Questions about voided top lease

Oil and Gas Leasing Help
#1

I had a 3 yr lease on17/2N/4W due to expire 8/29/11. In June I agreed to a new lease for $1000/ac 3/16. On 8/5/11 I received the lease dated 6/30/11 from Jackfork Land Co./Continental Resources. I returned the signed and notarized lease and it was received by Jackfork on 8/11/11. I spoke with the Landman the following week and was told my check would be sent out within 25 days. On 9/9/11 the OCC website posted a Final Pooling Order. Today 9/12/11 I called Jackfork to ask about my check. I was told that drilling operations had begun prior to expiration of the first lease and the new lease was null and void.

My Questions: Can operations begin before a Pooling Order or Drilling Permit has been issued or an Intent to Drill has been announced? Does the operator have to provide any proof to the lessors that work has started? Does the Operator have no obligation to honor an agreement made in good faith between their agent and the lessors? I guess it was just bad timing, but I still can't help but feel I got shafted. I would appreciate any comments or opinions from members of this forum. Thank You.

#2

Michael:

I would say that if drilling operations began prior to the expiration date there is not much you can do as the original lease was still in effect. An operator does not have to notify the lessor when a well started. As far as I know, a drilling permit must be applied for and approved prior to drilling a well. Sometimes the first contact will be a division order on a successful well. This situation has probably happened serveral times and will continue to occur as leases near their expiration dates. You might contact the State Agency in charge of oil and gas to verify a well has been started and verify when it was started. Good luck on your well.

#3

Mr. Mallory, Thank you for your reply. I forgot to mention that the lease is in Oklahoma. Can anyone tell me if there is a legal definition for the phrase in the lease: " If, at the expiration of the primary term, Lessee is engaged in operations for the drilling, testing....etc " Am I to just take their word that within the 18 days between the reciept of my signed lease and the expiration of the original lease that they actually became "engaged in operations" ? I know it is possible but I find the timing rather suspect. An unfortunate coincidence ?

#4

Dear Mr. Hutchinson,

"Operations for drilling is different from drilling operations. To its extreme, operations for drilling would include the staking of a well."

The better idea is to rely on a defined term in the lease form. This is what you really wanted:

"

2.3 The terms “Drilling or Reworking Operations” or “commencement of Drilling or Reworking Operations” as used in this Lease means the actual turning to the right of the drill-bit, with a rig and related equipment located on the Lease or on lands pooled with the Lease to drill the same to the permitted depth filed with the Railroad Commission of Texas, or the actual re-working of an existing well with a drilling or re-working rig located on the Lease or on lands pooled with the Lease and prosecution of such operation with due diligence with no cessation of operations for any period of more than thirty (30) days. “Drilling operations” or “commencement of drilling operations” shall not include securing permits, building a pad, building a road, or other steps preparatory or preliminary to the actual operations described in the prior sentence. The term “Completion” of Actual Drilling or Reworking Operations” shall mean the point in time that the drilling rig or work over rig is released and begins rigging down. For purposes of applying this definition of Completion” of Actual Drilling or Reworking Operations it is understood that Drilling Rig and Work Over Rig will be considered as separate operations."

Michael Hutchison said:

Mr. Mallory, Thank you for your reply. I forgot to mention that the lease is in Oklahoma. Can anyone tell me if there is a legal definition for the phrase in the lease: " If, at the expiration of the primary term, Lessee is engaged in operations for the drilling, testing....etc " Am I to just take their word that within the 18 days between the reciept of my signed lease and the expiration of the original lease that they actually became "engaged in operations" ? I know it is possible but I find the timing rather suspect. An unfortunate coincidence ?

#5

Mr. Cotton, Thank you for your reply. I was wondering if I could get your opinion on another aspect of this case. I have located an " Interim Order of the Commission " Relief Sought: Location Exception. I am sure you are familiar with this type of order so I will go to the final paragraph which reads: " That the well location in accordance with the foregoing is necessary to prevent waste and to protect correlative rights and Continental Resources, Inc. should be permitted to drill and produce the horizonal well as set out herein, provided that this cause is continued until February 13, 2012, to determine the exact location of the well. IT IS SO ORDERED. " This was signed Aug 26, 2011, just THREE days before the expiration of the lease. It seems to grant permission to drill without a Drilling Permit. How can they " engage in operations for the drilling...etc. " before the exact location of the well is determined? It is starting to sound to me like the Operators can pretty much do as they please and worry about the paperwork later.

