...whew! that has helped alot. I realize that most oc's will expect the mineral owner to request a Pugh clause....I was just curious about the distinction from a "vertical Pugh clause" as well.
The OC landman on Friday said he will send me an "approved list" of exibit A clauses ! We'll see what is there...I expect some form of Pugh will be there as it is most common. I don't expect that a free royalty clause will be included. My atty advised me that about half of his addendum "could be dumped" for an otherwise decent lease. The competing OC has sent me a lease, which had free royality in it up front! This does not sound like a company that will be doing any drilling! I suspect they are tempting us with a fat bonus ($1800/AC) so they gan get the lease and flip it at a later time for a profit. I also do not see any activity (applications for permits, relocations, completions) for this oil company for the last year..... Of course, I'd really love that big bonus check, but I want to see these minerals developed and not sat on!
I am scrambling to keep up with all of this, but I'll take it slow and steady...I've sent a couple more letters of lease offers to OC's that are active (completions especially!) in Richland Co...stir up the pot and perhaps get more competing offers.
Thanks again for all the helpful input!
Mark, unless you own the whole of the spacing or a very large part, who you leased to has less to do with whether you get a well or not than you might think. Your lessee, if they are not the well operator can participate in the drilling and pay their proportionate cost of the well. It’s not a horrible deal for the operator, who gets a less expensive well because someone else is shouldering part of the cost and any risk. If your lessee does flip the lease to the operator for a profit, it doesn’t affect you at all. I’d lease my acres on the basis of who offered the best balance of $/royalty and terms, regardless of who they were. The operator will frequently match any offer made because if you are in a good area the operator isn’t negotiating whether they make money or not but HOW MUCH they are going to make off your acres/oil. In the end I doubt the operator who wants to make $20,000 per acre off of your minerals will turn up his nose and not lease you, and let someone else lease you because they will settle for making $18,000 per acre off your minerals. That would truly be cutting ones nose off to spite their face. I favor making the best deal with heavy weighting on royalty and terms. I think of the bonus being there is mostly an attempt to draw your attention from what is important.
Thanks, RW…I see the logic to some extent…what I don’t understand is, with all of the various mineral owners fractions in a particular parcel, if they all leased to different companies, it seems no one company would have enough percentage interest to be worth the expense of exploration?
Mark,
You are wiser than a "tree full of owls" as Ted Turner would say.
Mark Presley said:
Thanks, again RW.....my atty has clarified things a bit with a "tip sheet" explaining the ramifications of the clauses in plain english...whew! that has helped alot. I realize that most oc's will expect the mineral owner to request a Pugh clause....I was just curious about the distinction from a "vertical Pugh clause" as well.
The OC landman on Friday said he will send me an "approved list" of exibit A clauses ! We'll see what is there...I expect some form of Pugh will be there as it is most common. I don't expect that a free royalty clause will be included. My atty advised me that about half of his addendum "could be dumped" for an otherwise decent lease. The competing OC has sent me a lease, which had free royality in it up front! This does not sound like a company that will be doing any drilling! I suspect they are tempting us with a fat bonus ($1800/AC) so they gan get the lease and flip it at a later time for a profit. I also do not see any activity (applications for permits, relocations, completions) for this oil company for the last year..... Of course, I'd really love that big bonus check, but I want to see these minerals developed and not sat on!
I am scrambling to keep up with all of this, but I'll take it slow and steady...I've sent a couple more letters of lease offers to OC's that are active (completions especially!) in Richland Co...stir up the pot and perhaps get more competing offers.
Thanks again for all the helpful input!
Mark, I wouldn’t worry about that too much. I have interest in a SM Energy well in which SM has less than 60 percent interest. I think you could also say that with many interest owners in the well it would increase the interest in drilling in an area that doesn’t have proven production, since nobody will be taking a big loss if the well is poor. I hope you have a great well right next door, but if you don’t, it could be a good thing that whoever drills your well would have low risk. It goes both ways, like anything else.
Mark Presley said:
Thanks, RW...I see the logic to some extent...what I don't understand is, with all of the various mineral owners fractions in a particular parcel, if they all leased to different companies, it seems no one company would have enough percentage interest to be worth the expense of exploration?
OK, after reading your post again, RW, I sense that dealing with a lease broker could be ok as they can pool their leaseholds into larger percentage interests so as to be more attractive to developers, whereas the big operator I was dealing with did not want to grant a lot of concessions for our small 40 net acre interest. The small company’s lease and bonus are much better, but I am concerned that their “Order For Payment” (substitute for a draft), is really no better, because if their flip/re-assignment does not go through, and they don’t have the funds (40AC x 1800/AC = $72,000) and did not honor their Order For Payment, we’d have to sue them to get our payment…I don’t even want to go there! I did some research on the small O&G company and they only show $1.5 - $2.5M Revenue per year, so coming up with $72K at signing might be an issue. On the other hand, I don’t want to miss out on an otherwise good lease… I am going to push the issue of a cashier’s check with them and see what their response is. Silly me, I thought this would be easy! (Gary, I hope no one is hiding at the bottom of that tree with a chainsaw !!)
Mark Presley said:
Thanks, RW...I see the logic to some extent...what I don't understand is, with all of the various mineral owners fractions in a particular parcel, if they all leased to different companies, it seems no one company would have enough percentage interest to be worth the expense of exploration?
OK, RW, good enough…I don’t know about “next door” BUT the current Montana Baaken record well for initial 24hr flow (2900 boepd) (April, 2011) is abut 3 miles north of our minerals.
r w kennedy said:
Mark, I wouldn't worry about that too much. I have interest in a SM Energy well in which SM has less than 60 percent interest. I think you could also say that with many interest owners in the well it would increase the interest in drilling in an area that doesn't have proven production, since nobody will be taking a big loss if the well is poor. I hope you have a great well right next door, but if you don't, it could be a good thing that whoever drills your well would have low risk. It goes both ways, like anything else.
Mark Presley said:Thanks, RW...I see the logic to some extent...what I don't understand is, with all of the various mineral owners fractions in a particular parcel, if they all leased to different companies, it seems no one company would have enough percentage interest to be worth the expense of exploration?