I apologize to all those I haven’t been in contact with recently.  I’m working hard to get to everyone.

I ran across an article that shows that the Marcellus formation isn’t the only play in this neck of the woods.  Gastar has gone down to the Utica and Point Pleasant in Marshall County, and are getting excellent results.

These ares not the only producible formations down there.  Keep that in mind when you’re negotiating a lease.  Ask for a formation reservation, a Pugh clause, and keep in mind that this document could easily exist beyond your grandkids’ lifetimes.

I’ve wondered at times whether or not these horizontal wells would be re-fracked at some point in the future.  Looks like they will be.  At least, the companies are thinking up ways to do it.  This one involves pumping “diverting agents” into the old cracks at high speeds.  Subsequent fracking would open up new cracks.  Pretty doggone cool.

I bet there are other ways to re-frack, too.  Shoot, it seems to me that you should be able to pump some kind of cement that would dry to be as hard or harder than the rock formation into the horizontal part of the drill bore, let it harden, and drill a completely new horizontal in a slightly different place.  You could use the old vertical part of the well, so you don’t have the expense of a new pad and vertical portion of the well.  That’s just one thought off the top of my head.  It’s a freebie for any gas company that wants to use it.  You’re welcome, guys.

There’s a guy up in Canada who came up with a novel way of creating negotiating leverage with the oil and gas companies.  Back in the early 2000’s he was having difficult with landmen and company reps coming to his door and taking up his time.  He wanted to protect his property from pipeline development.  So he turned his property into a work of art, and got it copyrighted. Now he charges the companies $500/hr to discuss use of his property, and only talks to company presidents.  I’m not sure that would work here in the US, but I don’t know the first thing about copyright law, so maybe somebody else could weigh in and let me know if it might work.  You can read more about it here.

The takeaway from this story, I think, is that knowledge really is power.

Here’s a link to an article from the Wall Street Journal (link goes to a Google search page, as that’s a simple way to get around WSJs paywall) about the infrastructure that is being put in place to handle some of the gas that the United States is producing.  This piece deals with what’s going on in Louisiana.  But large projects are needed in other locations as well.  Putting something as large as a 7000 acre plant in West Virginia would be a challenge due to the hilly nature of our state, but smaller projects could be and are being undertaken.  This is the kind of thing West Virginia could really benefit from.  A large percentage of the minerals under West Virginia topsoil are held by out-of-state owners, meaning that royalty payments won’t be paid to West Virginians in a lot of cases.  We need to make up for that missing royalty money from surface rights, oilfield and service industry jobs, taxes, and industrial development.

Another large pipeline is proposed that would pass through Marshall County, WV.  Here’s a link to an article about it.

There’s big news for West Virginia surface owners.  In the last four weeks, two large gas transmission pipeline projects have been announced.  Both are in the very early stages of planning, and could be scrapped if economics change.

Dominion Transmission is planning a pipeline from West Virginia to North Carolina.  It’s currently called the Southeast Reliability Pipeline Project, or the Dominion Southwest Reliability Project, depending on the news reports you find.  It’s expected to start in Harrison or Lewis County, West Virginia, cross into Virginia on the way, and end in Lumberton, North Carolina.  It would serve markets in Virginia and North Carolina, including the Brunswick Power Station and Hampton Roads.

Dominion is saying that it’s five years off, and that they’re two years from even applying for approval from FERC, the Federal Energy Regulatory Commission.  It seems their goal is under four years, though, as several reports state that Dominion would like to put it into use by the end of 2018.  They’re starting right now to ask property owners to let them come onto their property to do surveys.

The really interesting part is that it’s going to be a big pipeline.  42″ in diameter.  That’s really, really big.  If you’re familiar with the Trans-Alaska Pipeline, that one’s 48″ in diameter.

Spectra Energy also has proposed a pipeline.  There’s not as much information about it.  It’s planned to run from Pennsylvania, through Maryland and the eastern panhandle of West Virginia, into Virginia and North Carolina.  It’s going to be a 36″ pipe.  While it runs through a different part of West Virginia, it’s going to end up in the same place as the Dominion pipeline — Lumberport, NC.  That makes me think that we’re going to get either one or the other.  It seems that both pipelines are in response to a request for proposals from Duke Energy and Piedmont Natural Gas.

