Drilled, but not leased. What now?

I have an interesting situation. Through a long chain of events, my family recently learned that my Grandfather owned the O&G mineral rights to several hundred acres in Bradford County, PA, which we now own. With some effort, we have found two other families that also have mineral rights in the same properties. It seems our three grandfathers knew each other, back in the day.

Together we own 50% interest in these properties.

These plots are in units with planned or existing wells. We have seen the well maps. In some cases, the well bore goes under our property, and the well is bottomed on one of them. None are producing yet, but we believe production is expected to start this summer when a pipeline is put in.

So here’s the issue: we don’t have any leases. Chesapeake Energy, who is developing the units, never tried to find us that we know of. We contacted their offices many times to ask for a lease. We are on our sixth contact at the company. There must be an incredible turnover there.

We were finally offered $1000/acre and 18%, but it was withdrawn before we could accept. A second offer was then made for $0/acre and 18%, which we thought was low. They also refused to include any modifications to the leases.

So here we are, holding O&G deeds in the heart of Bradford County with wells drilled on the property, but no leases.

It appears that Chesapeake signed up some partial owners at market rates when beginning development and when the rest of the owners show up later and asked to be leased, they are offered rock-bottom terms with a take-it-or leave it approach. That sounds like a clever way to lock-up a unit cheaply and is unfair to those that were never contacted. Has anyone else had this happen to them? 

I would like to get some opinions here. Do we have a position to negotiate? Do we have to take whatever they offer us? If they do decide to make us an offer, what should we expect? We’ve thought about just keeping a working interest. Any comments will be appreciated.

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Permalink Reply by wyalusing jim on May 3, 2013 at 1:27pm

been there is correct.

i'd go for a 20% royalty with a good no deductions clause and whatever bonus you can get.

it's likely you wont be able to get no deductions, but try. even the market enhancement clause is better than the royalty clause that chk currently offers, since the market enhancement clause has a chance of being held to be ambiguous enough to limit deductions.

what township are your minerals in?

wj

Permalink Reply by DOUG on May 4, 2013 at 6:45am

Franklin Twp

Permalink Reply by Jim Litwinowicz on May 3, 2013 at 2:49pm

Are you telling me that all the leases in a unit are the same? That all the owners get the same royalty and/or bonuses?  That is patently unfair.  If some dummy is the first to sign then everyone else gets screwed. Plus, what about the common occurrence where one landowner has an old lease from the 1970s with the old minimums....does that mean other landowners will get the same out dated lease? If all that is true then there is little to negotiate for most landowners.

Permalink Reply by Been There on May 4, 2013 at 6:52am

John, you are mistaken. Mineral owners are free to negotiate lease terms any way they choose. The only protections specific to Ohio are minimum royalty % and certain required lease provisions.

Scuttlebutt = disaster. Take a look at 1501:9 of the OAC and 1509 of the ORC as a preview. Get professional advice.

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