Chesapeake wants to increase production unit

I am leased with Chesapeake and they just called to tell me that they want to increase my drilling unit size.  Currently my contract says it can't be more than 640 acres.  I have not been put into a drilling unit as of yet but it seems like they are trying to do that now.  I told the guy from Chesapeake that increasing my drilling unit would mean that royalties would be split by more people.  He agreed but then added that increasing the unit would also allow for more gas capture.  Does anyone have any insight into this??  The guy from Chesapeake told me that I would actually make more money in royalties but then again, what would you expect him to say.

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Permalink Reply by paleface on July 21, 2011 at 3:58pm
 Pam I have to agree with chesapeake more acreage and more wells is more production of gas.Suppose your unit is just ok production not outstanding and the added acreage has a great production well on it you get part of that royalty,I think it increases your odds? 
Permalink Reply by Jim Litwinowicz on July 21, 2011 at 5:25pm

Interesting conundrum. Increasing the unit will dilute the royalties by dividing it among more people/acreage. But it increases the odds of being in a unit that is drilled and producing. It also increases the odds of getting a productive well.

But it also increases the odds that you will be a unit that has one well and then is "Held by Production" for many years before another well is drilled.  You may make more in the long run but less in the short term.

Another plus is once they offer to make a change, it gives you leverage to make additional changes.  Anything in your lease that you have learned about that you don't like? Asked to get it changed. If you have a large acreage, maybe ask to set aside a certain surface area. Maybe you can get a change in royalty... or maybe a little extra bonus.  But if you ask for too much the will refuse or even withdraw so tread lightly.

 

Everything is negotiable...to a certain extent.

 

Good luck

Permalink Reply by craig on July 21, 2011 at 5:39pm

I am so glad you posted this looking for information on this subject.  

Pam, My brother is currently dealing with this exact same issue. It is a BIG issue which you need to understand fully. What they are saying maybe true, but there is one major downside. You will find that what they want changed (a pooling clause) also allows them to hold ALL your acreage by production even if a small portion of your land is actually in the unit for what you will get paid royalties. The worst case i've come across is someone who signed what CHK wanted, then got included in the unit....however out of his 160+ acres they are putting .4 acres in the unit. Yes that is right 4 tenths of one acre...and now the whole 160+ acres is held by production....which means when his lease runs out next year too bad, no more bonus money for re-signing. I don't believe there is an upside. My opinion is to tell them yes, i'll sign, but only if you add a Pugh clause that specifically states that the land not included in a unit at the end of your original lease will be released to you so that you can re-lease the balance of acreage not in currently in a unit.  If this doesn't make sense to you, get a lawyer or ask more questions.

 

Permalink Reply by paleface on July 21, 2011 at 5:59pm

 I thought chesapeake leases had a Pugh clause? They must have different leases for different areas or maybe they change with age?

Permalink Reply by craig on July 21, 2011 at 6:06pm

Pam has one of the original O+G Company (An Ohio Company) leases I believe and if this is true then she needs to tread carefully...They (all drillers) WILL take advantage of you if they can, I know first hand. They are just  trying to make as much $$'s as they can.

 

Permalink Reply by Ann Ticopa on July 22, 2011 at 8:29am

Chesapeake and other gascos have publicly said that some/much of the drilling they're doing is to hold leases. So, any request for a modification of a lease - particularly one that will soon expire - is "suspect".  There is another gasco that's asking for the maximum unit size to be bumped up to 1200 acres on some old 10-year leases.  The lease doesn't have an explicit Pugh Clause, but from the wording, the lease would not hold past expiration any land not in a production unit.  The advantage to the gasco is obvious.

 

As for the possible pluses for the landowner, look at the gasco's permit/declaration/spud record.  How many 12-well units are they actually getting permits for and fully drilling? 

Permalink Reply by craig on July 22, 2011 at 11:51am
"How many 12-well units are they actually getting permits for and fully drilling?"
Answer for Beaver County....None
Permalink Reply by scott peterson on July 23, 2011 at 8:05am

Went to a meeting the other night with a landowner group  rep. who said" a Pugh clause was not necessary & considered it to be a gloss item on the contract that he would recommend just leaving out"

What you are describing sounds like a prime example of why you need one! I am becoming more & more leary of what any of these guys say.........

Permalink Reply by Michael Antrim on July 24, 2011 at 2:38pm

i had the same thing happen to me.  Here is what you need to know.  Are they drilling yet? Are there any plots around you unitized?  if there are where do they sit in reference to your property.  CHK typically likes to layout their units (somewhat) side by side retangles going southest and north west.  This will give you an idea how deep into your property the will likely go. 

 

In my case, the well was drilled.  It was producing and then they came to me a 3rd time to lift the cap.  It not a bad idea as long as you do your homework.  They try to maximize the units.  900 scre tracks if they can, with 6 horz wells.  They drill one NW and one SE.  This locks up the unit.  You have 2 wells generating $.  Do the math, the increased acreage and your decreased % of the unit will seem lower.  Keep in mind there are 2 producing wells.

I was going to allow it but in the end they cut the units in 1/2.  It made sense to me to allow it.  Our well production was really good.  The only reason they change course was becasue there was a fault line in my property.  Pa law does not prohibit this, by chk corp policy is not to drill thru fault.  Other states ban it.  The adopt it across the board. 

 

The guy from CHK can tell you an estimate but that could change last minute.  Find out. 

 

Also CHK told me, they can drill in another direction to get behind the fault line. 

 

Permalink Reply by cheliped on July 28, 2011 at 5:39pm
does anybody know the smallest unit or acres needed to drill a well? 
Permalink Reply by Nancy LeNau on July 28, 2011 at 8:52pm
Lara, I think it is 5 or 6 acres.
Permalink Reply by Jim Litwinowicz on July 28, 2011 at 9:47pm

Depending on the length of the horizontal leg, one well will drain approx 75 to 100 acres. But it is much cheaper to drill more than one well from a single pad as all the legal work, access road, well pad, frack pond, pipeline(s), tank, power lines and more all already in place. Therefore, they will usually want  300 contiguous acres or more for a unit. But they often drill 6, 8 or more wells on a single pad so they usually want a larger area for a unit.

 

 

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