Continuing discussion on leases and clauses from the comment wall.
I'll pull the text in the next few entries.
Comment by Martha McMorries
Kathlyn and Kenneth, 3 card monte is about right and no lease clause will trump the OCC rules. However, a Must Drill Clause might be needed to demand the lessor/operator must drill and a Continuous Operations Clause might be needed requiring the operator to continue drilling additional wells to prevent depletion of the common source of supply, but identifying the common source of supply is going to be the 'trick'. Also, this clause would need to limit the lessor/operator's unlimited exercise in determining Continuous Operations. Really, I can see the need for modifying many of the lease clauses like: Habendum Clause giving lessor right to drill and extract, but extract what and how? Delay Clause giving lessor the right to delay drilling if they are still in compliance with the lease, but what constitutes delays? Re-working Clause requiring lessor/operator to re-work or re-drill if no production is found the first try, because not drilling would prevent mineral owner from their rightful share of production from the common source of supply. Rental-fees Clause for payment of rental if no drilling occurs and operator is still in compliance of lease, but rentals amounts need to be very high and fixed. Pugh Clause modified so that where possible a well must be drilled that will not be pooled with other acreage. Unitization Clause modified to prevent damage of formations that may be productive in the future due to more advanced techniques. Entirety Clause protecting royalty owners from allowing some other owner, company or country to take over drilling operations. Of course, all these clauses will have a release (termination) of lease fixed date if the legal requirements and determinations of the Lease Clauses are not met. There is so much more, but I'm a paralegal and we will need to get some very good attorneys to help us modify the clauses I've mentioned above and right new clauses. Hope this gets us all to thinking, because future oil and gas developments are going to challenge us mineral owners.
Comment by Kenneth McDonald 22 hours ago
Wow Martha, nice insight. More incentive for companies to HBP existing leases, something that will be greatly streamlined by the new rules. How is it that the owners of the minerals have no say, while the companys are presumably free to lobby? Is NARO going to be allowed to comment before this is implemented?
Comment by Martha McMorries 22 hours ago
Kenneth, NARO told me that they are working with the OCC on the new multiunits, but I don't know to what extent. Mineral owners can take courses at TCU in Fort Worth TX.http://www.energyinstitute.tcu.edu/2012/12/04/driven-by-oil-shale-e...
Comment by Rick Howell
Martha,
I’m confused. Are you trying to reserve rights for the mineral owners to operate alongside the operator they are leasing to? Or are you using the term “lessor” to be the same as the company leased to instead of “lessee”?
The “lessor” is the mineral owner. The “lessee” is party that the mineral owner is conveying rights to, such as the land company, operator, oil company.
Lessor=Grantor=Landlord=Owner
Lessee=Grantee=Tenant=Company.I’m going to assume you meant “Lessee” everywhere you stated “Lessor” because it makes more sense than retaining those rights.
1) Some really tight and tough leases can be drafted that is entirely in the Mineral Owners favor. But, how do you plan to get the companies to accept the terms? Sure if you own 640 NMA in the section, you might be able to negotiate some wild clauses. I don’t think anyone here has that. Even having 300 or so in the same section could give you some great power. Most oil companies are just going to say thanks but no thanks and force pool you. I can “insist” my royalty checks be delivered month by a man dressed in red riding in a sleigh pulled by a team of reindeer. Getting them to agree would be another thing. But if I had 640 NMA and I was willing to sign for $5 an acre and 1/8 RI, I’m sure I could get my check is such a fashion.
2) The Habendum is the duration of the lease, defining the primary and secondary term. This the part of the lease that holds us “by production”
3) The granting clause is what defines what is being granted, what zones, what hydrocarbons, etc.
4) The OCC cannot change law to allow more than 640 acre spacing. It has to go through the legislation process to allow 1280 spacing. It was attempted but the compromise was HB 1909 which developed §52-87.6 and this is where we get the mult-units we are seeing.
Here is a presentation on those changes.http://www.iogcc.state.ok.us/Websites/iogcc/images/2011BuffaloPrese...
However, I do believe the OCC has great power in influencing legislation. I guess we will have quite a bit to discuss at the OK NARO convention in April. Who are you getting this info from at NARO?
5) Delay clause? I haven’t seen these used in any lease I have signed, they have all been paid-up leases.
6) Re-working clause? I’m not sure why that would be needed. If they drill a dry hole, the lease will expire and the secondary term will not start. They could drill another well if they start prior to the expiration of the primary term.
7) Rental fees are part of a delay rental lease. They will be high and fixed in that type of lease.
