Oil and Gas Leases are for the Production of Oil and Gas Only, Except when they Aren’t

Posted on by

DocumentIf a person were to skim through your standard, run-of-the mill oil and gas lease, that person would probably come to the conclusion that the lease was intended for the production of oil and gas.  He or she would not jump to the conclusion that there was anything else allowed by the lease.

That person couldn’t be any more wrong.

It’s not that there aren’t leases out there that limit themselves to only oil and gas production; there are some.  However, the majority of oil and gas leases also provide for a number of other things the company can do with the property besides produce oil and gas.

We’ve written about storage wells in the past, and you can read up about them here.  Most leases include provisions which allow the company to use the property for storage.

Very similar to storage wells are disposal and injection wells.  Like storage wells, they are usually in formations that have been fully produced, or in other words, all the gas has already been sucked out of them.  The company will then truck in waste water and inject it into the formation.  They can put from a few thousand to tens of thousands of gallons of water per day into one of these wells.  Continuing the similarity to storage wells, the royalty that you’ll be paid (if any) on a disposal or injection well is tiny.  The end result is that what you thought was a lease for oil and gas production and good royalties becomes a lease that doesn’t pay you much at all.  Most leases include provisions which allow the company to use the property for disposal or injection.

Pipeline easements are also often part of an oil and gas lease.  All leases allow for some pipelines, of course.  In order to produce gas from the property you have to be able to run a pipeline from the well to the gathering system.  We’re not talking about that kind of pipeline, though.  We’re talking about a pipeline run across the property that is transporting gas from someone else’s property to a gathering system, or even an interstate pipeline.  This kind of pipeline is not going to benefit your property or you in any way.  And yet, there it is in your lease.  The company can run a pipeline across your property and if it does, it’s using the lease for one of the purposes specified in the lease, and so the lease can be kept alive without benefiting you in any way.

So once again the moral of the story is to read your lease very carefully.

We also hope that you’ll seek out competent counsel.  If you do, give us a call at 304-473-1403 and one of our well-trained and extremely competent staff will help you out.  We can explain what your lease does in plain English, and negotiate for better terms.

The Future of Natural Gas Prices in West Virginia

Posted on by

Power Plant

Here is an article in the Wheeling Intelligencer that explains why natural gas prices will go up in the next few years.  I’m sorry it’s behind a paywall, but I think they’ll give you a couple free articles before you have to pay.  If you want to keep up with oil and gas in West Virginia, the Intellgencer is the best publication for that at present.

There are also a bunch of pipelines going in, which we don’t have time to get into today.

Which brings us to an apology.  We apologize for not posting more articles lately.  There’s quite a bit going on at the office right now, and we’ll have a post up later this week announcing one of those things.

West Virginia Gas Wells Shut-In

Posted on by

Oil and gas companies refer to areas where they own a significant number of acres as fields.  Stone Energy has one called the Mary field here in West Virginia.  It’s up in Tyler and Wetzel counties, for the most part.  It produces about 100 MMCF of gas per day.  Stone Energy has decided to shut the entire field in.

The reason is that the amount of money that Stone can get for gas produced from the Mary field is so small that it isn’t worth their time; they’re practically giving the gas away.  For more details, and a lot of interesting facts about oil and gas pricing and production, take a look at this article by Marcellus Drilling News.

Oil and Gas is Alive and Well in West Virginia

Posted on by

Things have been picking up here at this office, indicating that oil and gas activity is picking up in West Virginia.  This article at the Exponent Telegram tells why.  To sum up, the current pipeline projects are going to be able to take a lot of gas out of the area, and will increase demand for the gas that’s still in the ground.

We’re awfully busy so we don’t have a lot of time to blog right now, but we thought we’d put this out there.

West Virginia Nuisance Lawsuits Against Oil and Gas Producers

Posted on by

There seem to be more and more nuisance lawsuits filed in West Virginia these days.  Property owners who are affected by oil and gas development, but who aren’t benefiting from it in any way, are resorting to legal action to protect their property.

The big problem with nuisance lawsuits is that they usually don’t pay for themselves.  You can count on getting a judgment, but that judgment usually won’t even cover the cost of the attorney or law firm you hire.  You can protect your property, but it’s going to cost you.  A lot of surface owners in West Virginia simply don’t have the resources to take on that cost.  Lawyers won’t (usually) work for free.

That hasn’t stopped every West Virginian, though.  This article over at E&E Publishing covers the subject pretty well.  It’s worth a quick read.

 

Lease Terms: Forfeiture Clause

Posted on by

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

Posted on by

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

Posted on by

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

Posted on by

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.