I am reviewing two mineral leases and both have clauses devoted to the size of the pools as it relates to horizontal wells in Texas. The exact verbiage is:
"
- Lessee shall have the right but not the obligation to pool all or any part of the leased premises or interest therein with any other lands or interests, as to any or all depths or zones, and as to any or all substances covered by this lease, either before or after the commencement of production, whenever Lessee deems it necessary or proper to do so in order to prudently develop or operate the leased premises, whether or not similar pooling authority exists with respect to such other lands or interests. The unit formed by such pooling for an oil well which is not a horizontal completion shall not exceed 80 acres plus a maximum acreage tolerance of 10%, and for a gas well or a horizontal completion shall not exceed 640 acres plus a maximum acreage tolerance of 10%; provided that a larger unit may be formed for an oil well or gas well or horizontal completion to conform to any well spacing or density pattern that may be allowed, prescribed or permitted by any governmental authority having jurisdiction to do so. For the purpose of the foregoing, the terms “oil well” and “gas well” shall have the meanings allowed, permitted, or prescribed by applicable law or the appropriate governmental authority, or, if no definition is so allowed, permitted or prescribed, “oil well” means a well with an initial gas-oil ratio of less than 100,000 cubic feet per barrel and “gas well” means a well with an initial gas-oil ratio of 100,000 cubic feet or more per barrel, based on 24-hour production test conducted under normal producing conditions using standard lease separator facilities or equivalent testing equipment; and the term “horizontal completion” means an oil well in which the horizontal component of the gross completion interval in the reservoir exceeds the vertical component thereof. In exercising its pooling rights hereunder, Lessee shall file of record a written declaration describing the unit and stating the effective date of pooling. Production, drilling or reworking operations anywhere on a unit which includes all or any part of the leased premises shall be treated as if it were production, drilling or reworking operations on the leased premises, except that the production on which Lessor’s royalty is calculated shall be that proportion of the total unit production which the net acreage covered by this lease and included in the unit bears to the total gross acreage in the unit, but only to the extent such proportion of unit production is sold by Lessee. Pooling in one or more instances shall not exhaust Lessee’s pooling rights hereunder, and Lessee shall have the recurring right but not the obligation to revise any unit formed hereunder by expansion or contraction or both, either before or after commencement of production, in order to conform to the well spacing or density pattern allowed, prescribed or permitted by the governmental authority having jurisdiction, or to conform to any productive acreage determination made by such governmental authority. In making such a revision, Lessee shall file of record a written declaration describing the revised unit and stating the effective date of revision. To the extent any portion of the leased premises is included in or excluded from the unit by virtue of such revision, the proportion of unit production on which royalties are payable hereunder shall thereafter be adjusted accordingly. In the absence of production in paying quantities from a unit, or upon permanent cessation thereof, Lessee may terminate the unit by filing of record a written declaration describing the unit and stating the date of termination. Pooling hereunder shall not constitute a cross-conveyance of interests."
It is my understanding that the Texas Railroad Commission determines the "label" of the well (oil or gas or other) and thus the size of the pool. I see no need for this language to remain in the lease. However, at my suggestion to remove or append the language, they stated that if they would not and would walk away from the leasing opportunity. This is in Walker Co. Texas, so it is not a red hot area, but there is definitely lots of activity around the court house lately with landmen working their claims. This really raises the red flag for me, when a certain singe element of a lease is so important as to NO CHANGE is allowed to it.
It is the first sentence that most bothers me with the language regarding their exclusive right to pool as they deem necessary and whether similar pooling authority exists.
Anyone have any input and/or insight into this clause in the lease contract?
How many mineral acres are you leasing?
Roy, I would say no. That clause gives away the whole store. The reason there can be no change is because they want the ability to work against your best interest, want you to agree they can work against your best interest, unlimited. They wouldn't need that clause otherwise. If you don't like a lease and don't sign it, a company may walk away and nobody may ever ask again but then again, if they work to your maximum detriment, how much did you truly gaim from this lease and was it worth it? Basically, would you sell your acres for the lease bonus price? Because you can't depend on them to even consider what is in your best interest and selling for the bonus price may be exactly what you are doing and you just don't know it yet. A bad lease is worse than a bad marriage, a judge may take pity on you and let you out of a bad marriage. Even if everyone had pity for you they probably wouldn't let you out of a bad lease. If you have misgivings, I wouldn't sign. In my opinion a bad lease is worse than none at all.
That is exactly what I think of this clause. It basically cancels out all other statements and even the control of the State governing bodies. It is in both of the current leases I have as well as a recent past one was requested to amend. I feel that every lease from this point forward will contain this language and render most mineral rights holders ability to draw their royalties void. I would hope that this topic could become a priority here on this forum to inform all of this current and horrible trend.
Roy,
Texas does not have a force pooling statute like Oklahoma does. Therefore, the Lessee needs to have the right to pool together the royalty and working interests in order to be able to drill a well. While the TRRC might provide "Field Rules", many times the field rules are insufficient for economic development of an area.
It is very common to have these pooling provisions within Texas oil and gas leases and yours is no different. All this clause provides the Lessee is 80-acre units for oil + 10% tolerance and 640 acres for a gas well +10% tolerance. I'm very surprised they didn't include a pooling formulation for horizontally developed wells.
This is a good pooling clause and by striking it from your lease you will inhibit the Lessee from developing your lands (something that I doubt you want either).
Roy, I can't disagree with you. The trend looks to be, take the lease or we will drain you against your will without compensation, or we force pool you, or we'll go around you and orphan your acres so they are never explored, or you can abjectly surrender, place your minerals in our hands and rely only on our good will (or blind luck) that you will be paid royalty for production. All of this is if you don't have enough acres for your own viable unit, not that they won't suggest these outcomes even if you do have sufficient acres to develop seperately from them. I find this more akin to extortion than business. Frankly, all I can see as a viable option is if you can band together with your neighbors, deny them the ability to pick you off one at a time.
