Anyone having a problem getting a pugh clause from Range or Chesapeake??

Have been negotiating with Range (we are in Beaver/Independence area of PA). We are being told directly by Range that they are no longer allowing Pugh's clause in the lease and we are also hearing through many attorneys that both Chesapeake and Range are saying the same things. We know that a large group in the area have just signed on with Range...have not figured out what terms they received. We were attempting to get $2700/ 16% with Pughs clause but at this point don't know if it is realistic. We have 100+ acres. We are being told by people at Pennstate extension webinars to accept what you can get but then we hear about Utica...anyone, anyone??

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Permalink Reply by Joe Fabeetz on June 4, 2011 at 4:41am

Finnbear and Dona Warner - great advice and comments.  Perhaps I can add a few suggestions.

1) As you have stated, everything is negotiable except for a mimimum royalty and that is there by law to protect the mineral owner.  Landmen are taught to say "This is a standard lease, please sign it and we'll get you your money."  "Standard" should be interpreted by you as "read the fine print", because a "standard lease" is a myth.   Everything in a lease is negotiable.

2) Somewhere in the lease that you are presented, you will see a "right to assign" clause.  The company does not have the right to assign unless it is in the lease.   You can demand to take it out if you choose, or you can tie it to the Pugh clause (or reverse Pugh Clause).  In other words, your position could be "I will agree to let the company have the right to assign if you will agree to put in a Pugh clause."   Also, somewhere in that lease will be a clause that says something like "if any portion of the acreage is assigned, then Lessee shall have no further obligation to Lessor regarding the assigned portion".  What that means if your lease is assigned to another company, the company with which you originally signed is off the hook for any obligations to you.  That is a negotiating point, sometimes referred to as "novation".  Check with your attorney.  One you understand that term, use it while negotiating.  It will serve as a signal to the Landman that you are a well informed Lessor.

 

3) In most cases, leases are "held by production in Paying Quantities" (HBP).  That means that a lease goes on forever, as long as the monthly gross revenue from that production exceeds the monthly lease operating expenses.  The Lessor has the burden of checking with the company to get that information, unless it was negotiated into the lease that the company must provide the Lessor a lease operating statement (LOS) or must notify the lessor if paying quantities are no longer being produced.  As the Lessor, you have what is sometimes called a "reversionary interest" which allows the Lessor to take back the working interest from the company under various circumstances.   Check with a knowledgeable attorney.   

4) Finally, if you reach a brick wall negotiating Pugh clause, you can try for a "retained acreage" clause.  What that means is that the company has a duty to release any acreage that is not necessary to meet the regulatory requirements back to you so that you can lease it to someone else and only retain a certain amount of acreage surrounding that well.   Again, check with a knowledgeable attorney.

 

One last comment.  The oil & gas business is a business like any other.   They are in it to make money and they risk a tremendous amount of capital to drill wells, with no assurance of any return and no assurance that if they do get a return it will be commeasurate with the expense.  It is up to you as the mineral owner to educate yourself as to what they are doing and how to best negotiate with them, just as you would if you were buying a car or a house or a computer.  Don't blame them for trying to make the most money, as long as they are playing by the rules.  It's up to you to learn what the rules are.

Permalink Reply by Finnbear on June 4, 2011 at 6:02am
Exactly. What they mean by "Standard" is that it is the standard form lease from the O&G they are working for. A "Standard Lease" is the starting point in negotiations for the O&G. If they can get you to sign at that point, they laugh all the way to the bank. You should NEVER sign a standard lease unless you really don't care what happens to your land or how much you get paid.
0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on June 4, 2011 at 8:04am

Excellent Joe and the rest here...

I think the case for the word 'standard lease'....was presented to us people who are used to that terminology referring to an 'industry standard' such as NAR (national assoc . of realtors ...they use a 'standard' contract).    We were presented with very similar 'standard contracts' and the land agent spoke of the addendum used for negotiating.   You see typically when one is presented an 'industry standard' contract then one would consider that it might be fruitless to try to get them to use another contract yet when presented already with about 4 each from a different company plus how would we as landowners (esp. farming, rural) know that their 'standard contract' hadn't been updated since 1988 (i found that in some real small print on page 1)!   this is why I started a discussion about demanding for these O & G's to update their 'standard' contract so they aren't taking advantage of the those who are yet ignorant of the O & G process.

