Comment on: The Gas Company Wants to Modify My Gas Lease to Increase the Maximum Unit Size: What Should I Do?

The discussion on UNIT SIZE is interesting.  I think it worth mentioning that the reason the Lessee-Producer requests larger units is:

He wants to hold more property longer without drilling.  The leases are extended for every lease within the unit and any property extending into the unit.  Do not expect aggressive drilling and royalties where unit sizes are increased over the maybe 400 acres practical for a unit.  Expect the opposite - drilling 1 or 2 wells in the unit to hold the leases and hold the rest of the unit-leasehold area as reserves for the future - problably the distant future.  Consider requiring a minimum annual minimum royalty after a few years in exchange for the enlarged unit.

640 acres just happens to be one square mile.  It has nothing to do with the practical operational size of a unit.

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Permalink Reply by Clinton44 on April 7, 2012 at 7:27am

I dont think 640 acres is a unreasonable size for a drilling unit, we happen to be pooled in two seperate units one is 698 acres with five out of the six wells in production. The other unit in close proximity to the first one I mentioned is 536 acres with three out of the six permitted wells that went into production on Feb 1st.

Considering that each horizontal well bore on the units that we are in are roughly 1 mile in length running NW to SE from the surface hole locations, futher suggests that one square mile is not an unreasonable size for a unit??   

Permalink Reply by Jack Straw on April 7, 2012 at 8:34am

It is interesting to note that in PA there is allowance for forced pooling (unitization) for wells that penetrate the Middle Devonian Onondaga Limestone (and deeper). The forced pooling can be as large as 10 square miles (6400 acres). This forced pooling is allowed under the terms of the PA Oil and Gas Conservation Law of 1961.

Fortunately, the Middle Devonian Marcellus Shale rests immediately above the Onondaga Limestone (and its time equivalent Selinsgrove Limestone). It is obvious that the 1961 demarcation of the Onondaga Limestone as the upper limit of potential deep Oil & Gas production was done under the belief that the Marcellus Shale was not (and never would be) a viable target for Oil & Gas production (my how things have changed).

For landowners, it is a fortunate that this negative opinion as to the prospectivity of the Marcellus Shale (as the basal unit of the Hamilton Group) was codified in the law of 1971. This is more than a historical footnote; this allows landowners to potentially have some input as to what agreements they might be able to enter into with respect to unitization.

If memory serves me correctly, two (or three) years ago, the O & G industry attempted to lobby for PA legislation that would extend forced pooling to the Marcellus Shale. And again, if memory serves me correctly, the O & G industry came close to ramming that through (and ramming it down the throat of landowners).

Without the threat of the "club" of forced pooling, there is hope that a HBP (held by shallow production) landowner might have some input/influence when presented with a Lease Modification request.

Current low Natural Gas prices currently hamper the Landowners bargaining position. It is hoped that these $2.00/mcf prices will be short lived; but it is likely that activity will be weak until prices gravitate upwards to perhaps $4.50/mcf. It may not be until 2014 before Natural Gas supply and demand reach  some sort of equalibrium.

 

All IMHO,

               JS

Permalink Reply by John Harrison on April 7, 2012 at 10:57am

It is true that the Conservation Law of 1961 does not apply to the Marcellus.  This takes away the possibility of forced pooling, but it also means that the gas companies are in total control of unit size and shape.  In Bradford county four units are declared for a well pad covering some 2000 acres.  Time will tell how this will work out for the landowners, but it would seem that having one unit per well pad would be more fair.  The ability to change the unit at any time gives the gas companies a powerful tool to force landowners to modify their leases as in "if you don't sign this addendum, we will just leave you out of the unit and you will get nothing"  

   Also there is no rule for setbacks for a well bore from the edge of a unit or from the border of land not leased yet.  Texas enforces a setback of 467 feet giving some protection that a fracked well collects gas from within its unit and from land leased to the well operator.  We have zero setback in Pennsylvania which means a lot of small property owners are going to be force pooled by having their gas removed without any payment.

 

   

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on April 7, 2012 at 11:18am

John,   not sure they could threat to leave someone out of the unit...as the unit is what is holding the land on the lease.    And as far as the set back you speak of....I guess if an owner signs with another competitive firm for drilling and the other company that puts a well on the set back area near the property line of another's acreage....you would think that the competitive company would be just as much concerned as the owner of the land or royalty on who is taking NG from under that ground....that is why most really need to lease but make sure it isn't these flimsy 'not even up to the par of a used car salesman's tactics' lease.

Permalink Reply by John Harrison on April 7, 2012 at 1:37pm

The wells around me have started to produce and one of my neighbors was told he wouldn't be included in the unit until he agreed to an amendment to the lease.  I agree that companies will include land to hold the lease, but they could leave that land out of the unit for a few years of peak production while the lease was still in the primary term.  This is more likely if the lease has a higher royalty.

The no setback allows gas to be stolen from land which the owners would lease, but will not at the miserable terms the companies are offering.  I have attached an example of the WAY 1H well in SE Bradford County which is currently producing.  The land  which is not included in the unit is not leased and the gas company has no incentive to lease.  Why would they when they can take the gas for free.

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Permalink Reply by Jack Straw on April 7, 2012 at 2:07pm

Hi John,

Interesting picture (as they say: worth a thousand words).

For scale, do you know the approximate width of the unit?

Do you know the approximate length of the horizontal leg?

Perhaps the largest beneficiaries of the Marcellus Shale boom are the members of the PA, OH, WV and NY legal profession.

All IMHO,

                 JS

Permalink Reply by Clinton44 on April 7, 2012 at 2:31pm

The leagal profession always seems to be the biggest beneficiary in anything in which they become involved!!

Permalink Reply by Clinton44 on April 7, 2012 at 2:46pm

John, You mention miserable terms do you know the particulars of the "miserable terms" that were offered to your neighbor?? How many acres would they have had in the unit if they would have signed the ammendment?? What was the royalty percentage? 

There comes a time when holding out for the proverbial golden goose causes you to loose out in the long run...

I can see holding out to a point, but if that decision causes you to loose royalty payments that would have continued for years is that in your best interest?? 

Even at the rock bottom price of gas today royalties will still out pace the initial signing bonus in a relatively short amount of time. 

 

Permalink Reply by John Harrison on April 8, 2012 at 4:20am

I recently received an offer for $100 an acre for 20 % royalty with full deductions and a standard industry lease for 180 acres just past the end of the well shown in the figure.  I added some dimensions to the figure to show the width of the unit which is 344 acres and the length of the well.

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Permalink Reply by Clinton44 on April 8, 2012 at 4:35am

Is the total acreage in the unit 344? How many acres will you have in the unit?

When you say full deductions does that mean you will share in gathering charges to get the gas to a pipeline with other royalty interest owners in the unit?

How many wells are there permits pulled for? How many wells are producing on the unit?

Permalink Reply by Clinton44 on April 8, 2012 at 5:17am

Sorry not trying to be too nosey I was going to try to come up with an approximate royalty figure that might help with your decision

Permalink Reply by John Harrison on April 10, 2012 at 3:17am

Only 1 acre of my property might be in the unit I showed, but I know where you are going.  By holding out and not being part of the unit I will lose a lot of money.  Of course the gas company uses that to get you to sign a bad lease with long term consequences.

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