Why is the 640 vs. 1280 a giant new hot topic?

Hi all,


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... 

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Replies to This Discussion

Permalink Reply by Kathleen on June 15, 2012 at 1:04pm
I know you directed this to DBD but with that size landowners around you I bet CHK lands up drilling the second production unit from the same pad. CHK just will not see the landowners side. They want so many to open their leases to benefit them and not give even the smallest of requests from the mineral right owner. I asked for 3 different adjustments. The first was a royality point: I thought the DPS guy was going to fall down, I asked for $$ and he almost tripped over himself, than I ask for the one item CHK took out of my lease which was the strata release. The DPS guy really did seem to think this was a go but again it was a no. So now they can put in another unit for all I care. I guess it's cheaper in the long run in their opinion to drill another production unit off the same pad. In my unit leg (the only part I know about) only has maybe 5 mineral rights owners with me being the 3rd smallest with 19 acres with only a few acres in.
Someone correct me if I'm wrong. They have to declare the unit size at some point if it's declared higher then 640 and you are in it they broke the lease terms if you never agreed. Keep an eye on this since even though at this time CHK seems to be working the area with care the upper level people seem to think they can do as they wish. One ex. My lease was clear they could not for any reason record a lease on my deed without full paid up lease paid in full. They recorded my lease 15 days before payment was cut than I received it 3 days later. My whole process only took 23-25 days from signature to check but they still did what they wanted.
Permalink Reply by Drill Pipe on June 15, 2012 at 11:01pm

DBD,

Would you please expand on the phrase, "you also give up your pugh clause" ? Why would a lessor

give up the clause?  Your response to the discussion makes good sense to me, except for this  phrase.

 

 

Permalink Reply by joe pierson on June 15, 2012 at 1:53pm

Nizhoni,

They are drilling much longer laterals then before, over one mile, and they need a larger unit to contain these wells within the units boundary. It is cheaper for them to drill one 5000 foot lateral as compared to two 2500 foot laterals. Your ultimate long term royalties won't change (short term they will), but it drops their cost of production. That is why they want it.

joe

Permalink Reply by Kathleen on June 15, 2012 at 6:49pm
I think to say the "long term royalties wont change" is wrong. Once you change that lease you are than at the mercy of the driller to go the whole 1280 or close to it to break even. They very well could not find that well to be worth making it bigger over time so you are stuck in maybe the original 640 acres but sharing at 1280. Unless its written in the lease they guarantee to drill it all I say stay at 640. If I knew they would do the 1280 I wouldn't hesitate to change my size since I would like the income stream well into retirement but there is no way they would ever say in your lease they will drill the whole unit. Maybe in time when more info on these wells is available the decision would be clearer but for now to little information is known.
Permalink Reply by Nizhoni on June 15, 2012 at 9:16pm

So, is it common for O & G to put guarantee's into a lease, or do you think I will get the "drop jaw reaction " like you got Kathleen when asking for some type of compensation for changing the lease.  Don't you think it is still early in the game?  What about those folks that signed years ago when they thought 50 - 75 an acre was great.... So now they are telling us, no compensation...  But, what if things don't go their way... I would think that they would start doing something to make the pot a little sweeter to get more to amend...

Permalink Reply by Kathleen on June 16, 2012 at 8:57am
Hi,
On the news I'm hearing of leases south of me with certain guarantees. One I recently heard was the driller had to drill within under 200 days (I don't remember the exact number so I went high) or they owed another 700,000 to I think it was a school district. I wish I remembered right now exactly who the entity was. But either way this was not CHK and was a much larger landowner, but it does show you never can say never when it comes to anything I guess. I think everyone gets the jaw dropped reaction from CHK. I've read here over and over about people in old clinton leases that aren't even closes to 640 in their leases who were contacted by the oil co. to increase the size, but I've yet to hear of CHK giving up anything for the change, yet except for a threat by their landman, of they will go around you.I very well could have missed it and a lot of people post a question about this than never come back to say what happened. This has to be happening all over mahoning county right now. I also think in time CHK will have to give something for unit size change.
Permalink Reply by Nizhoni on June 16, 2012 at 10:14am

That is exactly what is going on here in Stark.  Talking with a co-worker who has an old Belden & Blake lease that is max size of 160.  He was approached by CHK and they were like his best college buddy.... Dropping all the neighbors names like this landman has been around the town for years and knows everyone.  My coworker took his addendum in hand and told him he would look it over.  We talked, I shared this website, and some other info that I had come across, and he decided he was not going to be in a hurry and see an attorney.  They are offering him nothing in exchange for the switch, other than only 6 of his 7 acres will be in the 1280.

So the landman showed up a week later to get the signed amendment.  When my coworker told him he was not signing it and taking it along with his original lease to see an attorney next week, my coworker said his whole demeanor changed.  He was upset, short, and threatening him that his was making a huge mistake. They won't be back. They are cutting him out. They will go around him... Blah blah blah.. So him immediately thought that if this was such a good deal for all party's (as CHK put it) then why on earth would he be so upset about him wanting to get it reviewed by an attorney.  So right there, tells you something is shady... But, as I am saying.. You begin to second guess yourself because of all this being so new and an unknown future for us all.  You wonder can they really cut you out?  So maybe you better just sign... So, that is why I am thankful for this site that we can share personal experiences....  And it is so funny to hear how it is going on in other counties...  But, again, I just feel that we are at their mercy because we don't really know what is going on..

Permalink Reply by Kathleen on June 16, 2012 at 11:35am
I almost wish I would push this by asking the lawyer to get me the strata release for the change just to see if it can be done like he said but it would cost me extra money and I'm not sure it's the right thing to do, but again I'm curious.
I know if you are towards the end of the unit cutting you out can be done, but what if you fall in the middle? In PA I saw a unit with the middle side cut out but their laws on staying so many feet away are different. In Ohio the the new law just signed I think reads 1500 ft. That's a lot to cut out. It's that land than the 1500 feet into the unit. CHK would have to give up something you would think since how honestly can you make units with those restrictions? What I feel is fair for the old Clinton wells is either making their 1/8 to gross or at least getting it to 17% net. Time will tell what happens. Another question I personally have is why did they accept my lease in late Jan when they had to know this unit was coming? This would have been the time to kick the unit size back at me. I guess one hand is not seeing what the other hand is doing.
I really wish everyone would post back what they decided on this subject. I bet most believe the threat which honestly might have to come true since 160 is really small. I think I might sign if I was in that situation since the royalties is the goal here.
Permalink Reply by joe pierson on June 17, 2012 at 9:56pm

A lot of leases have a full developement clause in it, in NY it is state law (if there is nothing in the lease the state law provides a minimun number of years or else the lease terminates on the undrained acreage)

A full developement clause and pugh clause are MUCH more important then royalty rates or unit sizes, most landowners don't understand that, and gas companies take advantage of that.

Permalink Reply by Billy Park Whyde on June 17, 2012 at 10:28pm

This is what my lease in the Clinton Formation looks like that was done in 1980

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Permalink Reply by Nizhoni on June 18, 2012 at 2:49pm

Thanks for sharing!!!

Permalink Reply by Billy Park Whyde on June 18, 2012 at 3:03pm

yep

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