#6

I spoke with the OCC this morning and confirmed that a Drilling Permit has not been issued nor applied for. I was also told that a Permit is required in order to begin any work on the lease. I have called the Land Co. and Continental Resources, typical buck passing and stonewalling. Can any one point me toward the exact rule on this subject? Can the Operator engage in work of any kind without a Permit?

#7

Michael:

The operator could begin work on surface area (road/pit building) but a permit must be in place for the acutal spudding of a well. In regards to the surface work, it depends what the lease states constitutes as drilling operations. If what have stated is correct and your lease does not specify otherwise, this lease expiration date would be applied and a new lease would have to be negotiated. Mr. Cotten might want to elaborate on my response but this is my thoughts on the matter.

Michael Hutchison said:

I spoke with the OCC this morning and confirmed that a Drilling Permit has not been issued nor applied for. I was also told that a Permit is required in order to begin any work on the lease. I have called the Land Co. and Continental Resources, typical buck passing and stonewalling. Can any one point me toward the exact rule on this subject? Can the Operator engage in work of any kind without a Permit?

#8

Thank you Charles. I anxiously await an opinion from Mr. Cotton, please Sir.

#9

Mr. Hutchinson,

I do believe that this is important enough (no-- imperative) to employ a really good regulatory oil and gas attorney. I would be fascinated to see his opinion. The first and most excellent question is the top lease a real top lease. Does it satisfy the rule against perpetuities? Is it a in-lieu lease? A replacement lease? There are a lot of moving pieces to this puzzle.

You possibly could have a magnificent bargaining position. Then, of course, you might just be stuck.

#10

Mr. Cotton and Mr Mallory, Thank You both for your valuable input. The plot thickens as we speak. I’ll be posting more soon, hopefully good news.

#11

Gentlemen, Do you find it a little odd that the cause for Location Exception has been continued for 5 months yet Continental claims to be " engaged in operations " since the middle of August. I have spoken with an oil & gas attorney in Oklahoma City.

#12

Michael:

I find this entire matter rather bazarre and I like what Mr. Cotten stated on his last post. I'd go that direction with my actions.

Michael Hutchison said:

Gentlemen, Do you find it a little odd that the cause for Location Exception has been continued for 5 months yet Continental claims to be " engaged in operations " since the middle of August. I have spoken with an oil & gas attorney in Oklahoma City.
#13

Thank You Sir.

#14

In my opinion, I don't think you have an argument in regards to the payment. If i am understanding, their top lease would have become effective 8/30/2011, after the previous lease expired. You cannot have two leases that are active and effective at the same time, so because they began "operations" within the primary term of your first lease, the renewal lease never came into effect. It makes sense that they should not pay you for something that you cannot give to them (ie...you cannot renew them your executive rights to lease, because you were still subject to your prior lease).

As some of you all have discussed, "operations" is a loose term in Oklahoma. There is no set definition. Simply clearing dirt around for a location is often considered "operations for drilling a well." So in that regard, it sounds like the lessee has met that standard. Do not be surprised by the fact that they "conveniently" began operations only a few days before your lease expired - many operators do this before a large group of leases are set to expire. You have to remember, the lessee probably has several hundred acres leased in your section, and a large chunk of that might have expired if they did not begin when they did. You can rest assured they did not choose their timeline in order to "screw" you as a mineral owner. It happens each and everyday.

The only other requirement for commencing operations is that the lessee work in good faith and with due diligence, without long periods of non-operations. A lessee does not have to be enganged in dirt work, concrete work, gravel, etc...each and every day. Weather, drilling schedule, and contractors sometimes will not allow that to happen. So as long as they continue with "due diligence"...whatever that means to you...and as long as a well is drilled within a reasonable time (this length is also debatable, however I've heard before that as long as a well is drilled within a few months, it likely can be considered they are acting with due diligence), then they are doing what is required of them.