Oil companies have through legislation turned the natural order of things upside down. You own the minerals that the oil company needs to produce to survive. If the oil company will not make a reasonable offer so you both can have security while you both profit, you should be able to send the oil company packing. If the oil company can't get acres to drill they die. Your minerals on the other hand could easily spend the next 100 years in the ground until somone approached your great great grandson or grandaughter with a reasonable offer. Really we should be able to write our own lease or make amendments to the lessees lease and if a court found it to be fair the lessee should not be able to force pool you, drain you without compensation, orphan your acres or force you to agree to terms that are so greatly against your best interest that they border on constituting an unconsionable bargain, one that nobody in their right mind would make. With the lease terms that the operator makes, I am certain that you can't depend on their good will, but that is exactly what they require or they drag out the dire consequences if you don't.
Many people think I am anti-oil company. Little could be farther from the truth. My automobile, motorcycle, chainsaw, lawnmower and every aircraft I ever flew on for business or pleasure was fueled by products from oil. Drill, baby, drill. That said, the oil companies don't own the minerals under your surface and should not be able to coerce you into signing an agreement that they can calculate at their whim whether you should be compensated or not. There should be some form of protection for the mineral owner, besides the court battle that most of us probably could not afford. The truth is that no matter what is in your lease, it provides not a single bit of protection if you can't afford to enforce the contract in court. Even with this fact, the lessee wants you to agree to a lease that provides you no protections to enforce. Something is very wrong there.
Roy Botard said:
That is exactly what I think of this clause. It basically cancels out all other statements and even the control of the State governing bodies. It is in both of the current leases I have as well as a recent past one was requested to amend. I feel that every lease from this point forward will contain this language and render most mineral rights holders ability to draw their royalties void. I would hope that this topic could become a priority here on this forum to inform all of this current and horrible trend.
Roy
Or horizontal completion to conform to any well spacing that may be allowed, prescribed or permitted by any govermental authority having jurisdiction to do so. Don't worry, they didn't leave anything out. The kitchen sink is in there if you look for it.
So, what are the counter measures. The lease currently reflects both a vertical and horizontal pugh which offers a measure of protection. But if two articles of the lease directly conflict, which prevails? The one who wins in a costly court battle? The latter is what I suspect.
There are no counter measures, short of negotiating different terms and limits, which you will only be able to do if you have enough acres of your own, or band together with your neighbors so that collectively you have enough acres. I would make networking a priority. If I had to wait a couple of years for the leases of others to expire, I would do so if it meant we could display a united front, or you can accept what you are offered right now and hope for the best.
Dear Mr. Botard,
While Walker County may not be in a sweet spot for leasing, the clause that you quoted is a very typical clause on a Lessee generated form. That clause, in various iterations, has been around for years.
The only way to fully protect yourself will be to amend the pooling language to something more palatable to you.
At that point, since by the Grace of God we live in Texas, we may make our own decisions on our own mineral interest, rather than being forced into ridiculous units determined by well intentioned but generally uninformed political appointees or elected officials.
At the end of the day, you may present them with an amendment to the clause and if they do not accept your modifications, or worse, reject them out of pocket, then your decision is to accept the lease bonus and go on, or remain unleased.
I will hazard a guess that there are many more "got-chas" in the form of which you are not aware. Pooling is one of a great many items to be negotiated on the lease form itself.
Thanks for all of the input. It boils down to about what I expected, at least for this particular lease from this company, either take language or leave it (get whatever production they pool me into or not lease and get nothing). One of the prevailing issues is that this is a "family" lease in that several other heirs are closely related and they are mostly looking to me to provide the example lease/form for them to utilize for their lease. I am sure that all would not elect to forego the lease just to win position on this one clause. Thanks again.
Personally, I think pooling clauses which reduce the unit sizes to the Rule of 88, or the minimum allowed under the spacing rules for that field, whichever is less, is preferable to fixed acreage amounts. Also, I usually try to reserve the right to consent to pooling until it is presented. It all depends on the leverage you have.
I don't see why a Lessee would ever agree to a lease WITHOUT a Pooling Clause, especially when drilling horizontal wells. What good does it do them to lease up a bunch of tracts, ones that on their own are not significant enough in acreage to create lease wells, if they can't put them together to form a reasonable and prudent drilling unit? I would leave the Pooling clause in there.
Many of my clients lease forms do not have a pooling provision. In their case, they own thousands of contiguous acres, so pooling would not be to their best interest.
For example, why would an owner of 6000 contiguous mineral acres in southeast Texas ever agree to pooling?
Lessee's agree to no pooling all of the time, however for much smaller tracts, it is essential to be pooled from the oil companies standpoint -- and yours. However the pooling clauses can be modified to limit the wide discretion given by the printed form.
Well, that's what I was saying, that Lessees are not likely to agree to "No Pooling" for individual tracts "that on their own are not significant enough in acreage to create lease wells." Six-thousand contiguous mineral acres do not fall into that category. No, it would not make sense to allow pooling with that huge a number of contiguous mineral acres. But would it make sense if the 6,000 NMA were non-contiguous but still in relatively large contiguous pieces?
Pete and Buddy are correct that your leverage on resisting a pooling clause usually depends on the size of your tract.
The best option is to reserve the right to approve any future proposed unit. Second, you want to resist the provision that allows them to hold your lease by production if there is activity anywhere in the unit. Finally, you want to limit the units to the minimum size required by the applicable field rules. These are just a few of the problems with this clause.