 

Joe, I would really appreciate it if you would copy and paste most of your above post in this discussion as it is very helpful about the 'assigns' clause....

http://gomarcellusshale.com/forum/topics/assigns-clause-and-a-global

 

it is the most important clause in the entire contract for the Lessee (and of concern for the Lessor) as that is the clause that enables them to immediately make a profit off the negotiated lease.  Yet many landowners were not that aware of the importance of that clause and how it will affect their ownership relationship to any future leasees that may end up purchasing the lease and the relationship of the original leasee to the Lessor.

Permalink Reply by Joe Fabeetz on June 4, 2011 at 1:18pm

VG - The "right to assign" is merely a clause that enables a lessee to convey a lease to another lessee.  Let's say you own a property - a house in this case.  You can sell it, give it to your heirs in your will or rent it to somone else.  If, while it it rented, you want to sell it, you can do so.  But your renter cannot transfer the lease to someone else without your permission.  The renter is responsible for the remainder of the lease unless you let him out of it.   It's the same with a mineral lease.  The lessee (company) cannot transfer (assign) the lease to some other lessee without your agreement.  How do you agree?  Either up front, in the original lease, or by executing an amendment to the lease sometime down the road.  There is nothing that is stopping you from crossing out the "right to assign" clause in the original lease.  The lessee may object to that.  That is a negotiating point, what many in Texas call "horsetrading" and it's all part of the process.

You might also consider what the lessee wants to do with the minerals it has leased. Does he want to drill it, or does he want to flip it or does he want to sit on it hoping the price of the commodity (gas, oil or NGL's) goes up?   If you are in negotiation and he wants the right to assign, ask him why - what are his intentions?

I am a bit reluctant to get into your other post for two reasons.  First, I am NOT an attorney and I urge you and every other mineral owner to consult an ethical attorney knowledgeable in mineral law.   The "right to assign" issue is in my opinion a good way to judge such an attorney's competance.  Use the term "novation" as well and see what the result is.  If you get a blank stare, find another attorney.

I've read the other discussion thread.  Having followed the Barnett shale for a number of years, with many of the same companies, I am not concerned about them assigning the leases to some  foreign terrorist group or other such power.  They really are good Americans, just like the rest of us. Assigments are usually made due to domestic business issues, for good business reasons.  Nonetheless, they can be burdensome to a mineral owner so they become leverage in the negotiations.   So my opinion is don't worry too much about to whom they get assigned, just make sure you are protected in case they do so.  Negotiate it up front.

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on June 4, 2011 at 4:10pm

thanks Joe...I guess the problem is ''negotiate it up front''.   My dad as well as other rural landowners did not know just how useful that 'assigns' clause is for making profit for the lessee.   When we tried to speak with the land agent about the clause he was quick to tell us no contract without that clause...yet we were ignorant of whether we could negotiate the clause or not and since we were specifically and several times re-assured that we could negotiate the contract again in five years, we didn't find it that annoying.   But dad has passed and now I read the contract with more understanding (thanks to you all here at gomarcellusshale) and I see that we were are at loss with some of the typed clauses of the old original contract (such as leaving a $5. per acre delay rental fee still typed on the contract and not crossing it out and putting the actual bonus fee (also a delay fee) on the contract.  And there are clauses that leave us as Lessor in a lease without renegotiating at the end of the primary term and even without delay money paid at a reasonable price.   Dad didn't want to use an attorney and I must say that he didn't know a decent attorney that he could have used to do the contract and he was out of state at the time.

 

so with this discussion and other discussions...I am certainly speaking out to those who are now entering a lease process (or having the blessing of redoing/renewing the oen they have with better negotiating tools).....pls do your research and hopefully you can learn enough to even decide on an attorney if you wish to utilize their help also.

