I am new to the site, and just want to say thank you to everyone for all your incredibly helpful information. This is my first post so I hope that someone can help me out.
We signed an ALOV lease last April. We were pleased with our lease. When we heard that CHK would no longer entertain a lease like ALOV's, we felt that we did a responsible job on research, and getting a protective lease.
Now, a little over a year later, CHK is back knocking on several of my neighbor's doors stating that they need to do an addendum to their lease (which we pretty much all stuck together and signed the ALOV lease together) or they will not be included in a unit, and they will go around their land and as one landman stated "we will just cut you out". What they told my neighbor is that "all the neighbors" are signing and it isn't a big deal. But, yet they have not spoke to me or other ajoining properties that I have checked with. So I feel they are just using a tactic to hit every other property or so, so that we don't get together and compare notes.
What they are wanting to amend is that our lease has a pugh clause and a 640 max. unit size. They want to change it to 1280... and then they informed my neighbor that only part of her property would be in a unit of 1280, and then the other part will be put into another unit at a later date.
So I have spent many countless hours trying to find this out, but the bottom line is..... Does switching to a 1280 when you have a 640 affect your future royalties? The landman seems to evade the question and give some mumbo-jumbo answer, that doesn't hit... The bottom line... does it benefit us as a landowner to switch? or does it benefit CHK? I can't image they are here wanting us all to switch because it is going to help us in the long run. Especially because I know a neighbor down the road that did not sign with us last April. They would not even look at giving him a 640 max... it was a 1280 or nothing. So he ended up signing the 1280 just recently... And wouldn't we be smart to just wait for awhile till some wells go in? Why such a big rush on getting this amendment signed?
I guess I am just kind of looking for a black/white answer, to help me out when they come knocking on my door again. Actually, my neighbor called and informed me, that he said he was coming here next to work on us....
Thanks everyone for any insight...
The black and white answer. It is a good deal for CHK and mabye not a good deal for the land owner. CHK can drill ONE well and hold 1280 acres. If you have 640 acre units CHK has to drill 2 wells to hold the same acreage. CHK does not have enough time to drill on every 640 acre unit before their lease time runs out and they have to pay the landowner again for the renewal of the lease. The land owner will probably see about the same amount of royalities over a longer period of time. The 1280 acre pie is divided into a lot more pieces but there will be or should be twice as many wells on the 1280 unit. Smaller is generally better.
This is my understanding after talking to our attorney.
There are experts on this subject that should tell you the samething.
This is my understanding as to why you want the acreage to be no more than 640 acre units.
Thank you Richard. Appreciate the info!! I did find after posting this discussion, an article in the Youngstown vin. from last December. I don't think he is directly saying stay with the 640, but it seems that the numbers would say "don't amend"!! I just want to have all my ducks in a row when they come to my door. But how about the threat of "cutting you out"? What would your response be?
I will look at the calculator, thank you. I too have had my water tested, back in March. But, there is no permit as of yet? I figured that they have been out trying to get everyone to do this switch before they actually pull a permit to possibly reconfigure our area.
Hi Kathleen, Is your attorney still leasing? Would you mind sharing his name? Thanks!
Thanks Fang... I think the sit and wait method is the best. We did the same thing when they came to our doors 2 years ago offering $75.00 an acre! Best to do some research and ask others for help!!!
How would it impact me as a landowner, if most of the neighbors did sign the addendum to the 1280 and I chose not to? If all the property surrounding me is leased, they can't cut me out if I am tucked in there with only 25 acres can they? Would I be included in a 1280 unit, but only get royalties from 640 of it?
The landowner's royalty certainly can be diluted! Say CHK puts a wells on your property, which is part of a 1280 acre unit. Your royalties are going to be half of what they would be if the unit was only 640 acres.
The justification for 1280 acres is that you will eventually share in the production on the 1280 acres (not just 640 acres). This is certainly possible, but it's also possible that CHK will split off your well as its own 160-acre unit when they go to drill the 2nd well on the original 1280 acres. It's actually to CHK's advantage to remove that 160 acres from the original unit, so they can add 160 new acres which can then be HBP with the rest of the newly configured 1280 acres by that 2nd well.
Keep in mind that 75% to 85% of your well's production will come in the first few years. In the above example, during the first few years your royalties will be diluted by a denominator of 1280. If and when you are spun off from the original 1280, your % share of the new 160-acre unit obviously grows, but the production from that well is far greater. You will never share in the production coming off of the balance of the 1280 acres.
In summary, the landowner is at risk because CHK has the right to re-unitize (i.e. reconfigure units) at any time. The reduction in the landowner's royalty can be dramatic.
Wow... thank you for that explanation... Great info!!!
I think you are blowing smoke.
If you have a good lease then CHK can not do anything without your approval as to unit size and removing you from it.
Where is this written?
I am no expert, this is just common sense.
Reconfiguration has been a reality for decades, my friend. In many leases, the driller specifically reserves the right to reconfigure units at will - no permission is required from the landowner. You might try reseaching the unit maps for a few old wells in your area --- you will probably find a few where the boundaries changed over time. Usually they grow, not shrink, since drillers are looking to hold as much land by production as possible.
As good as my ALOV lease with CHK is, it fails to prevent CHK from reconfiguring... the lease just limits the total size of the unit to 640 + a 10% fudge factor.
An even bigger problem occurs when CHK gets a landowner to amend a lease to say that there is no maximum unit size, or that the maximum shall be whatever the state's limit is (which there is no limit in state law). On top of that, CHK's amendments also state that they can unitize leased property with uncontiguous property, and even unleased property! Under that scenario, CHK could create a 10,000 acre unit of disconnected properties in different counties, and legally hold it all with 1 well. Royalties would be diluted by a denominator of 10,000 acres, but CHK would only have to pay royalties to landowners with leases. Obviously, no royalties are due for unleased acreage, and obviously CHK has no right to drill, use or produce unleased properties --- it just serves to reduce the total amount of royalty money they have to pay out.
Yes, this violates common sense and is totally unfair, but it is unfortunately legal. The O&G business is not about what's fair, it's about money. Landowners beware.
Thank you Drill Baby Drill for your info. I think it is going to have to be a personal decision. It is just a shame that CHK is using scare tactics and threats to get folks to change their lease by telling them they will be cutting them out. So what would your future look like, if all your neighbors switch to the 1280 and you do not? Would they still put you in a 1280 unit, but you would only get royalties for 640 of it? Could they totally rework their projected units and cut you out? Or would they desperately bargain with you to amend? I only have 25 acres so I don't think I am a big fish by far, but I am nestled in with many similar sized farms, so I am confused as to where that will leave me. I am not a gambler, so I feel that amending my lease is not an option for me.