I’ll stop there. I think that is enough for start of discussion without getting into the other areas you mentioned.
Comment by Robert P Tyrrell III 17 hours ago
Martha, I haven't been a member of this board for long but Rick is right - I've had 35 + years in the business, land, production, litigation, ect. Unless you control a unit, of whatever size or configuration, and whether control is under you or by agreement w/ other owners, you will be hard pressed to force the clauses proposed. If you figure a way through otherwise, please let us know. Unless you have a penchant for supporting oil and gas litigators !
Mt
Comment by Rick Howell
Martha,
I did some search and found some recent leases in Oklahoma that are "delay rental" leases. They are rare enough that there seems to be about 100 filed in the state in the last year. The Lessor on almost all of them are the BLM, State of Oklahoma, or Indian. In comparison there seem to be between 200-600 leases filed in the state per day.
Comment by Chris Moore
Seems like there are better fish to fry than focusing on delay rental.
Top of my list is dealing with the new reality of these deep wells holding all the minerals above -- kind of turning the need for the traditional depth clause upside down since they are drilling at the bottom but holding everything above.
Delay rental leases seem to just be another way of saying you want a bigger bonus (don't we all). Sure, an operator might agree to a delay rental clause but they are going to want to lower the up front bonus -- it is just math. To me, "paid up" lease is simply means any delay is factored into the bonus rather than paid if they wait out the term.
Comment by Rick Howell
I agree Chris,
I am supposed to schedule a meeting with an attorney to discuss a few things in a few weeks. That is one of the topics at the top of my list. We have a few acres unleased that Marathon filed the location exception on. I want to be ready for the pooling so I can lease part of it to someone else. There are more acres than what I can see us participating in a single well of that cost.
Comment by r w kennedy
I believe that if you are leased to the operator that monthly delay rental is encouragement to drill. I believe that if monthly delay rental is in the lease, the lease is worded so that the missing of a delay rental payment would make the lease expire, or they would not need to pay you the delay rental anyway. If the monthly delay rental is considered a series of options, the exercise of options according to their terms is strictly enforceable. Oil companies like paid up leases because there is virtually no way they can lose the lease and they only have to remember the renewal date, not perform monthly or they lose the lease. From what I have seen, it must be extremely hard for an operator to perform on time, probably because they have become accustomed to having it their own way in practically every instance.
You might ask what you could gain from your lease abruptly expiring after a couple of years and the answer is the chance to renegotiate, possibly with more knowledge than you had when you first leased.
Comment by Martha McMorries
Robert P Tyrrell, Sorry...guess I've had a different experience getting oil/gas companies to accept leases. Probably because I started participating in wells back in the 80's and they learned to work with me on the leases so I wouldn't participate with my family's trust entire leasehold amount. Should have filled you in on my background, but I hate to bore people silly, but will do so since my honor is in question. At the ripe old age of 26 my family asked me to take over control of our family's trust which has over 11,000 acres in 600 tracts in 5 states. Without an education in geology my skills as a nurse where unless, so a geologist friend was good enough to set with me at the dinner table every night for 2 years and teach me to read logs, etc. I also learned that we could participate in wells and spun of a little O/G company which gave me an education in losing money with working interests, because the wells were drilled by a bunch of crooks who understood the legal side of O/G. That was the first and last time my money was spent on an attorney to defend me, because he just wanted my money too, so I spent the next 6 years driving back and forth from Stillwater to Tulsa 3 nights a week to study law and got my associates paralegal degree. Life was hard then because I was raising my kids, managing the trust, running the O/G biz and going to college. It was about that time that God showed up and punched my ticket and I learned that hard work will kill you, but I'm a fighter and lived to see the hot summer day in 95 that my first wildcat prospect appeared before my eyes on a trend map. The oil and gas industry was good to me over the next 10 years, but not for a lot of other mineral owners, so I started doing pro bono work helping them understand as much as they wanted to learn. In 2005 life got harder, I got older, closed up shop and went to work for Chesapeake and got an education in corporate politics, but didn't like it one bit and left on my own accord. Burn out was bad at 50, because I was to young to retire, so the gambler in me jumped head long into the stock market and found that picking stocks is a lot like picking oil and gas prospects. The current O/G boom pulled me back through that time tunnel and I've been digging my way back out. Now, my kids are trying to learn and are struggling and scared, because they can see the fear in my eyes. It's different this time around folks, because the O/G business has evolved into a giant machine grinding geology, physics, technology, software, state rules, regulations and yes... laws all into one big powerful force in this country and I know my kids can't fight this on their own without help. There are a few good attorneys out there who are still helping us mineral owners and I've been talking with some trying to write good leases and understand how to protect my kids from some highly sophisticated rules and regulations the OCC seems to think mineral owners need to have crammed down their throats.
