Category Archives: Lease Terms

A Study on Lease Terms and Money

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What matters most when you are negotiating an oil and gas lease? Your knowledge of oil and gas? Which company you’re negotiating with? Your negotiation skills? Where your property is located? How much oil and gas property you own? What the overall market is like? Which landman you’re negotiating with?

Turns out, it’s whether you “…have the skills or resources to negotiate for more favorable leases…”.

Here’s the abstract of a study done by the National Bureau of Economic Research.

Just in case the web page disappears someday, we’re going to quote the abstract in full.

“Oil and gas lease negotiations provide mineral owners the opportunity to negotiate for both compensation and auxiliary clauses that may protect their health and properties. We use optical character recognition to assemble a novel dataset of compensation and specific clauses in nearly 60,000 leases signed in the Marcellus Shale Play of Pennsylvania. We leverage the dataset to produce three main findings. First, contrary to the standard utility maximization model, we find a positive relationship between compensation and clauses. Second, we find that as development of the shale play progressed over time, compensation rose and leases became more likely to contain environmentally protective clauses. Third, we find that compensation and the presence of clauses have a weak relationship with the geologic productivity of nearby wells. Together, our findings indicate that oil and gas firms simultaneously make concessions by raising compensation and approving clauses, but these concessions do not depend on geologic productivity. This suggests that some mineral owners, such as those that are high-income or from more socially organized communities, have the skills or resources to negotiate for more favorable leases all-around and point to similar environmental justice concerns identified in other shale plays.”

There’s a good bit to unpack here, but the main point is that if you are knowledgeable in oil and gas, or you can hire someone who is (a lawyer), you will get the best terms and the most money.

Our experience shows that people with larger net mineral interests (more oil and gas property) also get better terms and more money than those who don’t.

So, if you want to maximize the return on your investment, get a lawyer.

Delay Rentals: The Old Becomes New Again

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Once upon a time in the oil patch it was completely normal for West Virginia oil and gas companies to pay a delay rentals for their leases.

Then the Marcellus Shale boom happened and competition for mineral rights blew up. Instead of paying a delay rental, the companies started paying a signing bonus. Actually, it might be better to say that the companies started paying the entire delay rental up front and calling it a signing bonus because that’s what actually happened.

Like for so many other things, 2020 happened. Demand for natural gas dropped, driving the price of natural gas down to almost $1.50/MMBtu at one point, a price that had never been seen in the Marcellus Shale era. Banks realized that oil and gas was a bad investment, and stopped throwing fists full of Benjamins at the drilling companies.

Without loads of cash, oil and gas companies had to cut back. But the nature of oil and gas wells is that their production goes down every day, so the companies had to keep drilling new wells. To drill new wells they had to keep taking new leases. You see the problem, right?

In order to make it cheaper to acquire new properties, one company, EQT, has started paying for leases the old fashioned way–delay rentals.

What’s, exactly, is a delay rental you ask? There are two parts to explain. The Rental, and The Delay.

The Rental: A delay rental is a rent payment that’s due on the anniversary of the lease. If you think of this as a commercial lease on a building where there is one large payment per year, it might make more sense. Right now, EQT is offering $250 per acre, so if you owned 10 acres you would get $2500 at the beginning of each year of the lease.

The Delay: A delay rental payment is made so that the oil and gas company can delay drilling on the property, but keep the property under contract. Historically, oil and gas companies would sign a lease and the lease would say that they had to drill a well within 30 or 90 or 180 days (or some other time period) or they would have to pay a rental or lose the lease. As the industry matured, they dropped the requirement to drill within a time period and just started agreeing upfront to pay a delay rental for a certain number of years.

There is one very important thing to know about Delay Rental leases. There is always language in the lease that says the company will no longer have to pay delay rentals if they drill a well. You don’t want this. They will change it.

There is one other very important thing to know about Delay Rental leases. There is also almost always language that says they will be able to recoup any delay rental paid once royalties start flowing. You don’t want this. They will change it.

So the next time EQT calls you up about a lease, take a good hard look at the language of the lease and make sure you understand what you’re agreeing to (or have your local oil and gas attorney take a look at it). You might find that you save yourself an awful lot of money and confusion if you do.

Why is my Bonus Check Smaller than It Was Supposed to Be?