For my clients, a large pipeline is going to mean cash.  The old rule of thumb for pipeline right of ways was a dollar per inch per foot.  At that rate, a 42″ pipeline crossing just 100 feet of your property would command an upfront payment of $4,200.  But that’s not where the price point lies today.  I’ve negotiated right of way deals for several times that amount.  Anybody in West Virginia signing a pipeline right of way for less than $2 per inch per foot is signing cheap.  I hope this deal comes through, and that hundreds of people get to negotiate right of way deals.

I want to call attention to something that’s new in the West Virginia oil patch . . . division orders.  What is a division order?  It’s a document used by oil and gas companies to verify the interest that you own in the minerals.  They send it out just before they start sending out checks for royalty payments.  They’ll wait to send out royalty checks until they get the signed division order back in the mail.  Sometimes the lease states that you have to sign the division order, sometimes it doesn’t.  Savvy mineral owners will get language in the lease stating that they don’t have to sign a division order, or at least strike the language requiring a division order from the lease.  Why would they do that?  Excellent question.

Division orders haven’t been used in West Virginia until recently.  Texas and Oklahoma companies used them out west for decades, but for some reason they never caught on with local companies.  When the Texas and Oklahoma companies came here to West Virginia to take advantage of the awesome Marcellus Shale play, they did business the same way they did at home, including sending out division orders.

They have a couple reasons to do so.  First, it’s the way they’ve done business in the past, and they want to keep their system working the same way it always has.  Also, it gives them a chance to verify the mineral owner’s interest in the minerals.  If you own 1/2 of 100 acres, it will state that you own 50 acres.  It will often (but not always) do so in a number of different ways, listing the gross acres, your fractional share of the gross acres, your net acres, and your decimal interest.  Pretty harmless.

Another reason they send out division orders is that it gives them another chance to get royalty owners to warrant the title and the ownership of the minerals.  They’ll include language saying that you warrant that the title is good, and that your are in actual fact the owner of the minerals.  In other words, when you sign the division order you are saying, “I promise that I own minerals, and it’s this much.”  That puts you in a bad position.  If it turns out later that you don’t own those minerals, the oil and gas company could come after you for the amount that they’ve overpaid you.  They would use the division order as evidence against you.

That would be OK if you were the one to approach them in the first place saying that you owned the minerals.

But most people who own West Virginia mineral rights never knew they owned West Virginia mineral rights until the company contacted them out of the blue one day and told them so.  They have no idea how they own the minerals, and they have no idea how to go about proving that they own the minerals, and they have no idea how to fix any problems in the chain of title if there are problems, and they don’t have the money or resources to fix the problems even if they do know how to fix the problems.  The company does, though.

So when you get a Division Order in the mail, you need to scrutinize it closely.  You need to scratch out any language that says you know something about your ownership, or that says you own X amount of minerals, or that does anything other than list your ownership interest for informational purposes only.  Be liberal with the red ink, and apply “to the best  of Lessor’s knowledge” everywhere.

Or just go ahead and throw it in the trash.  Unless your lease says you have to sign a division order, a division order is just not necessary.  West Virginia producers haven’t used them in the past, there’s plenty of reason for you as the Lessor not to use one, and there’s not much reason for the producer to require it.

SOME REALLY BASIC CONTRACTS LAW

In law school we learn quite a few things that I think everyone should be taught in high school.  One of those things is that the heading of a contract, or the heading of a clause in a contract, does not control what the contract or the clause actually says.  For example, I’ve seen plenty of documents that say they’re wills, but when you read through them, they actually set up trusts.  While the will still has to go through probate, it’s going to create a trust in the end.

APPLIED TO OIL AND GAS LEASES

Most oil and gas companies will give a name to their document that roughly describes what it actually is.  A lease is usually just a lease, a modification is usually just a modification, etc.