The fact that they have been in operations since mid-August does not surprise me at all. As i've been informed before, it is common and accepted that a drilling location can sometimes take months.

Did the lessee not attempt to renew you before August? That seems a little late for them to be trying to get renewal leases. As i have learned with my own minerals, it's a gamble if you hold out for more money. Sometimes it's best to take a solid offer when it's presented, and not have to worry about situations like this.

#15

Yes they did make an offer back in February for $450/acre, 25% down, balance to be paid on effective date. I now, of course realize it would have been better than nothing but all they were actually offering was $112/acre, a small price to pay to already have you pinned down until they decided if and when they would drill. By following the Spacing and Pooling orders I could tell the area was heating up and I had a couple of offers to buy my interest. What I don't understand is why they even sent me the lease if they had already started site work by the time I sent the lease back to them. I admit I was outsmarted. I was naive enough to not know that ethics are not considered a virtue in the oil and gas business. I've always believed that if a legitimate business tells you they are sending you a check they send you a check. I guess I realize now it is a game of wits. What would you say if I told you I just learned that some people who had the same original lease as I have and signed an identical new lease have received their $1000/acre bonus checks? In your opinion does that change anything? I think the right hand not know what the left hand do!

#16

I have seen some leases that specify in the lease what the definition of “operations” would be; one particular in mind was a lease that contained the wording such as “spudding occurring with equipment capable of reaching the permitted depth”.

#17

Thanks Charles, Mine is pretty vauge in that regard. It seems the concensus here is I should have gotten something like the clause you mention. Live and learn. I still took Buddie’s advice and contacted an attorney, waiting to hear back from him.

#18

Update: I took the advice I received here and contacted an attorney in Okla. City. My bonus check arrived today!

The attorneys fee was reasonable. Thank You all for your input.

#19

Michael:

Glad to hear your ordeal turned out ok. Sometimes, an attorney being involved is the best route to take. It is wise to maintain some good contacts in regards to attorneys as some situations you encounter is just better handled by legal assistence.

Michael Hutchison said:

Update: I took the advice I received here and contacted an attorney in Okla. City. My bonus check arrived today!

The attorneys fee was reasonable. Thank You all for your input.

#20

Glad I didn’t listen to you!

The Answer said:

In my opinion, I don't think you have an argument in regards to the payment. If i am understanding, their top lease would have become effective 8/30/2011, after the previous lease expired. You cannot have two leases that are active and effective at the same time, so because they began "operations" within the primary term of your first lease, the renewal lease never came into effect. It makes sense that they should not pay you for something that you cannot give to them (ie...you cannot renew them your executive rights to lease, because you were still subject to your prior lease).

As some of you all have discussed, "operations" is a loose term in Oklahoma. There is no set definition. Simply clearing dirt around for a location is often considered "operations for drilling a well." So in that regard, it sounds like the lessee has met that standard. Do not be surprised by the fact that they "conveniently" began operations only a few days before your lease expired - many operators do this before a large group of leases are set to expire. You have to remember, the lessee probably has several hundred acres leased in your section, and a large chunk of that might have expired if they did not begin when they did. You can rest assured they did not choose their timeline in order to "screw" you as a mineral owner. It happens each and everyday.

The only other requirement for commencing operations is that the lessee work in good faith and with due diligence, without long periods of non-operations. A lessee does not have to be enganged in dirt work, concrete work, gravel, etc...each and every day. Weather, drilling schedule, and contractors sometimes will not allow that to happen. So as long as they continue with "due diligence"...whatever that means to you...and as long as a well is drilled within a reasonable time (this length is also debatable, however I've heard before that as long as a well is drilled within a few months, it likely can be considered they are acting with due diligence), then they are doing what is required of them.

The fact that they have been in operations since mid-August does not surprise me at all. As i've been informed before, it is common and accepted that a drilling location can sometimes take months.

Did the lessee not attempt to renew you before August? That seems a little late for them to be trying to get renewal leases. As i have learned with my own minerals, it's a gamble if you hold out for more money. Sometimes it's best to take a solid offer when it's presented, and not have to worry about situations like this.