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We’ve gotten several phone calls and emails from clients over the years about the size of the bonus check that the oil and gas company sent them.  It’s always the same story: the landman made promises of big money, and the big money never came.  As you can imagine, this makes people angry.  It feels very bait-and-switchy.
Side Note: This happens often enough that the companies should train their landmen to warn people that it could happen.
To understand why this happens you’ll need some background.
When a company first decides it is interested in developing any given tract of land it will request a title search on that tract.  That title search will be done by a landman, not a lawyer.
The landman will tell the company who they think owns the mineral rights, and the company will then buy leases from those people.
Once the company gets a signed lease back from those people, it will usually have some time (90 days, for example) to check the title work the first landman did.  More than once we’ve seen the company change its mind about how much our clients own based off this second title search.  Usually it’s for the worse.
Later, usually much later (sometimes never, but we’re hopeful), the company will drill a well and produce natural gas.  Once they do, they owe royalties.  But before they go paying royalties, the company will ask a lawyer to provide them with certified title.  The lawyer will go out and do all the same work the first two landmen did, but sometimes with different results.  We’ve seen the company change its mind about how much our clients own based off this certified title.  Again, usually it’s for the worse.
When the company changes its mind, it has the right to pay only for what you own, not for what it promised to pay.  Why?

There’s a little-noticed clause in almost every lease called the Lesser Interest clause.  It says that if you own less than the entire tract, the company will pay you accordingly.  There is usually also an Order for Pay or an Order of Payment that the company has you sign at the same time you sign the lease, and it includes similar language.

So when the company discovers that you own less than they originally said you did they pay you accordingly.
The opposite is actually true, too.  If the company discovers that you own more than they originally said you did they pay you accordingly.  We’ve seen clients get more than they expected.  Oddly, that happens far less often than getting less.
Now, it’s quite possible that the landman/lawyer got it wrong.  It wouldn’t be the first time and won’t be the last that a human being makes a mistake.  The trouble is that it will often take quite a bit of time and effort to prove the landman/lawyer wrong, or in other words it will take quite a bit of money.
If you want to do something about it, you should start by getting a copy of the run sheet that the landman/lawyer made.  Most companies will provide it to you if you’re persistent and nice.  It’s a list of all the documents the landman/lawyer used to determine ownership.  It might not make any sense at all to you, but we can help with that part.
If the company won’t provide you with the run sheet, you will at least be able to get a copy of the document that changed your ownership.  Sometimes the change in ownership will be based on an interpretation of a vague clause in that document.  If so, we might be able to help you change the company’s interpretation of that clause.
As always, good luck!

Natural Gas Storage: Explanation Video

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The following is a good, short video that explains some of the basics of natural gas storage.  The narrators talks briefly about some stock trading strategies, but does an excellent job of explaining what gas storage is, the different types of storage facilities, when the different types are used, when injection season and withdrawal season take place, and a couple other odds and ends.  It’s under three minutes, so it’s well worth the time.

For oil and gas lease purposes, natural gas storage rights should always be removed from a lease.  Oil and gas leases should be for the production of oil and gas from the leased premises only.  If a company must have gas storage rights, those rights can be given in a separate agreement, and paid for separately.

Lease Terms: Confidentiality Clause

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DocumentThe subject of a confidentiality clause in an oil and gas lease has come up a few times in the last couple of months, so it seems like a good time to write about it here.

A confidentiality clause says you can’t talk about the terms of your lease with anybody.

While a confidentiality clause technically means that you can’t talk about the lease terms with your family, friends, and neighbors, or even your spouse, the company doesn’t really expect that to happen.  It’s pretty unlikely to enforce that aspect of the clause except in very egregious circumstances.  For example, if you were to negotiate a totally awesome lease and then go start a landowner’s group using your lease as the base lease, then they might take you to court to enforce the confidentiality clause.

The real reason for the confidentiality clause is that the company wants to keep the lease from being recorded at the courthouse.

The company doesn’t want to file the actual lease for a couple of reasons, the most important being that they don’t want to start bidding wars.  If all the terms of all of their leases were on file at the Doddridge County courthouse, for example, nobody in Doddridge County would have settled for less than $2,500 per acre for the bonus or less than 18% for the royalty.  Everyone would have gone to the courthouse, looked up recent leases, and seen that someone (we won’t mention who) had gotten those terms in their lease.  Everyone would have then asked for and probably gotten those terms and better.  In just a few months lease prices would have gone from $1,500 per acre to $5,000 per acre or more.

Instead of filing the lease, the company will have you sign both a lease and a memorandum of lease.  The memorandum of lease will include a description of the property, the length of the primary term and any extensions thereof, whether there is a right of first refusal, and a couple of other terms that vary from company to company.  It won’t include the bonus amount, the royalty amount, or any other unusual or different terms that you acquired.  It’s just enough information to show a subsequent landman that there is a lease on your property and how long that lease will probably last.  The company will file the memorandum of lease at the courthouse instead of the actual lease.

