Lease Offer Questions

Oil and Gas Leasing Help
1

I have interests in a well that was drilled and oil was found, but was not a profitable producer. However, it was leased again by a company till June of 2013. A company has since purchased the lease from that company and was planning to drill horizontally. However, they called and will not be able to start by the lease deadline. Therefore, they are offering a new lease.

I own mineral rights to 160 acres. I received a letter with a lease offer of $400.00 per net mineral acre with 1/4 royalty in a 3 year primary lease for 80 acres, and a $400.00 per net mineral acre with 1/4 royalty 2 year extension option.

1st. To deliver in-kind to Lessor, at the well, or to the credit of lessor into the pipeline or storage tank to which the well may be connected, 1/4 part of all oil and other liquid hydrocarbons produced, recovered or separated and saved from the leased premises.

In lieu thereof, lessee shall have the option, at any time, to sell lessor's oil, in which case lessor's royalty shall be based on lessee's net proceeds at the lease or to purchase lessor's oil at the lease.

In any event lessor's interest shall be free of all costs of production, but shall bear its proportionate part of production and similar taxes, and shall share proportionately with lessee in any costs to market, transport, or condition the oil.

Is this normal that the lessor shares in any costs to market, transport, or condition the oil?

Is this offer reasonable?

I have researched horizontal drilling. They save considerable production costs when the vertical drilling is already done.

I thought that a lease would be for the full 160 acres and not just 80.

Is it normal for the company to only offer to lease 80 instead of the full 160?

2

Mr. Win,

You should have someone with experience look into the transfer of the old lease and documentation of a new lease to make sure everything tracks. I suspect you are been set up to be force pooled on the 80 acres. One of the other lessee in the original well unit may be creating a problem for the new operator and they want to clean things up for their benefit. A good operator will do that.

I suggest you strike "and shall share proportionately . . . ." and put a period after "similar taxes"

More important is the measurement and payment (price determination) in the lease.

Having a vertical well rarely saves money on the cost of horizontal drilling but it does reduce risk to the Horizontal driller.

Made certain that the 80 acres not under lease is released back to you in the process. It may be very valuable later.

3

Thank you for the information. I will seek an attorney to look over the leases that were sent to me.

4

If they are going to drill horizontally, they must not need all 160 of your mineral acres to create the proration unit that they believe will maximize production. They certainly have no legal obligation to lease all 160, and you obviously have no legal obligation to lease only what they want either. If this is in an area with proven reserves, I would think that they would want to lease all 160 acres, but there are a whole host of reasons why they might not want to, most having to do with M O N E Y. It would be good to have a Release from the prior Lessee or Assign, but unless the prior lease required that the Release be filed, there is a good chance that you will not get one.