Donut Hole Hypothetical- Comments welcome!


1) Assume a 100 acre lease, O&G rights owned by Donut Hole Gas Company, is surrounded by roughly 3000 acres, O&G rights owned by Donut Gas Company.  

 

2) Definitions-

the 100 acre lease is the "Donut Hole Lease"

the landowner is "Donut Hole Lease Landowner", 
the Company with the O&G RIghts to 100 acres is the "Donut Hole Gas Company"

the Company with the O&G rights to Donut/3000 acres is "Donut Gas Company".

 

3)  the Donut Hole Landowner can approve or veto all transfers of the Donut Hole Lease by the Donut Hole Gas Company..

 

4) The Donut Hole Gas Company wants to transfer the Donut Hole Lease to the Donut Gas Company.  The Donut Hole Landowner vetoed the transfer until Donut Hole Gas Company pays him.  

 

5) the Donut Hole Gas Company has said that they will not pay to transfer the lease.  

 

6) The Donut Hole Gas Company has made the following threat-  The Donut Hole Gas Company will not drill on the lease or otherwise develop it, and it will expire.  

 

****However, the Donut Hole Gas Company has said that after 4 years, the Donut Gas Company will have drilling units set up and wells already planned.  It will be too late to include the Donut Hole Lease in their plans, and it will therefore never be developed.  

 

*****According to the Donut Hole Gas Company, this means that the Donut Hole Landowner

1) will never get any royalty payments, and

2) the land will go undeveloped forever, because

3) neither the Donut Gas Company nor any other Gas Company will ever want to develop the land.

 

I hope I am explaining this situation correctly.  IMO, this sounds like a bluff, as the Donut Gas Company will be turning away easy money if they don't eventually develop the Donut Hole Lease in 4 years (When the Donut Hole Lease will expire).

 

So, my plan was to continue to withhold permission, and notify the Donut Gas Company that the Donut Hole Lease will be available in 4 years, so they can construct their drilling units accordingly, or make whatever plans they want to make.

 

However, I am not sure if this is viable, given field decline rates (i.e. losing fat part of decline curve in units), or general willingness of Donut Gas Company to buy O&G rights or otherwise develop the field.

 

Any recommendations / criticisms of my thinking here?  Anything I am missing?  Any thoughts on unitization scenarios in particular would be appreciated.

 

Aaron

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0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on January 10, 2011 at 10:42am

ho...

3)  the Donut Hole Landowner can approve or veto all transfers of the Donut Hole Lease by the Donut Hole Gas Company..

 

Most every contract out there has an assigns clause that the lessee wants in the contract...and even hypothetically speaking I doubt they would ever agree for the landowner to have the right to approve the assignee though it would be beneficial if a percentage is given to the landowner upon any assigns (even if it isn't large percentage it would still be an area that the landowner would benefit in  the risk of assignment).

So hypothetically speaking if the landowner has the right to veto the assign then they would be best to research just who the new assignee is and their track record and if it is a good deal then they would be foolish to sit and wait for 4 years.....would you do that also with a ten year contract?. 

and of course the original lessee most likely stands to gain in selling their interest to the other company and most likely are stating  a threat to the landowner  in wanting to make the assign happen.   The other thing to research is why they want to sell their interest of the lease...are they going out of business, are they just purchasing leases to sell so they make their money at the assign time, or are they not a drilling company and do they want to sell to make sure that drilling starts so they also can hone in on the royalties?

Permalink Reply by mark ayers on January 10, 2011 at 11:27am

It was my understanding that drillers trade leases in other plays to fill out units and have done so for many years.

Penn State U said that there is between $250,000 and $500,000 worth of gas below every acre of land in this play, so at $25,000,000 worth of gas you would think it would not go undeveloped with pipelines nearby. 

Permalink Reply by Aaron Hovan on January 10, 2011 at 12:04pm

Hey Mark-

 

thanks alot.  do you have a citation for the 250,000 - 500K per acre figure?  If so, would very much appreciate it.

 

Aaron

Permalink Reply by mark ayers on January 10, 2011 at 12:49pm
I went back and looked, I cant find it, but the numbers kinda got burned into my brain the first time i read it.
Permalink Reply by Aaron Hovan on January 10, 2011 at 11:46am

the veto/permission clause is in the rider I wrote;-)

They are doing a land swap as mark describes below.

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