Lease-Option to Extend

Shales Eagle Ford Shale
1

Our property in Burleson Co( G.B. Wrath, A-21) was leased in February of 2013 for $500 an acre for 3 years with an option to extend for $550 an acre for 2 more with 22.5% royalty (stated in the lease).

We were recently contacted by someone from the company stating that our lease will come up in Feb 2016 to extend. They wanted us to know if we would be willing to accept $300 and acre instead of $550.

I have been told that if the terms of the option to extend are stated in the the lease, they cannot lower the terms. What is this guy trying to do here? Are the feeling us out to possible sell the lease to another company?

We need some guidance.

Any advice would be helpful

Thank you!

2

Unfortunately, the standard extension is entirely in the lessee's favor. Nothing says that the lessee has to exercise the option; if the company does not exercise the option then it expires and the lease expires. The lessee, recognizing the fall in oil prices has led to a fall in lease value is offering to extend for less than what is stated in the lease. That's why the options are not lessor favorable; if values rise then the lessee gets an extension for a bargain price; if values fall the lessee need not exercise the option at all. Nothing illegal or devious about it; that's what the lease contract allows.

3

Hi Betsy, An option is just that, an option. Obviously they are trying to get a lower price for the extension and it makes sense for them to try that. You can decline the reduced amount and see if they go ahead and exercise the option under the terms of the lease at $550 before the lease expires. If they don't exercise the option, the lease will expire and it is a whole new ballgame, depending upon the going rates and activity in your area. But you will also not have a lease on your property unless they come back and try to re-lease at a lower rate. Its a gamble you take - waiting them out to see if they will exercise per the lease or take the offered renewal rate.

4

This is just an opinion from another mineral owner and it would be next to impossible to read the mind of the company or their representative; but, IMO, with the price of oil in the tank and maybe even headed lower, these guys are searching for ways to hold as much acreage under lease as possible all the while keeping the cost down. Again, this is just my opinion; but, pretty much everything in a lease is negotiable at any point. Yes the lease is a legal document and should hold up; but, most everything in a lease in slanted toward the lessee (oil company), so if you have a 2 year option clause in your lease, then if the oil company wants to keep the acreage, then they must either pay you the agree price or negotiate some modification. Your choice, hold firm and maybe they will pay the full option price or maybe they will just let it go. IMO, that is why I always have serious reservations about an option clause because it is basically a clause that is binding on your part; but, not on the oil companies part.

These are tough times and it is hard for any of us to know what to do; but, my personal belief is that if they want to modify the original lease, meaning that you have to give up something, then they need to be giving up something too. I have two leases, neither of which have options; but, are running out of time none the less. I expect, based on the local scuttle butt, that the companies are going to want to re-lease; but, aren't wanting to pay much for the lease. I am willing to sign a new lease with changes that give me something on down the road if the price of oil ever gets back on a roll. I have inserted this royalty information into any lease I sign in the future.

Oil at <$55 = 20% royalty, >$55 but <$75 = 22.5%, >$75 but less than $100 = 25% and anything greater than $100 = 27.5%.

IMO, this is fair; but, many companies will not want to do that since they are use to having everything their way all the time and I believe it is time to be fair; but, not dumb either.

Good luck!

5

Hi, Betsy -

Martin, April and Bigfoot have all made some good points. Other contributors here on The Forum may have additional advice.

The entire oil and gas industry is in a tremendous downslide nationwide and it appears that it will continue to be so for some time. It may be years before we see anything like $100 a barrel oil again and I think you can forget about seeing anything above $3 to $5 natural gas for the remainder of your lifetime.

I am impressed that you negotiated for a higher per acre Extension Bonus than you received for your Original Primary Term. Good thinking, there. I've only seen that a few times.

The same compliment to you, Bigfoot, on your Royalty to Value Sliding Scale. I'd love a copy of your Lease Provision regarding the same.

Your issue, Betsy, appears to be whether to accept the lower Extension Bonus amount or to take the chance that your Lease will expire.

I suggest you stay in touch with the Landman, but "Play Chicken" with him or her right up to the expiration date of the original Primary Term of your Lease, in an effort to see if they will "Blink First" and pay you the previously agreed upon $550 an acre.

Whether they are willing to "Blink First" depends entirely upon the value that the company places on your lands / interests.

If they are not willing to "Blink First", then you may be able to, at the last moment, accept their offer of $300 an acre.

If your Lease expires, eventually someone may come along and make you another offer. When that might be and whether it is greater than $300 an acre, depends upon a great many things that none of us have any control over.

The way I see it, the things you need to consider are:

How much do you need the $300 an acre on the table now?

And

How long might it be before anyone contacts you again about a future Lease and what might they be willing to offer then?

Either way, given the overall atmosphere of the industry today the odds of your acreage being drilled by the end of the subject two year extension are, in my opinion, close to astronomical.

My best advice is to "Play Chicken" with them until you feel they are close to the end of their efforts. Then, if necessary, accept their offer.

You may even be able to negotiate to accept their offer and a little more, but with an amendment to your Lease to include Bigfoot's Sliding Royalty Scale.

Hope this helps -

Charles Emery Tooke III

Certified Professional Landman

Fort Worth, Texas