Monthly Archives: August 2015

Lease Terms: Forfeiture Clause

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An Ohio court has determined that an Ohio lease cannot be terminated in spite of the company not making royalty payments.  The well was drilled.  We don’t have any information regarding whether the well was produced or even hooked up to a pipeline, but there is definitely a well there.  That’s probably enough under most leases to keep the lease alive.  But without production, there aren’t going to be any royalties paid.

You would think that in a situation like this the lessor would be able to cancel the lease, but that’s not the way Ohio law is.  It’s also not the way West Virginia law is.  In West Virginia you have to have what’s often called forfeiture language in your lease.  If you don’t, the only thing you can ask for is money damages.

For most of the people that we talk to here, money is all they’re ever going to get out of one of these leases.  There won’t be free gas, there won’t be benefits to the surface tract, there won’t be anything but money coming their way.  It doesn’t make sense to allow leases to be kept in place when money is not being paid.  But that’s the way the law is.

Make sure that you talk to a competent oil and gas attorney before you sign a lease.

Rogersville Test Well a Bust at First Glance

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A test well drilled to the Rogersville shale in Kentucky has apparently produced very little, just 19 barrels per day of oil and 115 MCF per day of gas.  That would be end of story for the Rogersville shale if those numbers were the whole story.

Companies are exploring the Rogersville shale right now because of test wells that were done in the 1960s and 1970s which produced 10,000 barrels of oil (not per day) and 6-9 MCF per day of gas.  So why did this well get such poor results?  It’s a vertical well, and it hit a bad spot in the Rogersville shale.

The Marcellus shale used to be a formation that would yield dry holes.  Some vertical wells to the Marcellus produced like gangbusters, others didn’t produce a thing.  Horizontal drilling changed that.  The horizontal portion of the well passes through rock that doesn’t produce and through rock that does produce, and the end product is a well that produces a lot of gas.

So the Rogersville shale still has potential, and will probably be a great formation to develop.  It’s going to be expensive, at $18-$30 million per well, but it will also give some really awesome production when horizontal drilling starts.

Moundsville Power Plant: 2018

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The power plant that is being built up in Moundsville seems to be on schedule to be completed in June of 2018, just a little less than three years from today.  Of course, they haven’t even moved a shovelful of dirt yet.  Let’s hope that the construction schedule is easy to stick with.  A nice natural gas fired power plant would put a lot of this extra natural gas we have lying around to good use.  More demand equals more development equals better bonuses and royalties for mineral owners.  That’s the kind of equation even a lawyer could love.

Lease Terms: Gas Storage

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One issue that we run across with nearly every oil and gas lease that we see is that the lease gives away the rights to store gas on the property.  This has been standard language in West Virginia oil and gas leases for decades, nearly a century.  Sometimes it’s just a phrase contained in a sentence, other times it’s the subject of a full paragraph or more.

DocumentGas storage gives the oil and gas company the right to store gas from other places on your property.  Gas storage isn’t the primary purpose of an oil and gas lease.  The company wants to produce gas first of all, but once the gas is all gone the company might decide to use the property for gas storage.  The formations that trapped the naturally-occurring gas and kept it from escaping to the surface will also trap gas that the company pipes in from other locations and injects into the formation.

Gas storage exists mainly because natural gas production and natural gas consumption take place in different locations.  Historically, natural gas was produced in large quantities in Oklahoma and Texas, and the large markets for natural gas were on the east coast.  Pipelines carried the natural gas from production to consumption, but during the summer months consumption was a lot lower than production.  The company would get a much lower price during the summer, and needed far less gas.  Then in the winter the price would go up and the pipelines were overburdened with gas.  There are other factors in play as well, but that’s the main reason for gas storage to exist.

Natural gas storage fields can last an awfully long time.  The very first natural gas storage field in the United States, the Zoar field, was put into operation near Buffalo, NY in 1916.  It is still in operation today.  There are no plans to mothball it in the near future.

The natural gas that is injected into a storage field doesn’t come from the property, so it isn’t owned by you, the mineral owner.  It’s been extracted from some other property, sometimes from half way across the continent, and a royalty has been paid on it to the other mineral owner.

Since the storage company has already paid a royalty on the gas to some other mineral owner, it’s not going to pay a royalty to the mineral owner where the gas storage field is.  Sometimes the mineral owner will be able to negotiate for a royalty on gas stored on his or her property, but it will be pennies on the dollar compared to a real royalty, and rightfully so.  The mineral owner is not the owner of the stored gas.

A lack of royalty payments isn’t the big problem, though.  The big problem is that your lease, which you thought was supposed to be for oil and gas production, is kept alive by gas storage.  Where it would otherwise have expired by it’s own terms, since oil and gas production had stopped, the lease stays alive because the gas storage clause is being put to use.

The company gets to keep the rights to produce all the formations that are included in the lease, usually all the formations from the surface to the center of the earth, but doesn’t have to actually produce them.  The company can keep the lease indefinitely, waiting for a better price on the oil or gas, and then produce them when it wants to or sell the production rights to another company.  It won’t have to enter into a new lease with the mineral owner.  It won’t have to pay a new bonus, negotiate a new royalty, or negotiate any other terms of the lease.

Here in West Virginia it didn’t matter too much whether a lease was held in place by gas storage or not until the Marcellus shale boom.  Leases were being paid for at $5.00 per acre and the typical royalty was 12.5%.  There wasn’t a whole lot to negotiate.  Now if there’s any interest at all in minerals, the companies will offer $250 per acre and a 12.5% royalty on the low end, and $4,000 per acre and 15% royalty on the high end, and they’ll negotiate up from there.

People who have leases that are being held alive by gas storage don’t get the opportunity to negotiate the terms of a lease, or receive a new bonus payment.

We highly recommend that you get gas storage language removed from your lease.  It’s usually very easy to negotiate, and can be financially beneficial to you in the long run.

If an oil and gas company absolutely has to have gas storage rights make sure that gas storage is a separate agreement.  An oil and gas lease should only deal with oil and gas production and nothing else.

West Virginia Landowners Win Court Case Against Mountain Valley Pipeline

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Judge Irons in Monroe County, WV ruled yesterday that the surveyors that the Mountain Valley Pipeline has been sending out do not have the ability to enter your land without permission.  The will be considered trespassers.

I think this is exactly what West Virginia law says, and I think the judge got it exactly right.

Read more about it here.