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 Billy Park Whyde on June 15, 2012 at 11:54pm

With the problem CHK has at the present time I would not sign anything with them!

Permalink Reply by Miller on June 18, 2012 at 3:53pm

I have got one aspect of this that hasn't really been discussed. If I have the 640 clause in my lease and they are putting in a well in my neighborhood. They are limited to 640 acres for the production unit. The 640 acre production unit does not reach me. So now I am not part of the production unit and get zero royalties. If we didn't have the 640 clause they would have utilized the 1280 production unit, now it reaches my property and I get royalties. Sure it is not as big a chuck as if I was part of a 640 acre unit, but with small acreage you would have twice as much chance to get included in a unit. Now if you owned 80 acres or so then it may be different but I think small acreage could very well sit there inbetween production units and not be included. Does this make any sense.

Permalink Reply by Billy Park Whyde on June 18, 2012 at 4:18pm

  I have a BIG or Small question. For those that have dug further into than I have.  I have not seen any indication of large drilling units in Ohio. Can some one give some numbers as to the largest drilled unit so far, the smallest unit and the over all average? 

  It seems to me as if they want to tie up the acreage. Simply put some one had suggested a unionization of landowners. We see hey where can I lease, who is leasing but right now with the election uncertainty I believe everything is in somewhat of a frozen state.  

 

Permalink Reply by Nizhoni on June 18, 2012 at 9:26pm

That is a great question... The more I hear, the more I really think it is CHK's way of resolving their issue of trying to get the units secured before the 5 year expiration.  They can cut the units needed in almost half by getting the switch to the 1280.  That is why I really think I am going to sit back and wait to see what some of these 1280 units numbers look like before jumping the gun and sign something I don't understand.  I doubt their are any numbers in Ohio that are near the 1280.  Now, I have heard, but I don't know how to look it up, but if someone knows how.  Check out the Ron Smith well in Stark county.  He is close to me, and I have spoke with him.  He had an old lease on his property, which he said that CHK had him sign an amendment to the 1280.  So I wonder if they have enough properties around him to make that a 1280 unit? 

0i7okn54zwbdoPermalink Reply by 0i7okn54zwbdo on June 18, 2012 at 10:48pm

Gulfport has a 1,280 unit in Harrison county.  The smallest I've seen is 117 in Mahoning by CNX.

Permalink Reply by ray schmidt on June 19, 2012 at 10:01am

marcus, is this the boy scout well? if so how can i look it up? im not far from there 

Permalink Reply by Billy Park Whyde on June 19, 2012 at 10:39am

I had seen where someone had posted about the CAUV  tax. I called the Muskingum County Auditors Office today to ask about it. There response was the surface area only. I threw the hypothetical question of say a 4 acre drill pad and their answer was it would change the 4 acres involved only at the time but if the pad was restored (reclaimed) that the CAUV could be restored minus the area that wasn't so if it was only a Christmas tree with a fenced in boundary the surrounding area back into hay, pasture, crop would revert back to the CAUV upon reapplying for the CAUV.  

Permalink Reply by Jim Lawrence on June 21, 2012 at 10:34pm

Answer is it depends.  Your royalties will NOT be cut in half if more than one well is drilled.  In a 640 3 wells will be drilled.  In a 1280  6 wells will be drilled.  Royalties of 3 wells or royalties of 6 wells.  It ends up being the same.  An advantage to the 1280 is if the half you are in would have a below average production and the other half of the unit had an average or above average production, then your below average royalties would be pumped up a bit.  Of course the opposite is true as well, you could be in the above average half and have your royalties decreased.

Royalties would be cut if one well were drilled until a second well is drilled.  

If you are HBP then it does not factor that chk would have to pay out lease bonuses again, unless the HBP well stops producing and is plugged or abandoned before drilling.  The owners of the wells will not let that happen.

Pretty much comes down to a personal decision.  And yes you can be left out of a well in most cases.  It is called "a window".  Basically, if the well bore is more than 500' away from your property, then you can be removed.  The unit may be shrunk to leave you out as well.  This could affect your neighbors.  Moving the well parameters to omit your property could omit their property also.  

Talk with your neighbors.

 

Permalink Reply by Billy Park Whyde on June 21, 2012 at 11:56pm

  The bad thing Jim there is no guarantee that even more than one well would be drilled. The possibility of more wells sounds good but when 2 years down the road, 50 years, perhaps never!  There are smaller units that have been drilled so the mega site of the 1280 is in my personal opinion with no certainty of it being multi drilled would incline me to say no!  

  They can not leave out everyone regardless of threats.  

Permalink Reply by Jim Lawrence on June 22, 2012 at 3:30pm

You are correct Billy that there are no guarantees.   I don't think the companies drilling want to leave money in the ground.  The drill pads won't be reclaimed until all the wells are drilled so there is money saved that way.  If one does or does not modify their lease to 1280 ac doesn't guarantee that a well will be drilled.

I believe that the drilling companies will drill the larger units first especially when land owners with 640 and smaller leases are already hbp. When will they get around to drilling the smaller hbp units? I'll take some royalties now and take my chances that the companies come back to drill the rest of the wells.

Permalink Reply by Billy Park Whyde on June 22, 2012 at 5:49pm

They held by production does not mean they will agree to enter into a 1260 unit. There are farms  that are 300 plus acres HBP with no unitization clauses in the original lease so O'll bet no 300 plus acres is going to drop down to a possible a big possible  share of a 1260 acre unit when if they could get in a 640 acre unit with 20% . The idea behind the 1260 will be a hard sell as the land is carved up with to many HBP producers that can hold out for the top dollar. 

Permalink Reply by Kathleen on June 22, 2012 at 7:38pm
I agree. Some of those HBP feel ripped off too so I bet a bunch won't sign just on that point but to think about it some would have to go bigger no matter what since they are way under 640. My neighbor has over 700 acres (over a hundred has no surface, rest HBP) so what incentive would he have to go bigger when he could be his own unit. In that situation (wish I was :0) I wouldn't even want more $ to go bigger, the royalties should take care of that end for years.

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