Comment by Martha McMorries
Rick, you are right about lessee not lessor. Getting old, but not senile yet. The clauses as I mentioned and listed need to be modified or changed giving the mineral owners more control over the exploitation of their minerals. Also, new clauses addressing new rules and regs. need to be written and inserted in OK mineral leases. Some Oklahoma mineral owners are hiring Texas attorneys who have written new Texas leases that are over 6 pages long. My daughter-in-law who is a wills and trust attorney just had a TX attorney write a lease for an elderly client. Many of the clauses l listed are in her client's lease and were modified in favor of the mineral owner.
Comment by Rick Howell
Martha,
I’m sorry if my posts made you feel I was questioning your honor or integrity.
For every person posting in this forum, there is many more reading who don’t post. I feel I have a higher knowledge about the business than the average mineral owner or forum member here. I read through your post last night a few times trying to make it add up. Some things did, some didn’t. My intent was to open a dialog on the individual aspects of the post. By doing so, everyone learns. Stealth readers, participants, you, and myself, we all learn and win. There is a lot about this business to get our arms around. The more I learn, the more I find out there that I don’t know enough about. I’ve made my fair share of mistakes in posts on here and was so glad people corrected me to get a better understanding.
I would love to discuss the lease topics individually, but would prefer to do it in a discussion thread so it is kept intact instead of on the comment wall where it gets diluted and hard to follow.
I’m not a fan of the “it’s all Mineral Owner vs the Oil Companies”. We both need each other to make it work. As much as I despise partnerships, it is a partnership that we have to accept and make it profitable for everyone involved.
OK, I think I got everything relevant to the discussion copied into here.
Rick, All info on multiunit rule hearing came from my telecom with OCC Dec 30, 2013 and my follow up telecom with OK NARO confirmed OCC.
R W, I agree that a delay rental creates some incentive although it is not clear to me that it is significant. This wouldn't make or break a lease deal for me, it is just a nice one pretty far down on my wish list.
Rick Howell said:
Comment by r w kennedy
I believe that if you are leased to the operator that monthly delay rental is encouragement to drill. I believe that if monthly delay rental is in the lease, the lease is worded so that the missing of a delay rental payment would make the lease expire, or they would not need to pay you the delay rental anyway. If the monthly delay rental is considered a series of options, the exercise of options according to their terms is strictly enforceable. Oil companies like paid up leases because there is virtually no way they can lose the lease and they only have to remember the renewal date, not perform monthly or they lose the lease. From what I have seen, it must be extremely hard for an operator to perform on time, probably because they have become accustomed to having it their own way in practically every instance.
You might ask what you could gain from your lease abruptly expiring after a couple of years and the answer is the chance to renegotiate, possibly with more knowledge than you had when you first leased.
Martha, do you have a sense for why kind of changes are being considered for the multi-unit stuff?
Martha McMorries said:
Rick, All info on multiunit rule hearing came from my telecom with OCC Dec 30, 2013 and my follow up telecom with OK NARO confirmed OCC.
Martha,
I will agree we need some new clauses, but today's oil companies have got so big that they rule everything. I'm not sure that OCC works for the mineral owners anymore. Finding a good oil & gas attorney may be hard to do as the oil company has all of them on retainers, so they can't work for the mineral owner.
If the oil company doesn't like your lease, they will let you set. I have 320 A with H wells being drilled all around me. They didn't like my clauses, so they didn't want my lease. I keep thinking they are probably pulling the oil out from my land. Yet OCC tells me they can only pull 350 ft. Guess there isn't a pool of oil like their used to be. When one oil company has leased or purchases 9 square miles, they rule the area and you can just set if you don't like their leases.
That is exactly what I am talking about Virginia.
We can make that perfect clauses that work out best for us as Mineral Owners and they can turn it down. With 320 NMA you have quite a bit of control. In this case they seem to be choosing not to drill, likely based on the profitability.
It is a partnership we have to enter to market hydrocarbons we own. We do not have the resources to drill our own well, so we need them as much as they need us.
There is no doubt that most of default leases I see coming to me are slanted very favorably for the Operator. But a "dream lease" slanted to the other extreme is not profitable for them. We have to negotiate and meet in the middle. If a person has controlling acreage, then that could stop the chance of production. The average mineral owner does not have that control and they will be force pooled. Which is good because that keeps their decision from preventing other mineral owners from having production.