You want the lease to be on file, however.  The lease is the only actual record of what you and the company agreed to.  The landman will get fired, leave for a different job, get reassigned to a different project, or retire.  Companies lose leases more often than anyone cares to admit.  You could lose your lease in a move, a fire, a flood, or just because people lose things.  Your attorney (you did hire an attorney, right?) will retire and destroy files when the statutory time comes up.  The only somewhat reliable method for keeping a record of the lease is to have it filed at the courthouse.

You and the company have competing interests.  It’s not an easy thing to work around.  However, one solution is to get the company to agree that you can place a copy of the lease on file at the courthouse once there is production from the property.  Before that, it doesn’t matter too much whether the lease gets filed because it could simply expire at the end of the primary term.  Once there is production, however, the lease could be in effect for decades and the risk of losing all copies of it goes up.

As a practical matter, it’s been awfully difficult to get companies to agree to a clause like that.  If you’re in a strong negotiating position, however, I highly recommend you push for it.

Good luck, and get in touch if you want help with your lease.

Why You Should Always Ask How Long the Lateral Will Be

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Eclipse Resources holds the world record for a horizontal well at 18,500 feet.  This year they plan to drill 11 extra long wells.

Longer wells have several benefits, including a better ROI for the companies, and fewer environmental burdens on the surface.

The one thing people don’t like about them is that there will be fewer workers as there will be fewer drilling rigs.

Regarding the ROI, Eclipse says it makes an ROI of about 25% on a 6,000 foot well, 67% on a 13,000 foot well, and 87% at 19,000 feet.  That’s a huge jump in ROI.

It occurs to me that if the company is going to be making a lot more money per well, maybe it’s time we started tying royalty percentages to the length of the lateral.  A typical negotiated lease in West Virginia provides for 15-18% royalties, with a few even higher.  If the well is going to be longer than usual, say between 5000 and 10,000 feet the lease could provide for a 2% increase in royalties.  If between 10,000 and 15,000 feet, 4%.  And if between 15,000 feet and 20,000 feet, 6%.  So a 2% increase in royalties per 5,000 feet of lateral.

Share the wealth.

This may not be terribly applicable in some parts of West Virginia.  Well length and unit size are limited in Harrison County in part because there are a lot of leased properties checkerboarding the area.  The company wanting to do horizontal drilling isn’t always able to get an assignment for all the tracts it wants to drill.

It’s an idea to consider, though, and should work well in the northern panhandle where all the leases are owned mainly by Southwestern.

Another Reason Why You Need a Good Gross Proceeds Clause

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West Virginia University is working on a project, together with a large number of other groups, that would significantly improve the royalties paid to mineral and royalty owners–if it works.

The issue is that West Virginia terrain is so rough that it’s difficult to install pipelines.  The pipelines are needed to transport the produced natural gas to centralized refineries, cracker plants, separation plants, and the like.  Since pipelines are so difficult to build that sometimes they’re not built, leaving gas “stranded”, unable to be transported to a place it can be used.

The U.S. Department of Energy has started a branch of its National Network of Manufacturing Institutes which it calls Rapid Advancement in Process Intensification Deployment, or RAPID.  RAPID will bring together people from academia, industry, government labs, and non-government labs to tackle “process intensification“.

Process intensification in the natural gas fields will combine multiple gas processing steps into one.

The result will be the ability to process gas at the wellpad using small, mobile, modular units.  The processed gas would be turned into products that could be transported in trucks.  The benefit to West Virginia is obvious.

West Virginia royalty owners could expect higher royalty checks, and in some cases where they wouldn’t see any real royalties at all, they would see significant royalties.

Of course, leases would have to be written with the idea of capturing those royalties for the mineral owners.  Companies will, of course, try to pay royalties on the lowest value they possibly can.  Mineral owners should be able to get the highest value they can.

Getting a strong gross proceeds clause into a lease will become even more important for our clients.

West Virginia Oil and Gas Lease Basics

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DocumentIMPORTANT!:  The following article includes good advice about how to improve a “standard” oil and gas lease.  However, it is no substitute for hiring a lawyer to read the exact document you have and give you advice about the exact language of that document.  Even if you decide not to hire me, go find a lawyer that knows oil and gas leases.

