Replies to This Discussion

Permalink Reply by Richard Cotterman on June 12, 2012 at 1:12pm

Hi,

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. 

Permalink Reply by Nizhoni on June 12, 2012 at 1:44pm

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?

http://www.vindy.com/news/2011/dec/28/oil-and-gas-leases-learn-how-...

Permalink Reply by Kathleen on June 12, 2012 at 1:44pm

On this site is a royalty calculator, put the numbers in and see how it doubles CHK numbers and 1/2's yours. On the upside you are now apart of a larger area so your chances can go up in hitting a better spot for production and the royalties might go longer but in smaller amounts.
I too was called about this and called my lawyer who said its a personal decision. I told dps penn if chk wants something than CHK has to give up something. I wanted a strata release from the queenston up which I knew he couldn't do without asking. He called about 10 days ago to say CHK denied my request. My answer was than they don't want the bigger unit bad enough. He said they really did, but stayed pleasant and never threatened me using all the things they say. My lawyer said if I want to do this he feels he can get it even though CHK already said no.
DPS confirmed I was in a unit and so did CHK and the well was permitted on the 31 of May and my water has been tested. I plan on calling CHK again to see if maybe I was pushed out since I also have an unleased neighbor between me and that leg. Of course dps penn said they will go around him but keep me in. Honestly it's not possible from my point of view.
I really wish everyone would record dps penn when they say these crazy things. Be upfront and admit you are doing it before they start in on you. I have not personnelly had any rude or proved to be untrue things said to me but what I've heard of is shocking!
To me the odds of CHK getting everyone in a unit to agree to this is small since any calculator shows it does not favor the mineral rights owner.

Permalink Reply by Nizhoni on June 12, 2012 at 1:55pm

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. 

Permalink Reply by H. Allison on June 21, 2012 at 3:59pm

Hi Kathleen, Is your attorney still leasing? Would you mind sharing his name? Thanks!

 

Permalink Reply by Nizhoni on June 13, 2012 at 1:00am

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?

Permalink Reply by Garfield on June 13, 2012 at 4:00am

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.

Permalink Reply by Nizhoni on June 13, 2012 at 4:04am

Wow... thank you for that explanation... Great info!!!

Permalink Reply by Richard Cotterman on June 13, 2012 at 4:29am

Garfield,

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.

Permalink Reply by Garfield on June 13, 2012 at 7:00am

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.

Permalink Reply by Kathleen on June 13, 2012 at 8:27am

I have seen a lease with the uncontiguous land and it also did say it could be amended at anytime.
Again to any unleased land owner everything written in that lease is so important and inforceable. If you see strange wording like that is in a lease it's there for the oil co. to go back and inforce it at anytime they want.

Permalink Reply by Nizhoni on June 15, 2012 at 5:16am

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.

 

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