 

I still think that the 'assigns clause' is too open for the lessee to leave the lessor at risk...so you are right Joe, 'negotiate it up front'.

Permalink Reply by Finnbear on June 4, 2011 at 4:24pm
When you are considering leasing your land to an O&G, rewrite their "standard" assignment clause so that it suits you. O&G leases are assigned in part or in full all the time. It is one way for someone who spent all their ready cash leasing up a bunch of ground to generate the capital required to actually drill holes. They will sell a fraction of their lease rights to free up some cash. If you remove the right to assign altogether, then you can't expect anyone to want to buy your lease. You just need to rewrite the assignment clause to suit you. Maybe you want notice in writing, maybe you want to approve who it gets assigned to, maybe you want a % of the increased sale $ each time it is assigned. Bottom line, an assignment clause needs to be in the lease so the O&G can work with it. How that clause is worded is up to you. Just realize that the more restrictive it is, the less likely an O&G is to agree to it. 
Permalink Reply by Finnbear on June 4, 2011 at 4:14pm
The assignment clause allows someone like CHK to lease a bunch of land and then sell partial rights to those leases to come up with working capital to get on with drilling. They typically make money on those assignments and you can stipulate in your assignment clause that you get a % of the increase each and every time that interest is assigned. See the ALOV lease for an example that CHK agreed to.
0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on June 4, 2011 at 4:55pm

Right, Finnebear.....and it is the clause that makes them profitable and able to drill....a very important clause.   yet as in the real estate process the seller needs to be aware of whom they are dealing with when developers come along and want the assign clause which is good for both buyer and seller but not if the buyer turns up at the closing table with no money to buy the house and the orignal buyer is long gone!...so a good realtor uses negotiating tools to represent the seller (and effectively make the deal work by being fair to the buyer)... and clauses like you mentioned are put into the contract.

It should work the same with the O & G contract but the landman we used specifically would not let us work the assign clause in a bargaining situation and of course we thought we only had a lease for five years and could renegotiate...that has yet to be realized.    Again thanks each of you!

Permalink Reply by Marc on June 4, 2011 at 9:15am
Great stuff. Thanks for that, Joe.
Permalink Reply by Tanya Gabriele on June 5, 2011 at 12:12am
Yes.  Thanks for this great discussion.  I am taking notes because it is very difficult to find a competent attorney.
0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on June 5, 2011 at 9:19am

Tanya....this is new for many. 

  In fact I talked with a lawyer recently here at gomarcellusshale and he said he started getting involved because people were asking him to help.   So many areas of the states involved in gomarcellusshale have many capable lawyers but not so well informed in ROW and in O & G contracts.   A real pity because the O & G knew that ahead of time and again that was another tactic that was not a good situation for the landowners....some were very disappointed in the attorneys that did take on the contract but were not very competent in that area so the contracts are not as good as they should have been for the landowner that is.

Permalink Reply by A. Betz on June 5, 2011 at 10:51am
Sam, Dona, Joe, etc...we hired an attorney...only on an hourly basis so that we were not held to working with him but I feel like none of what has been mentioned here has even remotely been suggested by him. I think a lot of these attorneys are get in get out and quick buck. They represent as OG attorneys but I often question that. If any of you came across truly knowlegeable attorneys can anyone email me...I know it will only be people who might have done a good job for someone else or appeared knowledgeable to you and I will only take it as suggestions and will do my homework from there but I am frustrated. I have listened to Penn Edu webinars, I have listened to the attorneys hosting who literally say take what you can get because the OG companies are drawing down now and it ticks me off. I have attempted the courthouse route but have found at least in Beaver county that the oil companies do not have to put on record the first page of the lease that gives the amounts thay have agreed to so basically unless a person offers up info you will not know what the OG companies are paying and agreeing to as far as addendums. I see a whole lot of bragging to shareholders and a whole lot of "nope won't agree to that" with the mineral owners. Amny of you seem to know what you are talking about and several of you I am sure actually know an educated and successful negotiator and I NEED YOUR SUGGESTIONS. Thanks for such great conversation! 

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