Direction on lease process

Landman Discussion
1

Mineral Rights Lease question:

Getting answers seems to be quite a challenge regarding the Shale Exploration. My family is looking for some "experienced" direction on the following scenario.

Key points:

  • Family of 5 children are included for minerals rights (Father - now passed away) was included in Uncle Edward's Will in the 1800's. He owned land in Montana and we are informed that we have mineral rights.

LETTER Re: Oil and Gas Lease Proposal Daniels Co, MT

Dear Prospective Lessor,

Shale Exploration, LLC is currently leasing in Daniels County, Montana for oil and gas production. According to our completed title research of the public records, you own minerals under the above referenced lands, and we are excited to announce we will begin drilling our first wells in Daniels County this year. Shale Exploration, LLC wishes to lease your mineral interest in these lands so that your minerals can be included in the future drilling program.

Shale is extending a Special Offer to you and other select mineral owners in Daniels County. You have three offers to choose from:

Option 1:

Bonus: $325.00 per net mineral acre

Primary Term: Five (5) years with five (5) year option @ $600 per net mineral acre

Royalty: One-sixth (1/6th)

Option 2:

Bonus: $325.00 per net mineral acre

Primary Term: Five (5) years with three (3) year option @ $500 per net mineral acre

Royalty: One-sixth (1/6th)

Option 3:

Bonus: $300.00 per net mineral acre

Primary Term: Four (4) years with four (4) year option @ $550 per net mineral acre

Royalty: One-sixth (1/6th)

In order to be included in the future drilling program, Shale needs to acquire an oil and gas lease from you as soon as possible.

If you’ve already received a lease offer from Shale and would like to choose one of the options above, simply contact your Shale Landman and they can provide an addendum, that will become part of the lease, that will include the desired terms.

Shale (Jayhawk project). ___________________________________________________________________

Well, (a punt), there are many unanswered questions. While we are interested in cooperating, and expressed as much; however, we are not getting answers in hard copy from them. Also, this project, as I understand it, is now under the JayHawk project. The last communications (several weeks ago) was a request, from the family, to see a copy of the proposed lease, and to have an understanding of what that translates to. So, while the pressure was being built to respond to Shale, they did not fulfill their communications in the requests we had made.

Per your experience, can you advise what to do with this? If they can't give clear answers, then one can't make an intelligent decision.

Thanks for your input! Karen

2

1. Don't talk to them by phone, people will tell you anything they think you want to hear if it gets them a signed lease. Doing business by mail, they will make more accurate statements. 2. You are absolutely correct that you should not send them anything commiting yourself to a lease you have not even seen yet, that is just common sense but people do it all the time or they would not ask you to do so. 3. If you own an entire section or something along those lines, you could block drilling and therefore would have great clout in negotiations but if you had a net of about 40 acres you would not stop drilling from occouring if an operating company could obtain rights to the rest of the spacing and you would be included in the drilling program whether you leased or not. Shale Exploration is not an operating company that drills wells, they lease acreage and flip it for a profit or simply act as the land acquisation arm of other companies. I suggest you do a search of Shale Explorations / SE on this site. Check out the Dainels county forum. SE has also recently said that their leasing operations in Daniels county have stopped and that they have assigned their leases to Apache. When I heard that SE had ceased leasing in Daniels county, I doubted they would stop trying to fill in the gaps in any spacings that they had a majority leasehold in, or nearly a majority. Wells get drilled even if the operator does not have all of the acreage leased, the difference is that if you lease to someone else or don't lease at all the operator makes almost nothing off of your acres. Pay close attention to anyones lease form, if they ever send you one. I hear that SE's lease form with option to extend gives SE 1 year from the expiration of the leases primary term to pick up the option to extend the lease so a 5 year lease automatically ties up your interest / becomes a 6 year with the 6th year being unpaid and the 4 tying up your interest for 5 years and so on. Karen, I am not a landman but I thought I would answer because your questions fell under the leasing help. I wish you good luck and patience.

3

Karen,

Assuming you represent all the family interests and are trying to do the right thing by all and that you have some significant amount of acreage, I suggest that you:

1. Find out what the geologic potential of your area may be through examination of all wells within 5 miles of your land, production, producing formations, permit applications, and permits granted.

2.What each operator in the area is pursuing in terms of leasing, permitting, drilling, and producing.

3. Apply the information gained above and apply it to the needs and expectations of your group

4. Create lease terms you are happy with then armed with superior knowledge, go back to Shale and other operators uncovered and make an overture to lease under your terms.

You don't have to lease and you don't have to grant an extension unless it is to your advantage. The fact that Shale is demanding extensions confirms Mr. Kennedy's speculation that Shale is just filling in blanks for more revenue for them not you. Examination of activity in your immediate area will tell you if force pooling is a possibility. I doubt that it is with the actions Shale is taking. Think about what their objectives are in evaluating anything they tell you or send you.

You seem to be thoughtful and capable of examining facts. Couple that with patience. Your minerals are what they are and have been there a long time.