Oil Company not abiding by mineral lease

Oil and Gas Leasing Help
1

I am looking for some general thoughts on what road to take with an oil company who has thumbed their nose at us and completely disregarding provisions of our oil and gas lease.Our lease was initially with UPRC in the early 90's. Several Chalk wells were drilled with all but one now plugged and abandoned. The remaining well is operated by a company out of Giddings, Tx.

Prior to any leasing activity, we had very good roads on the ranch that we maintained ourselves. In our leases we have very explicit language pertaining to road maintenance. In basic terms, we turned over all road maintenance to UPRC and their successors. Our lease requires them to maintain roads in as good of or better shape though out the term of the lease and when they cease operation, they must leave the roads as they found them in the first place. In addition, the oil company must immediately repair the roads when we notify them of an issue. This includes about 3 miles of ranch roads.

After numerous attempts that we started well over a year ago that has included calls to the company, letters to the company and several demand letters by our attorney, they have refused to repair our roads. So we are left with figuring out a solution. What is an appropriate response to their unwillingness to abide by the lease? Locking them out, putting a lien on the well, suing them (the cost of which may exceed what it costs to repair the roads). Better Business Bureau etc.?

Any thought or ideas by someone who has had a similar issue would be appreciated.

2

Does your lease contain any termination provisions that are relevant to this issue?

Good luck,

Pat

3

In addition to looking at termination provisions, what is the cost of fixing the roads, and is there any new activity in the area that would make it worthwhile to try to get the lease terminated for other reasons?

4

Hi, Allen -

It always saddens me to hear about a company treating landowners this way. Can't they read their own leases?

Mr. Caldwell, who, by the way, is an excellent Oil and Gas Attorney, has a good point. If there is any new activity in the area, you could possibly have the lease terminated for non-development and at least be rid of the inept Operator.

If you will post the legal description, I will be happy to take a quick look at the area and see what is going on.

If you want to send it privately, the accept my offer to become A Friend on The Forum and you can send me the information that way.

Charles Emery Tooke III

Certified Professional Landman

Fort Worth, Texas

5

Thank you Pat, Wade and Charles, for responding. Basically, as I read the lease,which is a Producers 88 with addendums, we don’t have the right to terminate based solely on the issue of the roads. To put in perspective the cost of such road, I am venturing a guess of $ 30,000 or more for me to repair. I have several friends in the oil location contruction business who are going to help me with those cost estimates. When we initially built the roads, we did so to what would be Washingotn County specs. Contoured and laid with 5 to 6 inches of gravel by 15 foot wide and 2.5 miles long.

The roads have very little gravel left because the were neglected and not crowned. Much of it has washed into the pastures. We are going to have to basically start from scratch. If we bare the cost of constructing a new road, would I be within my rights to restrict their access going forward, since it is now my road and not theirs, until they pay up? What about some sort of Lien on the well?

About a year and a half ago, we leased all of the acreage that was not being held by the last ramaining well. We were able to lease the zones under the subject well though, which is an old Austin Chalk well. I don’t expect any new exploration in the current environment , but who knows.

Basically, we are at wits end. Thanks, Allen Grainger

6

Dear Mr. Grainger,

This looks like a lawyer question. I think that I will reach out to Wade Caldwell at this point. Wade, do you have an opinion on a lockout after notice?

Best

Buddy Cotten

7

Hard to do under a Producer’s 88. Generally, you would likely have to sue them and try for an injunction. If you eventually got a judgment, you might be able to terminate the lease. A lockout, even with notice and giving them an opportunity to cure, would be pretty risky.

8

Operators can run over hundreds of royalty owners and get away with it. How can an ant stop a road grader? If one sues and wins, they will try to settle and give them back only part of the money. Royalty owners could take organized action. For example, they could crowd fund or pool money with, e.g., Wade Caldwell for the use to change state laws to: 1) stop, 2) attempt to control or 3) penalize the uncontrollable abuse. With today's role models setting examples for all of us, it only will get worse. This very valuable forum is called Mineral Rights Forum, but the mineral rights are being ignored. That gives a lovely idea. Those controlling this wonderful forum could easily start a campaign. Okay, I will stop brainstorming and let the more obvious pros take the baton and run ... if they wish.