With the price of oil and natural gas rising and, more importantly, with production numbers dropping and new pipelines getting ready to be built, leasing activity in West Virginia is going to see another uptick.  People who have never seen an oil and gas lease will be needing some advice.  The following is some good basic advice that everyone can benefit from.  Rising tides and all……

THE MONEY – The Only Thing You Think Matters

The first thing anyone thinks of, and the first thing any landman will discuss after establishing that you own the oil and gas, is money.  The landman will offer you a signing bonus.  The signing bonus is in exchange for the rights to develop the oil and gas for a certain number of years.

You can always get more than their first offer.  You don’t wear your best pair of shoes to get to the dance.  As a rule of thumb, you can usually expect to get double what their first offer is, unless it’s over about $2,000/acre or below $500/acre.  (Note: If the company you’re dealing with is trying to get a delay rental lease, the bonus is paid out in equal yearly amounts.  It’s a little harder to understand, but the landman should be able to explain to you the difference between what they’re doing and a “paid up” lease, including the possibility of having to pay some of it back to the company.  Yes, that’s often in delay rental leases.)  Don’t be shy when negotiating the bonus, because the bonus can be the only money that you ever get.  If the company never drills on the land there will never be any production and there will never be anything to pay royalties on.

That segues nicely into the next thing that everyone thinks about–the royalty.  The statutory minimum royalty in West Virginia is 1/8, or 12.5%.  Don’t settle for 1/8, though.  You can get almost always get 15%, and the huge majority of leases we have negotiated over the years have ended up at 18%.  If the company does drill and produce, getting a little more money for that production can be a nice thing.

Along the same line of thought, you’re going to want to get what’s called a gross proceeds lease.  The company is going to want to deduct some of the costs of transporting the gas from the well to wherever it gets sold, and as many other costs as it can.  In West Virginia, the company is responsible for those costs up until it sells the gas.  Don’t let them stick you with those costs.  Not only will you end up with more royalty money, you will also find it a lot easier to read and understand the data on the check stub.

LIABILITY – You Should End Up With None

The company is going to ask you to warrant the title to the oil and gas.  In other words, they want you to promise that you own the oil and gas.  If it turns out later that you don’t own the oil and gas, or that you own a smaller portion of it, then they will ask you to return money to them.  Even worse, they could ask you to fix the problems with the title.  That’s expensive.  Thousands of dollars worth of expensive.

You probably didn’t have any clue you owned oil and gas in West Virginia before the company told you so.  You are acting in reliance on the company’s research.  It doesn’t make sense for the company to turn around and ask you to warrant that the company’s work was done right.  Tell them you won’t warrant title.

Also, make sure that there isn’t anything in the lease about old wells or old leases.  It’s a pretty safe bet that there is an old well somewhere on that property, and there’s also a chance that there’s an old lease that could be affecting the property.

Finally, go ahead and ask them for an indemnification clause.  It’s not terribly likely that you’ll be liable for bad things that happen while the company is drilling.  They have deep pockets, you don’t.  They’re easy to find, you’re not.  They’re doing things on the property, you probably had to look up West Virginia on Google.  But it’s pretty easy to get and nice insurance to have, so ask.

LIMITED SCOPE – Oil and Gas Production Only

An oil and gas lease should be limited to just producing oil and gas.  Most of them aren’t.  Most of them include things like the right to convert it to gas storage, or the right to use the property for a disposal well.  Many of them also include the right to produce coal bed methane.

The main problem with most of these is that they don’t pay well.  At all.  They pay a few hundred dollars a year most of the time.  Even worse, they keep that lease alive longer than it should be.  In other words, you won’t be able to re-negotiate the terms of the lease or get a new signing bonus.

In the case of coal bed methane, the company you are dealing with doesn’t drill coal bed methane wells.  How do I know?  Because I’ve asked them.  The best case scenario for coal bed methane is that another company will approach the company that owns your lease and work out a signing bonus with them.  Once they drill and start producing they will send you royalties, but nothing more.

You should make sure the lease is only for the purpose of producing oil and gas and other products that might come out of the well with the oil and gas.

FINAL WORDS – It’s Complicated

There are a lot of other things that we help people with when it comes to oil and gas leases, including making sure they’re getting the most amount of money they can for the area their property is in.  What’s in this article is the basic stuff that can help you improve the standard boilerplate that the company will present to you.  It can make your lease…..palatable.

If you own the surface it becomes even more important that you get a good lawyer on your side.

We highly recommend you hire us to help you with your lease, even if it’s just a quick initial consultation.  You’ll leave with a lot more knowledge, confidence, and peace of mind than you came in with.