But when it comes to the clauses in a lease, it’s a different story.  The heading will always tell you the main point to that clause.  Except when it doesn’t.  But the devil is in the details.

THE POST-PRODUCTION COSTS CLAUSE

For example, for decades there has been a post-production costs clause in almost every gas lease. It gave the producer the right to deduct some of their costs from the royalty. Those costs included things like transporting the gas through a pipeline, dehydration, compression, cleaning up the gas, and separating the different types of gasses for marketing, to name a few.

WEST VIRGINIA LAW ABOUT POST-PRODUCTION COSTS

Here in West Virginia a couple years ago there was a big, high profile case (Tawney v. Columbia Natural Resources) about royalties and post-production costs that went to the West Virginia Supreme Court.  The Court sided with the royalty owners and said that post-production costs could not be passed on to the royalty owner unless they were specifically spelled out in the lease.  It got a lot of press because it was a $404 million dollar settlement (which was negotiated down to $380 million.)

MARKET ENHANCEMENT IS BORN

Everybody heard about the Tawney case.  Royalty owners got wise and started asking for no post-production costs or deductions.  Oil and gas companies didn’t like that.

So instead of putting a Post-production Costs clause in their leases, they put in a Market Enhancement clause.  Their landmen could point to their lease and say, “we don’t include a post-production costs clause.”

While it was true, it was also a blatant lie.

WHAT MARKET ENHANCEMENT REALLY IS

The Market Enhancement clause was nothing more than the old Post-production Cost language, changed around a bit, with an emphasis on how the costs being deducted actually increased the value of the gas.  If you parsed the old language and the new language, there was almost no difference.

When someone called the landmen on it, the landmen would respond, “those costs actually increase the amount of royalty you get because they increase the value of the gas.”

POST PRODUCTION COSTS REDUCE YOUR ROYALTY

While that statement is (possibly) true, you have to remember that everything the producer does increases the value of the gas.  Building a pad, drilling the well, flaring the well, even the title work increase the value of the gas because if none of those things happen, the gas will have literally no value.  That’s the argument that the landmen are making, and it’s just wrong.  You will get more royalty when no post-production costs are deducted from it.  A post by John McFarland from Oil and Gas Lawyer Blog does an excellent job of explaining how.  It’s a long post, but I highly recommend you take the time to read it.

HOW TO POLICE THE OIL AND GAS COMPANY

It’s nearly impossible for you to ever be sure that the oil and gas company is only deducting those costs that are increasing the value of the gas.  You can’t even be sure they are deducting only what they say they are deducting.  Unless you audit them, you just have to take them at their word.  I can think of three ways of checking up on them.

First, you can audit their books.  This requires that you go to their office and spend time figuring out their record keeping system.  Because you probably don’t know much about oil and gas accounting systems, you’ll need to hire an expert to go with you.  In short, you’ll need to time and money to audit them.

Second, you can check the WV DEP’s web site for the oil and gas company’s reported production.  But if you want current numbers you’re going to have to wait a while because the oil and gas company only has to report once a year, by the 31st day of March.  And wait a little longer because the DEP takes a while to post those numbers to the internet.  Note, also, that the most recent numbers are going to be at least four months old.

Third, you can go out to the well site and check the gauges.  This is the simplest and most reliable method.  But it really only works to get the total production from the well.  That’s why the lease needs to say that royalties will be calculated based on the total production from the well, with no deductions.  It’s simple and you don’t have to rely on anyone else to get or give you information.  Of course, for all you out-of-state mineral owners this is not really an option.

The takeaway here is that you really need to read everything that’s in a lease.  You can’t skim the headings and know for sure what you’re signing.

And always get no post-production costs.

If everything goes according to plan you won’t need this advice, but things don’t always go according to plan.  Oil and gas businesses are run by human beings, and if there’s one thing we humans do, it’s make a mess of things.  Better safe than sorry, right?

Oh, and make sure they know you’re keeping records and taking pictures.  When we humans know we’re being scrutinized we are less likely to be lazy, cut corners, and forget things.

Luck favors the prepared.