Make your luck!! Bob Malone, Oil and gas auditor

9

Not a lawyer, but found the statement interesting if one sues and wins, they will try to settle and give them back only a part of the money. If someone sued and won, is that how it works? I thought in the American system of jurisprudence that they try to settle before the case goes to trial. If not then a judgment is issued. Then the company declares bankruptcy to avoid paying it as in The Rainmaker by John Grisham.

Robert P. Malone said:

Operators can run over hundreds of royalty owners and get away with it. How can an ant stop a road grader? If one sues and wins, they will try to settle and give them back only part of the money. Royalty owners could take organized action. For example, they could crowd fund or pool money with, e.g., Wade Caldwell for the use to change state laws to: 1) stop, 2) attempt to control or 3) penalize the uncontrollable abuse. With today's role models setting examples for all of us, it only will get worse. This very valuable forum is called Mineral Rights Forum, but the mineral rights are being ignored. That gives a lovely idea. Those controlling this wonderful forum could easily start a campaign. Okay, I will stop brainstorming and let the more obvious pros take the baton and run ... if they wish.

Make your luck!! Bob Malone, Oil and gas auditor

10

If you take the operator to court, you will very likely spend more than you will ever get back. They appear to be willing to take the risk of getting sued. Courts are notoriously unreliable, legal fees can get unreasonable in a hurry.

Maybe the Railroad Commission will help you deal with the operator.

If not, then you may just need to bite the bullet, and fix it yourself.

11

I read in part of the Texas Natural Resources code that if a company is breaking a lease

and you take them to court and win, the company has to pay the legal bills. The company

also has to pay back interest on the money they did not pay. I am having trouble with my

company. It states on their website they are hedged at $80 a barrel for 2015 but are

only paying $41.25 a barrel for oil on the royalty checks

. It is on their website for the whole World to see. I am just

documenting everything and hope I don't have to go the legal route which always produces ill will. I have read my lease and the natural resource code so much I can recite them in my sleep.

12

The operator took additional risk to obtain a hedge at $80/bbl, and that transaction is separate from their production from your well. They took the risk, they now get the profit, you get paid based on actual market prices.

You wouldn't want to pay their share of the company's loss if the price today was $100/ barrel, would you?

13



Ken G. said:

The operator took additional risk to obtain a hedge at $80/bbl, and that transaction is separate from their production from your well. They took the risk, they now get the profit, you get paid based on actual market prices.

You wouldn't want to pay their share of the company's loss if the price today was $100/ barrel, would you?

14

I understand what you are saying and it makes sense. I would want what the oil company is being

paid for the oil since they know much more about the business than me. Hedging is obviously a risk

that does and does not pay off.

I am not be one of those people that "wants their cake and eat it too." When the hedging is more than

the market price I want the hedging price, and when the hedging price is lower than the market price, all the sudden I want the market price.

For me this is a once in a lifetime risk that will never occur to me again. I would be willing to role the dice and see what happens.

In my lease which I have read dozens of times, it states that whatever price the oil company gets for a barrel of oil is the price I get per barrel of oil regardless if it is above or below market price.

When I wrote the person about the hedging price she said "She would look into it."

If she had said "Yes, oil companies hedge their product all the time and it has no effect on what price you receive. You receive whaever the market price is when the oil is sold." I would have taken her word but probably still looked into it just to make sure.

I would presume that she gets 4 or 5 dozen questions a day about various topics on royalty payments. After a month or two on the job she probably gets the same questions over and over by different people and she probably wants to answer their question in a way where they don't call 2 or 3 times a week about the same question.

Anyway, your input is appreciated. The way my lease is worded and her lack of a response to a question she must have gotten numerous times just makes me suspicious. Thanks, for responding, Eric S.

15

Concerning hedging and my 2 cents worth.

First, read what a "hedge" is. Then read what a "swap" is, then read what a "put": is and finally read what a "collar" is. When you read those, you will understand a lot more than all of you do now.

Why do oil companies hedge future production? For the most part it is because their lenders make it part of the lending process. What the oil companies are doing is contractually required under the terms of their lending agreement. This adds a layer of certainty in a volatile environment.