Give us a call at 304-473-1403 to schedule an appointment.  I promise we don’t bite.

Upper Devonian Drilling

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Upper Devonian

EQT has announced that it will start drilling Upper Devonian formations along with the Marcellus shale.  This is a great move, and while I don’t like EQTs stance on post-production costs or know anybody that really likes working with them, I have to applaud it.  Here’s why.

The Upper Devonian lies just a few hundred feet above the Marcellus shale.  It produces gas, sometimes wet gas that is rich in ethane, propane, butane and the like.  It doesn’t produce as much gas as the Marcellus, though, so a lot of companies have ignored it.

If memory serves, you can improve production from any acre by about 50% if you can produce from both the Marcellus and the Upper Devonian.

However, if you develop the Marcellus without developing the Upper Devonian formations you are unlikely to be able to develop the Upper Devonian.  This is because the fractures you make in the Marcellus migrate upwards for hundreds of feet, right up to the Upper Devonian formations.  When you go back later to fracture the Upper Devonian you lose a lot of, if not all of, your fracking pressure into the existing fractures.

In order to take advantage of the Upper Devonian formations you have to frack them at the same time you do the Marcellus formations.

Anybody out there negotiating their own lease should ask the company whether they are planning to develop the Upper Devonian, and find out why they are not.  They may have good reasons, such as it simply won’t produce much gas in your area.

You probably won’t be able to convince them to change their plans unless you control all of hundreds of acres, but you could always tell them you won’t sign a lease unless there’s something in there saying they will develop the Devonian with the Marcellus.  It’s worth a shot.

 

Get Everything in Writing!

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DocumentOne thing we hear all the time is that the company promised X but never did it.  Now the mineral owner wants the company to do X, but the company is refusing.

It’s a really unfortunate situation.  In general we all want to be able to trust people.  Were supposed to be able to trust people.  Everything works better when you can trust people.  Society and civilization work best when you can trust people.  But you can’t trust a company.

It’s not that the people running the company are bad or good or indifferent.  A company is made up of people who also want, are supposed to, and work better when trust can be given and received.

It’s that a company functions based off policies and procedures, not people.  The people come and go.  The policies and procedures stay.  The only way a company works over the long term is because of what is written down.

So a company can only go by what was written because that’s the nature of a company.

Even if that weren’t the case, the written paperwork is going to be the best evidence of what happened.  Some of the paperwork we’re working on today is going to be in existence long after we’re all dead.  We’ve seen a lease that was signed in 1892 that is still in effect today.  You can’t rely on people when the people aren’t there any more.  You won’t be able to show up in court and have your say 120 years from now.

You have to get it in writing.

Courts have recognized that this is the case and have said that if it isn’t written down it didn’t happen.  The following quote from a West Virginia Supreme Court case says exactly that.

In Iafolla v. Douglas Pocahontas Coal Corporation, the Court restated the well established rule that, “A written contract merges all negotiations and representations which occurred before its execution, and in the absence of fraud, mistake, or material misrepresentations extrinsic evidence cannot be used to alter or interpret language in a written contract which is otherwise plain and unambiguous on its face.”

Notice that the Court said it was a “well established” rule.  This case was from the 1970s.  The line of cases it quotes will go back to English common law, probably the 1600s or 1700s.  It doesn’t get much better “well established” than this.

So, the Court says that a “written contract merges all negotiations and representation”.  In other words, the Court assumes that what you talked about is what you wrote down.

However, you’ll notice that the sentence didn’t end there.  The Court continued on and gave some exceptions to the rule.  It did it in a roundabout kind of way, but it did it.  It said, “. . . in the absence of fraud, mistake, or material misrepresentation extrinsic evidence cannot be used to alter . . . a written contract . . . “.

With that language, the Court said that fraud, mistake, and material misrepresentations can throw into doubt whether the written paperwork is valid.

The trouble is, it’s hard to prove any of those things.  You need good witnesses or … wait for it … written documents.  In the modern world you could even use recordings of conversations (assuming that the other party knows they’re being recorded to follow the most strict rule we know of).  Emails would work, of course.

In a he-said-she-said situation it’s going to be awfully hard to convince a court that the paperwork with your signature on it is something other than what you intended to sign.

That’s why we recommend that you communicate with the landman or other company representatives by email as much as possible.  Even when you talk with them on the phone, send them an email summarizing the conversation.

Get it in writing!  If it’s not written down it didn’t happen.