The royalty owner is free to hedge future production as well. Even non-royalty owners hedge pricing. Go to a trading floor sometime.

Let's read the lease: Pound Printing and Publishing 4/76 Paid Up with 640 acres pooling -

3. As royalty, lessee covenants and agrees: (a) To deliver to the credit of lessor, in the pipelines to which lessee may connect its wells, the equal one-eighth part of all oil produced and saved by lessee from said land, or from time to time, at the option of lessee, As royalty, lessee covenants and agrees: (a) To deliver to the credit of lessor, in the pipelines to which lessee may connect its wells, the equal one-eighth part of all oil produced and saved by lessee from said land, or from time to time, at the option of lessee, to pay lessor the average posted price of such one-eighth part of such oil at the wells as of the day it is run to the pipe line or storage tanks, lessor’s interest, in either case, to bear one-eighth of the cost of treating oil to render it marketable pipe line oil; (emphasis added)

The sale of the oil is the trigger - not the option price when execercised. Everybody might want to read what their lease provides in the event of a sale.

Would we really have this discussion if oil was $125 per bbl and the options were at $90? They were. Several years ago. And not one word brought up.

Go play the commodities market until you cannot sleep at night. I did that for a while. Almost made a lot of money. Only made a little money., But I could not sleep at night. Therefore, my actions exceeded my risk tolerance.

Somebody start a new thread on option pricing.

Best

Buddy Cotten

16

My lease defines "Market Value" as "Oil and other liquefied hydrocarbons produced and saved from or

attributable to the leased premises, free of al costs and expenses. For purposes hereof, "Market Value"

is defined as the price actually received by the Lessee for the sale of oil and other liquefied hydrocarbons

produced and saved hereunder, provided the same is sold under an arm's-length, competitively-negotiated

contracts for a sale of such product with a purchaser who is not an "Affiliate" of Lessee as that term is defined below.

(this is the part I am interested in) (I also looked up arm's length a couple of months ago)

If such product is not sold under an arm's length, competitively-negotiated contract with a purchaser who is not an Affiliate of Lessee or is used off the Leased Premise, the Market Value of such product shall be the higher of either (I) the price actually received by Lessee for the sale of oil and other liquefied hydrocarbons produced and saved hereunder or attributable to the Leased Premise or (ii) the market value at the well of oil and other liquefied hydrocarbons of like grade and gravity prevailing in Texas RRC District 2 on the day the oil and other hydrocarbons are run from the lease."

It sounds to me whichever of the two prices is higher goes to the lesser. The word "hedging" is never mentioned in the contract. The lawyer who wrote the contract had a good reputation and was said to write contracts favorable to the land owner. Any input good or bad is appreciated. Eric

The only reason I am bringing it up is that it was mentioned on the company webpage. I can't imagine a large

land holder or company that buys mineral rights sitting by and getting $41 a barrel while the company gets $80 a barrel. That is just my way of thinking though. Eric

17

Dear Eric,

Congratulations on reading your lease form. So many do not.

Now ask your attorney what he meant when he drafted that language. I think that I already know the anwer, but get it from him.

Incidentally, this same line of questions have been asked and answered many times on this board,

Best of all possible luck and fortune,.

Buddy Cotten

18

Thanks all. Probably going to fix the roads ourselves. The operator is on notice and we will send them a bill but I don’t expect them to pay. Live and learn.

19

At this point, I would just change the locks to prevent them from coming across your land. That would get their attention. What could they do that they haven't already undone? At this point, they would probably initiate some sort of recourse and the "real" decision makers would enter the picture. I bet you would get your roads repaired then.

Good luck,

Pat

20

Hi, Allen -

I like Pat's suggestion.

When a Crude Oil Hauling Company's truck can't get to the Well Site to unload the tanks, big trouble happens real fast. Locking them out would most certainly get somebody waaay up the line's immediate attention.

If they have their own lock on your gate, I wouldn't remove them. Just add another heavy chain and huge lock.

I'll be looking forward to hearing how it all turns out.

Tee Hee -

Charles Emery Tooke III

Certified Professional Landman

Fort Worth, Texas